-----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, AIcg0q3x2CQugqTXqGkpQQFG7OwBvtZNST7rk64TqlAqn7mNzFKS+Lt4MfSpigtu XTpI6s7jDnfOMDbSSfsvqg== 0000008598-01-500060.txt : 20020413 0000008598-01-500060.hdr.sgml : 20020413 ACCESSION NUMBER: 0000008598-01-500060 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20011217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTO GRAPHICS INC CENTRAL INDEX KEY: 0000008598 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 952105641 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-04431 FILM NUMBER: 1815886 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 PRER14A 1 jan152002proxya.txt REVISED PRELIMINARY SCHEDULE 14A INCL SHARE PROPOSAL UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [ X ] Filed by a Party other than the Registrant [__} Check the appropriate box: [ X ] Preliminary Proxy Statement [___] Confidential, for Use of the Commission Only [___] Definitive Proxy Statement [___] Definitive Additional Materials [___] Soliciting Material Pursuant to Rule 240.14a-12 AUTO-GRAPHICS, INC. ------------------------- (Name of Registrant) Not Applicable - ------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [_X_] No fee required. Cover Letter Information NOTE: It is proposed that definitive proxy materials be mailed on or before December 21, 2001 if at all possible. CONTACT: For information regarding this proxy statement/filing, please call Daniel E. Luebben, Secretary at (909) 595-7204 ext. 499 or 3201 Temple Avenue, Pomona, Ca 91768 AUTO-GRAPHICS, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS January 15, 2002 To the Shareholders: The annual meeting of the shareholders ("Meeting") of Auto- Graphics, Inc. will be held at 3201 Temple Avenue, Pomona, California 91768 on January 15, 2002, at 3:00 p.m. for the following purposes: 1. To elect directors. 2. To approve the adoption of the 2001 Stock Plan. 3. To amend the Articles of Incorporation with Amendment No. 1 to delete the provision that provides for the number of directors to be stated in the Articles of Incorporation. 4. To amend the Articles of Incorporation with Amendment No. 2 to add a provision to eliminate or limit the personal liability of directors for money damages. 5. To amend the Bylaws to state the number of directors shall be at least three (3) and not more than five (5) directors, with the current exact number to be three (3) directors. 6. To consider one shareholder proposal described in the accompanying Proxy Statement. 7. To transact such other business as may properly come before the meeting. Only shareholders of record at the close of business on December 19, 2001, are entitled to notice of, and to vote at, this Meeting. A complete list of the shareholders entitled to vote at the Meeting will be available and open to the examination of any shareholder for any purpose germane to the Meeting during ordinary business hours from and after January 3, 2002, at the office of the Company. You are cordially invited to attend the Meeting. If you hold your shares through a broker or other nominee, proof of ownership will be accepted by the Company only if you bring either a copy of the voting instruction card provided by your broker or nominee, or a copy of a brokerage statement showing your share ownership in the Company as of December 19, 2001. IF YOU HAVE ANY QUESTIONS, OR NEED ASSISTANCE VOTING, PLEASE CONTACT, DANIEL E. LUEBBEN, THE SECRETARY OF THE COMPANY, AT 1-800-776- 6939. BY ORDER OF THE BOARD OF DIRECTORS ss/Daniel E. Luebben --------------------- Daniel E. Luebben Secretary Pomona, California December 21, 2001 AUTO-GRAPHICS, INC. 3201 Temple Avenue Pomona, California 91768 PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS To Be Held January 15, 2002 GENERAL INFORMATION This Proxy Statement, which will be first mailed to shareholders on or about December 21, 2001, is furnished in connection with the solicitation of proxies by the board of directors of Auto-Graphics, Inc. (the "Company" or "Auto-Graphics"), to be voted at the Annual Meeting of the Shareholders("Meeting") of the Company, which will be held at 3:00 p.m. on January 15, 2002, at 3201 Temple Avenue, Pomona, California 91768. The purpose of the Meeting and the matters expected to be acted upon are set forth in the accompanying Notice of Annual Meeting of Shareholders. Shareholders who execute proxies retain the right to revoke them at any time before the shares are voted by proxy at the meeting. A shareholder may revoke a proxy by delivering a signed statement to the Secretary of the Company at or prior to the Meeting or by executing another proxy dated as of the later date. The Company will pay the cost of solicitation of proxies. Shareholders of record at the close of business on December 18, 2001 will be entitled to vote at the meeting on the basis of one vote for each share held, however, any shareholder eligible to vote for the election of directors is entitled to cumulate votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or to distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. To be entitled to exercise cumulative voting rights for the election of directors, a shareholder must give notice at the Meeting of such person's desire to cumulate votes for one or more candidates whose name(s) have been placed in nomination prior to the commencement of voting for the election of directors. If any shareholder exercises the right to cumulate votes for the election of directors, then all shareholders are entitled to cumulative voting rights for the election of directors. Cumulative voting applies only to voting for the election of directors (not for the other proposals before the meeting). On December 18, 2001, there were 4,997,234 shares of Common Stock outstanding. ANNUAL REPORT The Annual Report of the Company for the fiscal year ended December 31, 2000 is being mailed with the Proxy Statement. Stockholders are referred to the Annual Report for financial and other information about the activities of the Company. The Annual Report is not incorporated by reference into this Proxy Statement and is not deemed to be a part of it. 1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION The Company's board of directors currently consists of three members. Three directors are to be elected at the Meeting to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. It is intended that the accompanying proxy will be voted in favor of the following persons to serve as directors unless the shareholder indicates to the contrary on the proxy. The election of the company's directors requires a plurality of the votes cast in person or by proxy at the meeting. The board of directors expects that each of the nominees will be available for election, but if any of them is not a candidate at the time the election occurs, it is intended that such proxy will be voted for the election of another nominee to be designated by the board of directors to fill any such vacancy. In the event all three of the board of directors' nominees cannot be elected, then the board of directors in its discretion may instruct Robert S. Cope to vote cumulatively for less than three of the board of directors' nominees. In such event it is the board of directors' current intention to instruct Mr. Cope to vote proxies received by the board of directors for the reelection of Robert S. Cope and James R. Yarter. Nominees Proposed by the Board of Directors Set forth below is certain information pertaining to the persons who are proposed as nominees for election to the Company's board of directors. Robert S. Cope, 66, along with his family is a 44% shareholder of the Company, a current director of the Company, and holds the officer positions of President and Chairman of the Board of the Company, will be seeking reelection to the Board. During the previous five years Mr. Cope has served the Company as Chief Executive Officer, President and Treasurer. Mr. Yarter, 64, is a 2% shareholder of the Company. Mr. Yarter's prior business background and experience covers a period of 35 years. During the past five years, his experience includes being President and Chief Executive Officer of the following companies: Block Medical, a division of Hillenbrand Industries, Inc., a company listed on the New York Stock Exchange for the period 1994-1996; US Medical, a start-up company for the period 1996-1997; and Gish Biomedical, Inc., a company listed on NASDAQ for the period 1999-2000. Besides being on the Company's Board of Directors, Mr. Yarter is currently on the board of directors of Advant Medical and Group 3 Inc. On June 21, 2001, Mr. Robert S. Cope filed a Notice of Written Consent of Shareholders to Fill a Vacancy on the Board of Directors and a Proxy Statement to solicit the necessary shareholder written consents ("Notice"). The Notice identified that the record date for voting to fill the vacancy was June 14, 2001. Mr. Cope obtained the required number of votes through the solicitation of less than ten (10) shareholders by use of written consent forms and Mr. James R. Yarter was elected to the board of directors to serve until a successor shall be duly elected and qualified. Robert L. Lovett, 64, is a retired medical doctor and a 4% shareholder of the Company. During the past five years Dr. Lovett has been a private investor. Dr Lovett has also served on the board of directors of the Lovett Pinetum Charitable Foundation. Dr. Lovett is a first time nominee for a position on the Company's Board. The following table sets forth information regarding the beneficial ownership of the Company's common shares by the board nominees for directors, the Company's Chief Executive Officer and the four other highest paid executive officers (the "Named Executive Officers"), and the directors and executive officers as a group. Amount and Nature of Beneficial Ownership of Percent Common Shares as of of Names 11/26/01 Class - ------------------------------------ -------------------- ------ Robert S. Cope 1,829,725(1) 36.6% Paul R. Cope 373,602 7.5% James R. Yarter 120,000 2.4% Robert L. Lovett 195,000 3.9% Executive Officers and Directors as a Group (6 Persons) 2,613,827 52.3 (1) Includes the following shares held by family members and relatives: 1,641,475 shares held by the Cope Family Trust of which Mr. Cope is the trustee; 71,625 shares held by Bryan A. Cope; 101,625 shares held by Lizabeth L. Cope; and 15,000 shares held by William R. McConnell. During the Company's year ended December 31, 2000, the board of directors did not hold any meetings, but acted by unanimous written consent on eight (8) occasions. For the calendar year 2001, the board of directors has held five meetings. In addition to these meetings the Board has acted by unanimous written consent on one occasion. The Company's board of directors does not maintain standing audit, nominating or compensation committees. These matters are considered and acted upon by the entire board of directors. Cash Compensation The following table discloses compensation received for the three fiscal years ended December 31, 2000, by the Named Executive Officers. SUMMARY COMPENSATION TABLE Long-term Compensation Annual Compensation Awards ------------------- Securities Name and Underlying All Other Principal Position Year Salary Bonus Options(#) Compensation - ------------------ ---- -------- ----- ---------- ------------ Robert S. Cope 2000 $137,000 -0- -0- -0- Chairman of the Board 1999 156,000 -0- -0- -0- 1998 133,000 -0- -0- -0- Michael .K. Skiles 2000 $102,000 -0- -0- -0- President Corey M. Patick EVP 2000 $145,000 -0- -0- -0- Daniel E. Luebben CFO 2000 $108,000 -0- -0- -0- 1999 93,000 -0- -0- -0- 1998 100,000 -0- -0- -0- William J. Kliss COO 2000 $ 69,000 -0- -0- -0- 1999 138,000 -0- -0- -0- 1998 138,000 -0- -0- -0- Compensation pursuant to Stock Options There have been no stock option grants for the three years ending December 31, 2000. Certain Relationships and Related Transactions In November 2000, the Company sold and issued 240,000 3-year warrants for $800 entitling Corey M. Patick to purchase one share of the Company's (restricted) Common Stock for each warrant for $.033 per share. Subsequently, Corey M. Patick sold the warrants to Robert H. Bretz. Robert H. Bretz then exercised the warrants and purchased the 240,000 shares of the Company's (restricted) Common Stock covered by such warrants for the exercise (purchase) price for such shares under the warrants (aggregating $8,000 or $.033 per share). There are no warrants outstanding at December 31, 2000. Subsequently Corey M. Patick purchased 120,000 shares from Robert H. Bretz and in November, 2001, James R. Yarter purchased those 120,000 shares from Corey M. Patick. In May 1999, Robert S. Cope and the Cope Family Trust granted an option to Corey M. Patick to purchase 1,125,000 (or 22%) of the Company's Common Stock for $1.67 per share (adjusted for the 3-for-1 stock split effective February 28, 2000). Mr. Patick subsequently exercised the option in November of 2000 and the closing for the purchase of and payment for the option shares, originally scheduled for November 2000, and was extended several times by the parties. By the terms of the most recent extension, Mr. Patick's option expired on August 31, 2001, without the purchase of and payment for the option shares having been consummated by Mr. Patick. Robert H. Bretz was the longtime general counsel of the Company in addition to his position as a director. Mr. Bretz was terminated as general counsel to the Company on May 9, 2001. Mr. Bretz had billed the Company on average $339,000 per year for the three (3) years prior to his termination. In addition to Mr. Bretz's billing, Mr. Bretz became disruptive to the business of the Company. In the period prior to the Company's filing of its Form 10-K, Mr. Bretz refused to sign the Form 10-K unless the Company signed a Safety Net Agreement (paying Mr. Bretz upon a change of control one years gross legal billing based upon the prior three year average) and a "comfort letter" for the sole benefit of Mr. Bretz that requested personal representations, warranties and assurances from Messrs. Cope, Skiles and Ferguson regarding the accuracy and completeness of the Company's financial statements. The Company filed its Form 10-K without Mr. Bretz's signature one day prior to when the Company's operating line of credit would have been discontinued by the bank because of its failure to file its Form 10-K. Using his position as a director, asserting a right of "director due diligence," Mr. Bretz has intimidated and issued veiled threats to the officers of the Company. For example, during the period January 1, 2001 through April 30, 2001, Mr. Bretz sent 580 e-mails requesting information. These due diligence requests virtually brought the daily operations of the Company to a standstill until such time as the Company advised Mr. Bretz that such "due diligence" would be subject to the rights of inspection and copying under California Corporations Code Section 1602. On May 17, 2001, the Company filed a Complaint with the California State Bar alleging the matters discussed above which is currently being investigated . Following Mr. Bretz' termination, Mr. Bretz filed on behalf of the Company, Auto-Graphics, Inc. v. The 664 Company, Ltd. ("The 664 Company") and Robert S. Cope, Los Angeles Superior Court Case No. BC252517 ("664 Lawsuit') alleging that The 664 Company's lease with the Company (the "Lease") violated Section 310 of the California Corporations Code. Mr. Bretz retained himself and his own law firm to represent the Company without authorization of the Company's Board of directors or management. On August 8, 2001 the 664 Lawsuit, was dismissed by the Los Angeles California Superior Court upon the court holding that the Action by Unanimous Written Consent signed solely by Mr. Bretz was invalid because it failed to satisfy the requirements of California Corporations Code Section 307(b). The Lease commenced on July 1, 1986, for an original term of five years and for 27,000 square feet of office space. The Lease provided for two options to extend the Lease for a period of five years each (the "Lease Options"). Prior to its execution, the Lease was approved unanimously by the three disinterested members of the Board of directors of the Company. During the term of the Lease, The 664 Company agreed in 1998 to reduce the rental rate by 22% and in 2000 allowed the Company to reduce its space leased by approximately 10,000 square feet. The Lease Options were exercised by the Company without any further approvals of the disinterested members of the Board of directors. Mr. Bretz, as its general counsel at the time, did not advise the Company that any such approval might be required. The Lease that Mr. Bretz alleges is unfair is at a rental rate of $1.55 per foot per month. The rental rates paid by the two other non-affiliated tenants located in the Company's facility are at a rental rate of $1.65 per foot per month. The Company filed a complaint against Mr. Bretz on June 29, 2001 for damages and injunctive relief for breach of fiduciary duty. In Case No. BC 253322 in Los Angeles California Superior Court captioned Auto- Graphics, Inc. vs. Robert H. Bretz et al. The Company, alleges that Mr. Bretz has become disruptive and harmful to the business operations of the company and has damaged the Company by his various actions including his excessive billings to the Company, filing of the unauthorized lawsuits on behalf of the Company and harassment of its officers and employees. Mr. Bretz answered denying the claims of the Company and filed a derivative cross-complaint against three of the Company's officers and former officers, Robert S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary duty, fraud and deceit, misrepresentation, breach of contract/employment, removal for cause and other declaratory and injunctive relief. The cross-complaint was filed on July 16, 2001 in Los Angeles, California Superior Court. The officers have filed a special and general demurrer to the cross-complaint which was heard on November 14, 2001. At the hearing on November 14, 2001, the court ruled that: (i) Mr. Bretz has 10 days to filed an amended cross-complaint; (ii) Within 30 days after being served with the amended cross-complaint, Auto-Graphics can file a motion for the court to order Mr. Bretz to furnish a bond to cover the reasonable expenses of the Company; and (iii) All discovery pertaining to this case is suspended until February 15, 2002. On or about November 26, 2001, Bretz filed an amended cross-complaint. The Company is in the process of preparing and filing their motion for the court to order Mr. Bretz to furnish a bond to cover reasonable expenses of the Company. Mr. Bretz filed a complaint on December 10, 2001, in Los Angeles Superior Court Case No BC263256, against Robert S. Cope, Daniel E. Luebben, James R. Yarter, and Craig O. Dobler, Esq. and named Auto-Graphics, as a nominal defendant to enforce director's inspection/copying rights under California Corporations Code Section 1602. Messrs. Cope, Luebben, Yarter, Dobler and Auto-Graphics are in the process of answering the complaint. Recent Developments On September 28, 2001 the Company's Board of directors replaced Michael K. Skiles as President with Robert S. Cope and replaced Michael F. Ferguson as Chief Financial Officer with Daniel E. Luebben effective as of October 4, 2001. The Company is developing a plan to reduce expenses during the fourth quarter of 2001 to return the Company to profitability for the year 2002. This will be accomplished primarily by reducing payroll and overhead associated with the initiatives begun in 2000 via the majority-owned subsidiaries, DataQuad and LibraryCard. Section 16(a) Beneficial Ownership Reporting Compliance Robert H. Bretz was late in filing form 4 for the purchase of 240,000 warrants to purchase 240,000 shares and also in the acquisition of the 240,000 shares. Robert S. Cope was late in filing form 4 for the purchase of 30,000 shares. 2. PROPOSAL FOR APPROVAL OF THE 2001 STOCK PLAN At the Meeting, the shareholders will be requested to approve the Auto-Graphics' 2001 Stock Plan (the "Stock Plan"). The Board of directors ("Board") recommends approval of the new Stock Plan to allow the Company to continue to attract and retain the best available employees, directors and consultants and provide an incentive for them to use their best efforts on the Company's behalf. For these reasons, the Board is recommending to the shareholders for their approval, the Stock Plan. A copy of the Stock Plan may be obtained upon written request to Auto-Graphics, Inc., Attn: Daniel E. Luebben, 3201 Temple Avenue, Pomona, California 91768. Description of the Plan General. The purposes of this Stock Plan are to attract and retain the best available individuals for positions of substantial responsibility to provide additional incentive to such individuals, and to promote the success of Auto-Graphics' business by aligning the financial interests of employees, directors, and consultants providing personal services to the Company or its affiliates with long-term shareholder value. Stock options may be granted under the Stock Plan. Options granted under the Stock Plan may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code ("Code"), or nonqualified stock options. Administration. The Stock Plan will be administered by the Board. New Plan Benefits. Because benefits under the Stock Plan will depend on the Board's actions and the fair market value of common stock at various future dates, it is not possible to determine the benefits that will be received by officers and other employees if the Stock Plan is approved by the shareholders. Eligibility. Incentive stock options may be granted only to employees of the Company or its subsidiaries. Nonqualified stock options may be granted under the Stock Plan to employees, directors, and consultants of the Company, its affiliates and subsidiaries, as well as to persons to whom offers of employment as employees have been granted. The Board, in its discretion, will select the individuals to whom options will be granted, the time or times at which such options are granted, the number of shares subject to each grant, and vesting schedule. Shares Subject to the Stock Plan. Shares of the Company common stock which may be awarded and delivered under the Stock Plan may be authorized, but unissued, or reacquired common shares. The Company expects there to be approximately 499,000 shares available for future awards under the Stock Plan as of January 1, 2002, the effective date of the Stock Plan. Limitations. The Stock Plan provides that the aggregate number of Company common shares underlying all options to be granted is 499,000 shares of common stock. The aggregate number of shares underlying all incentive stock options that may be granted under the Stock Plan may not exceed 350,000 and the aggregate number of shares underlying all nonqualified stock options that may be granted under the Stock Plan may not exceed 149,000. Terms and Conditions of Options. Each option is to be evidenced by an option agreement between the Company and the individual optionee and is subject to the following additional terms and conditions. Exercise Price. The Board will determine the exercise price for the shares of common stock underlying each option at the time the option is granted. The exercise price for shares under an incentive stock option may not be less than 100% of the fair market value of the common stock on the date such option is granted. The exercise price for shares subject to a nonqualified stock option may not be less than 100% of the fair market value of the common stock on the date such option is granted. The fair market value price for a share of Company common stock underlying each option is the arithmetic mean between the asked and the bid prices on the closing of the market on such date as reported on the Over-the-Counter Bulletin Board. Exercise of Option; Form of Consideration. The Board will determine when options become exercisable. The means of payment for shares issued upon exercise of an option will be specified in each option agreement. The Stock Plan permits payment to be made by cash or check. Term of Option. The term of an option may be no more than ten (10) years from the date of grant. No option may be exercised after the expiration of its term. Death or Disability. If an optionee's employment, directorship or consulting relationship terminates as a result of his or her death, then all options he or she could have exercised at the date of death, or would have been able to exercise within the following twelve (12) months if the employment, directorship, or consulting relationship had continued, may be exercised within the twelve (12) month period following the optionee's death by his or her estate or by the person who acquires the exercise right by bequest or inheritance. In addition, if an optionee's employment, directorship, or consulting relationship terminates as a result of the optionee's total and permanent disability, then the optionee may, within eighteen (18) months after the termination, exercise all options he or she could have exercised at the termination date, or would have been able to exercise within the twelve (12) month period following the termination of employment, directorship or consulting relationship had continued, provided that no such option may be exercised after expiration of the term specified in the option agreement. Non-transferability of Options. Unless otherwise determined by the Board, options granted under the Stock Plan are not transferable other than by will or the laws of descent and distribution and may be exercised during the optionee's lifetime only by the optionee. Other Provisions. An option agreement may contain other terms, provisions, and conditions not inconsistent with the Stock Plan, as may be determined by the Board. Stock Options. Incentive stock options may be granted alone, in addition to, or in tandem with nonqualified stock options under the Stock Plan. Unless the Board determines otherwise, the stock option agreement will provide that any non-vested stock is forfeited back to the Company upon the optionee's termination of employment for any reason. Adjustments upon Changes in Capitalization, Merger or Sale of Assets. In the event that the Company's stock changes by reason of any stock split, dividend, combination, reclassification or other similar change in the Company's capital structure effected without the receipt of consideration, appropriate adjustments shall be made in the number and class of shares of stock subject to the Stock Plan, the number and class of shares of stock subject to any option outstanding under the Stock Plan, and the exercise price for shares subject to any such outstanding option. In the event of a liquidation or dissolution, any unexercised options will terminate. In the event of a change of control of the Company, as determined by the Board, the Board, in its discretion, may provide for the assumption, substitution or adjustment of each outstanding option. Amendment and Termination of the Stock Plan. The Board may amend, alter, suspend or terminate the Stock Plan, or any part thereof, at any time and for any reason. However, the Company shall obtain shareholder approval for any amendment to the Stock Plan to the extent necessary and desirable to comply with applicable laws. No such action by the Board or shareholders may alter or impair any option previously granted under the Stock Plan without the written consent of the optionee. The Stock Plan shall remain in effect until termination by action of the Board or operation of law. Federal Income Tax Consequences Relating to the 2001 Stock Plan The federal income tax consequence to the Company and its employees of options under the Stock Plan are complex and subject to change. The following discussion is only a summary of the general rules applicable to the Stock Plan. Recipients of options under the Stock Plan should consult their own tax advisors since a taxpayer's particular situation may be such that some variation of the rules described below will apply. As discussed above, several different types of instruments may be issued under the Stock Plan. The tax consequences related to the issuance of each is discussed separately below. Options As noted above, options granted under the Stock Plan may be either incentive stock options or nonqualified stock options. Incentive stock options are options which are designated as such by the Company and which meet certain requirements under Section 422 of the Code and the regulations thereunder. Any option which does not satisfy these requirements will be treated as a non-qualified stock option. Incentive Stock Options If an option granted under the Stock Plan is treated as an incentive stock option, the optionee will not recognize any income upon either the grant or the exercise of the option, and the Company will not be allowed a deduction for federal tax purposes. Upon a sale of the shares, the tax treatment to the optionee and to the Company will depend primarily upon whether the optionee has met certain holding period requirements at the time he or she sells the shares. In addition, as discussed below, the exercise of an incentive stock option may subject the optionee to alternative minimum tax liability. If an optionee exercises an incentive stock option and does not dispose of the shares received within two years after the date such option was granted or within one year after the transfer of the shares to him or her, any gain realized upon the disposition will be characterized as long-term capital gain and, in such case, the Company will not be entitled to a federal tax deduction. If the optionee disposes of the shares either within two years after the date the option is granted or within one year after the transfer of the shares to him or her, such disposition will be treated as a disqualifying disposition and an amount equal to the lesser of (1) the fair market value of the shares on the date of exercise minus the exercise price, or (2) the amount realized on the disposition minus the exercise price, will be taxed as ordinary income to the optionee in the taxable year in which the disposition occurs. (However, in the case of gifts, sales to related parties, and certain other transactions, the full difference between the fair market value of the stock and the purchase price will be treated as compensation income). The excess, if any, of the amount realized upon disposition over the fair market value at the time of the exercise of the option will be treated as long-term capital gain if the shares have been held for more than one year following the exercise of the option. In the event of a disqualifying disposition, the Company may withhold income taxes from the optionee's compensation with respect to the ordinary income realized by the optionee as a result of the disqualifying disposition. The exercise of an incentive stock option may subject an optionee to alternative minimum tax liability. The excess of the fair market value of the shares at the time an incentive stock option is exercised over the purchase price of the shares is included in income for purposes of the alternative minimum tax even though it is not included in taxable income for purposes of determining the regular tax liability of an employee. Consequently, an optionee may be obligated to pay alternative minimum tax in the year he or she exercises an incentive stock option. In general, there will be no federal income tax deductions allowed to the Company upon the grant, exercise, or termination of an incentive stock option. However, in the event an optionee sells or otherwise disposes of stock received on the exercise of an incentive stock option in a disqualifying disposition, the Company will be entitled to a deduction for federal income tax purposes in an amount equal to the ordinary income, if any, recognized by the optionee upon disposition of the shares, provided that the deduction is not otherwise disallowed under the Code. Nonqualified Stock Options Nonqualified stock options granted under the Stock Plan do not qualify as "incentive stock options" and will not qualify for any special tax benefits to the optionee. An optionee generally will not recognize any taxable income at the time he or she is granted a nonqualified stock option. However, upon its exercise, the optionee will recognize ordinary income for federal tax purposes measured by the excess of the then fair market value of the shares over the exercise price. The income realized by the optionee will be subject to income and other employee withholding taxes. The optionee's basis for determination of gain or loss upon the subsequent disposition of shares acquired upon the exercise of a nonqualified stock option will be the amount paid for such shares plus any ordinary income recognized as a result of the exercise of such option. Upon disposition of any shares acquired pursuant to the exercise of a nonqualified stock option, the difference between the sale price and the optionee's basis in the shares will be treated as a capital gain or loss and generally will be characterized as long-term capital gain or loss if the shares have been held for more than one year at their disposition. In general, there will be no federal income tax deduction allowed to the Company upon the grant or termination of a nonqualified stock option or a sale or disposition of the shares acquired upon the exercise of a nonqualified stock option. However, upon the exercise of a nonqualified stock option, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that an optionee is required to recognize as a result of the exercise, provided that the deduction is not otherwise disallowed under the Code. Vote Required and Board Recommendation - -------------------------------------- The affirmative vote of holders of a majority of the shares of common stock cast in person or by proxy at the meeting is required for approval of the Stock Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE STOCK PLAN. 3. PROPOSAL FOR APPROVAL TO AMEND THE ARTICLES OF INCORPORATION WITH AMENDMENT NO. 1 TO DELETE THE PROVISION THAT STATES THE NUMBER OF DIRECTORS IN THE ARTICLES OF INCORPORATION At the meeting, the shareholders will be requested to approve an amendment ("Amendment No. 1") of the Auto-Graphics, Inc. Articles of Incorporation. The Board recommends approval of Amendment No.1. The original Articles of Incorporation were filed with the California Secretary of State on August 15, 1960. The Articles of Incorporation currently provide that the board of directors shall consist of three members as follows: FOURTH: (a) the number of directors of the corporation is three. (b) the names and addresses of the persons who are appointed to act as first directors are: (1) Ira C. Cope, 1216 South Mayflower Avenue, Monrovia, California. (2) Opal T. Cope, 1216 South Mayflower Avenue, Monrovia, California. (3) Charles M. Cope, 915 West Olive Avenue, Monrovia, California. Amendment No. 1 provides for the deletion of the provision stating the number of directors on the Company's board of directors as follows: Article FOURTH of the Articles of Incorporation of this corporation shall be stricken in its entirety from the Articles of Incorporation. The board of directors wish to provide for the numbers of directors in the bylaws of the Company by means of a variable board of directors of at least three (3) but not more than five (5) members, with the exact number currently being three (3) directors until changed by the board of directors or the shareholders If Amendment No. 1 is approved, it means that the Articles of Incorporation does not have to be amended if the exact current number of directors is increased to four (4) or five (5) directors. It would only require an amendment to the bylaws with either board of director or shareholder approval. In the event the exact current number of directors is increased to five (5) members, the board of directors could appoint the two directors to fill the two vacancies. The positive effect of this amendment for the Company's shareholders is fourfold: (i) Faster appointment to the board of directors; (ii) A more diversified board of directors, because of more members; and (iii) Cost savings because the board of directors can fill any vacancies on the board of directors; and (iv) Members of the board of directors who are experienced in directorship duties could be filling any vacancies on the board of directors. The negative effect of this amendment for the Company's shareholders would be that shareholders will be allowing the Company's board of directors to fill any vacancy that may occur on the board of directors. Vote Required and Board Recommendation - -------------------------------------- The affirmative vote of holders of a majority of the shares of common stock cast in person or by proxy at the meeting is required for approval of Amendment No. 1 of the Articles of Incorporation. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF AMENDMENT NO. 1 TO THE ARTICLES OF INCORPORATION. 4. PROPOSAL FOR APPROVAL TO AMEND THE ARTICLES OF INCORPORATION WITH AMENDMENT NO. 2 TO ADD A PROVISION TO ELIMINATE OR LIMIT THE PERSONAL LIABILITY OF A DIRECTOR FOR MONEY DAMAGES At the meeting, the shareholders will also be requested to approve an amendment ("Amendment No. 2") of the Auto-Graphics, Inc. Articles of Incorporation. The Board recommends approval of Amendment No. 2. When the original Articles of Incorporation were filed with the California Secretary of State on August 15, 1960, the California corporation law at that time did not permit a provision in the Articles of Incorporation to eliminate or limit the personal liability of directors for money damages. In 1987 the California Corporations Code was amended to permit the Articles of Incorporation to contain this provision. Amendment No. 2 provides for addition of the provision that would eliminate or limit the personal liability (except for violation of federal securities laws or federal law generally) of directors for money damages. This Amendment No. 2 is effective only for acts committed after the amendment is approved by the required vote of the shareholders and the board of directors of the Company. Amendment No.2 is as follows: Article SIXTH as set forth herein shall be added to the Articles of Incorporation as follows: SIXTH: The liability (except for violation of any federal securities laws or federal law generally) of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. This Article SIXTH is effective only for acts committed after this amendment is approved by the required vote of the shareholders and the board of directors of this corporation. This provision of eliminating or limiting the personal liability for money damages for directors, does not extend to director acts that are: (i) covered under Section 310 of the California Corporations Code (i.e. contracts in which director has a material financial interest); (ii) intentional misconduct; (iii) believed to be against the best interest of the corporation or its shareholders; (iv) involved in the absence of good faith; (v) transactions where director derived an improper benefit; (vi) a reckless disregard for the director's duty to the corporation or its shareholders in circumstances where the director was aware of a risk of serious injury to the corporation or its shareholders; (vii) an abdication of the director's duty to the corporation or its shareholders; (viii) covered under Section 316 of the California Corporations Code (i.e. corporate actions subjecting directors to joint and several liability). The Board of directors believes that Amendment No. 2 is necessary in order to attract qualified individuals to serve on the board of directors. The positive effect of the adoption of Amendment No. 2 for Auto-Graphics' shareholders is that it will attract qualified individuals to serve on the board of directors. At the present time other California corporations have this provision in their Articles of Incorporation and Auto-Graphics is competing with these corporations for qualified individuals to serve on their board of directors. Thus, this amendment will allow Auto-Graphics to compete equally with other California corporations to attract qualified individuals to serve on its board of directors. The board of directors does not believe there is any negative effect to the adoption of Amendment No. 2 for the Auto-Graphics' shareholders, because the benefit of attracting qualified individuals to serve on the board of directors greatly outweighs any potential increased costs to the Company. Vote Required and Board Recommendation - -------------------------------------- The affirmative vote of holders of a majority of the shares of common stock cast in person or by proxy at the meeting is required for approval of Amendment No. 2 of the Articles. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF AMENDMENT NO. 2 TO THE ARTICLES OF INCORPORATION. 5. PROPOSAL FOR APPROVAL TO AMEND THE BY-LAWS TO STATE THE NUMBER OF DIRECTORS IN THE BYLAWS. At the meeting, the shareholders will be requested to approve an amendment ("Amendment") to the Auto-Graphics, Inc. Bylaws ("Bylaws"). The Amendment to the Bylaws provides that the authorized number of directors shall not be less than three (3) nor more than five (5), with the current number to be three (3) directors until changed by an amendment adopted by the board of directors or the shareholders. The board recommends approval of this Amendment to the Bylaws. The current provision in the Company's Bylaws reads as follows: Section 2. Number of Directors and Qualifications. The authorized number of Directors of the corporation shall be not less than five (5) nor more than eight (8) until changed by amendment of the Articles of Incorporation or by a By-Law duly adopted by the shareholders amending this section 2. The exact number of Directors of the corporation shall be seven (7) until changed, within the limits specified in the preceding sentence, by a By-Law or amendment thereof duly adopted by the shareholders or by the Board of Directors amending this Section 2. Provided, however, that if it is proposed to reduce the authorized number of Directors below five (5), the vote or written consent of shareholders holding more than eighty percent (80%) of the voting power shall be necessary for such reduction. Because the current Articles of Incorporation of Auto-Graphics states that the number of directors is three, only an amendment to the Articles of Incorporation can change the number of directors. Since, there was never an amendment to the Articles of Incorporation to change number of directors, the current Section 2 of the Bylaws is erroneous and has no force or effect. Previously, in Item No. 3 of this Proxy Statement, it was explained that the Articles of Incorporation are being amended to remove the provision for the stated number of directors, so that the Bylaws can provide for the number of directors. The Amendment to the Bylaws will read as follow: 2. NUMBER OF DIRECTORS AND QUALIFICATION . The authorized number of directors shall be not less than three (3) nor more than five (5) until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted either by the Board or the shareholders. The exact number of directors shall be three (3) until changed as provided in this Section 2. The Amendment will permit the board of directors to increase the current exact number of directors from three (3) members to five (5) members. This will permit the board of directors to appoint two new directors to fill the two vacancies. This will allow for ease in increasing the number of directors on the Company's board of directors. Auto-Graphics' board of directors does not have a schedule for adopting an amendment to expand the board to five (5) members nor is there a schedule to submit the amendment to the shareholders. As stated earlier, under Item No. 3 of this Proxy Statement, the positive effect of this amendment for the Company's shareholders is fourfold: (i) Faster appointment to the board of directors; (ii) A more diversified board of directors, because of more members; and (iii) Cost savings because the board of directors can fill any vacancies on the board of directors; and (iv) Members of the board of directors who are experienced in directorship duties could be filling any vacancies on the board of directors. The negative effect of this amendment for the Company's shareholders would be that shareholders will be allowing the Company's board of directors to fill any vacancy that may occur on the board of directors. Vote Required and Board Recommendation - -------------------------------------- The affirmative vote of holders of a majority of the shares of common stock cast in person or by proxy at the meeting is required for approval of the Amendment to the Bylaws. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THIS AMENDMENT TO THE BYLAWS. 6. SHAREHOLDER PROPOSAL. Robert H. Bretz, 520 Washington Blvd., Suite 428, Marina del Rey, California 90202, phone (310) 578-1957 and Paul Shepherd, 2951 East Valley Road, Montecito, California 93108, phone (805) 969-7370, have notified the Company that they intend to submit the following proposal at this year's annual meeting: Messrs. Bretz and Shepherd have proposed the following amendment to the Company's By-Laws: RESOLVED, that the Company's By-laws, Article V, Section 5, be and is hereby amended by the shareholders of the Company (the "Amendment") to retain Section 5 as it currently appears but to add immediately following existing Section 5 "CONTRACTS, ETC." the following new Section 5.1. "RELATED PARTY TRANSACTIONS, CONTRACTS" to read as follows (the "Amendment"): "Section 5.1 RELATED PARTY TRANSACTIONS, CONTRACTS. Any contract or transaction between the Company and any director of the Company and/or any company or other entity in which any such director or any member of such director's family holds any interest (herein "related party") shall first be submitted for review, approval and authorization in good faith (following full disclosure of all relevant facts and circumstances as to such proposed transaction and/or contract including the director's interest therein) by the shareholders of the Company with the shares owned by the interested director not be entitled to vote thereon, or by a vote of the board of directors sufficient without counting the vote of the interested director, as being in the Company's just and reasonable to the Company. In no event shall any such "related party" transaction or contract be entered into and/or performed by the Company without the prior formal approval of the Company's shareholders or board of directors as provided for herein. Notwithstanding any contrary provision in these By-Laws, this section of the By-Laws shall only be amended by a majority vote (excluding shares owned by the interested shareholder) of shares entitled to vote at any annual meeting of shareholders as provided for in these By-Laws." Supporting Statement. Messrs. Bretz and Shepherd recommend to the shareholders of the Company for the adoption of the proposal at the Company's 2001 Annual Meeting of Shareholders to provide that all transactions and contracts by and between the Company and any such "related party" are first reviewed, approved and authorized by the disinterested shareholders or disinterested directors are just and reasonable to the Company. During the last ten years, the Company has entered into a lease with the 664 Company, a California partnership ("The 664 Company") in which Mr. Cope is the managing general partner and which owns the land and building in Pomona, California leased by the Company as its corporate office and production facility. Total payments by Auto- Graphics to The 664 Company in respect of such lease during the last ten (10) years approximated $4,500,000, including pro rata share of operating expenses. Statement Against Proposal. The Board recommends a vote against the shareholder proposal. The lease with The 664 Company ("Lease") commenced on July 1, 1986, for an original term of five years and for 27,000 square feet of office space. The Lease provided for two options to extend the Lease for a period of five years each (the "Lease Options"). Prior to its execution, the Lease was approved unanimously by the three disinterested members of the board of directors of the Company. During the term of the Lease, The 664 Company agreed in 1998 to reduce the rental rate by 22% and in 2000 allowed Auto-Graphics to reduce its space leased by approximately 10,000 square feet. The Lease Options were exercised by Auto-Graphics without any further approvals of the disinterested members of the board of directors. Mr. Bretz, as the Company's general counsel at the time, did not advise Auto-Graphics that any such approval might be required. The Lease that Mr. Bretz alleges is unfair is at a rental rate of $1.55 per foot per month. The rental rates paid by the two other non-affiliated tenants located in the Auto-Graphics' facility are at a rental rate of $1.65 per foot per month. An internal report prepared at the request of Robert H. Bretz concluded that Auto-Graphics saved approximately $1,300,000 as a result of The 664 Company waiving all but one cost of living adjustment over the 15 year term of the Lease. The Lease, originally due to expire on June 30, 2001, was extended for 90 days upon its same terms and conditions. On September 30, 2001, the Lease expired. The 664 Company has agreed to allow Auto-Graphics to holdover at its current rental rate until March 31, 2002 so as to allow Auto-Graphics to assess its space requirements. The 664 Company has proposed that Auto-Graphics enter into a new lease for a term of five years upon the same rate and terms as the two other non- affiliated tenants in the Company's facility for approximately 25% less space than currently leased. Any new lease will be submitted for approval of the disinterested members of Auto-Graphics' board of directors pursuant to California Corporations Code Section 310. California Corporations Code Section 310 places significant restrictions on contracts and transactions between a company and any of its directors or with an entity in which any of its directors have a material financial interest. Section 310(a) of the California Corporation Code provides as follows: A contract or transaction between Auto-Graphics and one of its directors or with an entity in which one of its directors has a material financial interest is valid, if the contract is: (1) Approved by the disinterested shareholders ("Shareholder Approval"); or (2) Approved by the disinterested board of directors and the contract or transaction is just and reasonable as to Auto-Graphics ("Director Approval"); or (3) The contract or transaction is just and reasonable as to Auto- Graphics ("Just and Reasonable Approval"). Thus, if one of the three procedures is followed, then the related party transaction is valid and binding on the parties. Also, note that if a disinterested Board of Directors approved the lease with The 664 Company, the lease must also be just and reasonable as to Auto- Graphics for the lease to be valid and binding on all parties. Auto-Graphics is bound by the California Corporations Code to follow Section 310 and thus all of a shareholder's concerns about related party transactions are already covered by Section 310 of the California Corporations Code in that any related party transactions involving Director Approval would be subject to a Just and Reasonable determination. However, the shareholder proposal would eliminate the Just and Reasonable Approval procedure. Thus, the shareholder proposal will not allow Auto- Graphics to avail itself of the Just and Reasonable Approval procedure when all other corporations in California can do so. Auto-Graphics' objective is to return Auto-Graphics to profitability. The shareholder proposal does not cut costs, and if shareholder approval is required for a related party transaction, it can increase costs when compared to the costs of adhering to the Just and Reasonable Approval procedure. To burden Auto-Graphics with such a time consuming and costly procedure would not seem to foster the objective of restoring profitability. However, Auto-Graphics is going to submit the 664 Lease to the disinterested board members for their approval as stated in this Proxy Statement. The Shareholder's proposal differs from California Corporations Code Section 310 on two major points. First, the related party contract must be submitted prior to entry into the contract to the disinterested shareholders or to the disinterested directors for their "review, approval and authorization". Section 310 does not require prior approval of a related party transaction. Second, Section 310 of the California Corporations Code allows for the enforceability of such related party contracts if the party asserting the validity of the contract is able to prove that the contract is just and reasonable to Auto-Graphics. The Shareholder's proposal does not allow for this approval procedure. Therefore any related party contract not "reviewed, approved and authorized" in advance by the disinterested shareholders or the disinterested directors could not be entered into by Auto-Graphics even though the contract is just and reasonable to Auto- Graphics and allowed by Section 310 of the California Corporations Code. Further, under California Corporations Code Section 310, Auto-Graphics has the right to assert the validity of a related party contract if it proves that the contract is just and reasonable to Auto-Graphics. Therefore, a related party contract that is very favorable to Auto-Graphics, can be asserted by Auto-Graphics to be valid and binding on all parties. Under the shareholder proposal, Auto-Graphics could not do so, and, in fact, it couldn't even enter into the contract. The board of directors believe that California Corporations Code Section 310 already greatly protects the shareholders of the Company and that the Shareholder proposal will create bylaws that conflict with the California Corporations Code. Vote Required and Board Recommendation - -------------------------------------- The affirmative vote of holders of a majority of the shares of common stock cast in person or by proxy at the meeting is required for approval of the proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE SHAREHOLDER PROPOSAL. PROPOSALS OF SHAREHOLDERS FOR THE 2002 ANNUAL MEETING To be considered for inclusion in next year's Proxy Statement, shareholder proposals must be received at the Company's principal executive office no later than the close of business on January 31, 2002. For any proposal that is not submitted for inclusion in next year's proxy statement (as described in the preceding paragraph) but is instead sought to be presented directly at next year's annual meeting, Securities and Exchange Commission rules permit management to vote proxies in its discretion if (a) the Company receives notice of the proposal before the close of business on January 31, 2002 and advises stockholders in next year's proxy statement about the nature of the matter and how management intends to vote on such matter, or (b) does not receive notice of the proposal prior to the close of business on January 31, 2002. Notices of intention to present proposals at the 2002 annual meeting should be addressed to Secretary, Auto-Graphics, Inc., 3201 Temple Avenue, Pomona, California 91768. The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements. SOLICITATION OF PROXIES The proxy accompanying this Proxy Statement is solicited by the Board of directors of the Company. Proxies may be solicited by officers, directors, and regular supervisory and executive employees of the Company, none of whom will receive any additional compensation for their services. Such solicitations may be made personally or by mail, facsimile, telephone, telegraph, messenger, or via the Internet. The Company will pay persons holding shares of common stock in their names or in the names of nominees, but not owning such shares beneficially, such as brokerage houses, banks, and other fiduciaries, for the expense of forwarding solicitation materials to their principals. All of the costs of solicitation of proxies will be paid by the Company. VOTING PROCEDURES Tabulation of Votes: Votes cast by proxy or in person at the meeting will be tabulated by persons appointed as inspectors of election for the meeting. Effect of an Abstention and Broker Non-Votes: A shareholder who abstains from voting on any or all proposals will be included in the number of shareholders present at the meeting for the purpose of determining the presence of a quorum. Abstentions and broker non-votes will not be counted either in favor of or against the election of the nominees or other proposals. Brokers holding stock for the accounts of their clients who have not been given specific voting instructions as to a matter by their clients will vote their clients' proxies in their own discretion. AUDITORS Representatives of BDO Seidman, LLP, independent public auditors for the Company for fiscal 2000 and the current fiscal year, will be present at the Annual Meeting, will have an opportunity to make a statement, and will be available to respond to appropriate questions. FEES PAID TO BDO SEIDMAN, LLP The following table shows the fees paid or accrued by the Company for the audit and other services provided by BDO Seidman, LLP for the fiscal year 2000. Audit Fees $85,331 Financial Information System Design and Implementation Fees -0- All Other Fees -0- ------- Total $85,331 OTHER MATTERS The Board of directors does not intend to bring any other business before the meeting, and so far as is known to the Board, no matters are to be brought before the meeting except as specified in the notice of the meeting. As to any other business that may properly come before the meeting, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies. If any of your shares of the Company are held in the name of a brokerage firm, bank, nominee or other institution, only it can vote such shares and only upon receipt of your specific instructions. Please sign, date and promptly mail the WHITE proxy card in the envelope provided by your broker. Remember, your shares cannot be voted unless you return a signed and executed proxy card to your broker. This Proxy Statement includes forward looking statements within the meaning of section 27A of the Securities Act and section 21E of the Exchange Act. If you have any questions or require any additional information or assistance or wish a copy of the annual report, please call Daniel E. Luebben, the Secretary of the Company, at 1-800-776-6939, or send request to 3201 Temple Avenue, Pomona, California 91768. DATED: Pomona, California, December 21, 2001. AUTO-GRAPHICS, INC. ATTN: CHIEF FINANCIAL OFFICER 3201 TEMPLE AVENUE POMONA, CALIFORNIA 91768 1-800-776-6939 This proxy when properly signed will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS PROVIDED, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4, 5, AND AGAINST PROPOSAL 6. Please mark your votes as indicated [X] FOR WITHHOLD election of vote all from all nominees nominees ----------- -------- 1. Election of directors: 01 Robert S. Cope, 02 James R. Yarter, 03 Robert L. Lovett, [_] [_] Except for nominee(s) listed below from whom vote is withheld: _________________________________________ FOR AGAINST ABSTAIN --- ------- ------- 2. Proposal to Approve the 2001 Stock Plan [_] [_] [_] 3. Proposal to Approve Amendment No. 1 to Articles of Incorporation [_] [_] [_] 4. Proposal to Approve Amendment No. 2 to Articles of Incorporation [_] [_] [_] 5. Proposal to Approve an Amendment to the Bylaws to state the number of directors in the Bylaws [_] [_] [_] 6. Shareholder Proposal [_] [_] [_] (The Board recommends a vote against this proposal). 7 In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting. AUTO-GRAPHICS, INC. P R O X Y FOR ANNUAL MEETING OF THE SHAREHOLDERS OF AUTO-GRAPHICS, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints ROBERT S. COPE with full power of substitution, as proxies to vote the shares which the undersigned is entitled to vote at the Annual Meeting of Shareholders of the Company to be held at 3201 Temple Avenue, Pomona, California 91768 on January 15, 2002 at 3:00 p.m. and at any adjournments thereof. IMPORTANT - PLEASE SIGN AND RETURN PROMPTLY. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by an authorized person. Signature________________________________________ Dated: ____________ Signature if held jointly________________________ Dated: ____________ YOUR VOTE IS IMPORTANT! VOTE BY PROXY CARD Mark, sign and date your proxy card and return it promptly in the enclosed envelope. THANK YOU FOR VOTING. JAN152002PROXYa EX-1 3 isonqsoplan2001.txt DRAFT 2001 STOCK PLAN AUTO-GRAPHICS, INC. 2001 STOCK OPTION PLAN This AUTO-GRAPHICS, INC 2001 STOCK OPTION PLAN ("Plan") is made and entered into by AUTO-GRAPHICS, INC., a California corporation ("Company"). Recitals A. The Company desires to adopt stock option plan. B. By execution of this Plan, the Company has adopted the stock option plan contained herein. Operative Provisions NOW, THEREFORE, it is agreed by the Company to adopt the following stock option plan. 1. PURPOSES. (a) Eligible Stock Option Recipients. The persons eligible to receive Stock Options are the Employees, Directors and Consultants of the Company and its Affiliates. (b) Available Stock Options. The purpose of the Plan is to provide a means by which eligible recipients of Stock Options may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following stock option: (i) Incentive Stock Options; and (ii) Nonqualified Stock Options. (c) General Purpose. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Options, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Common Stock" means the common stock of the Company. (e) "Company" means Auto-Graphics, Inc., a California corporation. (f) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (g) "Continuous Service" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's service with the Company or an Affiliate. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board, in its sole discretion, shall determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by the Company, including sick leave, military leave or any other personal leave. (h) "Corporate Transaction" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (i) "Director" means a member of the Board of Directors of the Company. (j) "Disability" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (k) "Employee" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of the Common Stock determined as follows: (i) The price for a share of Company common stock underlying each option is the arithmetic mean between the asked and the bid prices on the closing of the market on such date as reported on the Over-the-Counter Bulletin Board. (ii) In the absence of such market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Nonqualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (r) "Option" means an Incentive Stock Option or a Nonqualified Stock Option granted pursuant to the Plan. (s) "Option Agreement" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (t) "Optionholder" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (u) "Participant" means a person to whom a Stock Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Option. (v) "Plan" means this Auto-Graphics, Inc. 2001 Stock Option Plan (w) "Securities Act" means the Securities Act of 1933, as amended. (x) "Ten Percent Stockholder" means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) Administration by Board. The Board shall administer the Plan. (b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Options; when and how each Stock Option shall be granted, what type or combination of types of Stock Option shall be granted; the provisions of each Stock Option granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Option; and the number of shares of Common Stock with respect to which a Stock Option shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Option Agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Option as provided in Section 12. (iv) To terminate or suspend the Plan as provided in Section 13. (v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) Effect of Board's Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) Share Reserve. Subject to the provisions of Section 11 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Options shall not exceed in the aggregate Four Hundred Ninety-Nine Thousand (499,000) shares of Common Stock. (b) Reversion of Shares to the Share Reserve. If any Stock Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Option shall revert to and again become available for issuance under the Plan. (c) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Eligibility for Specific Stock Options. Incentive Stock Options may be granted only to Employees. Stock Options other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonqualified Stock Options at the time of grant. The provisions of separate Options need not be identical, but each Option shall include the substance of each of the following provisions: (a) Term. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) Exercise Price of an Incentive Stock Option. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. (c) Exercise Price of a Nonqualified Stock Option. The exercise price of each Nonqualified Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. (d) Consideration. The purchase price of Common Stock acquired pursuant to an Option shall be paid in cash at the time the Option is exercised. (e) Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. (f) Transferability of a Nonqualified Stock Option. A Nonqualified Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. (g) Vesting Generally. The total number of shares of Common Stock subject to an Option must vest and therefore become exercisable in periodic installments. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. (h) Termination of Continuous Service. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) Disability of Optionholder. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (j) Death of Optionholder. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to Section 6(e) or 6(1), but only within the period ending on the earlier of: (1) the date eighteen (18) months following the date of death, or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Options shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Option may first be exercised or the time during which a Stock Option or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Option stating the time at which it may first be exercised or the time during which it will vest. (b) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Option unless and until such Participant has satisfied all requirements for exercise of the Stock Option pursuant to its terms. (c) No Employment or other Service Rights. Nothing in the Plan or any instrument executed or Stock Option granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Option was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without Cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonqualified Stock Options. (e) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Option, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Option; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Option for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if: (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Option has been registered under a then currently effective registration statement under the Securities Act, or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) Withholding Obligations. To the extent provided by the terms of a Stock Option Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Option, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) Capitalization Adjustments. If any change is made in, or other event occurs with respect to, the Common Stock subject to the Plan, or subject to any Stock Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company). the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Section 4(a) and 4(b) and the maximum number of securities subject to award to any person pursuant to Section 5(c), and the outstanding Stock Options will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Options shall terminate immediately prior to the completion of such dissolution or liquidation. (c) Corporate Transaction. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume any or all Stock Options outstanding under the Plan or may substitute similar Stock Options for Stock Options outstanding under the Plan (it being understood that similar Stock Options include awards to acquire the same consideration paid to the stockholders or the Company, as the case may be, pursuant to the Corporate Transaction). In the event any surviving corporation or acquiring corporation does not assume any or all such outstanding Stock Options or substitute similar Stock Options for such outstanding Stock Options, then with respect to Stock Options that have been neither assumed nor substituted arid that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction, the vesting of such Stock Options (and, if applicable, the time during at which such Stock Options may be exercised) shall (contingent upon consummation of such Corporate Transaction) be accelerated in full to a date prior to the consummation of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the consummation of the Corporate Transaction), and the Stock Options shall terminate if not exercised (if applicable) at or prior to such event effective time. With respect to any other Stock Options outstanding under the Plan, that have been neither assumed nor substituted, the vesting of such Stock Options (and, if applicable, the time at which such Stock Option may be exercised) shall not be accelerated unless otherwise provided in a written agreement between the Company or any Affiliate and the holder of such Stock Option, and such Stock Options shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction. 12. AMENDMENT OF THE PLAN. (a) Amendment of Plan. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code. (b) Stockholder Approval. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval. (c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) No Impairment of Rights. Rights under any Stock Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless: (i) the Company requests the consent of the Participant, and (ii) the Participant consents in writing. (e) Amendment of Stock Options. The Board at any time, and from time to time. may amend the terms of any one or more Stock Options, provided, however, that the rights under any Stock Option shall not be impaired by any such amendment unless: (i) the Company requests the consent of the Participant, and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Option granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the state of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. IN WITNESS WHEREOF, the Company has adopted this Plan on this day of , 2001. AUTO-GRAPHICS, INC., a California corporation By: Robert S. Cope Its: President By: Daniel E. Luebben Its: Secretary -----END PRIVACY-ENHANCED MESSAGE-----