-----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, DclhpLwie0Fd2jJmFwdAsPbxE2/a8nzkROqP2Z7tvrKRn/uOfqNXGR5Ebh8Lblxe jx6BxGgtpkvaEQkRu7f0GQ== 0000008598-02-000035.txt : 20020814 0000008598-02-000035.hdr.sgml : 20020814 20020814180238 ACCESSION NUMBER: 0000008598-02-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTO GRAPHICS INC CENTRAL INDEX KEY: 0000008598 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 952105641 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04431 FILM NUMBER: 02737806 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-Q 1 form10q62002final.txt AUTO-GRAPHICS FORM 10-Q FOR THE QUARTER ENDED 6/30/02 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number June 30, 2002 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 91768-3200 -------------------------------------- -------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (909) 595-7204 ------------------ 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Total shares of Common Stock issued and outstanding as of August 9, 2002 were 4,997,234. AUTO-GRAPHICS, INC. Form 10-Q June 30, 2002 TABLE OF CONTENTS Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For Six Months Ended June 30, 2002 and 2001......................1 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For Three Months Ended June 30, 2002 and 2001....................2 Unaudited Condensed Consolidated Balance Sheets As of June 30, 2002 and December 31, 2001....................3 Unaudited Consolidated Statements of Cash Flows For Six Months Ended June 30, 2002 and 2001..................4 Notes to Unaudited Condensed Consolidated Financial Statements.........................................5 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................15 Part II - Other Information...................................21 Signatures....................................................25 -1- AUTO-GRAPHICS, INC. Form 10-Q PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For The Six Months Ended June 30 2002 2001 ---------- ---------- Net sales (See Note 3) $3,232,260 $4,716,005 Cost and expenses: Cost of sales 1,804,843 2,928,983 Selling, general & administrative 1,348,466 2,139,812 ---------- ---------- Total costs and expenses 3,153,309 5,068,795 ---------- ---------- Income/(loss) from operations 78,951 ( 352,790) Interest/other income/(expense) ( 35,926) ( 64,334) ---------- ---------- Income/(loss) before taxes and minority interests 43,025 ( 417,124) Provision for taxes based on income (See Note 4) 3,000 5,216 Minority interests ( 14,164) ( 184,907) ---------- ---------- Net income/(loss) and total comprehensive income/(loss) $ 54,189 ($ 237,433) ========== ========== Basic income/(loss) per share $ 0.01 ($ 0.05) Basic weighted average shares outstanding 4,997,234 4,997,234 Diluted income/(loss) per share $ 0.01 ($ 0.05) Diluted weighted average shares outstanding 5,070,567 4,997,234 See Notes to Unaudited Condensed Consolidated Financial Statements. -2- AUTO-GRAPHICS, INC. Form 10-Q Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For The Three Months Ended June 30 2002 2001 ---------- ---------- Net sales (See Note 3) $1,596,254 $1,593,936 Costs and expenses: Cost of sales 866,361 1,367,439 Selling, general & administrative 691,675 1,025,999 ---------- ---------- Total costs and expenses 1,558,036 2,393,438 ---------- ---------- Income/(loss) from operations 38,218 ( 799,502) Interest/other income/(expense) ( 10,877) ( 29,446) ---------- ---------- Income/(loss) before taxes and minority interests 27,341 ( 828,948) Provision for taxes/(benefit) based on income/(loss) (See Note 4) 3,000 ( 56,784) Minority interests ( 2,605) ( 83,033) ---------- ---------- Net income/(loss) and total comprehensive income/(loss) $ 26,946 ($ 689,131) ========== ========== Basic income/(loss) per share $ 0.01 ($ 0.14) Basic weighted average shares outstanding 4,997,234 4,997,234 Diluted income/(loss) per share $ 0.01 ($ 0.14) Diluted weighted average shares outstanding 5,143,900 4,997,234 See Notes to Unaudited Condensed Consolidated Financial Statements. -3- AUTO-GRAPHICS, INC. Form 10-Q Unaudited Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 ASSETS 2002 2001 ----------- ----------- Current assets: (Audited) Cash $ 124,579 $ 122,029 Accounts receivable, less allowance for doubtful accounts ($145,000 in 2002 and 2001) 319,786 695,789 Unbilled production costs 17,168 11,013 Other current assets 245,511 210,288 ----------- ----------- Total current assets 707,044 1,039,119 Software, net 3,352,980 3,458,256 Equipment, furniture and leasehold improvements, net 992,310 1,216,175 Other assets 78,525 87,210 ----------- ----------- $ 5,130,859 $ 5,800,760 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 243,442 $ 361,421 Deferred income 790,772 1,255,006 Other accrued liabilities 272,116 205,316 Accrued payroll and related liabilities 244,777 468,408 Current portion of long-term debt 1,393,521 1,380,427 ----------- ----------- Total current liabilities 2,944,628 3,670,578 Deferred taxes based on income 151,600 148,900 ----------- ----------- Total liabilities 3,096,228 3,819,478 Minority interests ( 133,877) ( 119,714) Stockholders' equity: Notes receivable - stock ( 73,297) ( 75,364) Common stock, 12,000,000 shares authorized, 4,997,234 shares issued and outstanding in 2002 and 2001 4,201,755 4,201,755 Accumulated deficit ( 1,960,228) ( 2,014,414) Accumulated comprehensive income/(loss) 278 ( 10,981) ----------- ----------- Total stockholders' equity 2,168,508 2,100,996 ----------- ----------- $ 5,130,859 $ 5,800,760 =========== =========== See Notes to Unaudited Condensed Consolidated Financial Statements. -4- AUTO-GRAPHICS, INC. Form 10-Q Unaudited Consolidated Statements of Cash Flows For the Six Months Ended June 30 Increase (Decrease) in Cash 2002 2001 Cash flows from operating activities: ----------- ----------- Net income/(loss) $ 54,189 ($ 237,433) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 583,374 711,972 Minority interests ( 14,163) ( 184,907) Changes in operating assets and liabilities: Accounts receivable 365,714 713,519 Unbilled production costs ( 6,155) 33,254 Other current assets ( 36,399) ( 28,273) Other assets 8,672 ( 9,122) Accounts payable ( 116,231) ( 361,615) Deferred income ( 457,216) ( 219,930) Other accrued liabilities 41,846 233,896 Accrued payroll and related liabilities ( 191,697) 22,613 ----------- ----------- Net cash provided by operating activities 231,934 673,974 Cash flows from investing activities: Capital expenditures ( 258,492) ( 1,068,244) Cash flows from financing activities: Net borrowings/under debt agreement 13,095 346,598 Payments on notes receivable-stock 2,067 2,136 ----------- ----------- Net cash provided by financing activities 15,162 348,734 ----------- ----------- Net decrease in cash ( 11,396) ( 45,536) ----------- ----------- Foreign currency effect on cash 13,946 - Cash at beginning of period 122,029 1,202,442 ----------- ----------- Cash at end of period $ 124,579 $ 1,156,906 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 55,873 $ 97,214 Income taxes 2,435 5,216 See Notes to Unaudited Condensed Consolidated Financial Statements. -5- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Condensed Consolidated Financial Statements June 30, 2002 NOTE 1. Basis of Presentation The unaudited condensed consolidated financial statements included herein have been prepared by the Registrant and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2002, the results of operations for the three and six months ended June 30, 2002 and 2001 and the statement of cash flows for the six months ended June 30, 2002 and 2001 pursuant to the rules and regulations of the Securities and Exchange Commission("SEC"). The consolidated financial statements include the accounts of Auto-Graphics, Inc., its wholly-owned and its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The results of operations for the subject periods are not necessarily indicative of the results for the entire year. This Quarterly Report on Form 10-Q is qualified in its entirety by the information included in the Company's Annual Report to the SEC on Form 10-K/A for the period ending December 31, 2001 including, without limitation, the financial statements and notes included therein. NOTE 2. Business As of June 30, 2002, the Company was in compliance with all of its loan covenants. The Company's primary bank renewed and extended the terms of its credit agreement for an additional year through June 2, 2003. The credit facility is a $1.6 million revolving line of credit, which decreases by $175,000 each quarter on September 30, 2002, December 31, 2002 and March 31, 2003 consistent with the Company's forecasted declining requirements for financing. In March 2001, the Company licensed the use of its REMARC(TM) bibliographic database of Library of Congress pre-1968 holdings to a Japanese Company for use exclusively in Japan for a one-time payment of $1.5 million. This transaction has had a material positive effect on the results of operations reported by the Company for the first six months ended June 30, 2001. -6- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 Asset Purchase of Maxcess Library Systems Verso Software: In February 2001, the Company completed the purchase of software, customer contracts and related assets of Maxcess Library Systems, Inc. The Verso software product expands the Company's ASP (Application Service Provider) product line into the integrated library automation business. Asset Purchase of Pigasus Wings Software: In June 2001, the Company acquired the software and rights to Wings, an ISO compliant inter- library loan software program developed by Pigasus, Inc. On November 6, 2001, the Company filed suit against Pigasus, Inc. and its principals seeking a judgment of the court that the acquisition contract be rescinded as well as monetary damages and attorney's fees (See Note 7 Legal Proceedings). In July, 2002, Pigasus delivered a complete and fully functional ISO (International Standards Organization) compliant interlibrary loan software product and the Company has agreed to acquire the Wings software product in settlement of the lawsuit. The Wings software will provide ISO compliant functionality for the Company's Impact/ONLINE(TM) interlibrary loan software module currently in use at over 10,000 libraries. Note 3. Operating Segments Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in interim and annual financial statements. The following table summarizes sales based on the location of the customers and assets based on the location of the asset presented on the basis of generally accepted accounting principles for the six months ended June 30, 2002, and 2001: 2002 2001 ----------- ----------- Geographic areas Net sales United States $ 2,784,022 $ 2,587,632 Foreign - Canada/Other 448,238 2,128,373 Long-lived assets, net United States 4,310,544 5,385,156 Foreign - Canada 34,746 93,566 -7- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 Note 4. Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been reported in the Company's financial statements or tax returns. At December 31, 2001, the Company had available approximately $1,115,000 in federal ($3,728,000 including Dataquad and LibraryCard subsidiaries), $1,055,000 in state and $199,000 in foreign net operating loss carryforwards, for income tax purposes. These net operating loss carryforwards expire in 2021 for federal taxes, 2007 for state and 2006 for foreign taxes. Because the NOL tax benefit for losses incurred in Dataquad and LibraryCard is unlikely to be realized, no tax benefit has been recognized and a valuation allowance has been established offsetting these potential future tax benefits. Note 5. Earnings Per Share Statement of Financial Accounting Standards No. 128, "Earnings per Share" requires the presentation of basic earnings per share and diluted earnings per share. Basic and diluted 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. For the year ended December 31, 2001, there were no common stock equivalents (warrants, options or convertible securities) outstanding. On May 3, 2002, the Company's Board of Directors granted stock options for 220,000 shares of the Company's restricted Common Stock to a director and certain officers and technical staff. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: Net Income Shares Per Share ---------- ---------- --------- Three months ended June 30, 2002 - -------------------------------- Basic earnings per share Net income available to common stockholders $ 26,946 4,997,234 $ 0.01 Effect of dilutive securities Stock options 146,666 ---------- ---------- --------- Diluted earnings per share Net income available to common stockholders $ 26,946 5,143,900 $ 0.01 -8- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 Note 5. Earnings Per Share (Continued) Net Income Shares Per Share ---------- ---------- --------- Three months ended June 30, 2001 - -------------------------------- Basic earnings per share Net income available to common stockholders ($ 689,131) 4,997,234 ($ 0.14) Effect of dilutive securities ---------- ---------- --------- Diluted earnings per share Net income available to common stockholders ($ 689,131) 4,997,234 ($ 0.14) Six months ended June 30, 2002 - ------------------------------ Basic earnings per share Net income available to common stockholders $ 54,189 4,997,234 $ 0.01 Effect of dilutive securities Stock options 73,333 ---------- ---------- --------- Diluted earnings per share Net income available to common stockholders $ 54,189 5,070,567 $ 0.01 Six months ended June 30, 2001 - ------------------------------ Basic earnings per share Net income available to common stockholders ($ 237,433) 4,997,234 ($ 0.05) Effect of dilutive securities ---------- ---------- --------- Diluted earnings per share Net income available to common stockholders ($ 237,433) 4,997,234 ($ 0.05) Note 6. Stock Option Plans As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", 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. -9- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 The Company adopted a 1997 Non-qualified Stock Option Plan effective December 31, 1997. The Plan consists of 300,000 shares of the Company's authorized but unissued Common Stock which shares have been reserved for possible future issuance under the Plan. The plan is a non- qualified plan covering only senior executives and related persons. As of June 30, 2002, there were no outstanding grants of options under the plan and no grants are currently planned. The Company adopted a qualified and non-qualified stock option plan following approval by its shareholders at its 2001 annual shareholder's meeting held on February 27, 2002. The plan consists of 499,000 shares with approximately 350,000 qualified shares reserved for employees and 149,000 non- qualified shares reserved for directors. On May 3, 2002, the Company's Board of Directors granted stock options for 220,000 shares of the Company's restricted Common Stock to a director (60,000 non-qualified shares), officers and technical staff (160,000 qualified shares). In June 2000, 700,000 shares each of Dataquad and LibraryCard Common Stock were sold to a trustee (Corey M. Patick) on a note to be held in trust ("trust shares") for use in a future stock purchase/option plan. As a result of the issuance, the Company's interest in the subsidiaries was diluted which resulted in a charge to Stockholders' Equity in the amount of $104,769. In January 2001, Robert S. Cope replaced Mr. Patick as trustee for the above trust shares. Under the trust agreement, the subsidiaries have the option to repurchase the stock on December 31, 2002. The effect of the repurchase would be a net increase in Minority Interests and a corresponding decrease in Stockholder's Equity of up to $280,500 ($180,250 for Dataquad and $100,250 for LibraryCard). In July, 2002 the Company exercised its right of first refusal and acquired 1,919,400 shares of common stock in each of its majority-owned subsidiaries, Dataquad, Inc. and LibraryCard, Inc. from a major investor bringing the Company's ownership to 6,609,400 (85.8%) in each subsidiary. -10- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 Note 7. Legal Proceedings On May 9, 2001 the Company terminated its long-time outside counsel, Robert H. Bretz, who had provided legal services and was compensated through his professional corporation, Robert H. Bretz, PC. Mr. Bretz is also a former director of the Company. Following Mr. Bretz' termination he began to file lawsuits for and on behalf of the Company that had not been authorized by Company's management or the Board of Directors. On August 8, 2001 one particular case filed by Mr. Bretz in the name of the Company, Case No. BC252517, was dismissed by the Los Angeles California Superior Court holding that the Action by Unanimous Written Consent signed solely by Mr. Bretz in reference to the filing of the case was invalid because it failed to satisfy the requirements of California Corporations Code Section 307(b). On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz et al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz had become disruptive and harmful to the business operations of the Company and damaged the Company by his various actions including his excessive billings to the Company. -11- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 As a response to the complaint filed by the Company, Mr. Bretz filed a derivative cross-complaint against three of the Company's officers, Robert S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary duty, fraud & deceit, misrepresentation, breach of contract/employment, removal for cause and other declaratory and injunctive relief. The original cross-complaint was filed on July 16, 2001 in Los Angeles California Superior Court under Case No. BC353322. The Company's management believes that the derivative cross-complaint filed by Mr. Bretz does not have any merit and that the Company will eventually prevail. The court ruled that the derivative cross-complaint was unlikely to benefit the Company or its shareholders and ordered Mr. Bretz to post the maximum ($50,000) bond in order to continue his lawsuit. The Company was notified that Mr. Bretz posted the bond on March 21, 2002. Mr. Bretz filed a motion to exonerate the bond or for reconsideration of the court order to post the bond. The court ruled against Mr. Bretz and upheld the bond requirement. Mr. Bretz has since appealed the ruling to the Court of Appeal of the State of California, Second Appellate District. On December 10, 2001, Mr. Bretz filed another complaint in Los Angeles Superior Court under Case No. BC263256 against the Company, two of the Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's general counsel, Craig O. Dobler, and a director, James R. Yarter. The complaint seeks to enforce a director's inspection and copying rights under California Corporations Code Section 1602 and seeks injunctive relief, attorney's fees and costs. The Company has denied access to some documents by Mr. Bretz until a suitable protective order may be implemented to protect the Company's interests. The Company and individual defendants filed a demurrer (a formal objection to the legal sufficiency of the opponent's pleading). In response, Mr. Bretz amended his complaint and has dismissed all of the above individual defendants. The Company intends to file a motion for summary judgement, because Mr. Bretz is no longer a director. -12- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 On February 19, 2002, Robert H. Bretz amended a complaint in Federal District Court under Case No. CV 01-5891 CAS originally filed in June 2001 by Mr. Bretz in the name of the Company seeking a temporary restraining order (TRO) and preliminary injunction blocking the 2001 annual shareholder's meeting scheduled for February 27, 2002, which had been delayed from October 31, 2001. At a hearing on February 26, 2002, the court denied the application for a temporary restraining order and ruled that the shareholder meeting could proceed as scheduled, but requested that the results of the proxy solicitation not be made public or be implemented until after a further hearing on March 22, 2002. The 2001 annual shareholder's meeting was conducted on February 27, 2002 and adjourned solely for the purpose of consideration on March 27, 2002 of a shareholder proposal sponsored by Mr. Bretz establishing a maximum age limit for directors of 67 years, which was the subject of a supplemental proxy statement later issued on March 4, 2002. On March 27, 2002, the vote as conducted at the adjourned meeting on the shareholder proposal. On April 26, 2002 the court issued its ruling, which denied the request by Mr. Bretz for a preliminary injunction and authorized the Company to release and implement the results of the vote from its February 27, 2002 shareholder meeting following completion of the vote on the shareholder proposal. As a result of a vote by the shareholders of the Company, Mr. Bretz is no longer a director of the company. The Company has filed complaints with the California State Bar alleging violations of ethics codes by Mr. Bretz and the State Bar has conducted an investigation of the matter. The Company believes that the State Bar intends to bring a disciplinary proceeding against Mr. Bretz. The Company filed a complaint in Los Angeles, California, Superior Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its principals, Arthur and Candy Zemon. The suit alleges a lack of informed consent, fraud, deceit, intentional and negligent misrepresentation, lack of consideration, and breach of contract and seeks to rescind the contract for the Company's acquisition of the Wings software developed by Pigasus and seeks damages in excess of $400,000. Subsequently, Pigasus Software, Inc., Arthur Zemon and Candace Zemon filed suit in the Circuit Court of Saint Charles County, State of Missouri, Civil Action No. 01CV129525, against Auto-Graphics, Inc. for breach of contract, and they seek damages in excess of $500,000. Both actions were removed to the local Federal District Courts and the California District Court has transferred the matter to the District Court in Missouri. The parties reached an agreement in principle on a settlement following the delivery of a fully functional and compilable ISO interlibrary loan software system by Pigasus to the Company in July 2002. The settlement is in the process of being documented by the parties and should not have a material adverse effect on the Company's financial condition or results of operations. -13- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 Note 8. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142): SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company adopted SFAS 141 and SFAS 142 as of January 1, 2002 and the adoption had no material impact on its financial statements. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements. -14- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements June 30, 2002 In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company adopted this Statement as of January 1, 2002 and the adoption had no material impact on its financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company believes the adoption of this Statement will have no material impact on its financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. The Company believes the adoption of this Statement will have no material impact on its financial statements based on the Company's current plans. -15- AUTO-GRAPHICS, INC. Form 10-Q June 30, 2002 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CRITICAL ACCOUNTING POLICIES The Company maintains its accounting books and records in accordance with accounting principles generally accepted in the United States of America. 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 sales and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Actual results may materially differ from those estimated. The Company's critical accounting policies include the following: + Capitalized software development costs + Amortization of software development costs + Revenue Recognition The Company accounts for internally developed software in accordance with Statement of Financial Accounting Standard (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." After technical feasibility has been established, the Company capitalizes the average cost per billable hour of its software development process including payroll and payroll benefits, training and recruiting costs. The Company collects and records the software development hours invested in software development projects. Annually, the Company evaluates these accumulated costs for recoverability against estimated future revenues and determines the amount, which will be capitalized. To the extent that more development costs are capitalized, the Company's net income will improve, and, to the extent that more software development costs are expensed instead of capitalized, the Company's net income will decline. -16- AUTO-GRAPHICS, INC. Form 10-Q June 30, 2002 The Company amortizes its software development costs in accordance with the estimated economic life of the software. Studies within the library community have indicated that the typical library automation system once installed remains in use for an average of approximately 10 years. Because libraries are generally under-funded, libraries frequently cannot afford the latest computer hardware and software and therefore tend to utilize their system for a longer period of time than in the commercial world. The Company's typical product lifecycle has been about 15 years, which was true for its prior film/fiche product line, current CD-ROM product line and current Internet/Web product line, which has now been deployed for eight years and is still growing. To the extent the average actual useful life varies significantly from the estimated useful life, amortization expense may be understated or overstated. Generally, amortization expense averages less than 10% of the corresponding revenue stream. Revenue recognition policies vary according to the nature of the revenue. The Company's primary revenue stream is outsourced web hosting services which are sold on a subscription basis. Services are billed in advance on an annual or quarterly basis. Revenue is recognized monthly on a pro-rata basis i.e., for a twelve month contract, one-twelfth of the revenue is recognized each month as services are rendered. Revenues which have been billed and collected in advance are booked to deferred income until the revenues are earned and services provided. Certain small annual subscriptions for databases and software support typically are recognized as revenue in the month they are billed during the year. Certain overhead costs for providing future software support services are accrued as expense in accordance with SOP 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and 98-9, and thereby matching revenues and expenses. Certain contract job processing services are progress billed and revenues recognized as the processing services are performed on a monthly basis. Certain software and hardware sales are billed when the product is shipped and title passes to the customer. -17- AUTO-GRAPHICS, INC. Form 10-Q June 30, 2002 FINANCIAL CONDITION December 31, 2001 to June 30, 2002 - ---------------------------------- Liquidity and capital resources. Working capital deficit decreased $395,000 in 2002 over 2001 primarily as a result of collection of accounts receivable, which declined $366,000 due to improved collections. Net cash provided by operating activities was $232,000 down from $674,000 in the first six months of 2001. 2001 was much higher than normal due to a significant cash sale in March 2001 when the Company licensed the use of its REMARC(TM) bibliographic database of Library of Congress pre-1968 holdings to an unaffiliated Japanese Company (for use exclusively in Japan) for a one-time license fee of $1.5 million. This transaction had a material effect on the results of operations reported by the Company for the first six months of 2001. Excluding this license fee, 2001 cash used by operating activities would have been approximately $826,000 which would have resulted in an increase in cash provided by operating activities in 2002 of $1,058,000. Capital expenditures are down $810,000 from $1,068,000 for the first six months of 2001 to $258,000 in 2002. Major expenditures for 2001 included the acquisition of Maxcess Verso software, acquisition of Pigasus Wings software, internally developed software and computer equipment. 2002 capital expenditures include internally developed software and computer equipment purchases. Management believes that liquidity and capital resources should be adequate to fund operations and expected reductions in bank debt during 2002 and into 2003. As of June 30, 2002, the Company was in compliance with all of its loan covenants. The Company's primary bank renewed and extended the terms of its credit agreement for an additional year to June 2, 2003. The credit facility is a $1.6 million revolving line of credit, which decreases by $175,000 each quarter on September 30, 2002, December 31, 2002 and March 31, 2003 consistent with the Company's forecasted declining requirements for financing. -18- AUTO-GRAPHICS, INC. Form 10-Q March 31, 2002 RESULTS OF OPERATIONS - --------------------- First Six Months of 2002 as Compared to First Six Months of 2001 - ---------------------------------------------------------------- Net sales decreased $1,484,000 or 31% from $4,716,000 in 2001 to $3,232,000 in 2002. In March 2001, the Company licensed the use of its REMARC(TM) bibliographic database of Library of Congress pre-1968 holdings to an unaffiliated Japanese Company (for use exclusively in Japan) for a one- time license fee of $1.5 million. This transaction had a material positive effect on the results of operations reported by the Company for the first six months of 2001. Excluding this license fee, sales were essentially unchanged from $3,216,000 in 2001 versus $3,232,000 in 2002. Cost of sales decreased $1,124,000 or 38% as a result of major cost reductions in payroll and production costs in late 2001. Gross margins improved from 38% in 2001 to 44% in 2002. 2001 gross margins were unusually high primarily as a result of the licensing of the Remarc(TM) database as described above, which had insignificant costs associated with its production and delivery. Excluding this transaction, gross margins which would have been 9% in 2001 improving to 44% in 2002. Selling, general and administrative expenses decreased $791,000 or 37% in 2002 as a result of major expense reductions in administrative and sales and marketing payroll and expenses. 2002 general & administrative expenses include $477,000 in legal expenses due primarily to the ongoing dispute with the Company's former general counsel, Robert H. Bretz. (See Note 7 of Notes to Unaudited Consolidated Financial Statements). Income/(loss) from operations increased $433,000 from a loss of $353,000 in 2001 to an income of $80,000 in 2002. The first six months of 2001 would have been a loss from operations of $1,853,000 excluding the effect of the above Remarc(TM) license fee of $1.5 million. Interest expense/other income/(expense) was $36,000 in 2002 down from $64,000 in 2001 due to lower average borrowings, lower interest rates and bad debt collection. -19- AUTO-GRAPHICS, INC. Form 10-Q Provision for taxes based on income in 2002 and 2001 reflect minimum state tax payments and the effect of federal and state net operating loss carryforwards (See Note 4 of Notes to Unaudited Consolidated Financial Statements). Minority interests reflects the outside owners' share of the losses realized by the majority-owned Dataquad subsidiary in 2002 compared to the two majority-owned (61%) subsidiaries, Dataquad and Librarycard in 2001. The reduction of $170,000 in the minority interests in the losses of majority-owned subsidiaries reflects the major reductions in payroll and expenses and a substantial curtailment of the losses of these two subsidiaries. Having exhausted the minority investor's capital, the Company must now recognize 100% of the losses for LibraryCard, although these losses are now immaterial. Net income was $55,000 in 2002 compared to a net loss of $237,000 in 2001, an improvement of $292,000. Both basic and diluted earnings per share were $0.01 in 2002 compared to a loss per share of $0.09 in 2001. The 2001 net loss would have been approximately $1,737,000 excluding the Remarc(TM) database license fee (as described above) of $1.5 million, which represents a net income improvement of $1,792,000 in 2002. The 2001 net loss would have resulted in a basic and diluted loss per share of approximately $0.35, excluding the Remarc(TM) database license fee (as described above) of $1.5 million. Second Quarter of 2002 as Compared to Second Quarter of 2001 - ------------------------------------------------------------ Net sales were essentially unchanged at $1,596,000 in 2002 as compared to $1,594,000 in 2001. Cost of sales decreased $501,000 or 37% as a result of major cost reductions in payroll and production costs in late 2001. Gross margins improved from 14% in 2001 to 46% in 2002 as the Company has refocused on its core library ASP (Application Software Provider) services business. Selling, general and administrative expenses decreased $335,000 or 33% in 2002 as a result of major reductions in administrative and sales and marketing payroll and expenses in late 2001. 2002 general & administrative expenses also include $216,000 in legal expenses due primarily to the ongoing dispute with the Company's former general counsel, Robert H. Bretz. (See Note 7 of Notes to Unaudited Consolidated Financial Statements). Income from operations increased $839,000 from a loss of $800,000 in 2001 to net income of $39,000 in 2002 as a result of substantial cost and expense reduction measures in late 2001. -20- AUTO-GRAPHICS, INC. Form 10-Q Interest expense/other income/(expense) was $11,000 in 2002 down from $29,000 in 2001 due to lower average borrowings, lower interest rates and bad debt collections. Provision for taxes based on income in 2002 and 2001 reflect minimum state tax payments and the effect of federal and state net operating loss carryforwards (See Note 4 of Notes to Unaudited Consolidated Financial Statements). Minority interests reflects the outside owners' share of the losses realized by the majority-owned Dataquad subsidiary in 2002 compared to the two majority-owned (61%) subsidiaries, Dataquad and Librarycard in 2001. The reduction of $80,000 in the minority interests in the losses of majority-owned subsidiaries reflects the major reductions in payroll and expenses and a substantial curtailment of the losses of these two subsidiaries. Having exhausted the minority investor's capital, the Company must now recognize 100% of the losses for LibraryCard, although these losses are now immaterial. Net income was $27,000 in 2002 compared to a net loss of $689,000 in 2001, an improvement of $718,000. Both basic and diluted earnings per share were $0.01 in 2002 compared to a net loss per share of $0.14 in 2001 for the reasons covered above. This Report includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Recently Issued Accounting Pronouncements See Note 8 to Unaudited Condensed Consolidated Financial Statements. -21- AUTO-GRAPHICS, INC. Form 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings. On May 9, 2001 the Company terminated its long-time outside counsel, Robert H. Bretz, who had provided legal services and was compensated through his professional corporation, Robert H. Bretz, PC. Mr. Bretz is also a former director of the Company. Following Mr. Bretz' termination he began to file lawsuits for and on behalf of the Company that had not been authorized by Company's management or the Board of Directors. On August 8, 2001 one particular case filed by Mr. Bretz in the name of the Company, Case No. BC252517, was dismissed by the Los Angeles California Superior Court holding that the Action by Unanimous Written Consent signed solely by Mr. Bretz in reference to the filing of the case was invalid because it failed to satisfy the requirements of California Corporations Code Section 307(b). On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz et al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz had become disruptive and harmful to the business operations of the Company and damaged the Company by his various actions including his excessive billings to the Company. As a response to the complaint filed by the Company, Mr. Bretz filed a derivative cross-complaint against three of the Company's officers, Robert S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary duty, fraud & deceit, misrepresentation, breach of contract/employment, removal for cause and other declaratory and injunctive relief. The original cross-complaint was filed on July 16, 2001 in Los Angeles California Superior Court under Case No. BC353322. The Company's management believes that the derivative cross-complaint filed by Mr. Bretz does not have any merit and that the Company will eventually prevail. The court ruled that the derivative cross-complaint was unlikely to benefit the Company or its shareholders and ordered Mr. Bretz to post the maximum ($50,000) bond in order to continue his lawsuit. The Company was notified that Mr. Bretz posted the bond on March 21, 2001. Mr. Bretz filed a motion to exonerate the bond or for reconsideration of the court order to post the bond. The court ruled against Mr. Bretz and upheld the bond requirement. Mr. Bretz has since appealed the ruling to the Court of Appeal of the State of California, Second Appellate District. -22- AUTO-GRAPHICS, INC. Form 10-Q PART II - OTHER INFORMATION On December 10, 2001, Mr. Bretz filed another complaint in Los Angeles Superior Court under Case No. BC263256 against the Company, two of the Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's general counsel, Craig O. Dobler, and a director, James R. Yarter. The complaint seeks to enforce a director's inspection and copying rights under California Corporations Code Section 1602 and seeks injunctive relief, attorney's fees and costs. The Company has denied access to some documents by Mr. Bretz until a suitable protective order may be implemented to protect the Company's interests. The Company and individual defendants filed a demurrer (a formal objection to the legal sufficiency of the opponent's pleading). In response, Mr. Bretz amended his complaint and has dismissed all of the above individual defendants. The Company intends to file a motion for summary judgement, because Mr. Bretz is no longer a director. On February 19, 2002, Robert H. Bretz amended a complaint in Federal District Court under Case No. CV 01-5891 CAS originally filed in June 2001 by Mr. Bretz in the name of the Company seeking a temporary restraining order (TRO) and preliminary injunction blocking the 2001 annual shareholder's meeting scheduled for February 27, 2002, which had been delayed from October 31, 2001. At a hearing on February 26, 2002, the court denied the application for a temporary restraining order and ruled that the shareholder meeting could proceed as scheduled, but requested that the results of the proxy solicitation not be made public or be implemented until after a further hearing on March 22, 2002. The 2001 annual shareholder's meeting was conducted on February 27, 2002 and adjourned solely for the purpose of consideration on March 27, 2002 of a shareholder proposal sponsored by Mr. Bretz establishing a maximum age limit for directors of 67 years, which was the subject of a supplemental proxy statement later issued on March 4, 2002. On March 27, 2002, the vote was conducted at the adjourned meeting on the shareholder proposal. On April 26, 2002 the court issued its ruling, which denied the request by Mr. Bretz for a preliminary injunction and authorized the Company to release and implement the results of the vote from its February 27, 2002 shareholder meeting following completion of the vote on the shareholder proposal. As a result of a vote by the shareholders of the Company, Mr. Bretz is no longer a director of the company. The Company has filed complaints with the California State Bar alleging violations of ethics codes by Mr. Bretz and the State Bar has conducted an investigation of the matter. The Company believes that the State Bar intends to bring a disciplinary action against Mr. Bretz. -23- AUTO-GRAPHICS, INC. Form 10-Q PART II - OTHER INFORMATION The Company filed a complaint in Los Angeles, California, Superior Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its principals, Arthur and Candy Zemon. The suit alleges a lack of informed consent, fraud, deceit, intentional and negligent misrepresentation, lack of consideration, and breach of contract and seeks to rescind the contract for the Company's acquisition of the Wings software developed by Pigasus and seeks damages in excess of $400,000. Subsequently, Pigasus Software, Inc., Arthur Zemon and Candace Zemon filed suit in the Circuit Court of Saint Charles County, State of Missouri, Civil Action No. 01CV129525, against Auto-Graphics, Inc. for breach of contract, and they seek damages in excess of $500,000. Both actions were removed to the local Federal District Courts and the California District Court has transferred the matter to the District Court in Missouri. The parties reached an agreement in principle on a settlement following the delivery of a fully functional and compilable ISO interlibrary loan software system by Pigasus to the Company in July 2002. The settlement is in the process of being documented by the parties and should not have a material adverse effect on the Company's financial condition or results of operations. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. The Company issued a definitive proxy statement on June 10, 2002 in preparation for the Company's 2002 Annual Meeting of shareholders, which was held on July 17, 2002. The results of the vote of the shareholders present in person and by proxy at the 2002 Annual Meeting are as follows: 1. Robert S. Cope, James R. Yarter and Thomas J. Dudley were elected as directors of the Company effective July 17, 2002. Messrs. Cope, Yarter and Dudley each received 3,352,935 votes cast for election (98.9%), 36,300 votes cast as withhold (1.1%) and no votes cast as abstentions out of a total of 3,389,235 votes cast cumulatively. Robert H. Bretz nominated himself at the Meeting to serve as a director and cast a total of 1,599,000 votes cumulatively in person and by proxy for his election, however, Mr. Bretz was not elected. 2. The amendment to the Bylaws to change the date for the Annual Meeting of Shareholders from May 15th to the second Wednesday in June, or, as established by the Board of Directors, but not later than September 30 was approved with 3,352,935 votes cast for the amendment to the Bylaws (85.5%), 569,300 votes cast against the amendment (14.5%) and no votes cast as abstentions out of a total of 3,922,235 votes cast. -24- AUTO-GRAPHICS, INC. Form 10-Q PART II - OTHER INFORMATION 3. The shareholder proposal sponsored by Robert H. Bretz that the Company's Bylaws, Article III, Section 3, be amended to establish the maximum age for service as a director to be 68 years old was defeated with 2,531,530 votes cast against (79.0%), 673,350 votes cast for the amendment (21.0%), and 3,350 votes cast as abstentions out of a total of 3,208,230 votes cast. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.54 Second Amendment to Amended and Restated Credit Agreement between Wells Fargo and Auto-Graphics, Inc. dated June 4, 2002. 10.55 Reducing Revolving Note Wells Fargo Bank and Auto-Graphics, Inc. dated June 4, 2002. (b) None. -25- AUTO-GRAPHICS, INC. Form 10-Q SIGNATURES Pursuant to the requirements 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. Date: August 14, 2002 By: /s/ Robert S. Cope ------------------- ------------------------------------ Robert S. Cope Chairman of the Board and President Date: August 14, 2002 By: /s/ Daniel E. Luebben ------------------- ------------------------------------ Daniel E. Luebben Chief Financial Officer and Secretary EX-1 3 wfb2ndamendmentjune2002.txt WELLS FARGO BANK 2ND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into as of June 4, 2002, by and between AUTO- GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS A. Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Amended and Restated Credit Agreement dated as of August 1, 2000 between Borrower and Bank as such agreement may have been amended or modified from time to time (the "Agreement"). Capitalized terms used herein without definition shall have the meanings ascribed to them in the Agreement. B. Borrower is indebted to Bank under the terms of the Agreement for a line of credit (the "Prior Line of Credit") which is evidenced by that certain Revolving Note dated November 20, 2001 in the principal amount of One Million Six Hundred Thousand Dollars ($1,600,000.00) (the "Prior Note"). C. Borrower has requested that Bank extend the maturity date of the Agreement and modify the financial covenant relating to the minimum tangible net worth to be maintained by Borrower. Bank has agreed to extend the maturity date and to reduce the required tangible net worth covenant, subject to the terms and conditions set forth herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Agreement shall be amended as follows; provided, however, that nothing herein shall terminate any security interest granted in favor of Bank and all such security interests shall remain in full force and effect; and Bank and Borrower further agree as follows: 1. Amendment to Section 1.1(a). Section 1.1(a) of the Agreement is hereby deleted and replaced in its entirety with the following: "(a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including June 2, 2003, not to exceed at any time the aggregate principal amount of One Million Six Hundred Thousand Dollars ($1,600,000.00) ("Line of Credit"), the proceeds of which shall be used for working capital requirements. Notwithstanding the principal amount set forth above, the maximum principal amount available under the Line of Credit shall be reduced automatically and without further notice on the last day of each calendar quarter, commencing September 30, 2002, by the amount of One Hundred Seventy-Five Thousand Dollars ($175,000.00). If the outstanding principal balance of the Line of Credit on any such date is greater than the Line of Credit then available hereunder, Borrower shall make a principal payment on such date in an amount sufficient to reduce the then outstanding principal balance of the Line of Credit to an amount not greater than said new Line of Credit. Borrower's obligation to repay advances shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto (the "Note"), all terms of which shall be incorporated by this reference." The foregoing change shall become effective upon the execution and delivery to Bank of a promissory note substantially in the form of Exhibit A attached hereto (which promissory note shall replace the Prior Note and be deemed the Note defined in and made pursuant to the Agreement) and all other contracts, instruments and documents required by Bank to evidence such change; provided, however, that outstanding advances under the Prior Line of Credit heretofore provided Borrower by Bank in connection with the Prior Note shall be deemed outstanding advances under the Note in effect hereby. 2. Addition of Section 1.2(c). A new Section 1.2(c) is hereby added to the Agreement, which shall read in its entirety as follows: "(c) In consideration of the Second Amendment to this Agreement dated as of June 4, 2002 (the "Second Amendment"), and as a condition to the effectiveness thereof, immediately upon Bank signing the Second Amendment, an amendment fee (the "Amendment Fee") in the amount of $42,000 shall be fully earned and non-refundable, and shall be payable as follows: (a) $7,000 on the "Effective Date" of the Second Amendment (as such term is defined in the Second Amendment), (b) $14,000 on September 2, 2002, and (c) $21,000 on February 1, 2003. Notwithstanding the foregoing, the Amendment Fee payable on September 2, 2002 shall be forgiven by Bank if on or before such date Borrower has repaid its obligations under the Loan Documents (collectively, the "Obligations") in full and all commitments of Bank to extend credit to Borrower have been terminated, and the Amendment Fee payable on February 1, 2003 shall be forgiven by Bank if on or before such date Borrower has repaid its Obligations in full and all commitments of Bank to extend credit to Borrower have been terminated." 3. Amendment to Section 4.8(b). Section 4.8(b) of the Agreement is hereby amended and restated to read in its entirety as follows: "(b) Tangible Net Worth of not less than $1,700,000 at any time. "Tangible Net Worth" is defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. For purposes of this Agreement, capitalized software development and acquisition cost is considered a tangible asset." 4. Amendment to Section 5.4. Section 5.4 of the Agreement is hereby amended and restated to read in its entirety as follows: "SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity, provided that any Subsidiary may merge with and into any other Subsidiary or into Borrower; make any substantial change in the nature of its business as conducted as of the date hereof; except as permitted within the limitations on investments set forth in Section 5.6 below, acquire all or substantially all of the assets of any other entity; sell, lease, transfer or otherwise dispose of all or a substantial or material portion of its assets except in the ordinary course of its business; or enter into any exclusive license agreement." 5. Amendment to Section 7.2. Section 7.2 of the Agreement is hereby amended to delete the requirement that copies of all notices be provided to Robert H. Bretz, Esq. 6. Conditions Precedent. Provided that each of the following conditions is satisfied on or before June 24, 2002, this Amendment shall become effective on the first business day that each of the following conditions have been met to Bank's satisfaction (the "Effective Date"): (a) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following: (i) This Amendment executed by Borrower and the attached Guarantors' Consent and Reaffirmation executed by each Guarantor;(ii) Reducing Revolving Note executed by Borrower; (iii) A good standing certificate with respect to Borrower as of a recent date, certified by the Secretary of State of California; and (iv) Such other documents as Bank may require under any other Section of this Amendment. (b) Amendment Fee. Borrower shall have paid to Bank the portion of the Amendment Fee required to be paid on the Effective Date by authorizing Bank to debit Borrower's demand deposit account no. 4644631202 or any other account with Bank. (c) Reaffirmation of Intellectual Property Representations and Warranties. Borrower shall have provided evidence satisfactory to Bank that Schedules II through V of each Security Agreement -- Intellectual Property and Investment Property signed by Borrower or any Guarantor (each, a "Security Agreement") fully identifies all Patent Collateral, Trademark Collateral, Copyright Collateral, and Trade Secrets Collateral, respectively, as each such term is defined in the applicable Security Agreement. By its execution and delivery of this Amendment, Borrower, on behalf of itself and each Guarantor, represents and warrants that the information set forth on Schedules I through IV hereto fully identifies all right, title and interest of Borrower and each Guarantor in Patent Collateral, Trademark Collateral, Copyright Collateral, and Trade Secrets Collateral. (d) Other Fees and Charges. In addition to Borrower's obligations under the Agreement and the other Loan Documents, Borrower shall reimburse Bank immediately upon demand for all costs and expenses, including attorneys' fees (including the allocated costs of bank's in-house counsel) expended or incurred by Bank in connection with the negotiation and preparation of this Amendment. Borrower authorizes Bank to debit its demand deposit account no. 4644631202 or any other account with Bank for all such costs and expenses. (e) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor. (f) Compliance. The representations and warranties contained in the Agreement and in each of the other Loan Documents shall be true on and as of the Effective Date, with the same effect as though such representations and warranties had been made on and as of the Effective Date, and on the Effective Date, no Event of Default, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. If all of the conditions set forth in this Section 6 have not been satisfied to Bank's satisfaction on or before June 24, 2002, then this Amendment shall be null and void. 7. General Release. In consideration of the benefits provided to Borrower under the terms and provisions hereof, Borrower and each guarantor hereunder hereby agree as follows ("General Release"): (a) Borrower and each guarantor hereunder, for itself and on behalf of its respective successors and assigns, do hereby release, acquit and forever discharge Bank, all of Bank's predecessors in interest, and all of Bank's past and present officers, directors, attorneys, affiliates, employees and agents, of and from any and all claims, demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or of any relationship, acts, omissions, misfeasance, malfeasance, causes of action, defenses, offsets, debts, sums of money, accounts, compensation, contracts, controversies, promises, damages, costs, losses and expenses, of every type, kind, nature, description or character, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, each as though fully set forth herein at length (each, a "Released Claim" and collectively, the "Released Claims"), that Borrower or any guarantor hereunder now has or may acquire as of the later of: (i) the date this Amendment becomes effective through the satisfaction (or waiver by Bank) of all conditions hereto; or (ii) the date that Borrower and each guarantor hereunder have executed and delivered this Amendment to Bank (hereafter, the "Release Date"), including without limitation, those Released Claims in any way arising out of, connected with or related to any and all prior credit accommodations, if any, provided by Bank, or any of Bank's predecessors in interest, to Borrower or any guarantor hereunder, and any agreements, notes or documents of any kind related thereto or the transactions contemplated thereby or hereby, or any other agreement or document referred to herein or therein. (b) Borrower and each guarantor hereunder hereby acknowledge, represent and warrant to Bank as follows: (i) Borrower and such guarantor understand the meaning and effect of Section 1542 of the California Civil Code which provides: "Section 1542. GENERAL RELEASE; EXTENT. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (ii) With regard to Section 1542 of the California Civil Code, Borrower and each such guarantor agree to assume the risk of any and all unknown, unanticipated or misunderstood defenses and Released Claims which are released by the provisions of this General Release in favor of Bank, and Borrower and each such guarantor hereby waive and release all rights and benefits which they might otherwise have under Section 1542 of the California Civil Code with regard to the release of such unknown, unanticipated or misunderstood defenses and Released Claims. (c) Each person signing below on behalf of Borrower or any guarantor hereunder acknowledges that he or she has read each of the provisions of this General Release. Each such person fully understands that this General Release has important legal consequences, and each such person realizes that they are releasing any and all Released Claims that Borrower or any such guarantor may have as of the Release Date. Borrower and each guarantor hereunder hereby acknowledge that each of them has had an opportunity to obtain a lawyer's advice concerning the legal consequences of each of the provisions of this General Release. (d) Borrower and each guarantor hereunder hereby specifically acknowledge and agree that: (i) none of the provisions of this General Release shall be construed as or constitute an admission of any liability on the part of Bank; (ii) the provisions of this General Release shall constitute an absolute bar to any Released Claim of any kind, whether any such Released Claim is based on contract, tort, warranty, mistake or any other theory, whether legal, statutory or equitable; and (iii) any attempt to assert a Released Claim barred by the provisions of this General Release shall subject Borrower and each guarantor hereunder to the provisions of applicable law setting forth the remedies for the bringing of groundless, frivolous or baseless claims or causes of action. 8. Interpretation. Except as specifically provided herein, all terms and conditions of the Agreement remain in full force and effect, without waiver or modification. This Amendment and the Agreement shall be read together, as one document. 9. Reaffirmation; Certification. Borrower hereby remakes all representations and warranties contained in the Agreement and reaffirms all covenants set forth therein. Borrower represents and warrants that the execution and delivery of this Amendment and the Note have been duly authorized by all necessary corporate action of Borrower. Borrower further certifies that as of the Effective Date of this Amendment there exists no Event of Default as defined in the 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. 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same agreement. 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 a California corporation ASSOCIATION By: ss/Robert S, Cope By: ss/Darryl S. Hallie ------------------- -------------------------- Name: Robert S. Cope Name: Darryl S. Hallie Title: President Title: Vice President/Principal GUARANTORS' CONSENT AND REAFFIRMATION Each of the undersigned guarantors of all indebtedness of AUTO- GRAPHICS, INC., a California corporation, to Wells Fargo Bank, National Association hereby: (i) consents to the foregoing Second Amendment to Amended and Restated Credit Agreement (the "Amendment"); (ii) reaffirms its obligations under its respective Continuing Guaranty; (iii) reaffirms its waivers of each and every one of the defenses to such obligations as set forth in its respective Continuing Guaranty; (iv) reaffirms that its obligations under its respective Continuing Guaranty are separate and distinct from the obligations of any other party under the Amendment and the other Loan Documents (as defined therein); and (v) agrees to join in and be bound by all of the terms and provisions of the General Release contained in Section 7 of the Amendment. GUARANTORS: A-G CANADA, LTD. By: ss/Robert S, Cope --------------------- Name: Robert S. Cope Title: President By: ss/Daniel E. Luebben ------------------------ Name: Daniel E. Luebben Title: Chief Financial Officer With reference to that certain Guarantee dated October 31, 1997 DATAQUAD, INC., a Nevada corporation By: ss/Robert S, Cope --------------------- Name: Robert S. Cope Title: President DATACAT, INC., a California corporation By: ss/Robert S, Cope --------------------- Name: Robert S. Cope Title: President THE LIBRARYCARD, INC., a Nevada corporation By: ss/Robert S, Cope --------------------- Name: Robert S. Cope Title: President EX-2 4 wfbjune2002revolvingnote.txt WELLS FARGO BANK REVOLVING NOTE REDUCING REVOLVING NOTE $1,600,000.00 Los Angeles, California June 4, 2002 FOR VALUE RECEIVED, the undersigned AUTO-GRAPHICS, INC., a California corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 333 South Grand Avenue, Los Angeles, California, 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 One Million Six Hundred Thousand Dollars ($1,600,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. Capitalized terms used herein without definition shall have the meanings assigned to such terms in that certain Amended and Restated Credit Agreement dated as of August 1, 2000 (as amended, modified, supplemented or restated from time to time, the "Credit Agreement") between Borrower and Bank. 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 plus the Applicable Margin as 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. The "Applicable Margin" shall mean the per annum rate set forth below for the applicable period set forth opposite such rate. Period Applicable Margin June 4, 2002 through September 30, 2002 2.5% October 1, 2002 through December 31, 2002 3.0% January 1, 2003 through March 31, 2003 3.5% April 1, 2003 through June 2, 2003 4.0% (b) Payment of Interest. Interest accrued on this Note shall be payable on the last day of each month, commencing June 30, 2002. (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 four percent (4%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided, however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount set forth above or such lesser amount as shall at any time be available hereunder. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 2, 2003. (b) Reductions in Availability. Notwithstanding the principal amount set forth above, the maximum principal amount available under this Note shall be reduced automatically and without further notice on the last day of each calendar quarter, commencing September 30, 2002, by the amount of One Hundred Seventy-Five Thousand Dollars ($175,000.00). If the outstanding principal balance of this Note on any such date is greater than the new maximum principal amount then available hereunder, Borrower shall make a principal reduction on this Note on such date in an amount sufficient to reduce the then outstanding principal balance hereof to an amount not greater than said new maximum principal amount. (c) Equity Proceeds. Borrower shall prepay the Line of Credit in an amount equal to ten percent (10%) of Excess Equity Proceeds not more than two (2) business days after any Excess Equity Proceeds are received, and the Line of Credit shall be permanently reduced on such date by the amount of prepayment required by this sentence. "Equity Proceeds" shall mean the gross amount of new equity received by the Borrower and its Subsidiaries from and after April 1, 2000. "Excess Equity Proceeds" shall mean Equity Proceeds in excess of $5,000,000.00. (d) Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Robert S. Cope or Daniel E. Luebben, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. (e) 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. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of the Credit Agreement. Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, 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 Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. 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 Borrower or any other person or entity. (b) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. (c) Superseded Note. This Note replaces and supersedes in its entirety that certain Revolving Note executed by Borrower in favor of Bank dated December __, 2001 in the original principal amount of $1,600,000.00. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. AUTO-GRAPHICS, INC., a California corporation By: ss/ Robert S. Cope ----------------------------- Name: Robert S. Cope Title: President -----END PRIVACY-ENHANCED MESSAGE-----