<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
For the Fiscal Year ended Commission File Number
December 31, 1998 0-4431
AUTO-GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
California 95-2105641
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3201 Temple Avenue
Pomona, California 91768
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number: (909) 595-7204
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value of voting stock held by non-affiliates of the
registrant was $662,000 as of March 23, 1999.
The number of shares of the registrant's Common Stock outstanding was
1,064,478 as of March 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed pursuant to Regulation 14A
for the fiscal year ended December 31, 1998 is incorporated herein by
reference in Part III, Items 11-13 of Form 10-K. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120
days after the close of the registrant's most recent calendar year.
</PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
Auto-Graphics, Inc. including its wholly-owed A-G Canada, Ltd. and
Datacat, Inc. subsidiaries (the "Company") provides software products
and services used to create, organize, manage, and deliver electronic
databases and information via the Internet/Web and/or other electronic
media such as CD-ROM and via traditional publication media such as
print.
Revenue is generated from direct sales, licensing and support of these
software products and services through outsourcing contracts to provide
hardware, software and other facilities to manage customer Web sites
(Web Hosting), and by using this technology to distribute "content" via the
Company's own Web sites.
The Company's products and services are presently sold into three
primary customer categories:
1) Libraries, especially library consortia requiring systems to
create, organize, manage, publish and access large bibliographic and
holdings databases of multiple institutions used to implement resource
sharing initiatives and services;
2) Corporate publishers, primarily manufacturers and
distributors, who publish catalogs and promotional content used in their
sales and marketing programs. The Company's capability, and customer's
needs, now extends into e-commerce applications as a result of the
Company's Internet/Web and database information expertise; and
3) Traditional database publishers (encyclopedias, dictionaries
and bibles) who use the Company's products and services to manage the
editorial process and create valuable content. Internet/Web
distribution is a natural extension for these customers.
Products
Impact/CMS (Content Management System) is a modular and expandable
editorial system that allows users to create, organize and manage
information for multi-purpose publishing. Data structures are SGML/XML
and are particularly suited to database applications. The system can be
configured from single user to enterprise systems. Editorial control,
iteration management and SGML/XML DTD validation are important features
of the Company's Impact/CMS product line.
Impact/CMS/Frame incorporates a module including Adobe's Frame+SGML
software to provide WYSIWYG graphics and interactive database
composition.
Impact/CD is the system used to index, format and output SGML/XML/HTML
data for CD-ROM distribution. The user interface is provided in Windows
or Web browser formats.
Impact/Web is the system used to build Web sites from SGML and XML data
formats. HTML display is created "on the fly" allowing basic data
structures to stay intact and providing greater page design flexibility.
Customizing modules include e-commerce features providing ordering,
credit card purchasing, multi-tier pricing and content scoping controls.
These features provide users with capabilities to customize Web sites to
individual requirements.
Applications
The Company provides outsourcing services to various types of customers.
The Company has been contracted by the State of Texas to create a Web-
based system providing library services to approximately 7,000 school
libraries. To date, over 3,500 users are already included in this Texas
state-wide system. The Company has similar contracts with the States of
Kansas, Oklahoma, Tennessee and the Canadian Provinces of British
Columbia and Ontario, and is the announced winning bidder for a state-wide
contract with the State of Connecticut. Customers also include regional
library organizations in the States of Illinois, New Jersey, Michigan,
Ohio, and New Hampshire.
The Company's outsourced Internet/Web database management services
presently support approximately 7,500 distinct library sites, enabling
library users to access these library services via the Internet from
their offices and homes as well as from within the library. This large
number of customer/users demonstrates the Company's ability to handle
large capacity Internet communications assignments.
The Company has developed a bibliographic database containing over 32
million records together with the holdings of U.S. and most Canadian
public and university libraries, and including five million authority
records. Through the Company's Internet/Web software, the Company provides
bibliographic records for use by its U.S. and Canadian library customers.
In the case of the Company's manufacturing and distribution catalog
products, the Company provides services and Internet/Web software to
create, maintain and provide access to product databases for these
customers. One example is an HVACR-specific product database which is
available on an annual site license basis to wholesalers in the HVACR
(heating, ventilation, air conditioning and refrigeration) industry.
This HVACR database, combined with the Company's Internet/Web software,
provides HVACR wholesalers an ability to quickly and easily put their
custom catalog on the Internet. The Company's software flexibility
provides customers with the capability of individualizing their Internet
catalogs to include features such as custom indexing, multi-tier
pricing, customer specific pricing and order entry (e-commerce). From
the database which is published on the Internet/Web, the Company's customer
also has the ability to publish CD-ROM and print catalogs.
The Company's Web access and Internet connectivity products and
services, developed over the last five years for the library and
publishing industries, provide the Company with the opportunity to
further develop, and package this technology and expertise for use by
a much broader category of customers. The Company is now in a position
to begin marketing a complete Internet/Web database, information and
knowledge management solution for utilization by customers, operated
internally or on an outsourced "host" basis by the Company, for use both
within the enterprise and outside the enterprise by suppliers, customers
and other categories of users for whose benefit the Company's customer
wants to provide access to this system.
The Company's product line now allows businesses to create database
content electronically, to organize and manage information then deliver
it over the Internet and/or via traditional media such as CD-ROM and
printed catalogs and other materials. The Company has developed and
is refining an SGML "editor" software product for sale to business and
other users who want to create, organize, maintain and publish large
content database products in multi-media form.
In addition to the Company's Internet/Web database information and
knowledge management products and services, the Company will continue to
provide ancillary services required by the customers/markets it
currently serves. These ancillary services include database entry and
database "clean-up", conversion and database loading services. These
services enable customers to quickly and easily create an electronic
database of information which may then be managed by the customer using
the Company's suite of software and services.
Product Development
Core software embraces industry standard data structures, such as XML,
SGML, and standards specific to the markets served, such as MARC and
Z39.50 in the library industry. These standards afford customers the
ability to create, organize, manage and output information/knowledge
databases for the benefit of the enterprise and its customers, suppliers
and other category of users independent of the media used to publish
this data.
Flexibility in the ability to distribute and use information/knowledge
by an enterprise is increasingly a primary goal and is the underlying
premise of the Company's Internet/Web products and services. All new
product development is being written in C++ and runs on Microsoft
NT/Intel platforms. The Company is using N-tiered architecture to allow
for customer implementation flexibility. Microsoft SQL server provides
the database engine for the second generation of the Company's flagship
Impact/Online software product family. Development is based on an
architecture that will work on multiple computers affording the system
the ability to grow as the Company's needs increase.
The Company provides its outsourcing customers a full T-1 and a back-up
T-1 data communication line with automatic re-routing to enhance "fail-
safe" communication.
Internet connections ("hits") to Web pages maintained by the Company
represent important information as to usage/capability. In 1998, this
online activity increased [at an average rate of] 133% over 1997. Hits
per month reached over 2 million early in 1999, and are expected to
double again by the end of the year.
Marketing
Products are distributed to specific markets discretely branded even
though the technology may be similarly applied across all markets
served. In addition to corporate office marketing staff, the Company
maintains a small direct sales force for each of the individual markets
(library, publishing and Datacat-HVACR) it currently serves. Marketing
activities include public relations, advertising, attendance at industry
trade shows, and targeted mail campaigns.
Products sold to the library market are generally sold by response to
RFP's (requests for proposals) and, more frequently than not,
competitive bidding managed by governmental purchasing departments.
The Company maintains a proposal writing department. Recently, the
Company's marketing strategy has included Internet advertising and sale
to complement the Company's sales force in the field. Price points for the
Company's various products/services are instrumental in determining the
type of sales effort deployed by the Company, except that Internet
advertising is used in all markets for the Company's products regardless
of the price point of the various products/services.
With the introduction by the Company of its Internet-centric line of
products, branded advertising has changed somewhat. As indicated above,
these Internet/Web products are now branded for a specific market.
However, as to the library market the Company continues to market its
products and services under the Company name (not by the name of the
specific suite of software products and services used by these library
customers).
The Company's strategy for its Internet-centric products and services in
the future includes the continued introduction of new products/services
to the customers and markets the Company currently serves, and to further
develop and refine these products for introduction and marketing to
customers and markets not currently served by the Company. The Company's
strategy for entering new markets in the future will include efforts to
utilize strategic relationships with other companies who are already
present or are otherwise knowledgeable about these prospective
customers/markets.
To be successful in these new products/services, customers and markets,
the Company will need to be able to create, finance, develop and
implement a new marketing initiative and capability designed to introduce
and market its Internet/Web line of products and services to prospective
users who are not already familiar with the Company, its products/services
and/or their capabilities. The Company must compete successfully with other
companies, many of whom will be larger, more established, better
financed, more recognized and more experienced in the introduction,
development, marketing, sales and service of the same or similar products
and services to these targeted new customers/markets in a rapidly changing
technological and distribution environment.
Accordingly, there can be no assurances that the Company will be able to
launch, sustain and profit in the near or long term from these new
products/services, customers and markets initiative. Likewise, no
assurances can be given that the Company will be successful in efforts
to develop and utilize a strategic alliances strategy to assist in efforts
to introduce and market its Internet/Web products and services to a broader
range of customers/markets. However, as the market for managing and
distributing information and knowledge continues to change, the Company
intends, as it has in the past, to be responsive to the changing needs and
requirements of customers by offering new products and services representing
advances in the information/knowledge industry for the benefit of all
concerned.
Competition
The Company was an early entrant into the computerized database
composition business and industry, and believes it may have been
offering these products and services longer than any of the other companies
in competition with the Company today in respect of these products/services
to the library and publishing markets. In the library market, the
Company competes with numerous companies, such as OCLC Online Computer
Library Center, Inc., which are larger with substantially greater resources
than are available to the Company and offer a wider variety of products and
services for the library industry. Although the Company has been
successful to date in securing most of the awarded contracts involving
the development and implementation of Internet/Web based "online"
bibliographic catalog and interlibrary loan services systems for state-
wide, regional or other consortia of libraries, if this category of
library products/services business continues to grow, as the Company
believes should be the case, increased emphasis on this products/services
niche of the library market can be expected to generate increased
attention, capability and effort by one or more of the Company's
competitors in this now relatively small niche of the library market.
The software and computerized database processing services business for
corporate and traditional publishing is highly competitive. There are no
definitive market share statistics available. Many competitors are
smaller and local in character, but some are larger and national with
greater financial resources than the Company. Contracts for computerized
database publishing services are awarded according to the results of
market pricing, competitive bidding, technical capability, customer
relationship and/or past performance.
In seeking to expand its customers/markets in the Internet/Web
publishing market, the Company can be expected to face intense
competition from existing and future competitors with substantially
greater financial, technical, marketing, distribution and other resources
than the Company and, therefore, may be able to respond more quickly than
the Company can to new challenging opportunities, technologies, standards
or customer requirements. The Company will compete with other large,
well-known software development and Internet/Web database platform companies
that offer a variety of software products. The Company will also compete
with a number of medium-sized, small and start-up companies that have
introduced or are developing Internet/Web development, management,
publishing and e-commerce products. Increasing competition could result
in pricing pressures negatively impacting margins available to companies
competing in this market and could make it difficult or even impossible
for the Company to gain recognition and acceptance of its particular
line of these products and services. Of course, it is also possible that
companies that are now or in the future may be competing in the broader
market where the Company is seeking to compete may determine to enter
the Company's traditional markets with adverse impact on the Company as a
result of this new competition.
Company Background
The Company was founded In 1950 and incorporated in 1960 in the State of
California. Beginning in 1964, the Company was one of the pioneers in
computerized typesetting and database composition services for the
library and publishing industries. Over the years, the Company has
migrated its products and services to the most current technology required
to address changing customer needs and requirements. The Company started
in print, moved to microfilm/fiche and then to CD-ROM as the media of choice
for its products/services, and is now completing the process of adapting its
products and services to the prevailing Internet/Web environment. In
1998, revenues attributable to the Company's Internet/Web products and
services grew by 33%. In 1999, these revenues will again increase, and
should account for over 50% of the Company's total revenues in 1999.
Offices/Employees
The Company's main office is in Pomona, California, in the greater Los
Angeles area. The Company's wholly-owned Canadian subsidiary, A-G
Canada, Ltd., is located in Toronto, Canada. Marketing representatives are
located in California, Florida, New York, Washington State, Washington
D.C. and Toronto, Canada. There are approximately 100 employees in all
locations.
ITEM 2. PROPERTIES
The Company leases its corporate office and production facilities
constituting approximately 29,000 square feet located at 3201 Temple
Avenue, Pomona, California 91768. The facility has been custom designed
for the Company's purposes, is substantially occupied and should be
adequate for the Company's anticipated growth for the foreseeable future.
The facility is currently leased to the Company through June 2001 under the
second of two five-year renewal options. (See Note 6 of "Notes to
Consolidated Financial Statements" and Item 13. "Certain Relationships
and Related Transactions").
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Stock quotations.
1998 1997
Bid Asked Bid Asked
Price Range High Low High Low High Low High Low
1st Quarter 2.625 2.625 4.000 3.500 2.250 2.000 3.250 2.375
2nd Quarter 3.500 2.625 5.625 3.500 2.000 1.625 2.750 2.000
3rd Quarter 5.500 3.625 7.500 4.000 2.125 1.750 4.500 3.500
4th Quarter 2.750 2.500 4.000 3.000 2.625 2.500 4.250 2.625
The Company's Common Stock ($.10 par value) is traded in the over-the
- - -counter market under the symbol "AUGR" (Cusip Number 05272510). The
stock quotations set forth above, as published by the National Quotation
Bureau, Inc., represent the highest and lowest closing bid and asked
prices quoted by broker/dealers making a market in the Company's Common
Stock. Prices quoted do not include retail markup, markdown or
commissions and may not reflect actual transactions in shares of the
Company's stock. Quotations for the Company's stock are also reported
on the OTC Bulletin Board.
As of December 31, 1998, the number of holders of record of the
Company's Common Stock was 214. The Company has never paid a cash
dividend and there are no plans to do so in the near future. (See Note
3 of "Notes to Consolidated Financial Statements" for information as to
the loan restriction on the payment of cash dividends).
ITEM 6. SELECTED FINANCIAL DATA
Dollar amounts in thousands except per share data.
(See Note 1 of "Notes to Consolidated Financial
Statements" under "Other Assets")
Years Ended December 31
1998 1997 1996 1995 1994
Operating results:
Net sales $ 9,099 $10,036 $ 9,218 $ 9,559 $9,165
Net income/(loss) (1,065) 212 236 194 158
Earnings /(loss)
per share ( 1.00) .19 .21 .16 .12
At year-end:
Total assets 7,573 8,852 7,132 6,688 6,106
Long-term debt 2,588 2,911 2,101 1,906 1,696
No cash dividends have been declared.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General and Future Business Trends
Liquidity and Capital Resources
Management believes that liquidity and capital resources will be adequate
for operations in 1999. The Company has a revolving credit facility with
maximum availability of $1,250,000 ($1,250,000 available at December 31,
1998), secured by accounts receivable, renewable every year. Management
believes that the current line of credit will again be renewed in 1999 and
is sufficient to handle the Company's cyclical working capital needs. (See
Note 2 of "Notes to Consolidated Financial Statements"). The Company also
maintains a capital line of credit facility with a maximum availability of
$3,000,000 (fully utilized at December 31, 1998), secured by substantially
all of the Company's capital assets, renewable every year. Management
believes that this credit facility will again be renewed in 1999.
Management believes that increased credit availability may be
required to finance planned capital expenditures in 1999 which are
estimated at $1,200,000, to be used to upgrade Internet server computers
and for software development primarily for the next generation of
Impact/ONLINE software required to accommodate the growing number of
libraries, and resulting increasing volume of transactions, using the
Company's Internet/Web product. The Company is evaluating alternative
means of financing this investment, including lease financing for planned
computer hardware purchases. The Company obtained an additional credit
facility of $750,000 used to fund the 1997 acquisition of the Company's
Canadian subsidiary. The term note is a three year note with interest
only for 12 months followed by a 24 month amortization schedule. In
January 1998, the Company prepaid $375,000 of the term loan. The balance
outstanding at December 31, 1998 was $375,000 and the loan is scheduled to
be repaid by June of 2000. (See Note 3 of "Notes to Consolidated
Financial Statements").
In 1998, cash flow provided by operating activities increased $226,000, to
$1,310,000, from $1,084,000 in 1997. Cash flow attributable to non-cash
depreciation and amortization was $1,676,000, collection of accounts
receivable was $639,000 and additional customer advances (deferred income)
was $278,000 in 1998. The average collection days for accounts receivable
was unchanged at 66 days in both 1998 and 1997. The substantial decrease
in accounts receivable of 28% resulted from the decrease in fourth quarter
sales in 1998, down 27% from the prior period. (See Results of Operations
below). At December 31, 1999, the Company's principal financial
commitments involved the lease of corporate facilities in Pomona,
California and Toronto, Ontario.
The Company's principal uses of cash for investing activities, $968,000 in
1998 and $2,141,000 in 1997, were for the continuing development of the
Company's Impact/ONLINE software, and for upgrades to the Company's
computer equipment (Internet servers) to expand and enhance online service
to the Company's current and prospective Internet/Web customers.
Liquidity was adversely affected by the decline in sales in 1998 and
resulting net loss of $1,065,000 ($1,462,000 before tax benefit).
(See Results of Operations below). Working capital at December 31,
1998 was ($459,000) versus $340,000 in 1997. As a result of the loss,
the Company was in non-compliance with two financial ratio loan covenants
under its bank credit facility in the quarter ending September 30, 1998,
and five financial ratio loan covenants for the year ended December 31,
1998. The Company was also in non-compliance with financial ratio loan
covenants for the quarter ended March 31, 1999. The Company's bank agreed
to waive default rights under the Company's bank loans pertaining to all
these financial ratio loan covenant violations through March 31, 1999, and
further agreed to reduce and in some cases eliminate these financial ratio
loan covenants on a going forward basis. The Company is in the process of
re-negotiating terms and conditions of its bank loan agreements to reflect
the Company's anticipated results of operations and financial condition in
1999 and beyond. The Company was timely in all payments to the bank in
1998, and anticipates timely payments in 1999. Notwithstanding the
substantial 1998 loss, the Company's cash position at December 31, 1998
was $293,000, up $49,000 from the same period in 1997, and the Company was
once again able to fully pay its revolving line of credit (maximum
$1,250,000) down to zero at December 31, 1998, due in part to increased
customer advances attributable to the Company's new Internet/Web products
which deposits (deferred revenue) were up $278,000 in 1998 versus 1997.
The Company's capital resources are available for use as working capital,
for capital investments and, although less likely for the immediate
future, possible acquisitions of businesses, products or technologies
complementary to the Company's business. Management believes that cash
reserves and cash flow from operations will be sufficient to fund
operations in 1999, although the Company believes that the bank may
require the Company to seek alternative sources of financing to complement
use of bank financing for planned 1999 capital expenditures. The Company
believes that it is imperative to continue to invest in Internet/Web
capability for the foreseeable future. Accordingly in 1999, and
thereafter, the Company may and likely will require additional financing
to continue to develop and refine its new Internet/Web line of products
and to seek to expand the market for these products. (See "Item 1.
Business" herein). There can, however, be no assurance that any
additional financing, if and when needed, will be available on terms
favorable to the Company, or at all.
Results of Operations
Overall, 1998 consolidated sales revenues were down $936,000 or 9.3% from
the prior year. Sales for the first six months of 1998 were up $806,000
or 21% from the same period in 1997. However sales in the second six
month period of 1998 were down $1,743,000 or 28% from the same period the
prior year. For the year ending December 31, 1998, the Company incurred a
net loss of $1,065,000, which was not only a significant loss but was the
first time the Company had experienced a loss in the last 23 years (since
1975). A number of factors contributed to this result.
The loss was due in part to the continued effect on the Company of the
Canadian acquisition completed in July of 1997. Sales of the Canadian
subsidiary, although additive to the Company's revenues in the last six
months of 1997, continued to decline as Canadian customers turned to
alternative sources for their bibliographic cataloging services following
the acquisition and were slow to commit to the Company's new Internet/Web
based library services products. Since the acquisition, annualized sales
of the Canadian subsidiary have declined approximately 40%.
Within the first year following the acquisition, customers in Japan
deferred several major contract awards to the Company indefinitely due to
the deepening recession in that country. Approximately half of the
decline in annualized sales revenues was due to the drop in international
business from Japan, where all of this business originated. The Company
introduced its new cataloging products into the Canadian market, and the
decline in sales revenues from Canada has slowed recently and is expected
to stabilize in 1999 - - although libraries in both Canada and the United
States appear to be seeking cheaper and sometimes even free alternative
sources for the high quality bibliographic cataloging records service that
the Company's product line has traditionally offered and libraries
traditionally preferred. In response to this trend, the Company has
modified its selling model from a fee per record based service to a
subscription based service entitling customers to quality cataloging
record information for a flat fee per year, which appears to be gaining
acceptance with customers and ameliorating the "alternative sources"
problem somewhat.
Sales revenues from the U.S. library market were down $1 million in 1998
from 1997 and declined in virtually all of the Company's traditional
(bibliographic cataloging and print publishing) product and service lines
due primarily to lower demand. The drop was exacerbated by the conversion
of many of the Company's customers from CD-ROM to the Company's
Internet/Web based products which has led to disruptions in the timing of
revenue as the Company has transitioned from a fee-for-service business
model to a monthly subscription model. Customers who did commit to adopt
the Company's new Internet/Web based technology product line cancelled
revisions to their CD-ROM catalogs otherwise scheduled for 1998 in order
to be able to allocate expenditures to the implementation of the Company's
Internet/Web delivery system in 1999. Now that most the CD-ROM customers
in both the U.S. and Canada have been converted to the Company's new
Internet/Web products, revenue from library services should become more
stable and predictable. Sales revenues in the publishing markets were
somewhat lower in 1998 from 1997 due primarily to a delay in the
completion of a major editor project which, like the transition from CD-
ROM to the Internet/Web in the library markets, occasioned a shift in
anticipated revenues from one period to a succeeding period.
Gross margins declined approximately $900,000 in 1998 from 1997.
Approximately half the decline was due to additional depreciation and
amortization expense associated with the acquisition of the Canadian
business assets (which transaction did not involve any goodwill). The
difference in gross margin also reflects additional depreciation and
amortization expense in the amount of $383,000 associated with an
adjustment of the useful life of some computer hardware and software
assets.
General and administrative expenses were up in 1998 over 1997 by $867,000.
As revenues from the Canadian operation continued to decline, management
began adjusting the Canadian cost structure, mostly payroll, to reflect
decreasing revenue forecasts. There were staff reductions commencing in
June and continuing through December 1998, from 19 down to 9 employees in
the Company's Toronto office; and the Company plans further reductions and
other cost savings steps for implementation in 1999. The combined cost
savings measures, primarily employee severance benefits payable under
Canadian law, resulted in a nonrecurring charge in 1998 of $318,000, which
is reflected under 1998 accrued payroll which exceeded 1997 by $300,000.
Legal expenses were up $243,000 over 1997. The Company challenged the
award of a large library contract to a competing bidder based on what the
Company believed, and the customer eventually concluded, was inaccurate
information supplied by the competing vendor. Although time consuming and
expensive, the Company was successful in getting a reversal of the
decision. The customer has now announced that the Company is the winning
bidder for this important contract which should be signed shortly and
provide the Company with substantial revenue over a period of the next
several years. Separately, an employee in the Company's Datacat
subsidiary, resigned to set-up a competing business using the Company's
own proprietary heating, ventilation, air conditioning and refrigeration
(HVACR) catalog database. Through extensive negotiations, copyright
application proceedings before the United States Patent Office and other
action, the Company was able to overcome this problem and the previously
departed employee returned the mis-appropriated Company HVACR material,
agreed not to compete with the Company in the future and accepted a
consulting role with Datacat. Additionally, during 1998 the Company made
a substantial effort to investigate the possible acquisition of another
company in the library services and information delivery system business.
Ultimately, the business was sold by its owner to the management/employees
of the subject company. The Company incurred substantial legal and related
outside consulting services expenses attributable to this possible
acquisition opportunity in 1998. Recruiting fees were also up
substantially in 1998 over 1997 as the Company filled several key
management and sales positions utilizing the services of outside placement
professionals.
Interest expense in 1998 was up $33,000 on higher average borrowings, due
to lower sales revenues, offset somewhat by lower interest rates. As a
result of the substantial net loss incurred in 1998 of $1,064,622
($1,461,622 before effect of anticipated tax benefits), the Company
recognized a $397,000 tax benefit attributable to the carryback and
carryforward provisions of the United States income tax laws. Due to the
relatively recent acquisition, and lack of profitability, of the Canadian
business, the Company did not recognize the full potential amount of the
tax benefit in Canada resulting in an unrecorded net operating loss
carryforward (NOL) in the amount of $370,000. See Note 4 of "Notes to
Consolidated Financial Statements".
The Company anticipates sales revenues will decline again to the $8.0-$8.5
million range in 1999, resulting in approximately break-even net income,
as the transition to the Company's Internet/Web line of products continues
and the Company seeks to develop new markets for the information and
knowledge management products, originally developed for library and
publishing customers, for adoption by expanding categories of customers
educated to the capabilities and benefits to be derived from these products.
Some of the Company's products/markets are mature, such as the
bibliographic cataloging records business, and are not perceived as growth
opportunities and are expected to continue to decline in succeeding years
as more and more of this information is available at reduced cost or for
free from sources like the Library of Congress and book distributors.
Accordingly, costs and expenses attributable to the "traditional"
products/markets have been reduced to be more in line with going forward
sales forecast. However, further cost and expense reductions in variable
product costs, and related fixed costs, will be much more difficult to
achieve given the Company's current, largely fixed, cost structure.
Should sales fall short of expected levels in 1999, the Company can be
expected to incur further, but more modest, losses. Any further
significant losses, however, could be expected to adversely affect the
Company's banking relationship and its ability to secure alternative
sources of capital.
Information Relating To Forward-Looking Statements
This Report may include forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Impact of Inflation
Inflation is not anticipated to have a material effect on the Company's
business in the near future. Historical dollar accounting does not
reflect changing costs of operations, the future cost of expansion and the
changing purchasing power of the dollar. Should inflation occur in the
future, it can be expected to impact the Company in an adverse manner, as
prices cannot be adjusted quickly due to the contract nature of the
business, while costs of personnel, materials and other purchases tend to
escalate more rapidly.
Foreign Exchange
The functional and reporting currency of the Company is the U.S. dollar,
while the functional and reporting currency for A-G Canada Ltd., the
Company's wholly-owned Canadian subsidiary, is the Canadian dollar.
Accordingly, the Company is now exposed to foreign currency translation
gains or losses as the relationship between the Canadian dollar and U.S.
dollar fluctuates. Since the date of the Company's Canadian acquisition,
the Canadian dollar has lost over 10% of its value against the U.S.
dollar. More recently, the value of the Canadian dollar has stabilized at
approximately U.S.$1.00=Cdn$1.54. Cash foreign currency losses, expressed
in terms of U.S. dollars, were approximately $47,000 in 1998 as compared
to $12,222 for the six month period in 1997. Further declines in the
value of the Canadian dollar against the U.S. dollar will result in
additional foreign exchange losses. Other than for sales by A-G Canada in
Canada, all other transactions involving the Company are denominated in
U.S. dollars. See Note 1 of "Notes to Consolidated Financial Statements".
Year 2000
The Year 2000 issue relates to the ability of computer software programs
to recognize the arrival of the Year 2000 because of a common software
design feature that describes the current year by only its last two
digits. The Company has developed a plan to modify its information
technology from a computer hardware and software perspective to be ready
for the Year 2000 ("Y2K") and has begun converting critical data
processing systems to be Y2K compliant. The Company currently expects the
conversion project to be largely complete before the end of 1999. This
conversion project is budgeted to cost between $50,000 and $100,000,
including internal and external costs but excluding costs to upgrade and
replace computer systems in the normal course of business, to ensure that
all key systems are ready for the Year 2000.
The Company's main computer systems have been upgraded and are now
compliant according to their manufacturers. Many of the Company's
personal computers will require a software and in some cases a hardware
upgrade or other "fixes" which are underway. Third-party application
software is being upgraded where necessary to be Y2K compliant. All new
products and services developed and offered by the Company will be Y2K
compliant as a matter of corporate policy. Most of the Company's
internally developed applications software products have now been tested
for compliance, except that it is not economical to upgrade certain of the
internally developed software which will be replaced by available third-
party software. The Company's management information system
software is also being replaced with a third-party software product.
The Company does not currently have any contingency plans to address a
systemic failure such as an interruption in power or telephone utility
service used by the Company and its customers (and/or their customers).
Likewise, the Company has not made provision for alternate site computer
and related processing services due to the lack of comparable alternative
computer processing alternatives. Should the Company experience an
unforeseen Year 2000 problem with one of its products, it is believed that
the Company has sufficient internal personnel and other resources to
adequately address any this problem. Of course, the actual occurrence of
any unforeseen problem, and/or the Company's inability to timely address
and resolve problems which the Company can reasonably foresee, could be
expected to adversely affect sales revenues in the short to mid-term,
increase costs and expenses and could expose the Company to substantial
litigation costs and expenses and possible judgments. The Company is
unable to determine with any high degree of certainty whether or not the
Year 2000 problem will ultimately have any material adverse effect on the
Company's business, products, customers, results of operations, financial
condition or otherwise.
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements covered by Reports of Independent
Certified Public Accountants.
Page
Reference
Report of Independent Certified Public Accountants 11
Report of Independent Auditors 12
Consolidated Balance Sheets at December 31, 1998 and 1997 13
Consolidated Statements of Operations for the years ended 14
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the 14
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years 15
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Auto-Graphics, Inc.
Pomona, California
We have audited the accompanying consolidated balance sheet of Auto-
Graphics, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Auto-Graphics, Inc. and its subsidiaries as of December 31, 1998, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 5, 1999
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Auto-Graphics, Inc.
We have audited the accompanying consolidated balance sheet of Auto-
Graphics, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Auto-
Graphics, Inc. at December 31, 1997, and the consolidated results of its
operations and its cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Riverside, California
April 8, 1998
</PAGE>
<PAGE>
AUTO-GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash $ 292,744 $ 244,620
Accounts receivable, less
allowance for doubtful accounts
($38,000 in 1998 and 1997) 1,697,826 2,365,837
Unbilled production costs 86,573 83,424
Other current assets 360,170 122,416
Total current assets 2,437,313 2,816,297
Software, equipment and leasehold
improvements, net (See Note 1) 5,016,627 5,787,301
Other assets 119,162 248,349
$ 7,573,102 $ 8,851,947
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 632,809 $ 669,237
Deferred income 813,113 536,225
Accrued payroll and related
liabilities 578,569 272,485
Other accrued liabilities 84,282 155,383
Current portion of long-term debt 787,500 842,500
Total current liabilities 2,896,273 2,475,830
Long-term debt, less current portion
(See Note 3) 2,587,500 2,911,573
Deferred taxes based on income (See Note 4) 486,000 695,000
Total liabilities 5,969,773 6,082,403
Commitments and contingencies (see Note 5)
Stockholders' equity:
Common stock, $.10 par value,
4,000,000 shares authorized,
1,064,478 shares issued and
outstanding in 1998 and
1,090,478 shares issued and
outstanding in 1997 106,448 109,048
Capital in excess of par value 1,123,899 1,128,319
Retained earnings 375,389 1,534,741
Accumulated other comprehensive income ( 2,407) (2,564)
Total stockholders' equity 1,603,329 2,769,544
$ 7,573,102 $ 8,851,947
See notes to consolidated financial statements.
</PAGE>
<PAGE>
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997, 1996
1998 1997 1996
Net sales $ 9,099,198 $10,035,824 $ 9,217,937
Costs and expenses
Cost of sales 6,258,523 6,264,141 5,500,527
Selling, general
and administrative 3,943,143 3,076,078 3,071,226
10,201,666 9,340,219 8,571,753
Income/(loss) from operations ( 1,102,468) 695,605 646,184
Interest expense, net ( 311,797)( 278,591)( 253,258)
Other income/(expense) ( 47,357)( 12,264) 33,980
Income/(loss) before taxes ( 1,461,622) 404,750 426,906
Provision/(benefit)
for taxes ( 397,000) 193,000 190,000
Net income/(loss) $(1,064,622)$ 211,750 $ 236,906
Basic and diluted
earnings per share $ (1.00) .19 $ .21
Weighted average
shares outstanding 1,066,645 1,090,611 1,109,345
</PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumulated
Common Stock Capital in other com-
excess of prehensive Retained
Shares Amount par value Income earnings
Balances at
Jan. 1,1996 1,130,478$ 113,048 $1,151,092 - $1,177,662
Net income - - - - 236,906
Common stock
retired ( 21,200) ( 2,120) ( 12,441) ( 45,788)
Balances at
Dec. 31,1996 1,109,278 110,928 1,138,651 - 1,368,780
Net income - - - - 211,750
Common stock
retired ( 18,800) ( 1,880) ( 10,332) ( 45,789)
Foreign Currency
Translation
Adjustments - - - $( 2,564) -
Balances at
Dec. 31,1997 1,090,478 109,048 1,128,319 ( 2,564)1,534,741
Net loss - - - - (1,064,622)
Common stock
retired ( 26,000) ( 2,600) ( 4,420) - ( 94,730)
Foreign Currency
Translation
Adjustments - - - 157 -
Balances at
Dec. 31,1998 1,064,478 $ 106,448 $1,123,899 $( 2,407) $ 375,389
</TABLE>
See notes to consolidated financial statements.
</PAGE>
<PAGE>
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, 1996
1998 1997 1996
Cash flows from operating activities:
Net income $(1,064,622) $ 211,750 236,906
Adjustments to reconcile net
Income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 1,676,056 1,134,348 1,048,639
Deferred taxes ( 209,000) 30,061 71,000
Changes in operating assets
and liabilities, net of the
effect of acquisitions
Accounts receivable 937,971 (405,058) 96,940
Unbilled production costs ( 3,149) 166,380 101,381
Other current assets ( 241,303) (39,908) (19,824)
Other assets 22,245 (284,166) (26,964)
Accounts payable ( 32,062) 338,977 (194,375)
Deferred income 277,642 (99,306) (45,779)
Accrued payroll and
related liabilities 313,030 2,275 3,389
Other accrued liabilities ( 66,698) 28,343 88,454
Net cash provided by
operating activities 1,310,110 1,083,696 1,359,767
Cash flows from investing activities:
Capital expenditures ( 173,233) (420,676) (611,840)
Capitalized software development ( 795,000) (750,676) (775,000)
Investment in Datacat, Inc.,
net of cash acquired - (182,175) -
Investment in A-G Canada, Ltd. - (787,095) -
Net cash used in investing ( 968,233) ( 2,140,622)( 1,386,840)
Cash flows from financing activities:
Borrowings under long-term debt 650,927 1,603,016 900,000
Borrowings under life insurance 150,278 - -
Principal payments under debt
agreements (1,030,000) (605,000) (555,000)
Repurchase of capital stock (101,750) (58,000) (60,351)
Net cash provided by (used in)
financing activities ( 330,545) 940,016 284,649
Net increase(decrease) in cash 11,332 (116,910) 257,576
Foreign currency effect on cash 36,792 (2,564) -
Cash at beginning of year 244,620 364,094 106,518
Cash at end of year $ 292,744 $ 244,620 $ 364,094
See notes to consolidated financial statements.
</PAGE>
<PAGE>
AUTO-GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Summary of significant accounting policies.
Description of Business
Auto-Graphics, Inc. including its wholly-owed A-G Canada, Ltd. and
Datacat, Inc. subsidiaries (the "Company") provides software products
and services used to create, organize, manage, and deliver electronic
databases and information via the Internet/Web and/or other electronic
media such as CD-ROM and via traditional publication media such as
print.
Basis of Presentation
The consolidated financial statements include the accounts of Auto-
Graphics, Inc. and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Revenue Recognition
Revenues are recognized as services are rendered monthly or when
finished goods are shipped to customers. Certain future software
support costs are accrued in accordance with American Institute of
Certified Public Accountant's Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9.
Use of Estimates
The preparation of the financial statements of the Company in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported
amounts of assets and liabilities and revenues and expenses during the
reporting period. These estimates are based on information available as
of the date of the financial statements. Actual results may differ from
those estimated.
Foreign Currency Translation
The functional and reporting currency for operations located in
Canada is the Canadian dollar. Consequently, assets and liabilities
must be translated into U.S. dollars using current exchange rates and
the effects of the foreign currency translation adjustments are
accumulated and included as a component of stockholders' equity. As of
December 31, 1998, the accumulated foreign currency translation
adjustments were not material and the net foreign exchange transaction
losses for 1998 were $47,357 and $12,222 in 1997. All other Company
transactions are currently denominated in U.S. dollars.
Concentration of Credit Risk
The Company is potentially subject to a concentration of
credit risk for trade receivables. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential losses for uncollectible
accounts and such losses have been within management's expectations.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical
to estimate that value:
Cash and Receivables. The carrying amount approximates fair value
because of the short-term maturity of these instruments.
Long-Term Debt. The carrying amount approximates fair value, since
the interest rate on the debt is at the bank's prime rate.
Unbilled Production Costs
Costs associated with work in process inventory including labor,
materials, supplies, and overhead (excluding selling, general and
administrative expenses) are stated at the lower of cost or net
realizable value and are removed from inventory on an average unit cost
basis.
Software, Equipment and Leasehold Improvements
Software, equipment and leasehold improvements are recorded at
historical cost. Software, equipment, furniture, fixtures and leasehold
improvements at December 31, 1998 and 1997 consist of the following:
1998 1997
Computer software and database $7,575,129 $7,602,243
Equipment 3,015,946 3,568,573
Furniture and fixtures 534,134 535,706
Leasehold improvements 273,973 276,100
11,399,182 11,982,622
Less accumulated depreciation
and amortization 6,382,555 6,195,321
$5,016,627 $5,787,301
Capitalized Acquisition Costs
Certain legal and accounting costs associated with several asset
acquisitions in 1997 have been capitalized as asset acquisition costs
And will be amortized over a five year period.
Depreciation and Amortization
Depreciation: Depreciation is based on the straight-line method over
the estimated useful life of the asset and commences in the year the
asset is placed in and/or is available for service or sale using the
half-year convention method.
Amortization: Certain costs incurred related to the development
and purchase of computer software are capitalized and amortized in
accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Amortization is based on the straight-line method
and commences in the first year of product availability. Unamortized
computer software was approximately $3,695,000 in 1998, $3,734,000 in
1997, and $2,502,000 in 1996. Amortization of computer software was
approximately $798,000 in 1998, $579,000 in 1997, and
$501,000 in 1996.
The following estimated useful lives are generally observed for the
respective asset categories:
Equipment - 5 years
Computer software
and databases - 7 years
Furniture and fixtures - 5 to 10 years
Leasehold improvements - the lesser of 5 to 15 years
or the lease term
Depreciation and amortization was $1,676,000 in 1998, $1,134,000 in
1997, and $1,049,000 in 1996.
Other Assets
Investment in A-G Canada, Ltd.
As of July 1, 1997, the Company acquired the assets of the Library
Information Systems ("LIS") division of ISM Information Systems
Management Manitoba Corporation ("ISM"), a subsidiary of IBM Canada,
Ltd. The LIS business includes bibliographic cataloging and
interlibrary loan resource sharing software and related services. The
assets acquired include a bibliographic database containing over 50
million records together with the holdings of most Canadian public and
university libraries, five million authority records, software, computer
equipment, furniture, leasehold improvements and contracts to provide
services to approximately 500 Canadian libraries.
The Company purchased the LIS assets and business for US$879,000
(Cdn$1,211,000) of which US$763,000 was paid in cash plus the assumption
of approximately US$116,000 in liabilities. The transaction was treated
as a purchase with the purchase price fully allocated to the fair value
of the assets acquired and no goodwill or other intangibles were
recognized. Financing for the purchase was provided in the form of a
new credit facility through Wells Fargo Bank via a combination of an
additional US$750,000 in bank term debt and an additional US$250,000 in
revolving working capital financing.
The Company formed a wholly-owned Canadian subsidiary, A-G Canada
Ltd., for purposes of acquiring and operating the LIS business located
in Etobicoke, Ontario near Toronto. Financial information for A-G
Canada Ltd. for the six months ending December 31, 1997 and twelve
months ending December 31, 1998 has been included in the accompanying
consolidated financial statements.
Investment in Datacat, Inc.
In 1990, the Company acquired a 50% interest in Datacat, Inc.
Datacat was formed to market a new technology developed by the Company
for the production of parts catalogs for the wholesale heating,
ventilation, air conditioning, and refrigeration (HVACR) industry. The
investment has been accounted for using the equity method. As of
October 2, 1997, the Company acquired the remaining 50% interest in
Datacat, which it did not already own. The Company invested $200,000 in
Datacat. The accompanying consolidated financial statements include
financial information for Datacat for the three month period ending
December 31, 1997 and twelve months ending December 31, 1998.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings
per Share", which is effective for interim and annual periods ending
after December 15, 1997. The Company adopted the standard as of
December 31, 1997. The standard requires the Company to present basic
earnings per share and diluted earnings per share if applicable, using a
revised methodology and requires restatement of prior earnings per share
data presented. Basic earnings per share computations presented by the
Company conform to the standard and are based on the weighted average
number of shares of common stock outstanding during the year.
Contingently issuable shares granted under the Company's 1997
Non-Qualified Stock Option Plan have been excluded from per share
calculations because all necessary conditions for exercise of said
options have not been satisfied as of December 31, 1998. (See Note 7 of
"Notes to Consolidated Financial Statements").
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". The statement establishes standards for reporting and display
of comprehensive income and its components in interim and annual
financial statements. Comprehensive income is defined as the change in
the equity (net assets) of an entity during a period from transactions,
events and circumstances excluding all transactions involving
investments by or distributions to the owners. Total comprehensive
income for the Company for the years ending December 31, 1998 and 1997
is as follows:
1998 1997 1996
Net income/(loss) $(1,064,622) $ 211,750 $ 236,906
Foreign currency translation
Adjustments 157 (2,564) -
Total comprehensive
income/(loss) $(1,064,465) $ 209,186 $ 236,906
Supplemental Disclosure of Cash Flow Information
The Company paid interest in the amount of $326,294 in 1998,
$290,937 in 1997 and $253,258 in 1996. The Company paid income taxes in
the amount of $59,609 in 1998, $182,682 in 1997 and $21,691 in 1996.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation." As permitted by this statement, the Company
has continued to account for employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation
expense has been recognized for the employee stock option plan. (See
Note 7 of Notes to the Consolidated Financial Statements).
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The FAS is effective for
fiscal years beginning after December 15, 1997 and the Company has
adopted the statement in fiscal year ending December 31, 1998. The
statement establishes standards for reporting of information about
operating segments in interim and annual financial statements.
The Company provides various standard and custom database management
products and services to its customers, who are publishers of
information in various forms such as print, CD-ROM and Internet/Web.
Geographically, the Company provides these same database management
products and services to customers in both the US and Canada as its
primary markets. The Company is managed and financial results reported
as a single operating unit (or profit center), which is managed by a
Chief Executive Officer and a Chief Operating Officer. The Company and
its subsidiaries are managed by a single organization which is organized
by functional discipline, such as Operations, Sales, Marketing, Finance,
and Software Development each headed by a manager who reports to the CEO
or COO. The Company is, therefore, a single "operating segment"
according to the definition of the above referenced standard.
The following table summarizes results of operations and total assets
presented on the basis of GAAP (generally accepted accounting principles)
accounting for the years ending December 31, 1998, 1997 and 1996.
1998 1997 1996
Geographic areas
Net sales
United States $ 6,967,453 $ 7,856,245 $ 8,518,490
Foreign-Canada 1,924,660 1,648,535 699,447
Foreign-Japan/Other 207,085 531,044 -
Long-lived assets, net
United States 4,796,917 5,468,218 4,425,522
Foreign-Canada 219,710 319,083 -
No single customer represents more than 10% of net sales. Management
believes that the loss of any single customer or vendor would not have a
material adverse effect on the business of the Company.
Pending Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP is
effective for financial statements for fiscal years beginning after
December 15, 1998. The SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The
SOP requires that the Company continue to capitalize certain costs of
software developed for internal use once certain criteria are met. The
Company does not expect this SOP will have a material effect on the
Company's financial position or results of operations.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and Other Post Retirement Benefits," which is
effective for fiscal years beginning after December 31, 1997. The
Company does not expect this FAS will have a material effect on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Opinion ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities." This SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. The SOP provides
guidance and examples of the types of expenses associated with one-time
(start-up) activities which under this SOP must be expensed as incurred.
The Company does not expect this SOP will have a material effect on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal
quarters of all fiscal years beginning after June 15, 1999. The Company
plans to adopt the statement in the fiscal year ending December 31,
2000. The statement establishes standards for accounting for
derivatives and hedging instruments (of which the Company currently has
none) and therefore the Company does not expect this FAS will have a
material effect on the Company's financial position or results of
operations.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," which is
effective for the first fiscal quarter beginning after December 31,
1998. The Company does not expect this FAS will have a material effect
on the Company's financial position or results of operations.
In February 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections," which is effective for
financial statements issued for fiscal years ending after February 15,
1999. The Company does not expect this FAS will have a material effect
on the Company's financial position or results of operations.
Reclassification
Certain amounts reported in 1997 and 1996 have been reclassified to
conform to the 1998 consolidated financial statement presentation.
2. Note Payable to Bank.
The Company has a revolving credit agreement under which borrowings
are secured by accounts receivable whereby the Company may borrow
against its eligible accounts receivable up to a maximum of $1,250,000
($1,250,000 available at December 31, 1998 and 1997) with interest at
the bank prime rate (7.75% at December 31, 1998). The credit facility is
renewable annually with the next renewal in June 1999. Among other
requirements, the revolving line of credit requires the Company to
maintain minimum financial covenant ratios, and restricts the payment of
cash dividends. There are no compensating balance requirements,
material commitment fees or note guarantors. For the quarter ending
September 30, 1998 and the year ending December 31, 1998, the Company
was not in compliance with certain loan covenant financial ratios. For
the quarter ending March 31, 1999, the Company also expects to be in
non-compliance with its loan covenants. The Company's bank has agreed
to waive these loan covenant violations and has amended the credit
agreement with less restrictive covenants for the balance of the loan
term.
3. Long-term Debt.
Long-term debt at December 31, 1998 and 1997 consists of the
following:
1998 1997
Capital line of credit due in monthly
installments of $50,000 plus interest
at the bank prime rate (7.75% at
December 31, 1998) through 2003;
secured by software, equipment, and
leasehold improvements with a net
book value of approximately $5,017,000
at December 31, 1998. $3,000,000 $2,949,073
Term note with interest only at bank prime
(7.75% at December 31, 1998) through
June 30, 1999, and 12 monthly install-
ments of $31,250 plus interest at bank
prime rate through June 30, 2000. 375,000 750,000
Note payable to stockholder due in annual
installments of $55,000 plus interest at
5.5% per annum. - 55,000
Total long-term debt 3,375,000 3,754,073
` Less current portion 787,500 842,500
Long-term portion $2,587,500 $2,911,573
Maturities of Long-Term Debt due after one year are: 1999--$787,500;
2000--$600,000; 2001--$600,000; and 2002--$600,000.
The capital line of credit at December 31, 1998 provides for maximum
borrowings of $3,000,000 for the purchase of equipment and software, and
financing of up to $1,000,000 annually in internal software development
costs. The capital line of credit is subject to renewal annually
with the next renewal in June 1999. This agreement contains the same
loan covenants as the revolving line of credit. (See Note 2 of Notes to
the Consolidated Financial Statements). There are no commitment fees,
compensating balance requirements or note guarantors. For the quarter
ending September 30, 1998 and the year ending December 31, 1998, the
Company was not in compliance with certain loan covenant financial
ratios. For the quarter ending March 31, 1999, the Company also expects
to be in non-compliance with its loan covenants. The Company's bank has
agreed to waive these loan covenant violations and has amended the
credit agreement with less restrictive covenants for the balance of the
loan term.
The term note provided financing of $750,000 for the acquisition of
the LIS division of ISM Information Systems Management Manitoba
Corporation in July 1997. Terms of the note include interest at bank
prime rate with interest only for 12 months followed by a 24 month
amortization of the balance. The note carries an uncompensated guarantee
by an officer/stockholder of the Company. In January 1998, the Company
prepaid $375,000 of the term debt financing.
In June 1995, the Company entered into a stock repurchase agreement
with a former director of the Company, whereby the Company agreed to
purchase and retire, in 1995, 115,000 of 141,000 shares of Company stock
owned by the stockholder. The total transaction cost of $230,000 is
being paid in four annual installments beginning in 1995 and ending in
1998 plus interest of 5.5% per annum ($65,000 paid in June 1995, and
$55,000 was paid in June 1996, 1997 and 1998).
4. Taxes Based on Income.
The provision /(benefit) for taxes based on income is composed of
the following for the years ended December 31:
1998 1997 1996
Current taxes based on income
Federal $(188,000) $ 63,000 $ 69,000
State ( 35,000) 47,000 43,000
Foreign - 42,000 -
(223,000) 152,000 112,000
Deferred taxes based on income
Federal ( 147,000) 55,000 78,000
State ( 27,000) ( 14,000) -
Foreign - - -
( 174,000) 41,000 78,000
$(397,000) $ 193,000 $ 190,000
A reconciliation of the provision for taxes based on income follows
for the years ended December 31:
1998 1997 1996
Statutory U.S. federal income tax $(497,000) $ 137,600 $ 145,200
Adjustments for foreign tax rates ( 55,000) 11,800 -
Valuation Allowance 254,000 - -
State tax, net of federal benefit ( 77,000) 21,800 28,500
Other ( 22,000) 21,800 16,300
$(397,000) $ 193,000 $ 190,000
The statutory U.S. federal income tax rate was 34% in 1998, 1997 and
1996. The deferred tax assets and liabilities are composed of the
following at December 31:
1998 1997 1996
Deferred tax liabilities:
Tax over book amortization and
depreciation $ 729,000 $ 695,000 $ 665,000
State taxes 28,000 - -
Total deferred tax liabilities 757,000 695,000 665,000
Deferred tax assets:
Net Operating Loss 463,000 - -
Bad debts/accrued vacation/other 62,000 57,000 54,000
State taxes - 11,000 15,000
Total deferred tax assets 525,000 68,000 69,000
Valuation allowance ( 254,000) - -
Net deferred tax assets 271,000 68,000 69,000
Net deferred tax liability $ 486,000 $ 627,000 $ 596,000
Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The valuation allowance
at December 31, 1998 reflects an unrecognized foreign tax loss
carryforward. At December 31, 1998, the Company has available federal,
state and Canadian net operating loss carryforwards of approximately
$462,000, $886,000 and $569,000, respectively, for income tax purposes.
These net operating loss carryforwards expire in 2018 for federal taxes,
2005 for state and for foreign taxes.
5. Commitments and Contingencies.
The Company incurred total facilities and equipment lease and
rental expense of approximately $415,000 in 1998, $509,000 in 1997 and
$474,000 in 1996. The Company is obligated under certain noncancellable
operating leases for office facilities and equipment.
Approximate minimum lease commitments as of December 31, 1998 are as
follows:
Years ended Operating
December 31 Leases
1999 $ 415,000
2000 383,000
2001 351,000
Total minimum lease payments $ 1,149,000
6. Related Party Transactions.
The Company leases its corporate office and production facility
from a limited partnership owned by two principal directors/stockholders
of the Company payable at $29,260 per month (plus expenses and
applicable increases based on the consumer price index) through June
2001 under the second of two five-year renewal options. The five-year
lease with options, which was entered into in June 1986, was approved
and authorized by the independent members of the Company's Board of
Directors.
The Company entered into a stock repurchase agreement in February 1995,
with a former employee/officer of the Company, whereby the Company
agreed to purchase and retire, over a seven year period, 156,000 of
171,000 shares of Company stock owned by the individual. The total
transaction cost of $825,000 includes stock, non-competition and
consulting fees. In January 1998, the Company purchased and retired a
block of 26,000 shares, and in each January 1997 and 1996, the Company
purchased and retired a block of 15,600 shares, in accordance with the
above referenced agreement, at the then current fair market value of
the stock.
7. Stockholders' Equity.
1997 Non-Qualified Stock Option Plan
The Company adopted and implemented a 1997 Non-Qualified Stock
Option Plan effective December 31, 1997. The plan is a non-qualified
plan covering only senior executives and related persons. The plan
consists of 100,000 shares of the Company's authorized but unissued
common stock. At the inception of the plan, the Company granted options
to four persons under the plan whereby they may purchase up to a total
of 47,500 shares over the next five years at a price per share of $1.65.
The recipient's right to exercise such options and acquire the stock is
conditioned upon further employment with the Company and on the market
trading price of the Company's stock rising to a minimum of $6.50 per
share. Shares actually sold and issued pursuant to the plan will be
restricted stock requiring that such stock be held by the recipients for
a minimum period of one year following purchase before they are eligible
to sell such stock in the public market. As of December 31, 1998 no
options were exercisable. Following such initial option grant, 52,500
shares remain eligible for future grants under the plan.
8. Defined Benefit Plan
The Company sponsors a defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code for the benefit of its U.S.
based employees. All full time employees are eligible to participate
beginning in January or June of each year following a 90 day waiting
period. The Company pays the administrative expenses of the plan.
Annually, the Company may, at its sole discretion, award an amount out
of the profits of the Company as a match against employee contributions
to the 401(k) plan. The Company contribution was approximately $25,000
in 1998, $24,000 in 1997 and $19,000 in 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 6, 1998, the Company was notified by Ernst & Young, LLP that
such firm would not stand for re-election for the fiscal year ending
December 31, 1998 and also tendered its resignation as the Company's
independent auditors.
A. Pursuant to Item 304(a)(1) of Regulation S-K, the Company reports
the following specific information:
(i) On August 7, 1998, the Company received written notification from
Ernst & Young, LLP dated August 6, 1998 that such firm would not stand
for re-election for the fiscal year ending December 31, 1998 and was
tendering its resignation as the Company's independent auditors.
(ii) The reports of Ernst & Young, LLP on the Company's financial
statements for each of the past two years were unqualified and contained
no adverse opinion or disclaimer of opinion and no such report was
qualified or modified as to uncertainty, audit scope, or accounting
principles.
(iii) The Company's Board of Directors have accepted the resignation of
Ernst & Young, LLP as the Company's independent auditors.
(iv) There were no disagreements on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure, between the Company and its independent auditors during the
Company's two most recent fiscal years or subsequent thereto.
(v) No event requiring disclosure under Item 304(a)(1)(v) of Regulation
S-K has occurred.
B. No event requiring disclosure under Item 304(a)(2) of Regulation S-K
has occurred.
On December 28, 1998, the Company engaged the services of BDO Seidman,
LLP as its principal accountant to audit the Company's consolidated
balance sheet as of December 31, 1998 and the related statements of
operations, stockholder's equity, and cash flows for the fiscal year
ending December 31, 1998. The engagement was approved by the Company's
Board of Directors.
Prior to the engagement of BDO Seidman, LLP, the Company did not consult
with such firm regarding the application of accounting principles to a
specific completed or contemplated transaction, or any matter that was
either the subject of a disagreement or a reportable event. The Company
also did not consult with BDO Seidman, LLP regarding the type of audit
opinion which might be rendered on the Company's financial statements
and no written or oral report was provided by BDO Seidman, LLP.
The Company has provided BDO Seidman, LLP with a copy of the disclosures
contained herein, and such firm has indicated that no letter will be
provided containing any new information, clarification of the Company's
expression of its views, or the respects in which such firm does not
agree with the statements made by the Company in response to Item
304(a). No other event requiring disclosure under Item 304(a)(2) of
Regulation S-K has occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of, and the positions
and offices within the Company presently held by, all directors and
officers of the Company:
Name Age Position
Robert S. Cope 63 Director, President and Treasurer.
Has served in these capacities for
more than ten years.
Robert H. Bretz 55 Director and Assistant Secretary.
Attorney who has acted as the Company's
outside general legal counsel for more
than ten years.
William J. Kliss 51 Chief Operating Officer.
Has served the Company in this capacity
for three years. Prior to this position,
Mr. Kliss served as the Company's Vice
President and General Manager of Library
Services for two years. Mr. Kliss formerly
served as Vice President of Operations at
Scan-Optics, Inc. for fifteen years prior
to his employment with the Company.
Daniel E. Luebben 50 Chief Financial Officer and Secretary.
Has served in these capacities for three
years. Prior to these positions, Mr.
Luebben served as the Company's Vice
President, Operations and Controller
for the past six years. Mr. Luebben
formerly served as Controller of
Ultrasystems Defense, Inc. for two
years prior to his employment with the
Company.
Directors serve until their successors are elected and qualified at the
annual meeting of stockholders. All executive officers serve at the
discretion of the Company's Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
A definitive Proxy Statement will be filed with the Securities and
Exchange Commission ("the Commission") pursuant to Regulation 14A within
120 days after the close of the Company's most recent calendar year and,
accordingly, Item 11 is incorporated by reference to said definitive
Proxy Statement. The Proxy Statement includes information covering this
item under the caption "Compensation of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A definitive Proxy Statement will be filed with the Commission pursuant
to Regulation 14A within 120 days after the close of the Company's most
recent calendar year and, accordingly, Item 12 is incorporated by
reference to said definitive Proxy Statement. The Proxy Statement
includes information covering this item under the caption "Security
Ownership of Certain Beneficial Owners and Management" and "Nominees for
Election as Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A definitive Proxy Statement will be filed with the Commission pursuant
to Regulation 14A within 120 days after the close of the Company's most
recent calendar year and, accordingly, Item 13 is incorporated by
reference to said definitive Proxy Statement. The Proxy Statement
includes information covering this item under the caption "Certain
Relationships and Related Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K
(a) Financial statements and financial statement schedules and
exhibits:
(1) Financial Statements: See Item 8. "Financial Statements."
(2) All schedules are omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedule, or because the information
required is included in the financial statements, including
the notes thereto.
(3) Exhibits:
3.1 Articles of Incorporation of Auto-Graphics, Inc., as
amended (incorporated by reference as filed with the SEC as Exhibit 3.1
to Item 14(a) in the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989).
3.2 Bylaws, as amended (incorporated by reference as filed with the SEC
as Exhibit 3.2 to Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1989).
10.8 Lease Agreement between 664 Company and Auto-Graphics,
Inc. dated May 27, 1986 (incorporated by reference as filed with the SEC
as Exhibit 10.7 to Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1990).
10.9 Agreement by, between and among Auto-Graphics, Inc. and
Douglas K. and Ruth T. Bisch executed February 15, 1995 (incorporated by
reference as filed with the SEC as Exhibit 10.9 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.10 Asset Purchase Agreement between A-G Canada, Ltd., a wholly owned
subsidiary of Auto-Graphics, Inc. and ISM Information Systems Management
Manitoba Corporation, a subsidiary of IBM Canada, Ltd. dated June 30,
1997 incorporated by reference as filed with the SEC in the registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997).
10.13 Stock Purchase Agreement by, between and among Auto-Graphics, Inc.
and Cary A. and Geri W. Marshall executed June 13, 1995 (incorporated by
reference as filed with the SEC as Exhibit 10.13 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.15 Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc.
dated May 12, 1997.
10.16 First Amendment to Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated June 23, 1997.
10.17 Second Amendment to Credit Agreement between Wells Fargo and
Auto-Graphics, Inc. dated October 31, 1997.
10.18 Revolving Line of Credit Note (Working Capital) between Wells
Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997.
10.19 Revolving Line of Credit Note (Capital Equipment) between Wells
Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997.
10.20 Term Note between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997.
10.21 Continuing Security Agreement Rights to Payment and Inventory
between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997.
10.22 Security Agreement Equipment between Wells Fargo Bank and Auto-
Graphics, Inc. dated May 12, 1997.
10.23 Guaranty between Wells Fargo Bank and Robert S. Cope dated May 12,
1997.
10.24 Settlement Agreement and Mutual Release between Diversified
Printing & Publishing Services, Inc., Gannam/Kubat Publishing, Inc.
Nasib Gannam, and T. Ron Kahraman, and Datacat, Inc., Auto-Graphics,
Inc. and Robert S. Cope dated September 30, 1997.
10.25 1997 Non-Qualified Stock Option Plan dated December 31, 1997.
10.26 Third Amendment to Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated June 1, 1998.
10.27 Term Note between Wells Fargo Bank and Auto-Graphics, Inc.
dated June 1, 1998.
10.28 Fourth Amendment to Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated September 15, 1998.
10.29 Fifth Amendment to Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated December 24, 1998.
(b) The Company has filed a Report on Form 8-K dated December 28, 1998
reporting the engagement of BDO Seidman, LLP as its independent
certified public accountant.
(c) The following document is filed herewith for information purposes,
but is not part of this Annual Report, except as otherwise indicated:
None.
(d) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AUTO-GRAPHICS, INC.
(Registrant)
Date: 4/20/99 By ss/ Robert S. Cope
Robert S. Cope, President,
Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacity and on the dates indicated.
Date: 4/20/99 By ss/ Robert S. Cope
Robert S. Cope, President,
Treasurer and Director
Date: 4/20/99 By ss/ Daniel E. Luebben
Daniel E. Luebben, Secretary
and Chief Financial Officer
Date: 4/20/99 By ss/ Robert H. Bretz
Robert H. Bretz, Director
</PAGE>
Exhibit 10-26
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into
as of June 1, 1998, by and between AUTO-GRAPHICS, INC., a California
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and
Bank dated as of May 12, 1997, as amended from time to time ("Credit
Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to
amend the Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the
Credit Agreement shall be amended as follows:
1. Exhibit C as referenced in Section 1.3(a) is hereby substituted with
a new Exhibit C as attached hereto, to reflect the new principal payment
schedule of the Term Loan.
2. Section 4.8(a),(b),(c) and (d) are hereby deleted in their entirety,
and the following substituted therefor:
"(a) Current Ratio not at any time less than 1.05 to 1.0, with
"Current Ratio" defined as total current assets divided by total
current liabilities (to include borrowings under Line of Credit).
(b) Tangible Net Worth not at any time less than $2,400,000.00,
with "Tangible Net Worth" defined as the aggregate of total
stockholders' equity plus subordinated debt less any intangible
assets.
(c) Total Liabilities divided by Tangible Net Worth not at any time
greater than 2.50 to 1.0 from the date of this Amendment up to
December 31, 1998 and not at anytime greater than 2.25 to 1.0 at
December 31, 1998 and at all times thereafter, with "Total
Liabilities" defined as the aggregate of current liabilities and
non-current liabilities less subordinated debt, and with "Tangible
Net Worth" defined as the aggregate of total stockholders' equity
plus subordinated debt less any intangible assets.
(d) EBITDA Coverage Ratio not less than 1.75 to 1.0 as of each
fiscal year end and not less than 1.75 to 1.0 as of the end of
each fiscal quarter excluding quarter ending December 31, on a
rolling four-quarter basis, with "EBITDA" defined as net profit
before tax plus interest expenses (net of capitalized interest
expense), depreciation expense and amortization expense, and with
"EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate
of total interest expense plus the prior period current maturity
of long-term debt (to be adjusted for the Amendment to the Term
Loan repayment period, of interest only, from the date of this
Amendment up to July 1, 1999) and the prior period current
maturity of subordinated debt."
3. The following is hereby added to the Credit Agreement as Section
4.10:
"SECTION 4.10. YEAR 2000 COMPLIANCE.
Perform all acts reasonably necessary to ensure that (a) Borrower and
any business in which Borrower holds a substantial interest,
and (b) all customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a
comprehensive review and assessment of all of Borrower's systems
and adopting a detailed plan, with itemized budget, for the
remediation, monitoring and testing of such systems. As used herein,
"Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by
or material to the business operations or financial condition of such
entity, will properly perform date sensitive functions before, during
and after the year 2000. Borrower shall, immediately upon request,
provide to Bank such certifications or other evidence of Borrower's
compliance with the terms hereof as Bank may from time to time
require."
4. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the
same meaning when used in this Amendment. This Amendment and the Credit
Agreement shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of this Amendment there
exists no Event of Default as defined in the Credit Agreement, nor any
condition, act or event which with the giving of notice or the passage
of time or both would constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
AUTO-GRAPHICS, INC. NATIONAL ASSOCIATION
By: ss/Robert S. Cope By: ss/Kirk C. Smith
Robert S. Cope Kirk C. Smith
President Vice President
Exhibit 10-27
WELLS FARGO BANK TERM NOTE
$375,000.00 West Covina,
California
June 1, 1998
FOR VALUE RECEIVED, the undersigned AUTO-GRAPHICS, INC, ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank") at this office at San Gabriel Valley RCBO, 1000 Lakes Drive,
Suite 250, West Covina, CA 91790, or at such other place as the holder
hereof may designate, in lawful money of the United States of America
and in immediately available funds, the principal sum of $375,000.00,
with interest thereon as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days
elapsed) at a rate per annum equal to the Prime Rate in effect from time
to time. The "Prime Rate" is a base rate that Bank from time to time
establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto. Each
change in the rate of interest hereunder shall become effective on the
date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be
payable on the 1st day of each month, commencing July 1, 1998.
(c) Default Interest. From and after the maturity date of this
Note, or such earlier date as all principal owing hereunder becomes due
and payable by acceleration or otherwise, the outstanding principal
balance of this Note shall bear interest until paid in full at an
increased rate per annum (computed on the basis of a 360-day year,
actual days elapsed) equal to 4% above the rate of interest from time to
time applicable to this Note.
REPAYMENT AND PREPAYMENT:
(a) Repayment. Principal shall be payable on the 1st day of each
month in installments of $31,250.00 each, commencing July 1, 1999, and
continuing up to and including May 1, 2000, with a final installment
consisting of all remaining unpaid principal due and payable in full on
June 1, 2000.
(b) Application of Payments. Each payment made on this Note shall be
credited first to any interest then due and second, to the outstanding
principal balance hereof.
(c) Prepayment. Borrower may prepay principal on this Note at any
time, in any amount and without penalty. All prepayments of principal
shall be applied on the most remote principal installment or
installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Borrower and Bank
dated as of May 12, 1997, as amended from time to time (the "Credit
Agreement"). Any default in the payment of performance of any
obligation under this Note, or any defined event of default under the
Credit Agreement, shall constitutes and "Event of Default" under this
Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default as defined
in the Credit Agreement, the holder of this Note, at the holder's
option, may declare all sums of principal and interest outstanding
hereunder to be immediately due and payable without presentment, demand,
notice of nonperformance, notice of protest, protest or notice of
dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder
shall immediately cease and terminate. Each Borrower shall pay to the
holder immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys
fees (to include outside counsel fees and all allocated costs of the
holder's in-house counsel), expended or incurred by the holder in
connection with the enforcement of the holder's rights and/or
the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought
by Bank or any other person) relating to any Borrower or any other
person or entity.
(b) Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such
Borrower shall be joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
AUTO-GRAPHICS, Inc.
By: ss/ Robert S. Cope
Robert S. Cope
President
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
entered into as of September 15, 1998, by and between AUTO-GRAPHICS,
INC., a California corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the
terms and conditions of that certain Credit Agreement between Borrower
and Bank dated as of May 12, 1997, as amended from time to time
("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the
terms and conditions set forth in the Credit Agreement and have agreed
to amend the Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree
that the Credit Agreement shall be amended as follows:
1. Section 1.1.(b)(i)(A) is hereby deleted in its entirety,
and the following substituted therefor:
"(i) any account which is more than ninety-three
(93) days past due;"
2. Section 4.3.(e) is hereby renumbered as Section 4.3.(f).
3. The following is hereby added to the Credit Agreement as
Section 4.3.(e):
"(e) not later than 20 days after and as of the end of each
month, Borrower will provide Bank a detailed report which
evidences that at least 80% of Borrower's invoices for that
period were billed on the last day of that month;"
4. Except as specifically provided herein, all terms and
conditions of the Credit Agreement remain in full force and
effect, without waiver or modification. All terms defined in
the Credit Agreement shall have the same meaning when used in
this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties
Contained in the Credit Agreement and reaffirms all covenants
set forth therein. Borrower further certifies that as of the
date of this Amendment there exists no Event of Default as
defined in the Credit Agreement, nor any condition, act or
event, which with the giving of notice or the passage of time
or both would constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed as of the day and year first written above.
AUTO-GRAPHICS, INC WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: ss/ Robert S. Cope By ss/ Debbie Dillard-Bell
Robert S. Cope Debbie Dillard-Bell
President Vice President
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
entered into as of December 24, 1998, by and between AUTO-GRAPHICS,
INC., a California corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the
terms and conditions of that certain Credit Agreement between Borrower
and Bank dated as of May 12, 1997, as amended from time to time
("Credit Agreement");
WHEREAS, as evidenced by Borrower's financial statements for the
quarter ending September 30, 1998, Borrower has violated the EBITDA
Coverage Ratio covenant and the profitability covenant set forth in
Section 4.9 (d) and (e) of the Credit Agreement (the "Existing
Violations"), which Existing Violations constitute Events of Default;
WHEREAS, Borrower has requested that Bank forbear from exercising
its rights and remedies with respect to the Existing Violations, and
Bank is willing to do so, subject to certain conditions;
WHEREAS, Bank and Borrower wish to amend two of the Events of
Default in the Credit Agreement;
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree
as follows:
1. Bank hereby agrees to forbear from exercising its rights
and remedies in connection with the Existing Violations until
February 15, 1999, except that Bank reserves the right to
refuse to make advances under the Credits in Bank's sole
discretion. Such agreement to forbear is conditioned upon
(a) delivery to Bank by January 4, 1999, of a current
financial statement of Robert S. Cope, in form and substance
satisfactory to Bank, and (b) delivery to Bank upon Bank's
request of any additional financial information Bank may
require, including without limitation information relating
to the business plan submitted by Borrower to Bank on December
11, 1998. Failure to comply with such conditions shall
terminate Bank's forbearance.
2. The forbearance by Bank described above shall not be deemed
a waiver of the Existing Violations, nor a waiver or agreement
to forbear with respect to any future violation which may occur
under the Credit Agreement or the other Loan Documents.
3. Section 6.1(f) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
(f) Borrower or any guarantor hereunder shall
become insolvent, or shall suffer or consent to or apply for
the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall
generally fail to pay its debts as they become due, or
shall make a general assignment for the benefit of
creditors; Borrower or any guarantor hereunder shall
file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other
arrangement with creditors or any other relief
under the Bankruptcy Reform Act, Title II of the
United States Code, as amended or recodified from
time to time, or under the Bankruptcy and Insolvency
Act (Canada) or comparable legislation in Canada or
any other jurisdiction (collectively, the "Bankruptcy
Code"), or under any state or federal law granting
relief to debtors, whether now or hereafter in effect;
or any involuntary petition or proceeding pursuant to
the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or
other relief for debtors is filed or commenced against
Borrower or any guarantor hereunder, and with respect
to any such filing by or against any guarantor hereunder,
such petition is unopposed or has not been stayed by
such guarantor within 60 days of such filing, or Borrower
or any such guarantor shall file an answer admitting the
jurisdiction of the court and the material allegations
of any involuntary petition; or Borrower or any such
guarantor shall be adjudicated a bankrupt, or an order
of relief shall be entered against Borrower or any
such guarantor by any court of competent jurisdiction
under the Bankruptcy Code or any other applicable state
or federal law relating to bankruptcy, reorganization or
other relief for debtors.
4. Section 6.1(h) of the Credit Agreement is hereby amended and
Restated in its entirety to read as follows:
(h)The death or incapacity of any individual
guarantor hereunder. The dissolution or liquidation
of Borrower or any guarantor hereunder; or Borrower
or any guarantor hereunder, or any of their directors,
stockholders or members, shall take action seeking to
effect the dissolution or liquidation of Borrower or
any such guarantor, and with respect to any such
guarantor, such action is unopposed or has not been
stayed by such guarantor within 60 days of the date
such action was taken.
5. Except as specifically provided herein, all terms
and conditions of the Credit Agreement remain in full
force and effect, without waiver or modification. All
terms defined in the Credit Agreement shall have the
same meaning when used in this Amendment. This Amendment
and the Credit Agreement shall be read together, as one
document.
6. Borrower hereby remakes all representations and warranties
contained in the Credit Agreement and reaffirms all covenants
set forth therein. Borrower further certifies that as of the
date of this Amendment there exists no Event of Default as
defined in the Credit Agreement except for the Existing
Violations, nor any condition, act or event which with the giving
of notice or the passage of time or both would constitute any such
Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed as of the day and year first written above.
AUTO-GRAPHICS, INC. WELLS FARGO BANK,
NATIONAL ASSOCIATION
By ss/ Robert S. Cope By ss/ Debbie Dillard-Bell
Robert S. Cope Debbie Dillard-Bell
President Vice-President
Acknowledged by the undersigned guarantor, who confirms that the
guaranty executed by him continues in full force and effect, and who
agrees to deliver to Bank, the financial statement referred to above.
By ss/ Robert S. Cope
Robert S. Cope
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and related Statement of Income of Auto-Graphics, Inc. as
of December 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 292744
<SECURITIES> 0
<RECEIVABLES> 1735826
<ALLOWANCES> 38000
<INVENTORY> 86573
<CURRENT-ASSETS> 2437313
<PP&E> 11399182
<DEPRECIATION> 6382555
<TOTAL-ASSETS> 7573102
<CURRENT-LIABILITIES> 2896273
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0
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<COMMON> 106448
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<TOTAL-LIABILITY-AND-EQUITY> 7573102
<SALES> 9099198
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<CGS> 6258523
<TOTAL-COSTS> 3943143
<OTHER-EXPENSES> 47357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311797
<INCOME-PRETAX> (1461622)
<INCOME-TAX> (397000)
<INCOME-CONTINUING> (1064622)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1064622)
<EPS-PRIMARY> (1.00)
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</TABLE>
