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, 1997				 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 nonaffiliates of the registrant was $679,000 as of December 31, 1997. The number of shares of the registrant's Common Stock outstanding was 1,090,478 as of December 31, 1997. 	DOCUMENTS INCORPORATED BY REFERENCE The definitive Proxy Statement to be filed pursuant to Regulation 14A for the fiscal year ended December 31, 1997 is incorporated herein by reference in Part III, Items 11-13 of Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant's most recent calendar year. PART I ITEM 1. BUSINESS Auto-Graphics, Inc. (the "Company") provides software products and processing services to information and database publishers. These products and services are used to create, maintain and distribute information databases through printed and/or electronic reference products. Electronic products include compact disc (CD-ROM) and client/server software systems (Internet/Web). The Company provides state and local government customers with products, services and outsourced facilities to maintain, publish and distribute bibliographic databases of library holdings and to manage interlibrary loan systems. Traditional commercial and corporate publishers use the Company's services to produce and distribute print and electronic products such as dictionaries, encyclopedias, Bibles, price catalogs and other reference works. In recent years, the Company has made a substantial investment in the development of online client/server software products and client-shared Internet/Web services. In 1993, the Company launched the development of a new product family called Impact/ONLINE(tm) for Internet information distribution services. This capability has been successfully utilized to a range of applications including the outsourcing by several statewide library consortia to the Company of complete system design, development, management, maintenance and operation of a web server for each customer. The Company currently has a number of statewide and regional Impact/ONLINE(tm) systems operational serving over 4,500 libraries. The Company's Impact/ONLINE(tm) products include: Impact/ONLINE WebPAC(tm) enables patrons, directly from home, school and office to search a database over the Internet using any web browser such as Netscape Navigator(tm) or Microsoft Explorer(tm). Impact/ONLINE ILL(tm) provides the means to automate the initiation, tracking and management of interlibrary borrowing and lending. Impact/ONLINE CAT(tm) is a powerful online cataloging utility for copying, creation and maintenance of a bibliographic database. Impact/MARCit(tm) is a cataloging support system providing access to the A-G Databases(tm) containing over 50 million bibliographic and authority records via the Web. Impact/TRACEit(tm) provides a one-stop source for satisfying quick reference queries and for locating potential interlibrary loan (ILL) sources. AVISO(tm) is an ISO standards compliant PC-based software system designed to manage all aspects of the interlibrary loan process. Impact/ACCESS(tm) provides for patron access to licensed commercial third- party databases. Impact/SLims(tm) is a small library information management system, which operates on a personal computer and integrates patron access catalog, circulation control and inventory management. In July 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 also employed the former staff of the LIS division each having an average of 17 years of experience in the library services business. The acquisition achieved the strategic objective of expanding the Company's customer base internationally, improving access to the academic library market and obtaining one of the largest bibliographic union databases in North America. The Company has delivered its first new software products for the Canadian market (and later the U.S. market) called Impact/MARCit(tm) and Impact/TRACEit(tm) within six months of concluding the acquisition. The Company has formed a new wholly-owned Canadian subsidiary, A-G Canada Ltd. located in Etobicoke, Ontario (a suburb of Toronto), to operate the business. The Company's software products and processing services continue to leverage technology and experience gained over more than 45 years of service to publishers. The Company provides standard and customized products and services used for database management, electronic composition and CD-ROM search and retrieval. These software products include: SGML Smart Editor System(SES) provides publishers with full editorial capabilities to create and maintain databases in Standard Generalized Markup Language ("SGML") format. Impact(tm)/CD-ROM products provide comprehensive searching, indexing, and cross-referencing features along with search and retrieval capabilities for CD-ROM's and are available in Windows and MAC versions. In addition to providing database creation, conversion and maintenance services to a wide variety of commercial customers, the Company provides a specialized database service for the wholesale heating, ventilation, air conditioning and refrigeration (HVACR) industry. This proprietary publishing business is operated by Datacat, Inc., which became a wholly- owned subsidiary of the Company effective October 2, 1998. The Company supplies software, database and composition services for printed, CD-ROM and Web-based HVACR parts catalogs. (See Note 1 of "Notes to Consolidated Financial Statements"). Company Background The Company was formed in 1950 and incorporated in 1960 in the state of California. No single customer represents more than 10% of net sales. Management believes that the loss of any single customer or vendor would not have a material adverse effect on the business of the Company. Backlog cannot be stated in a useful manner, as contracts are normally expressed as statements of specifications and unit prices rather than total sales volume in dollars. The software and computerized database processing services business is highly competitive. There are no definitive market share statistics available. The Company first introduced computerized database services in 1964, and believes that it has been offering such services longer than any of its existing competitors. Many competitors are smaller and local in character, but some are larger and national with greater financial resources than the Company. Contracts for computerized database publishing services and the purchase/lease of equipment are awarded according to the results of market pricing, competitive bidding, technical capability, customer relationship and/or past performance. Marketing Offices/Employees The Company has marketing representatives and service centers located in California, Connecticut, Illinois, Massachusetts, Washington, Texas and in Ontario, Canada. The Company and its subsidiaries currently employ approximately 110 persons. ITEM 2. PROPERTIES The Company leases its corporate office and production facilities constituting approximately 29,000 square feet located at 3201 Temple Avenue, Pomona, California 91768. The facility has been custom designed for the Company's purposes, is fully 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 In June 1990, the Company and Gannam/Kubat Publishing ("G/K") formed a 50/50 joint venture company called Datacat, Inc. Datacat was formed to produce printed illustrated parts catalogs for the wholesale heating, ventilation, air conditioning, and refrigeration (HVACR) industry. In 1996, G/K filed suit against Datacat and the Company for non-payment of their accounts receivable and allegedly unauthorized and excessive payments by Datacat to the Company for database development costs incurred prior to 1994 provided by the Company. On October 2, 1997, the Company concluded a settlement agreement with its partner in Datacat, which dismissed the lawsuit and all outstanding claims against Datacat and the Company. In the settlement, Datacat paid G/K $200,000 against G/K's accounts receivable from Datacat of $351,000 and G/K forgave the balance of the accounts receivable ($151,000) and agreed to not compete with Datacat for a period of five years. Concurrently, G/K also surrendered their stock ownership in Datacat. The Company now owns 100% of Datacat, Inc. as of October 2, 1997. The Settlement Agreement and Mutual Release dated September 30, 1997 has been included as an exhibit to this Report. See Index to Exhibits, Item No. 10.24. (See Note 1 of "Notes to Consolidated Financial Statements" under "Other Assets - investment in Datacat, Inc."). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Stock quotations. 1997 1996 Bid Asked Bid Asked Price Range	High 	 Low 	High 	 Low 	High 	 Low 	High 	 Low 1st Quarter	2.250	2.000	3.250	2.375	1.875	1.375	2.375	1.875 2nd Quarter	2.000	1.625	2.750	2.000	2.250	1.750	2.750	2.250 3rd Quarter	2.125	1.750	4.500	3.500	2.313	1.875	3.375	2.313 4th Quarter	2.625	2.500	4.250	2.625	2.750	2.125	3.500	2.750 The Company's Common Stock ($.10 par value) is traded in the over-the- counter market under the symbol "AUGR" (Cusip Number 05272510). The stock quotations set forth above, as published by the National Quotation Bureau, Inc., represent the highest and lowest bid and asked prices quoted by broker/dealers making a market in the Company's Common Stock. Prices quoted do not include retail markup, markdown or commissions and may not reflect actual transactions in shares of the Company's stock. Quotations for the Company's stock are also reported on the OTC Bulletin Board. As of December 31, 1997 the number of holders of record of the Company's Common Stock was 236. 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 1997 1996 1995 1994 1993 Operating results: 	Net sales	$10,036	$ 9,218	$ 9,559	$ 9,165	$ 9,678 	 	Net income	 212	 236	 194	 158	 132 	 Earnings per share .19 .21 .16 .12 .10 At year-end: 	Total assets	 8,852	 7,132	 6,688	 6,106	 5,841 	 Long-term debt 2,911 2,101 1,906 1,696 1,592 No cash dividends have been declared. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General and Future Business Trends Liquidity and Capital Resources The Company has a revolving credit facility with maximum availability of $1,250,000(fully available at December 31, 1997), secured by accounts receivable and renewed bi-annually in June. Management believes that the current line of credit will again be renewed in June 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 (maximum availability $3,000,000) secured by substantially all of the Company's capital assets which also renews bi-annually in June and management believes that this credit facility will again be renewed in June 1999. Management does not currently believe that increased credit availability will be required to finance planned capital expenditures in 1998, which are estimated at $1,000,000, to be used to upgrade computers, production equipment and for software development. The Company obtained a new term credit facility of $750,000 to fund the 1997 acquisition of the assets of the Library Information Systems division of ISM Information Systems Management Manitoba Corporation. The term note is a three year note with interest only for 12 months followed by a 24 month amortization schedule at bank prime rate. Subsequent to December 31, 1997, the Company retired $375,000 of the balance outstanding in term borrowings. (See Note 3 of "Notes to Consolidated Financial Statements"). Cash, in 1997, was provided from operating activities and long-term financing. Cash flow from operations (net income and depreciation) in 1997 increased $61,000 to $1,346,000 ($1,285,000 in 1996 and $1,196,000 in 1995). The increase in accounts receivable from 1996 to 1997 is due to the effect of the acquisitions. The average collection days for accounts receivable improved in 1997 to 66 days from 67 days in 1996 and 70 days in 1995. As of December 31, 1997 the Company's principal commitments consisted primarily of leases on facilities. There were also commitments of approximately $100,000 in capital expenditures at December 31, 1997. The Company's principal uses of cash for investing activities in 1997 were for the continuing development of the Company's Impact(tm) software product line, for upgrades to the Company's primary computer equipment to enhance its online service to its customers and acquisition of the assets of the LIS division of ISM and the remaining 50% share of Datacat, Inc. The Company's capital resources may be used to support working capital requirements, capital investment and possible acquisitions of businesses, products or technologies complementary to the Company's current business. The Company believes that current cash reserves and cash flow from operations are sufficient to fund its operations in 1998. However, during this period or thereafter, the Company may require additional financing. There can be no assurance that such additional financing will be available on terms favorable to the Company, or at all. Results of Operations Net Sales in 1997 increased $818,000 to $10,036,000 due primarily to additional revenues from the acquisitions of A-G Canada, Ltd. and Datacat, Inc. and additional sales of the Company's Impact/ONLINE(tm) product line. The decline in net sales from the Company's traditional business lines were more than offset by revenues contributed by the acquisitions. Sales prices remained generally constant in 1997 and in certain cases declined due to competitive pressures in some markets. The Company's gross margins declined in 1997 to 38% from 40% in 1996 (38% in 1995). Selling, general and administrative expenses for 1997 declined to 31% of sales in 1997 from 33% of sales in 1996 and in 1995. The Company's spending on sales and marketing of its new products with additional personnel and new product promotions have been the primary factor in this elevated expense level. Net interest expense in 1997 was $290,000 up from $253,000 in 1996 due to additional borrowings associated with acquisitions offset by lower interest rates from the new credit facility. Earnings per share declined in 1997 to $0.19 compared to $0.21 in 1996 ($0.16 in 1995). The decline in earnings was due to expenses associated with the acquisitions and duplicative and higher computer and telecommunication costs of old technology incurred while the Canadian business was being transitioned to the Company's Internet based client/server technology. Management believes that favorable product mix and productivity improvements should result in higher earnings and improved cash flow from operations. The Company intends to consider other acquisition opportunities which may become available in 1998. Information Relating To Forward-Looking Statements This Report includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Impact of Inflation Historical dollar accounting does not reflect changing costs of operations, the future cost of expansion and the changing purchasing power of the dollar. Inflation generally impacts the Company in a negative manner, as prices cannot be adjusted quickly due to the contract nature of the business, while costs of personnel, materials and other purchases tend to escalate more rapidly. However, inflation is not anticipated to have a material effect on the Company's business in the near future. 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. The Company will now be exposed to foreign currency transaction gains or losses as the relationship between the Canadian dollar and U.S. dollar fluctuates. Since the date of acquisition, the Canadian dollar has lost approximately 3.6% of its value against the U.S. dollar although it has stabilized recently at approximately US$1.00=Cdn$1.43. Cash foreign currency losses in 1997 totaled approximately $15,000. All other transactions outside of A-G Canada Ltd. are denominated in U.S. dollars. (See Note 1 of "Notes to Consolidated Financial Statements"). Year 2000 The Company has developed a plan to modify its information technology to be ready for the Year 2000 and has begun converting critical data processing systems. The Company currently expects the project to be substantially complete by June 30, 1999 and to cost between $50,000 and $100,000. This estimate includes internal costs, but excludes the costs to upgrade and replace computer systems in the normal course of business. The Company does not expect this project to have a significant effect on operations. The Company will continue to implement key systems though some projects may be delayed due to resource constraints. ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Auto-Graphics, Inc. We have audited the accompanying consolidated balance sheets of Auto- Graphics, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three 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 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Riverside, California April 8, 1998 AUTO-GRAPHICS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 Current assets: Cash $ 244,620 $ 364,094 Accounts receivable, less allowance for doubtful accounts ($38,000 in 1997 and 1996) 2,365,837 1,882,305 Unbilled production costs 65,375 94,143 Finished goods inventory 18,049 28,939 Other current assets 122,416 188,440 Total current assets 2,816,297 2,557,921 Software, equipment and leasehold improvements, net (See Note 1) 5,576,409 4,425,522 Other assets 459,241 148,507 $ 8,851,947 $ 7,131,950 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 669,237 $ 330,056 Deferred income 536,225 444,388 Accrued payroll and related liabilities 272,485 191,290 Other accrued liabilities 155,383 127,037 Current portion of long-term debt 843,000 655,000 Total current liabilities 2,476,330 1,747,771 Long-term debt, less current portion 2,911,073 2,100,881 Deferred taxes based on income 695,000 664,939 Total liabilities 6,082,403 4,513,591 Commitments and contingencies (see Note 5) Stockholders' equity: Common stock, $.10 par value, 4,000,000 shares authorized, 1,090,478 shares issued and outstanding in 1997 and 1,109,278 shares issued and outstanding in 1996 109,048 110,928 Capital in excess of par value 1,128,319 1,138,651 Retained earnings 1,534,741 1,368,780 Foreign currency translation adjustments ( 2,564) - Total stockholders' equity 2,769,544 2,618,359 $ 8,851,947 $ 7,131,950 	See notes to consolidated financial statements. AUTO-GRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996, 1995 1997 1996 1995 Net sales $10,035,824 $ 9,217,937 $ 9,559,107 Costs and expenses Cost of sales 6,264,141 5,500,527 5,908,075 Selling, general and administrative 3,076,078 3,071,226 3,124,978 Interest, net 290,855 253,258 221,703 9,631,074 8,825,011 9,254,756 Income from operations 404,750 392,926 304,351 Other income - 33,980 53,819 Income before taxes based on income 404,750 426,906 358,170 Provision for taxes based on income 193,000 190,000 164,000 Net income $ 211,750 $ 236,906 $ 194,170 Basic and diluted earnings per share $ .19 $ .21 $ .16 Weighted average shares outstanding 1,090,611 1,109,345 1,208,645 	CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 	Years ended December 31, 1997, 1996, 1995 Common Common Capital in Foreign Stock Stock Excess of Currency Retained Shares Amount Par Value Translation Earnings Balances at Jan. 1,1995 1,280,078 $ 128,008 $1,197,717 -- $1,225,001 Net income -- -- -- -- 194,170 Common stock retired (149,600) (14,960) (46,625) -- (241,509) Balances at Dec. 31,1995 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 	See notes to consolidated financial statements. AUTO-GRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996, 1995 1997 1996 1995 Cash flows from operating activities: Net income $ 211,750 $ 236,906 $ 194,170 adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,134,348 1,048,639 1,001,821 Deferred taxes 30,061 71,000 106,507 Changes in operating assets and liabilities, net of the effect of acquisitions Accounts receivable (405,058) 96,940 72,519 Unbilled production costs 28,768 69,374 (15,406) Finished goods inventory 137,612 32,007 (5,757) Other current assets (39,908) (19,824) 29,424 Other assets (284,166) (26,964) (29,355) Accounts payable 338,977 (194,375) 233,265 Deferred income (99,306) (45,779) 161,754 Accrued payroll and related liabilities 2,275 3,389 52,226 Other accrued liabilities 28,343 88,454 (128,238) Net cash provided by operating activities 1,083,696 1,359,767 1,672,930 Cash flows from investing activities: Capital expenditures (420,676) (611,840) (769,170) Capitalized software development (750,676) (775,000) (840,000) investment in Datacat, Inc., net of cash acquired (182,175) -- -- investment in A-G Canada, Ltd. (787,095) -- -- Net cash used in investing (2,140,622) ( 1,386,840) (1,609,170) Cash flows from financing activities: Borrowings under long-term debt 1,603,016 900,000 715,000 Principal payments under debt agreements (605,000) (555,000) (450,000) Repurchase of capital stock (58,000) (60,351) (303,094) Net cash provided by (used in) financing activities 940,016 284,649 (38,094) Net increase(decrease) in cash (116,910) 257,576 25,666 Foreign currency effect on cash (2,564) -- -- Cash at beginning of year 364,094 106,518 80,852 Cash at end of year $ 244,620 $ 364,094 $ 106,518 	See notes to consolidated financial statements. AUTO-GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 1.	Summary of significant accounting policies. 	Description of Business Auto-Graphics, Inc. provides software products and processing services to information and database publishers. These products and services are used to create, maintain and distribute information databases through printed and/or electronic reference products. Electronic products include compact disc (CD-ROM) and client/server software systems(Internet/Web). 	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 or when finished goods are shipped to customers. Certain future software support costs are accrued in accordance with AICPA Statement of Position (SOP) 97-2. 	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, 1997, the accumulated foreign currency translation adjustments were not material and the net foreign exchange transaction losses for 1997 were $12,222. 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. Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. 	Unbilled Production Costs Costs associated with work in process inventory including labor, materials, supplies, and overhead (excluding selling, general and administrative expenses) are stated at the lower of cost or net realizable value and are removed from inventory on an average unit cost basis. 	Finished Goods Finished goods inventory consists primarily of computer and CD-ROM equipment held for sale and related spare parts and is stated at the lower of average cost or market. 	Software, Equipment and Leasehold Improvements Software, equipment and leasehold improvements are recorded at historical cost. Software, equipment and leasehold improvements at December 31, 1997 and 1996 consist of the following: 1997 1996 Computer software and database $7,391,351 $5,258,209 Equipment 3,568,573 3,588,048 Furniture and fixtures 535,706 497,101 Leasehold improvements 276,100 246,341 11,771,730 9,589,699 Less accumulated depreciation and amortization 6,195,321 5,164,177 $5,576,409 $4,425,522 	Depreciation and Amortization Depreciation: Depreciation is based on the straight-line method over the estimated useful life of the asset and commences in the year the asset is placed in and/or is available for service or sale based on the half-year convention method. Amortization: Certain costs incurred related to the development and purchase of computer software are capitalized and amortized in accordance with Statement of Financial Accounting Standards No. 86. Amortization is based on a ratio of current and future revenues (the ratio method) or, at a minimum, the straight-line method, based on the full year convention in the first year of product availability. Unamortized computer software was approximately $3,734,000 in 1997, $2,502,000 in 1996, and $2,125,000 in 1995. Amortization of computer software was approximately $579,000 in 1997, $501,000 in 1996, and $452,000 in 1995. The following estimated useful lives are generally observed for the respective asset categories: 		Equipment 		- 5 to 15 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 $1,134,000 in 1997, $1,049,000 in 1996, and $1,002,000 in 1995. 	Other Assets 		Capitalized Acquisition Costs Certain legal and accounting costs totaling approximately $230,000 in 1997 associated with the following acquisitions have been capitalized as asset acquisition costs and will be amortized over a five year period. 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 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 $182,000 in Datacat. The accompanying consolidated financial statements include financial information for Datacat for the three month period ending December 31, 1997. 		Pro Forma Information - Unaudited The following table reflects unaudited pro forma combined results of operations of the Company, A-G Canada Ltd. and Datacat, Inc. on the basis that the acquisitions of A-G Canada, Ltd. and Datacat, Inc. had taken place at the beginning of the fiscal year 1996 and 1997. The information for A-G Canada, Ltd. was provided by the seller, ISM. The information provided is unaudited and is not covered by the independent auditor's report. 			 	Year Ended December 31, 1997 1996 (unaudited) (unaudited) Net sales $12,550,000 $14,080,000 Net income (loss) $ 546,670 $ (201,317) Earnings per share $ 0.53 $ (0.18) Shares outstanding 1,090,611 1,109,345 It is management's opinion, that the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the fiscal year 1996 or of future operations of the combined companies under the ownership and management of the Company. 		Earnings Per Share In February 1997, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards 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, 1997. (See Note 7 of "Notes to Consolidated Financial Statements") 		Supplemental Disclosure of Cash Flow Information The Company paid interest in the amount of $290,937 in 1997, $253,258 in 1996 and $221,703 in 1995. The Company paid income taxes in the amount of $182,682 in 1997, $21,691 in 1996 and $100,883 in 1995. 		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. 		Pending Pronouncements In February 1997, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure", which is effective for interim and annual periods ending after December 15, 1997. The Company adopted the statement as of December 31, 1997. The statement requires the Company to disclose certain pertinent rights and privileges of the Company's equity securities and therefore will have no material effect on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income", which is effective for interim and annual periods beginning after December 15, 1997. The Company will adopt the standard in fiscal year 1998. The statement requires the Company to report comprehensive income and its components in a set of general purpose financial statements and therefore will have no material effect on the Company's financial position or results of operations. 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", which is effective for interim and annual periods beginning after December 15, 1997. The Company will adopt the statement in fiscal year 1998. The statement establishes standards for reporting of information about operating segments in interim and annual financial statements and therefore will have no material effect on the Company's financial position or results of operations. 		Reclassification Certain amounts reported in 1996 and 1995 have been reclassified to conform to the 1997 consolidated financial statement presentation. 2.	Note Payable to Bank. The Company has a revolving credit agreement under which borrowings are secured by accounts receivable and inventory 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, 1997) with interest at the bank prime rate (8.50% at December 31, 1997). The credit facility is renewable bi-annually with the next renewal in June 1999. There was no outstanding loan balance at December 31, 1997 or December 31, 1996. There are no compensating balance requirements, material commitment fees or note guarantors. This agreement contains the same loan covenants as the capital line of credit. At December 31, 1997, the Company was in compliance with its loan covenants. 3.	Long-term Debt. Long-term debt at December 31, 1997 and 1996 consists of the following: 1997 1996 Capital line of credit due in monthly installments of $50,000 plus interest at the bank prime rate (8.5% at December 31, 1997) through 2002; secured by software, equipment, and leasehold improvements with a net book value of approximately $5,576,000 at December 31, 1997. $2,949,073 $2,645,881 Term note with interest only at bank prime through June 30, 1998, and 24 monthly installments of $31,250 plus interest at bank prime rate through June 30, 2000. 750,000 -- Note payable to stockholder due in annual installments of $55,000 plus interest at 5.5% per annum. 55,000 110,000 Total long-term debt 3,754,073 2,755,881 Less current portion 843,000 655,000 Long-term portion $2,911,073 $2,100,881 		Maturities of Long-Term Debt due after one year are: 1998-- $843,000; 1999-$975,000; 2000--$787,000; 2001--$600,000 and 2002--$549,000. The capital line of credit at December 31, 1997 provides for maximum borrowings of $3,000,000 for the purchase of equipment and software, and financing of up to $1,000,000 in internal software development costs. The capital line of credit is subject to renewal bi-annually with the next renewal in June 1999. Among other requirements, the capital line of credit requires the Company to maintain minimum financial covenant ratios, and prohibits the payment of cash dividends. There are no commitment fees, compensating balance requirements or note guarantors. At December 31, 1997, the Company was in compliance with its loan covenants. The term note provides financing of $750,000 at December 31, 1997 for the acquisition of the LIS division of ISM Information Systems Management Manitoba Corporation. 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. Subsequent to December 31, 1997, the Company repaid $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 plus interest of 5.5% per annum ($65,000 paid in June 1995, and $55,000 paid in June 1996, 1997 and 1998). 4.	Taxes Based on Income. The provision for taxes based on income is composed of the following for the years ended December 31: 			 1997 	 1996 	 1995 Current taxes based on income 		Federal	$ 63,000	$ 69,000	$ 32,000 		State	 47,000	 43,000	 38,000 Foreign 42,000 -- -- _______ _______ _______ 			 152,000	 112,000	 70,000 Deferred taxes based on income 		Federal	 55,000	 78,000	 94,000 State ( 14,000) -- -- Foreign - -- -- _______ _______ _______ 			 41,000	 78,000	 94,000 ________ ________ ________ 			$193,000	$190,000	$164,000 A reconciliation of the provision for taxes based on income follows for the years ended December 31: 1997 1996 1995 Statutory U.S. federal income tax $137,600 $145,200 $122,000 Excess foreign tax rates 11,800 -- -- State tax, net of federal benefit/other 21,800 28,500 24,400 Other 21,800 16,300 17,600 $193,000 $190,000 $164,000 The statutory U.S. federal income tax rate was 34% in 1997, 1996 and 1995. The deferred tax assets and liabilities are composed of the following at December 31: 1997 1996 1995 Deferred tax liabilities: Tax over book amortization and depreciation $695,000 $665,000 $594,000 Deferred tax assets: Bad debts/accrued vacation/other 57,000 54,000 66,000 State taxes 11,000 15,000 10,000 ________ ________ ________ Total deferred tax assets 68,000 69,000 76,000 ________ ________ ________ Net deferred tax liability $627,000 $596,000 $518,000 5. Commitments and Contingencies. The Company incurred total facilities and equipment lease and rental expense of approximately $509,000 in 1997, $474,000 in 1996 and $486,000 in 1995. The Company is obligated under certain noncancellable operating leases for office facilities and equipment. There were also non- cancelable purchase commitments of approximately $100,000 for capital expenditures outstanding at December 31, 1997. Approximate minimum lease commitments are as follows: Years ended Operating December 31, Leases 1998 $ 555,000 1999 538,000 2000 538,000 2001 224,000 Total minimum lease payments $ 1,855,000 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 $37,345 per month (plus expenses and applicable increases based on the consumer price index) through June 2001 under the second of two five-year renewal options. The five-year lease with options, which was entered into in June 1986, was approved and authorized by the independent members of the Company's Board of Directors. The Company entered into a stock repurchase agreement in February 1995, with a former employee/officer and current director 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 each of January 1997 and 1996, the Company purchased and retired a block of 15,600 shares, in accordance with the above referenced agreement. 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. Following such initial option grant, 52,500 shares remain eligible for future grants under the plan. The Company also anticipates submitting a proposed qualified stock option plan covering an additional 100,000 shares available for grant to all levels of employees of the Company at the fair market value of shares of the Company's stock at the date of grant. 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 their 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 $24,000 in 1997, $19,000 in 1996 and $16,000 in 1995. 9.	Year 2000 - Unaudited The Company has developed a plan to modify its information technology to be ready for the Year 2000 and has begun converting critical data processing systems. The Company currently expects the project to be substantially complete by June 30, 1999 and to cost between $50,000 and $100,000. This estimate includes internal costs, but excludes the costs to upgrade and replace computer systems in the normal course of business. The Company does not expect this project to have a significant effect on operations. The Company will continue to implement key systems though some projects may be delayed due to resource constraints. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 	Not applicable. 	PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of, and the positions and offices within the Company presently held by, all directors and officers of the Company: Name Age Position Douglas K. Bisch 76 Director. Has served in this capacity for more than ten years. Robert H. Bretz 54 Director and Assistant Secretary. Attorney who has acted as the Company's outside general legal counsel for more than ten years. Robert S. Cope 62 Director, President and Treasurer. Has served in these capacities for more than ten years. William J. Kliss	 50	Chief Operating Officer. Has served the Company in this capacity for two 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 49 Chief Financial Officer and Secretary. Has served in these capacities for two 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 Bank 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. (b) The Company has not filed any reports on Form 8-K during the last quarter of the period covered by this Report. (c) The following document is filed herewith for information purposes, but is not part of this Annual Report, except as otherwise indicated: None. (d) None. 	SIGNATURES 	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 		 AUTO-GRAPHICS, INC. (Registrant) Date: 4/15/98 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: 4/15/98 By Ss/ Robert S. Cope Robert S. Cope, President, Treasurer and Director Date: 4/15/98 By Ss/ Daniel E. Luebben Daniel E. Luebben, Secretary and Chief Financial Officer Date: 4/15/98 By Ss/ Robert H. Bretz Robert H. Bretz, Director </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.15 <SEQUENCE>2 <TEXT> DESCRIPTION - Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. CREDIT AGREEMENT THIS AGREEMENT is entered into as of May 12, 1997, by and between AUTO- GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodations described below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to provide the Credits to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDITS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including June 1, 1.999, not to exceed at any time the aggregate principal amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00) ("Line of Credit"), the proceeds of which shall be used for working capital. Borrower's obligation to repay advances under the Line of Credit shall he evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. Outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any time exceed an aggregate of the sum of eighty percent (80%) of the eligible accounts receivable of Borrower "Borrower's Borrowing Base") plus eighty percent (80%) of the eligible accounts receivable of A-G Canada Ltd., a Canadian corporation ("A-G Canada") which is a wholly-owned subsidiary of Borrower ("A-G Canada's Borrowing Base"). All of the foregoing shall be determined by Bank upon receipt and review of all collateral reports required hereunder and such other documents and collateral information as Bank may from time to time require. (i) Borrower's Borrowing Base. Borrower acknowledges that Borrower's Borrowing Base was established by Bank with the understanding that among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than five percent (5%) of Borrower's, gross sales for said period. If such dilution of Borrower's accounts for the immediately preceding three (3) months at any time exceeds five percent (5%) of Borrower's a gross sales for said period, or if there at any time exists any other matters, events, conditions or contingencies which Bank reasonably believes may affect payment of any portion of Borrower's accounts Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such dilution and/or establish additional reserves against Borrower's eligible accounts receivable. As used herein with respect to Borrower's Borrowing Base "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of Borrower's business, upon which Borrower's right to receive payment is absolute and not contingent upon the fulfillment or any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (A) any account which is past due more than twice Borrower's, standard selling terms; (B) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (C) any account which represents an obligation of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which Bank's forms N-138 and N-139 been duly executed and acknowledged); (D) any account which represents an obligation of an account debtor located in a foreign country other than an account debtor located in the Canadian provinces of Alberta, British Columbia, Manitoba, Ontario, Saskatchewan or the Yukon Territory so long as, in Bank's determination, such Canadian jurisdictions recognize Bank's first priority security interest in and right to collect such account as a consequence of any security agreements and UCC filings in favor of Bank, and other than an account debtor located in any other Canadian province where Bank has obtained a perfected security interest of first priority pursuant to the applicable laws of such province; (E) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (F) any account which represents an obligation of any account debtor when twenty-five percent (25%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (A) above; (G) that portion of any account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five (25%) of Borrower's total accounts; (H) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. (ii) A-G Canada's Borrowing Base. Borrower acknowledges that A-G Canada's Borrowing Base was established by Bank with the understanding that, among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than five percent (5%) of A-G Canada's gross sales for said period. If such dilution of A-G Canada's accounts for the immediately preceding three (3) months at any time exceeds five percent (5%) of A-G Canada's gross sales for said period, or if there at any time exists any other matters, events, conditions, or contingencies which Bank reasonably believes may affect payment of any portion of A-G Canada's accounts, Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such additional dilution and/or establish additional reserves against A-G Canada's eligible accounts receivable. As used herein with respect to A-G Canada's Borrowing Base, "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of A-G Canada's business, upon which A-G Canada's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (A) any account which is past due more than twice A-G Canada's standard selling terms; (B) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (C) any account which represents an obligation of an account debtor located in a country other than Canada; (D) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of A-G Canada; (E) any account which represents an obligation of any account debtor when twenty-five percent (25%) or more of A-G Canada's accounts from such account debtor are not eligible pursuant to (A) above; (F) that portion of any account from an account debtor which represents the amount by which A-G Canada's total accounts from said account debtor exceeds twenty-five percent (25%) of A-G Canada's total accounts; (G) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. EQUIPMENT LINE OF CREDIT. (a) Equipment Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including June 1, 1999, not to exceed at any time the aggregate principal amount of Three Million Dollars ($3,000,000.00) ("Equipment Line of Credit"), the proceeds of which shall be used to finance the purchase and/or development of equipment and software. Borrower's obligation to repay advances under the Equipment Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit B attached hereto ("Equipment Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. Each request for an advance under the Equipment Line of Credit shall be accompanied by Borrower's written statement as to the use of the proceeds of such advance. Advances under the Equipment Line of Credit shall not exceed eighty percent (80-%) of the purchase price of equipment and software developed by a person or entity other than Borrower, and shall not exceed eighty percent (80%) of the development cost of equipment and software developed by Borrower, in each case as evidenced by the invoices and/or expense reports therefor. Moreover, the aggregate amount of all advances under the Equipment Line of Credit which are to be used to finance the development cost of equipment and software developed by Borrower shall not exceed One Million Dollars ($1,000,000.00) during any given fiscal year. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Equipment Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Equipment Line of Credit Note; provided, however, that the total outstanding borrowings under the Equipment Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. (d) Option to Cancel and Amortize. Borrower shall have a one-time option during the term of the Equipment Line of Credit to cancel the Equipment Line of Credit and to amortize the principal balance then outstanding over a period of five (5) years, to be repaid in sixty (60) equal monthly installments, as set forth in the promissory note to be executed by Borrower upon the exercise of the option. Borrower may exercise this option at anytime during the term of the Equipment Line of Credit upon sending written notice thereof to Bank; provided, however, Borrower may not exercise this option if an Event of Default, or an event or act which with the giving of notice or the passage or time or both would constitute an Event of Default, has occurred and is continuing. SECTION 1.3. TERM LOAN. (a) Term Loan. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of Seven Hundred Fifty Thousand Dollars ($750,0OO.00) ("Term Loan"), the proceeds of which shall be used by Borrower and/or contributed by Borrower to A-G Canada to finance the acquisition (the "ISM Acquisition") by Borrower and/or by A-G Canada of the assets of ISM Information Systems Management Manitoba Corporation pursuant to the terms of that certain Asset Purchase Agreement between A-G Canada and ISM Information Systems Management Manitoba Corporation to be dated as of June 1 1997 (the "Purchase Agreement"). Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note substantially in the form of Exhibit C attached hereto ("Term Note"), all terms of which are incorporated herein by this reference. Bank's commitment to grant the Term Loan shall terminate on June 30, 1997. (c) Repayment. The principal amount of the Term Loan shall be repaid in accordance with the provisions of the Term Note. (d) Prepayment. Borrower may prepay principal on the Term Loan at any time, in any amount and without penalty. SECTION 1.4 INTEREST/FEES. (a) Interest. The outstanding principal balances of the Line of Credit, Equipment Line of Credit and the Term Loan shall bear interest at the rates of interest set forth in the Line of Credit Note, Equipment Line of Credit Note, and the Term Note (collectively, the "Notes"). (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Notes. (c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one- eighth percent (1/8%) per annum (computed on the basis of a 360 day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears within ten (10) days after each billing is sent by Bank. SECTION 1.5 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each Credit by charging Borrower's demand deposit account with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.6. COLLATERATAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable and other rights to payment, general intangibles, inventory, equipment and all proceeds of the foregoing. As security for all indebtedness of Borrower to Bank subject hereto, on or before June 30, 1997, Borrower shall cause A-G Canada to grant to Bank security interests of first priority in all of A-G Canada's accounts receivable and other rights to payment, general intangibles, inventory, equipment and all proceeds of the foregoing. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals and audits. SECTION l.7. GUARRANTIES. All indebtedness of Borrower to Bank under the Term Loan shall be guaranteed by Robert S. Cope in the principal amount of Seven Hundred Fifty Thousand Dollars ($750,000.00), as evidenced by and subject to the terms of a guaranty in form and substance satisfactory to Bank. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in jurisdictions in which such Qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material, adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31, 1997, a true copy of which has beer, delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement -there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX.RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement indenture, contract or instrument to which Borrower is a party or by which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or remodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health-and safety statutes, and; any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to grant any of the Credits is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the granting of each of the Credits shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Notes. (ii) Articles of Incorporation. (iii) Corporate Borrowing Resolution. (iv) Incumbency Certificate. (v) Security Agreement covering Equipment. (vi) Security Agreement covering Account Receivable and Inventory. (vii) UCC Financing Statement. (viii) Guaranty (ix) Such other documents as Bank may require under any other Section of this Agreement. And by June 30, 1977, Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (x) Third Party Security Agreement: All Accounts, Inventory, Equipment and Fixtures. (xi) Financing Statement or such other filings as may be required under Canadian law. (xii) Corporate Resolution authorizing endorsement and hypothecation of property. (xiii) Incumbency Certificate. (xiv) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsement in favor of Bank, including without limitation, policies of fire and extended coverage insurance covering all real property collateral required hereby, with replacement cost and mortgagee loss payable endorsements, and such policies of insurance against specific hazards affecting any such real property as may be required by governmental regulation or Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. SECTION 3.3. SPECIAL CONDITION TO TERM LOAN. The obligation of Bank to make the Term Loan shall be subject to receipt by Bank of such assurances and/or evidence as Bank may require that concurrently with or prior to the funding of the Term Loan, the ISM Acquisition shall be or shall have been completed in compliance with all applicable laws, and that Borrower and/or A-G Canada shall acquire or shall have acquired the assets described in the Purchase Agreement free from any liens or claims of any person or entity except for "Permitted Encumbrances" as defined in the Purchase Agreement. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS Punctually pay all principal, interest, fees or other liability ties due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any of the Credits at any time exceeds any limitation on borrowings applicable thereto. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, a audited consolidated financial statement of Borrower, prepared by an certified public accountant acceptable to Bank, to include a balance sheet, income statement and statement of cash flow and all footnotes; (b) not later than 45 days after and as of the end of each fiscal quarter, a consolidated financial statement of Borrower, prepared by Borrower, to include a balance sheet and income statement; (c) not later than 20 days after and as of the end of each month, a borrowing base certificate of Borrower and A-G Canada, an aged listing of accounts receivable and accounts payable of Borrower and of A-G Canada, a reconciliation of accounts of Borrower and A-G Canada, and by March 31 of each year, a list of the names and addresses of Borrower's and A-G Canada's account debtors; (d) not later than 90 days after the end of each calendar year, a financial statement of each guarantor hereunder, prepared by such guarantor, to include all assets and liabilities, and within 15 days filing, but in no event later than each April 30th, copies of guarantor's filed federal income tax returns for such year; (e) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $100,000.00. SECTION 4.8. FINANCIAL CONDITION. Maintain Borrower's consolidated financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending June 30, 1997: (a) Current Ratio not at any time less than 1.10 to 1.0, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Tangible Net Worth not at any time less than $2,500,000.00, 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 2.25 to 1.0, 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 2. 0 to 1. 0 as of each fiscal year end and as of the end of each fiscal quarter, 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 and the prior period current maturity of subordinated debt. (e) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year end, and pre-tax profit not less than $1.00 on a quarterly basis, determined as of each fiscal quarter end. SECTION 4.9. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any, Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $100,000.00. ARTICLE V NEGATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's , prior or written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $2,000,000.00 (excluding U.S.$1,000,000.00 of the purchase price of the ISM Acquisition). SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser or negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations or any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.6. LOANS, ADVANCES, investmentS. Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding; provided, however, Borrower may repurchase its common stock for a purchase price not to exceed $100,000.00 in the aggregate during any given year, so long as no other term or provision of this Agreement would be violated after giving effect to any such repurchase. SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any or the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any guarantor hereunder has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower or any guarantor hereunder; or the recording or any abstract of judgment against Borrower or any guarantor hereunder in any county in which Borrower or such guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any guarantor hereunder; or the entry of a judgment against Borrower or any guarantor hereunder. (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 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under 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, 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 for 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. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of any guarantor hereunder. The dissolution or liquidation or Borrower; or Borrower or any of its directors, stockholders or members shall take action seeking to effect the dissolution or liquidation of Borrower. (i) Any change in ownership during the term of this Agreement of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or other wise affect any other or further exercise thereof or exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any Provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: AUTO-GRAPHICS, INC. 3201 Temple Avenue Pomona, California 91768 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Regional Commercial Banking Office 9000 Flair Drive, Suite 100 El Monte, CA 91731 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all- advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, 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. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participation's in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any of the Credits, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such Prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation , any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with AAA the Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may me entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. 91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent it jurisdiction before, after or during the pendency or any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses) . By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5, 000, COO shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitration's (i) the arbitrators shall not have power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f ) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement 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 By: Robert S. Cope By: Kirk C. Smith Title: President Title: Vice President