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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number
June 30, 2002 0-4431
AUTO-GRAPHICS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-2105641
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3201 Temple Avenue, Pomona, California 91768-3200
-------------------------------------- --------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (909) 595-7204
------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Total shares of Common Stock issued and outstanding as of August 9, 2002
were 4,997,234.
AUTO-GRAPHICS, INC.
Form 10-Q
June 30, 2002
TABLE OF CONTENTS
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income For
Six Months Ended June 30, 2002 and 2001......................1
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income For
Three Months Ended June 30, 2002 and 2001....................2
Unaudited Condensed Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001....................3
Unaudited Consolidated Statements of Cash Flows
For Six Months Ended June 30, 2002 and 2001..................4
Notes to Unaudited Condensed Consolidated
Financial Statements.........................................5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................................15
Part II - Other Information...................................21
Signatures....................................................25
-1-
AUTO-GRAPHICS, INC.
Form 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated
Statements of Operations and
Comprehensive Income
For The Six Months Ended June 30
2002 2001
---------- ----------
Net sales (See Note 3) $3,232,260 $4,716,005
Cost and expenses:
Cost of sales 1,804,843 2,928,983
Selling, general & administrative 1,348,466 2,139,812
---------- ----------
Total costs and expenses 3,153,309 5,068,795
---------- ----------
Income/(loss) from operations 78,951 ( 352,790)
Interest/other income/(expense) ( 35,926) ( 64,334)
---------- ----------
Income/(loss) before taxes
and minority interests 43,025 ( 417,124)
Provision for taxes
based on income (See Note 4) 3,000 5,216
Minority interests ( 14,164) ( 184,907)
---------- ----------
Net income/(loss) and total
comprehensive income/(loss) $ 54,189 ($ 237,433)
========== ==========
Basic income/(loss) per share $ 0.01 ($ 0.05)
Basic weighted average
shares outstanding 4,997,234 4,997,234
Diluted income/(loss) per share $ 0.01 ($ 0.05)
Diluted weighted average
shares outstanding 5,070,567 4,997,234
See Notes to Unaudited Condensed Consolidated Financial Statements.
-2-
AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Condensed Consolidated
Statements of Operations and
Comprehensive Income
For The Three Months Ended June 30
2002 2001
---------- ----------
Net sales (See Note 3) $1,596,254 $1,593,936
Costs and expenses:
Cost of sales 866,361 1,367,439
Selling, general & administrative 691,675 1,025,999
---------- ----------
Total costs and expenses 1,558,036 2,393,438
---------- ----------
Income/(loss) from operations 38,218 ( 799,502)
Interest/other income/(expense) ( 10,877) ( 29,446)
---------- ----------
Income/(loss) before taxes
and minority interests 27,341 ( 828,948)
Provision for taxes/(benefit)
based on income/(loss) (See Note 4) 3,000 ( 56,784)
Minority interests ( 2,605) ( 83,033)
---------- ----------
Net income/(loss) and total
comprehensive income/(loss) $ 26,946 ($ 689,131)
========== ==========
Basic income/(loss) per share $ 0.01 ($ 0.14)
Basic weighted average
shares outstanding 4,997,234 4,997,234
Diluted income/(loss) per share $ 0.01 ($ 0.14)
Diluted weighted average
shares outstanding 5,143,900 4,997,234
See Notes to Unaudited Condensed Consolidated Financial Statements.
-3-
AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
ASSETS 2002 2001
----------- -----------
Current assets: (Audited)
Cash $ 124,579 $ 122,029
Accounts receivable, less
allowance for doubtful accounts
($145,000 in 2002 and 2001) 319,786 695,789
Unbilled production costs 17,168 11,013
Other current assets 245,511 210,288
----------- -----------
Total current assets 707,044 1,039,119
Software, net 3,352,980 3,458,256
Equipment, furniture and
leasehold improvements, net 992,310 1,216,175
Other assets 78,525 87,210
----------- -----------
$ 5,130,859 $ 5,800,760
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 243,442 $ 361,421
Deferred income 790,772 1,255,006
Other accrued liabilities 272,116 205,316
Accrued payroll and
related liabilities 244,777 468,408
Current portion of long-term debt 1,393,521 1,380,427
----------- -----------
Total current liabilities 2,944,628 3,670,578
Deferred taxes based on income 151,600 148,900
----------- -----------
Total liabilities 3,096,228 3,819,478
Minority interests ( 133,877) ( 119,714)
Stockholders' equity:
Notes receivable - stock ( 73,297) ( 75,364)
Common stock, 12,000,000
shares authorized, 4,997,234
shares issued and outstanding
in 2002 and 2001 4,201,755 4,201,755
Accumulated deficit ( 1,960,228) ( 2,014,414)
Accumulated comprehensive income/(loss) 278 ( 10,981)
----------- -----------
Total stockholders' equity 2,168,508 2,100,996
----------- -----------
$ 5,130,859 $ 5,800,760
=========== ===========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-4-
AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Consolidated
Statements of Cash Flows
For the Six Months Ended June 30
Increase (Decrease) in Cash
2002 2001
Cash flows from operating activities: ----------- -----------
Net income/(loss) $ 54,189 ($ 237,433)
Adjustments to reconcile net
income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 583,374 711,972
Minority interests ( 14,163) ( 184,907)
Changes in operating
assets and liabilities:
Accounts receivable 365,714 713,519
Unbilled production costs ( 6,155) 33,254
Other current assets ( 36,399) ( 28,273)
Other assets 8,672 ( 9,122)
Accounts payable ( 116,231) ( 361,615)
Deferred income ( 457,216) ( 219,930)
Other accrued liabilities 41,846 233,896
Accrued payroll and
related liabilities ( 191,697) 22,613
----------- -----------
Net cash provided by
operating activities 231,934 673,974
Cash flows from investing activities:
Capital expenditures ( 258,492) ( 1,068,244)
Cash flows from financing activities:
Net borrowings/under
debt agreement 13,095 346,598
Payments on notes receivable-stock 2,067 2,136
----------- -----------
Net cash provided by
financing activities 15,162 348,734
----------- -----------
Net decrease in cash ( 11,396) ( 45,536)
----------- -----------
Foreign currency effect on cash 13,946 -
Cash at beginning of period 122,029 1,202,442
----------- -----------
Cash at end of period $ 124,579 $ 1,156,906
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 55,873 $ 97,214
Income taxes 2,435 5,216
See Notes to Unaudited Condensed Consolidated Financial Statements.
-5-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed
Consolidated Financial Statements
June 30, 2002
NOTE 1. Basis of Presentation
The unaudited condensed consolidated financial statements included
herein have been prepared by the Registrant and include all normal and
recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position at June 30, 2002, the
results of operations for the three and six months ended June 30, 2002
and 2001 and the statement of cash flows for the six months ended June 30,
2002 and 2001 pursuant to the rules and regulations of the Securities and
Exchange Commission("SEC"). The consolidated financial statements include
the accounts of Auto-Graphics, Inc., its wholly-owned and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
The results of operations for the subject periods are not
necessarily indicative of the results for the entire year.
This Quarterly Report on Form 10-Q is qualified in its entirety by
the information included in the Company's Annual Report to the SEC on Form
10-K/A for the period ending December 31, 2001 including, without limitation,
the financial statements and notes included therein.
NOTE 2. Business
As of June 30, 2002, the Company was in compliance with all of its
loan covenants. The Company's primary bank renewed and extended the terms
of its credit agreement for an additional year through June 2, 2003. The
credit facility is a $1.6 million revolving line of credit, which decreases
by $175,000 each quarter on September 30, 2002, December 31, 2002 and March
31, 2003 consistent with the Company's forecasted declining requirements for
financing.
In March 2001, the Company licensed the use of its REMARC(TM)
bibliographic database of Library of Congress pre-1968 holdings to a
Japanese Company for use exclusively in Japan for a one-time payment
of $1.5 million. This transaction has had a material positive effect
on the results of operations reported by the Company for the first six
months ended June 30, 2001.
-6-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
Asset Purchase of Maxcess Library Systems Verso Software: In
February 2001, the Company completed the purchase of software, customer
contracts and related assets of Maxcess Library Systems, Inc. The Verso
software product expands the Company's ASP (Application Service Provider)
product line into the integrated library automation business.
Asset Purchase of Pigasus Wings Software: In June 2001, the
Company acquired the software and rights to Wings, an ISO compliant inter-
library loan software program developed by Pigasus, Inc. On November 6,
2001, the Company filed suit against Pigasus, Inc. and its principals
seeking a judgment of the court that the acquisition contract be rescinded
as well as monetary damages and attorney's fees (See Note 7 Legal Proceedings).
In July, 2002, Pigasus delivered a complete and fully functional ISO
(International Standards Organization) compliant interlibrary loan software
product and the Company has agreed to acquire the Wings software product in
settlement of the lawsuit. The Wings software will provide ISO compliant
functionality for the Company's Impact/ONLINE(TM) interlibrary loan
software module currently in use at over 10,000 libraries.
Note 3. Operating Segments
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" establishes
standards for reporting information about operating segments in interim and
annual financial statements.
The following table summarizes sales based on the location of
the customers and assets based on the location of the asset presented on
the basis of generally accepted accounting principles for the six months
ended June 30, 2002, and 2001:
2002 2001
----------- -----------
Geographic areas
Net sales
United States $ 2,784,022 $ 2,587,632
Foreign - Canada/Other 448,238 2,128,373
Long-lived assets, net
United States 4,310,544 5,385,156
Foreign - Canada 34,746 93,566
-7-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
Note 4. Income Taxes
Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been reported in the Company's
financial statements or tax returns. At December 31, 2001, the Company had
available approximately $1,115,000 in federal ($3,728,000 including Dataquad
and LibraryCard subsidiaries), $1,055,000 in state and $199,000 in foreign
net operating loss carryforwards, for income tax purposes. These net
operating loss carryforwards expire in 2021 for federal taxes, 2007 for
state and 2006 for foreign taxes. Because the NOL tax benefit for losses
incurred in Dataquad and LibraryCard is unlikely to be realized, no tax
benefit has been recognized and a valuation allowance has been established
offsetting these potential future tax benefits.
Note 5. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic and diluted earnings per share computations
presented by the Company conform to the standard and are based on the
weighted average number of shares of Common Stock outstanding during the
year. For the year ended December 31, 2001, there were no common stock
equivalents (warrants, options or convertible securities) outstanding. On
May 3, 2002, the Company's Board of Directors granted stock options for
220,000 shares of the Company's restricted Common Stock to a director and
certain officers and technical staff.
The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations:
Net Income Shares Per Share
---------- ---------- ---------
Three months ended June 30, 2002
- --------------------------------
Basic earnings per share
Net income available to
common stockholders $ 26,946 4,997,234 $ 0.01
Effect of dilutive securities
Stock options 146,666
---------- ---------- ---------
Diluted earnings per share
Net income available to
common stockholders $ 26,946 5,143,900 $ 0.01
-8-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
Note 5. Earnings Per Share (Continued)
Net Income Shares Per Share
---------- ---------- ---------
Three months ended June 30, 2001
- --------------------------------
Basic earnings per share
Net income available to
common stockholders ($ 689,131) 4,997,234 ($ 0.14)
Effect of dilutive securities
---------- ---------- ---------
Diluted earnings per share
Net income available to
common stockholders ($ 689,131) 4,997,234 ($ 0.14)
Six months ended June 30, 2002
- ------------------------------
Basic earnings per share
Net income available to
common stockholders $ 54,189 4,997,234 $ 0.01
Effect of dilutive securities
Stock options 73,333
---------- ---------- ---------
Diluted earnings per share
Net income available to
common stockholders $ 54,189 5,070,567 $ 0.01
Six months ended June 30, 2001
- ------------------------------
Basic earnings per share
Net income available to
common stockholders ($ 237,433) 4,997,234 ($ 0.05)
Effect of dilutive securities
---------- ---------- ---------
Diluted earnings per share
Net income available to
common stockholders ($ 237,433) 4,997,234 ($ 0.05)
Note 6. Stock Option Plans
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation", the Company has continued
to account for employee stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
-9-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
The Company adopted a 1997 Non-qualified Stock Option Plan
effective December 31, 1997. The Plan consists of 300,000 shares of the
Company's authorized but unissued Common Stock which shares have been
reserved for possible future issuance under the Plan. The plan is a non-
qualified plan covering only senior executives and related persons. As of
June 30, 2002, there were no outstanding grants of options under the plan
and no grants are currently planned.
The Company adopted a qualified and non-qualified stock option
plan following approval by its shareholders at its 2001 annual shareholder's
meeting held on February 27, 2002. The plan consists of 499,000 shares with
approximately 350,000 qualified shares reserved for employees and 149,000 non-
qualified shares reserved for directors. On May 3, 2002, the Company's Board
of Directors granted stock options for 220,000 shares of the Company's
restricted Common Stock to a director (60,000 non-qualified shares),
officers and technical staff (160,000 qualified shares).
In June 2000, 700,000 shares each of Dataquad and LibraryCard
Common Stock were sold to a trustee (Corey M. Patick) on a note to be held in
trust ("trust shares") for use in a future stock purchase/option plan. As a
result of the issuance, the Company's interest in the subsidiaries was diluted
which resulted in a charge to Stockholders' Equity in the amount of $104,769.
In January 2001, Robert S. Cope replaced Mr. Patick as trustee for the above
trust shares. Under the trust agreement, the subsidiaries have the option to
repurchase the stock on December 31, 2002. The effect of the repurchase would
be a net increase in Minority Interests and a corresponding decrease in
Stockholder's Equity of up to $280,500 ($180,250 for Dataquad and $100,250 for
LibraryCard). In July, 2002 the Company exercised its right of first refusal
and acquired 1,919,400 shares of common stock in each of its majority-owned
subsidiaries, Dataquad, Inc. and LibraryCard, Inc. from a major investor
bringing the Company's ownership to 6,609,400 (85.8%) in each subsidiary.
-10-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
Note 7. Legal Proceedings
On May 9, 2001 the Company terminated its long-time outside counsel,
Robert H. Bretz, who had provided legal services and was compensated through
his professional corporation, Robert H. Bretz, PC. Mr. Bretz is also a
former director of the Company. Following Mr. Bretz' termination he began to
file lawsuits for and on behalf of the Company that had not been authorized
by Company's management or the Board of Directors. On August 8, 2001 one
particular case filed by Mr. Bretz in the name of the Company, Case No.
BC252517, was dismissed by the Los Angeles California Superior Court holding
that the Action by Unanimous Written Consent signed solely by Mr. Bretz in
reference to the filing of the case was invalid because it failed to satisfy
the requirements of California Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles
California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz
et al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz
had become disruptive and harmful to the business operations of the Company
and damaged the Company by his various actions including his excessive
billings to the Company.
-11-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
As a response to the complaint filed by the Company, Mr. Bretz
filed a derivative cross-complaint against three of the Company's officers,
Robert S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of
fiduciary duty, fraud & deceit, misrepresentation, breach of
contract/employment, removal for cause and other declaratory and injunctive
relief. The original cross-complaint was filed on July 16, 2001 in Los
Angeles California Superior Court under Case No. BC353322. The Company's
management believes that the derivative cross-complaint filed by Mr. Bretz
does not have any merit and that the Company will eventually prevail. The
court ruled that the derivative cross-complaint was unlikely to benefit
the Company or its shareholders and ordered Mr. Bretz to post the maximum
($50,000) bond in order to continue his lawsuit. The Company was notified
that Mr. Bretz posted the bond on March 21, 2002. Mr. Bretz filed a motion
to exonerate the bond or for reconsideration of the court order to post the
bond. The court ruled against Mr. Bretz and upheld the bond requirement.
Mr. Bretz has since appealed the ruling to the Court of Appeal of the State
of California, Second Appellate District.
On December 10, 2001, Mr. Bretz filed another complaint in Los
Angeles Superior Court under Case No. BC263256 against the Company, two of
the Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents
by Mr. Bretz until a suitable protective order may be implemented to protect
the Company's interests. The Company and individual defendants filed a
demurrer (a formal objection to the legal sufficiency of the opponent's
pleading). In response, Mr. Bretz amended his complaint and has dismissed
all of the above individual defendants. The Company intends to file a
motion for summary judgement, because Mr. Bretz is no longer a director.
-12-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
On February 19, 2002, Robert H. Bretz amended a complaint in
Federal District Court under Case No. CV 01-5891 CAS originally filed in
June 2001 by Mr. Bretz in the name of the Company seeking a temporary
restraining order (TRO) and preliminary injunction blocking the 2001
annual shareholder's meeting scheduled for February 27, 2002, which had
been delayed from October 31, 2001. At a hearing on February 26, 2002,
the court denied the application for a temporary restraining order and
ruled that the shareholder meeting could proceed as scheduled, but
requested that the results of the proxy solicitation not be made public
or be implemented until after a further hearing on March 22, 2002. The
2001 annual shareholder's meeting was conducted on February 27, 2002 and
adjourned solely for the purpose of consideration on March 27, 2002 of a
shareholder proposal sponsored by Mr. Bretz establishing a maximum age
limit for directors of 67 years, which was the subject of a supplemental
proxy statement later issued on March 4, 2002. On March 27, 2002, the vote
as conducted at the adjourned meeting on the shareholder proposal. On April
26, 2002 the court issued its ruling, which denied the request by Mr. Bretz
for a preliminary injunction and authorized the Company to release and
implement the results of the vote from its February 27, 2002 shareholder
meeting following completion of the vote on the shareholder proposal. As a
result of a vote by the shareholders of the Company, Mr. Bretz is no longer
a director of the company.
The Company has filed complaints with the California State Bar
alleging violations of ethics codes by Mr. Bretz and the State Bar has
conducted an investigation of the matter. The Company believes that the
State Bar intends to bring a disciplinary proceeding against Mr. Bretz.
The Company filed a complaint in Los Angeles, California, Superior
Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its
principals, Arthur and Candy Zemon. The suit alleges a lack of informed
consent, fraud, deceit, intentional and negligent misrepresentation, lack
of consideration, and breach of contract and seeks to rescind the contract
for the Company's acquisition of the Wings software developed by Pigasus
and seeks damages in excess of $400,000. Subsequently, Pigasus Software,
Inc., Arthur Zemon and Candace Zemon filed suit in the Circuit Court of
Saint Charles County, State of Missouri, Civil Action No. 01CV129525,
against Auto-Graphics, Inc. for breach of contract, and they seek damages
in excess of $500,000. Both actions were removed to the local Federal
District Courts and the California District Court has transferred the
matter to the District Court in Missouri. The parties reached an agreement
in principle on a settlement following the delivery of a fully functional
and compilable ISO interlibrary loan software system by Pigasus to the
Company in July 2002. The settlement is in the process of being documented
by the parties and should not have a material adverse effect on the Company's
financial condition or results of operations.
-13-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
Note 8. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible
Assets (SFAS 142):
SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS 141 also requires
that the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. SFAS 141 applies to
all business combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. It also requires,
upon adoption of SFAS 142, that the Company reclassify the carrying amounts
of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS 142 requires that the Company identify
reporting units for the purposes of assessing potential future impairments
of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful
life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of
SFAS 142.
The Company adopted SFAS 141 and SFAS 142 as of January 1, 2002
and the adoption had no material impact on its financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company believes the adoption of this
Statement will have no material impact on its financial statements.
-14-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
June 30, 2002
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally,
are to be applied prospectively. The Company adopted this Statement as of
January 1, 2002 and the adoption had no material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, which rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company believes the adoption of this Statement will have
no material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue No.
94-3. The Company will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3,
a liability for an exit cost was recognized at the date of a company's
commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. The Company believes
the adoption of this Statement will have no material impact on its financial
statements based on the Company's current plans.
-15-
AUTO-GRAPHICS, INC.
Form 10-Q
June 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CRITICAL ACCOUNTING POLICIES
The Company maintains its accounting books and records in accordance
with accounting principles generally accepted in the United States of America.
The preparation of the financial statements of the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
sales and expenses during the reporting period. These estimates are based on
information available as of the date of the financial statements. Actual
results may materially differ from those estimated. The Company's critical
accounting policies include the following:
+ Capitalized software development costs
+ Amortization of software development costs
+ Revenue Recognition
The Company accounts for internally developed software in accordance
with Statement of Financial Accounting Standard (SFAS) No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed."
After technical feasibility has been established, the Company capitalizes the
average cost per billable hour of its software development process including
payroll and payroll benefits, training and recruiting costs. The Company
collects and records the software development hours invested in software
development projects. Annually, the Company evaluates these accumulated
costs for recoverability against estimated future revenues and determines
the amount, which will be capitalized. To the extent that more development
costs are capitalized, the Company's net income will improve, and, to the
extent that more software development costs are expensed instead of
capitalized, the Company's net income will decline.
-16-
AUTO-GRAPHICS, INC.
Form 10-Q
June 30, 2002
The Company amortizes its software development costs in accordance
with the estimated economic life of the software. Studies within the
library community have indicated that the typical library automation system
once installed remains in use for an average of approximately 10 years.
Because libraries are generally under-funded, libraries frequently cannot
afford the latest computer hardware and software and therefore tend to
utilize their system for a longer period of time than in the commercial
world. The Company's typical product lifecycle has been about 15 years,
which was true for its prior film/fiche product line, current CD-ROM product
line and current Internet/Web product line, which has now been deployed for
eight years and is still growing. To the extent the average actual useful
life varies significantly from the estimated useful life, amortization
expense may be understated or overstated. Generally, amortization expense
averages less than 10% of the corresponding revenue stream.
Revenue recognition policies vary according to the nature of the revenue.
The Company's primary revenue stream is outsourced web hosting services
which are sold on a subscription basis. Services are billed in advance on
an annual or quarterly basis. Revenue is recognized monthly on a pro-rata
basis i.e., for a twelve month contract, one-twelfth of the revenue is
recognized each month as services are rendered. Revenues which have been
billed and collected in advance are booked to deferred income until the
revenues are earned and services provided. Certain small annual
subscriptions for databases and software support typically are recognized
as revenue in the month they are billed during the year. Certain overhead
costs for providing future software support services are accrued as expense
in accordance with SOP 97-2, "Software Revenue Recognition," as amended by
SOP 98-4 and 98-9, and thereby matching revenues and expenses. Certain
contract job processing services are progress billed and revenues recognized
as the processing services are performed on a monthly basis. Certain
software and hardware sales are billed when the product is shipped and
title passes to the customer.
-17-
AUTO-GRAPHICS, INC.
Form 10-Q
June 30, 2002
FINANCIAL CONDITION
December 31, 2001 to June 30, 2002
- ----------------------------------
Liquidity and capital resources. Working capital deficit decreased
$395,000 in 2002 over 2001 primarily as a result of collection of accounts
receivable, which declined $366,000 due to improved collections. Net cash
provided by operating activities was $232,000 down from $674,000 in the
first six months of 2001. 2001 was much higher than normal due to a
significant cash sale in March 2001 when the Company licensed the use of
its REMARC(TM) bibliographic database of Library of Congress pre-1968
holdings to an unaffiliated Japanese Company (for use exclusively in Japan)
for a one-time license fee of $1.5 million. This transaction had a material
effect on the results of operations reported by the Company for the first six
months of 2001. Excluding this license fee, 2001 cash used by operating
activities would have been approximately $826,000 which would have resulted
in an increase in cash provided by operating activities in 2002 of $1,058,000.
Capital expenditures are down $810,000 from $1,068,000 for the first
six months of 2001 to $258,000 in 2002. Major expenditures for 2001 included
the acquisition of Maxcess Verso software, acquisition of Pigasus Wings
software, internally developed software and computer equipment. 2002 capital
expenditures include internally developed software and computer equipment
purchases.
Management believes that liquidity and capital resources should be
adequate to fund operations and expected reductions in bank debt during
2002 and into 2003. As of June 30, 2002, the Company was in compliance with
all of its loan covenants. The Company's primary bank renewed and extended
the terms of its credit agreement for an additional year to June 2, 2003.
The credit facility is a $1.6 million revolving line of credit, which
decreases by $175,000 each quarter on September 30, 2002, December 31, 2002
and March 31, 2003 consistent with the Company's forecasted declining
requirements for financing.
-18-
AUTO-GRAPHICS, INC.
Form 10-Q
March 31, 2002
RESULTS OF OPERATIONS
- ---------------------
First Six Months of 2002 as Compared to First Six Months of 2001
- ----------------------------------------------------------------
Net sales decreased $1,484,000 or 31% from $4,716,000 in 2001 to
$3,232,000 in 2002. In March 2001, the Company licensed the use of its
REMARC(TM) bibliographic database of Library of Congress pre-1968 holdings
to an unaffiliated Japanese Company (for use exclusively in Japan) for a one-
time license fee of $1.5 million. This transaction had a material positive
effect on the results of operations reported by the Company for the first six
months of 2001. Excluding this license fee, sales were essentially unchanged
from $3,216,000 in 2001 versus $3,232,000 in 2002.
Cost of sales decreased $1,124,000 or 38% as a result of major cost
reductions in payroll and production costs in late 2001. Gross margins
improved from 38% in 2001 to 44% in 2002. 2001 gross margins were unusually
high primarily as a result of the licensing of the Remarc(TM) database as
described above, which had insignificant costs associated with its production
and delivery. Excluding this transaction, gross margins which would have
been 9% in 2001 improving to 44% in 2002.
Selling, general and administrative expenses decreased $791,000 or
37% in 2002 as a result of major expense reductions in administrative and
sales and marketing payroll and expenses. 2002 general & administrative
expenses include $477,000 in legal expenses due primarily to the ongoing
dispute with the Company's former general counsel, Robert H. Bretz. (See
Note 7 of Notes to Unaudited Consolidated Financial Statements).
Income/(loss) from operations increased $433,000 from a loss of
$353,000 in 2001 to an income of $80,000 in 2002. The first six months of
2001 would have been a loss from operations of $1,853,000 excluding the
effect of the above Remarc(TM) license fee of $1.5 million.
Interest expense/other income/(expense) was $36,000 in 2002 down
from $64,000 in 2001 due to lower average borrowings, lower interest
rates and bad debt collection.
-19-
AUTO-GRAPHICS, INC.
Form 10-Q
Provision for taxes based on income in 2002 and 2001 reflect
minimum state tax payments and the effect of federal and state net operating
loss carryforwards (See Note 4 of Notes to Unaudited Consolidated Financial
Statements).
Minority interests reflects the outside owners' share of the
losses realized by the majority-owned Dataquad subsidiary in 2002 compared
to the two majority-owned (61%) subsidiaries, Dataquad and Librarycard in
2001. The reduction of $170,000 in the minority interests in the losses of
majority-owned subsidiaries reflects the major reductions in payroll and
expenses and a substantial curtailment of the losses of these two
subsidiaries. Having exhausted the minority investor's capital, the Company
must now recognize 100% of the losses for LibraryCard, although these losses
are now immaterial.
Net income was $55,000 in 2002 compared to a net loss of $237,000
in 2001, an improvement of $292,000. Both basic and diluted earnings per
share were $0.01 in 2002 compared to a loss per share of $0.09 in 2001. The
2001 net loss would have been approximately $1,737,000 excluding the
Remarc(TM) database license fee (as described above) of $1.5 million,
which represents a net income improvement of $1,792,000 in 2002. The 2001
net loss would have resulted in a basic and diluted loss per share of
approximately $0.35, excluding the Remarc(TM) database license fee (as
described above) of $1.5 million.
Second Quarter of 2002 as Compared to Second Quarter of 2001
- ------------------------------------------------------------
Net sales were essentially unchanged at $1,596,000 in 2002 as
compared to $1,594,000 in 2001.
Cost of sales decreased $501,000 or 37% as a result of major cost
reductions in payroll and production costs in late 2001. Gross margins
improved from 14% in 2001 to 46% in 2002 as the Company has refocused on its
core library ASP (Application Software Provider) services business.
Selling, general and administrative expenses decreased $335,000
or 33% in 2002 as a result of major reductions in administrative and sales
and marketing payroll and expenses in late 2001. 2002 general &
administrative expenses also include $216,000 in legal expenses due primarily
to the ongoing dispute with the Company's former general counsel, Robert H.
Bretz. (See Note 7 of Notes to Unaudited Consolidated Financial Statements).
Income from operations increased $839,000 from a loss of $800,000
in 2001 to net income of $39,000 in 2002 as a result of substantial cost and
expense reduction measures in late 2001.
-20-
AUTO-GRAPHICS, INC.
Form 10-Q
Interest expense/other income/(expense) was $11,000 in 2002 down
from $29,000 in 2001 due to lower average borrowings, lower interest rates
and bad debt collections.
Provision for taxes based on income in 2002 and 2001 reflect
minimum state tax payments and the effect of federal and state net
operating loss carryforwards (See Note 4 of Notes to Unaudited Consolidated
Financial Statements).
Minority interests reflects the outside owners' share of the
losses realized by the majority-owned Dataquad subsidiary in 2002 compared
to the two majority-owned (61%) subsidiaries, Dataquad and Librarycard in
2001. The reduction of $80,000 in the minority interests in the losses
of majority-owned subsidiaries reflects the major reductions in payroll
and expenses and a substantial curtailment of the losses of these two
subsidiaries. Having exhausted the minority investor's capital, the
Company must now recognize 100% of the losses for LibraryCard, although
these losses are now immaterial.
Net income was $27,000 in 2002 compared to a net loss of $689,000
in 2001, an improvement of $718,000. Both basic and diluted earnings per
share were $0.01 in 2002 compared to a net loss per share of $0.14 in 2001
for the reasons covered above.
This Report includes forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Recently Issued Accounting Pronouncements
See Note 8 to Unaudited Condensed Consolidated Financial Statements.
-21-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 9, 2001 the Company terminated its long-time outside counsel,
Robert H. Bretz, who had provided legal services and was compensated through
his professional corporation, Robert H. Bretz, PC. Mr. Bretz is also a
former director of the Company. Following Mr. Bretz' termination he began
to file lawsuits for and on behalf of the Company that had not been
authorized by Company's management or the Board of Directors. On August 8,
2001 one particular case filed by Mr. Bretz in the name of the Company, Case
No. BC252517, was dismissed by the Los Angeles California Superior Court
holding that the Action by Unanimous Written Consent signed solely by Mr.
Bretz in reference to the filing of the case was invalid because it failed
to satisfy the requirements of California Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles
California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz
et al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz
had become disruptive and harmful to the business operations of the Company
and damaged the Company by his various actions including his excessive
billings to the Company.
As a response to the complaint filed by the Company, Mr. Bretz filed
a derivative cross-complaint against three of the Company's officers, Robert
S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary
duty, fraud & deceit, misrepresentation, breach of contract/employment,
removal for cause and other declaratory and injunctive relief. The
original cross-complaint was filed on July 16, 2001 in Los Angeles
California Superior Court under Case No. BC353322. The Company's
management believes that the derivative cross-complaint filed by Mr. Bretz
does not have any merit and that the Company will eventually prevail. The
court ruled that the derivative cross-complaint was unlikely to benefit the
Company or its shareholders and ordered Mr. Bretz to post the maximum
($50,000) bond in order to continue his lawsuit. The Company was notified
that Mr. Bretz posted the bond on March 21, 2001. Mr. Bretz filed a motion
to exonerate the bond or for reconsideration of the court order to post the
bond. The court ruled against Mr. Bretz and upheld the bond requirement.
Mr. Bretz has since appealed the ruling to the Court of Appeal of the State
of California, Second Appellate District.
-22-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
On December 10, 2001, Mr. Bretz filed another complaint in Los
Angeles Superior Court under Case No. BC263256 against the Company, two of
the Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents
by Mr. Bretz until a suitable protective order may be implemented to protect
the Company's interests. The Company and individual defendants filed a
demurrer (a formal objection to the legal sufficiency of the opponent's
pleading). In response, Mr. Bretz amended his complaint and has dismissed
all of the above individual defendants. The Company intends to file a
motion for summary judgement, because Mr. Bretz is no longer a director.
On February 19, 2002, Robert H. Bretz amended a complaint in
Federal District Court under Case No. CV 01-5891 CAS originally filed in
June 2001 by Mr. Bretz in the name of the Company seeking a temporary
restraining order (TRO) and preliminary injunction blocking the 2001
annual shareholder's meeting scheduled for February 27, 2002, which had
been delayed from October 31, 2001. At a hearing on February 26, 2002,
the court denied the application for a temporary restraining order and
ruled that the shareholder meeting could proceed as scheduled, but
requested that the results of the proxy solicitation not be made public
or be implemented until after a further hearing on March 22, 2002. The
2001 annual shareholder's meeting was conducted on February 27, 2002
and adjourned solely for the purpose of consideration on March 27, 2002
of a shareholder proposal sponsored by Mr. Bretz establishing a maximum
age limit for directors of 67 years, which was the subject of a
supplemental proxy statement later issued on March 4, 2002. On March
27, 2002, the vote was conducted at the adjourned meeting on the
shareholder proposal. On April 26, 2002 the court issued its ruling,
which denied the request by Mr. Bretz for a preliminary injunction and
authorized the Company to release and implement the results of the vote
from its February 27, 2002 shareholder meeting following completion of
the vote on the shareholder proposal. As a result of a vote by the
shareholders of the Company, Mr. Bretz is no longer a director of the
company.
The Company has filed complaints with the California State Bar
alleging violations of ethics codes by Mr. Bretz and the State Bar has
conducted an investigation of the matter. The Company believes that the
State Bar intends to bring a disciplinary action against Mr. Bretz.
-23-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
The Company filed a complaint in Los Angeles, California, Superior
Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its
principals, Arthur and Candy Zemon. The suit alleges a lack of informed
consent, fraud, deceit, intentional and negligent misrepresentation, lack of
consideration, and breach of contract and seeks to rescind the contract for
the Company's acquisition of the Wings software developed by Pigasus and
seeks damages in excess of $400,000. Subsequently, Pigasus Software, Inc.,
Arthur Zemon and Candace Zemon filed suit in the Circuit Court of Saint
Charles County, State of Missouri, Civil Action No. 01CV129525, against
Auto-Graphics, Inc. for breach of contract, and they seek damages in excess
of $500,000. Both actions were removed to the local Federal District Courts
and the California District Court has transferred the matter to the District
Court in Missouri. The parties reached an agreement in principle on a
settlement following the delivery of a fully functional and compilable ISO
interlibrary loan software system by Pigasus to the Company in July 2002.
The settlement is in the process of being documented by the parties and
should not have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company issued a definitive proxy statement on June 10, 2002
in preparation for the Company's 2002 Annual Meeting of shareholders, which
was held on July 17, 2002. The results of the vote of the shareholders
present in person and by proxy at the 2002 Annual Meeting are as follows:
1. Robert S. Cope, James R. Yarter and Thomas J. Dudley were elected as
directors of the Company effective July 17, 2002. Messrs. Cope, Yarter
and Dudley each received 3,352,935 votes cast for election (98.9%), 36,300
votes cast as withhold (1.1%) and no votes cast as abstentions out of a
total of 3,389,235 votes cast cumulatively. Robert H. Bretz nominated
himself at the Meeting to serve as a director and cast a total of 1,599,000
votes cumulatively in person and by proxy for his election, however, Mr.
Bretz was not elected.
2. The amendment to the Bylaws to change the date for the Annual
Meeting of Shareholders from May 15th to the second Wednesday in June,
or, as established by the Board of Directors, but not later than September
30 was approved with 3,352,935 votes cast for the amendment to the Bylaws
(85.5%), 569,300 votes cast against the amendment (14.5%) and no votes
cast as abstentions out of a total of 3,922,235 votes cast.
-24-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
3. The shareholder proposal sponsored by Robert H. Bretz that the Company's
Bylaws, Article III, Section 3, be amended to establish the maximum age for
service as a director to be 68 years old was defeated with 2,531,530 votes
cast against (79.0%), 673,350 votes cast for the amendment (21.0%), and
3,350 votes cast as abstentions out of a total of 3,208,230 votes cast.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.54 Second Amendment to Amended and Restated Credit
Agreement between Wells Fargo and Auto-Graphics, Inc.
dated June 4, 2002.
10.55 Reducing Revolving Note Wells Fargo Bank and
Auto-Graphics, Inc. dated June 4, 2002.
(b) None.
-25-
AUTO-GRAPHICS, INC.
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AUTO-GRAPHICS, INC.
Date: August 14, 2002 By: /s/ Robert S. Cope
------------------- ------------------------------------
Robert S. Cope
Chairman of the Board and President
Date: August 14, 2002 By: /s/ Daniel E. Luebben
------------------- ------------------------------------
Daniel E. Luebben
Chief Financial Officer
and Secretary