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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2002
_____________________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the transition period from ____________________
to ____________________.
Commission file number: 0-4431
_________________________
Auto-Graphics, Inc.
_______________________________________________________
(Exact name of registrant as specified in its charter)
California
__________________________________
(State or other jurisdiction of
incorporation or organization)
95-2105641
______________________
(I.R.S. Employer
Identification No.)
3201 Temple Avenue, Pomona
______________________________________
(Address of principal executive offices)
91768
____________
(Zip Code)
Registrant's telephone number, including area code 909-595-7204
________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class None.
___________________________________
Name of each exchange on which registered None.
____________
Securities registered pursuant to section 12(g) of the Act:
Common Stock
____________________
(Title of class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. _______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _____ No __X__
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently
completed second fiscal quarter.
The aggregate market value of voting stock held by non-affiliates of the
registrant at June 30, 2002 was $712,000.
The number of shares of the registrant's Common Stock outstanding at
March 28, 2003 was 4,904,234.
DOCUMENTS INCORPORATED BY REFERENCE
Except for exhibits, none.
PART I
ITEM 1. BUSINESS
Auto-Graphics, Inc. and its subsidiaries, (the Company) provide software
products and services used to create, manage, publish and access information
content via the Internet/Web.
Auto-Graphics Inc. (parent) provides products and services to clients in
the U.S.
A-G Canada Ltd. provides products and services to clients in Canada.
Revenue is primarily derived from a subscription or ASP (Application Service
Provider) model, which includes "turn-key" software and support as well as
outsourced Web "hosting" providing communications bandwidth, hardware, data
management and facilities management and personnel for customer Web sites and
content. Revenue is also generated from direct sales, licensing and support
of software products and services.
The Company's products and services are presently sold primarily to libraries,
especially multi-library consortia requiring systems to create, manage,
publish and access large bibliographic and holdings databases used to
implement resource sharing initiatives (interlibrary locating, and borrowing
of materials). Recent product releases include a portal used by all types of
libraries to manage local and third-party vendor databases within a single
concurrent search interface.
Products and Services
The products and services offered by the Company in 2003 include the
following:
AGent(TM) is an Internet/Web-based "portal" product offering a powerful, easy-
to-use interface to search, retrieve, and manipulate data from disparate and
multiple sources concurrently. It searches repositories containing data in
formats such as MARC, XML, PDF, MS Word, MS SQL, and many others. Organizing
the results from multiple sources within a single search interface more
efficiently organizes the volume of information available on the Internet
quickly and thereby simplifies the searching process. By targeting multiple
virtual or Z39.50 compliant library catalogs, the system becomes a virtual
multi-library catalog. A physical union catalog using Impact/ONLINE(TM) (see
below) can be included to provide even broader access and availability of
content to those libraries not possessing the software technologies needed for
virtual environments. Local and licensed full-text databases as well as
multiple library authorized and Web sources such as URL's (Universal Resource
Locator Web site addresses) and subject oriented electronic databases can be
included and authenticated in a broadcast search, thereby enhancing and
accelerating the information discovery and retrieval process. With the
addition of optional AGent modules such as ISO capable interlibrary loan
management, bibliographic cataloging, patron authentication, statistics and
administration, AGent leverages its flexible and modular approach to become an
efficient integrated library information system for all sizes of systems from
single libraries to statewide consortia.
Impact/VERSO(TM) is an entirely Web-based Integrated Library System (ILS).
This product is an ASP (Application Service Provider) offering. Acquisition
of the Company's ILS software on an ASP basis will provide libraries with a
low capital investment alternative to their ILS needs, with no local
software/hardware requirements other than a Web browser and a PC workstation,
allowing the library and their patrons to access and utilize the library's
bibliographic holdings information to manage inventory and circulation via the
Internet/Web. Impact/VERSO can also be seamlessly integrated with the AGent
product described above to provide a vast array of services.
Impact/ONLINE(TM) is an Internet/Web and union catalog based online
bibliographic maintenance and management system. The Agent interface is
currently being added to existing Impact/ONLINE customers to expand the
functional capabilities of their systems. This product provides multiple
libraries with resource sharing facilities of interlibrary loan, cataloging
and union catalog access and maintenance.
Impact/XML(TM) is a modular editorial, publishing and management software
system used to create, organize, maintain and manage information databases in
XML (eXtensible Markup Language). The system can be configured for a single
user or a multi-user enterprise system. Integrated components include
authenticated user access and control, data content validation through the use
of one or more Document Type Definition (DTD) overlays, data authentication
based on control and authority files, editorial revision control and version
control, complete record routing and approval management, and DTD (Document
Type Definition) validation. Impact/XML can include a Web page preview
capability used to validate electronic publishing compatibility. With the
integration of Impact/WEB(TM) as an indexing and searching module, the CMS
system provides a fully functioning Web publishing system and integrated
with AGent provides a complete and seamless enterprise-wide Web publishing
and searching environment.
The Company has acquired, developed and owns a substantial bibliographic
database (including exclusive North American rights to the REMARC(TM) database
of over four million pre-1968 records) and also makes available public agency
databases including those offered by the United States Library of Congress,
National Library of Canada, British Library and many U.S. and Canadian public
and university libraries as a compendium of databases containing over 30
million unique records. The Company provides online bibliographic records for
use by its U.S. and Canadian library customers via the Internet/Web through a
product known as Impact/MARCit(TM).
Applications
AGent is being installed in all of the individual libraries currently covered
by the Impact/ONLINE union database contracts (over 10,000 libraries).
The Company has similar statewide contracts in seven states and one province
in Canada. Customers also include many regional library organizations in
several other states. Some Company contracts employ only physical union
catalogs, some only virtual union catalogs and some employ both types of
catalogs.
The Company was recently awarded a contract to deliver AGent to Toronto Public
Library ("TPL"), which has the largest circulation of any library system in
North America. They will use AGent to not only search third-party public
access catalog and to authenticate users allowing for the simultaneous
searching of 66 or more other reference databases licensed by or developed by
TPL.
Product Development
Core software embraces industry standard data structures, such as XML, and
standards specific to the markets served, such as MARC, Z39.50, SIP2, NCIP and
ISO 10160/61 in the library community.
All new system development is being programmed to operate on Microsoft
platforms. The Company is using N-tiered architecture to allow for customer
implementation flexibility. Microsoft SQL Server provides the database engine
for the Company's software product families. Development is based on an
architecture that works on multiple computer servers and which provides system
scalability, as the customer's needs increase.
Marketing
The technology utilized and developed in the Company's products and services
is applicable to a diverse group of markets and customers. Marketing
activities include public relations, advertising, display and presentation at
industry trade shows, targeted mailings, telemarketing and e-messaging
campaigns.
Products sold to the library market are generally sold by response to RFP's
(Requests for Proposals) and, more frequently than not, competitive bidding
managed by governmental purchasing departments. The Company maintains a bids
and proposals department, which focuses on the identification of bidding
opportunities and subsequent generation of all responses and documentation to
respond to a Request for Proposal or Request for Information. Price points
for the Company's various products/services are instrumental in determining
the type of sales effort deployed by the Company, and the Company strives to
take into account the available budgets of the procuring agencies and the
competitive practices found within the marketplace.
The Company's strategy for entering emerging new markets in the future is
focused on the Internet/Web "Portal" market and will utilize the new AGent
product to capitalize on this emerging market opportunity. The Company's
strategy for its Internet-centric products and services includes the continued
development of new products and services in order to continually respond to
the evolving needs of its existing and potential customer base. The Company
will also expand strategic relationships with other companies or independent
representatives who are already present or are otherwise knowledgeable about
these prospective customers/markets.
To be successful in these new products/services, customers and markets, the
Company will need to be able to create, finance, develop and implement new
marketing initiatives and capabilities designed to introduce and market its
Internet/Web line of products and services to prospective users who are not
already familiar with the Company. The Company must compete successfully with
other companies, many of whom will be larger, more established, better
financed, more recognized and more experienced in the development,
introduction, marketing, sales and service of the same or similar products and
services to these targeted new customers/markets in a rapidly changing
technological and distribution environment.
Accordingly, there can be no assurances that the Company will be able to
launch, sustain and profit in the near or long term from these new
products/services, customers and markets initiatives. Likewise, no assurances
can be given that the Company will be successful in efforts to develop and
utilize a strategic alliances strategy to assist in efforts to introduce and
market its Internet/Web products and services to a broader range of
customers/markets. However, as the market for managing and distributing
information and knowledge continues to change, the Company intends, as it has
in the past, to be responsive to the changing needs and requirements of
customers as they evolve by offering new and enhanced products and services
representing advances in the information and knowledge management industry.
Competition
The Company was an early entrant into the software and database publishing
business and industry. Although the Company has been successful to date in
securing many of the awarded contracts involving the development and
implementation of Internet/Web based "online" bibliographic catalog and
interlibrary loan services systems for state-wide, regional or other consortia
of libraries, increased emphasis on this products/services niche of the
library market can be expected to generate additional attention, capability
and effort by one or more of the Company's competitors in this now relatively
small niche of the library market.
Software sales of the Company's products, as well as complementary design,
development and processing services are highly competitive. There are no
definitive market share statistics available, however, the market is sizable
and there are many companies attempting to establish a position in this
market. Many competitors are smaller and local in character; however, many
are larger and national with greater financial and other resources than the
Company. Purchase contracts are generally awarded according to the results of
pricing, technical capability, customer references and service performance.
In seeking to expand its customers/markets, the Company can be expected to
face competition from existing and future competitors with substantially
greater financial, technical, marketing, distribution and other resources than
the Company and, therefore, may be able to respond more quickly than the
Company can to new challenging opportunities, technologies, standards or
customer requirements. The Company will compete with other large, well-known
software development and Internet/Web database platform companies that offer a
variety of software products. Several large, well-known computer hardware
manufacturers have entered the Internet/Web solutions and outsourced "hosting"
business. Increasing competition could result in pricing pressures negatively
impacting margins available to companies competing in this market and could
make it difficult or even impossible for the Company to gain recognition and
acceptance of its particular line of these products and services.
Company Background
The Company was founded in 1950 and incorporated in 1960 in the State of
California. Beginning in 1964, the Company was one of the pioneers in
computerized typesetting and database composition services for the library and
publishing industries. Over the years, the Company has migrated its products
and services to the most current technology required to address changing
customer needs and requirements. The Company started in print, moved to
microfilm/fiche, then to CD-ROM and now browser based Internet/Web as the
media of choice for its products/services.
Offices/Employees
The Company's main office is in Pomona, California, in the greater Los Angeles
area. The Company's wholly-owned Canadian subsidiary, A-G Canada, Ltd., is
located in Toronto, Canada. Sales representatives are located in California,
Missouri, Florida, Massachusetts and Toronto. In 2002, the Company signed
distributor agreements with three library networks covering the east coast,
Texas and California. Additional distributors will be added in 2003 further
expanding the coverage. The Company including its subsidiaries employs
approximately 45 persons in all locations. The Company believes that
relationships with its employees are good.
ITEM 2. PROPERTIES
The Company leases its corporate office facility from a limited partnership
owned by a current and a former director/stockholder of the Company
("Lessor"). For the past 18 months, the Company has leased the facility as a
hold-over tenant under a 15 year (five year with two five year renewal
options) lease that expired in June 2001. In January 2002, the Company
reduced its square footage occupied from 19,460 to 14,694 square feet having
an annual base rent of $194,000 (plus expenses). In December 2002, a new five
year lease (with one five year renewal option) was negotiated and approved by
the two independent members of the Company's Board of Directors. The Company
further reduced in square footage occupied to 12,745 under the new lease. The
rental rate for the lease renewal is equal to or less than the rental rates
paid by three unaffiliated tenants in the same building. The Company also
surveyed available office properties of similar size and amenities in the
Pomona and surrounding areas and the lease rental rate is in the bottom
quartile of the range of comparable properties. The Company also has an
option to purchase a one-third interest in the Lessor from one of the partners
who is also a former director/stockholder of the Company for an amount not to
exceed $150,000 subject to certain conditions. Management believes that the
reconfigured space will be sufficient for the Company's current and
foreseeable future needs. The Company also leases a small sales and support
office in Toronto, Ontario, Canada for its wholly-owned subsidiary, A-G
Canada, Ltd. (See Note 5 of Notes to Consolidated Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
On May 9, 2001 the Company terminated the services of its long-time outside
counsel, Robert H. Bretz. Mr. Bretz was also a director and shareholder of
the Company. Following his termination, Mr. Bretz began to file multiple
lawsuits (a total of eight) against the Company, its current and former
officers, directors and counsel:
1. Auto-Graphics, Inc. vs. Cope, Los Angeles County Superior Court, Case No.
BC 252517;
2. Auto-Graphics, Inc. v. Cope, United States District Court, Central
District of California, Case No. CV 01-5891 PA(MCx);
3. Auto-Graphics, Inc. v. Robert H. Bretz, et al, Los Angeles County
Superior Court, Case No. BC 253322;
4. Robert H. Bretz, v. Robert S. Cope, et al., Los Angeles County Superior
Court, Case No. BC 263256;
5. Robert H. Bretz v. Rose, et al., Los Angeles County Superior Court, Case
No. 02K10479;
6. Robert H. Bretz v. Rose, et al., Los Angeles County Superior Court, Case
No. 02K12686;
7. Robert H. Bretz v. Auto-Graphics, Los Angeles County Superior Court, Case
No. BS80223; and
8. Robert H. Bretz v. Robert S. Cope, et al., Los Angeles County Superior
Court, Case No. BC 273691.
Over the past eighteen months, the Company has spent over $1,100,000
"successfully" defending these lawsuits, but anticipated spending another
$500,000 over the next six months were the lawsuits to continue and trials to
commence. On January 16, 2003, Company settled the lawsuits with Mr. Bretz
dismissing all of the lawsuits in return for a payment of $15,000 for legal
fees. The settlement entailed the purchase of stock owned by Mr. Bretz at
a price in excess of the then current fair market value of the underlying
common stock. Two directors agreed to pay Mr. Bretz $0.85 per share for
414,168 shares or a total of approximately $352,000 even though the market
price was approximately $0.30. Therefore, the two directors paid a premium of
$0.55 per share over the fair market value of $0.30 per share or approximately
$228,000. Since the settlement was clearly in the best interests of the
Company and would avoid substantial future legal fees and costs, the Company
agreed to reimburse the two directors for the premium they paid to Mr. Bretz
in the form of warrants to purchase additional shares of the Company's
"restricted" Common Stock. The Company engaged an independent appraiser to
establish a fair market value for the large block of shares, which fair market
value was determined to be $0.30 per share. Based on the premium paid by the
directors of approximately $228,000 and an exercise price of $0.01 each per
warrant and share, the directors would be entitled to a total of 814,000
warrants/shares. However, the directors have agreed to accept a total of
621,252 warrants to purchase additional shares of the Company's "restricted"
Common Stock representing a discount of approximately 24%. As permitted by
Statement of Financial Accounting Standards No. 123 (and No. 148), "Accounting
for Stock Based Compensation", the Company will continue to account for
employee stock options (and warrants) using the "intrinsic method" under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The result has been a non-cash
charge to earnings of $215,000 in 2002. The transaction has been reviewed
by the Company's general counsel and approved by the sole independent
director, Thomas J. Dudley.
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 sought to rescind the contract for the Company's
acquisition of the Wings software developed by Pigasus and sought 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 sought damages in excess of $500,000. Both
actions were removed to the local Federal District Courts and the California
District Court transferred the matter to the District Court in Missouri. The
parties concluded a settlement on August 21, 2002 following the delivery of a
fully functional and compilable ISO interlibrary loan software system by
Pigasus to the Company in July 2002 (See Exhibit 10.56).
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.
2002
_______________________________________________
Bid Ask
_____________________ _____________________
Price Range High Low High Low
______________ _______ _______ _______ _______
First Quarter $ .440 $ .300 $ .520 $ .400
Second Quarter .400 .200 .500 .240
Third Quarter .440 .230 .560 .300
Fourth Quarter .450 .350 1.500 .480
2001
_______________________________________________
Bid Ask
_____________________ _____________________
Price Range High Low High Low
______________ _______ _______ _______ _______
First Quarter $ 1.313 $ .531 $ 1.500 $ .625
Second Quarter 1.050 .510 1.100 .600
Third Quarter .510 .350 .600 .450
Fourth Quarter .440 .410 .650 .510
Trading in the Company's Common Stock is reported on the electronic OTC (Over-
the-Counter) Bulletin Board under the symbol "AUGR" (Cusip Number 052725 10
8). The stock quotations set forth above have been provided by Pink Sheets
LLC and represent the highest and lowest closing bid and asked prices quoted
by broker/dealers making a market in the Company's Common Stock in the OTC
market for the periods presented. Prices quoted do not include retail markup,
markdown or commissions and may or may not reflect actual transactions in
shares of the Company's stock.
As of December 31, 2002, the number of holder accounts of record (including
depository and nominee or "street name") of the Company's Common Stock was
approximately 210. The Company believes that the number of record and
beneficial owners of the Company's Common Stock is in excess of 450
stockholders. The Company has never paid a cash dividend and there are no
plans to do so in the near future. See Note 2 of Notes to Consolidated
Financial Statements for information as to the bank loan restriction on the
payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
Dollar amounts in thousands except per share data.
Years Ended December 31,
________________________________________________________
2002 2001 2000 1999 1998
________ ________ ________ ________ ________
Operating results:
Net sales $ 6,663 $ 8,615 $ 8,323 $ 8,391 $ 9,099
Net income/(loss) (228) (1,320) (875) 105 (1,064)
Basic Earnings/
(loss)per share (.05) (.26) (.18) .03 (.33)
Diluted Earnings/
(loss)per share (.05) (.26) (.18) .03 (.33)
At year-end:
Total assets 4,719 5,801 8,153 10,647 7,573
Long-term debt 34 -- 2,057 3,153 2,588
No cash dividends have been declared.
ITEM 7. 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. Of the annual software development project
costs eligible for capitalization, the Company generally capitalizes about
two-thirds and expenses the remainder. To the extent that more development
costs are capitalized, the Company's current net income will improve, and, to
the extent that more software development costs are expensed instead of
capitalized, the Company's current net income will decline. Because of the
effect on earnings, the Company endeavors to capitalize a relatively
consistent amount year-to-year to minimize the fluctuation in earnings.
The Company amortizes its software development costs in accordance with the
estimated economic life of the software, which generally is seven years.
Studies within the library community have indicated that the typical library
automation system once installed remains in use for an average of
approximately ten years. The Company's typical product lifecycle has been
about 15 years, which was true for its prior film/fiche product line, CD-ROM
product line and current Internet/Web product line, which has now been
deployed for nine 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 as deferred income until the services are provided and
revenues earned. Certain small annual subscriptions for databases and
software support typically are recognized as revenue in the month they are
billed. Certain cost of sales and 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.
Liquidity and Capital Resources
The Company incurred a net loss of $228,000 in 2002, although the net loss was
caused by two unusual and non-recurring non-cash charges totaling $335,000 in
the fourth quarter of 2002. Excluding these two charges, the Company's would
have earned a net income of $107,000.
On May 9, 2001 the Company terminated the services of its long-time outside
counsel, Robert H. Bretz. Mr. Bretz was also a director and shareholder of
the Company. Following his termination, Mr. Bretz began to file multiple
lawsuits (a total of eight) against the Company, its current and former
officers, directors and counsel. Over the past eighteen months, the Company
has spent over $1,100,000 "successfully" defending these lawsuits, but
anticipated spending another $500,000 over the next six months were the
lawsuits to continue and trials to commence. On January 16, 2003, Company
settled the lawsuits with Mr. Bretz dismissing all of the lawsuits in return
for a payment of $15,000 for legal fees. The settlement entailed the purchase
of stock owned by Mr. Bretz at a price in excess of the then current fair
market value of the underlying common stock. Two directors agreed to pay Mr.
Bretz $0.85 per share for 414,168 shares or a total of approximately $352,000
even though the market price was approximately $0.30. Therefore, the two
directors paid a premium of $0.55 per share over the fair market value of
$0.30 per share or approximately $228,000. Since the settlement was clearly
in the best interests of the Company and would avoid substantial future legal
fees and costs, the Company agreed to reimburse the two directors for the
premium they paid to Mr. Bretz in the form of warrants to purchase additional
shares of the Company's "restricted" Common Stock. The Company engaged an
independent appraiser to establish a fair market value for the large block of
shares, which fair market value was determined to be $0.30 per share. Based
on the premium paid by the directors of approximately $228,000 and an exercise
price of $0.01 each per warrant and share, the directors would be entitled to
a total of 814,000 warrants/shares. However, the directors have agreed to
accept a total of 621,252 warrants to purchase additional shares of the
Company's "restricted" Common Stock representing a discount of approximately
24%. As permitted by Statement of Financial Accounting Standards No. 123 (and
No. 148), "Accounting for Stock Based Compensation", the Company will continue
to account for employee stock options (and warrants) using the "intrinsic
method" under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. The result has been
a non-cash charge to earnings of $215,000 in 2002. (See Part II, Item 3,
"Legal Proceedings").
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. When the
subsidiaries were originally formed, 700,000 shares each of Dataquad and
LibraryCard common stock was reserved for use in a future stock option and
purchase plan for the subsidiaries. In June 2000, the subsidiaries issued the
shares to a trustee (Corey M. Patick) secured by a note. As a result of the
issuance, the Company's interest in the subsidiaries was diluted which
resulted in a reduction in Stockholders' Equity in the amount of $104,769. In
January 2001, Robert S. Cope replaced Mr. Patick as trustee for the trust
shares. Under the trust agreement, the subsidiaries had the right and, in
November 2002, exercised that right to repurchase the stock (at the original
sales price) in return for cancellation of the trust note. The effect of the
repurchase was a non-cash charge of $120,000, and a net decrease in Common
Stock (Paid-in Capital) of $160,500. In December 2002, the Company paid the
remaining minority shareholders approximately $4,000 to acquire all remaining
shares in Dataquad, Inc. and LibraryCard, Inc. bringing the Company's
ownership to 100% in both subsidiaries. On December 31, 2002, the Company
executed a short form merger and merged the assets and immaterial liabilities
into the Company and cancelled the intercompany notes between the Company and
two subsidiaries.
The Company's liquidity has been adversely affected by significant net losses
in 2001 and 2000 totaling approximately $2.2 million ($1.32 million in 2001
and $0.875 million in 2000). The losses were for the most part expected and
represented an effort to restore revenue growth through the launching of two
new business initiatives. The Company had raised a total of approximately
$4.0 million in new equity in 1999 and early 2000 to fund Internet/Web new
product development and these new business initiatives. Two new companies
were formed in December 1999: Dataquad, Inc. and The LibraryCard, Inc., with
approximately $1,000,000 each in seed capital out of the above $4.0 million
from an outside investor. Approximately $2.6 million of the gross losses over
the last two years were derived from Dataquad and LibraryCard. The efforts
were unsuccessful and both companies failed to produce a revenue stream. In
late 2001, full-time staffing for these operations was eliminated and part-
time as needed assistance was provided by the Company in 2002.
Working capital improved by $581,000 to a negative $2,050,000 in 2002 from a
negative $2,631,000 in 2001, primarily as a result of a reduction (paydown) in
the bank line of credit of $963,000. Working capital is being adversely
affected by the requirement to report the $309,000 bank line of credit as a
current liability under generally accepted accounting principles since it
matures in June of 2003 (see below). Net cash provided by operating
activities in 2002 was approximately $2.0 million up $937,000 from
approximately $1.0 million in 2001. 2001 included 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. Gross accounts receivable is down $473,000 in 2002 compared to a
decrease of $478,000 in 2001 primarily due to lower sales levels (see below),
improved collections and a gradual shift in the mix of business. The
Company's primary Impact/ONLINE product is sold on an annual subscription
basis with fees for services billed to the customer and paid annually or
quarterly in advance. This cash is received and booked to customer advances
(deferred income on the balance sheet) to be applied as the monthly sales
revenues are earned and recognized on a pro-rata basis. As the actual cash is
received, it is used to pay down the line of credit. A growing percentage of
sales (currently over 65%) of the Company's sales revenues are now being paid
through customer advances without ever flowing through accounts receivable.
Therefore, the average accounts receivable balance is approximately one-third
what it would otherwise historically be and there is a substantial deferred
income balance in current liabilities representing revenues to be earned from
future services to customers who have paid in advance.
At December 31, 2002, the Company's principal financial commitments, other
than its bank line of credit, involved the lease of corporate facilities in
Pomona, California and in Toronto, Canada. Total commitments over next five
years total approximately $1.0 million. (See Note 5 of Notes to Consolidated
Financial Statements and Item 2. Properties herein).
The Company's principal use of cash for investing activities during 2002,
2001, and 2000 were directed primarily towards continuing development of the
Company's Agent(TM), VERSO(TM) and Impact/ONLINE(TM) software, to enhance the
Impact/WEB(TM) search and retrieval engine and develop Impact/XML(TM) for the
maintenance of XML databases. The amounts invested were $500,000, $750,000,
and 775,000, respectively. The remainder of investing activities were to
acquire hardware and software used to expand and enhance online services to
the Company's current and prospective Internet/Web customers. Capital
expenditures are down $614,000 from $1,333,000 in 2001 to $720,000 in 2002.
Major expenditures for 2002 include internal software development of
Agent(TM), VERSO(TM), acquisition of Pigasus Wings ISO interlibrary loan
software and computer equipment. 2001 included the acquisition of Maxcess
Verso software, internal software development and computer equipment.
2002 expenditures also included investments of approximately $35,000 in the
remaining common stock of the subsidiaries: Dataquad and LibraryCard, which
the Company did not own. In July 2002, the Company exercised its right of
first refusal and acquired the stock in the two subsidiaries from the outside
investor raising the Company's ownership from 61% to 85%. In November 2002,
the two subsidiaries exercised their right under the Cope Stock Trust
Agreement and recalled and retired the unissued shares in the trust and
cancelled the corresponding note raising the Company's ownership interest to
94.5%. In December 2002, owning in excess of 90%, the Company initiated a
short-form statutory merger and bought out the remaining minority
shareholders. On December 31, 2002, the Company merged Dataquad and
LibraryCard into the Company and assumed both subsidiary's assets, immaterial
liabilities and intercompany notes were cancelled by operation of law. The
services formerly offered by the subsidiaries will be now offered by the
Company. In the course of the merger, the Company acquired the subsidiary's
net operating loss (NOL) tax carryforwards in the total amount of $2,411,000
and $1.300,000 for Federal and state taxes, respectively. These NOL
carryforwards may be used to shelter the Company's U.S. taxable income through
2022 for Federal purposes and through 2010 for state purposes. The NOL
carryforward for California state tax purposes has been suspended for 2002 and
2003, meaning that the Company may be unable to use its NOL carryforward for
this period and may therefore be liable for state taxes.
Management believes that liquidity and capital resources should be adequate to
fund operations and expected reductions in bank debt in 2003. As of December
31, 2002, the Company was in compliance with all of its loan covenants. The
Company's primary bank, Wells Fargo Bank, renewed and extended the terms of
its credit agreement for an additional year to June 2, 2003. Because the
Company's bank line of credit facility matures in June 2003, it is reported as
a current liability in the Company's balance sheet for the years ended
December 31, 2002 and 2001. 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. The total commitment under
the line of credit at December 31, 2002 was $1,250,000 and total borrowing was
$309,000 with $940,000 in additional credit availability. The Company
believes that the bank will extend this credit facility or may consider
converting the line of credit to a term loan. The Company expects that the
bank will continue to reduce the availability under the line of credit over
any renewal period and may increase the interest rates and fees charged to the
Company under the credit facility. The Company has no so-called special
purpose entities or off-balance sheet or derivative financing of any kind.
All entities have been consolidated and all material intercompany accounts and
transactions have been eliminated.
Major banks such as the Company's current primary bank, Wells Fargo Bank, have
shifted their focus to companies requiring much larger credit facilities
generally above $20 million and appear to be exiting the so-called middle
market. As a result, the Company has been seeking proposals from smaller
regional banks, who are still seeking smaller credit facilities. However, due
to the substantial losses during the two of the last three years, most
commercial banks have not been willing to offer credit to the Company without
a source of traditional collateral, which the Company lacks and personal
guarantees by major shareholders. At a minimum, two out of three years of
profitability are required before a prospective commercial bank is willing to
consider the Company's credit application. There has been a definite
tightening in credit availability to small businesses like the Company during
the economic decline over the past several years and a return to more asset-
based lending policies. To help solve the short-term financing requirement,
the Company has borrowed the cash surrender value of its key-man life
insurance policies and obtained additional short-term financing for computer
equipment from a related party in the amount of $59,000 (See Notes 2, 5 and 6
in Notes to the Consolidated Financial Statements).
The Company has considered equity financing, however, the depressed stock
market and the relatively poor market for new equity offerings as well as the
low current stock price for the Company's Common Stock ($0.37 per share as of
March 28, 2003) make this source of financing relatively unattractive. At the
current stock price, an offering would raise a very small amount of capital at
a significant dilution and expense to the existing shareholders. Management
believes that the current stock price is well below its historical and
underlying value and should increase as the Company continues to show
profitable results and improved cash flow in 2003. Management believes that
it would be more prudent to take steps to restore and raise the stock price
before additional equity financing is further considered. Therefore, the
Company has no current plans to enter the equity market to raise additional
capital.
The Company's largest customer, the Texas Education Agency ("TEA") now
provides 23% of the Company's sales in 2002 up from 15% in 2001 and 12% in
2000. The increase, however, is more a function of the decline in total
Company sales revenues from $8.6 million in 2001 to $6.7 million in 2002 than
an increase in the TEA contract which is relatively unchanged. TEA also
accounted for approximately one-half of the outstanding accounts receivable at
year-end. Again, this was more a function of unusually low accounts
receivable balance than an unusually high TEA accounts receivable balance.
Accounts receivable turnover at year-end was only 20 days and, therefore, the
total accounts receivable balance was unusually low. The full amount of the
TEA account receivable was subsequently collected in the first quarter of
2003.
In February 2001, the Company completed the purchase of software and related
assets of Maxcess Library Systems, Inc. for approximately $196,000. Verso
software has expanded the Company's ASP (Application Service Provider) product
line into the integrated library automation business. Verso will be licensed
to libraries for "in library" use or as an ASP (Application Software Provider)
service. Acquisition of the Company's new ILS software on an ASP basis will
provide libraries with a low capital investment alternative to their ILS
needs, with no local software/hardware requirements (other than a PC
workstation with a Web browser), allowing libraries and their patrons to
access and utilize the library's bibliographic holdings information via the
Internet/Web.
In July 2002, Pigasus delivered a complete and fully functional ISO
(International Standards Organization) compliant Wings interlibrary loan
software product and the Company agreed to acquire the Wings software product
in settlement of the lawsuit for $100,000. 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. (See Part II
Legal Proceedings).
The Company has refocused its resources on its core business of library
services. The Company's strategy is to offer ASP (Application Service
Provider) services through outsourced web hosting to its library customers
sold on an annual subscription basis. This is very attractive to our
customers because it eliminates the large upfront capital investment, and
ongoing technical management and technical staff requirements that the library
would otherwise require and also provides an affordable and predictable
monthly budget for the library. With a core of highly competent technical
personnel, computer equipment and the Internet/Web, the Company can offer an
efficient and very cost effective solution for the library. The majority (now
approximately 85%) of this subscription business also forms an ongoing stream
of recurring business each year under multiple year contracts.
RESULTS OF OPERATIONS
2002 as Compared to 2001
Net sales decreased $1,952,000 or 23% from $8,615,000 in 2001 to $6,664,000 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 2001. Excluding this
license fee, sales were down $452,000 in 2002 due primarily to sales declines
in publishing and in the Company's Canadian subsidiary.
Cost of sales decreased $2,378,000 in 2002 or 38% as a result of major cost
reductions in payroll and production costs in late 2001. Gross margins
improved from 28% in 2001 to 42% in 2002 as the Company has refocused on its
core library ASP (Application Software Provider) services business. 2001
gross margins were elevated primarily as a result of the licensing of the
Remarc(TM) database as described above, which had insignificant direct costs
associated with its production and delivery. Excluding this transaction,
gross margins which would have been 12% instead of 28% in 2001. As the
Company has transitioned from labor intensive businesses to outsourced web
hosting (ASP) businesses much of the direct costs in cost of sales have been
replaced largely by fixed indirect period costs. Therefore as revenues
increase in the future from these business lines, margins can be expected to
increase rapidly also.
Selling, general and administrative expenses decreased $1,504,000 or 36% in
2002 as a result of major expense reductions in administrative and sales and
marketing payroll and expenses in late 2001. 2002 general & administrative
expenses include nearly $1,100,000 in legal expenses due to the ongoing
lawsuits initiated by the Company's former general counsel, Robert H. Bretz.
For the past 18 months, the Company has been engaged in litigation involving
the Company's former general counsel. The Company has spent over $1.1 million
in legal fees defending the eight lawsuits filed by Mr. Bretz and although the
Company prevailed in nearly every lawsuit, the defense cost the Company a
substantial amount of money. On January 16, 2003, the Company reached a
settlement with Mr. Bretz dismissing all of the lawsuits involving the parties
for a cash payment of $15,000. The dispute cost the Company the equivalent of
$0.22 per share and severely impacted profitability and liquidity. (See Part
II, Item 3, "Legal Proceedings" and Note 6 of Notes to Unaudited Consolidated
Financial Statements).
Income(loss) from operations increased $1,931,000 from a loss of $1,805,000 in
2001 to an operating income of $126,000 in 2002 due again to substantial cost
reduction measures taken in late 2001. 2001 would have been a loss from
operations of $3,305,000 excluding the effect of the above Remarc(TM) license
fee of $1.5 million.
Interest expense was $97,000 in 2002 down $32,000 from $129,000 in 2001 due to
lower average borrowings, lower interest rates and bad debt collection.
Warrant expense reflects a non-cash charge to earnings for the issuance of
621,252 warrants for a corresponding number of shares of Common Stock as
reimbursement for the premium paid by two directors to Robert H. Bretz, the
Company's former counsel, in settlement of all lawsuits between the parties.
(See Part I, Item 3, "Legal Proceedings").
Foreign exchange gains of $1,000 in 2002 compared to losses of $36,000 in
2001. (See Foreign Exchange below).
Provision for taxes based on income in 2002 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 recognition of a non-cash charge of $120,000
recognized by the two majority-owned subsidiaries in connection with the
repurchase of stock in return for cancellation of the trust note. Minority
interest in income for 2002 was $77,000 compared to a benefit from losses of
$368,000 in 2001.
Net loss was $228,000 in 2002 compared to a net loss of $1,320,000 in 2001, an
improvement (turnaround) of $1,092,000. Both basic and diluted loss per share
were $0.05 and $0.05 in 2002, respectively, compared to a basic and diluted
loss per share of $0.26 in 2001. The 2001 net loss would have been
approximately $2,820,000 excluding the Remarc(TM) database license fee (as
described above) of $1.5 million, which represents a net income improvement of
$2,592,000 in 2002. The 2001 net loss would have resulted in a basic and
diluted loss per share of approximately $0.59, excluding the Remarc(TM)
database license fee (as described above) of $1.5 million.
2001 Compared to 2000
Overall, 2001 sales as compared to 2000 were up $292,000 or 3.5% from
approximately $8.3 million in 2000 to $8.6 million in 2001. 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 has had a material positive effect on the results of operations
reported by the Company for the year ended December 31, 2001. Excluding this
license fee, 2001 sales would have been down approximately $1.2 million or
14.5% to approximately $7.1 million. Sales in Dataquad were down $484,000 due
to completion of a large contract in 2000 and sales in publishing were down
$435,000 in 2001. Library sales in Canada were down $245,000 due to the loss
of a major contract.
Cost of sales was up $789,000 or 15% from 2000 to 2001 due partially to the
increase in sales and due to a substantial increase in software development
costs of approximately $600,000 all of which was expensed. Development
projects included the completion of the second generation of the
Impact/ONLINE(TM)family, completion of Impact/XML and development of the new
Impact/VERSO(TM)and AGent(TM) products.
Selling, general and administrative expenses in 2001 were essentially
unchanged from 2000 at $4.2 million.
Net interest expense in 2001 was $129,000 up from $104,000 in 2000 as a result
of lower investment income due to declining interest rates and lower average
cash balances in 2001 than in 2000.
Foreign exchange transaction losses in 2001 were $36,000 compared to $68,000
in 2000. The Canadian dollar has continued to fall in value relative to the
US dollar losing another 6% in 2001. (See Foreign Exchange below).
In 2001, the income tax benefit was $267,000 compared to a benefit of $98,000
in 2000 reflecting the future tax benefit of net operating loss carryforwards
for federal, state and foreign tax purposes. At December 31, 2001, the
Company has available federal, state and foreign net operating loss
carryforwards of approximately $1,115,000 ($3,728,000 including all
subsidiaries) $1,055,000 and $199,000, respectively, 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.
The net loss in 2001 was $1,320,000 up from an $875,000 net loss in 2000.
Both the basic and fully diluted loss per share was $0.26 per share in 2001
compared to $0.18 per share in 2000.
2003 Operating Plan
The Company's 2003 operating plan calls for sales revenue growth of 5-10% in
2003 and the Company expects to be profitable, although significant risks
remain. The Company primarily serves state and local fiscal government
entities. The current economic slump has reduced tax receipts and placed
pressure on state and local government budgets. The Company expects pressure
to lower prices or offer discounts due to the reduced availability of funding.
The Company is investing heavily in sales and marketing to drive sales growth
through better customer coverage and focused marketing. The 2003 capital
budget is estimated to grow approximately 5% in 2002 over 2001 primarily
representing internally developed software and additional computer equipment
for projected new customer orders. The Company plans no further business or
product acquisitions for the foreseeable future and will instead focus on its
core library business.
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
General price inflation is not anticipated to have a material effect on the
Company's business in the near future. Historical dollar accounting does not
reflect changing costs of operations, the future cost of expansion and the
changing purchasing power of the dollar. Should more than moderate inflation
occur in the future, it can be expected to impact the Company in an adverse
manner, as prices cannot be adjusted quickly due to the contractual nature of
a substantial amount of the Company's business, while costs of personnel,
materials and other purchases tend to escalate more rapidly.
Foreign Exchange
The functional and reporting currency of the Company is the U.S. dollar, while
the functional and reporting currency for A-G Canada Ltd., the Company's
wholly owned Canadian subsidiary, is the Canadian dollar. Accordingly, the
Company is exposed to foreign currency translation gains or losses as the
relationship between the Canadian dollar and United States dollar fluctuates.
The value of the Canadian dollar increased in relation to the U.S. dollar
resulting in a foreign exchange gain of $1,000 in 2002 and decreased in 2001
and 2000 resulting in a net foreign currency losses of $36,000 and $69,000,
respectively. Increases in the value of the Canadian dollar against the U.S.
dollar will result in foreign exchange gains and decreases in the value of the
Canadian dollar will result in additional foreign currency translation losses.
Other than for sales by A-G Canada in Canada, all other transactions involving
the Company are generally denominated in U.S. dollars. (See Note 1 of Notes
to Consolidated Financial Statements).
Recently Issued Accounting Pronouncements
See Note 1 "Recently Issued Accounting Pronouncements" of Notes to
Consolidated Financial Statements.
ITEM 7a. MARKET RISK
See Note 1 "Foreign Currency Translation," "Credit Risk," and "Fair Value of
Financial Instruments" of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements covered by Report of Independent
Certified Public Accountants.
Page
Reference
_________
Independent Auditor's Report 22
Report of Independent Certified Public Accountants 23
Balance Sheets at December 31, 2002 and 2001 24
Statements of Operations and Comprehensive Income (Loss)
for years ended December 31, 2002, 2001 and 2000 25
Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000 26
Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 27
Notes to Consolidated Financial Statements 28
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Auto-Graphics, Inc.
Pomona, California
We have audited the accompanying consolidated balance sheet of Auto-Graphics,
Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Auto-
Graphics, Inc. and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
March 7, 2003
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Auto-Graphics, Inc.
Pomona, California
We have audited the accompanying consolidated balance sheet of Auto-Graphics,
Inc. and subsidiaries as of December 31, 2001, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity
and cash flows for each of the years in the two-year period ended December 31,
2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Auto-
Graphics, Inc. and its subsidiaries as of December 31, 2001, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
BDO Seidman, LLP
Los Angeles, California
March 14, 2002
AUTO-GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS (Note 2) 2002 2001
_______________________________________________ ___________ ___________
Current assets:
Cash $ 31,877 $ 122,029
Accounts receivable, less
allowance for doubtful
accounts ($25,000 in
2002 and 145,000 in 2001) 332,167 695,789
Unbilled production costs 3,398 11,013
Other current assets 175,145 210,288
___________ ___________
Total current assets 542,587 1,039,119
Software, net (Note 1) 3,186,465 3,458,256
Equipment, furniture and
leasehold improvements, net (Note 1) 910,947 1,216,175
Other assets 79,447 87,210
___________ ___________
$ 4,719,445 $ 5,800,760
LIABILITIES AND STOCKHOLDERS' EQUITY
_______________________________________________
Current liabilities:
Accounts payable $ 254,569 $ 361,421
Deferred income 1,381,746 1,255,006
Accrued payroll and related liabilities 385,227 468,408
Other accrued liabilities 236,798 205,316
Current portion of long-term debt (Note 2) 334,694 1,380,427
___________ ___________
Total current liabilities 2,593,034 3,670,578
Long-term debt, less current portion (Note 2) 33,614 --
Deferred taxes (Note 3) 73,000 148,900
___________ ___________
Total liabilities 2,699,648 3,819,478
Commitments and contingencies (Note 4)
Minority interest receivable (Note 6) -- (119,714)
Stockholders' equity:
Notes Receivable - Stock (Note 6) -- (75,364)
Common Stock, 12,000,000 shares
authorized, 4,904,234 shares
issued and outstanding in 2002
and 4,997,234 shares in 2001 (Note 6) 4,262,169 4,201,755
Accumulated deficit (2,242,649) (2,014,414)
Accumulated other comprehensive income(loss) 277 (10,981)
___________ ___________
Total stockholders' equity 2,019,797 2,100,996
___________ ___________
$ 4,719,445 $ 5,800,760
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2002, 2001, 2000
2002 2001 2000
__________ __________ __________
Net sales (See Note 1) $6,663,626 $8,615,227 $8,322,604
Costs and expenses
Cost of sales 3,850,200 6,228,027 5,439,035
Selling, general
and administrative 2,687,922 4,192,411 4,217,306
__________ __________ __________
6,538,122 10,420,438 9,656,341
__________ __________ __________
Income(loss) from operations 125,504 (1,805,211) (1,333,737)
Interest expense, net (97,196) (129,423) (103,648)
Foreign exchange gains(losses) 1,249 (35,578) (68,817)
Warrant Expense (215,000) -- --
Other income(expense) 38,486 15,351 --
__________ __________ __________
Loss before taxes
and minority interests (146,957) (1,954,861) (1,506,202)
Income tax expense
(benefit) (Note 3) 4,000 (267,000) (98,000)
Minority interest in
income (loss) of
subsidiaries (Note 6) 77,278 (367,828) (533,504)
__________ __________ __________
Net Loss (228,235) (1,320,033) (874,698)
Foreign currency translation
adjustments (Note 1) 11,258 -- 11,196
__________ __________ __________
Total comprehensive
loss $ (216,977) $(1,320,033) $ (863,502)
Earnings per share (Note 1):
Basic loss
per share $ (.05) $ (.26) $ (.18)
Weighted average shares
outstanding 4,996,979 4,997,234 4,821,321
Diluted loss
per share $ (.05) $ (.26) $ (.18)
Weighted average shares
outstanding 4,996,979 4,997,234 4,821,321
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001, 2000
Retained
Common Stock Earnings/ Other Total
______________________ Notes (Accumulated Comprehensive Stockholders'
Shares Amount Receivable Deficit) Income/(Loss) Equity
__________ __________ ___________ ___________ _____________ ____________
Balances at
December
31, 1999 4,784,934 $3,793,332 $ (127,500) $ 438,977 $ (22,177) $ 4,082,632
Net loss -- -- (874,698) -- (874,698)
Common Stock
Issued in:
Parent 225,000 930,000 -- -- -- 930,000
Warrants exercised
in Parent 240,000 8,800 -- -- -- 8,800
Common Stock
Retired (252,700) (171,848) -- (258,660) -- (430,508)
Note Receivable -- 50,000 -- -- 50,000
Cost of Equity
Funding (253,760) -- -- -- (253,760)
Change in
Minority Interest (104,769) -- -- -- (104,769)
Foreign Currency
Translation
Adjustments -- -- -- 11,196 11,196
___________ __________ ___________ ___________ _____________ ___________
Balances at
December
31, 2000 4,997,234 4,201,755 (77,500) (694,381) $ (10,981) $ 3,418,893
Net loss -- (1,320,033) -- (1,320,033)
Note Receivable -- 2,136 -- -- 2,136
___________ __________ ___________ ___________ _____________ ___________
Balances at
December
31, 2001 4,997,234 4,201,755 (75,364) (2,014,414) (10,981) 2,100,996
Net Income -- -- (228,235) -- (228,235)
Note Receivable -- (2,136) -- -- (2,136)
Adjustment to
Minority
Interests, net (160,500) -- -- -- (160,500)
Subsidiary Stock
Purchase 83,414 -- -- -- 83,414
Issuance of
Warrants 215,000 -- -- -- 215,000
Retire Notes
Receivable-Stk (93,000) (77,500) 77,500 -- -- --
Foreign Currency
Translation
Adjustments -- -- -- 11,258 11,258
___________ __________ ___________ ___________ _____________ ___________
Balances at
December
31, 2002 4,904,234 $4,262,169 $ -- $(2,242,649) $ 277 $ 2,019,797
See Note 6 "Stockholder's Equity in Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001, 2000
2002 2001 2000
___________ ___________ ___________
Cash flows from operating activities:
Net income/(loss) $ (228,235) $(1,320,033) $ (874,698)
Adjustments to reconcile net
income/(loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,294,847 1,783,679 1,412,328
Deferred taxes (78,600) (272,000) (98,000)
Allowance for doubtful accounts (120,000) 107,000 --
Warrant Expense 215,000 -- --
Minority Interest 77,278 (367,828) (533,504)
Changes in operating assets
and liabilities
Accounts receivable 473,333 478,188 138,991
Unbilled production costs 7,615 240,075 (223,197)
Other current assets 31,389 4,614 (72,407)
Other assets 12,207 (31,777) 36,616
Accounts payable (105,104) (119,715) 187,592
Deferred income 133,758 272,840 (281,463)
Accrued payroll and
related liabilities (227,015) 124,928 (145,922)
Other accrued liabilities 182,296 141,471 (58,091)
___________ ___________ ___________
Net cash provided by (used in)
operating activities 1,668,768 1,041,442 (511,755)
Cash flows from
investing activities (Note 1):
Capital expenditures (119,502) (386,817) (654,085)
Capitalized software development (500,000) (750,000) (775,000)
Purchase of Maxcess Software -- (196,261) --
Purchase of Pigasus Software (100,000) -- --
Investment in Dataquad, Inc. (33,046) -- --
Investment in The LibraryCard, Inc. (1,605) -- --
___________ ___________ ___________
Net cash used in investing (754,153) (1,333,078) (1,429,085)
Cash flows from
financing activities (Note 1):
Borrowings under long-term debt 58,850 31,430 100,287
Payments under long-term debt (993,923) (807,564) (1,026,945)
Borrowings(payments) under
cash surrender value of
life insurance, net (4,457) 55,823 --
Payments under capital lease (77,047) (70,602) (69,430)
Proceeds from
stock/warrant sales, net (2,136) 2,136 685,041
Repurchase of capital stock -- -- (380,508)
___________ ___________ ___________
Net cash used in
financing activities (1,018,713) (788,777) (691,555)
___________ ___________ ___________
Net decrease in cash (104,098) (1,080,413) (2,632,395)
Foreign currency effect on cash 13,946 -- 18,551
Cash at beginning of year 122,029 1,202,442 3,816,286
___________ ___________ ___________
Cash at end of year $ 31,877 $ 122,029 $ 1,202,442
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, 2000
1. Summary of significant accounting policies.
Auto-Graphics, Inc., a California corporation incorporated in 1960,
including its wholly-owned A-G Canada, Ltd. subsidiary and its
majority-owned subsidiaries Dataquad, Inc. and The LibraryCard, Inc.
(the "Company") provide software products and services used to create,
manage, publish and access information content via the Internet/Web.
A-G Canada, a Canadian corporation created in 1997, provides software
products and services to customers in the library community in Canada.
Dataquad, a Nevada corporation, was formed in 1999 to market XML based
content management software products and services, which enable enterprises
to create, organize, maintain, manage and deliver database and other
information dynamically within and outside the enterprise including over
the Internet/Web. Dataquad was merged into Auto-Graphics, Inc. on December
31, 2002.
LibraryCard, a Nevada corporation, was formed in 1999 develop and operate
an Internet/Web site, "www.LibraryCard.com", offering access to library
type information services to consumers in their homes, schools, libraries
and offices. LibraryCard was merged into Auto-Graphics, Inc. on December
31, 2002.
Basis of Presentation
The consolidated financial statements include the accounts of Auto-Graphics,
Inc. and its wholly and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Revenue Recognition
Sales are recognized as services are rendered monthly on a subscription basis
and when goods (software, equipment, databases, etc.) are shipped to
customers. Certain costs for future software support services are accrued in
accordance with American Institute of Certified Public Accountant's Statement
of Position ("SOP") 97-2, "Software Revenue Recognition", as amended by SOP
98-4 and SOP 98-9. Revenues for which payment has been received are treated
as deferred income until services are provided and revenues have been earned.
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
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.
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 as other comprehensive income
(loss) and included as a component of stockholders' equity. The net foreign
exchange transaction gain for 2002 was $1,249, losses for 2001 were $35,578
and for 2000 were $68,817 in the Consolidated Statements of Operations and
Comprehensive Income/(Loss). All other Company transactions are denominated
in U.S. dollars.
Credit Risk
The Company performs ongoing credit evaluations of its customers and generally
requires cash deposits in advance of providing services. The Company
maintains reserves for potential losses from uncollectible accounts, and
actual losses in 2002 were in line with management's expectations and exceeded
management's expectations in 2001 due to the U.S. economic decline. The
Company may be exposed to credit risk for trade receivables beyond the
reserves established by the Company for this purpose. The Company places its
cash with high credit quality financial institutions and, at times, the
balance may be in excess of the FDIC limit. (See Segment Reporting below).
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 amounts approximate
fair value because of the short-term maturity of these
instruments.
Long-term Debt. The carrying amounts approximates fair
value, since the interest rate on the debt is at least
equal to the bank's prime rate which the Company believes
is reflective of rates it could currently obtain.
Unbilled Production Costs
Costs associated with work in process (WIP) include: labor, materials, and
operations overhead (excluding selling, general and administrative expenses)
are stated at the lower of cost or net realizable value, and are removed from
WIP on a standard cost basis.
Software
Software is recorded at historical cost. Software at December 31, 2002 and
2001, consist of the following:
2002 2001
___________ ___________
Computer software and database $ 6,715,602 $ 6,925,013
Less accumulated amortization 3,529,137 3,466,757
___________ ___________
$ 3,186,465 $ 3,458,256
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. for approximately $196,000. 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. 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 for $100,000. 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.
Asset Retirements: Fully amortized software having an original cost of
$804,000 was retired in 2002 and $2,933,885 was retired in 2001.
Amortization: Certain costs incurred related to the development and purchase
of computer software are capitalized and amortized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". In
accordance with EITF (Emerging Issues Task Force) Issue 00-02, "Accounting for
Web Site Development Costs", certain marketing costs incurred to develop Web
sites are expensed. Amortization is based on the straight-line method and
commences in the first full year of product availability and continues over
the product's estimated useful life. The estimated useful life for computer
software and databases is seven years based on its estimated economic life.
Unamortized computer software was approximately $3,186,000 in 2002, $3,458,000
in 2001, and $3,745,000 in 2000. Amortization of computer software was
approximately $807,000 in 2002, $1,441,000 in 2001, and $939,000 in 2000.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are recorded at historical
cost. Equipment, furniture and leasehold improvements at December 31, 2002
and 2001, consist of the following:
2002 2001
____________ ____________
Equipment $ 1,415,356 $ 2,005,075
Furniture and fixtures 323,665 729,184
Leasehold improvements 25,508 273,974
____________ ____________
1,764,519 3,008,233
Less accumulated depreciation 853,572 1,792,058
____________ ____________
$ 910,947 $ 1,216,175
Asset Retirements: Fully depreciated fixed assets having an original cost of
$1,344,000 were retired in 2002 and $1,388,530 were retired in 2001.
Useful Lives: The following estimated useful lives are generally observed for
the respective asset categories:
Equipment - 5 years
Furniture and fixtures - 5 to 10 years
Leasehold improvements - the lesser of 5 to 15 years,
or the lease term
Depreciation: Depreciation is based on the straight-line method over the
estimated useful life of the asset and commences in the year the asset is
placed in and/or is available for service or sale using the half-year
convention method. Depreciation was $362,002 in 2002, $339,000 in 2001, and
$473,000 in 2000.
Impairment Of Long-lived Assets
The Company periodically assesses the recoverability of the carrying amounts
of long-lived assets. An impairment loss is recognized when expected
undiscounted future cash flows are less than the carrying amount of the asset.
The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
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. On May 3, 2002, the Company's Board of Directors granted stock
options for 255,000 shares of the Company's restricted Common Stock
to a director and certain officers and technical staff.
For the years ended December 31, 2001 and 2000, there were no common stock
equivalents (warrants, options or convertible securities) outstanding.
On January 31, 2000, the Company announced a 3-for-1 stock split of its Common
Stock to shareholders of record on February 12, 2000, which occurred on
February 28, 2000. Two additional shares were issued for each share held on
the record date. Following the stock split, shares authorized increased from
4,000,000 to 12,000,000. (See Note 6 Stockholders' Equity). Share amounts in
the Statement of Operations including basic and diluted earnings per share,
the Consolidated Balance Sheet, and Consolidated Statements of Stockholders'
Equity, and Notes to Consolidated Financial Statements have been adjusted
retroactively to reflect the stock split for the periods presented.
Comprehensive Income
The Company accounts for comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in interim and annual financial statements. Comprehensive
income is defined as the change in the equity (net assets) of an entity during
a period from transactions, events and circumstances excluding all
transactions involving investments by or distributions to the owners.
Supplemental Disclosure of Cash Flow Information
The Company paid net interest in the amount of $97,194 in 2002, $176,034 in
2001, and $103,648 in 2000. The Company paid income taxes in the amount of
$8,347 in 2002, $2,147 in 2001, and $16,702 in 2000. (See Note 6, "Dataquad
and LibraryCard Merger with Auto-Graphics").
Segment Reporting
As of the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement 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 years ended December 31,
2002, 2001 and 2000:
2002 2001 2000
___________ ___________ ___________
Geographic areas
Net sales
United States $ 5,741,889 $ 5,740,996 $ 6,663,704
Foreign - Canada 918,024 1,368,205 1,635,295
Foreign - Other/Primarily
Japan 3,716 1,506,026 23,605
Long-lived assets, net
United States 4,084,694 4,607,929 5,005,602
Foreign - Canada 12,718 66,502 115,990
The Company has one customer, the Texas Education Agency (TEA), which
represents approximately 23% of the Company's sales in 2002, 15% in 2001, and
12% in 2000. TEA also represents approximately 50% of accounts receivable at
December 31, 2002 and was fully paid by February, 28, 2003. The Company has a
contract with TEA to develop and operate, on an outsourced "hosting" basis, an
Internet/Web based online bibliographic database locator and interlibrary loan
system linking approximately 7,500 kindergarten through grade 12 public school
libraries when the system is fully developed and implemented. Management
believes that the loss of a single large customer, such as the TEA, would have
a material adverse effect on the Company.
Also in March 2001, the Company licensed 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 license fee of $1.5 million. This
transaction, which represents approximately 17% of 2001 sales, has had a
material effect on the results of operations reported by the Company for the
year ended December 31, 2001.
Recently Issued Accounting Pronouncements
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.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
interprets the guidance of FASB Statement No. 5. Specifically, Interpretation
No. 45 requires that a guarantor recognize at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee and augments the disclosure in interim and annual financial
statements. The Company believes the adoption of this Interpretation will
have no material impact on its financial statements.
On December, 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends the transition and
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. The statement requires more frequent and prominent disclosure
of stock-based compensation expense in annual and interim financial statements
beginning in fiscal years ending after December 15, 2002. The Company has
adopted the statement commencing with its fiscal year ended December 31, 2002
and the statement has not had a material adverse effect on the Company's
financial statements.
2. Long-term Debt.
Long-term debt at December 31, 2002 and 2001 consists of the following:
2002 2001
___________ ___________
Revolving line of credit with
interest at the bank prime
rate plus 3% percentage points
(7.25% at December 31, 2002)
secured by all of the assets
of the Company and its subsidiaries $ 309,458 $1,271,950
Capital lease of computer equipment
with monthly payments of $7,371 -- 77,047
Note payable for computer equipment
with monthly payments of $2,452 in
2002 and $2,619 in 2001 (See Note 5) 58,850 31,430
__________ __________
Total debt 368,308 1,380,427
Less current portion 334,694 1,380,427
__________ __________
Long-term portion $ 33,614 $ --
The Company was in compliance with its financial loan covenants as of December
31, 2002 under its bank credit agreement. The interest rate on the line of
credit is the bank prime rate plus three (escalating to four) percentage
points over the remaining loan term (7.25% at December 31, 2002). The
Company's bank line of credit facility matures each year in June and is
therefore reported as a current liability in the Company's balance sheet for
the year ended December 31, 2002 and 2001. The credit line is secured by all
of the assets of the Company and its subsidiaries. It also requires that the
Company maintain certain minimum financial covenant ratios, restricts the
payment of cash dividends, and limits the amount of certain types of equity
investments, the repurchase of Company stock and loans to third parties and
subsidiaries.
3. Taxes Based on Income.
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are recognized based on the differences between
financial statement and income tax valuations of assets and liabilities using
applicable tax rates for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax asset amounts to the amount expected to be realized. The
provision for income taxes represents the tax payable (or benefit) for the
period plus the change in deferred tax assets and liabilities during the year.
The provision/(benefit) for taxes based on income is composed of the following
for the years ended December 31, 2002, 2001, and 2000:
2002 2001 2000
__________ __________ _________
Current taxes based on income
Federal $ (1,000) $ -- $ (10,000)
State 34,000 5,000 8,000
Foreign -- -- 2,000
__________ __________ ________
33,000 5,000 --
__________ __________ ________
Deferred taxes based on income
Federal (49,000) (237,000) (68,000)
State (15,000) (35,000) 5,000
Foreign 35,000 -- (35,000)
__________ __________ ________
(29,000) (272,000) (98,000)
__________ __________ ________
$ 4,000 $ (267,000) $(98,000)
A reconciliation of the provision/(benefit) for taxes based on income follows
for the years ended December 31, 2002, 2001, and 2000:
2002 2001 2000
__________ __________ _________
Statutory U.S. Federal income tax $ 28,000 $ (665,000) $(512,000)
Adjustments for foreign tax rates (5,000) (2,000) 6,000
Change in valuation allowance 148,000 475,000 300,000
State tax, net of Federal benefit 5,000 (116,000) (89,000)
Benefit of prior NOL carryforward -- -- 180,000
Other (172,000) 41,000 17,000
__________ __________ _________
$ 4,000 $ (267,000) $ (98,000)
The statutory U.S. Federal income tax rate was 34% in 2002, 2001, and 2000.
The deferred tax assets and liabilities are composed of the following at
December 31, 2002, 2001 and 2000:
2002 2001 2000
__________ __________ _________
Deferred tax liabilities:
Tax over book amortization and
depreciation $ 232,000 $ 626,000 $ 680,000
Deferred tax assets:
Net operating loss 1,308,000 1,501,000 821,000
Bad debts/accrued vacation/other 65,000 90,000 76,000
__________ __________ _________
Total deferred tax assets 1,373,000 1,591,000 897,000
Valuation allowance (1,154,000) (1,006,000) (531,000)
__________ __________ _________
Net deferred tax assets 219,000 585,000 366,000
__________ __________ _________
Net deferred tax liability $ 13,000 $ 41,000 $ 314,000
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. The valuation allowance at December 31, 2002,
2001, and 2000 reflects an unrecognized U.S. and foreign tax loss
carryforward. At December 31, 2002, the Company has available federal, state
and foreign net operating loss carryforwards of approximately $740,000
($3,151,000 including all subsidiaries) $1,115,000 and $1,055,000,
respectively, for income tax purposes. These net operating loss carryforwards
expire in 2022 for federal taxes, 2010 for state and 2007 for foreign taxes.
4. Commitments and Contingencies.
The Company incurred total facilities and equipment lease and rental expense
of approximately $265,000 in 2002, $304,000 in 2001, $307,000 in 2000. The
Company is obligated under certain non-cancelable operating leases for office
facilities and equipment expiring in 2003, 2004, 2005, 2006 and 2007.
Approximate future minimum lease commitments as of December 31, 2002 are as
follows:
Years ended Operating
December 31, Leases
____________ __________
2003 $ 213,000
2004 194,000
2005 187,000
2006 194,000
2007 202,000
__________
Total minimum lease payments $ 990,000
From time to time, the Company is involved in legal proceedings incidental to
its normal business activities. Management does not believe that the outcome
of these proceedings will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
5. Related Party Transactions.
The Company leases its corporate office facility from a limited partnership
owned by a current and a former director/stockholder of the Company
("Lessor"). For the past 18 months, the Company has leased the facility as a
hold-over tenant under a 15 year lease that expired in June 2001. In January
2002, the Company reduced its square footage occupied from 19,460 to 14,694
square feet having an annual base rent of $194,000 (plus expenses). In
December 2002, a new five year lease (with one five year renewal option) was
negotiated and approved by the two independent members of the Company's Board
of Directors. The Company further reduced in square footage occupied to
12,745 under the new lease. Under the terms of the lease, the Company may opt
out of the lease in the event of a change in control with payment of a six
month rental penalty. The rental rate for the lease renewal is equal to or
less than the rental rates paid by three unaffiliated tenants in the same
building. The Company also surveyed available office properties of similar
size and amenities in the Pomona and surrounding areas and the lease rental
rate is in the bottom quartile of the range of comparable properties. The
Company also has an option to purchase a one-third interest in the Lessor from
one of the partners who is also a former director/stockholder of the Company
for an amount not to exceed $150,000 subject to certain conditions.
Management believes that the reconfigured space will be sufficient for the
Company's current and foreseeable future needs. The Company also leases a
small sales and support office in Toronto, Ontario, Canada for its wholly-
owned subsidiary, A-G Canada, Ltd.
James R. Yarter, a shareholder, has been a director of the Company since June
2001 and was paid $23,500 and $9,000 in director fees for the Company and its
subsidiaries in 2002 and 2001, respectively. Mr. Yarter also serves as a
sales and marketing consultant to the Company and was paid $30,000 and $7,500
for consulting services rendered to the Company in 2002 and 2001,
respectively.
Thomas J. Dudley, a shareholder, has been a director of the Company since July
2002 and was paid $8,755 in director fees in 2002.
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 for a payment of
approximately $31,000 bringing the Company's ownership to 6,609,400 (85.8%) in
each subsidiary.
In December 2002, the Company paid approximately $4,000 to acquire shares in
Dataquad, Inc. and LibraryCard, Inc. owned by Corey M. Patick and Paul
Shepherd, shareholders in the Company, and Paul R. Cope, an officer and
shareholder in the Company.
In January 2003, Donald A. Scurti, a shareholder, provided financing to the
Company of approximately $59,000 on a two year note to purchase computer
servers and 31,000 on a one year note to purchase computer servers in December
2001, which note has been fully repaid as of December 2002.
6. Stockholders' Equity.
Warrants
In May 1999, the Company entered into a selling agreement with an associate
pertaining to the Company's 1999 private placement offering (see above), where
the associate earned and the Company sold and issued 240,000 3-year warrants
for $800 entitling the associate to purchase one share of the Company's
(restricted) Common Stock for each warrant for $.033 per share. Subsequently,
the associate sold the warrants to the Company's outside director for an
amount representing a substantial discount for the (restricted) shares of the
Company's Common Stock underlying these warrants as compared to the reported
market price for "free trading" shares of the Company's Common Stock; and the
purchaser/ transferee then exercised the warrants and purchased, and the
Company caused to be sold and issued, the 240,000 shares of the Company's
(restricted) Common Stock covered by these warrants for the exercise
(purchase) price for these shares under the warrants (aggregating $8,000 or
$0.033 per share). In November 2001, the outside director resold 120,000
shares back to the associate who in December resold the shares to another
outside director. There are no warrants outstanding at December 31, 2001 and
2000.
Over the past eighteen months, the Company has spent over $1,100,000
"successfully" defending these lawsuits, but anticipated spending another
$500,000 over the next six months were the lawsuits to continue and trials to
commence. On January 16, 2003, Company settled the lawsuits with Mr. Bretz
dismissing all of the above lawsuits in return for a payment of $15,000 for
legal fees. The settlement entailed the purchase of stock owned by Mr. Bretz
at a price in excess of the then current fair market value of the underlying
common stock. Two directors agreed to pay Mr. Bretz $0.85 per share for
414,168 shares or a total of approximately $352,000 even though the market
price was approximately $0.30. Therefore, the two directors paid a premium of
$0.55 per share over the fair market value of $0.30 per share or approximately
$228,000. Since the settlement was clearly in the best interests of the
Company and would avoid substantial future legal fees and costs, the Company
agreed to reimburse the two directors for the premium they paid to Mr. Bretz
in the form of warrants to purchase additional shares of the Company's
"restricted" Common Stock. The Company engaged an independent appraiser to
establish a fair market value for the large block of shares, which fair market
value was determined to be $0.30 per share. Based on the premium paid by the
directors of approximately $228,000 and an exercise price of $0.01 each per
warrant and share, the directors would be entitled to a total of 814,000
warrants/shares. However, the directors have agreed to accept a total of
621,252 warrants to purchase additional shares of the Company's "restricted"
Common Stock representing a discount of approximately 24%. As permitted by
Statement of Financial Accounting Standards No. 123 (and No. 148), "Accounting
for Stock Based Compensation", the Company will continue to account for
employee stock options (and warrants) using the "intrinsic method" under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The result has been a non-cash
charge to earnings of approximately $215,000 for warrant expense in 2002. The
transaction has been reviewed by the Company's general counsel and approved by
the sole independent director, Thomas J. Dudley.
Private Placement Offerings
In May of 1999, the Company initiated a private placement offering of
its Common Stock at $0.83 per share (after adjustment of the 3-for-1 stock
split which occurred on February 28, 2000). Shares offered and sold in the
offering were classified as "restricted" stock, meaning that these shares
could not be sold in the public trading market for the Company's stock for a
minimum period of one year. The offering was concluded in October 1999 with a
total of 1,654,200 shares sold raising gross proceeds of $1,378,500. The
Company sold 1,501,200 shares at $0.83 per share raising a total of $1,251,000
in cash. An additional 153,000 shares at $0.83 per share (for total
investment of $127,500) were sold to certain senior management of the Company
on four year interest bearing full recourse notes. In July of 2000, 65,500
shares were repurchased from a former executive in conjunction with the
settlement of a lawsuit and the corresponding $50,000 note receivable was
simultaneously canceled. In December 2002, the Company's Board of Directors
agreed to cancel the remaining notes in return for a surrender of the
corresponding 93,000 shares being held as collateral by the Company.
In February 2000, the Company consummated a private placement of
225,000 shares (after giving effect to the 3-for-1 stock split) of its
(restricted) Common Stock with an offshore investment company for $4.125 per
share for gross proceeds of $930,000. The Company used a portion of the net
proceeds from the sale of this stock to reduce its capital line of credit with
the bank by $600,000.
The Company incurred direct and incremental expenses in connection
with the 1999 private placement offering of $1,251,000, the sales of $2.0
million in shares of the Company's Dataquad, Inc. and The LibraryCard, Inc.
subsidiaries, and 2000 private placement offering of $930,000 resulting in
gross proceeds from the sale of all these securities of $4,181,000. Equity
funding costs and expenses in 2000, including legal, and selling expenses
totaling $254,000, have been offset against the total equity raised.
Repurchase of Stock
In February 2000, the Company accelerated the purchase and retired the
remaining 187,200 shares (after giving affect to the 3-for-1 stock split)
outstanding under a stock repurchase agreement with a former director/
stockholder of the Company for $203,000 in cash consideration. The Company
also transferred an insurance policy to the seller having a net cash surrender
value of approximately $72,000.
In July 2000, the Company settled a lawsuit with a former officer for total
consideration of $225,000 including the repurchase of 65,500 shares of the
Company's Common Stock for $105,000 and the balance of $120,000 was expensed.
2002 Qualified and Non-qualified Stock Option Plan
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 490,000 shares with approximately
350,000 qualified shares reserved for employees and 140,000 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 at a strike price of $0.30, reflecting the market price on the
date of the grant, to an outside director (60,000 non-qualified shares),
officers and technical staff (160,000 qualified shares). On July 17, 2002,
the Company's Board of Directors granted stock options for 35,000 non-
qualified shares of the Company's restricted Common Stock at a strike price of
$0.325, reflecting the market price on the date of the grant, to its outside
directors. As of December 31, 2002, there were 195,000 qualified options and
60,000 non-qualified options outstanding for a total of 255,000 options and
235,000 options available for future grant. Under the plan, the stock option
price per share for options granted is determined by the Board of Directors
and is based on the market price of the Company's common stock on the date of
grant. The stock options vest over four years and no option can be exercised
later than ten years from the date it was granted.
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. As a result of this election, the Company does not recognize
compensation expense for its stock option plans since the exercise price of
the options granted equals the fair value of the stock on the date of grant.
Had the Company determined compensation cost based on the fair value for its
fully vested stock options at grant date, under SFAS 123, the Company's net
income and earning per share would have been reduced to the pro forma amounts
indicated below:
2002
____________
Net loss:
As reported $ (228,765)
Pro forma (258,765)
Earnings (loss) per share:
As reported:
Basic (0.05)
Diluted (0.05)
Pro forma:
Basic (0.05)
Diluted (0.05)
The fair value for these options was estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002: expected life of five years, weighted
average risk-free interest rate of 3.6%, expected volatility of 30% and a
dividend yield of 0%. The weighted average fair value of options granted at
the fair market price on the grant date in 2002 was $0.30. All options
granted in 2002 were at the fair market price.
Transactions involving stock options are summarized as follows:
Number of Weighted Average
Shares Exercise Price
_________ ________________
Balance at December 31, 2001 -- $ 0.00
Granted during 2002 255,000 0.30
Balance at December 31, 2002 255,000 0.30
Additional information with respect to the outstanding options as of December
31, 2002 is as follows:
Options Outstanding Options Exercisable
_________________________________ ____________________
Average Weighted
Remaining Average Average
Option Exercise Number of Contractual Exercise Number of Exercise
Price Range Shares Life(Yrs.) Price Shares Price
_______________ _________ ___________ _________ _________ ________
$0.30 to 0.40 255,000 9.4 $ 0.30 None N/A
1997 Non-qualified Stock Option Plan
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 December 31, 2002, 2001 and
2000, there were no outstanding grants of options under the Plan and no grants
are currently planned.
Dataquad and LibraryCard Merger with Auto-Graphics
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.
When the subsidiaries were originally formed, 700,000 shares each of Dataquad
and LibraryCard common stock was reserved for use in a future stock option and
purchase plan for the subsidiaries. In June 2000, the subsidiaries issued the
shares to a trustee (Corey M. Patick) secured by a note. As a result of the
issuance, the Company's interest in the subsidiaries was diluted which
resulted in a reduction in Stockholders' Equity in the amount of $104,769. In
January 2001, Robert S. Cope replaced Mr. Patick as trustee for the trust
shares. Under the trust agreement, the subsidiaries had the right and, in
November 2002, exercised that right to repurchase the stock (at the original
sales price) in return for cancellation of the trust note. The effect of the
repurchase was a non-cash charge to earnings of $120,000 reflected as Minority
Interest in income (loss) of subsidiaries and a net decrease in Stockholder's
Equity of $160,500.
In December 2002, the Company paid approximately $4,000 to acquire shares in
Dataquad, Inc. and LibraryCard, Inc. owned by Corey M. Patick and Paul
Shepherd, shareholders in the Company, and Paul R. Cope, an officer and
shareholder in the Company, bringing the Company's ownership to 100% in both
subsidiaries. On December 31, 2002, the Company executed a short form merger
and merged the assets and immaterial liabilities into the Company and
cancelled the intercompany notes between the Company and two subsidiaries.
7. 401(k) 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. The Company
pays the immaterial administrative expenses of the plan. Annually, the
Company may, at its sole discretion, award an amount as a match against
employee contributions to the 401(k) plan. The Company contribution was
approximately $9,000 in 2002, $750 in 2001 and $35,000 in 2000.
8. Quarterly Results (Unaudited)
Quarterly results for the years ended December 31, 2002, 2001, 2000 are
reflected below:
Fourth Third Second First
___________ ___________ ___________ ___________
2002
Revenue $ 1,797,604 $ 1,633,762 $ 1,596,254 $ 1,636,006
Operating Income 31,961 14,592 38,218 40,733
Net Income (313,245) 30,821 26,946 27,243
Basic Earnings
per share (0.06) 0.01 0.01 0.01
Diluted Earnings
per share (0.06) 0.01 0.01 0.01
2001
Revenue $ 1,957,195 $ 1,942,027 $ 1,593,936 $ 3,122,069
Operating loss (462,539) (989,882) (799,502) 446,712
Net (loss) (342,101) (740,499) (689,131) 451,698
Basic (loss)
per share (.06) (.15) (.14) .09
Diluted (loss)
per share (.06) (.15) (.14) .09
2000
Revenue $ 2,084,480 $ 1,858,787 $ 2,269,456 $ 2,109,881
Operating loss (607,383) (483,600) (122,199) (120,555)
Net (loss) (321,079) (312,908) (107,297) (122,218)
Basic (loss)
per share (.07) (.07) (.02) (.03)
Diluted (loss)
per share (.07) (.07) (.02) (.03)
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may
not agree with the per share amounts for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 13, 2003, Auto-Graphics, Inc. (the "Company") dismissed BDO
Seidman LLP ("BDO") as the Company's principal accountant and the Company
engaged the services of Singer Lewak Greenbaum & Goldstein LLP ("SLGG")
as its principal accountant to audit the Company's consolidated balance
sheet as of December 31, 2002 and the related statements of operations,
stockholder's equity, and cash flows for the fiscal year ending December 31,
2002.
A. Pursuant to Item 304(a)(1) of Regulation S-K, the Company reports the
following specific information:
(i) On January 13, 2003, the Company notified BDO that BDO would not be
engaged to audit the Company's consolidated balance sheet as of December
31, 2002 and the related statements of operations, stockholder's equity,
and cash flows for the fiscal year ending December 31, 2002 and was being
dismissed as the Company's principal accountant.
(ii) The reports of BDO on the Company's financial statements for each
of the past two years were unqualified and contained no adverse opinion
or disclaimer of opinion and no report was qualified or modified as to
uncertainty, audit scope, or accounting principles.
(iii) The decision to change principal accountants and the engagement of
SLGG was recommended and approved by the Company's Audit Committee and
Board of Directors.
(iv) There were no disagreements on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure, between the Company and BDO during the Company's two most
recent fiscal years or for the subsequent period through the date of
termination.
(v) No event requiring disclosure under Item 304(a)(1)(v) of Regulation
S-K has occurred during the Company's two most recent fiscal years and
for the subsequent period through the date of termination.
B. No event requiring disclosure under Item 304(a)(2) of Regulation S-K
has occurred.
C. In accordance with the requirements of Item 304(a)(3) of Regulation
S-K, BDO has been provided with a copy of the foregoing disclosures.
Prior to the engagement of SLGG, the Company did not consult with SLGG or
any firm regarding the application of accounting principles to a specific
completed or contemplated transaction, or any matter that was either the
subject of a disagreement or a reportable event. The Company also did
not consult with SLGG regarding the type of audit opinion which might be
rendered on the Company's financial statements and no written or oral
report was provided by SLGG.
The Company has provided SLGG with a copy of the disclosures contained
herein and SLGG has indicated that no letter will be provided containing
any new information, clarification of the Company's expression of its views,
or the respects in which SLGG does not agree with the statements made by the
Company in response to Item 304(a). No other event requiring disclosure
under Item 304(a)(2) of Regulation S-K has occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of, and the positions and
offices within the Company held by, certain directors and officers of the
Company at December 31, 2002:
Name Age Position
________________ ___ ________________________________________________
Robert S. Cope 67 Chairman of the Board, Director and President.
Has served in these capacities for more than ten
years.
Thomas J. Dudley 71 Director, Chairman of the Audit Committee.
Dr. Thomas J, Dudley, Ph.D. was elected to
the Board in July, 2002. Dr. Dudley is the
Distinguished Professor of Decision and
Information Systems at Pepperdine University
in Los Angeles, CA. and the founder of the
Pepperdine Executive Management Program.
Also a former director for Space Labs
Medical, Inc. for 10 years. Dr. Dudley is
also the founder and a principal of Thomas J.
Dudley & Associates, a firm providing management
consulting services since 1968.
James R. Yarter 65 Director. Has served as a director for more
than one year. During the past five years, Mr.
Yarter has served as President and CEO of Block
Medical, US Medical, and Gish Biomedical, Inc.
and as a member of the board of director's of
Avant Medical and Group 3 Inc.
Daniel E. Luebben 54 Chief Financial Officer and Secretary.
Has served in these and similar capacities for
more than ten years.
Directors serve until their successors are elected 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 ("Commission") pursuant to Regulation 14A within 120 days after the
close of the Company's most recent calendar year, and, accordingly,
information for Item 11 is incorporated by reference from said definitive
Proxy Statement. The information from the Proxy Statement is included under
the caption "Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A definitive Proxy Statement will be filed with the Securities and Exchange
Commission ("Commission") pursuant to Regulation 14A within 120 days after the
close of the Company's most recent calendar year, and, accordingly,
information for Item 12 is incorporated by reference from said definitive
Proxy Statement. The information from the Proxy Statement is included under
the captions "Security Ownership of Certain Beneficial Owners and Management"
and "Nominees Proposed by the Board of Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A definitive Proxy Statement will be filed with the Securities and Exchange
Commission ("Commission") pursuant to Regulation 14A within 120 days after the
close of the Company's most recent calendar year, and, accordingly,
information for Item 13 is incorporated by reference from said definitive
Proxy Statement. The information from the Proxy Statement is included under
the caption "Certain Relationships and Related Transactions".
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed, under the supervision
and with the participation of the President and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, the President and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective
as of December 31, 2002. No significant changes in internal controls or in
other factors have occurred that could significantly affect controls
subsequent to December 31, 2002.
PART IV
ITEM 15. 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), as amended by
within additional Exhibit 3.1 filing of the amendment
to the Articles covering 3-for-1 stock split
implemented February 28, 2000.
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).
10.15 Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.15 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.16 First Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated June 23, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.16 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.17 Second Amendment to Credit Agreement between Wells
Fargo and Auto-Graphics, Inc. dated October 31, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.17 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.18 Revolving Line of Credit Note (Working Capital)
between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997 (incorporated by reference as filed with
the SEC as Exhibit 10.18 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.19 Revolving Line of Credit Note (Capital Equipment)
between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997 (incorporated by reference as filed with
the SEC as Exhibit 10.19 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.20 Term Note between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.20 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.21 Continuing Security Agreement Rights to Payment
and Inventory between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.21 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.22 Security Agreement Equipment between Wells Fargo
Bank and Auto-Graphics, Inc. dated May 12, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.22 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.23 Guaranty between Wells Fargo Bank and Robert S.
Cope dated May 12, 1997 (incorporated by reference as
filed with the SEC as Exhibit 10.23 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
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 (incorporated by
reference as filed with the SEC as Exhibit 10.24 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.25 1997 Non-Qualified Stock Option Plan dated
December 31, 1997 (incorporated by reference as filed
with the SEC as Exhibit 10.25 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.26 Third Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated June 1, 1998
(incorporated by reference as filed with the SEC as
Exhibit 10.26 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.27 Term Note between Wells Fargo Bank and
Auto-Graphics, Inc. dated June 1, 1998 (incorporated by
reference as filed with the SEC as Exhibit 10.27 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.28 Fourth Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated September 15,
1998 (incorporated by reference as filed with the SEC as
Exhibit 10.28 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.29 Fifth Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated December 24,
1998 (incorporated by reference as filed with the SEC as
Exhibit 10.29 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.30 Option Agreement dated May 15, 1999 between Robert
S. Cope and Elizabeth Cope and the Cope Family Trust and
Corey M. Patick (incorporated by reference as filed with
the SEC as Exhibit 10.30 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.31 Selling Agreement (formerly Employment Agreement)
dated May 15, 1999 between Auto-Graphics, Inc. and Corey
M. Patick (as amended) (incorporated by reference as
filed with the SEC as Exhibit 10.31 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.32 Sixth Amendment to Credit Agreement between Auto-
Graphics, Inc. and Wells Fargo Bank dated June 30, 1999
(incorporated by reference as filed with the SEC as
Exhibit 10.32 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999).
10.33 Continuing Guaranty between Auto-Graphics, Inc.
and Wells Fargo Bank dated June 30, 1999 (incorporated
by reference as filed with the SEC as Exhibit 10.33 to
Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.34 Amendment to Continuing Guaranty between
Auto-Graphics, Inc. and Wells Fargo Bank dated June 30,
1999 (incorporated by reference as filed with the SEC as
Exhibit 10.34 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999).
10.35 Revolving Line of Credit Note (working capital)
$1,000,000 between Auto-Graphics, Inc. and Wells Fargo
Bank dated June 30, 1999 (incorporated by reference as
filed with the SEC as Exhibit 10.35 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.36 Revolving Line of Credit Note (capital) $3,000,000
between Auto-Graphics, Inc. and Wells Fargo Bank dated
June 30, 1999 (incorporated by reference as filed with
the SEC as Exhibit 10.36 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.37 Term Note $750,000 between Auto-Graphics, Inc. and
Wells Fargo Bank dated June 30, 1999 (incorporated by
reference as filed with the SEC as Exhibit 10.37 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.38 Stock Purchase Agreement between Auto-Graphics,
Inc. and Gibraltar Permanente Assurance dated February
14, 2000 (incorporated by reference as filed with the
SEC as Exhibit 10.38 to Item 14(a) in the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.39 Letter of Intent between Auto-Graphics, Inc. and
Steve White dated December 29, 1999 (incorporated by
reference as filed with the SEC as Exhibit 10.39 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.40 Form of Patick Stock Purchase Agreement dated June
30, 2000 (incorporated by reference as filed with the
SEC as Exhibit 10.40 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2000).
10.41 First Amended and Restated Credit Agreement
between Wells Fargo and Auto-Graphics, Inc. dated August
1, 2000 (incorporated by reference as filed with the SEC
as Exhibit 10.41 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter
ended September 30,2000).
10.42 Revolving Reducing Note dated August 1, 2000
(incorporated by reference as filed with the SEC as
Exhibit 10.41 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter
ended September 30,2000).
10.43 LibraryCard Revolving Line of Credit Agreement and
Note dated November 1, 2000 (incorporated by reference
as filed with the SEC as Exhibit 10.41 to Item 14(a) in
the registrant's Quarterly Report on Form 10-Q/A for the
fiscal quarter ended September 30,2000).
10.44 Settlement Agreement Including General Release and
Stock Purchase Agreement with William J. Kliss dated
July 11, 2000.
10.45 Employment offer letter -- Michael K. Skiles dated
April 28, 2000.
10.46 Amendment to Option Agreement Re: Option Closing
Date with Robert S. Cope and Corey M. Patick dated
January 31, 2000.
10.47 Warrant Purchase and Exercise Agreement with Corey
M. Patick dated October 23, 2000.
10.48 Japanese licensing agreement dated February 21,
2001.
10.49 Eric Jung agreement (salary protection following
change of control) dated October 22, 1999.
10.50 Maxcess Library Systems, Inc. Asset Purchase
Agreement dated January 2, 2001.
10.51 Cope Stock Purchase Agreement (subsidiaries stock
purchase/plan) dated January 1, 2001.
10.52 Further Amendment to Option Re Closing Date and
Other Matters dated April 13, 2001.
10.53 Waiver and First Amendment to Amended and
Restated Credit Agreement and Note between
Auto-Graphics, Inc. and Wells Fargo Bank National
Association dated November 20, 2001.
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.
10.56 Settlement Agreement between Auto-Graphics, Inc.
and Pigasus, Inc. dated August 21, 2002.
10.57 2002 Stock Option Plan.
(b) None.
(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.
AUTO-GRAPHICS, INC.
Form 10-K
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: March 31, 2003 By: /s/ Robert S. Cope
___________________ _______________________________________
Robert S. Cope, Director and President
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: March 31, 2003 By: /s/ Robert S. Cope
___________________ _______________________________________
Robert S. Cope, Director and President
Date: March 31, 2003 By: /s/ Daniel E. Luebben
___________________ _______________________________________
Daniel E. Luebben,
Chief Financial Officer and Secretary
Date: March 31, 2003 By: /s/ Thomas J. Dudley
___________________ _______________________________________
Thomas J. Dudley, Director
Date: March 31, 2003 By: /s/ James R. Yarter
___________________ _______________________________________
James R. Yarter, Director
AUTO-GRAPHICS, INC.
Form 10-K
CERTIFICATIONS
I, Robert S, Cope, certify that:
1. I have reviewed this annual report on Form 10-K of Auto-Graphics, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of this registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure control and procedures based on
our evaluation as of the Evaluation Date;
AUTO-GRAPHICS, INC.
Form 10-K
CERTIFICATIONS
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. In this annual report whether or not there were significant changes in
internal controls the registrant's other certifying officers and I have
indicated or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003 /s/ Robert S. Cope
__________________ _____________________________________
Robert S. Cope
Chairman of the Board and President
AUTO-GRAPHICS, INC.
Form 10-K
CERTIFICATIONS
I, Daniel E. Luebben, certify that:
1. I have reviewed this annual report on Form 10-K of Auto-Graphics, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of this registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure control and procedures based on
our evaluation as of the Evaluation Date;
AUTO-GRAPHICS, INC.
Form 10-K
CERTIFICATIONS
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. In this annual report whether or not there were significant changes in
internal controls the registrant's other certifying officers and I have
indicated or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003 /s/ Daniel E. Luebben
__________________ _____________________________________
Daniel E. Luebben
Chief Financial Officer and Secretary