10-Q 1 form10q32001c.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission File Number 0-4431 ----------------------------------- ------------------------------------ AUTO-GRAPHICS, INC. --------------------------------------------------- (exact name of registrant as specified in its charter) California 95-2105641 ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3201 Temple Avenue, Pomona, California 91768-3200 ------------------------------------------------------- (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (800) 776-6939 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Total shares of Common Stock issued and outstanding as of March 31, 2001 was 4,997,234. AUTO-GRAPHICS, INC. Form 10-Q March 31, 2001 TABLE OF CONTENTS Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).....................................1 Unaudited Consolidated Balance Sheets...............2 Unaudited Consolidated Statements of Cash Flows..........................3 Notes to the Unaudited Consolidated Financial Statements..............................4 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................7 Part II. Other Information........................11 -1- AUTO-GRAPHICS, INC. Form 10-Q PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) For the Three Months Ended March 31, 2001 2000 ---------- ---------- Net sales (See Note 3) $3,122,069 $2,109,881 Costs and expenses: Cost of sales 1,511,488 1,100,060 Selling, general & administrative 1,163,869 1,130,376 ---------- ---------- Total costs and expenses 2,675,357 2,230,436 ---------- ---------- Income(loss) from operations 446,712 ( 120,555) Interest/other income/(expense) ( 34,888) ( 63,447) ---------- ---------- Income(loss) before taxes and minority interests 411,824 ( 184,002) Provision for taxes based on income (See Note 4) 62,000 4,368 Minority Interests ( 101,874) ( 66,152) ---------- ---------- Net income(loss) and total comprehensive income(loss) $ 451,698 ($ 122,218) ========== ========== Basic earnings(loss) per share $ .09 ($ .03) Shares outstanding 4,997,234 4,822,734 Diluted earnings(loss) per share $ .09 ($ .03) Shares outstanding 4,997,234 4,822,734 See Notes to Unaudited Consolidated Financial Statements. -2- AUTO-GRAPHICS, INC. Form 10-Q Unaudited Consolidated Balance Sheets March 31, 2001 and December 31, 2000 ASSETS 2001 2000 -------------------------------------- ----------- ----------- Current assets: Cash $ 1,180,610 $ 1,202,442 Accounts receivable, less allowance for doubtful accounts ($38,000 in 2001 and 2000) 690,354 1,280,977 Unbilled production costs 217,522 251,088 Other current assets 185,077 181,902 ----------- ----------- Total current assets 2,273,563 2,916,409 Software, equipment and leasehold improvements, net 5,177,843 5,121,592 Other assets 113,836 114,696 ----------- ----------- $ 7,565,242 $ 8,152,697 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 164,680 $ 481,136 Deferred income 913,661 982,166 Other accrued liabilities 492,203 63,845 Accrued payroll and related Liabilities 261,119 436,510 Current portion of long-term debt 77,257 77,257 ----------- ----------- Total current liabilities 1,908,920 2,040,914 Long-term debt, less current portion 1,251,590 2,056,876 Deferred taxes based on income 387,900 387,900 ----------- ----------- Total liabilities 3,548,410 4,485,690 Minority Interests 146,241 248,114 Stockholders' equity: Notes Receivable - Stock ( 77,500) ( 77,500) Common stock, 12,000,000 shares authorized, 4,997,234 shares issued and outstanding in 2001 and 2000 4,201,755 4,201,755 Retained earnings ( 242,683) ( 694,381) Other comprehensive income ( 10,981) ( 10,981) ----------- ----------- Total stockholders' equity 3,870,591 3,418,893 ----------- ----------- $ 7,565,242 $ 8,152,697 =========== =========== See Notes to Unaudited Consolidated Financial Statements. -3- AUTO-GRAPHICS, INC. Form 10-Q Unaudited Consolidated Statements of Cash Flows For the Three Months Ended March 31, Increase (Decrease) in Cash 2001 2000 ---------- ---------- Cash flows from operating activities: Net income(loss) $ 451,698 ($ 122,218) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Depreciation and amortization 389,478 314,564 Minority Interests ( 101,874) ( 66,152) Changes in operating assets and liabilities: Accounts receivable 590,624 158,049 Unbilled production costs 33,566 ( 128,418) Other current assets ( 3,175) ( 102,092) Other assets - 72,987 Accounts payable ( 316,455) 79,873 Deferred income ( 68,504) ( 376,981) Other accrued liabilities 428,358 168,209 Accrued payroll and related liabilities ( 151,378) ( 76,984) Net cash provided by (used in) ---------- ---------- operating activities 1,252,338 ( 79,163) Cash flows from investing activities: Capital expenditures ( 444,870) ( 461,568) Cash flows from financing activities: Principal payments under debt Agreements ( 829,300) ( 617,356) Sale of Capital Stock, Net - 645,441 Repurchase of capital stock - ( 275,508) Cash used in ---------- ---------- financing activities ( 829,300) ( 247,423) ---------- ---------- Net decrease in cash ( 21,832) ( 788,154) Cash at beginning of period 1,202,442 3,816,286 ---------- ---------- Cash at end of period $1,180,610 $3,028,132 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 67,463 $ 83,211 Income taxes 5,659 2,768 See Notes to Unaudited Consolidated Financial Statements. -4- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements March 31, 2001 NOTE 1. The unaudited consolidated financial statements included herein have been prepared by Registrant and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at March 31, 2001, the results of operations and the statement of cash flows for the three months ended March 31, 2001 and 2000 pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements include the accounts of Auto-Graphics, Inc. and its wholly-owned and majority- owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The results of operations for the subject periods are not necessarily indicative of the results for the entire year. This Quarterly Report on Form 10-Q is qualified in its entirety by the information included in the Company's Annual Report to the SEC on Form 10-K for the period ending December 31, 2000 including, without limitation, the financial statements and notes therein. NOTE 2. In May 1999, Robert S. Cope and the Cope Family Trust granted an option to Corey M. Patick to purchase 1,125,000 (or 22%) of the Company's Common Stock for $1.67 per share (adjusted for the 3-for-1 stock split effective February 28, 2000). Patick subsequently exercised the option in November of 2000 and the closing for the purchase of and payment for the option shares, originally scheduled for November 2000, has been extended several times by the parties; and such closing is currently scheduled to take place no later than August 31, 2001. Mr. Patick owns 91,980 or 2% of the shares of the Company's Common Stock (without taking the option shares into account). Purchase of the option shares by Mr. Patick would increase his stock ownership to 1,216,980 shares (or 24%) of the Company's issued and outstanding stock and would represent a "change of control" of the Company (under applicable securities law definitions). -5- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements March 31, 2001 On June 30, 2000 the Company's LibraryCard and Dataquad subsidiaries implemented a previously planned stock purchase/option plan whereby each of such subsidiaries sold and issued 700,000 shares of its capital stock representing 10% of total outstanding stock following such issuance by each such corporation. Such stock was sold and issued by the subsidiaries to Corey M. Patick as "trustee" for use in implementing such subsidiaries' employee and related party stock ownership/option plans. Patick purchased the stock using promissory notes totaling an aggregate of $280,500 representing the per share price paid by a third party investor in such subsidiaries in "arm's length" transactions at the time of the organization of the subsidiaries in December of 1999. (See Exhibit 10.40 to the Company's 10-K for the year ended December 31, 2000). If the subject stock is not subsequently sold or optioned to the intended recipients, the trustee has the right to return such stock to the subsidiaries in return for the cancellation of the balance due and owing on the purchaser's full recourse promissory note, and the subsidiaries have the right in December of 2002 to reacquire such stock from the trustee at the price paid to the subsidiaries for such stock. If the subsidiaries 10% stock purchase plan/option stock should be returned by the purchaser/trustee, a balance sheet reduction of stockholders' equity, representing the principal balance of the purchase promissory notes used to purchase such stock, would be required ($280,500 at March 31, 2001). There were no transactions by Patick regarding the subsidiaries' stock purchase/option plans stock in 2000. Effective January 1, 2001, Robert S. Cope replaced Patick as the owner/trustee of the subsidiaries stock purchase/option plans stock and assumed the respective full recourse promissory notes. In February of 2001, the Company completed the purchase of software and related assets of Maxcess Library Services, Inc. for approximately $200,000. This purchase and resulting software product offering will afford the Company the opportunity to expand its current ASP (Application Service Provider) IMPACT/Online(TM) product/services in the library automation area to include a fully web-based integrated library system (ILS) which will be offered to libraries, including those who currently use the Company's SLiMS (Small Library Management System) product, for license for "in library" use or as an ASP service under the trade name IMPACT/Verso(TM). 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 web browser and a PC workstation), allowing the library and their patrons to access and utilize the library's bibliographic holdings information via the Internet/Web. -6- AUTO-GRAPHICS, INC. Form 10-Q Notes to Unaudited Consolidated Financial Statements March 31, 2001 In March 2001, the Company licensed the use of its REMARC(TM) bibliographic database of Library of Congress pre-1968 holdings to a Japanese Company for use exclusively in Japan for a one-time payment of U.S. $1.5 million. Such transaction has had a material affect on the results of operations reported by the Company for the first quarter ended March 31, 2001. The Company's management intends to propose for approval by the Company's stockholders at the Company's 2001 Annual Meeting of Stockholders a qualified (incentive stock option) plan consisting of approximately 10% (currently 500,000 shares) of the Company's then issued and outstanding shares of Common Stock to be reserved for future issuance to key employees of the Company. Note 3. 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 for the quarters ending March 31, 2001 and 2000: 2001 2000 ----------- ----------- Geographic areas Net sales United States $ 1,303,060 $ 1,677,029 Foreign - Canada/Other 1,819,009 432,852 Long-lived assets, net United States 5,075,174 5,078,568 Foreign - Canada 102,669 179,528 Note 4. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. At December 31, 2000, the Company has available federal, state and Canadian net operating loss carry-forwards of approximately $2,454,000, $615,000 and $137,000, respectively, for income tax purposes. These net operating loss carry-forwards expire in 2020 for federal taxes, 2006 for state and 2005 for foreign taxes. -7- AUTO-GRAPHICS, INC. Form 10-Q March 31, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION ------------------- December 31, 2000 to March 31, 2001 ----------------------------------- Liquidity and capital resources. Working capital decreased $511,000 primarily as a result of additional principal payments on long-term bank debt in the amount of $829,000. Accounts receivable declined $591,000 despite an increase in sales because the licensing of the Remarc(TM) database in March 2001 was a cash transaction in the amount of $1.5 million. Net cash provided by operations was $1,252,000 in the first quarter of 2001 which was an increase of $1,332,000 from the $79,000 net cash used in the first quarter of 2000. This was due primarily to the net income of $452,000 generated in the quarter and a decrease of $591,000 in accounts receivable. The equity raised by the Company in 1999 and 2000 was used in 2000 to fund the Company's Internet/Web initiatives and the Company's new LibraryCard and Dataquad subsidiaries. Under AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", all costs incurred by such subsidiaries of a "start-up" nature were expensed as incurred. Such "start-up" expenses, and other non-capitalized costs/expenses, associated with such activities are not anticipated to have the same impact in 2001 as in 2000. LibraryCard's available cash resources were substantially consumed in 2000 in the development of the consumer "portal" Internet/Web site, www.LibraryCard.com. On November 1, 2000 the Company entered into a revolving line of credit agreement with it's majority-owned subsidiary, LibraryCard, whereby the Company agreed to loan LibraryCard up to $250,000 for use as working capital. Amounts loaned to LibraryCard under the line of credit bear interest at the rate of 10.0% (which was the then current rate applicable under the Company's line of credit with Wells Fargo Bank). At December 31, 2000, no funds had been loaned by the Company to LibraryCard. LibraryCard received and used an advance of approximately $225,000 from the Company in the first quarter of 2001 to continue such development efforts. The full amount of the 250,000 credit line had been loaned to LibraryCard by the end of April 2001. Repayment of the credit line is unlikely by the October 31, 2001 due date unless LibraryCard is successful in finding additional outside funding, or one or more sponsors. Management believes that LibraryCard's ability to raise additional funds in late 2000 and early 2001 were, and remain, negatively affected by the existing unfavorable market conditions for Internet and related companies' stock offerings. LibraryCard's ability to raise capital in the near future is limited until the investment environment is more receptive to an offering of stock. The Company's ability to advance further monies to LibraryCard is limited by the Company's bank line of credit agreement that limits loans by the Company to its subsidiaries to a maximum aggregate total amount of $350,000. -8- AUTO-GRAPHICS, INC. Form 10-Q March 31, 2001 Management believes that liquidity and capital resources will be adequate to fund operations and scheduled reductions in bank debt during 2001 and into 2002. In order to accelerate development and expand the scope of the Company's Internet/Web initiatives and business, the Company will continue to explore opportunities to raise additional equity. In 1999 and 2000, the Company raised approximately $4.0 million through the sale of stock in the Company and in the Dataquad(TM) and LibraryCard(TM) subsidiaries In August 2000, the Company implemented a revolving credit agreement to replace and repay its prior Capital line of credit. Upon commencement of the new line of credit, the maximum credit availability was $3,000,000. The maximum credit commitment under the new line of credit reduces periodically over the term of the credit agreement and reaches a maximum credit availability of $2,000,000 on April 2, 2002 and, the agreement matures on June 2, 2002. The interest rate on the line of credit is one-half of one percent above the bank prime rate in effect from time to time. The agreement also requires that the Company maintain consolidated cash balances equal to 40% of the maximum credit commitment in effect throughout the term of the agreement. 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, including the repurchase of Company stock as well as limiting the amount of loans to third parties, including, subsidiaries. As of March 31, 2001, the Company was in compliance with all of its loan covenants. -9- AUTO-GRAPHICS, INC. Form 10-Q RESULTS OF OPERATIONS --------------------- First Quarter 2001 as Compared to First Quarter 2000 ---------------------------------------------------- Net sales increased $1,012,000 or 48% to $3,122,000 in 2001. Sales to the Company's library customers were up $1,232,000 or 75%. Sales were positively impacted in March 2001 when 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 payment of U.S. $1.5 million. Such transaction has had a material affect on the results of operations reported by the Company for the first quarter of 2001. The licensing of the database is an unusual occurrence that is not expected to repeat in the foreseeable future. Sales to other library and publishing customers were $500,000 lower than the same period last year primarily as a result of a decrease in one-time projects. Cost of sales increased $411,000 or 37%. Gross margins improved to 52% in 2001 up from 48% in 2000 primarily as a result of the licensing of the Remarc(TM) database as described above. In addition, the Company is continuing to shift its product mix away from the Company's traditional labor intensive services to higher margin Internet/Web hosting services. This trend is expected to continue through 2001. Selling, general and administrative expenses increased $34,000 or 3% due to increased payroll and related expenses for the period. The Company took steps to reduce payroll and related expense during the period and expects to continue to reduce costs if ongoing sales continue to decline. Interest expense/other was $35,000 in 2001 down $28,000 or 44% from $63,000 in 2000 due to lower average borrowings and higher interest income. Provision for taxes based on income reflects the amount of federal and state income taxes payable (See Note 4 of Notes to Unaudited Consolidated Financial Statements). Minority interests reflects the outside owners' share of the losses realized by the two majority-owned (61%) subsidiaries, Dataquad and Librarycard. Net income was $452,000 in 2001 compared to a net loss of $122,000 in 2000. The increase in net income results from the licensing of the Remarc(TM) database as described above. Basic earnings per share were $0.09 in 2001 compared to a basic loss per share of $0.03 for the comparative quarter in 2000. The diluted earnings per share were $0.09 in 2001 compared to a diluted loss per share of $0.03 for the comparative quarter in 2000. Shares outstanding have been retroactively restated for a 3-for-1 stock split in February 2000. -10- AUTO-GRAPHICS, INC. Form 10-Q 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. -11- AUTO-GRAPHICS, INC. Form 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None. (b) None. -12- AUTO-GRAPHICS, INC. Form 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTO-GRAPHICS, INC. Date May 15, 2001 ss/ Michael K. Skiles -------------------- -------------------------------------- Michael K. Skiles, President Date May 15, 2001 ss/ Michael F. Ferguson -------------------- -------------------------------------- Michael F. Ferguson, Chief Financial Officer