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, 2002 Commission File Number 0-4431
------------------------------------ -----------------------------------
AUTO-GRAPHICS, INC.
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(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
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(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 May 10, 2002
was 4,997,234.
AUTO-GRAPHICS, INC.
Form 10-Q
March 31, 2002
TABLE OF CONTENTS
Unaudited Condensed Consolidated
Statements of Operations and Comprehensive
Income............................................1
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.......................................12
Part II. Other Information........................15
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AUTO-GRAPHICS, INC.
Form 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income
For the Three Months Ended March 31,
2002 2001
---------- ----------
Net sales (See Note 3) $1,636,006 $3,122,069
Costs and expenses:
Cost of sales 938,483 1,511,488
Selling, general & administrative 656,791 1,163,869
---------- ----------
Total costs and expenses 1,595,274 2,675,357
---------- ----------
Income from operations 40,732 446,712
Interest/other income/(expense) ( 25,052) ( 34,888)
---------- ----------
Income before taxes
and minority interests 15,680 411,824
Provision for taxes
based on income (See Note 4) -- 62,000
Minority Interests ( 11,559) ( 101,874)
---------- ----------
Net income and total
comprehensive income $ 27,239 $ 451,698
========== ==========
Basic earnings per share $ .01 $ .09
Basic weighted average
shares outstanding 4,997,234 4,997,234
Diluted earnings per share $ .01 $ .09
Diluted weighted average
shares outstanding 4,997,234 4,997,234
See Notes to Unaudited Consolidated Financial Statements.
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AUTO-GRAPHICS, INC.
Form 10-Q
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
ASSETS 2002 2001
-------------------------------------- ----------- -----------
Current assets: (Unaudited)
Cash $ 120,622 $ 122,029
Accounts receivable, less allowance
for doubtful accounts
($145,000 in 2002 and 2001) 436,345 695,789
Unbilled production costs 27,079 11,013
Other current assets 233,191 210,288
----------- -----------
Total current assets 817,237 1,039,119
Software, net 3,405,618 3,458,256
Equipment, furniture
and leasehold improvements, net 1,107,332 1,216,175
Other assets 78,524 87,210
----------- -----------
$ 5,408,711 $ 5,800,760
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 392,659 $ 361,421
Deferred income 1,062,339 1,255,006
Other accrued liabilities 192,929 205,316
Accrued payroll and
related liabilities 261,979 468,408
Current portion of long-term debt 1,336,916 1,380,427
----------- -----------
Total current liabilities 3,246,822 3,670,578
Deferred taxes based on income 151,600 148,900
----------- -----------
Total liabilities 3,398,422 3,819,478
Minority Interests (131,273) (119,714)
Stockholders' equity:
Notes Receivable - Stock ( 73,297) ( 75,364)
Common stock, 12,000,000
shares authorized, 4,997,234
shares issued and outstanding
in 2002 and 2001 4,201,755 4,201,755
Accumulated deficit ( 1,987,174) ( 2,014,414)
Other comprehensive income/(loss) 278 ( 10,981)
----------- -----------
Total stockholders' equity 2,141,562 2,100,996
----------- -----------
$ 5,408,711 $ 5,800,760
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Consolidated
Statements of Cash Flows
For the Three Months Ended March 31,
Increase (Decrease) in Cash
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 27,239 $ 451,698
Adjustments to reconcile
net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 286,899 389,478
Minority Interests ( 11,559) ( 101,874)
Changes in operating assets
and liabilities:
Accounts receivable 249,155 590,624
Unbilled production costs ( 16,066) 33,566
Other current assets ( 24,079) ( 3,175)
Other assets 8,673 -
Accounts payable 32,986 ( 316,455)
Deferred income ( 185,649) ( 68,504)
Other accrued liabilities ( 10,001) 428,358
Accrued payroll and
related liabilities ( 201,834) ( 151,378)
Net cash provided by ---------- ----------
operating activities 155,764 1,252,338
Cash flows from investing activities:
Capital expenditures ( 129,674) ( 444,870)
Cash flows from financing activities:
Principal payments under debt
Agreements ( 43,511) ( 829,300)
Receipts from notes receivable - stock 2,067 --
Cash used in ---------- ----------
financing activities ( 41,444) ( 829,300)
---------- ----------
Net decrease in cash ( 15,354) ( 21,832)
Foreign currency effect on cash 13,947 --
Cash at beginning of period 122,029 1,202,442
---------- ----------
Cash at end of period $ 120,622 $1,180,610
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 33,050 $ 67,463
Income taxes 2,435 5,659
See Notes to Unaudited Consolidated Financial Statements.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
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, 2002, the results of operations and the statement of cash
flows for the three months ended March 31, 2002 and 2001 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/A for the period ending December 31, 2001
including, without limitation, the financial statements and notes
therein.
NOTE 2. As of March 31, 2002, the Company was in compliance with all
of its loan covenants. The Company's primary bank has provided a letter
of intent to amend and extend the terms of its credit agreement for an
additional year to assist the Company in its recovery plan, which new terms
are in the process of being finalized. The Company expects that the bank
will continue to reduce the availability under the line of credit over the
loan term and increase the interest rates and fees charged to the Company.
The Company expects to complete the loan renewal within the next several
weeks. The Company intends to replace this credit facility with a
new facility from a different financial institution within the next six
months.
In March 2001, the Company licensed the use of its REMARC(TM)
bibliographic database of Library of Congress pre-1968 holdings to a
Japanese Company for use exclusively in Japan for a one-time payment
of $1.5 million. This transaction has had a material effect on the
results of operations reported by the Company for the first quarter
ended March 31, 2001 and for the year ended December 31, 2001.
-5-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
Asset Purchase of Maxcess Library Systems Software: In February
2001, the Company completed the purchase of software and related assets
of Maxcess Library Systems, Inc. The purchase and resulting Verso product
offering will provide the Company with the opportunity to expand its current
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 inter-library loan software
program from Pigasus, Inc. In October 2001, following an evaluation of the
Wings software and customer base, the Company concluded that the software
did not conform to the representations made by the sellers and the Company
has sought to rescind the contract to acquire the software. On November 6,
2001, the Company filed suit against Pigasus, Inc. and its principals and
is seeking a judgment of the court that the contract is rescinded as well
as monetary damages and attorney's fees. The Company has reversed the
acquisition transaction and expensed approximately $206,500 in expense
associated with the transaction and related finished goods inventory
in the third quarter of 2001.
Note 3. Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" establishes
standards for reporting information about operating segments in interim and
annual financial statements.
The following table summarizes sales based on the location of
the customers and assets based on the location of the asset presented on
the basis of generally accepted accounting principles for the three months
ended March 31, 2002, and 2001:
2002 2001
----------- -----------
Geographic areas
Net sales
United States $ 1,403,258 $ 1,303,060
Foreign - Canada/Other 232,748 1,819,009
Long-lived assets, net
United States 4,464,884 5,075,174
Foreign - Canada 48,066 102,669
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
Note 4. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been reported in the Company's
financial statements or tax returns. At December 31, 2001, the Company had
available 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.
Note 5. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic and diluted earnings per share computations
presented by the Company conform to the standard and are based on the
weighted average number of shares of Common Stock outstanding during the
year. For the year ended December 31, 2001 and quarter ended March 31, 2002,
there were no common stock equivalents (warrants, options or convertible
securities) outstanding.
Note 6. Stock Option Plans
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation", the Company has continued
to account for employee stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
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
March 31, 2002, there were no outstanding grants of options under the plan
and no grants are currently planned.
-7-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
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 497,000 shares with
approximately 350,000 shares reserved for employees and 147,000 shares
reserved for directors. There were no outstanding grants of options under
the Plan as of March 31, 2002, although a small number of shares have been
promised to certain executives who relinquished shares under the above
referenced 1997 Non-qualified Stock Option Plan.
In June 2000, 700,000 shares each of Dataquad and LibraryCard
Common Stock were sold to a trustee (Corey M. Patick) on a note for use
in a future stock purchase/option plan. As a result of the issuance,
the Company's interest in the subsidiaries was diluted which resulted
in a charge to Stockholders' Equity in the amount of $104,769. In January
2001, Robert S. Cope replaced Mr. Patick as trustee for the shares. Under
the terms of the Cope Stock Purchase Agreement, the subsidiaries have the
option to repurchase the stock by December 31, 2002. The effect of the
repurchase would be a net increase in Minority Interests and a corresponding
decrease in Stockholder's Equity of up to $280,500 ($180,250 for Dataquad
and $100,250 for LibraryCard).
Note 7. Legal Proceedings
On May 9, 2001 the Company terminated the services of its long-time
outside counsel, Robert H. Bretz. Mr. Bretz is also a former director of the
Company. Following Mr. Bretz' termination he began to file lawsuits for and
on behalf of the Company that had not been authorized by Company's management
or the Board of Directors. On August 8, 2001 one particular case filed by
Mr. Bretz in the name of the Company, Case No. BC252517, was dismissed by the
Los Angeles California Superior Court holding that the Action by Unanimous
Written Consent signed solely by Mr. Bretz in reference to the filing of the
case was invalid because it failed to satisfy the requirements of California
Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles
California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz et
al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz had
become disruptive and harmful to the business operations of the Company and
damaged the Company by his various actions including his excessive billings
to the Company.
-8-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
As a response to the complaint filed by the Company, Mr. Bretz filed
a derivative cross-complaint against three of the Company's officers, Robert
S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary
duty, fraud & deceit, misrepresentation, breach of contract/employment,
removal for cause and other declaratory and injunctive relief. The original
cross-complaint was filed on July 16, 2001 in Los Angeles California Superior
Court under Case No. BC353322. The Company's management believes that the
derivative cross-complaint filed by Mr. Bretz does not have any merit and that
the Company will eventually prevail. The court ruled that the derivative
cross-complaint was unlikely to benefit the Company or its shareholders and
ordered Mr. Bretz to post the maximum ($50,000) bond in order to continue his
lawsuit. The Company has been notified that Mr. Bretz has posted the bond on
March 21, 2001. Mr. Bretz has filed a motion to exonerate the bond or for
reconsideration of the court order to post the bond and a hearing on the
matter is scheduled for May 23, 2002.
On December 10, 2001, Mr. Bretz filed another complaint in Los
Angeles Superior Court under Case No. BC263256 against the Company, two of
the Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents
by Mr. Bretz until a suitable protective order may be implemented to protect
the Company's interests. The Company and individual defendants filed a
demurrer (a formal objection to the legal sufficiency of the opponent's
pleading). In response, Mr. Bretz amended his complaint and has dismissed
all of the individual defendants. The Company intends to seek dismissal
of the case, because Mr. Bretz is no longer a director.
On February 19, 2002, Robert H. Bretz amended a complaint in
Federal District Court under Case No. CV 01-5891 CAS originally filed in
June 2001 by Mr. Bretz in the name of the Company seeking a temporary
restraining order (TRO) and preliminary injunction blocking the 2001
annual shareholder's meeting scheduled for February 27, 2002, which had
been delayed from October 31, 2001. At a hearing on February 26, 2002, the
court denied the application for a temporary restraining order and ruled that
the shareholder meeting could proceed as scheduled, but requested that the
results of the proxy solicitation not be made public or be implemented until
after a further hearing on March 22, 2002. The 2001 annual shareholder's
meeting was conducted on February 27, 2002 and adjourned solely for the
purpose of consideration on March 27, 2002 of a shareholder proposal
submitted by Mr. Bretz, which was the subject of a supplemental proxy
statement later issued on March 4, 2002. On March 27, 2002, the vote was
-9-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
conducted at the adjourned meeting on the shareholder proposal. On April 26,
2002 the court issued its ruling, which denied the request by Mr. Bretz for
a preliminary injunction and authorized the Company to release and implement
the results of the vote from its February 27, 2002 shareholder meeting
following completion of the vote on the shareholder proposal sponsored by
Mr. Bretz establishing a maximum age limit for directors of 67 years. As
a result of a vote by the shareholders of the Company, Mr. Bretz is no longer
a director of the Company. Due to the delay in the court's ruling, the
Company will not be able to proceed with its shareholder meeting originally
planned for May 15, 2002 in accordance with its Bylaws and will be forced to
reschedule the meeting to a tentative date of June 27, 2002.
The Company has filed complaints with the California State Bar
alleging violations of ethics codes by Mr. Bretz and the matters are
currently being investigated by the State Bar.
The Company filed a complaint in Los Angeles, California, Superior
Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its
principals, Arthur and Candy Zemon. The suit alleges a lack of informed
consent, fraud, deceit, intentional and negligent misrepresentation, lack
of consideration, and breach of contract and seeks to rescind the contract
for the Company's acquisition of the Wings software developed by Pigasus and
seeks damages in excess of $400,000. Subsequently, Pigasus Software, Inc.,
Arthur Zemon and Candace Zemon filed suit in the Circuit Court of Saint
Charles County, State of Missouri, Civil Action No. 01CV129525, against
Auto-Graphics, Inc. for breach of contract, and they seek damages in excess
of $500,000. Both actions were removed to the local Federal District Courts
and the California District Court has transferred the matter to the District
Court in Missouri. The parties have been engaging in mediation, but have
been unable to reach agreement on a settlement.
-10-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
Note 8. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible
Assets (SFAS 142):
SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS 141 also requires
that the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. SFAS 141 applies to
all business combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. It also requires,
upon adoption of SFAS 142, that the Company reclassify the carrying amounts
of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is required
to be applied in fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at that date, regardless of
when those assets were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The Company adopted SFAS 141 and SFAS 142 as of January 1, 2002 and
the adoption had no material impact on its financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company believes the adoption of this
Statement will have no material impact on its financial statements.
-11-
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to
Unaudited Consolidated Financial Statements
March 31, 2002
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally,
are to be applied prospectively. The Company adopted this Statement as of
January 1, 2002 and the adoption had no material impact on its financial
statements.
-12-
AUTO-GRAPHICS, INC.
Form 10-Q
March 31, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
-------------------
December 31, 2001 to March 31, 2002
-----------------------------------
Liquidity and capital resources. Working capital increased
$202,000 primarily as a result of collection of accounts receivable, which
declined $259,000 due to improved collections. Net cash provided by
operating activities was $156,000 down from $1,252,000 in the first quarter
of 2001. 2001 was much higher than normal due to a significant cash sale
in March 2001 when the Company licensed the use of its REMARC(TM)
bibliographic database of Library of Congress pre-1968 holdings to an
unaffiliated Japanese Company (for use exclusively in Japan) for a one-time
license fee of $1.5 million. This transaction had a material effect on the
results of operations reported by the Company for the 1st Quarter of 2001.
Excluding this license fee, 2001 cash used by operating activities would
have been approximately $248,000 resulting in a $404,000 increase in cash
provided by operating activities in 2002.
Capital expenditures are down $315,000 from $445,000 for the first
quarter of 2001 to $130,000 in 2002. Major expenditures for 2001 included
the acquisition of Maxcess software for approximately 196,000, internally
developed software for $175,000 and computer equipment. 2002 capital
expenditures include $125,000 in internally developed software and minor
hardware purchases.
Management believes that liquidity and capital resources should be
adequate to fund operations and expected reductions in bank debt during
2002 and into 2003. As of March 31, 2002, the Company was in compliance
with all of its loan covenants. The Company's primary bank has provided a
letter of intent to amend and extend the terms of its credit agreement for
an additional year to assist the Company in its recovery plan, which new
terms are in the process of being finalized. The Company expects that the
bank will continue to reduce the availability under the line of credit over
the loan term and increase the interest rates and fees charged to the Company.
The Company expects to complete the loan renewal within the next several
weeks. The Company intends to replace this credit facility with a new
facility from a different financial institution within the next six months.
The Company has been in discussion with several banks, although no firm
commitment has been received at the time of this filing.
-13-
AUTO-GRAPHICS, INC.
Form 10-Q
March 31, 2002
RESULTS OF OPERATIONS
---------------------
First Quarter 2002 as Compared to First Quarter 2001
----------------------------------------------------
Net sales decreased $1,486,000 or 48% from $3,122,000 in 2001 to
$1,636,000 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 effect on
the results of operations reported by the Company for the 1st Quarter of
2001. Excluding this license fee, sales were essentially unchanged from
$1,622,000 in 2001 to $1,636,000 in 2002.
Cost of sales decreased $573,000 or 38% as a result of major cost
reductions in payroll and production costs in late 2001. Gross margins
declined from 52% in 2001 to 43% in 2002. 2001 gross margins were unusually
high primarily as a result of the licensing of the Remarc(TM) database as
described above, which had insignificant costs associated with its
production and delivery. Excluding this transaction, gross margins actually
improved from 7% in 2001 to 43% in 2002. The Company has been and is re-
evaluating all labor-intensive business segments in which it competes and
has recently discontinued its retro-conversion business (the conversion of
shelflist cards to electronic bibliographic records) where the market has
dwindled to the point where it no longer justifies a continuation of the
business. The Company is also evaluating the labor-intensive typesetting
operations of its Publishing Division, which has also been declining for
many years. We are, however, continuing the more profitable facets of the
publishing business and intend to continue these sales as long as they
provide a positive contribution to income.
Selling, general and administrative expenses decreased $507,000 or
44% in 2002 as a result of major expense reductions in administrative
payroll and sales and marketing expenses in late 2001. 2002 general &
administrative expenses also included $252,000 in legal expenses due
primarily to the ongoing dispute with the Company's former general
counsel, Robert H. Bretz. (See Part II, Item 1. "Legal Proceedings").
Income from operations declined $406,000 from $447,000 in 2001 to
$41,000 in 2002. Excluding the effect of the above Remarc(TM) license fee
of $1.5 million, the first quarter would have been a loss from operations
of $1,053,000.
Interest expense/other was $25,000 in 2002 down from $35,000 in
2001 due to lower average borrowings and lower interest rates.
-14-
AUTO-GRAPHICS, INC.
Form 10-Q
Provision for taxes based on income in 2002 were zero, which
reflects the federal and state net operating loss carryforward (See Note 4
of Notes to Unaudited Consolidated Financial Statements).
Minority interests reflects the outside owners' share of the
losses realized by the majority-owned Dataquad subsidiary in 2002 compared
to the two majority-owned (61%) subsidiaries, Dataquad and Librarycard in
2001. The reduction of $90,000 in the minority interests in the losses of
majority-owned subsidiaries reflects the major reductions in payroll and
expenses of these two subsidiaries and a substantial curtailment of the
losses. Having exhausted the minority investor's capital, the Company must
now recognize 100% of the losses for LibraryCard, although not currently
material.
Net income was $27,000 in 2002 compared to net income of $452,000
in 2001. Excluding the Remarc(TM) database license fee (as described above)
of $1.5 million from the 2001 net income would have resulted in a net loss
of approximately $1,048,000, which is a net income improvement of
$1,075,000.
Both basic and diluted earnings per share were $0.01 in 2002
compared to $0.09 in 2001. Excluding the Remarc(TM) database license fee
(as described above) of $1.5 million from the 2001 net income would have
resulted in a net loss of approximately $0.20 per share basic and diluted.
Shares outstanding have been retroactively restated for a 3-for-1 stock
split in February 2000.
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.
-15-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 9, 2001 the Company terminated the services of its long-time outside
counsel, Robert H. Bretz. Mr. Bretz is also a former director of the Company.
Following Mr. Bretz' termination he began to file lawsuits for and on behalf
of the Company that had not been authorized by Company's management or the
Board of Directors. On August 8, 2001 one particular case filed by Mr.
Bretz in the name of the Company, Case No. BC252517, was dismissed by the
Los Angeles California Superior Court holding that the Action by Unanimous
Written Consent signed solely by Mr. Bretz in reference to the filing of the
case was invalid because it failed to satisfy the requirements of California
Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles
California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz
et al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz
had become disruptive and harmful to the business operations of the Company
and damaged the Company by his various actions including his excessive
billings to the Company.
As a response to the complaint filed by the Company, Mr. Bretz filed a
derivative cross-complaint against three of the Company's officers, Robert
S. Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary
duty, fraud & deceit, misrepresentation, breach of contract/employment,
removal for cause and other declaratory and injunctive relief. The original
cross-complaint was filed on July 16, 2001 in Los Angeles California
Superior Court under Case No. BC353322. The Company's management believes
that the derivative cross-complaint filed by Mr. Bretz does not have any
merit and that the Company will eventually prevail. The court ruled that
the derivative cross-complaint was unlikely to benefit the Company or its
shareholders and ordered Mr. Bretz to post the maximum ($50,000) bond in
order to continue his lawsuit. The Company has been notified that Mr. Bretz
has posted the bond on March 21, 2001. Mr. Bretz has filed a motion to
exonerate the bond or for reconsideration of the court order to post the
bond and a hearing on the matter is scheduled for May 23, 2002.
-16-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
On December 10, 2001, Mr. Bretz filed another complaint in Los Angeles
Superior Court under Case No. BC263256 against the Company, two of the
Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents
by Mr. Bretz until a suitable protective order may be implemented to protect
the Company's interests. The Company and individual defendants have filed a
demurrer (a formal objection to the legal sufficiency of the opponent's
pleading). In response, Mr. Bretz amended his complaint and has dismissed
all of the above individual defendants. The Company intends to seek
dismissal of the case, because Mr. Bretz is no longer a director.
On February 19, 2002, Robert H. Bretz amended a complaint in Federal
District Court under Case No. CV 01-5891 CAS originally filed in June
2001 by Mr. Bretz in the name of the Company seeking a temporary
restraining order (TRO) and preliminary injunction blocking the 2001
annual shareholder's meeting scheduled for February 27, 2002, which had
been delayed from October 31, 2001. At a hearing on February 26, 2002, the
court denied the application for a temporary restraining order and ruled that
the shareholder meeting could proceed as scheduled, but requested that the
results of the proxy solicitation not be made public or be implemented until
after a further hearing on March 22, 2002. The 2001 annual shareholder's
meeting was conducted on February 27, 2002 and adjourned solely for the
purpose of consideration on March 27, 2002 of a shareholder proposal
submitted by Mr. Bretz, which was the subject of a supplemental proxy
statement later issued on March 4, 2002. On March 27, 2002, the vote was
conducted at the adjourned meeting on the shareholder proposal. On April 26,
2002 the court issued its ruling, which denied the request by Mr. Bretz for
a preliminary injunction and authorized the Company to release and implement
the results of the vote from its February 27, 2002 shareholder meeting
following completion of the vote on the shareholder proposal sponsored by
Mr. Bretz establishing a maximum age limit for directors of 67 years. As
a result of a vote by the shareholders of the Company, Mr. Bretz is no longer
a director of the company. Due to the delay in the court's ruling, the
Company will not be able to proceed with its shareholder meeting originally
planned for May 15, 2002 in accordance with its Bylaws and will be forced to
reschedule the meeting to a tentative date of June 27, 2002.
The Company has filed complaints with the California State Bar alleging
violations of ethics codes by Mr. Bretz and the matters are currently being
investigated by the State Bar.
-17-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
The Company filed a complaint in Los Angeles, California, Superior Court,
Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its
principals, Arthur and Candy Zemon. The suit alleges a lack of informed
consent, fraud, deceit, intentional and negligent misrepresentation, lack of
consideration, and breach of contract and seeks to rescind the contract for
the Company's acquisition of the Wings software developed by Pigasus and
seeks damages in excess of $400,000. Subsequently, Pigasus Software, Inc.,
Arthur Zemon and Candace Zemon filed suit in the Circuit Court of Saint
Charles County, State of Missouri, Civil Action No. 01CV129525, against
Auto-Graphics, Inc. for breach of contract, and they seek damages in excess
of $500,000. Both actions were removed to the local Federal District Courts
and the California District Court has transferred the matter to the District
Court in Missouri. The parties have been engaging in mediation, but have
been unable to reach agreement on a settlement.
Item 2. Changes in Securities and Use of Proceeds. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company issued a definitive proxy statement on February 8, 2002
in preparation for the Company's 2001 annual shareholder's meeting, which
was held on February 27, 2002 after having been delayed from October 31,
2001. The results of the vote of the shareholders present in person and by
proxy at the 2001 annual shareholder's meeting which may now be announced
and implemented following the ruling by the court on April 26, 2002 (see
Item 1 above) are as follows:
1. Robert S. Cope, James R. Yarter and Robert L. Lovett were elected as
directors of the Company effective February 27, 2002. Messrs. Cope and
Yarter received 2,755,375 votes cast for election (90.6%), 300 votes cast
as withhold and 285,178 votes cast as abstentions out of a total of 3,040,853
votes cast. Mr. Lovett received 2,889,375 votes cast for election (95.0%),
300 votes cast as withhold and 151,178 votes cast as abstentions out of a
total of 3,040,853 votes cast.
2. 2002 Stock Plan was approved with 2,894,575 votes cast for the Plan
(95.2%), 31,600 votes cast against and 114,678 votes cast as abstentions
out of a total of 3,040,853 votes cast.
3. No. 1 to the Articles of Incorporation to delete the provision that
provides for the number of directors to be stated in the Articles of
Incorporation was approved with 2,897,875 votes cast for Amendment No. 1
(95.3%), 28,300 votes cast against and 114,678 votes cast as abstentions
out of a total of 3,040,853 votes cast.
-18-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
4. Amendment No. 2 to the Articles of Incorporation to add a provision to
eliminate or limit the personal liability of directors for money damages
was approved with 2,762,875 votes cast for Amendment No. 2 (90.9%), 163,300
votes cast against and 114,678 votes cast as abstentions out of a total of
3,040,853 votes cast.
5. The amendment to the Bylaws to state that the number of directors shall
be at least three (3) and not more than five (5) directors, with the
current exact number to be three (3) directors was approved with 2,898,475
votes cast for the amendment to the Bylaws (95.3%), 27,700 votes cast
against and 114,678 votes cast as abstentions out of a total of 3,040,853
votes cast.
6. The shareholder proposal sponsored by Paul Shepherd to amend Article V,
Section 5 of the Company's Bylaws to require approval either by the
shareholders or by the independent members of the board of directors for
related party transactions and contracts was defeated with 180,500 votes
cast for the amendment to the Bylaws, 2,720,675 votes cast against (89.5%)
and 139,678 votes cast as abstentions out of a total of 3,040,853 votes cast.
The 2001 annual shareholder's meeting on February 27, 2002 was adjourned
to March 27, 2002 solely for the purpose of considering a second shareholder
proposal sponsored by Robert H. Bretz, the Company's former corporate
counsel, to amend the Company's Bylaws, Article III, Section 3 to limit the
age of directors to 67 years. The proposal was defeated by a vote of the
shareholders present in person and by proxy at the adjourned 2001 annual
shareholder's meeting on March 27, 2002 with 248,865 votes cast for the
second shareholder proposal, 2,959,425 votes cast against (92.2%) and 2,275
votes cast as abstentions out of a total of 3,210,565 votes cast.
A description of the resolution between the Company and the Special
Shareholder's Committee chaired by Corey M. Patick is included under the
section entitled "Background and Chronology of Abandoned Proxy Contest"
contained in the Company's definitive proxy statement (Schedule 14A) as
filed with the SEC on February 8, 2002.
On February 27, 2002, the Company's shareholders re-elected Robert S.
Cope and James R. Yarter and elected Robert L. Lovett to the board of
directors replacing Robert H. Bretz. Mr. Lovett has since resigned his
position and the remaining two members (Messrs. Cope and Yarter) of the
Board are seeking a suitable candidate to fill the third seat.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) None.
-19-
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, 2002 ss/ Robert S. Cope
-------------------- ---------------------------
Robert S. Cope, President
Date May 15, 2002 ss/ Daniel E. Luebben
-------------------- ---------------------------
Daniel E. Luebben,
Chief Financial Officer