UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2003.
or
[ ] TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-2105641
(IRS Employer Identification No.)
3201 Temple Avenue, Pomona, CA
(Address of principal executive offices)
91768
(Zip Code)
(909) 595 - 7004
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
Title of each class None.
Name of each exchange on which registered None.
Securities registered under section 12(g) of the Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. _______
State issuer's revenues for its most recent fiscal year. $5,771,756
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant at March 25, 2004 was $739,000.
The number of shares of the registrant's Common Stock outstanding at
March 30, 2004 was 5,525,586.
DOCUMENTS INCORPORATED BY REFERENCE
Except for exhibits, none.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
Documents available from Auto-Graphics, Inc.
The Company's Annual Report on Form 10-KSB and Code of Ethical Conduct may be
viewed and printed on the Company's website at http://www.auto-graphics.com
and click on the "company" hyperlink and then on the "Investor Relations"
hyperlink. If you would like to receive a printed copy of the Company's
Annual Report on Form 10-KSB and/or a copy of the Company's Code of Ethical
Conduct at no charge, please mail your request to Attention: Secretary, Auto-
Graphics, Inc., 3201 Temple Avenue, Pomona, California 91768, or send an e-
mail to del@auto-graphics.com with your return address or call Daniel E.
Luebben, the Secretary of the Company, at 1-800-776-6939 extension 1504.
PART I
ITEM 1. BUSINESS
Auto-Graphics, Inc. and its subsidiary, A-G Canada Ltd., (the "Company")
provides 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-type 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 enhance or build on
existing technologies to provide a Web portal used by all types of libraries
to manage not only traditional bibliographic databases but adds the
functionality to manage local and third-party vendor databases and other Web
resources within a single concurrent or metasearch search interface. (This
is also known within the industry as a "federated" search interface.)
Additionally, the Company offers a number of options for its products that
are library standards based.
Products and Services
The products and services offered by the Company in 2003 include the
following:
AGent(TM) is an Internet/Web-based software suite encompassing six distinct
modules offering libraries a broad and complete set of library management
solutions that can be customized/personalized down to the patron level.
AGent's modules include: portal, authentication, cataloging, resource-
sharing, library automation (formally VERSO(TM)) and statistics. The AGent
Portal module is a metasearch single search module that allows libraries to
manage and search diverse bibliographic and full-text content through one
convenient user interface. The AGent Authentication module enables users
(patrons and staff) to be identified and provided with a specific level of
service authorization according to customer specific definitions. The AGent
Cataloging module allows libraries to select from a wide variety of
bibliographic content sources in a subscription service format.
Additionally, the AGent Cataloging module can offer authorized staff access
to Auto-Graphics' MARC editor, AGCat(TM). Within the AGent Library
Automation module there are three specific sub-modules: circulation, serials,
and acquisitions. These can be purchased and configured/implemented in whole
or in part creating an integrated local library automation system. Inter-
library loan initiatives are supported in our AGent Resource-Sharing module
through the use of ISO 10160/61 compliant software, allowing libraries to
construct regional, statewide/province-wide systems. The AGent Statistics
module provides the consortium or each library with a full range of metrics
that can be applied to a broad spectrum of reports that reflect system usage,
library usage, patron access, etc.
AGent Digital Content Management ("DCM") 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 validation. AGent DCM can include a Web page preview
feature used to validate electronic publishing compatibility. When used in
conjunction with AGent this system provides a fully functioning Web
publishing system and, when integrated with AGent, provides a complete and
seamless enterprise-wide content development, control and Web publishing
system. DCM is designed to work within the AGent umbrella of products to
provide a full spectrum of capabilities in the MARC and XML environments.
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 AGent MARCit(TM).
Applications
AGent has been installed in all of the individual libraries comprising our
consortium customers. The Company has statewide contracts in six 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 AGent library automation system has been installed in over 70 libraries
consisting of public, school, academic and special libraries to manage their
local collections and circulation. All of the libraries utilize the ASP
services provided by the Company. Many of the libraries migrated from older
legacy systems offered by the Company's competitors. Other libraries did not
have any library automation until they installed AGent. The unique approach
of ASP has provided a cost effective way for libraries to acquire a library
automation system without high front-end investments in server hardware.
The Company installed AGent at the Toronto Public Library ("TPL"), which has
the largest circulation of any library system in North America. They use
AGent to search (approximately 66) third-party public access catalogs and
authenticate users allowing for the simultaneous searching of 66 or more
other reference databases licensed by or developed by TPL. The Company was
also awarded contracts for AGent from the National Geographic Society, the
Food and Drug Administration, and Chaffey College. Auto-Graphics negotiated
and finalized the first of our multi-tiered selling programs in the state of
New Jersey known as "JerseyClicks". This program will offer the 1,000
school, public, academic and special libraries of New Jersey an opportunity
to significantly upgrade their software capability by implementing AGent
(Portal) at the local level. Similar initiatives are also under review in
the other five statewide systems. Additionally, the British Columbia
provincial-wide system known as "Outlook" has also endorsed and initiated a
similar program in Canada. Smart Choices of British Columbia that consists
of two libraries have implemented AGent as a front-end replacement for their
local library catalogs. In addition to utilizing AGent as a replacement for
their local catalogs, the libraries are also managing their complete offering
of reference databases via AGent. This unique approach will allow the
library to move their electronic services beyond the walls of the library
that will make these services available to all patrons of the libraries from
their homes or businesses.
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. These protocols are industry
standards that provide for the efficient distribution of information to and
from disparate library systems and vendors. The use of standards provides
the Company with the ability to allow the AGent to sit on top of other vendor
systems so that the product can be mixed and matched with existing library
systems that the individual library has determined can be replaced by AGent.
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. Development is based on an architecture that
works on multiple computer servers and which provides system scalability, as
the customer's needs change. Microsoft SQL Server provides the database
engine for the Company's software product families.
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 documentation in response to
all proposal requests. 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
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. 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 statewide, 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, Texas, Missouri, Oklahoma and Toronto. The Company including its
subsidiary employs approximately 40 persons in all locations. The Company
believes that relationships with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases its corporate office facility from a limited partnership
owned by a current and a former director/stockholder of the Company. 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 its 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.
Management believes that the reconfigured space will be sufficient for the
Company's current and foreseeable future needs. The Company also has an annual
lease on a small sales and support office in Toronto, Canada for its wholly-
owned subsidiary, A-G Canada, Ltd. (See Note 5 of Notes to Consolidated
Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock quotations.
2003
------------------------------------------------
Bid Ask
---------------------- ----------------------
Price Range High Low High Low
------------------ -------- -------- -------- --------
First Quarter $ .370 $ .350 $ .750 $ .480
Second Quarter .400 .370 .850 .600
Third Quarter .400 .400 .850 .830
Fourth Quarter .400 .310 .850 .600
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
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 108). 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, 2003, the number of holder accounts of record (including
depository and nominee or "street name") of the Company's Common Stock was
approximately 200. 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.
EQUITY COMPENSATION PLAN INFORMATION
______________________________________________________________________________
Number of
securities
remaining
Number of available
securities for future
to be issued Weight-average issuance
upon exercise of exercise price of under equity
outstanding options, outstanding options, compensation
Plan category warrants & rights warrants & rights plans
-------------------- -------------------- -------------------- --------------
Equity compensation
plans approved by
security holders 354,900 $0.34 135,000
Equity compensation
plans not approved
by security holders -- -- --
-------------------- -------------------- --------------
Total 354,900 $0.34 135,000
==================== ==================== ==============
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 programming labor 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 60% and expenses the remainder. To the extent that more development
costs are capitalized, the Company's net income will improve, and, to the
extent that more software development costs are expensed instead of
capitalized, the Company's net income will decline. Because of the direct
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. 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 ten 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
approximately 16% of the 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. Generally, these large contract services
are billed in advance on an annual, semi-annual or quarterly basis. Revenue
is then recognized monthly as services are rendered. Revenues which have
been billed and payment collected in advance are booked as deferred revenue
until the services are provided and revenues earned. For certain small
annual subscriptions, one-fourth of the annual revenue is recognized in the
quarter the annual subscription is billed and the balance is deferred and
recognized evenly over the next three quarters in accordance with SOP 97-2,
"Software Revenue Recognition," as amended by SOP 98-4 and 98-9. 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 or access
rights are provided to the customer.
Liquidity and Capital Resources
Working capital improved by $1,295,000 to a negative $755,000 in 2003 up from
a negative $2,050,000 in 2002 due primarily to a substantial reduction in
current liabilities (excluding current portion of long-term debt) of
approximately $957,000 offset by an $89,000 increase in borrowings and the
replacement of the Company's short-term credit facility with long-term debt.
Profitability in terms of operating income tripled to $370,000 and EBITDA
cash flow (Earnings Before Interest, Taxes, Depreciation and Amortization)
improved accordingly to approximately $1,578,000 in 2003 from $1,168,000 in
2002. The Company replaced its credit facility in February 2004 with a new
facility that matures in May 2005 and is extendable to May 2006 subject to
meeting certain conditions (see below). The Company's primary AGent(TM)
product is sold on an annual subscription basis with fees for services billed
to the customer and paid annually or quarterly in advance. These cash
payments are received and booked to deferred revenue 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 or for working capital needs. 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
of what it would otherwise historically be and there is a substantial
deferred revenue balance in current liabilities representing revenues to be
earned from future services to customers who have paid in advance.
At December 31, 2003, the Company's principal financial commitments, other
than its bank line of credit and equipment financing, involved the lease of
corporate facilities in Pomona, California and in Toronto, Canada. Total
commitments over next four years total approximately $734,000. (See Note 4
of Notes to Consolidated Financial Statements and Item 2. Properties herein).
The Company's principal use of cash for investing activities during 2003 and
2002 were directed primarily towards continuing development of the Company's
AGent(TM) and VERSO(TM) software and ASP (Application Service Provider)
services. The amounts invested in capitalized software was $500,000 in 2003
and 2002, 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 ASP customers. Total capital
expenditures and investments were down $193,000 to $561,000 in 2003 from
$754,000 in 2002. Major expenditures for 2002 include internal software
development of AGent(TM) and VERSO(TM) software, acquisition of Pigasus Wings
ISO interlibrary loan software and computer equipment.
2002 expenditures also included investments of approximately $35,000 in the
remaining common stock of the Company's majority-owned subsidiaries: Dataquad
and LibraryCard. 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. In
the course of the merger, the Company acquired both 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
without limitation through 2022 for federal purposes and through 2010 for
state purposes. At December 31, 2003, the Company had total available net
operating loss carryforwards for federal income tax purposes of $3,398,000,
$2,089,000 for state income tax purposes and $160,000 for foreign income tax
purposes. These net operating loss carryforwards expire in 2022 for federal
taxes, 2010 for state and 2008 for foreign taxes. The NOL carryforward for
California state tax purposes has been suspended for 2002 and 2003, meaning
that the Company will be unable to use its NOL carryforward for this period
and will therefore be liable for California state taxes.
The Company was in compliance with all of its financial loan covenants as of
December 31, 2003 under its previous bank credit agreement. In October 2003,
the Company began negotiations with a new bank, Pacific Mercantile Bank, to
replace the Company's existing credit facility with Wells Fargo Bank. The
new credit facility was concluded in February 2004 and is a revolving line of
credit with an initial commitment of $750,000 declining to $600,000 on April
1, 2004 and $500,000 on July 1, 2004 consistent with the Company's forecasted
declining requirements for financing. The credit facility matures on May 1,
2005 and may be extended to May 1, 2006 under certain conditions. Under FAS
No. 6, "Classification of Short-term Obligations Expected To Be Refinanced",
the line of credit is therefore reported as a long-term liability in the
Company's balance sheet for the year ended December 31, 2003. The interest
rate on the new credit facility is the Wall Street Journal bank prime rate
plus a 2.5% margin declining to a 1.5% margin under certain conditions. The
credit facility is secured by all of the assets of the Company and its
subsidiary, A-G Canada Ltd. and requires that the Company maintain certain
minimum financial covenant ratios. At December 31, 2003, the total borrowing
was $398,000 with $352,000 in additional credit availability under the new
credit facility. (See Note 2 of Notes to Consolidated Financial Statements).
Management believes that liquidity and capital resources should be adequate
to fund operations and expected reductions in bank debt in 2004. Based on
the Company's 2004 Plan, management expects that the Company will have no
bank debt by December 31, 2004 and will only require occasional working
capital financing in the future. The Company has no current plans to enter
the equity market to raise additional capital.
Off-Balance Sheet Financing
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.
The Company's largest customer, the Texas Education Agency ("TEA") provided
13% and 23% of the Company's sales in 2003 and 2002, respectively. In late
2003, TEA began a process of changing the way that the Company's services
were procured from a central purchase contract through TEA to direct purchase
by the schools using the Company's system. The Company is in the process of
registering school districts and individual schools for the service.
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
2003 as Compared to 2002
Net sales decreased $892,000 or 13% from $6,664,000 in 2002 to $5,772,000 in
2003 due to lower sales from its TEA contract (see above) and planned
declining sales to publishing customers. The Company is focusing on its core
library services and software businesses and not soliciting new publishing
customers.
Cost of sales decreased $500,000 in 2003 or 13% as a result of major cost
reductions in payroll and production costs in late 2002. Gross margins were
unchanged at 42% in both 2003 and 2002 as the Company has continued to focus
on its core library ASP services business. 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 $635,000 or 24% in
2003 from 2002. In 2003, the Company began investing heavily in sales and
marketing staff in an effort to reverse the declining sales trends. 2002
selling, general & administrative expenses include nearly $1,000,000 in
litigation expenses successfully defending eight lawsuits filed by the
Company's former general counsel, Robert H. Bretz, following his dismissal.
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,
severely impacted profitability and liquidity for the year ended December 31,
2002. (See Note 6 of Notes to Consolidated Financial Statements).
Income from operations nearly tripled from $127,000 in 2002 to an operating
income of $370,000 in 2003 due again to substantial cost reduction measures
taken in late 2001 and 2002 and relief from the above referenced litigation.
Interest expense was $72,000 in 2003 down $25,000 from $97,000 in 2002 due to
lower average borrowings.
Other income primarily reflects bad debt recovery.
Warrant expense in 2002 reflects a non-cash charge to earnings for the
issuance of 621,252 warrants for a corresponding number of shares of
"restricted" 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 Note 6 of Notes to Consolidated
Financial Statements).
Provision for taxes based on income in 2003 and 2002 reflect minimum state
tax payments and the effect of federal and state net operating loss
carryforwards (See Note 3 of Notes to Consolidated Financial Statements).
Minority interests in the losses of subsidiaries of $77,000 in 2002 reflects
a non-cash charge of $120,000 recognized by two majority-owned subsidiaries
in connection with the repurchase of stock in return for cancellation of a
trust note offset by minority interests in the losses incurred by those
subsidiaries of $43,000. The subsidiaries were merged with the Company on
December 31, 2002.
Net income was $305,000 compared to a net loss of $228,000 in 2002, an
improvement (turnaround) of $533,000. Both basic and diluted "earnings" per
share were $0.06 and $0.05, respectively in 2003, compared to a basic and
diluted "loss" per share of $0.05 in 2002, an improvement of $0.11 and $0.10
in earnings per share, respectively.
2004 Operating Plan
The Company expects to be profitable in 2004 and EBITDA cash flow coupled
with lower capital expenditures should continue to reduce bank debt and
improve liquidity. The Company primarily serves state and local fiscal
government entities and is seeing some improvement in sales prospects in 2004
with the economic recovery apparently underway. The Company is investing
heavily in sales and marketing to drive sales growth through better customer
coverage and more focused marketing programs. The 2004 capital budget is
expected to decline about 10% from 2003 on reduced spending for internally
developed software and on computer equipment due to performance improvements
and declining prices. The Company plans no further business or product
acquisitions for the foreseeable future and will instead focus on building
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. Increases in the value of the Canadian dollar against the
U.S. dollar will result in foreign exchange transaction gains and decreases
in the value of the Canadian dollar will result in foreign exchange
transaction 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 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements covered by Report of the
Independent Auditors.
Page
Reference
---------
Independent Auditor's Report 17
Consolidated Balance Sheets
at December 31, 2003 and 2002 18
Consolidated Statements of Operations
and Comprehensive Income (Loss) for
the years ended December 31, 2003 and 2002 19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2003 and 2002 20
Consolidated Statements of Cash Flows for
the years ended December 31, 2003 and 2002 21
Notes to Consolidated Financial Statements 23
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Auto-Graphics, Inc.
Pomona, California
We have audited the accompanying consolidated balance sheets of Auto-
Graphics, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations and comprehensive income
(loss), stockholders' equity and cash flows for the years 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, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
February 27, 2004
AUTO-GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS 2003 2002
--------------------------------------------- ----------- -----------
Current assets:
Cash $ 10,534 $ 31,877
Accounts receivable, less
allowance for doubtful
accounts ($25,000 in
2003 and 2002) 389,201 332,167
Unbilled production costs 4,674 3,398
Other current assets 180,476 175,145
----------- ----------
Total current assets 584,885 542,587
Software, net (Note 1) 2,946,315 3,186,465
Equipment, furniture and
leasehold improvements, net (Note 1) 513,267 910,947
Other assets (Note 1) 119,869 79,446
----------- -----------
$ 4,164,336 $ 4,719,445
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 83,652 $ 254,569
Deferred revenue 842,183 1,381,746
Accrued payroll and related liabilities 245,673 236,798
Other accrued liabilities 139,711 385,227
Current portion of long-term debt (Note 2) 28,977 334,694
----------- -----------
Total current liabilities 1,340,196 2,593,034
Long-term debt, less current portion (Note 2) 418,425 33,614
Deferred taxes (Note 3) 68,000 73,000
----------- -----------
Total liabilities 1,826,621 2,699,648
Commitments and contingencies (Note 4)
Stockholders' equity:
Common Stock, 12,000,000 shares
authorized, 5,525,586 shares
issued and outstanding in 2003
and 4,904,234 shares in 2002 (Note 6) 4,274,625 4,262,169
Accumulated deficit (1,937,187) (2,242,649)
Accumulated other comprehensive income(loss) 277 277
----------- -----------
Total stockholders' equity 2,337,715 2,019,797
----------- -----------
$ 4,164,336 $ 4,719,445
=========== ===========
See Notes to Consolidated Financial Statements
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003 and 2002
2003 2002
---------- ----------
Net sales (See Note 1) $5,771,756 $6,663,626
Costs and expenses
Cost of sales 3,350,356 3,850,200
Selling, general
and administrative 2,051,770 2,686,673
---------- ----------
5,402,126 6,536,873
---------- ----------
Income from operations 369,630 126,753
Interest expense, net 71,785 97,196
Warrant expense -- 215,000
Other income (9,617) (38,486)
---------- ----------
Income (loss) before taxes
and minority interests 307,462 (146,957)
Income tax expense (Note 3) 2,000 4,000
Minority interest in loss
of subsidiaries (Note 6) -- 77,278
---------- ----------
Net income (loss) 305,462 (228,235)
Foreign currency translation
adjustments (Note 1) -- --
---------- ----------
Total comprehensive
income (loss) $ 305,462 $ (228,235)
========== ==========
Earnings per share (Note 1):
Basic income (loss)
per share $ .06 $ (.05)
Weighted average shares
outstanding 5,525,586 4,996,979
Diluted income (loss)
per share $ .05 $ (.05)
Weighted average shares
outstanding 5,880,486 4,996,979
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003 and 2002
Retained
Common Stock Earnings/ Other Total
Notes (Accumulated Comprehensive Stockholders'
Shares Amount Receivable Deficit) Income/(Loss) Equity
--------- ---------- ---------- ----------- ------------- -------------
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
Net Income -- -- 305,462 -- 305,462
Issuance of
Stock 621,352 12,456 -- -- -- 12,456
--------- ---------- ---------- ----------- ------------- -------------
Balances at
December
31, 2003 5,525,586 $4,274,625 $ -- $(1,937,187) $ 277 $ 2,337,715
========= ========== ========== =========== ============= =============
See Note 6 "Stockholder's Equity in Notes to Consolidated Financial
Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002
2003 2002
----------- -----------
Cash flows from operating activities:
Net income/(loss) $ 305,462 $ (228,235)
Adjustments to reconcile net
income/(loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,198,719 1,294,847
Deferred taxes (5,000) (78,600)
Allowance for doubtful accounts -- (120,000)
Warrant Expense -- 215,000
Minority Interest -- 77,278
Changes in operating assets
and liabilities
Accounts receivable (57,034) 473,333
Unbilled production costs (1,276) 7,615
Other current assets (5,329) 31,389
Other assets (40,423) 12,206
Accounts payable (170,918) (105,104)
Deferred revenue (539,562) 133,758
Accrued payroll and
related liabilities 8,876 (227,015)
Other accrued liabilities (245,517) 182,296
----------- ----------
Net cash provided by
operating activities $ 447,998 $1,668,768
Cash flows from
investing activities (Note 1):
Capital expenditures (60,891) (119,502)
Capitalized software development (500,000) (500,000)
Purchase of Pigasus Software -- (100,000)
Investment in Dataquad, Inc. -- (33,046)
Investment in The LibraryCard, Inc. -- (1,605)
----------- ----------
Net cash used in investing activities $ (560,891) $ (754,153)
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002
2003 2002
----------- -----------
Cash flows from
financing activities (Note 1):
Borrowings under long-term debt $ 88,694 $ 58,850
Payments under long-term debt -- (993,923)
Borrowings(payments) under
cash surrender value of
life insurance, net -- (4,457)
Payments under capital lease -- (77,047)
Payments under equipment financing (9,600) --
Proceeds from
stock/warrant sales, net 12,456 (2,136)
---------- -----------
Net cash provided by (used in)
financing activities 91,550 (1,018,713)
----------- -----------
Net decrease in cash (21,343) (104,098)
Foreign currency effect on cash -- 13,946
Cash at beginning of year 31,877 122,029
----------- -----------
Cash at end of year $ 10,534 $ 31,877
=========== ===========
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
1. Summary of significant accounting policies.
Auto-Graphics, Inc. (the "Company"), a California corporation incorporated in
1960, including its wholly-owned A-G Canada, Ltd. subsidiary provide software
products and services used to create, manage, publish and access information
content via the Internet/Web.
A-G Canada, a Canadian corporation formed 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 to develop and operate
an Internet/Web site 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 or quarterly on a
subscription basis and when goods (software, equipment, databases, etc.) are
shipped to customers in accordance with the 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 revenue 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 standard 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. 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 2003 and 2002 were in line with management's
expectations. 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 inventory on a standard cost basis.
Software
Software is recorded at historical cost. Software at December 31, 2003 and
2002, consist of the following:
2003 2002
----------- -----------
Computer software and database $ 7,192,374 $ 6,715,602
Less accumulated amortization 4,246,059 3,529,137
----------- -----------
$ 2,946,315 $ 3,186,465
=========== ===========
Asset Purchase of Pigasus Wings Software: In July 2002, the Company acquired
Wings ISO (International Standards Organization) compliant interlibrary loan
software product for $100,000. The Wings software has provided ISO compliant
functionality for the Company's AGent(TM) interlibrary loan software module.
Asset Retirements: Fully amortized software having an original cost of
$804,000 was retired in 2002 and none in 2003.
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 as incurred. 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
$2,946,000 in 2003 and $3,186,000 in 2002. Amortization of computer software
was approximately $937,000 in 2003 and $807,000 in 2002.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are recorded at historical
cost. Equipment, furniture and leasehold improvements at December 31, 2003
and 2002, consist of the following:
2003 2002
------------ ------------
Equipment $ 1,409,118 $ 1,415,346
Furniture and fixtures 320,695 323,665
Leasehold improvements 25,508 25,508
------------ ------------
1,755,321 1,764,519
Less accumulated depreciation 1,242,054 853,572
------------ ------------
$ 513,267 $ 910,947
============ ============
Asset Retirements: Fully depreciated fixed assets having an original cost of
$93,316 and $1,344,000 were retired in 2003 and 2002, respectively.
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 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 expense was $262,000 in 2003 and $362,002 in
2002.
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.
Other Assets
In February 2003, A-G Canada, Ltd. a wholly-owned Canadian subsidiary of the
Company, pledged a Guaranteed Income Certificate in the amount of $45,000 to
Toronto Dominion Bank as collateral for a four-year Letter of Credit.
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. In 2003 and
2002, the Company's Board of Directors granted stock options for 255,000 and
125,000 shares of the Company's restricted Common Stock to two directors and
certain employees. For the year ended December 31, 2003 and 2002, there were
common stock equivalents (warrants, options or convertible securities)
outstanding representing 354,900 and 876,252 shares, respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Year ended December 31, 2003 Net Income Shares Per Share
------------------------------------- ---------- --------- ----------
Basic earnings per share
Net income available to
common stockholders $ 305,462 5,525,586 $ 0.06
Effect of dilutive securities
Stock options -- 354,900
---------- --------- ----------
Diluted earnings per share
Net income available to
common stockholders $ 305,462 5,880,486 $ 0.05
========== ========= ==========
Year ended December 31, 2002 Net Income Shares Per Share
------------------------------------- ---------- --------- ----------
Basic earnings per share
Net income available to
common stockholders $ (228,235) 4,996,979 $ (0.05)
Effect of dilutive securities
Warrants -- --
Stock options -- --
---------- --------- ----------
Diluted earnings per share
Net income available to
common stockholders $ (228,235) 4,996,979 $ (0.05)
========== ========= ==========
Warrants and stock options have been excluded in 2002, since they are anti-
dilutive.
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 $71,785 in 2003 and $97,196 in
2002. The Company paid income taxes in the amount of $26,480 in 2003 and
$8,347 in 2002.
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,
2003 and 2002:
2003 2002
------------ ------------
Geographic areas
Net sales
United States $ 4,805,377 $ 5,741,889
Foreign - Canada/Other 966,379 921,737
Long-lived assets, net
United States 3,456,221 4,084,694
Foreign - Canada 3,361 12,718
The Company's largest customer, the Texas Education Agency ("TEA") provided
13% and 23% of the Company's sales in 2003 and 2002, respectively. In late
2003, TEA began a process of changing the way that the Company's services
were procured from a central purchase contract through TEA to direct purchase
by the schools using the Company's system. The Company is in the process of
registering school districts and individual schools for the service. There
was three accounts which represent more than 10% of the Company's accounts
receivable as of December 31, 2003. All accounts representing over 10% of
total accounts receivable were subsequently collected.
Recently Issued Accounting Pronouncements
In May, 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
The Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The Company believes the adoption of this Statement will have no
material impact on its financial statements.
2. Long-term Debt.
Long-term debt at December 31, 2003 and 2002 consists of the following:
2003 2002
------------ -----------
Revolving line of credit with
interest at the bank prime
rate plus five percentage points
(9.0% at December 31, 2003)
secured by all of the assets of
the Company and its subsidiaries $ 398,150 $ 309,458
Note payable for computer equipment
with monthly payments of $2,612 in
2003 and $2,452 in 2002 (See Note 5
"Related Party Transactions") 49,252 58,850
------------ -----------
Total debt 447,402 368,308
Less current portion 28,977 334,694
------------ -----------
Long-term portion $ 418,425 $ 33,614
============ ===========
The Company was in compliance with all of its financial loan covenants as of
December 31, 2003 under its "previous" bank credit agreement. The interest
rate on the "previous" line of credit is the bank prime rate plus 5% margin
(9.0%) at December 31, 2003. In October 2003, the Company began negotiations
with a new bank, Pacific Mercantile Bank, to replace the Company's existing
credit facility with Wells Fargo Bank. The new credit facility was concluded
in February 2004 and is a revolving line of credit with an initial commitment
of $750,000 declining to $600,000 on April 1, 2004 and $500,000 on July 1,
2004 consistent with the Company's forecasted declining requirements for
financing. The credit facility matures on May 1, 2005 and may be extended to
May 1, 2006 under certain conditions. Under FAS No. 6, "Classification of
Short-term Obligations Expected To Be Refinanced", the line of credit is
therefore reported as a long-term liability in the Company's balance sheet
for the year ended December 31, 2003. The interest rate on the new credit
facility is the Wall Street Journal bank prime rate plus a 2.5% margin
declining to a 1.5% margin under certain conditions. The credit facility is
secured by all of the assets of the Company and its subsidiary, A-G Canada
Ltd. and requires that the Company maintain certain minimum financial
covenant ratios. At December 31, 2003, the total borrowing was $398,000 with
$352,000 in additional credit availability under the new credit facility.
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, 2003 and 2002:
2003 2002
------------ ------------
Current taxes based on income
Federal $ -- $ (1,000)
State 2,000 34,000
Foreign -- --
------------ ------------
2,000 33,000
Deferred taxes based on income
Federal -- (49,000)
State -- (15,000)
Foreign -- 35,000
------------ ------------
-- ( 29,000)
------------ ------------
$ 2,000 $ 4,000
============ ============
A reconciliation of the provision/(benefit) for taxes based on income follows
for the years ended December 31, 2003 and 2002:
2003 2002
------------ ------------
Statutory U.S. Federal income tax $ 71,000 $ 28,000
Adjustments for foreign tax rates 3,000 (5,000)
Change in valuation allowance (209,000) 148,000
State tax, net of Federal benefit 12,000 5,000
Benefit of prior NOL carryforward -- --
Other 125,000 (172,000)
------------ ------------
$ 2,000 $ 4,000
============ ============
The statutory U.S. Federal income tax rate was 34% in 2003 and 2002. The
deferred tax assets and liabilities are composed of the following at December
31, 2003 and 2002:
2003 2002
------------ ------------
Deferred tax liabilities:
Tax over book amortization and
depreciation $ 471,000 $ 232,000
Deferred tax assets:
Net operating loss 1,348.000 1,308,000
Bad debts/accrued vacation/other 60,000 65,000
------------ ------------
Total deferred tax assets 1,408,000 1,373,000
Valuation allowance (945,000) (1,154,000)
------------ ------------
Net deferred tax assets 463,000 219,000
------------ ------------
Net deferred tax liability $ 8,000 $ 13,000
============ ============
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, 2003 and
2002 reflects an unrecognized U.S. and foreign tax loss carryforward. At
December 31, 2003, the Company had available net operating loss carryforwards
for federal income tax purposes of $3,398,000, $2,089,000 for state income
tax purposes and $160,000 for foreign income tax purposes. These net
operating loss carryforwards expire in 2022 for federal taxes, 2010 for state
and 2008 for foreign taxes.
4. Commitments and Contingencies.
The Company incurred total facilities and equipment lease and rental expense
of approximately $219,000 in 2003 and $265,000 in 2002. The Company is
obligated under certain non-cancelable operating leases for office facilities
and equipment expiring in 2004, 2005, 2006 and 2007.
Approximate future minimum lease commitments as of December 31, 2003 are as
follows:
Years ended Operating
December 31, Leases
------------ ----------
2004 $ 215,000
2005 173,000
2006 173,000
2007 173,000
----------
Total minimum lease payments $ 734,000
==========
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. 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 its 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.
Management believes that the reconfigured space will be sufficient for the
Company's current and foreseeable future needs. The Company also has an
annual lease on a small sales and support office in Toronto, 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 $15,000 and $23,500 in director fees for the Company and
its subsidiaries in 2003 and 2002, respectively. Mr. Yarter also serves as a
sales and marketing consultant to the Company and was paid $30,000 annually
for consulting services rendered to the Company in 2003 and 2002,
respectively.
Thomas J. Dudley, a shareholder, has been a director of the Company since
July 2002 and was paid $17,510 and $8,755 in director fees in 2003 and 2002,
respectively.
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 December 2003, Donald A. Scurti, a shareholder, provided financing to the
Company of approximately $51,000 on a 21 month note to purchase computer
equipment.
6. Stockholders' Equity.
Warrants
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. Through December 31, 2002, the Company had
spent over $1,100,000 successfully defending these lawsuits, but anticipated
spending another $500,000 in defending these existing cases through trial and
believed that Mr. Bretz would continue to file similar lawsuits. On January
16, 2003 the Company settled the existing lawsuits with Mr. Bretz dismissing
all of the lawsuits, including his lawsuit to recover approximately $65,000
for previously billed services to the Company, in return for a payment of
$15,000. 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 paid 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 Company could not legally repurchase the stock under the
California Corporations Code and the settlement was clearly in the best
interests of the Company and would avoid substantial future legal fees and
costs, the Company reimbursed 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 were entitled to a total
of 814,000 warrants/shares. However, the directors accepted a total of
621,252 warrants to purchase an equal number of additional shares of the
Company's "restricted" Common Stock representing a discount of approximately
24%. All of the 621,252 warrants were exercised and 621,252 shares were
issued in 2003. 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 was 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.
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 an exercise price of $0.30, reflecting the market
price on the date of the grant, to an outside director (60,000 shares) and
employees (160,000 shares). On July 17, 2002, the Company's Board of
Directors granted non-qualified stock options for 35,000 shares of the
Company's restricted Common Stock at an exercise price of $0.325, reflecting
the market price on the date of the grant, to its outside directors. On June
18, 2003, the Board of Directors granted stock options for 125,000 shares of
the Company's restricted Common Stock at an exercise price of $0.40,
reflecting the market price on the date of the grant, to its outside
directors (30,000 shares) and employees (95,000 shares). As of December 31,
2003, there were 125,000 non-qualified options and 230,000 qualified options
outstanding for a total of 355,000 options and 15,000 non-qualified options
and 120,000 qualified options for a total of 135,000 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:
2003 2002
-------------- --------------
Net income (loss):
As reported $ 305,462 $ (228,765)
Pro forma 299,035 (228,765)
Earnings (loss) per share:
As reported:
Basic 0.06 (0.05)
Diluted 0.05 (0.05)
Pro forma:
Basic 0.05 (0.05)
Diluted 0.05 (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 2003 and 2002:
2003 2002
-------------- --------------
Expected life Five Years Five Years
Risk-free interest rate 1.6% 3.6%
Expected volatility 30% 30%
Dividend yield 0% 0%
Fair value of options
granted at fair market price $0.12 $0.10
All options granted in 2003 and 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
Granted during 2003 125,000 0.40
Exercised during 2003 ( 100) 0.30
Forfeited during 2003 ( 25,000) 0.37
--------- -----------
Balance at December 31, 2003 354,900 $ 0.34
========= ===========
Additional information with respect to the outstanding options as of
December 31, 2003 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 0.399 244,900 8.49 $ 0.30 76,250 $ 0.30
$0.40 to 0.499 110,000 9.51 0.40 -- --
--------- ----------- --------- --------- ---------
354,900 8.81 0.34 76,250 0.30
========= =========
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 for shares have been reserved for possible future
grants under the Plan. The plan is a non-qualified plan covering only senior
executives and related persons. As of December 31, 2003 and 2002, 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 $13,000 in 2003 and $9,000 in 2002.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2003, 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, 2003. No significant changes in internal controls or in
other factors have occurred that could significantly affect controls
subsequent to December 31, 2003.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
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, 2003:
Name Age Position
------------------ ----- ----------------------------------------------
Robert S. Cope 68 Chairman of the Board, Director and President.
Has served in these capacities for more than
ten years.
Thomas J. Dudley 72 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 66 Director. Has served as a director for more
than two years. 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 directors of
Avant Medical and Group 3 Inc.
Paul R. Cope 48 Chief Technology Officer. Has served in this
and other capacities for more than ten years.
Albert A. Flores 38 Vice President, Library Sales and Marketing.
Has served in this and other capacities for
more than ten years.
Juergen A. Jung 53 Vice President, Operations. Has served in this
capacity for more than ten years.
Daniel E. Luebben 55 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 10. 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 11. 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 and information for Compliance with Section 16(a) of
the Exchange Act 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,"
"Nominees Proposed by the Board of Directors" and "Compliance With Section
16(a) of the Exchange Act".
ITEM 12. 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".
PART IV
ITEM 13. EXHIBITS 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).
10.9 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).
10.25 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).
10.49 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.
10.56 Settlement Agreement between Auto-Graphics, Inc.
and Pigasus, Inc. dated August 21, 2002.
10.57 2002 Stock Option Plan.
10.62 Business Loan Agreement between Auto-Graphics,
Inc. and A-G Canada Ltd. and Pacific Mercantile Bank
dated February 13, 2004.
10.63 Promissory Note between Auto-Graphics, Inc. and
A-G Canada Ltd. and Pacific Mercantile Bank dated
February 13, 2004.
10.64 Commercial Security Agreement between
Auto-Graphics, Inc. and Pacific Mercantile Bank
dated February 13, 2004.
10.65 Commercial Security Agreement between A-G
Canada Ltd. and Pacific Mercantile Bank dated
February 13, 2004.
99.10 Certification by the Chief Executive Officer
99.20 Certification by the Chief Financial Officer
99.30 Code of Ethics
(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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees paid or accrued by the Company for the
audit and other services provided by Singer Lewak Greenbaum and Goldstein,
LLP for 2003 and 2002:
2003 2002
----------- -----------
Audit and Review Fees $ 58,275 $ 37,500
Audit-Related Fees - Consulting Services 2,387 --
Tax Fees -- --
All Other Fees -- --
----------- -----------
Total $ 60,662 $ 37,500
=========== ===========
The Company's Audit Committee has considered the amount of Audit-Related Fees
for consulting on accounting matters to be immaterial.
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 30, 2004 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 30, 2004 By: /s/ Robert S. Cope
------------------ --------------------------------------
Robert S. Cope, Director and President
Date: March 30, 2004 By: /s/ Daniel E. Luebben
------------------ --------------------------------------
Daniel E. Luebben,
Chief Financial Officer and Secretary
Date: March 30, 2004 By: /s/ Thomas J. Dudley
------------------ --------------------------------------
Thomas J. Dudley, Director
Date: March 30, 2004 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 30, 2004 /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 30, 2004 /s/ Daniel E. Luebben
---------------- -------------------------------------
Daniel E. Luebben
Chief Financial Officer and Secretary