Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ____________________ to ____________________.
For the Fiscal Year Ended Commission File Number
December 31, 2001 0-4431
AUTO-GRAPHICS, INC.
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(Exact name of registrant as specified in its charter)
California 95-2105641
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3201 Temple Avenue, Pomona, California 91768
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number: (800) 776-6939
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 29, 2002 was $1,600,000.
The number of shares of the registrant's Common Stock outstanding at March 29,
2002 was 4,997,234.
DOCUMENTS INCORPORATED BY REFERENCE
Except for exhibits, none.
PART I
ITEM 1. BUSINESS
Auto-Graphics, Inc. and its subsidiaries, (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 libraries
and print publishers.
A-G Canada Ltd. provides products and services to libraries across
Canada.
Datacat Inc. provides products and services to the Heating and Air
Conditioning industry.
Dataquad, Inc. (majority owned) provides products and services to
commercial customers.
Library Card Inc. (majority owned) provides access to library
information for consumers. Operations were suspended in 2001 due to
lack of revenue and capital.
Revenue is generated from direct sales, licensing and support of software
products and services. Revenues are 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 for customer
Web sites.
The Company's products and services are presently sold to the following
general customer categories:
1) Libraries, especially library consortia requiring systems to create,
manage, publish and access large bibliographic and holdings databases
of multiple institutions used to implement resource sharing
initiatives (interlibrary borrowing and loaning of materials) and
services. Individual libraries that are in need of sophisticated
library management software to assist them in the daily operation of
their libraries.
2) Traditional database publishers (encyclopedias, catalogs,
dictionaries and bibles) who use the Company's editorial products and
typesetting services to create and publish proprietary content.
3) Business and government customers who need an XML based content
management system and related services enabling them to create,
manage, publish and access databases and other information
dynamically within and outside the enterprise using the Internet/Web
or print media.
4) Corporate publishers, primarily manufacturers and distributors, who
publish catalogs and promotional content used in their sales and
marketing programs including e-commerce applications.
New Products and Services
The new products and services offered by the Company in 2001 include the
following:
Agent(TM) is an Internet/Web based "portal" product offering a powerful, easy-
to-use interface to search, retrieve, and manipulate data from disparate and
multiple sources concurrently. It searches repositories containing data in
formats such as MARC, XML, PDF, word documents, SQL databases, and many
others. Organizing the results from multiple sources narrows the volume of
information available on the Internet quickly and thereby simplifies the
searching process. By targeting multiple virtual or Z39.50 compliant library
catalogs, the system becomes a virtual multi-library catalog. A physical
union catalog using Impact/ONLINE(TM) (see below) can be included to provide
even broader access and availability of content to those libraries not
possessing the electronic technologies needed for virtual environments.
Licensed full text databases as well as multiple library authorized and
authenticated Web sources such as URL's (Universal Resource Locator Web site
addresses) and subject oriented electronic databases can be included in a
broadcast search, thereby enhancing and accelerating the information retrieval
process. With the addition of optional Agent modules such as Interlibrary
Loan Management and Cataloging, AGent leverages its flexible and modular
approach to become an efficient resource sharing system.
Impact/VERSO(TM) is an Integrated Library System (ILS) based on software and
related assets acquired in 2001. This purchase and resulting offering provide
an opportunity for the Company to expand its current ASP (Application Service
Provider) product/services offering in the library automation market.
Acquisition of the Company's new ILS software on an ASP basis will provide
libraries with a low capital investment alternative to their ILS needs, with
no local software/hardware requirements other than a Web browser and a PC
workstation, allowing the library and their patrons to access and utilize the
library's bibliographic holdings information to manage inventory and
circulation via the Internet/Web. Impact/VERSO can also be seamlessly
integrated with the AGent product described above.
In 2001, the Company developed a database of web sites that provide
educational, research, and general topical information. This database
consists of over 16,000 entries and is currently being used by the Texas
Education Agency to enhance and expand informational services to all public
schools in Texas. The database is monitored and checked for appropriate
content on a weekly basis to insure that all web sites are functional and do
not contain inappropriate material. To effectively check over 16,000 web
sites the Company developed a "spider" program that validates each web site in
the database. Records that are not appropriate are removed and reviewed by
the Company's editorial staff.
Existing Products and Services
Impact/ONLINE(TM) is an Internet/Web and union catalog based online
bibliographic locator and interlibrary loan system. The second generation of
Impact/ONLINE was completed and all customers completed upgrades to this
version in 2001. In addition to incorporating and upgrading current
technologies and expanding capacity, the new version of Impact/ONLINE includes
a number of functional enhancements requested by users and broadens the
Company's markets. Existing Impact/ONLINE customers can also seamlessly
integrate the AGent product described above.
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 25
million unique records. The Company provides online bibliographic records for
use by its U.S. and Canadian library customers via the Internet/Web through a
product known as Impact/MARCIT(TM).
Impact/CMS(TM) (Content Management System) is a modular editorial, publishing
and management software system used to create, organize, maintain and manage
information databases in XML (eXtensible Markup Language) or SGML (Standard
Generalized Markup Language). The system can be configured for a single user
or a multi-user enterprise system. Editorial revision control, iteration
management and DTD (Document Type Definition) validation are important
functional capabilities of the system. Integrated components include data
content validation through the use of one or more Document Type Definition
(DTD) overlays, data authentication based on control and authority files,
revision control and version control, complete record routing and approval
management. The database resides under a Sequel relational database system.
Impact/CMS(TM) can include a Web page preview capability used to validate
electronic publishing compatibility. With the integration of Impact/WEB(TM)
as an indexing and searching module, the CMS system provides a fully
functioning Web publishing system. High-end composition system engines can
be integrated or added to the CMS system to provide integrated composition
and WYSIWYG viewing of the content for print applications as desired.
Impact/WEB (Web access and publishing software) is owned by Auto-Graphics and
is licensed for resale to Dataquad and Datacat. The system is the core
software for all Web publishing applications and solutions offered by the
Company including the Impact/ONLINE (IOL) and AGent systems for libraries.
This system provides custom indexing, search, content scoping, retrieval and
display of database content. Customized modules include support for MS Sequel
database, XML and MARC data and e-commerce features. Impact/WEB is a "stand
alone" Web publishing system. DHTML (dynamic HTML) pages are created "on the
fly" based on database, application and/or user specific parameters and
standard tools such as Application Server Pages, thereby eliminating the high
cost of creating and managing static HTML based Web sites.
Applications
Agent(TM) has been installed in approximately 50% of the individual libraries
currently covered by the Impact/ONLINE(TM) union database contracts.
The Company has an Impact/ONLINE(TM) contract with the State of Texas (Texas
Educational Agency or TEA) to develop and operate, on an outsourced hosting
basis, an Internet/Web based online bibliographic database locator and
interlibrary loan system linking up to 7,500 K-12 public school libraries
(when the system is fully developed and implemented). Approximately 6,000
school libraries are currently included in this Texas statewide system.
The Company has similar statewide contracts (primarily public libraries) in
the six and one province in Canada. Customers also include regional library
organizations in several other states.
The Boeing Company uses the Impact/CMS(TM) product for the development and
maintenance of a database containing all maintenance and support documentation
for the C-17 Air Transport project for the U.S. Air Force. Houghton Mifflin
Co. uses the CMS product to develop and maintain their English language
database for publication of the American Heritage Dictionary and its several
spin-off dictionaries (College, High School, Paperback, etc.). Affinity Group
Database Publishing uses CMS to develop and maintain its database of North
American campgrounds and amenities published annually in the "Trailer Life
Campground, RV Parks and Services Directory".
Customers engaged in manufacturing and distribution use the Company's products
and services to prepare catalogs for the marketing and sales of their own
products and services. For example, Datacat produces an HVACR specific
product database which is available on an annual site license basis to
wholesalers and others in the HVACR (heating, ventilation, air conditioning
and refrigeration) industry. This HVACR database, combined with the Company's
flexible Internet/Web software, provides HVACR wholesalers and manufacturers
the ability to quickly and easily publish custom catalogs over the
Internet/Web. Customers may tailor their Internet catalogs with features such
as custom indexing, multi-tier pricing and order entry (e-commerce). These
catalogs may also be published on CD-ROM or in print.
The Company provides database composition services to major publishers such as
Houghton Mifflin Co., Zondervan Bible Publishers and TL Enterprises.
Product Development
Core software embraces industry standard data structures, such as XML, SGML,
and standards specific to the markets served, such as MARC and Z39.50 in the
library community. These standards afford customers the ability to create,
manage, publish and access databases for the benefit of the enterprise and its
customers, suppliers and other categories of users independent of the media
used to publish this data.
All new product development is being programmed in C++ and runs on Microsoft
platforms. The Company is using N-tiered architecture to allow for customer
implementation flexibility. Microsoft SQL Server provides the database engine
for the Company's software product families. Development is based on an
architecture that will work on multiple computer servers and which provides
system scalability, as the Company's needs increase.
The Company currently employs 11 software engineers and two consultants.
Marketing
The technology utilized and developed in the Company's products and services
is applicable to a diverse group of markets and customers. Marketing
activities include public relations, advertising, display and presentation at
industry trade shows, targeted mailings, telemarketing and e-messaging
campaigns.
Products sold to the library market are generally sold by response to RFP's
(requests for proposals) and, more frequently than not, competitive bidding
managed by governmental purchasing departments. The Company maintains a bids
and proposals department, which focuses on the identification of bidding
opportunities and subsequent generation of all responses and documentation to
respond to a Request for Proposal or Request for Information. Price points
for the Company's various products/services are instrumental in determining
the type of sales effort deployed by the Company, except that Internet
advertising is used in all markets for the Company's products regardless of
the price point of the various products/services.
The Company's strategy for entering emerging new markets in the future is
focused on the Internet/Web "Portal" market and will utilize the new AGent
product to capitalize on this emerging market opportunity. The Company's
strategy for its Internet-centric products and services includes the continued
development of new products and services in order to continually respond to
the evolving needs of its existing and potential customer base. The Company
will also expand strategic relationships with other companies or independent
representatives who are already present or are otherwise knowledgeable about
these prospective customers/markets.
To be successful in these new products/services, customers and markets, the
Company will need to be able to create, finance, develop and implement new
marketing initiatives and capabilities designed to introduce and market its
Internet/Web line of products and services to prospective users who are not
already familiar with the Company. The Company must compete successfully with
other companies, many of whom will be larger, more established, better
financed, more recognized and more experienced in the development,
introduction, marketing, sales and service of the same or similar products and
services to these targeted new customers/markets in a rapidly changing
technological and distribution environment.
Accordingly, there can be no assurances that the Company will be able to
launch, sustain and profit in the near or long term from these new
products/services, customers and markets initiatives. Likewise, no assurances
can be given that the Company will be successful in efforts to develop and
utilize a strategic alliances strategy to assist in efforts to introduce and
market its Internet/Web products and services to a broader range of
customers/markets. However, as the market for managing and distributing
information and knowledge continues to change, the Company intends, as it has
in the past, to be responsive to the changing needs and requirements of
customers as they evolve by offering new and enhanced products and services
representing advances in the information and knowledge management industry.
Competition
The Company was an early entrant into the computerized database composition
business and industry, and believes it may have been offering these products
and services to the library and publishing markets longer than any of the
other companies in competition with the Company today. Although the Company
has been successful to date in securing many of the awarded contracts
involving the development and implementation of Internet/Web based "online"
bibliographic catalog and interlibrary loan services systems for state-wide,
regional or other consortia of libraries, the Company has not been selected in
competitive bidding for all of these contracts and, if this category of
library products/services business continues to grow as the Company believes
should be the case, increased emphasis on this products/services niche of the
library market can be expected to generate increased 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 Impact/CMS(TM) and Impact/WEB(TM) systems 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 in the Internet/Web publishing
market, the Company can be expected to face intense 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. The
Company will also compete with a number of medium-sized, small and start-up
companies that have introduced or are developing Internet/Web, management,
publishing and e-commerce products. 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. Of course, it is also possible that companies that are
now, or, may be in the future, competing in the broader market where the
Company is seeking to compete may determine to enter the Company's markets
with adverse impact on the Company as a result of increased competition.
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. Marketing representatives are located in
California, Missouri, Washington, Connecticut and Toronto, Ontario. The
Company including its subsidiaries employs approximately 50 persons in all
locations. The Company believes that relationships with its employees are
fair following a major reduction in force.
ITEM 2. PROPERTIES
The Company leases its corporate office facility from a limited partnership
owned by a current and a former director/stockholder of the Company ("Lessor")
under a 15 year lease (five year with two five year options), which was
approved and authorized by the independent members of the Company's Board of
Directors in June 1986. The Company also has an option to purchase a one-
third interest in the partnership from the Lessor for an amount not to exceed
$150,000 subject to certain conditions. In 2001, the Company leased 19,460
square feet having an annual base rent of $234,000 (plus expenses). As of
March 1, 2002, the Company has reduced its space occupied by approximately 26%
from 19,460 square feet to 14,462 square feet. The reduction in space was
completed following a reduction in staffing levels in the fourth quarter of
2001 and should result in a decrease in the Company's annualized rent of
approximately $60,000 (plus expenses). The original lease expired in June,
2001 and the Company has remained in the facility as a hold-over tenant
pending completion of negotiations on a new lease and approval by the
independent members of the Board of Directors. The proposed rental rate for
the lease renewal is equivalent to the rental rates paid by two unaffiliated
tenants in the same building. The Company has also surveyed similar available
office properties in the Pomona and surrounding areas and the lease rental
rate is in the bottom quartile of the range of comparable properties. Since
the Company did not renew the lease prior to March 31, 2002, the Company may
be obligated to the Lessor for an additional $88,000 in rental payments for
the period from July 1, 2001 through March 31, 2002 under the original lease.
(See Note 5 of Notes to Consolidated Financial Statements). Management
believes that the reconfigured space will be sufficient for the Company's
current and foreseeable future needs. The Company leases small sales and/or
sales support office space in Seattle, Washington, and in Toronto, Ontario,
Canada for its wholly-owned subsidiary, A-G Canada, Ltd.
ITEM 3. LEGAL PROCEEDINGS
On May 9, 2001 the Company terminated the services of its long-time outside
counsel, Robert H. Bretz. Mr. Bretz is also a director of the Company.
Following Mr. Bretz' termination he began to file lawsuits for and on behalf
of the Company that had not been authorized by Company's management or the
Board of Directors. On August 8, 2001 one particular case filed by Mr. Bretz
in the name of the Company, Case No. BC252517, was dismissed by the Los
Angeles California Superior Court holding that the Action by Unanimous Written
Consent signed solely by Mr. Bretz in reference to the filing of the case was
invalid because it failed to satisfy the requirements of California
Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles California
Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz et al.,
alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz had become
disruptive and harmful to the business operations of the Company and damaged
the Company by his various actions including his excessive billings to the
Company.
As a response to the complaint filed by the Company, Mr. Bretz filed a
derivative cross-complaint against three of the Company's officers, Robert S.
Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary duty,
fraud & deceit, misrepresentation, breach of contract/employment, removal for
cause and other declaratory and injunctive relief. The original cross-
complaint was filed on July 16, 2001 in Los Angeles California Superior Court
under Case No. BC353322. The Company's management believes that the
derivative cross-complaint filed by Mr. Bretz does not have any merit and that
the Company will eventually prevail. The court ruled that the derivative
cross-complaint was unlikely to benefit the Company or its shareholders and
ordered Mr. Bretz to post the maximum ($50,000) bond in order to continue his
lawsuit. The Company has been notified that Mr. Bretz has posted the bond on
March 21, 2001. Mr. Bretz has filed a motion to exonerate the bond or for
reconsideration of the court order to post the bond and a hearing on the
matter is scheduled for May 23, 2002.
On December 10, 2001, Mr. Bretz filed another complaint in Los Angeles
Superior Court under Case No. BC263256 against the Company, two of the
Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents by
Mr. Bretz until a suitable protective order may be implemented to protect the
Company's interests. The Company and individual defendants have filed a
demurrer (a formal objection to the legal sufficiency of the opponent's
pleading), which is set for hearing on May 7, 2002.
On February 19, 2002, Mr. Bretz amended the complaint in Federal District
Court under Case No. CV 01-5891 CAS originally filed in June 2001 by Mr. Bretz
in the name of the Company seeking a temporary restraining order (TRO) and
preliminary injunction blocking a shareholder's meeting scheduled for February
27, 2002, which had been delayed from October 31, 2001. Mr. Bretz' complaint
sought a preliminary injunction enjoining the holding of the shareholder's
meeting scheduled for February 27, 2002 and the use of proxies based on a
proxy statement, which Mr. Bretz alleges is false and misleading. The proxy
statement (including revisions thereof) in question had been reviewed in
detail on numerous occasions by the Securities and Exchange Commission ("SEC")
during the period from October 2001 through January 2002. On February 7,
2002, the SEC reported to the Company that it had no further questions or
comments on the preliminary (draft) proxy statement and that the Company could
immediately proceed with the filing of that preliminary proxy statement as a
definitive (final) proxy statement and issuance to the Company's shareholders
in preparation for a shareholder's meeting on February 27, 2002. At a hearing
on February 26, 2002, the court denied the application for a temporary
restraining order and ruled that the shareholder meeting could proceed as
scheduled, but requested that the results of the proxy solicitation not be
made public or implemented until after a further hearing on March 22, 2002.
At the March 22, 2002 hearing on the request for a preliminary injunction, the
court indicated that it would rule on the matter shortly. No ruling from the
court has been received by the Company as of the date of this filing. The
Company believes that Mr. Bretz is seeking to delay/block his removal from the
Company's Board of Directors, which will further limit his ability to continue
to harass the Company. In the interim, the Company is abiding by the court's
order and has not made any announcements of the results of the voting. Due to
the delay in the court's ruling, however, the Company will not be able to
proceed with its shareholder meeting scheduled for May 15, 2002 and will be
forced to reschedule the meeting to a date approximately 60 days after the
court issues its ruling.
Because Mr. Bretz is an attorney licensed by the California State Bar, he is
able to represent himself and perform all of his own legal work at virtually
no cost to himself, while the Company must hire multiple attorneys to
represent the Company and its officers. The Company has filed complaints
with the California State Bar alleging violations of ethics codes by Mr.
Bretz and the matters are currently being investigated by the State Bar.
Until the courts or State Bar intervene, the Company will be required to
expend substantial legal fees and related expenses to protect the Company's
interests.
The Company filed a complaint in Los Angeles, California, Superior Court, Case
No. BC261175 on November 6, 2001 against Pigasus, Inc. and its principals,
Arthur and Candy Zemon. The suit alleges a lack of informed consent, fraud,
deceit, intentional and negligent misrepresentation, lack of consideration,
and breach of contract and seeks to rescind the contract for the Company's
acquisition of the Wings software developed by Pigasus and seeks damages in
excess of $400,000. Subsequently, Pigasus Software, Inc., Arthur Zemon and
Candace Zemon filed suit in the Circuit Court of Saint Charles County, State
of Missouri, Civil Action No. 01CV129525, against Auto-Graphics, Inc. for
breach of contract, and they seek damages in excess of $500,000. Both actions
were removed to the local Federal District Courts and the California District
Court has transferred the matter to the District Court in Missouri. The
parties have engaged in mediation, but were unable to reach agreement on a
settlement.
In December 1999, the Company and an associate formed two new subsidiaries,
Dataquad, Inc. and The LibraryCard, Inc. A third party investor invested $1.0
million in cash in each of the subsidiaries in return for a 24.5% ownership
interest. In October 2000, the third party investor reported to the Company
that he did not believe that the Company had fully performed all of its
obligations under the subsidiary's securities sale and purchase transactions.
The Company believes that the investor may be experiencing "buyer's remorse"
following the recent significant decline in the market valuations for
technology including Internet stocks. The Company is not aware of any facts
upon which the investor could be expected to prevail in any action against the
Company or its subsidiaries in connection with the investor's purchase of
shares. No action has been commenced by the investor and the Company believes
that a portion of any claim would be barred by the applicable statute of
limitations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Stock quotations.
2001
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Bid Ask
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Price Range High Low High Low
------------ ------- ------- ------- -------
First Quarter $ 1.313 $ .531 $ 1.500 $ .625
Second Quarter 1.050 .510 1.100 .600
Third Quarter .510 .350 .600 .450
Fourth Quarter .440 .410 .650 .510
2000
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Bid Ask
-------------------- --------------------
Price Range High Low High Low
------------ ------- ------- ------- -------
First Quarter $13.500 $ 5.333 $15.000 $ 5.667
Second Quarter 12.000 5.063 13.000 6.250
Third Quarter 5.500 2.250 6.500 2.875
Fourth Quarter 3.750 1.250 4.438 1.438
Share prices above have been retroactively adjusted to reflect a 3-for-1 stock
split, which occurred on February 28, 2000. Trading in the Company's Common
Stock is reported on the electronic OTC (Over-the-Counter) Bulletin Board
under the symbol "AUGR" (Cusip Number 052725 10 8). The stock quotations set
forth above have been provided by Pink Sheets LLC and represent the highest
and lowest closing bid and asked prices quoted by broker/dealers making a
market in the Company's Common Stock in the OTC market for the periods
presented. Prices quoted do not include retail markup, markdown or
commissions and may not reflect actual transactions in shares of the Company's
stock.
As of December 31, 2001, the number of holder accounts of record (including
depository and nominee or "street name") of the Company's Common Stock was
approximately 227. The Company believes that the number of record and
beneficial owners of the Company's Common Stock is in excess of 450
stockholders. The Company has never paid a cash dividend and there are no
plans to do so in the near future. See Note 2 of Notes to Consolidated
Financial Statements for information as to the bank loan restriction on the
payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
Dollar amounts in thousands except per share data (which has been adjusted to
reflect the 3-for-1 stock split in February 2000).
Years Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Operating results:
Net sales $ 8,615 $ 8,323 $ 8,391 $ 9,099 $10,036
Net income/(loss) (1,320) (875) 105 (1,064) 212
Basic Earnings/
(loss)per share (.26) (.18) .03 (.33) .06
Diluted Earnings/
(loss)per share (.26) (.18) .03 (.33) .06
At year-end:
Total assets 5,801 8,153 10,647 7,573 8,852
Long-term debt -- 2,057 3,153 2,588 2,911
No cash dividends have been declared.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
The Company maintains its accounting books and records in accordance with
accounting principles generally accepted in the United States of America. The
preparation of the financial statements of the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
sales and expenses during the reporting period. These estimates are based on
information available as of the date of the financial statements. Actual
results may materially differ from those estimated. The Company's critical
accounting policies include the following:
+ Capitalized software development costs
+ Amortization of software development costs
+ Revenue Recognition
The Company accounts for internally developed software in accordance with
Statement of Financial Accounting Standard (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." After
technical feasibility has been established, the Company capitalizes the
average cost per billable hour of its software development process including
payroll and payroll benefits, training and recruiting costs. The Company
collects and records the software development hours invested in software
development projects. Annually, the Company evaluates these accumulated costs
for recoverability against estimated future revenues and determines the
amount, which will be capitalized. For the years 2001, 2000, and 1999, the
Company capitalized $750,000, $775,000 and $750,000, respectively and the
balance of $1,055,000, $832,000, and $386,000, respectively, of the gross
software development costs were expensed through cost of sales. 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.
The Company amortizes its software development costs in accordance with the
estimated economic life of the software. Studies within the library community
have indicated that the typical library automation system once installed
remains in use for an average of approximately 10 years. Because libraries
are generally under-funded, libraries frequently cannot afford the latest
computer hardware and software and therefore tend to utilize their system for
a longer period of time than in the commercial world. The Company's typical
product lifecycle has been about 15 years, which was true for its prior
film/fiche product line, current CD-ROM product line and current Internet/Web
product line, which has now been deployed for eight years and is still
growing. To the extent the average actual useful life varies significantly
from the estimated useful life, amortization expense may be understated or
overstated. Generally, amortization expense averages less than 10% of the
corresponding revenue stream.
Revenue recognition policies vary according to the nature of the revenue. The
Company's primary revenue stream is outsourced web hosting services which are
sold on a subscription basis. Services are billed in advance on an annual or
quarterly basis. Revenue is recognized monthly on a pro-rata basis i.e., for
a twelve month contract, one-twelfth of the revenue is recognized each month
as services are rendered. Revenues which have been billed and collected in
advance are booked to deferred income until the revenues are earned and
services provided. Certain small annual subscriptions for databases and
software support typically are recognized as revenue in the month they are
billed during the year. Certain overhead costs for providing future software
support services are accrued as expense in accordance with SOP 97-2, "Software
Revenue Recognition," as amended by SOP 98-4 and 98-9, and thereby matching
revenues and expenses. Certain contract job processing services are progress
billed and revenues recognized as the processing services are performed on a
monthly basis. Certain software and hardware sales are billed when the
product is shipped and title passes to the customer.
Liquidity and Capital Resources
The Company has incurred significant net losses totaling approximately $2.2
million ($0.875 million in 2000 and $1.32 million in 2001). The losses were
for the most part planned and represented an effort to restore revenue growth
through the launching of two new business initiatives. (The Company had
previously raised a total of approximately $4.0 million in new equity in 1999
and early 2000 to fund Internet/Web new product development and new business
initiatives). Two new companies were formed in December 1999, Dataquad, Inc.
and The LibraryCard, Inc. with approximately $1,000,000 each in seed capital
out of the above $4.0 million from an outside investor. Approximately $2.6
million of the gross losses over the last two years were derived from Dataquad
and LibraryCard. The efforts were unsuccessful and both companies have failed
to produce a growing revenue stream.
Dataquad
Dataquad markets 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 has been reduced to a minimal
support level consistent with its software support and small project revenues
and new product development has been curtailed (Impact/CMS product development
was essentially completed in 2001). Staff have been terminated or reassigned
to the Company and provide part-time support to Dataquad, which is being
charged to Dataquad on an actual cost basis. The Company has advanced no
funds to Dataquad.
LibraryCard
LibraryCard(TM) owns and operates an Internet/Web site, "www.LibraryCard.com",
offering access to library type information services to consumers in their
homes, schools, libraries and offices. LibraryCard revenues from book sales
have been negligible and LibraryCard still lacks a viable business model
necessary to operate. Efforts to raise additional capital or obtain outside
sponsors have been unsuccessful and no source of additional funding has been
identified or is expected. The staff of LibraryCard have been eliminated as
all funds have been expended including a $250,000 loan and $54,000 cash
advance from the Company. The Company does not plan to advance any more funds
to LibraryCard. The Company's ability to advance further monies to
LibraryCard is limited by the Company's bank line of credit agreement that
restricts loans by the Company to all subsidiaries to a maximum aggregate
total amount of $350,000. The loan by the Company was due to be repaid on
October 31, 2001. LibraryCard has defaulted on the loan and the Company does
not expect to be repaid. Since the loan was an intercompany loan and nearly
all of the funds have already been expensed by LibraryCard, the default is not
expected to have a material effect on the financial results of the Company.
The web site is still operating with part-time support from the Company.
2002 Operating Plan
In the fourth quarter of 2001, Robert S. Cope, the Company's CEO for many
years returned from retirement replacing Michael K. Skiles as President. A
plan was quickly developed and implemented to stop the substantial losses and
negative cash flow. The Company reduced its employment from 110 employees to
50 employees cutting estimated 2002 payroll by $2.5 million and cash expenses
by an additional $800,000 consistent with expected revenues in 2002. As
mentioned above, operations at the Company's new business initiatives,
Dataquad and LibraryCard were reduced or suspended. The Company closed its
Missouri and Maryland offices in October, 2001. The Company also vacated and
consolidated occupied space in its Pomona headquarters and relinquished
approximately 5,000 square feet (26% of its rented space) which had been on a
month-to-month lease back to the lessor. As a result of these steps, the
operating loss improved from the third quarter to the fourth quarter of 2001
by approximately $527,000 from $990,000 to $463,000 on comparable sales of
$1.950 million per quarter. (See Note 8 to Notes to Consolidated Financial
Statements). The fourth quarter included a reserve for severance benefits of
approximately $215,000 and an additional $275,000 in accelerated amortization
on database and software assets.
The Company has been and is re-evaluating all labor-intensive business
segments in which it competes and has recently discontinued its retro-
conversion business (the conversion of shelflist cards to electronic
bibliographic records) where the market has dwindled to the point where it no
longer justifies a continuation of the business. The Company is also
evaluating the labor-intensive typesetting operations of its Publishing
Division, which has also been declining for many years. We are, however,
continuing the more profitable facets of the publishing business and intend to
continue these sales as long as they provide a positive contribution to
income.
Having exhausted the above new equity capital, 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 a very cost effective solution for the library. The
majority of this subscription business also forms an ongoing stream of
recurring business each year under multiple year contracts.
The 2002 operating plan calls for revenues of $6.7 million down from $8.6
million in 2001. The plan calls for achieving $1,000,000 in new sales over a
beginning backlog of $5.7 million, half of which has already been achieved as
of March 2002. The plan is expected to restore the company to profitability,
although significant risks remain. Should sales fall short of expectations,
management plans to make further cuts in staff, if necessary, to maintain
profitability. With approximately $1.2 million in estimated depreciation and
amortization and profitable operating results, cash flow should be restored to
more historical levels. The capital budget has been scaled down from $1.3
million in 2001 to approximately $600,000 in 2002 primarily representing
internally developed software and a small amount of additional computer
equipment. The Company plans no further acquisitions for the foreseeable
future and will instead focus on the health of its core library business.
Free cash flow should be approximately $800,000 depending on the plan's
success. By far the biggest threat to the profitability of the Company in
2002 remains the substantial legal expenses, which the Company is being forced
to incur to protect its interests and fight the lawsuits initiated by the
Company's former general counsel. (See Part II, Legal Proceedings herein).
The Company's liquidity has been adversely affected by the losses over the
last two years. Working capital is a negative $2,631,000 and the Company's
current ratio is now 0.28:1 at December 31, 2001 compared to working capital
of $875,000 and a current ratio of 1.43:1 at December 31, 2000. (A normal
current ratio is from 1.1:1 to 1.25:1). Working capital in 2002 is being
adversely affected by the requirement to report the $1,272,000 line of credit
as a current liability under generally accepted accounting principles since it
matures in June of 2002 (see below). Gross accounts receivable is down
$478,000 from 2000 to 2001 primarily due to lower sales levels (see below),
improved collections and a gradual shift in the mix of business. The
Company's primary Impact/ONLINE product is sold on an annual subscription
basis with fees for services billed to the customer and paid annually or
quarterly in advance. This cash is received and booked to customer advances
(deferred income on the balance sheet) to be applied as the monthly sales
revenues are earned and recognized on a pro-rata basis. As the actual cash is
received, it is used to pay down the line of credit. A growing percentage of
sales (currently over 50%) of the Company's sales revenues are now being paid
through customer advances without ever flowing through accounts receivable.
Therefore, we have an average accounts receivable balance in current assets
that is approximately one-half what it would otherwise historically be and a
substantial deferred income balance in current liabilities representing
revenues to be earned from future services to customers who paid in advance.
Since any available cash is used to reduce long-term debt and accounts
receivable are lower than normal due to the terms of sale, working capital and
the current ratio are below normal levels. Likewise, unbilled production
costs (work in process inventory) are down $240,000 in 2001 from 2000. The
volume of contract work is becoming a much smaller part of the business
leading to lower inventory levels. The Company also wrote-off $106,500 in
finished goods inventory associated with Pigasus Wings software product in the
third quarter of 2001.
Management believes that liquidity and capital resources should be adequate to
fund operations of the Company in 2002. The Company was in non-compliance
with most of its financial loan covenants as of September 30, 2001 under its
bank credit agreement with Wells Fargo Bank and was unable to paydown its line
of credit to $2,250,000 on the October 1, 2001 due date because of a delay in
a large customer payment (the Company received the customer payment and made
the required payment to the bank on October 3, 2001). The Company's bank
agreed to waive its default rights as a result of these violations and agreed
to amend the terms of the credit facility to better conform to the Company's
expected future results. The prior agreement required that the Company
maintain consolidated cash balances equal to 40% of the maximum commitment in
effect throughout the term of the agreement ($900,000 at December 31, 2001).
At the Company's request, the bank eliminated this compensating balance
requirement applying approximately $800,000 in otherwise idle cash to a
paydown of the line of credit to $1.6 million, the new line of credit
commitment. The interest rate on the line of credit is the bank prime rate
plus one percentage point in effect from time to time (5.75% at December 31,
2001). The bank eliminated certain loan covenants and changed other covenants
at the Company's request to better fit the Company's forecast. As of December
31, 2001, the Company was in compliance with all of its loan covenants.
The Company currently could use approximately $200,000 in additional short-
term financing for the balance of the year and the Company's bank has been
unwilling to increase the availability under the credit facility to
accommodate this short-term need. The Company's bank line of credit facility
matures in June 2002 and is therefore reported as a current liability in the
Company's balance sheet for the year ended December 31, 2001 in accordance
with SFAS No. 6 "Classification of Short-term Obligations Expected to be
Refinanced." However, the bank has provided a written letter of intent to
amend and extend the terms of the credit agreement for an additional year to
assist the Company in its recovery plan, which new terms have not yet been
finalized. The Company expects that the bank will continue to reduce the
availability under the line of credit over the renewal period and increase the
interest rates and fees charged to the Company under the credit facility.
The Company has been seeking proposals from other banks for the past several
months to replace the Company's current bank and provide the additional
financing desired by the Company. However, due to the substantial losses
during the last two years, most commercial banks have not been willing to
offer credit to the Company without a source of traditional collateral, which
the Company lacks. At a minimum, two quarters to as much as two out of three
years of profitability are required before a prospective commercial bank is
willing to consider the Company's application for credit. There has been a
definite tightening in credit availability to small businesses like the
Company during the economic decline over the past year and a return to more
asset-based lending policies. To help solve the short-term financing
requirement, the Company has borrowed the maximum additional amount available
under the cash surrender value of its key-man life insurance policies of
approximately $64,000 and obtained additional short-term financing for
computer equipment from a related party in the amount of $31,000 (See Notes 2
and 5 in Notes to the Consolidated Financial Statements). The Company's 2002
cash flow forecasts indicate that the financing shortfall will gradually
decline over the balance of the year. 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 has been and will be extending some vendor payments as a result of
the lack of sufficient cash, working capital and available financing.
Generally, the Company's vendors are cooperating and the Company is making
every effort to pay the past due amounts over a reasonable period of time.
This is particularly true of legal expenses which have been significant in
2001 and to date in 2002. (See Part I, Legal Proceedings). Unless and until
the courts provide protection for the Company from the lawsuits being filed
against the Company and its officers by the Company's former general counsel,
the Company will be forced to incur substantial legal fees to protect its
interests.
The Company has considered equity financing, however, the depressed stock
market and the relatively poor market for new equity offerings as well as the
low current stock price for the Company's Common Stock ($0.32 per share as of
March 29, 2002) make this source of financing relatively unattractive. At the
current stock price, an offering would raise a very modest amount of capital
at a significant dilution to the existing shareholders. Management believes
that the current stock price is well below its historical and underlying value
and should increase as the Company begins to show profitable results and
improved cash flow in 2002. Management believes that it would be more prudent
to take steps to restore and raise the stock price before additional equity
financing is further considered. Therefore, the Company has no current plans
to enter the equity market to raise additional capital.
Net Cash Provided by Operating Activities was $1,041,000 in 2001 compared to
Net Cash Used by Operating Activities of $512,000 in 2000. The negative cash
flow in 2000 was primarily attributable to the start-up costs incurred by the
two new subsidiaries, Dataquad and LibraryCard. The cash flow in 2001
attributable to (non-cash) depreciation and amortization was $1,784,000
compared to $1,412,000 in 2000 due partially to additional accelerated
amortization of database and software assets. Net collection of accounts
receivable was $478,000 in 2001 due to lower sales and improved cash
collections. Other significant sources of Net Cash Provided by Operating
Activities was an increase in Deferred Income, Accrued Payroll and Other
Accrued Liabilities totaling $539,000. At December 31, 2001, the Company's
principal financial commitments, other than its bank line of credit, involved
the lease of computer equipment ($77,000) and the lease of corporate
facilities in Pomona, California and in Toronto, Canada. (See Note 5 of Notes
to Consolidated Financial Statements and Item 2. Properties herein).
The Company's principal use of cash for investing activities during 2001,
2000, and 1999 were directed primarily towards continuing the improvement and
development of the Company's Impact/ONLINE(TM) software, to enhance the
Impact/WEB search and retrieval engine and to further develop Dataquad's
Impact/CMS(TM) (Content Management System) for the management and maintenance
of XML databases. The amounts invested were $750,000, 775,000, and $750,000,
respectively. The remainder of investing activities were to acquire hardware
and software used to expand and enhance online services to the Company's
current (and prospective) Internet/Web customers.
In February of 2001, the Company completed the purchase of software and
related assets of Maxcess Library Systems, Inc. for approximately $196,000.
This purchase and resulting Impact/VERSO(TM) product offering provides the
Company with the opportunity to expand its current ASP (Application Service
Provider) product/services into the library automation area to include a fully
Internet/Web based Integrated Library System (ILS). Verso will be licensed to
libraries, including as a replacement for those who currently use the
Company's SLiMS (Small Library Management System) product for "in library" use
or as an ASP (Application Software Provider) service. Acquisition of the
Company's new ILS software on an ASP basis will provide libraries with a low
capital investment alternative to their ILS needs, with no local
software/hardware requirements (other than a PC workstation with a Web
browser), allowing the library and their patrons to access and utilize the
library's bibliographic holdings information via the Internet/Web.
In June 2001, the Company acquired the software and rights to Wings, an inter-
library loan software program, from Pigasus, Inc. In October 2001, following
a thorough evaluation of the Wings software and customer base, the Company
concluded that the software did not conform to the representations made by the
sellers and the Company has sought to rescind the contract to acquire the
software. On November 6, 2001, the Company filed suit against Pigasus, Inc.
and its principals and is seeking a judgment of the court that the contract is
rescinded as well as monetary damages and attorney's fees. The Company has
reversed the acquisition transaction and expensed approximately $206,500
associated with the transaction and related finished goods inventory. (See
Part II, Item 1. - Legal Proceedings).
Cash flows used for financing activities for the Company for the last three
years have been applied to a reduction of long-term debt totaling over $2.2
million while the primary source of cash from investing activities was sales
of stock totaling approximately $4 million. An $800,000 payment in December
2001 followed an amendment of the Company's bank loan agreement eliminating a
compensating balance requirement saving approximately $20,000 in annual
interest expense. (See Notes 2 of Notes to Consolidated Financial
Statements). Also, in 2000 the Company repurchased stock from a former
director/stockholder and a former officer of the Company ($380,000). (See
Note 6 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
2001 Compared to 2000
---------------------
Overall, 2001 sales as compared to 2000 were up $292,000 or 3.5% from
approximately $8.3 million in 2000 to $8.6 million in 2001. In March 2001,
the Company licensed the use of its REMARC(TM) bibliographic database of
Library of Congress pre-1968 holdings to an unaffiliated Japanese Company (for
use exclusively in Japan) for a one-time license fee of $1.5 million. This
transaction has had a material positive effect on the results of operations
reported by the Company for the 1st Quarter of 2001 and year ended December
31, 2001. Excluding this license fee, 2001 sales would have been down
approximately $1.2 million or 14.5% to approximately $7.1 million. Sales in
Dataquad were down $484,000 due to completion of a large contract in 2000 and
sales in publishing were down $435,000 in 2001. Library sales in Canada were
down $245,000 due to the loss of a major contract.
Cost of sales was up $789,000 or 15% from 2000 to 2001 due partially to the
increase in sales and due to a substantial increase in software development
costs of approximately $600,000 all of which was expensed. Development
projects included the completion of the second generation of the
Impact/ONLINE(TM)family, completion of Impact/CMS and development of the new
Impact/VERSO(TM)and AGent(TM) products.
Selling, general and administrative expenses in 2001 were essentially
unchanged from 2000 at $4.2 million.
Net interest expense in 2001 was $129,000 up from $104,000 in 2000 due
primarily to lower investment income due to declining interest rates and lower
average cash balances in 2001 than in 2000.
Foreign exchange transaction losses in 2001 were $36,000 compared to $68,000
in 2000. The Canadian dollar has continued to fall in value relative to the
US dollar losing another 6% in 2001. The consensus is that the Canadian
dollar will continue to fall in value for the foreseeable future. (See Foreign
Exchange below).
In 2001, the income tax benefit was $267,000 compared to a benefit of $98,000
in 2000 reflecting the future tax benefit of net operating loss carryforwards
for federal, state and foreign tax purposes. At December 31, 2001, the
Company has available federal, state and foreign net operating loss
carryforwards of approximately $1,115,000 ($3,728,000 including all
subsidiaries) $1,055,000 and $199,000, respectively, for income tax purposes.
These net operating loss carryforwards expire in 2021 for federal taxes, 2007
for state and 2006 for foreign taxes. Because the NOL tax benefit for losses
incurred in Dataquad and LibraryCard is unlikely to be realized, no tax
benefit has been recognized and a valuation allowance has been established
offsetting these potential future tax benefits.
The net loss in 2001 was $1,320,000 up from an $875,000 net loss in 2000.
Both the basic and fully diluted loss per share was $0.26 per share in 2001
compared to $0.18 per share in 2000.
2000 Compared to 1999
---------------------
Overall, 2000 sales as compared to 1999 were down $69,000 or 0.8% from $8.39
million in 1999 to $8.32 million in 2000, essentially unchanged.
Overall, gross margins decreased $635,000 or 18% (from $3.5 million, or 41% of
sales in 1999 to $2.9 million or 35% of sales in 2000). The decrease in gross
margin results from losses (negative gross margin) in the amount of $493,000
that were attributable to start-up costs of the Company's two new
subsidiaries, Dataquad and LibraryCard. The Company continues to emphasize
its Internet/Web hosting library services, which are less labor intensive and,
therefore, generally have higher gross margins than the high labor content
work such as the publishing database business. As the mix of products and
services offered by the Company continues to move toward higher margin
business, gross margins should improve as a result when combined with the
expectation that losses for LibraryCard will be substantially less than in
2000.
Selling, general and administrative expenses in 2000 increased $1,067,000 or
34%(from $3.15 million in 1999 to $4.22 million in 2000). The increase was
primarily a result of increased expenses at the Company's two new
subsidiaries, Dataquad and LibraryCard, where the combined expenses were
$978,000 for 2000.
Net interest expense in 2000 was down $244,000 or 70% (from $348,000 in 1999
to $104,000 in 2000). The decrease results from the overall lower borrowings
from the bank, a lower interest rate on the bank debt and increased interest
income that resulted from the investing the cash balances required to be
maintained by the credit agreement with the bank.
Information Relating To Forward-Looking Statements
This Report includes forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
Impact of Inflation
General price inflation is not anticipated to have a material effect on the
Company's business in the near future. Historical dollar accounting does not
reflect changing costs of operations, the future cost of expansion and the
changing purchasing power of the dollar. Should more than moderate inflation
occur in the future, it can be expected to impact the Company in an adverse
manner, as prices cannot be adjusted quickly due to the contractual nature of
a substantial amount of the Company's business, while costs of personnel,
materials and other purchases tend to escalate more rapidly.
Foreign Exchange
The functional and reporting currency of the Company is the U.S. dollar, while
the functional and reporting currency for A-G Canada Ltd., the Company's
wholly owned Canadian subsidiary, is the Canadian dollar. Accordingly, the
Company is exposed to foreign currency translation gains or losses as the
relationship between the Canadian dollar and United States dollar fluctuates.
The value of the Canadian dollar decreased in relation to the U.S. dollar in
2000 and 2001 (whereas the opposite occurred in 1999) resulting in a net
foreign currency loss for the Company. Decreases in the value of the Canadian
dollar will result in additional foreign currency translation losses, and
increases in the value of the Canadian dollar against the U.S. dollar will
result in foreign exchange gains. Other than for sales by A-G Canada in
Canada, all other transactions involving the Company are generally denominated
in U.S. dollars. See Note 1 of Notes to Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
See Note 1 "Recently Issued Accounting Pronouncements" of Notes to
Consolidated Financial Statements.
ITEM 7a. MARKET RISK
See Note 1 "Foreign Currency Translation," "Credit Risk," and "Fair Value of
Financial Instruments" of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements covered by Report of Independent
Certified Public Accountants.
Page
Reference
---------
Report of Independent Certified Public Accountants 23
Balance Sheets at December 31, 2001 and 2000 24
Statements of Operations and Comprehensive Income (Loss)
for years ended December 31, 2001, 2000 and 1999 25
Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999 26
Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 27
Notes to Consolidated Financial Statements 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2001 and 2000, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Auto-
Graphics, Inc. and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
BDO SEIDMAN, LLP
Los Angeles, California
March 14, 2002
AUTO-GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS (Note 2) 2001 2000
---------------------- ----------- -----------
Current assets:
Cash $ 122,029 $ 1,202,442
Accounts receivable, less
allowance for doubtful
accounts ($145,000 in
2001 and $38,000 in 2000) 695,789 1,280,977
Unbilled production costs 11,013 251,088
Other current assets 210,288 181,902
----------- -----------
Total current assets 1,039,119 2,916,409
Software, net (Note 1) 3,458,256 3,745,000
Equipment, furniture and
leasehold improvements, net (Note 1) 1,216,175 1,376,592
Other assets 87,210 114,696
----------- -----------
$ 5,800,760 $ 8,152,697
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 361,421 $ 481,136
Deferred income 1,255,006 982,166
Accrued payroll and related liabilities 468,408 436,510
Other accrued liabilities 205,316 63,845
Current portion of long-term debt (Note 2) 1,380,427 77,257
----------- -----------
Total current liabilities 3,670,578 2,040,914
Long-term debt, less current portion (Note 2) -- 2,056,876
Deferred taxes (Note 3) 148,900 387,900
----------- -----------
Total liabilities 3,819,478 4,485,690
Commitments and contingencies (Note 4)
Minority Interests (See Note 6) (119,714) 248,114
Stockholders' equity:
Notes Receivable - Stock (Note 6) (75,364) (77,500)
Common Stock, 12,000,000
shares authorized, 4,997,234
shares issued and outstanding
in 2001 and 2000 (Note 6) 4,201,755 4,201,755
Accumulated deficit (2,014,414) (694,381)
Accumulated other comprehensive loss (10,981) (10,981)
----------- -----------
Total stockholders' equity 2,100,996 3,418,893
----------- -----------
$ 5,800,760 $ 8,152,697
=========== ===========
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2001, 2000, 1999
2001 2000 1999
----------- ----------- -----------
Net sales $ 8,615,227 $ 8,322,604 $ 8,391,323
Costs and expenses
Cost of sales 6,228,027 5,439,035 4,872,445
Selling, general
and administrative 4,192,411 4,217,306 3,149,754
----------- ----------- -----------
10,420,438 9,656,341 8,022,199
----------- ----------- -----------
Income/(loss) from operations (1,805,211) (1,333,737) 369,124
Interest expense, net (129,423) (103,648) (347,957)
Foreign exchange gains/(losses) (35,578) (68,817) 52,591
Other income/(expense) 15,351 -- --
----------- ----------- -----------
Income/(loss) before taxes
And minority interests (1,954,861) (1,506,202) 73,758
Income tax benefit (Note 3) (267,000) (98,000) (46,630)
Minority interest in income/
(loss) of subsidiaries (367,828) (533,504) 15,200
----------- ----------- ----------
Net income/(loss) (1,320,033) (874,698) 105,188
----------- ----------- ----------
Foreign currency
translation adjustments -- 11,196 (19,770)
----------- ----------- -----------
Total comprehensive
income/(loss) ($1,320,033) $ (863,502) $ 85,418
=========== =========== ===========
Basic earnings(loss) per share $ (.26) $ (.18) $ .03
=========== =========== ===========
Weighted average
shares outstanding (Note 1) 4,997,234 4,821,321 3,684,009
=========== =========== ===========
Diluted
earnings(loss) per share $ (.26) $ (.18) $ .03
=========== =========== ===========
Weighted average
shares outstanding (Note 1) 4,997,234 4,821,321 3,776,004
=========== =========== ===========
Note: Shares outstanding have been retroactively adjusted to reflect a 3-for-1
stock split which occurred on February 28, 2000. See Note 1 "Earnings per
Share" in Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000, 1999
Retained
Common Stock Earnings/ Other Total
---------------------- Notes (Accumulated Comprehensive Stockholders'
Shares Amount Receivable Deficit) Income/(Loss) Equity
---------- ---------- ---------- ------------ ------------- -------------
Balances at
January
1, 1999 3,193,434 $1,230,347 -- $375,389 $ (2,407) $1,603,329
Net income -- -- 105,188 -- 105,188
Notes Receivable -- ($127,500) -- -- (127,500)
Common Stock
Issued in:
Parent 1,654,200 1,225,501 -- -- -- 1,225,501
Subsidiaries
Net of Minority
Interests 1,343,350 -- -- -- 1,343,350
Common Stock
Retired (62,700) (5,866) -- (41,600) -- (47,466)
Foreign Currency
Translation
Adjustments -- -- -- (19,770) (19,770)
---------- ---------- ---------- ------------ ------------- -------------
Balances at
December
31, 1999 4,784,934 3,793,332 (127,500) 438,977 (22,177) 4,082,632
Net loss -- -- (874,698) -- (874,698)
Common Stock
Issued in:
Parent 225,000 930,000 -- -- -- 930,000
Warrants exercised
in Parent 240,000 8,800 -- -- -- 8,800
Common Stock
Retired (252,700) (171,848) -- (258,660) -- (430,508)
Note Receivable -- 50,000 -- -- 50,000
Cost of Equity
Funding (253,760) -- -- -- (253,760)
Change in
Minority Interest (104,769) -- -- -- (104,769)
Foreign Currency
Translation
Adjustments -- -- -- 11,196 11,196
----------- ---------- ---------- ------------ ------------- -------------
Balances at
December
31, 2000 4,997,234 4,201,755 (77,500) (694,381) $(10,981) $ 3,418,893
Note Receivable -- 2,136 -- -- 2,136
Net loss -- (1,320,033) -- (1,320,033)
----------- ---------- ---------- ------------ ------------- -------------
Balances at
December
31, 2001 4,997,234 $4,201,755 $ (75,364) $ (2,014,414) $ (10,981) $ 2,100,996
=========== ========== ========== ============ ============= =============
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000, 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income/(loss) $(1,320,033) $ (874,698) $ 105,188
Adjustments to reconcile net
Income/(loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,783,679 1,412,328 1,381,053
Deferred taxes (272,000) (98,000) (74,000)
Allowance for doubtful accounts 107,000 -- --
Minority Interest (367,828) (533,504) 15,200
Changes in operating assets
and liabilities, net of the
effect of acquisitions
Accounts receivable 478,188 138,991 276,121
Unbilled production costs 240,075 (223,197) 58,682
Other current assets 4,614 (72,407) 204,933
Other assets (31,777) 36,616 27,874
Accounts payable (119,715) 187,592 (341,215)
Deferred income 272,840 (281,463) 452,067
Accrued payroll and
related liabilities 124,928 (145,922) (93,925)
Other accrued liabilities 141,471 (58,091) 37,876
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,041,442 (511,755) 2,049,854
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (386,817) (654,085) (664,335)
Capitalized software development (750,000) (775,000) (750,000)
Purchase of Maxcess Software (196,261) -- --
Investment in Dataquad, Inc. -- -- (1,500)
Investment in The LibraryCard, Inc. -- -- (1,500)
----------- ----------- -----------
Net cash used in investing (1,333,078) (1,429,085) (1,417,335)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 31,430 100,287 --
Payments under long-term debt (807,564) (1,026,945) (375,000)
Borrowings under life insurance 55,823 -- 7,064
Borrowings (payments) under
capital lease, net (70,602) (69,430) 223,250
Proceeds from stock/warrant sales 2,136 685,041 3,106,000
Repurchase of capital stock -- (380,508) (47,466)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (788,777) (691,555) 2,913,848
----------- ----------- -----------
Net increase/(decrease) in cash (1,080,413) (2,632,395) 3,546,367
Foreign currency effect on cash -- 18,551 (22,825)
Cash at beginning of year 1,202,442 3,816,286 292,744
----------- ----------- -----------
Cash at end of year $ 122,029 $ 1,202,442 $ 3,816,286
=========== =========== ===========
See Notes to Consolidated Financial Statements.
AUTO-GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000, 1999
1. Summary of significant accounting policies.
Description of Business
Auto-Graphics, Inc., a California corporation incorporated in 1960,
including its wholly-owned A-G Canada, Ltd. and Datacat, Inc. subsidiaries and
its majority-owned (61%) subsidiaries Dataquad, Inc. and The LibraryCard, Inc.
(the "Company") provides software products and services used to create,
convert, organize, manage and deliver database information via the
Internet/Web, CD-ROM and/or print media.
A-G Canada, a Canadian corporation created in 1997, provides software
products and services to customers in the library community in Canada.
Dataquad markets 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.
Operations have been reduced to a level consistent with backlog and
product development suspended.
LibraryCard operates an Internet/Web site, "www.LibraryCard.com",
offering access to library type information services to consumers in
their homes, schools, libraries and offices. Operations have been
suspended due to a lack of revenue and capital.
Basis of Presentation
The consolidated financial statements include the accounts of Auto-
Graphics, Inc. and its wholly and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Revenue Recognition
Sales are recognized as services are rendered monthly on a
subscription basis and when finished goods (software, equipment, databases,
etc.) are shipped to customers. Certain overhead costs for future software
support services are accrued in accordance with American Institute of
Certified Public Accountant's Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", as amended by SOP 98-4 and SOP 98-9. Revenues for which
payment has been received are treated as deferred income until services are
provided and revenues have been earned.
Use of Estimates
The preparation of the financial statements of the Company in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and sales and expenses during the reporting period. These
estimates are based on information available as of the date of the financial
statements. Actual results may materially differ from those estimated.
Foreign Currency Translation
The functional and reporting currency for operations located in Canada
is the Canadian dollar. Consequently, assets and liabilities must be
translated into U.S. dollars using current exchange rates and the effects of
the foreign currency translation adjustments are accumulated as other
comprehensive income and included as a component of stockholders' equity. The
net foreign exchange transaction losses for 2001 were $35,578, for 2000 were
$68,817 and transaction gains of $52,591 in 1999 and are included in "Other
income/(expense)" in the Consolidated Statements of operations and
Comprehensive Income/(Loss). All other Company transactions are currently
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 have exceeded management's expectations due to the U.S.
economic decline in 2001. 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 approximates
fair value because of the short-term maturity of these
instruments.
Long-term Debt. The carrying amounts approximates fair
value, since the interest rate on the debt is at least
equal to the bank's prime rate which the Company believes
is reflective of rates it could currently obtain.
Unbilled Production Costs
Costs associated with work in process (WIP) include: labor, materials,
and operations overhead (excluding selling, general and administrative
expenses) are stated at the lower of cost or net realizable value, and are
removed from WIP on a standard cost basis.
Software
Software is recorded at historical cost. Software at December 31,
2001 and 2000, consist of the following:
2001 2000
----------- -----------
Computer software and database $ 6,925,013 $ 8,704,485
Less accumulated amortization 3,466,757 4,959,485
----------- -----------
$ 3,458,256 $ 3,745,000
=========== ===========
Asset Purchase of Maxcess Library Systems Software: In February 2001,
the Company completed the purchase of software and related assets of Maxcess
Library Systems, Inc. for approximately $196,000. The purchase and resulting
Verso product offering will provide the Company with the opportunity to expand
its current ASP (Application Service Provider) product line into the
integrated library automation business and replace the Company's Slims
software product.
Asset Purchase of Pigasus Wings Software: In June 2001, the Company
acquired the software and rights to Wings, an inter-library loan software
program from Pigasus, Inc. In October 2001, following a thorough evaluation
of the Wings software and customer base, the Company concluded that the
software did not conform to the representations made by the sellers and the
Company has sought to rescind the contract to acquire the software. On
November 6, 2001, the Company filed suit against Pigasus, Inc. and its
principals and is seeking a judgment of the court that the contract is
rescinded as well as monetary damages and attorney's fees. The Company has
reversed the acquisition transaction and expensed approximately $206,500 in
expense associated with the transaction and related finished goods inventory.
Asset Retirements: Fully amortized software having an original cost of
2,933,885 was retired in 2001.
Amortization: Certain costs incurred related to the development and
purchase of computer software are capitalized and amortized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". In
accordance with EITF (Emerging Issues Task Force) Issue 00-02, "Accounting for
Web Site Development Costs", certain marketing costs incurred to develop Web
sites are expensed. Amortization is based on the straight-line method and
commences in the first full year of product availability and continues over
the product's estimated useful life. The estimated useful life for computer
software and databases is seven years based on its estimated economic life.
Unamortized computer software was approximately $3,458,000 in 2001, and
$3,745,000 in 2000. Amortization of computer software was approximately
$1,441,000 in 2001, $939,000 in 2000 and $838,000 in 1999.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are recorded at
historical cost. Equipment, furniture and leasehold improvements at
December 31, 2001 and 2000, consist of the following:
2001 2000
----------- -----------
Equipment 2,005,075 3,212,987
Furniture and fixtures 729,184 731,135
Leasehold improvements 273,974 273,974
----------- -----------
3,008,233 4,218,096
Less accumulated depreciation 1,792,058 2,841,504
----------- -----------
$ 1,216,175 $ 1,376,592
=========== ===========
Asset Retirements: Fully depreciated fixed assets having an original
cost of 1,388,530 were retired in 2001.
Useful Lives: The following estimated useful lives are generally
observed for the respective asset categories:
Equipment - 5 years
Furniture and fixtures - 5 to 10 years
Leasehold improvements - the lesser of 5 to 15 years,
or the lease term
Depreciation: Depreciation is based on the straight-line method over
the estimated useful life of the asset and commences in the year the asset is
placed in and/or is available for service or sale using the half-year
convention method. Depreciation was $339,000 in 2001, $473,000 in 2000 and
$543,000 in 1999.
Impairment Of Long-lived Assets
The Company periodically assesses the recoverability of the carrying
amounts of long-lived assets. A loss is recognized when expected undiscounted
future cash flows are less than the carrying amount of the asset. The
impairment loss is the difference by which the carrying amount of the asset
exceeds its fair value.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic and diluted earnings per share computations
presented by the Company conform to the standard and are based on the weighted
average number of shares of Common Stock outstanding during the year. Common
Stock equivalents in 1999 were 91,995. For the year ended December 31, 2001
and 2000 there were no warrants, options or convertible securities
outstanding.
On January 31, 2000, the Company announced a 3-for-1 stock split of
its Common Stock to shareholders of record on February 12, 2000, which
occurred on February 28, 2000. Two additional shares were issued for each
share held on the record date. Following the stock split, shares authorized
increased from 4,000,000 to 12,000,000. (See Note 6 Stockholders' Equity).
Share amounts in the Statement of Operations including basic and diluted
earnings per share, the Consolidated Balance Sheet, and Consolidated
Statements of Stockholders' Equity, and Notes to Consolidated Financial
Statements have been adjusted retroactively to reflect the stock split for the
periods presented.
Comprehensive Income
The Company accounts for comprehensive income in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in interim and annual financial
statements. Comprehensive income is defined as the change in the equity (net
assets) of an entity during a period from transactions, events and
circumstances excluding all transactions involving investments by or
distributions to the owners.
Supplemental Disclosure of Cash Flow Information
The Company paid net interest in the amount of $176,034 in 2001,
$103,648 in 2000, and $342,815 in 1999. The Company paid income taxes in the
amount of $2,147 in 2001, $16,702 in 2000, and $19,295 in 1999.
Stock Based Compensation
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.
There are presently no outstanding grants under the Company's 1997
Non-Qualified Stock Option Plan and the "2002 Qualified and Non-qualified
Stock Option Plan". (See Note 6 Stockholders' Equity "1997 Non-Qualified
Stock Option Plan" and "2002 Qualified and Non-qualified Stock Option Plan").
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,
2001, 2000, and 1999:
2001 2000 1999
---------- ---------- ----------
Geographic areas
Net sales
United States $5,740,996 $6,663,704 $6,648,752
Foreign - Canada 1,368,205 1,635,295 1,693,966
Foreign - primarily
Japan/Other 1,506,026 23,605 48,605
Long-lived assets, net
United States 4,607,929 5,005,602 4,916,734
Foreign - Canada 66,502 115,990 193,497
The Company has one customer, the Texas Education Agency (TEA), which
represents approximately 15% in 2001, 12% in 2000, and 10% in 1999 of the
Company's sales. The Company has a contract with TEA to develop and operate,
on an outsourced "hosting" basis, an Internet/Web based online bibliographic
database locator and interlibrary loan system linking approximately 7,500
kindergarten through grade 12 public school libraries when the system is fully
developed and implemented. Management believes that the loss of a single
large customer, such as the TEA, would have a material adverse effect on the
Company.
Also in March 2001, the Company licensed use of its REMARC(TM)
bibliographic database of Library of Congress pre-1968 holdings to a Japanese
Company for use exclusively in Japan for a one-time license fee of $1.5
million. This transaction, which represents approximately 17% of annual
sales, has had a material effect on the results of operations reported by the
Company for the 1st Quarter and year ended December 31, 2001.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS 141 also requires
that the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is required
to be applied in fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at that date, regardless of
when those assets were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The Company believes the adoption of SFAS 141 and SFAS 142 will have no
material impact on its financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company believes the adoption of this
Statement will have no material impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to be
applied prospectively. The Company 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, 2001 and 2000 consists of the
following:
2001 2000
---------- ----------
Revolving line of credit with
interest at the bank prime
rate plus one percent (5.75%
at December 31, 2001) secured
by all of the assets of the
Company and its subsidiaries $1,271,950 $1,986,694
Capital lease of computer equipment
with monthly payments of $7,371 77,047 147,439
Note payable for computer equipment
with monthly payments of $2,619
(See Note 5) 31,430 --
---------- ----------
Total debt 1,380,427 2,134,133
Less current portion 1,380,427 77,257
---------- ----------
Long-term portion $ -- $2,056,876
========== ==========
The Company was in non-compliance with most of its financial loan
covenants as of September 30, 2001 under its bank credit agreement and was
unable to paydown its line of credit to $2,250,000 on the October 1, 2001 due
date because of a timing delay in a large customer payment (the Company made
the required payment on October 3, 2001). The Company's bank agreed to waive
its default rights as a result of these violations and agreed to amend the
terms of the credit facility to better conform to the Company's expected
future results. The prior agreement required that the Company maintain
consolidated cash balances equal to 40% of the maximum commitment in effect
throughout the term of the agreement ($900,000 at December 31, 2001). At the
Company's request, the bank eliminated this compensating balance requirement
applying $800,000 in cash to a paydown of the line of credit to a revised
maximum commitment of $1.6 million. The interest rate on the line of credit
is the bank prime rate plus one percentage point in effect from time to time
(5.75% at December 31, 2001). The Company's bank line of credit facility
matures in June 2002 and is therefore reported as a current liability in the
Company's balance sheet for the year ended December 31, 2001 in accordance
with SFAS No. 6 "Classification of Short-term Obligations Expected to be
Refinanced." The credit line is secured by all of the assets of the Company
and its subsidiaries. It also requires that the Company maintain certain
minimum financial covenant ratios, restricts the payment of cash dividends and
limits the amount of certain types of equity investments, and the repurchase
of Company stock as well as limiting the amount of loans to third parties and
subsidiaries. As of December 31, 2001, the Company was in compliance with all
of its loan covenants. The bank has provided a written letter of intent and
offered to amend and extend the terms of the credit agreement for an
additional year to assist the Company in its recovery plan, which new terms
have not yet been finalized. The Company expects that the bank will continue
to reduce the availability under the line of credit over the renewal period
and increase the interest rates and fees charged to the Company under the
credit facility.
As of December 31, 2001, the Company had $230,620 in computer
equipment under a capital lease. Accumulated amortization on these assets was
$115,310 at December 31, 2001. The present value of minimum lease payments at
December 1999 was $223,000. The following is a schedule of future minimum
lease payments required under the capital leases together with their estimated
present values:
Year Ending December 31, 2002
---------------------------------------
$ 81,081
---------
Total Minimum Lease Payments 81,081
Less interest (4,034)
---------
Present Value of
Minimum Lease Payments 77,047
Less Current Portion (77,047)
---------
Long-term Portion $ --
=========
3. Taxes Based on Income.
The Company uses the asset and 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 and 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, 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ---------
Current taxes based on income
Federal $ -- $ (10,000) $ 22,000
State 5,000 8,000 5,000
Foreign -- 2,000 --
--------- --------- ---------
5,000 -- 27,000
--------- --------- ---------
Deferred taxes based on income
Federal (237,000) (68,000) (68,000)
State (35,000) 5,000 28,000
Foreign -- (35,000) (34,000)
--------- --------- ---------
(272,000) (98,000) (74,000)
--------- --------- ---------
$(267,000) $ (98,000) $ (47,000)
========= ========= =========
A reconciliation of the provision/(benefit) for taxes based on income
follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ---------
Statutory U.S. Federal income tax $(665,000) $(512,000) $ 25,000
Adjustments for foreign tax rates (2,000) 6,000 9,000
Change in valuation allowance 475,000 300,000 (23,000)
State tax, net of Federal benefit (116,000) (89,000) 4,000
Benefit of prior year NOL carryforward -- 180,000 (98,000)
Other 41,000 17,000 36,000
--------- --------- ---------
$(267,000) $ (98,000) $ (47,000)
========= ========= =========
The statutory U.S. Federal income tax rate was 34% in 2001, 2000 and
1999. The deferred tax assets and liabilities are composed of the following
at December 31, 2001 and 2000:
2001 2000
--------- ---------
Deferred tax liabilities:
Tax over book amortization and
depreciation $ 626,000 $ 680,000
--------- ---------
Deferred tax assets:
Net operating loss 1,501,000 821,000
Bad debts/accrued vacation/other 90,000 76,000
--------- ---------
Total deferred tax assets 1,591,000 897,000
Valuation allowance (1,006,000) (531,000)
--------- ---------
Net deferred tax assets 585,000 366,000
--------- ---------
Net deferred tax liability $ 41,000 $ 314,000
========= =========
Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been reported in the Company's
financial statements or tax returns. The valuation allowance at December 31,
2001, 2000 and 1999 reflects an unrecognized U.S. and foreign tax loss
carryforward. At December 31, 2001, the Company has available federal, state
and foreign net operating loss carryforwards of approximately $1,115,000
($3,728,000 including all subsidiaries) $1,055,000 and $199,000, respectively,
for income tax purposes. These net operating loss carryforwards expire in
2021 for federal taxes, 2007 for state and 2006 for foreign taxes.
4. Commitments and Contingencies.
The Company incurred total facilities and equipment lease and rental
expense of approximately $304,000 in 2001, $307,000 in 2000, and $374,000 in
1999. The Company is obligated under certain non-cancelable operating leases
for office facilities and equipment expiring in 2002, 2003 and 2004.
Approximate future minimum lease commitments as of December 31, 2001 are as
follows:
Years ended Operating
December 31, Leases
------------ -----------
2002 $ 79,000
2003 33,000
2004 19,000
---------
Total minimum lease payments $ 131,000
=========
On November 1, 2000 the Company entered into a line of credit
agreement with its majority-owned subsidiary, LibraryCard, whereby the Company
agreed to loan LibraryCard up to $250,000 for use as working capital during
the twelve month period ending October 31, 2001. As of December 31, 2001, a
total of $304,000 had been advanced and loaned by the Company to LibraryCard.
The outstanding balance of this credit line was scheduled to be repaid by no
later than October 31, 2001. LibraryCard has defaulted on its loan from the
Company and the Company anticipates that the full amount advanced under the
$250,000 line of credit will not be repaid without a cash infusion/investment
into LibraryCard, which is not currently expected. No interest income has
been accrued and the loan is an intercompany loan and LibraryCard has expensed
virtually all of the cash advance, therefore the loan default is not expected
to have a material adverse effect on the results of operations or financial
condition of the Company.
On May 9, 2001 the Company terminated the services of its long-time
outside counsel, Mr. Robert H. Bretz. Mr. Bretz is also a director of the
Company. Following Mr. Bretz' termination he began to file lawsuits for and
on behalf of the Company that had not been authorized by Company's management
or the Board of Directors. On August 8, 2001 one particular case filed by Mr.
Bretz in the name of the Company, Case No. BC252517, was dismissed by the Los
Angeles California Superior Court holding that the Action by Unanimous Written
Consent signed solely by Mr. Bretz in reference to the filing of the case was
invalid because it failed to satisfy the requirements of California
Corporations Code Section 307(b).
On June 29, 2001 the Company filed Case No. BC353322 in Los Angeles
California Superior Court captioned Auto-Graphics, Inc. vs. Robert H Bretz et
al., alleging breach of fiduciary duty by Mr. Bretz and that Mr. Bretz had
become disruptive and harmful to the business operations of the Company and
damaged the Company by his various actions including his excessive billings to
the Company.
As a response to the complaint filed by the Company, Mr. Bretz filed a
derivative cross-complaint against three of the Company's officers, Robert S.
Cope, Michael K. Skiles and Michael F. Ferguson for breach of fiduciary duty,
fraud & deceit, misrepresentation, breach of contract/employment, removal for
cause and other declaratory and injunctive relief. The original cross-
complaint was filed on July 16, 2001 in Los Angeles California Superior Court
under Case No. BC353322. The Company's management believes that the
derivative cross-complaint filed by Mr. Bretz does not have any merit and that
the Company will eventually prevail. The court ruled that the derivative
cross-complaint was unlikely to benefit the Company or its shareholders and
ordered Mr. Bretz to post the maximum ($50,000) bond in order to continue his
lawsuit. The Company has been notified that Mr. Bretz has posted the bond on
March 21, 2001. Mr. Bretz has filed a motion to exonerate the bond or for
reconsideration of the court order to post the bond and a hearing on the
matter is scheduled for May 23, 2002.
On December 10, 2001, Mr. Bretz filed another complaint in Los Angeles
Superior Court under Case No. BC263256 against the Company, two of the
Company's officers, Robert S. Cope and Daniel E. Luebben, the Company's
general counsel, Craig O. Dobler, and a director, James R. Yarter. The
complaint seeks to enforce a director's inspection and copying rights under
California Corporations Code Section 1602 and seeks injunctive relief,
attorney's fees and costs. The Company has denied access to some documents by
Mr. Bretz until a suitable protective order may be implemented to protect the
Company's interests. The Company has filed a demurrer (a formal objection to
the legal sufficiency of the opponent's pleading), which is set for hearing on
May 7, 2002. Should Mr. Bretz be voted off of the board of directors, the
Company expects the suit will be dismissed by the court.
On February 19, 2002, Mr. Bretz amended the complaint in Federal
District Court under Case No. CV 01-5891 CAS originally filed in June 2001 by
Mr. Bretz in the name of the Company seeking a temporary restraining order
(TRO) and preliminary injunction blocking a shareholder's meeting scheduled
for February 27, 2002, which had been delayed from October 31, 2001. Mr.
Bretz' complaint sought a preliminary injunction enjoining the holding of the
shareholder's meeting scheduled for February 27, 2002 and the use of proxies
based on a proxy statement, which Mr. Bretz alleges is false and misleading.
The proxy statement (including revisions thereof) in question had been
reviewed in detail on numerous occasions by the Securities and Exchange
Commission ("SEC") during the period from October 2001 through January 2002.
On February 7, 2002, the SEC reported to the Company that it had no further
questions or comments on the preliminary (draft) proxy statement and that the
Company could immediately proceed with the filing of that preliminary proxy
statement as a definitive (final) proxy statement and issuance to the
Company's shareholders in preparation for a shareholder's meeting on February
27, 2002. At a hearing on February 26, 2002, the court denied the application
for a temporary restraining order and ruled that the shareholder meeting could
proceed as scheduled, but requested that the results of the proxy solicitation
not be made public or implemented until after a further hearing on March 22,
2002. At the March 22, 2002 hearing on the request for a preliminary
injunction, the court indicated that it would rule on the matter shortly. No
ruling from the court has been received by the Company as of the date of this
filing. The Company believes that Mr. Bretz is seeking to delay/block his
removal from the Company's Board of Directors, which will further limit his
ability to continue to harass the Company. In the interim, the Company is
abiding by the court's order and has not made any announcements of the results
of the voting. Due to the delay in the court's ruling, however, the Company
will not be able to proceed with its shareholder meeting scheduled for May 15,
2002 and will reschedule the meeting to a date approximately 60 days after the
court issues its ruling.
Because Mr. Bretz is an attorney licensed by the California State Bar,
he is able to represent himself and perform all of his own legal work at
virtually no cost to himself, while the Company must hire multiple attorneys
to represent the Company and its officers. The Company has filed complaints
with the California State Bar alleging violations of ethics codes by Mr. Bretz
and the matter is currently being investigated by the State Bar. Until the
courts or State Bar intervene, the Company will be required to expend
substantial legal fees and related expenses to protect the Company's
interests.
The Company filed a complaint in Los Angeles, California, Superior
Court, Case No. BC261175 on November 6, 2001 against Pigasus, Inc. and its
principals, Arthur and Candy Zemon. The suit alleges a lack of informed
consent, fraud, deceit, intentional and negligent misrepresentation, lack of
consideration, and breach of contract and seeks to rescind the contract for
the Company's acquisition of the Wings software developed by Pigasus and seeks
damages in excess of $400,000. Subsequently, Pigasus Software, Inc., Arthur
Zemon and Candace Zemon filed suit in the Circuit Court of Saint Charles
County, State of Missouri, Civil Action No. 01CV129525, against Auto-Graphics,
Inc. for breach of contract, and they seek damages in excess of $500,000.
Both actions were removed to the local Federal District Courts and the
California District Court has transferred the matter to the District Court in
Missouri. The parties have engaged in mediation, but were unable to reach
agreement on a settlement.
From time to time, the Company is involved in legal proceedings
incidental to its normal business activities. Management does not believe
that the outcome of these proceedings will have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.
5. Related Party Transactions.
The Company leases its corporate office facility from a limited
partnership owned by a current and a former director/stockholder of the
Company ("Lessor") under a 15 year lease, which was approved and authorized by
the independent members of the Company's Board of Directors in June 1986. The
Company also has an option to purchase a one-third interest in the partnership
from the Lessor for an amount not to exceed $150,000 subject to certain
conditions. In 2001, the Company leased 19,460 square feet having an annual
base rent of $234,000 (plus expenses). As of March 1, 2002, the Company has
reduced its space occupied by approximately 26% from 19,460 square feet to
14,462 square feet. The reduction in space was completed following a
reduction in staffing levels in the fourth quarter of 2001 and should result
in a decrease in the Company's annualized rent of approximately $60,000 (plus
expenses). The original lease expired in June, 2001 and the Company has
remained in the facility as a hold-over tenant pending completion of
negotiations on a new lease and approval by the independent members of the
Board of Directors. The proposed rental rate for the lease renewal is
equivalent to the rental rates paid by two unaffiliated tenants in the same
building. The Company has also surveyed similar available office properties
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 leases small sales and/or sales support
office space in Seattle, Washington, and in Toronto, Ontario, Canada for its
wholly-owned subsidiary, A-G Canada, Ltd. Since the Company did not renew the
lease prior to March 31, 2002, the Company may be obligated to the Lessor for
an additional $88,000 in rental payments for the period from July 1, 2001
through March 31, 2002 under the original lease.
Robert H. Bretz is a director of the Company and also served as the
Company's outside legal counsel until May 9, 2001. The Company paid Mr.
Bretz's law firm $168,000, $340,000 and $345,000, respectively, for 2001, 2000
and 1999 for legal services rendered to the Company for these years.
Corey M. Patick, a shareholder, provided consulting services related
to corporate development and was paid $64,750 in 2001.
James R. Yarter has been a director of the Company since June 2001 and
also serves as a sales and marketing consultant to the Company and was paid
$7,500 for services rendered to the Company in 2001.
In December 2001, Donald A. Scurti, a shareholder, provided
financing to the Company of approximately $31,000 on a one year note to
purchase computer servers.
6. Stockholders' Equity.
Private Placement Offerings
In May of 1999, the Company initiated a private placement offering of
its Common Stock at $0.83 per share (after adjustment of the 3-for-1 stock
split which occurred on February 28, 2000). Shares offered and sold in the
offering were classified as "restricted" stock, meaning that these shares
could not be sold in the public trading market for the Company's stock for a
minimum period of one year. The offering was concluded in October 1999 with a
total of 1,654,200 shares sold, increasing total shares outstanding to
4,784,934, and raising gross proceeds of $1,378,500. The Company sold
1,501,200 shares at $0.83 per share raising a total of $1,251,000 in cash. An
additional 153,000 shares at $0.83 per share (for total investment of
$127,500) were sold to certain senior management of the Company on four year
interest bearing full recourse notes. In July of 2000, 60,000 shares were
repurchased from a former executive in conjunction with the settlement of a
lawsuit. The corresponding note receivable of $50,000 was simultaneously
canceled. The remaining notes are presented as "Notes Receivable - Stock" in
the Stockholders' equity section of the Company's Consolidated Balance Sheet.
In February 2000, the Company consummated a private placement of
225,000 shares (after giving effect to the 3-for-1 stock split) of its
(restricted) Common Stock with an offshore investment company for $4.125 per
share for gross proceeds of $930,000. The Company used a portion of the net
proceeds from the sale of this stock to reduce its capital line of credit with
the bank by $600,000.
The Company incurred direct and incremental expenses in connection
with the 1999 private placement offering of $1,251,000, the sales of $2.0
million in shares of the Company's Dataquad, Inc. and The LibraryCard, Inc.
subsidiaries, and 2000 private placement offering of $930,000 resulting in
gross proceeds from the sale of all these securities of $4,181,000. Equity
funding costs and expenses in 2000, including legal, and selling expenses
totaling $254,000, have been offset against the total equity raised.
Warrants
In May 1999, the Company entered into a selling agreement with an
associate pertaining to the Company's 1999 private placement offering (see
above), where the associate earned and the Company sold and issued 240,000 3-
year warrants for $800 entitling the associate to purchase one share of the
Company's (restricted) Common Stock for each warrant for $.033 per share.
Subsequently, the associate sold the warrants to the Company's outside
director for an amount representing a substantial discount for the
(restricted) shares of the Company's Common Stock underlying these warrants as
compared to the reported market price for "free trading" shares of the
Company's Common Stock; and the purchaser/ transferee then exercised the
warrants and purchased, and the Company caused to be sold and issued, the
240,000 shares of the Company's (restricted) Common Stock covered by these
warrants for the exercise (purchase) price for these shares under the warrants
(aggregating $8,000 or $0.033 per share). In November 2001, the outside
director resold 120,000 shares back to the associate who in December resold
the shares to another outside director. There are no warrants outstanding at
December 31, 2001.
Option to Purchase Restricted Shares
In May 1999, Robert S. Cope and the Cope Family Trust granted an
option to Corey M. Patick to purchase 1,125,000 (or 22%) of the Company's
Common Stock for $1.67 per share (adjusted for the 3-for-1 stock split
effective February 28, 2000). Mr. Patick subsequently exercised the option in
November of 2000 and the closing for the purchase of and payment for the
option shares, originally scheduled for November 2000, has been extended
several times by the parties; and the closing was most recently scheduled to
take place no later than August 31, 2001. On August 31, 2001, when the
prevailing market price for the Company's Common Stock was $0.60 per share,
the option expired without the shares having been purchased by Mr. Patick.
Planned Dataquad and LibraryCard Stock Purchase/Option Plans
In June 2000, 700,000 shares each of Dataquad and LibraryCard Common
Stock were sold to a trustee (Corey M. Patick) on a note for use in a future
stock purchase/option plan. As a result of the issuance, the Company's
interest in the subsidiaries was diluted which resulted in a charge to
Stockholders' Equity in the amount of $104,769. In January 2001, Robert S.
Cope replaced Mr. Patick as trustee for the shares. Under the terms of the
Cope Stock Purchase Agreement, the subsidiaries have the option to repurchase
the stock by December 31, 2002. The effect of the repurchase would be a net
increase in Minority Interests and a corresponding decrease in Stockholder's
Equity of up to $280,500 ($180,250 for Dataquad and $100,250 for LibraryCard).
Repurchase of Stock
In February 2000, the Company accelerated the purchase and retired the
remaining 187,200 shares (after giving affect to the 3-for-1 stock split)
outstanding under a stock repurchase agreement with a former director/
stockholder of the Company for $203,000 in cash consideration. The Company
also transferred an insurance policy to the seller having a net cash surrender
value of approximately $72,000.
In July 2000, the Company settled a lawsuit with a former officer for
total consideration of $225,000 including the repurchase of 65,500 shares of
the Company's Common Stock for $105,000 and the balance of $120,000 was
expensed.
1997 Non-qualified Stock Option Plan
The Company adopted a 1997 Non-qualified Stock Option Plan effective
December 31, 1997. The Plan consists of 300,000 shares of the Company's
authorized but unissued Common Stock which shares have been reserved for
possible future issuance under the Plan. The plan is a non-qualified plan
covering only senior executives and related persons. As of December 31, 2001,
2000 and 1999, there were no outstanding grants of options under the Plan and
no grants are currently planned.
2002 Qualified and Non-qualified Stock Option Plan
In February 2002, the Company submitted a qualified and non-qualified
stock option plan to its shareholders for approval at a shareholder's meeting
held on February 27, 2002. The plan consists of 497,000 shares with
approximately 350,000 shares reserved for employees and 147,000 shares
reserved for directors. As of December 31, 2001, 2000 and 1999, there were no
outstanding grants of options under the Plan, although a small number of
shares have been promised to certain executives who relinquished shares under
the above referenced 1997 Non-qualified Stock Option Plan. The Company is
awaiting a ruling from the Federal District Court on whether the results of
the proxy vote at the above referenced meeting can be announced.
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 $750 in 2001, $35,000 in 2000 and $23,000 in 1999.
8. Quarterly Results (Unaudited)
Quarterly results for the years ended December 31, 2001, 2000 and
1999 are reflected below:
Fourth Third Second First
----------- ----------- ----------- -----------
2001
----
Revenue $ 1,957,195 $ 1,942,027 $ 1,593,936 $ 3,122,069
Operating loss $ (462,539) $ (989,882) $ (799,502) $ 446,712
Net (loss) $ (342,101) $ (740,499) $ (689,131) $ 451,698
Basic (loss)
per share $ (.06) $ (.15) $ (.14) $ .09
Diluted (loss)
per share $ (.06) $ (.15) $ (.14) $ .09
2000
----
Revenue $ 2,084,480 $ 1,858,787 $ 2,269,456 $ 2,109,881
Operating loss $ (607,383) $ (483,600) $ (122,199) $ (120,555)
Net (loss) $ (321,079) $ (312,908) $ (107,297) $ (122,218)
Basic (loss)
per share $ (.07) $ (.07) $ (.02) $ (.03)
Diluted (loss)
per share $ (.07) $ (.07) $ (.02) $ (.03)
1999
----
Revenue $ 2,463,085 $ 1,904,796 $ 2,041,412 $ 1,982,030
Operating income $ 101,099 $ 109,428 $ 67,852 $ 90,975
Net income $ 28,860 $ 24,934 $ 14,172 $ 17,452
Basic earnings
per share $ .01 $ .01 $ .01 $ .01
Diluted earnings
per share $ .01 $ .01 $ .01 $ .01
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may
not agree with the per share amounts for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of, and the positions and
offices within the Company held by, certain directors and officers of the
Company at December 31, 2001:
Name Age Position
--------------- ----- -----------------------------------------------
Robert S. Cope 66 Chairman of the Board and Director. Has served
in these capacities for more than ten years.
Robert H. Bretz 58 Director. Attorney who has acted as the
Company's outside general legal counsel for
more than ten years until May 9, 2001.
James R. Yarter 64 Director. Has served as a director for less
than one year.
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.
On February 8, 2002, the Company issued a Proxy Statement, which
included the election of a slate of directors, several Company proposals and a
shareholder proposal in preparation for a shareholder meeting on February 27,
2002. On February 19, 2002, Mr. Bretz amended a complaint in Federal District
Court under Case No. CV 01-5891 CAS originally filed in June 2001 by Mr. Bretz
in the name of the Company seeking a temporary restraining order (TRO) and
preliminary injunction blocking the shareholder's meeting scheduled for
February 27, 2002, which had been delayed from October 31, 2001. Mr. Bretz'
complaint sought a preliminary injunction enjoining the holding of the
shareholder's meeting scheduled for February 27, 2002 and the use of proxies
based on a proxy statement, which Mr. Bretz alleges is false and misleading.
The proxy statement (including revisions thereof) in question had been
reviewed in detail on numerous occasions by the Securities and Exchange
Commission ("SEC") during the period from October 2001 through January 2002.
On February 7, 2002, the SEC reported to the Company that it had no further
questions or comments on the preliminary (draft) proxy statement and that the
Company could immediately proceed with the filing of that preliminary proxy
statement as a definitive (final) proxy statement and issuance to the
Company's shareholders in preparation for a shareholder's meeting on February
27, 2002. At a hearing on February 26, 2002, the court denied the application
for a temporary restraining order and ruled that the shareholder meeting could
proceed as scheduled, but requested that the results of the proxy solicitation
not be made public or implemented until after a further hearing on March 22,
2002. At the March 22, 2002 hearing on the request for a preliminary
injunction, the court indicated that it would rule on the matter shortly. No
ruling from the court has been received by the Company as of the date of this
filing. In the interim, the Company is abiding by the court's order and has
not made any announcements of the results of the voting. Due to the delay in
the court's ruling, however, the Company will not be able to proceed with its
shareholder meeting scheduled for May 15, 2002 and will be forced to
reschedule the meeting to a date approximately 60 days after the court issues
its ruling.
Management Changes
On September 18, 2001, the Company's Board of Directors dismissed Michael K.
Skiles, President and Michael F. Ferguson, Chief Financial Officer and
Secretary and re-appointed Robert S. Cope as President and Daniel E. Luebben,
Chief Financial Officer and Secretary the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and 10% shareholders to file forms
with the SEC to report their ownership of the Company's shares and any changes
in said ownership. Anyone required to file forms with the SEC must also send
copies of the forms to the Company. Robert H. Bretz was late in filing Form 4
for the purchase of 240,000 warrants from Corey M. Patick to purchase 240,000
shares and also for the acquisition of the same 240,000 shares. Mr. Bretz has
not provided the Company with a copy of the Form 4 for the sale of 120,000
shares back to Mr. Patick in November of 2001. Mr. Patick has not provided
the Company with a copy of the Form 4 for the sale of 120,000 shares to Mr.
Yarter in December of 2001. Robert S. Cope was late in filing Form 4 for the
purchase of 30,000 shares.
ITEM 11. EXECUTIVE COMPENSATION
A definitive Proxy Statement will be filed with the Securities and Exchange
Commission ("Commission") pursuant to Regulation 14A within 120 days after the
close of the Company's most recent calendar year, and, accordingly, Item 11 is
incorporated by reference to said definitive Proxy Statement. The Proxy
Statement includes information covering this item under the caption
"Compensation of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A definitive Proxy Statement will be filed with the Commission pursuant to
Regulation 14A within 120 days after the close of the Company's most recent
calendar year, and, accordingly, Item 12 is incorporated by reference to said
definitive Proxy Statement. The Proxy Statement includes information covering
this item under the caption "Security Ownership of Certain Beneficial Owners
and Management" and "Nominees for Election as Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A definitive Proxy Statement will be filed with the Commission pursuant to
Regulation 14A within 120 days after the close of the Company's most recent
calendar year, and, accordingly, Item 13 is incorporated by reference to said
definitive Proxy Statement. The Proxy Statement includes information covering
this item under the caption "Certain Relationships and Related Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules and
exhibits:
(1) Financial Statements: See Item 8. "Financial
Statements".
(2) All schedules are omitted since the required
information is not present or not present in
amounts sufficient to require submission of the
schedule, or because the information required is
included in the financial statements, including
the notes thereto.
(3) Exhibits:
3.1 Articles of Incorporation of Auto-Graphics, Inc.,
as amended (incorporated by reference as filed with
the SEC as Exhibit 3.1 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989), as amended by
within additional Exhibit 3.1 filing of the amendment
to the Articles covering 3-for-1 stock split
implemented February 28, 2000.
3.2 Bylaws, as amended (incorporated by reference as
filed with the SEC as Exhibit 3.2 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989).
10.8 Lease Agreement between 664 Company and
Auto-Graphics, Inc. dated May 27, 1986 (incorporated by
reference as filed with the SEC as Exhibit 10.7 to Item
14(a) in the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990).
10.9 Agreement by, between and among Auto-Graphics,
Inc. and Douglas K. and Ruth T. Bisch executed
February 15, 1995 (incorporated by reference as
filed with the SEC as Exhibit 10.9 to Item 14(a) in
the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
10.10 Asset Purchase Agreement between A-G Canada,
Ltd., a wholly owned subsidiary of Auto-Graphics,
Inc. and ISM Information Systems Management Manitoba
Corporation, a subsidiary of IBM Canada, Ltd. dated
June 30, 1997 incorporated by reference as filed with
the SEC in the registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997).
10.15 Credit Agreement between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.15 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.16 First Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated June 23, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.16 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.17 Second Amendment to Credit Agreement between Wells
Fargo and Auto-Graphics, Inc. dated October 31, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.17 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.18 Revolving Line of Credit Note (Working Capital)
between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997 (incorporated by reference as filed with
the SEC as Exhibit 10.18 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.19 Revolving Line of Credit Note (Capital Equipment)
between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997 (incorporated by reference as filed with
the SEC as Exhibit 10.19 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.20 Term Note between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.20 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.21 Continuing Security Agreement Rights to Payment
and Inventory between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.21 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.22 Security Agreement Equipment between Wells Fargo
Bank and Auto-Graphics, Inc. dated May 12, 1997
(incorporated by reference as filed with the SEC as
Exhibit 10.22 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.23 Guaranty between Wells Fargo Bank and Robert S.
Cope dated May 12, 1997 (incorporated by reference as
filed with the SEC as Exhibit 10.23 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.24 Settlement Agreement and Mutual Release between
Diversified Printing & Publishing Services, Inc.,
Gannam/Kubat Publishing, Inc. Nasib Gannam, and T. Ron
Kahraman, and Datacat, Inc., Auto-Graphics, Inc. and
Robert S. Cope dated September 30, 1997 (incorporated by
reference as filed with the SEC as Exhibit 10.24 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.25 1997 Non-Qualified Stock Option Plan dated
December 31, 1997 (incorporated by reference as filed
with the SEC as Exhibit 10.25 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.26 Third Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated June 1, 1998
(incorporated by reference as filed with the SEC as
Exhibit 10.26 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.27 Term Note between Wells Fargo Bank and
Auto-Graphics, Inc. dated June 1, 1998 (incorporated by
reference as filed with the SEC as Exhibit 10.27 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.28 Fourth Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated September 15,
1998 (incorporated by reference as filed with the SEC as
Exhibit 10.28 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.29 Fifth Amendment to Credit Agreement between Wells
Fargo Bank and Auto-Graphics, Inc. dated December 24,
1998 (incorporated by reference as filed with the SEC as
Exhibit 10.29 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998).
10.30 Option Agreement dated May 15, 1999 between Robert
S. Cope and Elizabeth Cope and the Cope Family Trust and
Corey M. Patick (incorporated by reference as filed with
the SEC as Exhibit 10.30 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.31 Selling Agreement (formerly Employment Agreement)
dated May 15, 1999 between Auto-Graphics, Inc. and Corey
M. Patick (as amended) (incorporated by reference as
filed with the SEC as Exhibit 10.31 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.32 Sixth Amendment to Credit Agreement between Auto-
Graphics, Inc. and Wells Fargo Bank dated June 30, 1999
(incorporated by reference as filed with the SEC as
Exhibit 10.32 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999).
10.33 Continuing Guaranty between Auto-Graphics, Inc.
and Wells Fargo Bank dated June 30, 1999 (incorporated
by reference as filed with the SEC as Exhibit 10.33 to
Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.34 Amendment to Continuing Guaranty between
Auto-Graphics, Inc. and Wells Fargo Bank dated June 30,
1999 (incorporated by reference as filed with the SEC as
Exhibit 10.34 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999).
10.35 Revolving Line of Credit Note (working capital)
$1,000,000 between Auto-Graphics, Inc. and Wells Fargo
Bank dated June 30, 1999 (incorporated by reference as
filed with the SEC as Exhibit 10.35 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.36 Revolving Line of Credit Note (capital) $3,000,000
between Auto-Graphics, Inc. and Wells Fargo Bank dated
June 30, 1999 (incorporated by reference as filed with
the SEC as Exhibit 10.36 to Item 14(a) in the
registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.37 Term Note $750,000 between Auto-Graphics, Inc. and
Wells Fargo Bank dated June 30, 1999 (incorporated by
reference as filed with the SEC as Exhibit 10.37 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.38 Stock Purchase Agreement between Auto-Graphics,
Inc. and Gibraltar Permanente Assurance dated February
14, 2000 (incorporated by reference as filed with the
SEC as Exhibit 10.38 to Item 14(a) in the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.39 Letter of Intent between Auto-Graphics, Inc. and
Steve White dated December 29, 1999 (incorporated by
reference as filed with the SEC as Exhibit 10.39 to Item
14(a) in the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.40 Form of Patick Stock Purchase Agreement dated June
30, 2000 (incorporated by reference as filed with the
SEC as Exhibit 10.40 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2000).
10.41 First Amended and Restated Credit Agreement
between Wells Fargo and Auto-Graphics, Inc. dated August
1, 2000 (incorporated by reference as filed with the SEC
as Exhibit 10.41 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter
ended September 30,2000).
10.42 Revolving Reducing Note dated August 1, 2000
(incorporated by reference as filed with the SEC as
Exhibit 10.41 to Item 14(a) in the registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter
ended September 30,2000).
10.43 LibraryCard Revolving Line of Credit Agreement and
Note dated November 1, 2000 (incorporated by reference
as filed with the SEC as Exhibit 10.41 to Item 14(a) in
the registrant's Quarterly Report on Form 10-Q/A for the
fiscal quarter ended September 30,2000).
10.44 Settlement Agreement Including General Release and
Stock Purchase Agreement with William J. Kliss dated
July 11, 2000.
10.45 Employment offer letter -- Michael K. Skiles dated
April 28, 2000.
10.46 Amendment to Option Agreement Re: Option Closing
Date with Robert S. Cope and Corey M. Patick dated
January 31, 2000.
10.47 Warrant Purchase and Exercise Agreement with Corey
M. Patick dated October 23, 2000.
10.48 Japanese licensing agreement dated February 21,
2001.
10.49 Eric Jung agreement (salary protection following
change of control) dated October 22, 1999.
10.50 Maxcess Library Systems, Inc. Asset Purchase
Agreement dated January 2, 2001.
10.51 Cope Stock Purchase Agreement (subsidiaries stock
purchase/plan) dated January 1, 2001.
10.52 Further Amendment to Option Re Closing Date and
Other Matters dated April 13, 2001.
10.53 Waiver and First Amendment to Amended and
Restated Credit Agreement and Note between
Auto-Graphics, Inc. and Wells Fargo Bank National
Association dated November 20, 2001.
(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.
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: April 16, 2002 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: April 16, 2002 By: /s/ Robert S. Cope
-------------------------- --------------------------------------
Robert S. Cope, Director and President
Date: April 16, 2002 By: /s/ Daniel E. Luebben
-------------------------- --------------------------------------
Daniel E. Luebben,
Chief Financial Officer and Secretary
Date: April 16, 2002 By: /s/ James R. Yarter
-------------------------- --------------------------------------
James R. Yarter, Director