SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended:
September 30, 2001 Commission File Number 0-4431
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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 executive offices) (zip code)
Registrant's telephone number, including area code: (909) 595-7204
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Total Shares Outstanding:
Common Stock: 4,997,234
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AUTO-GRAPHICS, INC.
Form 10-Q
September 30, 2001
TABLE OF CONTENTS
Part I - Financial Information 3
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income
For Nine Months Ended September 30, 2001 and 2000 3
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income
For Three Months Ended September 30, 2001 and 2000 4
Unaudited Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 5
Unaudited Condensed Consolidated Statements of
Cash Flows For Nine Months Ended
September 30, 2001 and 2000 6
Notes to the Unaudited Condensed
Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II - Other Information 16
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AUTO-GRAPHICS, INC.
Form 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated
Statements of Operations and Comprehensive Income
For the Nine Months Ended September 30, 2001 and 2000
2001 2000
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Net sales (See Note 3) $6,658,139 $6,238,124
Costs and expenses:
Cost of sales 4,597,657 3,671,675
Selling, general & administrative 3,402,704 3,292,803
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Total costs and expenses 8,000,361 6,964,478
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Loss from operations (1,342,222) (726,354)
Interest/other 102,488 142,626
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Loss before taxes (1,444,710) (868,980)
Provision for taxes
based on income (See Note 4) (213,915) 5,651
Minority Interest (252,863) (332,208)
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Net loss and
Comprehensive loss $ (977,932) $ (542,423)
========== ==========
Basic loss per share $ (0.20) $ (0.11)
Weighted average shares outstanding 4,997,234 4,794,782
Diluted loss per share $ (0.20) $ (0.11)
Weighted average shares outstanding 4,997,234 4,794,782
See Notes to Unaudited Condensed Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Condensed Consolidated
Statements of Operations and Comprehensive Income
For Three Months Ended September 30, 2001 and 2000
2001 2000
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Net sales (See Note 3) $1,942,027 $1,858,787
Costs and expenses:
Cost of sales 1,668,674 1,138,343
Selling, general & administrative 1,263,235 1,204,044
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Total costs and expenses 2,931,909 2,342,387
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Loss from operations (989,882) (483,600)
Interest/other 37,704 35,053
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Loss before taxes (1,027,586) (518,653)
Provision for taxes
based on income (See Note 4) (219,131) 1,283
Minority Interest (67,956) (207,028)
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Net loss and
comprehensive loss $ (740,499) $ (312,908)
========== ==========
Basic earnings/(loss) per share $ (0.15) $ (0.07)
Weighted average shares outstanding 4,997,234 4,765,678
Diluted earnings/(loss) per share $ (0.15) $ (0.07)
Weighted average shares outstanding 4,997,234 4,765,678
See Notes to Unaudited Condensed Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
ASSETS 2001 2000
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(Unaudited)
Current Assets:
Cash & cash equivalents $ 945,628 $ 1,202,442
Accounts receivable, less allowance
for doubtful accounts ($88,000 in
2001 and $38,000 in 2000) 666,516 1,280,977
Unbilled production costs 55,157 251,088
Other current assets 195,552 181,902
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Total current assets 1,862,853 2,916,409
Software, equipment and leasehold
improvements, net 5,082,908 5,121,592
Other assets 112,117 114,696
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$ 7,057,878 $ 8,152,697
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 513,318 $ 481,136
Deferred income 835,535 982,166
Accrued payroll and related
liabilities 339,453 436,510
Other accrued liabilities 224,114 63,845
Current portion of long-term debt 97,569 77,257
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Total current liabilities 2,009,989 2,040,914
Long-term debt 2,440,770 2,056,876
Deferred taxes based on income 168,769 387,900
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Total liabilities 4,619,528 4,485,690
Minority Interests (4,750) 248,114
Stockholders' equity:
Notes Receivable - Stock (75,364) (77,500)
Common stock, 12,000,000
shares authorized, 4,997,234
shares issued and outstanding
in 2001 and 2000 4,201,755 4,201,755
Accumulated Deficit (1,672,310) (694,381)
Accumulated Other Comprehensive Loss (10,981) (10,981)
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Total stockholders' equity 2,443,100 3,418,893
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$ 7,057,878 $ 8,152,697
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See Notes to Unaudited Condensed Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
2001 2000
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Cash flows from operating activities:
Decrease in Cash
Net loss $ (977,932) $ (542,423)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,078,172 977,769
Allowance for Uncollectable Accounts 50,000 --
Deferred Income Taxes (219,131) --
Minority Interest (252,863) (332,208)
Changes in operating assets
and liabilities:
Accounts receivable 564,462 356,863
Unbilled production costs 195,931 (241,661)
Other current assets (13,650) (151,937)
Other assets -- 48,246
Accounts payable 32,182 165,605
Deferred income (146,631) (375,424)
Other accrued liabilities 160,270 (4,488)
Accrued payroll and
related liabilities (4,028) (96,685)
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Net cash provided by (used in)
operating activities 466,782 (196,343)
Cash flows from investing activities:
Capital expenditures (1,036,893) (1,285,738)
Cash flows from financing activities:
Net principal borrowings (payments)
under debt agreements 311,161 (643,206)
Sale of capital
stock/warrants, net 2,136 677,041
Repurchase of stock, net -- (380,508)
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Net cash provided by (used in)
financing activities 313,297 (346,673)
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Net decrease in cash (256,814) (1,828,754)
Cash & cash equivalents at beginning of year 1,202,442 3,816,286
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Cash & cash equivalents at end of period $ 945,628 $1,987,532
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 135,355 $ 222,778
Income taxes 2,147 15,251
See Notes to Unaudited Condensed Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed
Consolidated Financial Statements
September 30, 2001
Note 1.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Registrant and include all normal and
recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position at September 30, 2001, the
results of operations for the three and nine months ended September 30, 2001
and 2000 and the statement of cash flows for the nine months ended September
30, 2001 and 2000 pursuant to the rules and regulations of the Securities and
Exchange Commission("SEC"). The consolidated financial statements include the
accounts of Auto-Graphics, Inc., its wholly-owned and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
The results of operations for the subject periods are not necessarily
indicative of the results for the entire year.
This Quarterly Report on Form 10-Q is qualified in its entirety by
the information included in the Company's Annual Report to the SEC on Form
10-K for the period ending December 31, 2000 including, without limitation,
the financial statements and notes included therein.
NOTE 2.
In May 1999, Robert S. Cope and the Cope Family Trust granted an
option to Corey M. Patick to purchase 1,125,000 (or 22%) of the Company's
Common Stock for $1.67 per share (adjusted for the 3-for-1 stock split
effective February 28, 2000). Patick exercised the option in November of
2000 and the closing date for the purchase of and payment for the option
shares, originally scheduled for December 31, 2000 expired on August 31,
2001 without the purchase of and payment for the option shares having been
consummated by Patick.
On June 30, 2000 the Company's LibraryCard and Dataquad
subsidiaries implemented a previously planned stock purchase/option plan
whereby each of these subsidiaries sold and issued 700,000 shares of its
capital stock representing 10% of total outstanding stock following
issuance by each corporation. The stock was sold and issued by the
subsidiaries to Corey M. Patick as "trustee" for use in implementing these
subsidiaries' employee and related party stock ownership/option plans.
Patick purchased the stock using promissory notes totaling an aggregate
of $280,500 representing the per share price paid by a third-party investor
in the subsidiaries in "arm's length" transactions at the time of the
organization of the subsidiaries in December of 1999. (See Exhibit 10.40
to the Company's 10-K for the year ended December 31, 2000).
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed
Consolidated Financial Statements
September 30, 2001
NOTE 2. Continued
The note receivable - stock in the amount of $280,500 has been
reclassed into minority interests. If the subject stock is not
subsequently sold or optioned to the intended recipients, the trustee has
the right to return the stock to the subsidiaries in return for the
cancellation of the balance due and owing on the purchaser's full recourse
promissory note, and the subsidiaries have the right in December of 2002 to
reacquire the stock from the trustee at the price paid to the subsidiaries
for the stock. If the subsidiaries 10% stock purchase plan/option stock
should be returned by the owner/trustee, a balance sheet reduction of
stockholders' equity, representing the principal balance of the purchase
promissory notes used to purchase the stock, would be required ($280,500 at
September 30, 2001). Effective January 1, 2001, Robert S. Cope replaced
Patick as the owner/trustee of the subsidiaries stock purchase/option plans
stock and assumed the respective full recourse promissory notes. There were
no transactions regarding the subsidiaries' stock purchase/option plans stock
in 2000 and to date in 2001.
In February of 2001, the Company completed the purchase of software
and related assets of Maxcess Library Services, Inc. for approximately
$196,000. This purchase and resulting software product offering will afford
the Company the opportunity to expand its current ASP (Application Service
Provider) IMPACT/Online(TM) product/services in the library automation area
to include a fully web-based integrated library system (ILS) which will be
offered to libraries, including those who currently use the Company's SLiMS
(Small Library Management System) product, for license for "in library" use
or as an ASP service under the trade name IMPACT/Verso(TM). Acquisition of
the Company's new ILS software on an ASP basis will provide libraries with a
low capital investment alternative to their ILS needs, with no local
software/hardware requirements (other than a web browser and a PC
workstation), allowing the library and their patrons to access and utilize
the library's bibliographic holdings information via the Internet/Web.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed
Consolidated Financial Statements
September 30, 2001
NOTE 2. Continued
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
fee of $1.5 million. This transaction has had a material affect on the
results of operations reported by the Company for the nine months ended
September 30, 2001.
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 sought to rescind the contract to acquire
the software. On October 6, 2001, the Company filed suit against Pigisus,
Inc. and its principals and is seeking a judgement 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 accrued approximately
$200,000 in expense associated with the transaction and unrelated finished
goods inventory. (See Part II, Item 1. - Legal Proceedings).
The Company is 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 has agreed
to waive its default rights as a result of these violations and has agreed
to amend the terms of the credit facility to better conform to the Company's
expected future results, which terms have not yet been finalized.
The Company's management intends to propose for approval by the
Company's stockholders at the Company's 2001 Annual Meeting of Stockholders
a qualified (incentive stock option plan) and non-qualified stock option
plan consisting of a maximum of 10% (currently 499,000 shares) of the
Company's then issued and outstanding shares of Common Stock to be reserved
for future issuance to key employees and directors of the Company.
Note 3.
The following table summarizes sales based on the location of the
customers and assets based on the location of the asset for the nine months
ending September 30, 2001 and 2000:
2001 2000
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Geographic areas
Net sales
United States $ 4,064,269 $ 4,914,002
Foreign - Canada/Other 2,593,763 1,324,122
Long-lived assets, net
United States 5,002,663 5,268,341
Foreign - Canada 80,245 152,440
Note 4.
Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Provision for taxes based on income
reflects a deferred income tax benefit for net operating loss carryforwards,
which have been offset against deferred tax liabilities. At December 31, 2000,
the Company had available combined federal, state and Canadian net operating
loss carry-forwards of approximately $2,454,000, $615,000 and $137,000,
respectively, for income tax purposes. These net operating loss carry-
forwards expire in 2020 for federal taxes and 2006 for state and 2005 for
foreign taxes.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed
Consolidated Financial Statements
September 30, 2001
Note 5. Pending Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
FASB Statements 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 has not had a material effect on the
financial position, results of operations or cash flows of the company for
the six months ended June 30, 2001.
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.
-11-
AUTO-GRAPHICS, INC.
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
December 31, 2000 to September 30, 2001
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Liquidity and capital resources. Working capital decreased
$1,023,000 as a result of a decrease in accounts receivable of $564,000
and inventory. A growing portion of the Company's net sales are also being
paid through customer advances resulting in lower average accounts receivable
balances. Net cash provided by operations was $467,000 in the first nine
months of 2001, which was an increase of $663,000 from the $196,000 net cash
used in the first nine months of 2000. This significant change in net cash
provided by operations was primarily a result of a licensing agreement signed
in March 2001 wherein an unaffiliated Japanese company licensed use of the
Company's REMARC(TM) bibliographic database of Library of Congress pre-1968
holdings for a one-time cash payment of $1,500,000. (See Note 2 of Notes to
Unaudited Condensed Consolidated Financial Statements).
On November 1, 2000 the Company entered into a revolving line of
credit agreement with it's majority-owned subsidiary, LibraryCard, whereby
the Company agreed to loan LibraryCard up to $250,000 for use as working
capital. Amounts loaned to LibraryCard under the unsecured line of credit
bear interest at the rate of 1.0% above the bank prime rate. The Company
commenced advances to LibraryCard under the credit line in 2001 and has
advanced approximately $304,000 in the first nine months ended September
30, 2001. Repayment of balance outstanding on the credit line did not
occur by the due date of October 31, 2001 and therefore LibraryCard is in
default on the promissory note. The Company does not intend to advance any
more funds to LibraryCard having already advanced $304,000 on its $250,000
note. LibraryCard currently has no available sources for additional funding
and management believes that LibraryCard's ability to raise additional funds
will remain negatively affected by the existing unfavorable market conditions
for Internet and related companies' stock offerings. The Company's ability
to advance further monies to LibraryCard is limited by the Company's bank
line of credit agreement that limits loans by the Company to its subsidiaries
to a maximum aggregate total amount of $350,000. Until additional funds are
obtained the Company has terminated the staff at LibraryCard and has
curtailed development of the Internet/Web site in an effort to enable the web
site, "www.librarycard.com" to continue to operate within the financial
limitations currently imposed by the Company's bank line of credit agreement.
In July 2001, the Company filed a current report on Form 8-K with
the SEC and identified under Item 5 "Other Events" that mounting legal
expenses are having a substantial adverse impact on the operating results of
the Company for 2001. The purpose of the Form 8-K was to inform investors
that a series of lawsuits filed by, between and among the Company's former
outside legal counsel (who is also a director of the Company), the Company
and separately against three of its current and former officers were filed
in June and July 2001. Legal expenses for the nine months ended September
30, 2001 have totaled $450,000. A description of the litigation is presented
in Part II Item 1 "Legal Proceedings" of this Form 10-Q.
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AUTO-GRAPHICS, INC.
Form 10-Q
Since the Form 8-K was filed management has assessed the litigation
and its impact on the Company. Currently, management anticipates that if
the legal matters now in process are not resolved in the next 30 to 60 days
legal fees and related expenses which are attributable to the aforementioned
litigation will approximate $600,000 for the year 2001. An unplanned legal
expense for the year 2001 of that magnitude will result in a drain on the
limited financial resources of the Company, increase the operating loss for
the year and adversely affected the Company's ability to meet its financial
loan covenants under its bank credit agreement. The Company is in non-
compliance with most of its financial loan covenants as of September 30,
2001 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 has agreed to waive its default rights as a result of these
violations and has agreed to amend the terms of the credit facility to
better conform to the Company's expected future results, which terms have
not yet been finalized.
2002 Forecast
- -------------
As of October 4, 2001, Robert S. Cope has reassumed the position
of President and CEO in response to continued substantial losses through
the third quarter. The Company is implementing a plan to reduce expenses
during the fourth quarter 2001 to return the Company to profitability for
the year 2002. This will be accomplished primarily by reducing payroll
and overhead associated with the new initiatives begun in 2000 via the
majority-owned subsidiaries, DataQuad and LibraryCard.
First Nine Months of 2001 as Compared to First Nine Months of 2000
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Net sales increased $420,000 or 7% to $6,658,000 in 2001 up from
$6,238,000 in 2000. The net sales increase is due primarily to a one-time
license fee from a Japanese company in March 2001 in the amount of
$1,500,000. Excluding this license fee, sales decreased $1,080,000 or 17%.
Cost of sales increased $926,000 or 25% corresponding in part
to the increase in net sales, additional software amortization, additional
software development costs and write-offs of investment and inventory
associated with rescission of the Pigisus software acquisition contract.
Selling, general and administrative expenses increased $115,000 or
3% in 2001 over 2000 due primarily due to an increase in legal expenses from
$285,000 in 2000 to $457,000 in 2001, an increase of $172,000 over the prior
year due to the continuing litigation discussed above. (See Part II Item 1
"Legal Proceedings").
Loss from operations increased $576,000 to a loss of $1,445,000 in
2000.
Interest expense/other decreased $41,000 or 28% due to declining
interest rates in 2001.
Provision for taxes based on income reflects a deferred income tax
benefit for net operating loss carryforwards, which have been offset against
deferred tax liabilities. (See Note 4 of Notes to Unaudited Condensed
Consolidated Financial Statements).
Minority interests reflects the non-Company owners' share of the
losses realized by the two majority-owned subsidiaries.
Net loss increased to $978,000 in 2001 up from net loss of
$542,000 in 2000.
Basic and diluted loss per share increased from $0.11 per share
in 2000 to $0.20 in 2001.
-13-
AUTO-GRAPHICS, INC.
Form 10-Q
Third Quarter of 2001 as Compared to Third Quarter of 2000
- ----------------------------------------------------------
Net sales increased $83,000 or 4% to $1,942,000. The net sales
increase was due primarily to an increase in library sales from new software
products.
Cost of sales increased $530,000 or 47% in 2001 due to additional
software development costs and write-offs of investment and inventory
associated with rescission of the Pigisus software acquisition contract.
Selling, general and administrative expenses increased $59,000
or 5% due primarily to an increase in legal expenses associated with pending
litigation in the amount of $119,000 for the third quarter. (See Part II
Item 1 "Legal Proceedings").
Loss from operations increased $506,000 to a loss of $1,028,000 in
2001.
Interest expense/other was $38,000 in 2001 up from $35,000 in
2000 due to lower interest rates.
Provision for taxes based on income reflects a deferred income tax
benefit for net operating loss carryforwards, which have been offset against
deferred tax liabilities. (See Note 4 of Notes to Unaudited Condensed
Consolidated Financial Statements).
Minority interests reflects the non-Company owners' share of the
losses realized by the two majority-owned subsidiaries.
Net loss increased $428,000 to a net loss of $740,000 in 2001 up
from a net loss of $313,000 in 2000.
Basic and diluted loss per share increased from $0.07 per share
in 2000 to a loss of $0.15 per share in 2001.
Pending Pronouncements
See Note 4 of Notes to Unaudited Condensed Consolidated Financial
Statements.
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.
-14-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 9, 2001 the Company terminated the services of it's long-
time outside counsel, Mr. Robert H. Bretz. Mr. Bretz remains 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, 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 was invalid because it failed to satisfy
the requirements of California Corporation Code Section 307(b).
Mr. Bretz' actions left the Company with no alternative but to file
a complaint against Mr. Bretz for damages and injunctive relief for breach of
fiduciary duty. 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 that Mr. Bretz has become disruptive and harmful to
the business operations of the Company and has 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 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 it will
eventually be dismissed. Until the above cases are resolved the Company
will be required to expend substantial legal fees and related expenses.
The Company filed a complaint in Los Angeles, California, Superior
Court, Case No. BC261175 on October 6, 2001 against Pigisus, 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 Pigisus
and seeks damages in excess of $400,000.
Item 2. Changes in Securities and Use of Proceeds. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) The Company filed Form 8-K under Item 5 "Other Events" on
July 23, 2001. The Form reported that a series of events (lawsuits) have
occurred which will have a material adverse effect on the Company's
financial position and results of operations as disclosed in Part II
Item 1 "Legal Proceedings" above.
-15-
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AUTO-GRAPHICS, INC.
Date: 11/19/01 ss/ Robert S. Cope
------------------------ -------------------------------------
Robert S. Cope, Chairman of the Board
and President
Date: 11/19/01 ss/ Daniel E. Luebben
------------------------ -------------------------------------
Daniel E. Luebben, Chief Financial
Officer and Secretary