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
June 30, 1998 Commission File Number 0-4431
AUTO-GRAPHICS, INC.
(exact name of registrant as specified in its charter)
California 95-2105641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3201 Temple Avenue, Pomona, California 91768-3200
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (909) 595-7204
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 of1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Total Shares Outstanding:
Common Stock: 1,064,478
AUTO-GRAPHICS, INC.
Form 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated
Statement of Operations
For Six Months Ended June 30
1998 1997
Net sales (See Note 4) $4,682,360 $3,876,328
Costs and expenses:
Cost of sales 2,815,921 2,201,367
Selling, general & administrative 1,568,062 1,380,007
Interest expense/other 176,343 106,280
Total costs and expenses 4,560,326 3,687,654
Income from operations 122,034 188,674
Provision for taxes based on income 54,760 85,000
Net income (See Note 3) $ 67,274 $ 103,674
Net income per share $ .06 $ .09
Shares outstanding 1,064,478 1,093,678
See Notes to Unaudited Consolidated Financial Statements
Unaudited Condensed Consolidated
Statement of Operations
For Three Months Ended June 30
1998 1997
Net sales (See Note 4) $2,288,425 $2,081,960
Costs and expenses:
Cost of sales 1,385,481 1,230,603
Selling, general & administrative 790,932 701,444
Interest expense/other 81,439 50,091
Total costs and expenses 2,257,852 1,982,138
Income from operations 30,573 99,822
Provision for taxes based on income 13,760 46,000
Net income (See Note 3) $ 16,813 $ 53,822
Net income per share $ .02 $ .05
Shares outstanding 1,064,478 1,093,678
See Notes to Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
ASSETS 1998 1997
(Audited)
Current assets:
Cash $ 140,118 $ 244,620
Accounts receivable, less allowance
for doubtful accounts ($38,000 in
1998 and 1997) 1,502,657 2,365,837
Unbilled production costs 219,794 65,375
Finished goods inventory 17,303 18,049
Other current assets 373,326 122,416
Total current assets 2,253,198 2,816,297
Software, equipment and leasehold
improvements, net 5,657,408 5,576,409
Other assets 384,238 459,241
$ 8,294,844 $ 8,851,947
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 571,743 $ --
Accounts payable 318,209 669,237
Deferred income 231,088 536,225
Other accrued liabilities 88,858 155,383
Accrued payroll and related
liabilities 329,917 272,485
Current portion of long-term debt 600,000 842,500
Total current liabilities 2,139,815 2,475,830
Deferred taxes based on income 695,000 695,000
Long-term debt, less current portion 2,725,000 2,911,573
Total liabilities 5,559,815 6,082,403
Stockholders' equity:
Common stock, $.10 par value,
4,000,000 shares authorized,
1,064,478 shares issued and
outstanding in 1998, and
1,090,478 shares issued and
outstanding in 1997 106,448 109,048
Capital in excess of par value 1,123,899 1,128,319
Retained earnings 1,507,286 1,534,741
Foreign currency translation adjustments (2,604) (2,564)
Total stockholders' equity 2,735,029 2,769,544
$ 8,294,844 $ 8,851,947
See Notes to Unaudited Consolidated Financial Statements
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30
Increase (Decrease) in Cash
1998 1997
Cash flows from operating activities:
Net income $ 67,275 $ 103,674
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 534,531 406,282
Deferred taxes -- --
Changes in operating assets
and liabilities:
Accounts receivable 825,314 440,657
Unbilled production costs (154,419) (216,077)
Finished goods inventory 746 10,049
Other current assets (250,906) (90,717)
Other assets 49,851 (47,437)
Accounts payable (313,162) (131,011)
Deferred income (305,137) 174,219)
Other accrued liabilities (66,525) (21,046)
Accrued payroll and
related liabilities 57,432 (12,389)
Net cash provided by
operating activities 445,000 267,766
Cash flows from investing activities:
Capital expenditures (590,378) (441,211)
Cash flows from financing activities:
Borrowings under long-term debt 923 --
Principal payments under debt
agreements (430,000) (305,000)
Net borrowings (payments)under
line-of-credit agreement 571,743 225,000
Repurchase of capital stock (101,750) (50,000)
Net cash provided by (used in)
financing activities 40,916 (130,000)
Net increase in cash (104,462) (303,445)
Foreign currency effect on cash (40)
Cash at beginning of year 244,620 364,094
Cash at end of year $ 140,118 $ 60,649
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 175,946 $ 123,394
Income taxes -- 109,100
See Notes to Unaudited Consolidated Financial Statements.
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
NOTE 1. The unaudited 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 June 30, 1998, the
results of operations and the statement of cash flows for the six
months ended June 30, 1998 and 1997 pursuant to the rules and
regulations of the Securities and Exchange Commission. The
consolidated financial statements include the accounts of Auto-
Graphics, Inc. and its wholly-owned 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, as amended, for the period ending December 31, 1997
including, without limitation, the financial statements and notes
included therein.
NOTE 2. The Company entered into a stock repurchase agreement in February
1995 with a former employee/officer and current director of the
Company, whereby the Company agreed to purchase and retire, over a
seven-year period, 156,000 of 171,000 shares of Company stock owned
by the individual. The total transaction cost of $825,000 includes
stock, non-competition and consulting fees. In January of 1995,
1996 and 1997, the Company purchased and retired three blocks of
15,600 shares each and, in January 1998, the Company purchased and
retired 26,000 shares under the above referenced agreement.
NOTE 3. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". The
statement 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. Total
comprehensive income for the Company is as follows:
Six Months Ended June 30 1998 1997
Net income $ 67,274 $ 103,674
Foreign currency
translation adjustments (40) --
Total comprehensive income $ 67,234 $ 103,674
NOTE 4. The growth in net sales between the three and six months ending June
30, 1997 and June 30, 1998, respectively, includes the additional
revenues contributed by the acquisitions of A-G Canada Ltd. in July,
1997 and the remaining 50% share of Datacat, Inc., which the Company did not
already own in October, 1997.
AUTO-GRAPHICS, INC.
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
December 31, 1997 to June 30, 1998
Liquidity and capital resources. Working capital decreased $415,000
through the second quarter of 1998 due to the payment of long-term debt in the
amount of $429,000. The average collection period for accounts receivable
improved from 66 days at December 31, 1997 to 60 days at June 30, 1998. Net
cash provided by operating activities was approximately $445,000 through the
second quarter of 1998 up from $268,000 through the second quarter of 1997 due
primarily to the collection of approximately $825,000 in accounts receivable.
Capital expenditures were $590,000 through the second quarter of 1998 up from
$441,000 through the second quarter of 1997 due to the procurement of
additional production equipment and software development costs in 1998.
The Company has a revolving credit facility with maximum
availability of $1,250,000 ($678,000 available at June 30, 1998), secured by
accounts receivable and renewed bi-annually in June. Management believes that
the current line of credit will again be renewed in June 1999 and is
sufficient to handle the Company's cyclical working capital needs. The
Company also maintains a capital line of credit facility with a maximum
availability of $3,000,000 ($50,000 available at June 30, 1998) secured by
substantially all of the Company's assets which also renews bi-annually in
June and management believes that this credit facility will again
be renewed in June 1999. Management does not currently believe that
increased credit availability will be required to finance planned capital
expenditures in 1998, which are estimated at $1,000,000, to be used to upgrade
computers, production equipment and for software development. The Company has
a term credit facility of $750,000 to fund the 1997 acquisition of the assets
of the Library Information Systems division of ISM Information Systems
Management Manitoba Corporation. The term note is a three year note with
interest only for 24 months followed by a 12 month amortization schedule.
The Company retired $375,000 of the balance outstanding in term borrowings
in January 1998. The term facility carries an uncompensated guarantee by
the Company's principal officer/stockholder. These credit facilities carry
no commitment fees or compensatory balance requirements, require that the
Company maintain minimum financial ratio covenants and prohibit the payment
of cash dividends. In recognition of the Company's declining working capital,
the Company has negotiated revised credit terms and loan covenants with its
bank effective June 1, 1998. (See Exhibits to Form 10-Q, Part II, Item 6(a)).
The Company is in compliance with its loan covenants as of June 30, 1998.
As of July 1, 1997, the Company acquired the assets fo the Library
Information Systems ("LIS") division of ISM Information Systems Management
Manitoba Corporation ("ISM"), a subsidiary of IBM Canada, Ltd. The LIS
business includes bibliographic cataloging and interlibrary loan resource
sharing software and related services, and contracts to provide services
to approximately 500 Canadian libraries. As of October 2, 1997, the Company
also acquired the remaining 50% interest in Datacat, which it did not already
own.
The Company entered into a stock repurchase agreement in February 1995,
with a former employee/officer and current director of the Company, whereby
the Company agreed to purchase and retire, over a seven year periodm 156,000
of 171,000 shares of Company stock owned by the individual The total
transaction cost of $825,000 includes stock, non-competition and consulting
fees. In January of 1995, 1996 and 1997, the Company purchased and retired
three blocks of 15,600 shares each, and, in January 1998, the Company purchased
and retired a fourth block of 26,000 shares in accordance with the above
referenced agreement.
The Company's capital resources may be used to support working
capital requirements, capital investment and possible acquisitions of
businesses, products or technologies complementary to the Company's current
business. The Company believes that current cash flow from operations and
credit facilities are sufficient to fund its operations in 1998. However,
during this period or thereafter, the Company may require additional
financing. There can be no assurance that such additional financing will be
available on terms favorable to the Company, or at all.
The Company currently anticipates that annual net sales for 1998 will
decline by approximately $500,000 from 1997 net sales of $10.0 million. The
primary reason for the decline is the current transition by the Company's
library customers from CD-ROM to online library information systems, and the
resulting difference in short-term revenues and the timing thereof.
Accordingly, given its current cost structure, the Company anticipates that it
will report a loss for the third quarter of 1998.
The anticipated reduction in sales and income for 1998 is not expected
to continue through-out 1999. Management believes that the increased revenue
attributable to sales of its online family of library information services
and systems should be sufficient to more than offset the declining revenues
attributable to the Company's CD-ROM based services and systems. The
anticipated reduction in sales and income is expected to adversely affect
the Company's operating capital position, however, management believes that
the Company's cash flow from operations and credit facilities should be
adequate to provide for the Company's needs pending improvement in the
Company's operating performance.
RESULTS OF OPERATIONS
First Six Months 1998 as Compared to First Six Months 1997
Net sales increased $806,000 or 21% to $4,682,000. The net sales
growth was due primarily to the additional revenues contributed by
the acquisition of A-G Canada Ltd. in July, 1997 and the remaining
50% share of Datacat, Inc. in October, 1997, which the Company did
not already own.
Cost of sales increased $615,000 or 28%. Significant factors in the
increased cost of sales include changes in operating costs generally
attributable to variable costs fluctuating with product mix.
Selling, general and administrative expenses increased $188,000 or
14%. As a percentage of sales, these expenses decreased from 36% in
1997 to 33% in 1998.
Interest expense/other increased $70,000 or 66% on higher bank
borrowing associated with financing the operations of the Company
and the acquisition of A-G Canada Ltd.
Income from operations decreased $67,000 or 35% to $122,000 in 1998.
Net income decreased $36,000 to $67,000 in 1998, down 35% from
$104,000 in 1997.
Net income per share decreased from $0.09 per share in 1997 to $0.06
per share in 1998.
Second Quarter 1998 as Compared to Second Quarter 1997
Net sales increased $206,000 or 10% to $2,288,000. The net sales
growth was due primarily to the additional revenues contributed by
the acquisition of A-G Canada Ltd. in July, 1997 and the remaining
50% share of Datacat, Inc. in October, 1997, which the Company did
not already own.
Cost of sales increased $155,000 or 13%. Significant factors in the
increased cost of sales include changes in operating costs generally
attributable to variable costs fluctuating with product mix.
Selling, general and administrative expenses increased $89,000 or 13%.
As a percent of sales, these expenses increased from 34% in 1997 to 35%
in 1998.
Interest expense/other was $81,000 in 1998, up from $50,000 in 1997 on
higher bank borrowing associated with financing the operations of the
Company and the acquisition of A-G Canada Ltd.
Income from operations decreased 69% or $69,000 to $31,000 in 1998.
Net income decreased $37,000 to $17,000 in 1998, down 69% from $54,000
in 1997.
Net income per share decreased from $0.05 per share in 1997 to $0.02
per share in 1998.
AUTO-GRAPHICS, INC.
Form 10-Q
PENDING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information", which is effective for
annual periods beginning after December 15, 1997 and interim periods beginning
after December 15, 1998. The statement establishes standards for reporting of
information about operating segments in interim and annual financial
statements and therefore will have no material effect on the Company's
financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP is
effective for financial statements for fiscal years beginning after December
15, 1998. This SOP provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The SOP requires that the
Company capitalize certain costs of software developed for internal use once
certain criteria are met. The Company is currently evaluating SOP 98-1, but
does not expect it will have a material effect on its consolidated financial
statements.
YEAR 2000
The Company has developed a plan to modify its information technology
to be ready for the Year 2000 and has begun converting critical data
processing systems. The Company currently expects the project to be
substantially complete by June 30, 1999 and to cost between $50,000 and
$100,000. This estimate includes internal costs, but excludes the costs to
upgrade and replace computer systems in the normal course of business. The
Company does not expect this project to have a significant effect on
operations. The Company will continue to implement key systems though some
projects may be delayed due to resource constraints.
AUTO-GRAPHICS, INC.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
10.26 Third Amendment to Credit Agreement between Wells Fargo Bank
and Auto-Graphics, Inc. dated June 1, 1998.
10.27 Term Note between Wells Fargo Bank and Auto-Graphics, Inc.
dated June 1, 1998.
b) The Company has not filed any reports on Form 8-K during the
period covered by this report, however, see the Company's
subsequent report on Form 8-K dated August 6, 1998 indicating that
a new independent accountant will be engaged to audit and report
upon the Company's financial statements for the fiscal year
ended December 31, 1998.
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 8/25/98 ss/ Robert S. Cope
Robert S. Cope, President
and Treasurer
Date 8/25/98 ss/ Daniel E. Luebben
Daniel E. Luebben,
Chief Financial Officer
and Secretary