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, 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
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (909) 595-7004
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Total Shares 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 Nine Months Ended September 30
1998 1997
Net sales $6,675,759 $6,715,381
Costs and expenses:
Cost of sales 4,127,078 4,038,256
Selling, general & administrative 2,396,927 2,164,791
Interest/other 282,084 187,305
Total costs and expenses 6,806,089 6,390,352
Income/(loss) from operations (130,330) 325,029
Provision for taxes based on income (58,802) 148,000
Net income/(loss) $ (71,528) $ 177,029
Net income/(loss) per share $ (0.07) 0.16
Shares outstanding 1,064,478 1,093,678
See Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statement of Operations
For Three Months Ended September 30
1998 1997
Net sales $1,993,399 $2,839,053
Costs and expenses:
Cost of sales 1,311,147 1,836,889
Selling, general & administrative 828,869 784,784
Interest 105,741 81,025
Total costs and expenses 2,245,757 2,702,698
Income/(loss) from operations (252,358) 136,355
Provision for taxes based on income (113,560) 63,000
Net income/(loss) $ (138,798) $ 73,355
Net income/(loss) per share $ (0.13) $ 0.07
Shares outstanding 1,064,478 1,093,678
See Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Balance Sheets
September 30, 1998 and December 31, 1997
ASSETS 1998 1997
(Audited)
Current assets:
Cash $ 78,525 $ 244,620
Accounts receivable, less allowance
for doubtful accounts ($38,000 in
1998 and 1997) 1,916,120 2,365,837
Unbilled production costs 266,749 65,375
Finished goods inventory 2,144 18,049
Other current assets 322,215 122,416
Total current assets 2,585,753 2,816,297
Software, equipment and leasehold
improvements, net 5,583,154 5,576,409
Other assets 215,819 459,241
$8,384,726 $ 8,851,947
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 840,162 $ --
Accounts payable 183,837 669,237
Deferred income 410,487 536,225
Accrued payroll and related
liabilities 371,843 272,485
Other accrued liabilities (44,720) 155,383
Current portion of long-term debt 693,750 843,000
Total current liabilities 2,455,359 2,476,330
Long-term debt, less current portion 2,631,250 2,911,073
Deferred taxes based on income 708,000 695,000
Total liabilities 5,794,609 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 1,368,483 1,534,741
Foreign Currency Translation (8,713) (2,564)
Total stockholders' equity 2,590,117 2,769,544
$8,384,726 $ 8,851,947
See Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Statements of Cash Flows
For the Nine Months Ended September 30
Increase (Decrease) in Cash
1998 1997
Cash flows from operating activities:
Net income $ (71,528) $ 177,029
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 774,543 673,182
Deferred taxes 13,000 --
Changes in operating assets
and liabilities:
Accounts receivable 411,851 (698,915)
Unbilled production costs (201,374) (134,661)
Finished goods inventory 15,905 11,469
Other current assets (199,795) (222,244)
Other assets 206,084 (48,743)
Accounts payable (447,534) 172,193
Deferred income (125,738) 10,681
Other accrued liabilities (200,103) 14,357
Accrued payroll and
related liabilities 99,358 151,725
Net cash provided by
operating activities 274,669 106,073
Cash flows from investing activities:
Capital expenditures (743,950) (1,762,197)
Cash flows from financing activities:
Borrowings under long-term debt 923 1,295,000
Principal payments under debt
agreements (430,000) (451,808)
Net borrowings (payments)under
line-of-credit agreement 840,162 600,000
Repurchase of capital stock (101,750) (50,000)
Net cash provided by (used in)
financing activities 309,335 1,393,192
Effect of exchange rate change on cash (6,149) 1,195
Net change in cash (166,095) (261,737)
Cash at beginning of year 244,620 364,094
Cash at end of year $ 78,525 $ 102,357
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 260,468 $ 212,265
Income taxes -- 163,555
See Notes to Unaudited Condensed Consolidated Financial Statements
AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
NOTE 1. The Unaudited Condensed Consolidated Financial Statements included
herein have been prepared by Registrant and include all normal and
recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position at
September 30, 1998, the results of operations and the statement of
cash flows for the nine months ended September 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 all of 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 for the period ending December 31, 1997, as amended,
and including, without limitation, the financial statements 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. 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 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:
Nine Months Ended Sept. 30 1998 1997
Net income/(Loss) $ (71,528) $ 177,029
Foreign currency
translation adjustments (6,149) --
Total comprehensive income $ (77,677) 177,029
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 September 30, 1998
Liquidity and capital resources. Working capital decreased $209,000
through the third quarter of 1998 and long-term debt decreased $430,000 due to
the pre-payment of long-term debt in the amount of $375,000 in January of
1998. The average collection period for accounts receivable increased from 66
days at December 31, 1997 to 88 days at September 30, 1998 due to delays in
funding several customers. The increases in unbilled production costs and
other current assets reflect normal increases in the Company's seasonal
activity. Net cash provided by operating activities was approximately
$275,000 through the third quarter of 1998 up from $106,000 through the third
quarter of 1997 due primarily to the collection of approximately $412,000 in
accounts receivable. Capital expenditures were $744,000 through the third
quarter of 1998 down from $1,762,000 through the third quarter of 1997, which
included the acquisitions in 1997 discussed below.
The Company has a revolving credit facility with maximum
availability of $1,250,000 ($410,000 available at September 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 should
be 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 September 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 $1,150,000, 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. As of
September 30, 1998, the Company was not in compliance with certain loan
covenants and has requested a waiver from the Company's bank in respect
thereof.
As of July 1, 1997, the Company acquired the assets of 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 period,
156,000 of 171,000 shares of Company stock owned by the individual. 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 will be 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 $0.5 to 0.7 million from 1997 net sales of $10.0
million. A primary reason for the decline in net sales 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 year 1998 and first
quarter of 1999.
The reduction in sales and income for 1998 is currently 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.
AUTO-GRAPHICS, INC.
Form 10-Q
RESULTS OF OPERATIONS
First Nine Months 1998 as Compared to First Nine Months 1997
Net sales were essentially unchanged at $6.7 million year to date.
Cost of sales increased $89,000 or 2%.
Selling, general and administrative expenses increased $232,000 or 11%
due to the acquisition of the LIS business in Canada and the inclusion of
three months of expense in 1997 compared to nine months of expense in 1998.
Interest expense/other increased $95,000 or 51%. Net interest expense
increased $48,000 as a result of lower interest rates on higher average
borrowings in 1998 associated with the acquisition financing. Other expense
in 1998 was $47,000 including foreign currency losses of $34,000 versus
$25,000 in income in 1997 representing expense reimbursements from other
firms.
Income/(loss) from operations decreased to a loss $130,000 in 1998, down
from income of $325,000 in 1997, due to higher costs.
Net income/(loss) decreased to a $72,000 loss in 1998, down from a
$177,000 in net income in 1997. Net income/(loss) per share decreased to a
loss of $0.07 in 1998, down from $0.16 in net income per share in 1997.
Third Quarter 1998 as Compared to Third Quarter 1997
Net sales decreased $846,000 or 30% due to lower US and Canadian library
services sales in 1998.
Cost of sales decreased $526,000 or 29% reflecting lower variable costs
associated with lower sales.
Selling, general and administrative expenses increased $44,000 or 6% for
the third quarter of 1998 from the third quarter of 1997.
Interest expense/other increased $25,000 due to a foreign currency loss
caused by the declining value of the Canadian dollar. Net interest expense
was essentially unchanged.
Income/(loss) from operations decreased from income of $136,000 in 1997
to a loss of $252,000 in 1998 due to lower sales.
Net income/(loss) decreased from income of $73,000 in 1997 to a loss of
$139,000 in 1998. Net income/(loss) per share decreased from net income per
share of $0.07 in 1997 to a loss per share of $0.13 in 1998.
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. The 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 does not expect it will have a material
effect on its consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Opinion ("SOP") 98-5, "Accounting for the Costs of Start-
up Activities". This SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The SOP provides guidance and
examples of the types of expenses associated with one-time (start-up)
activities which under this SOP must now be expensed as incurred. The Company
is currently evaluating SOP 98-5, 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.
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 - Shareholder Proxy Proposals.
Any shareholder of the Company desiring to have a proposal considered
for inclusion in the Company's 1999 proxy solicitation material must,
in addition to other applicable requirements, set forth such proposal
in writing and file it with the Secretary of the Company on or before
January 1, 1999. The Board of Directors of the Company will review
any such proposals from shareholders received by that date and will
determine whether any such proposals are to be included in the
Company's 1999 proxy solicitation materials.
Item 6. Exhibits and Reports on Form 8-K.
a. The Company filed Form 10-K/A on April 30, 1998 covering exhibits
to the Form 10-K report for the year ended December 31, 1997.
These exhibits were separated from the 10-K prior to the filing
thereof and were subsequently re-filed during the period covered
by this report.
b. The Company filed Form 8-K on August 13, 1998, reporting that the
Company's independent accountant, Ernst & Young LLP, had resigned
effective August 6, 1998 and would not stand for re-election as
the Company's independent accountant for the period ending
December 31, 1998.
c. Exhibits: None
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 11/16/98 ss/ Robert S. Cope
Robert S. Cope, President
and Treasurer
Date 11/16/98 ss/ Daniel E. Luebben
Daniel E. Luebben, Chief Financial
Officer and Secretary