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, 1999 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
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: 1,043,678
AUTO-GRAPHICS, INC.
Form 10-Q
June 30, 1999
TABLE OF CONTENTS
Unaudited Condensed Consolidated Statement of
Operations For Six Months Ended June 30 1
Unaudited Condensed Consolidated Statement of
Operations For Three Months Ended June 30 2
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Cash Flows
For Six Months Ended June 30 4
Notes to Unaudited Consolidated
Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II - Other Information 11
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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
1999 1998
---------- ----------
Net sales (See Note 4) $4,023,442 $4,682,360
Costs and expenses:
Cost of sales 2,332,661 2,815,921
Selling, general & administrative 1,532,184 1,568,062
Total Costs and Expenses 3,864,845 4,383,983
Income from Operations 158,597 298,377
Interest expense/other 126,973 176,343
Income before taxes 31,624 122,034
Provision for taxes
based on income (See Note 5) -- 54,760
Net income/comprehensive income
(See Note 3) $ 31,624 $ 67,274
Net income per share $ .03 $ .06
Shares outstanding 1,043,678 1,064,478
See Notes to Unaudited Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Condensed Consolidated
Statement of Operations
For Three Months Ended June 30
1999 1998
---------- ----------
Net sales (See Note 4) $2,041,412 $2,288,425
Costs and expenses:
Cost of sales 1,135,929 1,385,481
Selling, general & administrative 837,631 790,932
Total Costs and Expenses 1,973,560 2,176,413
Income from Operations 67,852 112,012
Interest expense/other 53,680 81,439
Income before taxes 14,172 30,573
Provision for taxes
based on income (See Note 5) -- 13,760
Net income/comprehensive income
(See Note 3) $ 14,172 $ 16,813
Net income per share $ .01 $ .02
Shares outstanding 1,043,678 1,064,478
See Notes to Unaudited Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
ASSETS 1999 1998
----------- -----------
Current assets: (Audited)
Cash $ 50,219 $ 292,744
Accounts receivable, less allowance
for doubtful accounts ($38,000 in
1999 and 1998) 1,391,632 1,697,826
Unbilled production costs 96,485 86,573
Other current assets 459,165 360,170
Total current assets 1,997,501 2,437,313
Software, equipment and leasehold
improvements, net 5,020,532 5,016,627
Other assets 117,444 119,162
$ 7,135,477 $ 7,573,102
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 246,803 $ --
Accounts payable 252,773 632,809
Deferred income 704,016 813,113
Accrued payroll and related
liabilities 478,964 578,569
Other accrued liabilities 35,434 84,282
Current portion of long-term debt 943,750 787,500
Total current liabilities 2,661,740 2,896,273
Deferred taxes based on income 486,000 486,000
Long-term debt, less current portion 2,400,000 2,587,500
Total liabilities 5,547,740 5,969,773
Stockholders' equity:
Common stock, $.10 par value,
4,000,000 shares authorized,
1,043,678 shares issued and
outstanding in 1999, and
1,064,478 shares issued and
outstanding in 1998 (See Note 2) 104,369 106,448
Capital in excess of par value 1,120,363 1,123,899
Retained earnings 365,413 375,389
Foreign currency translation adjustments (2,408) (2,407)
Total stockholders' equity 1,587,737 1,603,329
$ 7,135,477 $ 7,573,102
See Notes to Unaudited Consolidated Financial Statements
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AUTO-GRAPHICS, INC.
Form 10-Q
Unaudited Consolidated
Statements of Cash Flows
For the Six Months Ended June 30
Increase (Decrease) in Cash
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 31,624 $ 67,274
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 622,931 534,532
Deferred taxes -- --
Changes in operating assets
and liabilities:
Accounts receivable 306,194 825,314
Unbilled production costs (9,912) (153,673)
Other current assets (98,995) (250,906)
Other assets -- 49,851
Accounts payable (380,036) (313,162)
Deferred income (109,097) (305,137)
Other accrued liabilities (48,846) (66,525)
Accrued payroll and
related liabilities (99,605) 57,432
Net cash provided by
operating activities 214,258 445,000
Cash flows from investing activities:
Capital expenditures (625,120) (590,378)
Cash flows from financing activities:
Borrowings under long-term debt -- 923
Principal payments under debt
Agreements (31,250) (430,000)
Net borrowings (payments)under
line-of-credit agreement 246,803 571,743
Repurchase of capital stock (47,216) (101,750)
Net cash provided by (used in)
financing activities 168,337 40,916
Net increase in cash (242,525) (104,462)
Foreign currency effect on cash -- (40)
Cash at beginning of year 292,744 244,620
Cash at end of year $ 50,219 $ 140,118
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 146,907 $ 175,946
Income taxes -- --
See Notes to Unaudited Consolidated Financial Statements.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited
Consolidated Financial Statements
June 30, 1999
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, 1999, the results of operations and the statement of cash flows
for the three and six months ended June 30, 1999 and 1998 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, for the period ending December 31, 1998 including,
without limitation, the financial statements and notes included
therein.
NOTE 2. In 1995, the Company entered into a stock repurchase agreement with
a former officer and 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. In
January of 1998 and 1999, the Company purchased and retired 26,000
and 20,800 shares, respectively, in accordance with the above
referenced agreement.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited
Consolidated Financial Statements
June 30, 1999
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. There were no material comprehensive income items for the
six months ending June 30, 1998 and 1999.
Note 4. In June 1997, the Financial Accounting Standards ("FAS")
Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The FAS is effective for fiscal years beginning after December 15, 1997
and the Company has adopted the statement in fiscal year ending December
31, 1998. The statement establishes standards for reporting of
information about operating segments in interim and annual financial
statements.
The following table summarizes sales and total assets presented on
the basis of GAAP (generally accepted accounting principles)
accounting for the six months ending June 30, 1999 and 1998.
1999 1998
----------- -----------
Geographic areas
Net sales
United States $ 3,103,845 $ 3,266,404
Foreign - Canada 912,447 1,205,059
Foreign - Japan/Other 7,150 210,897
Long-lived assets, net
United States 4,832,931 5,450,921
Foreign - Canada 187,601 206,487
Note 5. 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. At December 31,
1998, the Company has available federal, state and Canadian net
operating loss carry-forwards of approximately $462,000, $886,000
and $569,000, respectively, for income tax purposes. These net
operating loss carry-forwards expire in 2018 for federal taxes,
2005 for state and for foreign taxes.
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AUTO-GRAPHICS, INC.
Form 10-Q
Notes to Unaudited
Consolidated Financial Statements
March 31, 1999
Note 6. Pending Pronouncements
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
continue to capitalize certain costs of software developed for
internal use once certain criteria are met. The Company does not
expect this SOP will have a material effect on the Company's
financial position or results of operations.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Opinion ("SOP") 98-5, "Reporting on
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 be expensed as incurred. The Company does not
expect this SOP will have a material effect on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which is
effective for fiscal quarters of all fiscal years beginning after
June 15, 1999. The Company plans to adopt the statement in the
fiscal year ending December 31, 2000. The statement establishes
standards for accounting for derivatives and hedging instruments
(of which the Company currently has none) and, therefore, the
Company does not expect this FAS will have a material effect on the
Company's financial position or results of operations.
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AUTO-GRAPHICS, INC.
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
December 31, 1998 to June 30, 1999
Liquidity and capital resources. Accounts receivable declined $306,000
due to lower sales and improved collections, which resulted in a decline
in working capital of $205,000. The average collection period for accounts
receivable decreased from 66 days at December 31, 1998 to 62 days at June
30, 1999. Net cash provided by operations decreased approximately
$231,000 to $214,000 year-to-date through the second quarter of 1999 from
$445,000 through the second quarter of 1998 due primarily to lower
collection of accounts receivable due to lower net sales compared to the
same period in the prior year. Capital expenditures year-to-date increased
to $625,000 through the second quarter of 1999 from $590,000 through the
second quarter of 1998. Long-term debt declined by $31,250 as a result of a
principal payment on term debt.
Management believes that liquidity and capital resources will be
adequate for operations in 1999. The Company has a revolving credit
facility with maximum availability of $1,250,000 ($1,003,000 available at
June 30, 1999), secured by accounts receivable, and renewable annually.
The current line of credit is in the process of being renewed and a planned
reduction in the maximum availability to $1.0 million will 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 (fully utilized at June 30, 1999), secured by substantially all of
the Company's capital assets, and renewable annually. This capital line of
credit is in the process of being renewed. Management believes that increased
credit availability will be required to finance planned capital expenditures
in 1999, which are estimated at $1,200,000, to be used to expand the Company's
Internet infrastructure to better accommodate the growing number of libraries,
and resulting increasing volume of transactions, using the Company's
Internet/Web products. The Company is in the process of raising additional
equity as a means of financing a portion of this planned investment in
computer hardware and software development. The Company obtained an
additional credit facility of $750,000 used to fund the 1997 acquisition
of the Company's Canadian subsidiary. The term note is a three-year note
with interest only for 12 months followed by a 24-month amortization
schedule. In January 1998, the Company prepaid $375,000 of the term loan.
The balance outstanding at June 30, 1999 was $343,750. The term facility
carries an uncompensated guarantee by an officer/stockholder of the Company.
These credit facilities carry no commitment fees or compensatory balance
requirements, and require that the Company maintain minimum financial ratio
covenants.
The Company and it's bank have adopted fewer and less restrictive
financial ratio loan covenants effective June 30, 1999. The Company was in
compliance with these revised loan covenants in the second quarter ending
June 30, 1999. The Company is in the process of finalizing the terms and
conditions of its bank loan renewal to reflect the Company's anticipated
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AUTO-GRAPHICS, INC.
Form 10-Q
results of operations and financial condition in 1999 and beyond. The revised
loan agreement is expected to include an increase in interest rates and the
addition of a commitment fee applied to the total credit facility. It will
also include an expanded guarantee by the Company's principal shareholder.
The Company was timely in all payments to the bank in 1998, and anticipates
timely payments in 1999.
The Company is in the process of offering for sale and issuance, in
a private placement offering which is exempt from registration under
applicable federal and state securities laws, shares of its restricted
common stock for $2.50 per share. The Company is offering to sell 200,000
to 450,000 shares (possibly to be extended to 500,000 shares) of restricted
common stock for gross proceeds of $500,000 to $1,250,000. The proceeds will
be used primarily to build the Company's Internet infrastructure, for
enhancement and development of the Company's Internet based products and
services and for working capital. The offering is expected to be completed
by December 31, 1999.
The Company's capital resources are available for use as working
capital, for capital investments and, although less likely for the immediate
future, possible acquisitions of businesses, products or technologies
complementary to the Company's business. Management believes that cash
reserves, cash flow from operations and the proceeds from the private
placement offering together with the revised and renewed credit facility will
be sufficient to fund operations in 1999 and provide financing for planned
1999 capital expenditures. The Company believes that it is imperative to
continue to invest in Internet/Web capability for the foreseeable future.
Accordingly in 1999, and thereafter, the Company may and likely will require
additional financing to continue to develop and refine its Internet/Web line
of products and to seek to expand the market for these products. There can
be no assurance, however, that any additional financing, if and when needed,
will be available on terms favorable to the Company, or at all.
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.
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AUTO-GRAPHICS, INC.
Form 10-Q
RESULTS OF OPERATIONS
First Six Months 1999 as Compared to First Six Months 1998
Net sales decreased $659,000 or 14% to $4,023,000. The net sales
decline is due to shrinking publishing composition markets and lower demand
for library services in Canada and international markets (Japan).
Cost of sales decreased $483,000 or 17%. Significant factors in the
decreased cost of sales include a continuing shift toward the Company's new
lower cost Internet products.
Selling, general and administrative expenses decreased $36,000 or 2%.
As a percentage of sales, these expenses increased from 33% in 1998 to 38%
in 1999 primarily due to the lower sales levels.
Income from operations decreased $140,000 or 47% to $159,000 in 1999
due primarily to lower sales.
Interest expense/other decreased $49,000 or 28% on lower bank borrowings
and foreign exchange gains.
Net income decreased $36,000 to $32,000 in 1999, down 53% from $67,000
in 1998 due primarily to lower sales.
Net income per share decreased from $0.06 per share in 1998 to $0.03
per share in 1999 due primarily to lower sales.
Second Quarter 1999 as Compared to Second Quarter 1998
Net sales decreased $247,000 or 11% to $2,041,000. The net sales
decline was due to shrinking publishing composition markets and lower
demand for library services in Canada and international markets (Japan).
Cost of sales decreased $250,000 or 18%. Significant factors in the
decreased cost of sales include a continuing shift toward the Company's new
lower cost Internet products.
Selling, general and administrative expenses increased $47,000 or 6%.
As a percent of sales, these expenses increased from 35% in 1998 to 41% in
1999 as a result of the decline in sales.
Income from operations decreased 39% or $44,000 to $68,000 in 1999 due
primarily to lower sales.
Interest expense/other was $54,000 in 1999 down from $81,000 in 1998 on
lower bank borrowings and foreign exchange gains.
Net income decreased $3,000 to $14,000 in 1999, down 16% from $17,000
in 1998 due primarily to lower sales.
Net income per share decreased from $0.02 per share in 1998 to $0.01
per share in 1999 due primarily to lower sales.
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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: None.
(b) The Company filed Form 8-K on April 30, 1999 covering
Exhibits to the Form 10-K report for the year ended December
31, 1998. These exhibits were separated from the 10-K prior
to the filing thereof and were subsequently refiled during
the period covered by this report.
(c) The Company filed a report on Form 8-K dated July 1999
indicating a potential change of control of the registrant
resulting from an agreement whereby the Company's principal
officer/shareholder (Robert S. Cope) granted an option to a
new officer/shareholder of the Company (Corey M. Patick) to
acquire, subject to certain terms and conditions, up to
523,391 shares of the Company's common stock owned by such
person. The exhibits filed with the report were: Option
Agreement (Exhibit 10.30) and Employment Agreement (Exhibit
10.31).
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 8/16/99 ss/ Robert S. Cope
Robert S. Cope, President
and Treasurer
Date 8/16/99 ss/ Daniel E. Luebben
Daniel E. Luebben, Chief Financial
Officer and Secretary