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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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WYOMING 87-0305614
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P. O. BOX 1750, BLAINE, WASHINGTON 98231
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (360) 332-6711
----------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
Indicate by checkmark 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 [ ] No [X]
Indicate by checkmark if disclosure of delinquent filers [ ]
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 31, 1998 was $3,696,470 based on a closing sales price of
$0.375 per share on the NASDAQ OTC Bulletin Board on such date.
The number of shares outstanding of the registrant's common stock, no par
value, as of March 31, 1998 was 9,857,252.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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TABLE OF CONTENTS
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PART I .................................................................................................1
ITEM 1. BUSINESS................................................................................1
GENERAL.................................................................................1
LATE-FILING; SUBSEQUENT EVENTS & FILINGS................................................1
FORWARD-LOOKING STATEMENTS..............................................................1
BACKGROUND..............................................................................2
INDUSTRY................................................................................3
PRODUCTS................................................................................3
SALES BY PRODUCT CATEGORY...............................................................4
SALES/ASSETS BY GEOGRAPHIC LOCATION.....................................................5
BUSINESS CONCENTRATIONS.................................................................6
PURCHASING..............................................................................6
DISTRIBUTION............................................................................7
COMPETITION.............................................................................7
TRADEMARKS AND COPYRIGHTS...............................................................8
SEASONALITY.............................................................................8
EMPLOYEES...............................................................................8
RISK FACTORS............................................................................9
ITEM 2. DESCRIPTION OF PROPERTIES..............................................................14
ITEM 3. LEGAL PROCEEDINGS......................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................15
PART II..................................................................................................15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...............15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................18
ITEM 8. FINANCIAL STATEMENTS...................................................................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.............................................................................24
PART III.................................................................................................24
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................24
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TABLE OF CONTENTS
(CONTINUED)
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PAGE
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PART IV.................................................................................................24
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.....................24
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PART I
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") was incorporated as
a Wyoming corporation on September 20, 1974. The Company is engaged in the
development, manufacture, marketing and distribution of specialty paper
products, generally made using pre-printed designs, including stationery,
business cards, brochures, memo pads and paper cubes.
The Company's fiscal year end is March 31. The Company's executive
offices and domestic operations are located at 1555 Odell Road, Blaine,
Washington 98231, and its telephone number is (360) 332-6711.
LATE-FILING; SUBSEQUENT EVENTS & FILINGS
The Company has not timely filed all reports required to be filed by it
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, despite the fact that it has been subject to such filing
requirements for the past 90 days.
INFORMATION SET FORTH IN THIS FORM 10-K EXCLUSIVELY COVERS THE COMPANY'S
FISCAL YEAR ENDED MARCH 31, 1998 AND MUST ONLY BE READ IN
CONJUNCTION WITH THE COMPANY'S MOST RECENT REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Potential investors should realize that material, subsequent developments with
respect to the Company's business, operations and financial condition which have
occurred from and after March 31, 1998 are more fully described in each of the
following reports filed by the Company on or before March 15, 1999:
1. Form 10-Q for the period ending December 31, 1998;
2. Form 10-Q for the period ending September 30, 1998; and
3. Form 10-Q for the period ending June 30, 1998.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of specialty paper
products as a percentage of revenue; the Company's ability to increase its
market share within the preprint industry; the ability of the Company to
successfully implement price increases for the Company's products when and as
needed; trends relating to the Company's profitability and gross profits
margins; the ability of the Company to implement a management information
system, including an electronic data interchange system, adequate to meet
operations requirements in the future and to improve its internal controls; the
ability of the Company to refinance its existing revolving credit facility, to
identify potential buyers for all or part of its business or to raise additional
debt or equity financing sufficient to meet its working capital requirements;
and the ability of the Company to continue operations as a going concern.
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Relevant risks and uncertainties include, but are not limited to,
slower than anticipated growth of the preprint papers market; loss of certain
key customers; insufficient consumer acceptance of the Company's specialty paper
products; unanticipated actions, including price reductions, by the Company's
competitors; unanticipated increases in the costs of raw materials used to
produce the Company's products; loss of favorable trade credit, supply terms,
reliable and immediately available raw material supply and other favorable terms
with certain key vendors; greater than expected costs incurred in connection
with the implementation of a management information system; inability to
implement an electronic data interchange system adequate to support the
Company's operations; failure to realize expected economic efficiencies of the
Company's automated production system; the inability to hire and retain key
personnel; unexpected increases in the overall costs of production as a result
of collective bargaining arrangements; unfavorable determinations of pending
lawsuits or disputes; and inability to secure additional working capital when
and as needed
Additional risks and uncertainties include those described under "Risk
Factors" below and those described from time to time in the Company's other
filings with the Securities and Exchange Commission, press releases and other
communications.
BACKGROUND
From its inception in 1974 until fiscal 1991, the Company was engaged
exclusively in the manufacture and wholesale marketing of various rub-on and
stick-on lettering, stencils, graphics arts products and other signage products.
In 1991, the Company began the development of "pre-print" or "specialty" paper
products consisting of paper on which photographs or other art images are
printed and which is then cut to size. In 1992, the Company introduced its first
specialty paper product under the Geopaper brand name. The Company now has
several specialty paper products made using Geopaper designs, including
stationery, business cards, brochures, memo pads and paper cubes which, in North
America, are sold primarily to office supply superstores, including Office Depot
and OfficeMax, and mass market retailers, such as Wal-Mart, and which are also
distributed internationally through the Company's subsidiaries in Canada, Europe
and Australia. The specialty papers group constitutes the Company's principal
business, with approximately 78% of the Company's total sales in fiscal year
1998 attributable to sales of Geopaper products. Primarily as a result of sales
generated by the specialty papers group, the Company experienced substantial
growth, with total sales increasing from $6,900,875 from fiscal year 1994 to
$24,097,845 for fiscal year 1998, an increase of 246%.
Primarily to develop its specialty papers group, the Company made
substantial investments to expand facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company experienced delays,
set-backs and unanticipated additional expenses in the installation of the
production equipment and its management information system. Unanticipated
expenses relating to problems with the installment of the company's management
information systems and operational inefficiencies, together with price
reductions for the Company's products and cost increases for certain raw
materials, had a negative impact on the Company's gross margins and contributed
to a substantial net loss for fiscal year 1998.
Since May 1997, the Company has been in default of several financial
covenants under its revolving credit facility, the Company's primary source of
working capital, and borrowings under the facility have exceeded permitted
borrowing base limitations. The existence of these defaults constitutes a
default under the Company's mortgage loans and equipment lease facilities. The
report of the Company's auditors included in this Form 10-K states that the
Company's fiscal year 1998
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losses and non-compliance with covenants under its revolving credit facility
raise and continue to raise substantial doubt about the Company's ability to
continue as a going concern.
The Company has been able to successfully negotiate a forbearance
agreement with its revolving credit lender. However, a failure by the Company to
obtain (a) an increase in borrowing availability under the revolving credit
facility, (b) an extension to its forbearance agreement and (c) additional,
alternative funds when and as needed to satisfy its working capital requirements
may force the Company to curtail operations, seek extended payment terms from
its vendors or seek protection under the federal bankruptcy law. See "Risk
Factors--Ability to Continue as a Going Concern; Defaults under Credit Facility;
Need for Additional Working Capital" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut
sheet papers used for letterheads, brochures, flyers and bulletins. Suppliers
within the preprint industry also offer combination sets made up of multiple
products such as matching letterhead, envelopes and business cards, or software
packages that improve ease of use of preprints by the consumer. New designs and
a large variety of preprints and related specialty products have been important
elements of success and growth for businesses in the preprint market.
The preprint market is segmented among two major methods of
distribution: retail, making up approximately 25% of the current total domestic
preprint market (as measured during fiscal year 1998), and direct mail, which is
estimated to represent approximately 75% of the market (as measured during
fiscal year 1998). Within the retail segment of the preprint market there are
numerous sub-segments, including office supply superstores, mass market
retailers, arts & crafts stores, party stores, specialty paper retailers, and
office supply business-to-business retailers. The Company sells its specialty
paper products exclusively in the retail segment of the preprint market,
primarily to office supply superstores such as Office Depot and Office Max and
mass market retailers such as Wal-Mart.
Large retailers somewhat dominate the retail segment of the preprint
industry, and as such, exert considerable influence over the operations of the
relatively smaller suppliers, such as the Company, that service them in the
preprint market. Of particular importance are factors such as pricing, monetary
requirements for retailer's selling programs (including such expenses as volume
rebates and advertising allowances), prompt order turnaround which in turn
requires the maintenance of large inventories, and payment terms, including
prompt pay discounts and extended and seasonal terms. See "Risk
Factors--Competition", "--Maintenance of Large Inventory of Products" and
"--Customer Concentrations."
Compared to the preprint market, during fiscal year 1998, the market
for the Company's lettering and signage products was smaller, more mature,
slower-growing and more narrowly focused on the office supply and arts and
crafts market. Though the total dollar volume of this market segment is unknown,
the Company experienced little or no growth in its lettering and signage
revenues over the past five years.
PRODUCTS
As of March 31, 1998, the products manufactured by the Company were
separated into two major product groups: (1) specialty papers and (2) lettering
and signage.
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The specialty papers group consists of paper on which photographs or
other art images are printed and which is then cut to size. In 1992, the Company
introduced its first specialty paper product under the Geopaper brand name. The
Company now has several specialty paper products made using Geopaper designs,
including stationery, business cards, brochures, memo pads and paper cubes.
These specialty paper products are often designed to be used with personal
computer printers. The specialty papers group now constitutes the Company's
principal business, with approximately 78% of the Company's total sales in
fiscal year 1998 attributable to sales of Geopaper products. See "--Sales by
Product Category."
The Company's lettering and signage group manufactured and distributed
rub-on and stick-on lettering, stencils, electronic moving message signs,
American Disabilities Act signs in Braille, and other signage products. This
product group represented 22% of sales in fiscal year 1998, down from 29%, 29%
and 97% of sales during fiscal years 1997, 1996 and 1995, respectively.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total sales attributable to
each class of product offered by the Company for the last three years is set
forth below.
AS A PERCENTAGE OF SALES
CLASS OF PRODUCT
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FISCAL YEAR
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1998 1997 1996
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Designer stationeries and specialty papers 78% 71% 71%
Lettering, signage, stencil and graphic art products 22% 29% 29%
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STATED IN U.S. DOLLARS (ROUNDED)
CLASS OF PRODUCT
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FISCAL YEAR
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1998 1997 1996
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Designer stationeries and specialty papers $24,100,000 $17,050,000 $16,075,000
Lettering, signage, stencil and graphic art products $ 6,600,000 $ 6,800,000 $ 6,500,000
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SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows:
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CLASS OF PRODUCT FISCAL YEAR
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1998 1997 1996
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Sales to Domestic and $ 17,774,299 $ 11,637,497 $12,939,098
Foreign Customers
United States
Canada(1) $ 4,082,664 $ 3,872,621 $ 2,854,935
Europe $ 1,197,192 $ 715,327 $ 281,330
Australia $ 1,043,690 $ 825,697 0
Total $ 24,097,845 $ 17,051,142 $16,075,363
============ ============ ===========
Operating profit or (loss): (7,261,961) (6,587,756) $ 944,157
United States
Canada(1) (301,179) (473,296) $ 377,328
Europe (489,263) (727,467) $ 65,316
Australia $ 40,684 $ 189,715 0
Total (8,011,719) (7,598,804) $ 1,386,801
============ ============ ===========
Identifiable assets: $ 21,677,859 $ 27,464,715 $24,263,181
United States
Canada(1) $ 1,122,452 $ 940,046 $ 410,060
Europe $ 1,321,662 $ 1,058,046 $ 64,800
Australia $ 1,222,992 $ 782,894 0
Total $ 25,344,965 $ 30,245,701 $24,738,041
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(1) Effective April 1, 1996, Geographics--Canada succeeded Martin Distribution,
Inc. ("Martin Distribution") as the exclusive importer of Geographics products
into Canada. Martin Distribution was at the time owned and controlled by one of
the Company's then-acting directors. All export sales to Canada in fiscal year
1997 were to Geographics--Canada. All export sales to Canada in fiscal year 1996
and fiscal 1995 were to Martin Distribution.
International sales accounted for approximately 20%, 32%, and 26% of
the Company's total net sales in fiscal years 1996, 1997 and 1998, respectively.
International sales were concentrated in Canada, Europe and Australia. As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers, political
and economic instability and other risks. See "--Risk Factors-International
Subsidiaries" and "--Risk Factors--Foreign Exchange and International Trade."
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BUSINESS CONCENTRATIONS
Historically, a substantial portion of the Company's sales have been to
a limited number of customers. Concentration of sales to the Company's five
largest customers is detailed below:
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CUSTOMER FISCAL YEAR
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1998 1997 1996
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Office Depot Inc 30% 31% 40%
Office Max Inc 14% 26% 24%
Business Depot, Inc(1) 11% 10% 0%
United Stationers Inc 3% 3% 3%
Wal-Mart Stores, Inc 6% 4% 3%
64% 83% 66%
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(1) Business Depot, Inc. (Staples of Canada) sales were included in sales of
Martin Distribution for 1996 and 1995.
From and after fiscal year 1998, the Company expects that sales to
relatively few customers will continue to account for a high percentage of its
net sales in the foreseeable future and believes that its financial results will
continue to depend in significant part upon the success of these few customers.
See "Risk Factors--Customer Concentrations."
PURCHASING
The Company's principal purchases are materials for use in the
manufacture of specialty paper. In particular, the Company routinely purchases
sheets, rolls and reams of commodity paper, as well as other direct materials
involved in the printing and packaging of its Geopaper product lines, such as
inks, packaging film, labels, shipping boxes and other materials. Certain of the
products used in the manufacture of the Company's products are considered
commodities, and as such can vary significantly in cost from time to time.
Though prices may vary, the Company has not experienced and does not currently
anticipate any market shortages of supply of the specific raw materials that it
purchases and uses in the manufacture of its products.
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. Although the
Company purchases goods from approximately 1,100 vendors, it generally practices
a "sole source" approach to vendor selection in that it typically relies on a
single vendor for all purchases on its various categories of production
materials, and other major categories of purchased goods and services. One key
vendor of commodity paper and other raw materials and supplies is Unisource, a
broker/vendor who represented 48% of the Company's total purchases during the
fiscal year 1998.
Unisource has provided the Company an immediately available and
uninterrupted supply of paper. In addition, Unisource and other key vendors have
granted the Company significant amounts
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of trade credit, along with favorable pricing and payment terms. Although the
Company may be able to find other sources of supply for commodity paper and
other major raw material categories, there can be no assurance that potential
new vendors, once sourced, would provide an uninterrupted supply of raw
materials or adequate levels of trade credit, competitive prices or acceptable
payment terms. See "Risk Factors-Dependence on Key Vendors."
DISTRIBUTION
The Company sells its products on a wholesale basis primarily to
retailers, including office supply superstores, mass market retailers, arts &
crafts stores, party stores, specialty paper retailers, and office supply
business-to-business catalog retailers. The Company also markets its products to
office supply distributors in the U.S. and to distributors in those countries
where the Company does not service retailers directly. Historically, the Company
has sold a substantial portion of its products to a limited number of retail
customers, and the Company believes that this trend can be expected to continue
in the future. See "--Business Concentrations" and "Risk Factors-Customer
Concentrations."
The Company conducts its export operations through three subsidiaries:
o Geographics Marketing Canada, Inc. ("Geographics--Canada") was
incorporated as a British Columbia, Canada corporation on July 31,
1995, and was established to import the Company's products into Canada
and market them to wholesale and retail distribution channels.
o Geographics (Europe) Limited ("Geographics--Europe") was incorporated
in England on December 12, 1995. The offices of Geographics--Europe are
located at 4 Iceni Court, Letchworth, Herts SG6 1TN, England, and its
telephone number is 01462-487100. Geographics--Europe was established
to import, warehouse, market and distribute the Company's products
throughout Europe.
o Geographics Australia Pty. Ltd. ("Geographics--Australia") was
incorporated in Brisbane, Australia on June 28, 1996. The offices of
Geographics--Australia are located at 3/32 Lillian Fowler Place,
Marrickville NSW 2204, Australia and its telephone number is
61-2-9519-4488. Geographics--Australia was organized to import,
warehouse, market and distribute the Company's products throughout
Australia.
COMPETITION
The Company operates in a highly competitive environment. The Company's
designer stationery products compete in most of the Company's markets with Paper
Direct, Inc., Taylor, Inc., American Pad and Paper, Inc., Z-International, Inc.,
and REDIFORM, Inc. (a division Moore Corp Ltd.). The Company's designer
stationery products compete for limited shelf space in the office products
superstores, office product stores, mass market stores, contract stationers,
wholesalers, office product catalogs and mail order catalogs.
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized and have substantially greater financial, marketing
and human resources. Moreover, the development and manufacture of new designer
stationeries and specialty papers are highly capital intensive. In order to
remain competitive, the Company may be required to continue to make significant
expenditures for capital equipment, sales, service, training and support
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capabilities, investments in systems, procedures and controls, expansions of
operations and research and development, among many other items. Additional
financing might be required to fund the Company's investments in those areas.
There can be no assurance that additional financing will be available on terms
acceptable to the Company, or at all. See "--Risk Factors--Competition" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation--Liquidity and Capital Resources."
TRADEMARKS AND COPYRIGHTS
The Company maintains five registered trademarks in the U.S., Canada
and Australia: (1) GEOPAPER(TM), (2) GEOTYPE(TM), (3) GEOTAPE(TM), (4)
GEOSTENCIL(TM), and (5) GEOSIGN(TM). The Company's trademarks have various
expiration dates from 2002 to 2006 in the U.S., expiration dates in 2005 in
Canada, and expiration dates in 2011 in Australia.
The Company considers consumer awareness of its products and brand
names an important factor in creating demand for its products among office
supply stores and other existing or prospective customers. Part of the Company's
strategy for increasing consumer awareness is to establish consistent brand
identity across all of its major product lines. The Company believes that its
trademarks and copyrights play an important role in this effort
While the Company has made reasonable efforts to protect its
intellectual property, including registering them as trademarks and copyrights
in the countries where the product lines are marketed, to the extent that such
protections are inadequate, the Company could lose all or a part of these rights
which, in turn, could result in the diminution of the Company's overall brand
identity or individual product line identities. Either the loss of intellectual
property rights or the diminution of the Company's brand identities could have a
material adverse effect on the Company. See "Risk Factors--Uncertain Protection
of Intellectual Property Rights".
SEASONALITY
A significant portion of the Company's customer orders are placed
between August and October of each year for shipment during the Company's third
fiscal quarter, which includes the Christmas season, with the largest levels of
sales historically occurring in the second half of the calendar year. As a
result, the Company has experienced, and expects to continue experiencing,
seasonal fluctuations in its operating results based upon past purchasing
patterns.
EMPLOYEES
At March 31, 1998, the Company had approximately 201 employees, 188 of
whom were employed at its headquarters in Blaine, Washington, 6 of whom were
employed at the Company's facilities in the United Kingdom, and 7 of whom were
employed at the Company's facilities in Australia. At March 31, 1997, the
manufacturing, warehousing and product distribution aspects of the Company's
business employed 143 employees, 31 employees worked in administration and 27
employees worked in various managerial positions. As of the date of this Report,
none of the Company's employees were subject to a collective bargaining
agreement.
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RISK FACTORS
PROSPECTIVE INVESTORS ARE STRONGLY CAUTIONED THAT AN INVESTMENT IN THE COMPANY
INVOLVES A VERY HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD NOT DISMISS,
AS "BOILERPLATE" OR "CUSTOMARY," DISCLOSURE OF THE RISK FACTORS SET FORTH BELOW.
THE CONTINGENCIES AND OTHER RISKS DISCUSSED BELOW COULD AFFECT THE COMPANY IN
WAYS NOT PRESENTLY ANTICIPATED BY ITS MANAGEMENT AND THEREBY HAVE A MATERIAL
ADVERSE EFFECT ON THE VALUE OF ITS COMMON STOCK. A CAREFUL REVIEW AND
UNDERSTANDING OF EACH OF THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS REPORT IS ESSENTIAL FOR AN INVESTOR SEEKING TO
MAKE AN INFORMED DECISION WITH RESPECT TO THE COMPANY.
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY; NEED FOR
ADDITIONAL WORKING CAPITAL
As a result of the rapid growth of the Company's specialty papers
group, capital expenditures relating to the purchase and installation of an
automated production system and a management information system, operating
losses and other factors, the Company has required, and continues to require,
substantial external working capital. Moreover, subsequent to the end of fiscal
year 1998, the Company experienced working capital short-falls which required
the Company to delay payments to certain vendors, delay purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital.
At the end of fiscal year 1998, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation,--Liquidity and Capital Resources." Since May 1997, the
Company has failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under the revolving credit facility, and borrowings under
the facility exceeded the permitted borrowing base limitations. The Company's
lender has also provided the Company with several mortgage loans and equipment
loans, and the existence of the defaults under the revolving credit facility
constitutes a default under these other loans. The report of the Company's
auditors included in this Report states that the Company's fiscal year 1998
losses and non-compliance with covenants under its revolving credit facility
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company entered into a forbearance agreement with its lender,
effective August 31, 1997, pursuant to which the lender agreed to extend the
expiration date of the revolving credit facility to October 31, 1997, to
increase the $12.0 million commitment by a $300,000 stand-by letter of credit,
to permit borrowings of up to $2.25 million in excess of the applicable
borrowing base limitation (not to exceed the $12.0 million revolving credit
facility commitment) and to forbear from asserting is rights with respect to the
Company's non-compliance with the financial covenants as well as the defaults
under the Company's mortgage loans and equipment loans. However, on September
12, 1997, the Company was required to request borrowings in excess of the
amended borrowing limits in order to meet payroll and other expenses. Although
the Company's lender permitted the requested borrowings, it did not formally
waive this additional default. The Company will, during fiscal year 1999
continue to seek extended payment terms from its vendors, delayed purchases of
raw materials, internal cost reduction measures and other steps to conserve
operating capital. As a result, the Company's vendors may place the Company on
credit hold or take other actions against the Company, including the termination
of their relationship with the Company or the initiation of collection
proceedings. See "--Dependence on Key Vendors." In addition, the Company will
continue to
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actively pursue additional sources of working capital, which could include the
issuance of debt or equity securities or the sale of some or all of the
Company's assets. However, at the end of fiscal year 1998, the Company had
received no firm commitments with respect to any such transactions and there can
be no assurance that any such transaction will be identified. Further, there can
be no assurance that the Company will be able to obtain additional sources of
additional working capital when and as needed or that the terms of any such
funding will be acceptable to the Company or in the best long-term interests of
the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and
to extend the expiration date of, the Company's revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy the Company's
working capital requirements could force the Company to curtail operations, seek
extended payment terms from its vendors or seek protection under the federal
bankruptcy laws. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized, more established and have substantially greater
financial, marketing and human resources. Moreover, the development and
manufacture of new designer stationeries and specialty papers are highly capital
intensive. In order to remain competitive, the Company may be required to
continue to make significant expenditures for capital equipment, sales, service,
training and support capabilities, investments in systems, procedures and
controls, expansions of operations and research and development, among many
other items. Additional financing might be required to fund the Company's
investments in those areas. There can be no assurance that additional financing
will be available on terms acceptable to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
CUSTOMER CONCENTRATIONS
The Company's three largest customers, Office Depot Inc., Office Max,
Inc. and Business Depot, Inc., in the aggregate accounted for approximately 55%
and 67% of the Company's total sales for fiscal year 1998 and fiscal year 1997,
respectively. The Company expects that sales to relatively few customers will
continue to account for a high percentage of its net sales in the foreseeable
future and believes that its financial results depend in significant part upon
the success of a limited number of customers. See "--Business Concentrations."
Although the composition of the group comprising the Company's largest customers
may vary from period to period, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the designer stationery or
specialty papers industry, would have a material adverse effect on the Company's
business, financial condition and results of operations.
As a result of the concentration occurring in the office supply
industry in which the major office megastores are accounting for a greater
percentage of industry-wide sales, it is anticipated that an increasing number
of the smaller outlets and retail stores will discontinue operations in the
years ahead. While the Company anticipates that certain of such sales will be
transferred to the larger megastores to which the Company currently supplies its
products, there can be no assurance that any loss of sales to smaller outlets
and retail stores will be replaced in this manner.
10
<PAGE> 14
DEPENDENCE ON KEY VENDORS
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. Although the
Company purchases goods from approximately 1,100 vendors, it generally practices
a "sole source" approach to vendor selection in that it typically relies on a
single vendor for all purchases on its various categories of production
materials, and other major categories of purchased goods and services. One key
vendor of commodity paper and other raw materials and supplies is Unisource, a
broker/vendor who represented 48% of the Company's total purchases during the
fiscal year 1998.
Unisource has provided the Company an immediately available and
uninterrupted supply of paper. In addition, Unisource and other key vendors have
granted the Company significant amounts of trade credit, along with favorable
pricing and payment terms. Although the Company may be able to find other
sources of supply for commodity paper and other major raw material categories,
there can be no assurance that potential new vendors, once sourced, would
provide an uninterrupted supply of raw materials or adequate levels of trade
credit, competitive prices or acceptable payment terms.
TECHNOLOGY CHANGES AFFECTING PRODUCTS
The design and manufacture of production equipment used in the designer
stationery and specialties paper industries has undergone and continues to
undergo rapid and significant technological change. In particular, developments
in the software industry may afford customers and consumers with the ability to
produce paper products which offer quality characteristics comparable with that
provided by the Company. Any such developments may, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's business is, to a significant degree,
dependent on the enhancement of its current products and development of new
products. Product development and enhancement involve substantial expenditures
and a high degree of risks, and there is no assurance that product development
efforts of the Company will be successful, will have sufficient utility or will
be superior to efforts by others, including current customers and consumers of
the Company's products. There can be no assurances that future technological
developments will not render existing or proposed products of the Company
uneconomical or obsolete, or that the Company will not be adversely affected by
the future development of commercially viable products by others. The
development of superior products by others could have a material adverse effect
on the Company's business, financial condition or results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of trademarks and copyrights, and certain of
the Company's proprietary manufacturing processes are protected by trade
secrets. There can be no assurance that the Company's trade secrets, trademarks,
copyrights or other proprietary rights will be effective in discouraging
competition or held valid if subsequently challenged, or that others will not
assert rights in, or ownership of, any of such proprietary rights. In addition,
there can be no assurance that the actions taken by the Company to protect its
proprietary rights will be adequate to prevent imitation of its products, that
the Company's proprietary information will not become known to competitors or
that others will not independently develop products substantially equivalent or
superior to the Company's products without infringing on the Company's
proprietary rights. There can be no assurance that any pending trademark
application will result in the issuance or a registered trademark. In addition,
the laws of certain foreign countries do not protect proprietary rights to the
same extent as do the laws of the United States. While the Company has made
reasonable efforts to protect all of its trade secrets,
11
<PAGE> 15
trademarks, copyrights and other proprietary rights, to the extent such
protections are inadequate, the Company could lose a part or all of these rights
which, in turn, could have a material adverse effect on the Company's business,
financial condition or results of operations.
POSSIBLE FAILURE TO QUALIFY FOR NASDAQ NATIONAL MARKET OR NASDAQ SMALLCAP MARKET
In July 1997, Nasdaq informed the Company that its Common Stock and
warrants would be delisted from the Nasdaq National Market as a result of the
Company's failure to file this report with the Securities and Exchange
Commission by the due date. NASDAQ continued listing for the Company's Common
Stock and warrants provided the Company files this Report and its Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1997 by no later than
September 18, 1997, however, that deadline was not satisfied by the Company. The
Company has been informed by Nasdaq that the letter "E" that has been added to
the trading symbols for the Company's securities will be removed once these
conditions have been satisfied. The Company has requested that NASDAQ extend the
period within which it may file this report, however, there can be no assurance
that NASDAQ will honor this request. If the Company is unable to satisfy these
listing requirements, trading, if any, in the Common Stock would thereafter be
conducted in the over-the-counter market, in which case an investor may find it
difficult to dispose of, or to obtain accurate quotations as to the market
value, of the Common Stock. This would have a material adverse impact on the
trading market and market price for the Common Stock.
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5 per share, subject to certain exceptions.
Unless the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, it may be deemed to be "penny stock" and thus will become
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. These rules could adversely effect the
ability and willingness of broker-dealers to sell the Common Stock, which could
reduce the liquidity of the Common Stock and have a material adverse effect on
the trading market and the market price for the Common Stock. There can be no
assurance that the Common Stock will continue to be listed on the Nasdaq
National Market or, if necessary, that the Common Stock will qualify for listing
on the Nasdaq Small Cap Market. See "Risk Factors--Possible Failure to Qualify
for Nasdaq National Market or Nasdaq SmallCap Market."
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of September 8, 1997, there were outstanding warrants for the
purchase of an aggregate of 1,342,293 shares of Common Stock at an exercise
price of $.77 to $6.50 per share. In addition, as of September 8, 1997, there
were outstanding options granted under the Company's stock option plan to
purchase up to 173,500 shares of Common Stock at exercise prices ranging from
Cdn. $1.00 to Cdn. $4.15 per share. In the event that the outstanding warrants
and options are exercised, the holders will be given the opportunity to profit
from a rise in the market price of the underlying shares. This may have certain
dilutive effects on, and a materially depressive effect on, the market price for
the Common Stock. The terms on which the Company could obtain additional capital
during the life of such warrants and options may be adversely affected because
the holders may be expected to exercise them at a time when the Company might
otherwise be able to obtain comparable additional capital in a new offering of
securities at a price per share greater than the exercise price of such options
and warrants. As a result, the existence and possible exercise of such options
or warrants
12
<PAGE> 16
could have a material adverse effect on the Company's ability to raise capital
through the sale of its equity securities.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
Management continues to expect that the Company's financial results may
vary materially from period to period. Most of the Company's customers order
products for immediate delivery. As a result, a substantial amount of the
Company's net sales in each quarter results from orders received in that
quarter. The Company's net sales and operating results may, therefore, vary
significantly as a result of, among other things, volume and timing of orders
received during the quarter, variations and sales mix, and delays in production
schedules. Accordingly, the Company's historical financial performance is not
necessarily a meaningful indicator of future results. Moreover, a significant
portion of the Company's customer orders are placed between August and October
of each year in anticipation for shipment during the Company's third fiscal
quarter (i.e., the Christmas period). As a result, the Company has experienced
and is expected to continue to experience seasonal fluctuations in its operating
results based on such purchasing patterns. See "--Seasonality." These
fluctuations in quarterly operating results could have a material adverse effect
on, among other things, the market price for the Company's Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to
continue to be, volatile. See Market for Registrant's Common Equity and Related
Stockholder Matters." The market price of the Common Stock could fluctuate,
perhaps substantially, in response to a number of factors, such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers or suppliers, changes in the general condition of, or trends in,
the designer stationery and specialty paper industry, paper prices, changes in
governmental regulations, or changes in securities analysts' estimates of the
Company's or its competitors' or industry's, future performance. In addition, in
recent years the stock market in general, and the market for shares of small
capitalization stocks in particular, including the Company's, have experienced
extreme price and volume volatility, which has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of such companies. These broad
market fluctuations may have a material adverse effect on the market price of
the Common Stock.
YEAR 2000 ISSUES
The Company uses three principal software packages at its North
American production, warehousing and administrative facilities. These include an
operating system, an electronic data interchange software and an integrated
operations and accounting application package. Of particular importance, the
Company's operations and accounting applications were determined to not be Year
2000 ready. Accordingly, the Company is in negotiations to secure a new
operating and accounting software package with installation to be scheduled as
soon as practicable. The Company estimates that the costs of acquiring and
installing this new software package will range between $125,000 and $150,000.
The Company continues to evaluate its remaining principle software
packages and believes that existing available upgrades will mitigate the risk of
significant operational problems. However, the Company has not completed an
assessment of its hardware and other systems, including those of vendors,
customers and other third parties. Until a complete assessment is completed, the
Company
13
<PAGE> 17
is unable to estimate the total expense of assuring that all of its software and
hardware are Year 2000 compliant. The Company plans to complete these
assessments no later than March 1999.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company considers its properties to be suitable and adequate for
their intended uses for the foreseeable future. These properties consist of the
following:
EXECUTIVE OFFICES AND DOMESTIC FACILITIES
The Company's headquarters and manufacturing facility in Blaine,
Washington has approximately 96,500 square feet of office, warehouse and
manufacturing space located on ten and one-half acres of Company-owned land. The
Company's Blaine, Washington facility was increased from 34,000 sq. ft to 49,000
sq. ft in December 1994. The facility was increased to its current size during
fiscal year 1996.
OTHER WHATCOM COUNTY FACILITIES
During 1998 and 1997, the Company also leased 4 additional 10,000 sq.
ft. buildings at a business park facility near Ferndale, Washington, each
facility on a renewable six month lease of $15,000 per month, triple net.
EUROPEAN FACILITIES
In connection with the distribution of the Company's products in
Europe, Geographics--Europe leases 6,700 square feet of warehouse space near
London, England. The lease requires quarterly lease payments of approximately
$5,200, triple net, and expires on February 14, 2006.
AUSTRALIAN FACILITIES
In connection with the distribution of the Company's products in
Australia, Geographics--Australia leases 5,000 square feet of warehouse space
near Brisbane, Australia. The lease requires lease payments of $3,400 per month,
triple net (with annual review of the rental rate beginning in August 1997), and
expires on August 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company, Ronald S. Deans, the Company's President, Chief Executive
Officer and Chairman of its Board of Directors, and Terry A. Fife, the Company's
former Vice President of Finance and Chief Financial Officer, were named as
defendants in a securities action filed on July 17, 1997 in the U.S. District
Court for the Western District of Washington (the "Complaint"). The Complaint
was filed on behalf of a class of purchasers of the Company's Common Stock
during the period beginning on August 6, 1996 (the day the Company announced
financial results for the first quarter of its 1997 fiscal year) and ending on
June 12, 1997 (the "Class Period"). The Complaint alleged, among other things,
that, throughout the Class Period, the defendants inflated the price of the
Common Stock by intentionally or recklessly making material misrepresentations
or omissions which deceived the public about the Company's financial condition
and prospects. The Complaint alleges claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and seeks damages in an unstated amount. Two
separate but related complaints (the "Related Complaints") naming the same
defendants and alleging substantially similar claims as set forth in the
Complaint were filed in the U.S. District Court for the Western District of
Washington on July 22, 1997 and July 23, 1997.
14
<PAGE> 18
The Company is also party to other routine litigation incident to its
business and to which its property is subject. The Company's management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during fiscal
year 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National Market
under the symbol "GGIT" on March 8, 1996. From May 5, 1995 to March 7, 1996 the
Company's Common Stock traded on the OTC Bulletin Board. The Company's Common
Stock also trades on the Toronto Stock Exchange under the symbol "GGIT".
The following table sets forth the high and low closing bid prices or
closing sales prices, as the case may be, of the Common Stock, as reported on
the OTC Bulletin Board or the Nasdaq National Market System, as the case may be,
for each fiscal quarter beginning with the first fiscal quarter of the fiscal
year ended March 31, 1996.
NASDAQ NMS/OTC BULLETIN BOARD
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ----- -----
<S> <C> <C>
First Quarter $6.94 $4.75
Second Quarter $5.96 $2.88
Third Quarter $5.38 $2.75
Fourth Quarter(1) $5.25 $3.25
</TABLE>
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter $1.01 $1.00
Second Quarter $0.625 $0.563
Third Quarter $0.375 $0.375
Fourth Quarter $0.375 $0.375
</TABLE>
- ------------------
(1) The Company's shares began trading on the Nasdaq National Market System
effective March 8, 1996.
15
<PAGE> 19
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. As
of March 31, 1998, there were approximately 272 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company has not paid dividends at any time during the two fiscal
year period ending on March 31, 1998. The Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
16
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's Consolidated Financial Statements for the periods indicated. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's 1998 Consolidated Financial Statements and notes thereto contained
elsewhere in this Report.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 6,901,845 $ 10,186,136 $ 16,075,363 $ 17,051,142 $ 24,097,845
Cost of sales 4,488,176 5,881,649 10,343,463 16,522,236 21,035,139
Gross margin 2,413,669 4,304,487 5,731,900 528,906 3,062,706
Selling, general and administrative 2,981,861 2,873,476 4,185,331 8,127,710 11,074,425
Amortization of goodwill 479,300 639,067 159,768 -- --
----------- ------------ ------------ ------------ ------------
Income (loss) from operations (1,047,492) 791,944 1,386,801 (7,598,804) (8,011,719)
Other income (expense) 209,521 15,398 130,684 24,907 (38,365)
Gain (loss) on sales of property
and equipment (12,687) (13,468) (594) (86,048) (159,406)
Reserve for impairment on EDP
installation-in-progress -- -- (620,759) --
Interest expense (356,060) (457,499) (539,394) (805,079) (1,413,219)
----------- ------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes (1,206,718) 336,375 977,497 (9,085,783) (9,622,709)
Income tax provision (benefit) 34,800 (411,367) 332,350 (55,972) --
----------- ------------ ------------ ------------ ------------
Income (loss)
From Continuing Operations 1,241,518 747,742 645,147 9,029,811 9,622,709
Income From Discontinued
Operations net of income taxes in
1996 of $302,329* 586,877 1,079,510 973,091
Net Income (loss) $(1,241,518) $ 747,742 $ 1,232,024 $ (7,950,301) $ (8,649,618)
Net income (loss) per average
common share outstanding $ (0.28) $ 0.16 $ 0.19 $ (0.85) $ (0.90)
Weighted average shares
outstanding used in computing per
share data 4,424,535 4,549,101 6,606,499 9,322,278 9,626,335
</TABLE>
- ------------
* Substantially all sales in years 1995, 1994 were from Lettering Signage.
17
<PAGE> 21
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
For the year ended: 1994 1995 1996(1) 1997(1) 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 869,651 $ 1,836,436 $ 5,886,703 $ 401,550 $(8,795,125)
Total assets 6,788,067 10,614,673 24,738,041 30,245,701 25,344,965
Long-term obligations, 2,484,634 3,319,948 3,690,360 4,322,371 4,853,254
less current portion
Stockholders' equity 1,471,514 2,803,341 9,989,852 7,917,023 (427,218)
</TABLE>
- ------------------
(1) Certain amounts for the fiscal year ended March 31, 1996 and 1997 have been
reclassified to conform to the current year presentation of the fiscal year
ended March 31, 1998 amounts. Such reclassifications had no effect on previously
reported earnings or financial position.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto appearing
elsewhere on this Report.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.3 96.9 64.3
Gross margin 12.7 3.1 35.7
Selling, general and
administrative expenses 45.9 47.7 26.0
Amortization of goodwill -- -- 0.9
Income from operations (33.2) (44.6) 8.6
Other income -- .1 .8
Interest expense (5.9) (4.7) (3.4)
Total other income (expense) (6.7) (8.7) (2.5)
Income before provision for
income taxes (39.9) (53.3) 6.1
Income tax provision
(benefit) -- (.3) 2.1
Income From Discontinued
Operations 4.0 6.3 3.6
Net income (35.9) (46.6) 7.7
</TABLE>
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<PAGE> 22
1998 COMPARED TO 1997
NET SALES. Net sales increased 41.3% to $24,097,845 in fiscal year 1998
from $17,051,142 in fiscal year 1997. This increase was primarily attributable
to the continued growth of the Geopaper product line, which offset certain
factors in the third and fourth quarters that negatively impacted fiscal year
1998 sales. Revenue growth with respect to the Geopaper product line slowed
compared to the two prior years. Geopaper sales increases in 1998 were due
primarily to sales for new store openings by Office Depot, and initial shipments
of Geopaper products to new customers, including Wal-Mart, Target and Kmart. In
addition, Geopaper sales increased due to the introduction of the Geoposterboard
product line in over 900 Wal-Mart stores, 500 Office Depot stores in the United
States and Canada, and 80 Staples/Business Depot stores in Canada.
The shift in the Company's sales mix toward Geopaper and related
products continued in fiscal year 1998. In 1998, the percentage of total Company
sales represented by Geopaper increased to 78%, compared to 71% of total sales
in fiscal year 1997, while signage and lettering sales declined to 22% of total
sales. In fiscal year 1997, the sales mix of signage and lettering was 29% of
sales. Sales for signage and lettering products are not presented with net sales
in the Statement of Operations, but are included in discontinued operations,
which is discussed later in this section.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross profit as a percentage of sales
increased to 12.7% in fiscal year 1998, from 3.1% in fiscal year 1997. The
higher gross margin is primarily attributable to an increase in selling prices
for the Company's paper products coupled with modest cost decreases and a
continuing shift in mix of sales to higher margin products
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those expenses that are incurred to support
the Company's selling, marketing and manufacturing efforts. SG&A expenses
increased to $11,074,425 (45.9% of sales) in fiscal year 1998 from $8,127,710
(47.7% of sales) in fiscal year 1997. The SG&A expense for fiscal year 1998 was
attributable to an increase in advertising rebates and other rebates and
promotions to customers, and increases in salaries and wages of administrative,
and sales & marketing personnel and an increase in legal expenses incurred by
the Company.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from
operations in fiscal year 1998 of $8,011,719 compared to an operating loss of
$7,598,804 during fiscal year 1997. The operating loss was the result of higher
gross margins more than offset by significantly higher sales, general and
administrative expenses.
OTHER INCOME (EXPENSE). There was no other income in fiscal year 1998
compared to $24,907 in fiscal year 1997. In previous years, this category
included such items such as management fees, foreign exchange gains, gains on
disposition of fixed assets, and other miscellaneous items.
INTEREST EXPENSE. Interest expense increased to $1,413,219 (5.9% of
sales) during fiscal year 1998, compared to $805,079 (4.7% of sales) during
fiscal year 1997. The higher interest costs were caused by increased average
borrowings to support the Company's operating losses, and the acquisition of
equipment used in the manufacture of Geopaper in 1998 and 1997.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before
provision for income taxes was $9,622,709 (39.9% of sales) in fiscal year 1998
compared to the loss before provision for income taxes of $9,085,783 (53.3% of
sales) in fiscal year 1997. The 1998 loss before provision for
19
<PAGE> 23
income taxes was primarily the result of the Company's operating losses and
increased interest expense.
The Company did not recognize a tax benefit resulting from its loss
from continuing operations in 1998 because of uncertainty concerning the use of
this loss to reduce future taxes. A portion of the loss was used to reduce taxes
that would have been attributable to income from discontinued operations. The
amount of taxes eliminated on discontinued operations was estimated to be
approximately $330,000. As of March 31, 1998, the total deferred tax assets
estimated to be available to the Company were $5,801,000 which had been reduced
in their entirety by a valuation allowance.
DISCONTINUED OPERATIONS. On May 4, 1998, the Company sold substantially
all of its signage and lettering operating assets, licenses, inventory and other
rights to a corporation for total consideration of $6,820,000.
Signage and lettering net sales for fiscal year 1998 decreased 3% to
approximately $6,598,000 from $6,789,000 in fiscal year 1997. The decline in the
sales of the signage and lettering product lines was attributable to a general
decline in the demand for products of this type and increased management
attention on the development of the specialty papers group. Management believes
that sales of signage and lettering products will continue to decline in the
future as the computerization of homes and offices will allow the efficient
production of lettering and signage products by current end-users.
NET INCOME/LOSS. Net loss of $8,649,618 in fiscal year 1998, or 35.9%
of sales, compares to net income of $7,950,301 in fiscal year 1997, 46.6% of
sales.
1997 COMPARED TO 1996
NET SALES. Net sales increased 6.1% to $17,051,142 in fiscal year 1997
from $16,075,363 in fiscal year 1996. This increase was primarily attributable
to the acceptance of the Geopaper product line. Geopaper experienced a sales
increase of 665% in fiscal year 1996 to $16,075,363 compared to $2,100,000 for
fiscal 1995. Geopaper sales increases in fiscal year 1996 were due to shipments
of Geopaper products to all Office Depot Inc. and OfficeMax stores in North
America, as well as shipments of Geopaper products to 248 Wal-Mart stores in
March 1996.
Signage and lettering sales for fiscal year 1997 increased 4% to
$6,789,364 from $6,538,272 in fiscal year 1996. The majority of the increase in
signage and lettering sales was due to increased sales to Office Max.
The sales mix of Geopaper products remained unchanged in fiscal year
1997 and 1996. Lettering and signage sales also remained unchanged for the same
periods.
GROSS MARGIN. Gross margin as a percentage of sales decreased to 3.1%
in fiscal year 1997, from 35.7% in fiscal year 1996. The decrease in the gross
margin was the result of a change in sales mix to products with lower gross
margins. Geopaper represented 71% of sales while lettering and signage
represented 29% of sales in 1997, compared to 71% and 29% of sales in 1996,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
in fiscal year 1997 to $8,127,710 (47.7% of sales) from $4,185,331 (26.0% of
sales) in fiscal year 1996.
20
<PAGE> 24
AMORTIZATION OF GOODWILL. Goodwill amortization declined to $0 from
$159,768 (.98% of sales) for fiscal years 1997 and 1996 respectively. The
decrease was due to the completion of the amortization of the goodwill related
to the 1993 purchase of the lettering division of E-Z Industries.
INCOME FROM OPERATIONS. Income from operations decreased to
$(7,598,804) (44.6% of sales) during fiscal year 1997, a decrease from
$1,386,801 (8.6% of sales) in fiscal year 1996.
OTHER INCOME. Other income was $24,907 (0.14% of sales) in fiscal year
1997, compared to $130,684 (0.8% of sales) during fiscal year 1996.
INTEREST EXPENSE. Interest expense increased to $805,079 (4.7% of
sales) during fiscal year 1997, compared to $539,394 (3.4% of sales) for fiscal
year 1996. The acquisition of equipment used in the manufacture of Geopaper, in
addition to higher bank debt related to facilities expansion and working capital
requirements resulted in higher interest costs during fiscal year 1997.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes declined to $(9,085,783) (53.2% of sales) in fiscal year 1997
compared to $977,497 (6.1% of sales) in fiscal year 1996.
INCOME TAX PROVISION/BENEFIT. There is no ITP in fiscal year 1998. In
fiscal year 1997, the Company recorded a current income tax benefit of $55,972,
which represents the amount of income tax recoverable from net operating loss
carry-backs. The total potential income tax benefit for fiscal year 1997, and
corresponding increase in the Company's deferred tax asset as of March 31, 1997,
was an estimated $3,162,000. The total potential deferred tax asset (before
valuation allowance) as of March 31, 1997 was $3,774,000. Based on the Company's
current operating income and available projections for operating income, the
Company determined that future operating and taxable income may not be
sufficient to fully or partially recognize the deferred tax asset of $3,774,000
at March 31, 1997. As a result, the Company decided to provide a valuation
allowance on all of its deferred tax assets at March 31, 1997. This valuation
analysis was recorded in the fourth quarter and totaled $3,774,000. The income
tax provision in fiscal year 1996 was 2.1% of sales in fiscal year 1996. This
provision was 34% of pre-tax net income.
NET INCOME. Net income of $(7,950,301) in fiscal year 1997 (46.6% of
sales) compares to net income of $1,232,024 in fiscal year 1996 (7.7% of sales).
21
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As a result of the rapid growth of the Company's specialty papers
group, capital expenditures relating to the purchase and installation of an
automated production system and a management information system, operating
losses and other factors, the Company has required, and continues to require,
substantial external working capital. Moreover, subsequent to the end of fiscal
year 1998, the Company has experienced working capital short-falls which have
required the Company to delay payments to certain vendors, institute internal
cost reduction measures and take other steps to conserve operating capital.
During fiscal year 1998, operating losses totaled $8,011,719, and the Company
experienced positive operating cash flows of $1,145,131.
1998 COMPARED TO 1997
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced
positive operating cash flow of $1,145,131 in fiscal year 1998 and a negative
operating cash flow of ($6,601,926) in fiscal year 1997. The Company's principal
cash flow requirements in fiscal year 1998 were to fund operating losses, which
totaled $8,011,719, and to fund increased working capital needs. Operating
losses in 1997 of ($7,598,809) also created substantial cash requirements which
were further strained by growing needs for working capital used in operating
assets and liabilities. The Company was able to decrease its current assets
which reduced the need for cash. Of particular note were decreases in trade
accounts receivable of $2,500,000 and inventories of $2,700,000. Also aiding
cash flows in a meaningful way in 1998 were the lengthening of payment periods
with vendors and suppliers. During 1998, accounts payable and accrued expenses
increased by $1,400,000. The combined effect of reducing current assets and
increasing current liabilities enabled the Company to achieve positive cash
flows from operations in 1998. These events are in contrast with 1997, where
trade accounts receivable increased by $1,500,000 and inventories increased by
$121,000, both of which used cash in 1997. In 1997, accounts payable, accrued
liabilities and income taxes payable, together increased by $562,000 over 1996
which reduced the need for operating cash.
NET CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal year 1998, the
Company used a net ($44,469) from various financing sources, compared to
$11,273,041 during fiscal year 1997. In fiscal year 1998, the Company increased
borrowings under its revolving credit facility by $2,651,418 compared to an
increase of $3,326,451 in fiscal year 1997. Proceeds from long-term debt in
fiscal year 1998 were $0.00 compared to $2,333,526 in fiscal year 1997.
Repayments of long-term debt in fiscal year 1998 totaled $1,790,535 compared to
$875,134 in fiscal year 1997. The Company received no loans from officers or
directors in fiscal year 1998. Repayments of notes payable to officers and
directors totaled $850,000 in fiscal year 1998 compared to $362,706 in fiscal
year 1997. In 1998, the Company received no proceeds from private placements,
option exercises and warrant exercises, compared to $6,459,945 in fiscal year
1997.
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net
negative cash flow from investing activities for fiscal year 1998 of $1,193,341,
compared to a negative cash flow from investing activities of $4,312,394 for
fiscal year 1997. The Company made significant investments in fiscal year 1997
to increase the production capacity of its specialty papers group by acquiring
automated production equipment.
22
<PAGE> 26
1997 COMPARED TO 1996
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced
negative operating cash flows during fiscal year 1997 and 1996 ($6,601,926) for
fiscal year 1997 and $(4,931,017) for fiscal year 1996). Contributing to the
negative cash flow from operations was the increase in trade receivable and
related party trade receivables balances. Trade receivables increased to
$6,654,500 at the end of fiscal year 1997 compared to $4,974,156 at the end of
fiscal year 1996. This increase was in part due to difficulties experienced in
the installation and implementation of a new electronic data interchange
software package which resulted in significant delays in the required electronic
delivery of invoices to certain key customers. These delays resulted in
significant corresponding delays in the collection of accounts receivable during
the third and fourth quarters of fiscal year 1997. See "Item 1. Business--Risk
Factors--Electronic Data Interchange" and "Item 1. Business--Risk
Factors--Collection of Accounts Receivable." Total trade receivables for fiscal
year 1997 increased 34% to $6,654,500 compared to $4,979,156 for fiscal 1996.
Inventory increased to $9,457,874 at year end fiscal year 1997 compared
to $9,139,273 for fiscal year end 1996, an increase of 3%. The increase in
inventory is due in part to the building of North American inventories in
anticipation of higher sales levels in fiscal year 1997.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In fiscal year 1997, the
Company received a net $11,273,049 from various financing sources, compared to
$8,555,704 for the prior fiscal year. In fiscal year 1997, the Company increased
borrowings under its revolving credit facility by $3,326,451, compared to
$3,139,463 for the prior year. Proceeds from long-term debt borrowings during
fiscal year 1997 were $2,333,526, compared to $1,003,029 in fiscal year 1996.
Repayments of long-term debt in fiscal year 1997 were $875,134 compared to
$467,986 in fiscal year 1996. The Company received $0 from officers and
directors in the form of notes during fiscal year 1997, while $2,452,573 was
received from officers and directors in fiscal year 1996. Repayments of notes
payable to officers and directors were $362,706 in fiscal year 1997 compared to
$398,629 in fiscal year 1996. In addition the Company received proceeds from
private placements, option exercises and warrant exercises in the amount of
$6,459,945 in fiscal year 1997, compared to $2,827,254 in fiscal year 1996. The
proceeds received from the above debt and equity financings were primarily
utilized to finance working capital requirements, building expansion and
equipment acquisitions related to the increased sales of the Geopaper program.
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net
negative cash flow from investing activities for fiscal year 1997 of $4,312,394,
compared to a negative cash flow from investing activities of $3,590,007 for
fiscal year 1996. The Company decreased its expenditures on plant and equipment
to $1.9 million in 1998 from $4.2 million in 1997. Other assets decreased to
$340,047 in 1998 from $1,005,613 in 1997. During fiscal year 1997 and 1996, the
Company made significant investments to increase its Geopaper production
capacity by acquiring printing presses, paper cutting equipment, and packaging
equipment.
ITEM 8. FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc.
are incorporated into this Item 8 by reference to another section of this Report
as follows:
<TABLE>
<S> <C>
(a) Report of Moss Adams LLP regarding Financial Statements F-2
(b) Consolidated Balance Sheets as of March 31, 1998 and 1997 F-3
</TABLE>
23
<PAGE> 27
<TABLE>
<S> <C>
(c) Consolidated Statements of Income for the years ended March 31,
1998, 1997 and 1996 F-4
(d) Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1998, 1997 and 1996 F-5
(e) Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996 F-6
(f) Notes to Consolidated Financial Statements F-7
(g) Report of Moss Adams LLP regarding Schedule II - Valuation and
Qualifying Accounts S-1
(h) Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10-13.
During fiscal year 1999, the Company's management structure was
completely restructured. A full description of this restructuring is set forth
in the Company's Form 10-Q for the period ending September 30, 1998 and Form
10-Q for the period ending December 31, 1998, each of which were filed with the
Securities and Exchange Commission on or about March 15, 1999. Such information
is incorporated herein by reference and made a part hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. List of documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
(a) Report of Moss Adams LLP regarding Financial Statements
(b) Consolidated Balance Sheets as of March 31, 1998 and 1997
(c) Consolidated Statements of Income for the years ended
March 31, 1998, 1997 and 1996
(d) Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998, 1997 and 1996
24
<PAGE> 28
(e) Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996
(f) Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
(a) Report of Moss Adams LLP regarding Schedule II--Valuation of
Qualifying Accounts
(b) Schedule II--Valuation of Qualifying Accounts
All other schedules have been omitted because the required information
is included in the financial statements or the notes thereto, or is not
applicable or required.
3. EXHIBITS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
EXHIBIT HUMBER
(REFERENCED TO
ITEM 601 OF
REGISTRATION S-K)
DESCRIPTION OF DOCUMENT
<S> <C>
3.1 Restated Articles of Incorporation of Geographics, Inc.(1)
3.2 Restated Bylaws of Geographics, Inc.(2)
[Additional Items TBD]
11.1 Statement re computation of per share earnings.
21.1 List of the subsidiaries of Geographics, Inc.
23.1 Consent of Moss Adams LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Exhibit is filed herewith.
(1) Incorporated by reference to an identically numbered exhibit to the
Registration Statement on Form 10, as amended, as filed with the
Securities and Exchange Commission on September 12, 1995 (SEC File No.
0-26756).
(2) Incorporated by reference to an identically numbered exhibit to the
Registration Statement on Form 10, as amended, filed with the
Securities and Exchange Commission on September 12, 1995 (SEC File No.
0-26756).
B. No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
25
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this _____ day of
March, 1999.
GEOGRAPHICS, INC. (Registrant)
By: /s/ Richard C. Goodman
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
/s/ Richard C. Gockelman /s/ Williams S. Hanneman
------------------------------------- -----------------------------
President and Chief Executive Officer Director
/s/ William T. Graham /s/ John F. Kuypers
------------------------------------- -----------------------------
Chairman of the Board Director
/s/ George H. Giroux /s/ David C. Lentz
------------------------------------- -----------------------------
Controller Director
/s/ C. Joseph Barnette
-------------------------------------
Director
26
