<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
For the Fiscal Quarter Ended: SEPTEMBER 30, 1998
Commission File Number: 0-26756
--------
GEOGRAPHICS, INC.
(Exact name of registrant as specified in its charter)
WYOMING 87-0305614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1755, BLAINE, WA 98231
(Address of principal executive office and zip code)
(360) 332-6711
(Registrant's telephone number including area code)
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 No X
--- ---
The registrant had 9,857,252 shares of common stock outstanding as of September
30, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Report and by this reference incorporated herein the consolidated balance sheets
as of September 30, 1998 (unaudited) and March 31, 1998 (audited), the unaudited
statements of operations for the three months ended September 30, 1998 and
September 30, 1997, and the unaudited consolidated statements of cash flows for
the three months ended September 30, 1998 and September 30, 1997, together with
the notes thereto.
ITEM 2 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.
LATE FILINGS; SUBSEQUENT EVENTS AND FILINGS
The Company has not, during the preceding 12 months, timely filed all
reports required to be filed by it pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, despite the fact that it has been subject to
such filing requirements for the past 90 days.
INFORMATION SET FORTH IN THIS FORM 10-Q EXCLUSIVELY COVERS THE COMPANY'S FISCAL
QUARTER ENDED SEPTEMBER 30, 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 have
occurred from and after June 30, 1998 and that such developments are more fully
described in each of the following reports filed by the Company on or before
March 19, 1999:
1. Form 10-Q for the period ending December 31, 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 trends relating to the Company's profitability and gross
profits margins; the ability of the Company to increase the size and
capabilities of its accounting department, 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.
Relevant risks and uncertainties include, but are not
<PAGE> 3
limited to, slower than anticipated growth of the pre-print market, loss of
certain key customers, insufficient market acceptance of the Company's specialty
papers 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 equipment; unexpected increases in the 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" in Part I of the
Company's Annual Report on Form 10-K for the year ended March 31, 1998 and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission, press releases and other communications.
Overview
Geographics was incorporated as a Wyoming corporation on September 20,
1974. From its inception 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 using Geopaper designs, including stationery, business
cards, brochures, memo pads, posterboards and paper cubes, which, in North
America, are sold primarily to office supply superstores and mass market
retailers, and which are also distributed internationally through the Company's
subsidiaries in Canada, Europe and Australia. The specialty papers group now
constitutes the Company's only business for that quarter, with approximately
100% and 93% of the Company's total sales in the quarter ended September 30,
1998 and the year ended March 31, 1998, respectively, attributable to sales of
Geopaper products.
Primarily to develop its specialty papers group, the Company has made
substantial investments to expand its facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The report of the Company's
auditors dated September 22, 1998 relating to the Company's Consolidated
Financial Statements for the fiscal year ended March 31, 1998 states that the
Company's fiscal 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. See "-Liquidity and Capital Resources."
The Company's lender has permitted borrowings under the revolving credit
facility in spite of existing defaults, there can be no assurance that it will
continue to do so. Accordingly, the Company is continuing to seek extended
payment terms from its vendors, delaying purchases of raw materials, instituting
internal cost reduction measures and taking 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.
<PAGE> 4
The Company has been actively pursuing possible sources of additional
capital and has engaged an investment banker to assist in the evaluation and
pursuit of financing transactions, which could include the issuance of debt or
equity securities or the sale of all or part of the Company's assets. Further,
there can be no assurance that the Company will be able to obtain additional
sources of working capital when and as needed or that the terms of any such
funding will be acceptable to the Company. Any equity financing may involve
substantial dilution to the interests of the Company's shareholders.
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
second and third fiscal quarters, 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 is expected to
continue to experience, seasonal fluctuations in its operating results.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate
significantly from period to period as a result of a variety of factors,
including product returns, purchasing patterns of consumers, the length of the
Company's sales cycle to key customers and distributors, the timing of the
introduction of new products and product enhancements by the Company and its
competitors, technological factors, variations in sales by product and
distributions channel, and competitive pricing. Consequently, the Company's
revenues may vary significantly by quarter and the Company's operating results
may experience significant fluctuations.
Results of Operations
SALES. Sales decreased 36% to $5,323,712 in the quarter ended September 30,
1998 from $8,363,293 in the quarter ended September 30, 1997. Sales decreased
29% to $11,322,662 in the six month period ended September 30, 1998 from
$15,971,552 in the same period a year earlier. The decrease is primarily due to
the sale of the Core Business and the loss of Office Max.
Geopaper products were responsible for 100% and 93% of sales for the three
and six month period ended September 30, 1998 respectively, compared to 84% and
80% in the corresponding three and six month periods of the prior year. Sales of
Geopaper have decreased 18% to $10,751,123 in the six months ended September 30,
1998 from $12,901,223 in the corresponding six month period of the prior year.
Sales of the Company's lettering and signage products decreased 76% to
approximately $751,539 for the six month period ended September 30, 1998
compared to approximately $3,070,329 for the quarter ended September 30, 1997
International sales of Geographics products were $1,998,689 and $3,745,310
for the quarter and six month period ended September 30, 1998, respectively, and
$2,053,139 and $3,737,258 for the quarter and six month period ended September
30, 1997, respectively. International sales of Geographics products represented
30% and 27% of the Company's total sales for the quarter and six month period
ended September 30, 1998, respectively, compared to 20% and 20%, respectively,
of total sales for the same periods in the prior year.
GROSS MARGIN. Gross profit margin as a percentage of sales was 54.8% for
the quarter ended September 30, 1998, compared to 32.2% for the same period in
the prior year. For the
<PAGE> 5
six month period ended September 30, 1998, gross profit margin as a percentage
of sales was 53.7%, compared to 27.6% for the same period in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
shipping, general and administrative (S,G&A) expenses, which consist of payroll,
advertising, commissions, administrative, accounting, legal and other costs,
decreased as a percentage of sales during the quarter ended September 30, 1998
to 46.6%, as compared to 51.9% during the same period in the prior year. S,G&A
expenses decreased as a percentage of sales to 45.7% for the six month period
ended September 30, 1998 as compared to 51.6% for the same period in the prior
year.
INTEREST EXPENSE. The Company's interest expense for the quarter ended
September 30, 1998 decreased 36% to $270,429 compared to $419,873 for the same
period in the prior year. The company's interest expense for the six month
period ended September 30, 1998, decreased 28% to $607,910 compared to $848,197
for the same period in the prior year. The decrease in interest expense was
primarily the result of the pay-down of U.S. Bank from the sale of the Core
Business.
Liquidity and Capital Resources
As a result of the rapid growth of the Company's specialty papers group,
capital expenditures relating to the purchase and installation of automated
production equipment 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 1997, the
Company has experienced working capital short-falls which have required the
Company to delay payments to certain vendors, delay planned purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital. During fiscal 1998, operating losses totaled $8,011,719, and the
Company experienced positive operating cash flows of $1,145,131. During the
quarter ended September 30, 1998, operating income totaled $438,047. The Company
experienced positive operating cash flows of $7,161,222 during the quarter ended
September 30, 1998.
At the date of this Report, the Company's only available source of working
capital consisted of borrowings available under its revolving credit facility.
The revolving credit facility permits borrowings of up to $6.0 million subject
to a borrowing base limitation of 70% of the value of the Company's eligible
accounts receivable and 55% of the value of its inventory, net of certain
reserves. Borrowings under the facility bear interest at the prime rate and are
secured by substantially all of the Company's assets. Under the terms of the
facility, the Company is required to comply with a number of financial covenants
relating to, among other things, the maintenance of minimum net worth,
debt-to-equity ratios and cash flow coverage ratios.
The report of the Company's auditors dated September 22, 1998 relating to
the Company's Consolidated Financial Statements for the fiscal year ended March
31, 1998 states that the Company's fiscal 1998 losses raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
Consolidated Financial Statements for the fiscal year ended March 31, 1998 (as
well as the Unaudited Consolidated Financial Statements for the fiscal quarter
ended September 30, 1998 included in this Report) were prepared assuming that
the Company will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
<PAGE> 6
The Company entered into a short-term forbearance agreement with its
lender, effective May 1, 1998, pursuant to which the lender agreed to extend the
expiration date of the revolving credit facility to November 30 1998. There can
be no assurance that the lender will continue to permit borrowings under the
revolving credit facility, that the lender will agree to further extend the
facility's expiration date or that the Company will be able to refinance or
replace the facility on acceptable terms when and as needed.
The Company has been actively pursuing possible sources of additional
capital and engaged an investment banker to assist in the evaluation and pursuit
of financing transactions, which could include the issuance of debt or equity
securities or the sale of all or part of the Company's assets. However, there
can be no assurance that the Company will be able to obtain additional sources
of working capital when and as needed or that the terms of any such funding will
be acceptable to the Company. Any equity financing may involve substantial
dilution to the interests of the Company's shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY
Substantially all of the revenue and operating expenses of the Company's
foreign subsidiaries are denominated in local currencies and translated into
U.S. dollars at rates of exchange approximating those existing at the date of
the transactions. Foreign currency translation impacts primarily revenue and
operating expenses as a result of foreign exchange rate fluctuations. The
Company's foreign currency transaction risk is primarily limited to amounts
receivable from its foreign subsidiaries, which are denominated in local
currencies. To minimize foreign currency transaction risk, the Company ensures
that its foreign subsidiaries remit amounts to the U.S. parent in a timely
manner. Foreign country short-term borrowing facilities are utilized where
necessary (and to the extent available) to ensure prompt payments. The Company
does not currently utilize foreign currency hedging contracts.
If the U.S. dollar uniformly increases in strength by 10% in 1999 relative
to the currencies in which the Company's sales are denominated, income before
taxes would decrease by $100,000.00 for the fiscal year ending March 31, 1999.
This calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting
sales, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency prices.
INFLATION
Although the Company cannot accurately anticipate the effects of inflation
on its financial condition or operations, the Company does not believe inflation
has had or is likely to have a material adverse effect on its results,
operations or liquidity.
<PAGE> 7
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In its Form 10-Q filed with the Securities and Exchange Commission on April
29, 1998 for the period ending December 31, 1997, the Company reported that in
July 1997, three related class actions were filed against it, its then chairman
of the board, Ronald S. Deans, and its then chief financial officer, Terry A.
Fife. These suits alleged that the defendants violated Section 10(b) of the
Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In
August 1998, the Company, its insurance carrier and the plaintiffs reached a
settlement agreement with respect to the lawsuits, which had previously been
consolidated as one lawsuit. As at September 30, 1998, the court presiding over
the lawsuit was in the midst of reviewing the settlement agreement prior to its
ratification. Under the terms of the proposed settlement, the plaintiffs would
receive a cash payment of $1.6 million without any admission of wrongdoing on
the parts of the defendants. In light of the defendants' insurance carrier's
proposed substantial contribution to any final settlement amount, the Company
did not expect that the funding of the settlement would have a material impact
on its financial condition or operations
In addition to the litigation matter described above, the Company is
subject to additional claims and actions incident to the operation of its
business. It is the opinion of management that the ultimate resolution of these
matters and any future unidentified claims will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Trading Suspension. On September 10, 1998, the Company was informed that
trading in its shares had been suspended on the Toronto Stock Exchange for
failure by the Company to file on a timely basis with that exchange periodic
reports required by that exchange. The trading suspension has had a material
adverse effect on the liquidity of the market for the Company's securities and
could have a material adverse effect on the Company's ability to obtain
additional equity investments. Although the Company has committed itself to
remedying the delinquencies leading to the trading suspension imposed by the
Ontario Securities Commission, it had not, as at September 30, 1998, cured the
defaults leading in the suspension.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As has been previously reported by the Company, the Company has, since May
1997, failed to comply with the net worth, debt-to-equity ratios and cash flow
coverage ratios under its existing revolving credit facility with its lender. As
at September 30, 1998 borrowings under the Company's revolving credit facility
aggregated approximately $4,877,400. The Company's lender has also provided the
Company with several mortgage loans and equipment loans and the defaults under
the revolving credit facility constitute cross-defaults under these other loans.
The Company has previously reported that these defaults, coupled with its fiscal
year 1998 losses, raise substantial doubt about the Company's ability to
continue as a going concern.
In May 1998, the Company requested and received a forbearance agreement
with its lender pursuant to which the lender agreed to extend the expiration
date of the revolving credit
<PAGE> 8
facility to November 1, 1998, and to forbear from asserting its rights with
respect to the Company's non-compliance with the revolving credit facility's
financial covenants. Although the Company's lender has permitted borrowings
under the revolving credit facility in excess of the borrowing base limitations
set forth in the agreement, there can be no assurance that the lender will
continue to allow such borrowings to occur. Over the course of the fiscal
quarter ending September 30, 1998, the Company continued to evaluate additional
sources of working capital in order to finance its ongoing business operations.
The Company is firmly committed to continuing that process for the remainder of
the 1999 fiscal year. In addition, the Company continues to have ongoing
discussions with its lender regarding the execution of a new forbearance
agreement and/or a complete restructuring of its obligations under its existing
revolving credit facility. See "Management's Discussion of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Changes in Executive Officers. In July 1998, Raymond Maxon, David McCleery
and Ronald S. Deans, the entire membership of the Company's board of directors,
appointed Richard C. Gockelman as the Company's chairman, chief executive
officer and president. As part of the resolution appointing Mr. Gockelman to
these positions, Messrs. Maxon, McCleery and Deans resigned their positions as
directors of the Company, leaving Mr. Gockelman as the Company's sole director.
Prior to joining the Company, Mr. Gockelman [DICK INSERT BRIEF BIO HERE].
Examination of Management. In its Form 10-Q filed with the Securities
and Exchange Commission on April 29, 1998, for the period ending December 31,
1997 (the "April Form 10-Q"), the Company reported the establishment of a
special committee of the Company's board of directors (the "Special Committee")
to investigate the performance and conduct of management. As reported in the
April Form 10-Q, the Special Committee requested that the former chief
executive officer of the Company, Ronald S. Deans, implement certain policies
and procedures to address some of the internal control irregularities that had
occurred during Mr. Deans' tenure. In addition, counsel to the Special
Committee suggested, and the Special Committee adopted, a number of proposals
pursuant to which Mr. Deans would be required to reimburse the Company for
approximately $150,000 in expenses that were paid to Mr. Deans without adequate
documentation and/or which appeared to be primarily personal in nature. Mr.
Deans reviewed certain of his expense reports and agreed that certain expenses
may not have been properly substantiated. After completing his review of the
expense reports, Mr. Deans proposed to reimburse the Company approximately
$32,000 and has reimbursed the Company approximately $47,000. In addition, Mr.
Deans also agreed to assist the Company in its evaluation of the
appropriateness of certain transactions entered into by him on the Company's
behalf, most notably, the issuance of shares of the Company's Common Stock in
July 1996, October 1997 and November 1997 and the failure by the Company to
properly withhold federal income tax for Mr. Deans and his two sons in
connection with the exercise by each of them of certain stock options granted
to them by the Company.
In addition to these issues, Mr. Gockelman began examining a number of
other transactions effected by Mr. Deans during his tenure as the Company's
chief executive officer and president. Among these additional issues is the
payment by the Company
<PAGE> 9
to the Deans Family Limited Partnership (the "DFL Partnership") of approximately
$700,000 in satisfaction of a loan from the DFL Partnership to the Company. The
loan to the Company by the DFL Partnership raises questions with respect to the
propriety of the loan repayment because neither management nor counsel to the
Company has been able to locate any corporate resolutions pursuant to which the
Company's board authorized the loan or any payments in respect of the loan. In
addition, the timing of the repayment raises additional questions, since it
occurred ten days before the Company announced a net loss of approximately $6.7
million for the fiscal year ending March 31, 1998.
Mr. Gockelman also continued an investigation of Mr. Deans' authorizing the
payment by the Company of legal expenses incurred by Mr. Deans in connection
with two lawsuits and a bank guaranty transaction. Finally, the Company is also
investigating the circumstances surrounding the purchase by Mr. Deans of a
company automobile for approximately $950.
In connection with the investigations of Mr. Deans' activities either
continued or initiated by Mr. Gockelman, in August 1998, Mr. Gockelman sent a
letter to Mr. Deans requesting that Mr. Deans fully explain the circumstances
surrounding the above-described transactions and that he also satisfy his
monetary obligations to the Company. Mr. Deans' responses to Mr. Gockelman's
request were either incomplete, evasive or completely unresponsive. At Mr.
Gockelman's direction, the Company's general outside counsel and special
securities counsel also sought information from Mr. Deans regarding the
above-described matters. Neither the Company nor counsel to the Company has
received a satisfactory response from Mr. Deans.
Despite a lack of cooperation from the Company's former chief executive
officer, the Company's present management has been able to resolve, on its own,
the circumstances surrounding the issuance by the Company in July 1996 of 50,000
shares of common stock to Graham's Graphics Pty Limited. The Company requested
and received from Graham Hanrahan, the holder of such shares, representations
that he is an "accredited investor" and that he acquired the shares solely for
his own account and not with an intent to distribute such shares. In addition,
Mr. Hanrahan returned the shares to the Company for the purpose of affixing a
legend to the shares reflecting their status as restricted securities.
With respect to the shares of common stock issued by the Company in October
and November of 1997 (the "1997 Shares"), Mr. Deans has thwarted, through
inconsistent accounts of the details surrounding the issuance of the 1997
shares, efforts by the Company's management and special securities counsel to
determine the circumstances surrounding the issuance of such securities. Mr.
Deans avers that the Company's Board of Directors authorized the issuance of the
1997 Shares and that counsel to the Company assured the Company that the 1997
Shares could be issued pursuant to an exemption from registration under the
Securities Act of 1933, as amended. However, as of September 30, 1998, neither
the Company nor its special securities counsel could accurately state whether
the issuance of such securities satisfied applicable securities laws and
regulations governing exemptions from registration available to issuers under
such laws and regulations. In addition, neither the Company's current management
nor its general outside counsel has been able to locate any documentation
evidencing any action authorizing the issuance of the 1997 Shares. While the
Company continues to investigate the circumstances surrounding the issuance by
it of the 1997 Shares, and while the Company believes that these matters will be
resolved in a manner that will not result in a material adverse effect to the
Company's financial position or results of operation, there can be no assurance
of such an outcome.
<PAGE> 10
As at September 30, 1998, Mr. Gockelman and other members of the Company's
management have continued to work with each of the Company's general outside
counsel and special securities counsel for the purpose of resolving fully the
circumstances surrounding a number of Mr. Deans' actions during his tenure as
the Company's president and chief executive officer. Unfortunately, this process
was not, as at September 30, 1998, complete. Nevertheless, members of the
Company's senior management remain committed to resolving fully these issues and
will timely file periodic reports with the Securities and Exchange Commission as
the above-described issues are resolved.
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
11.1 Statement re computation of net income (loss) per share.
27.1 Financial Data Schedule.
</TABLE>
B. No reports were filed by the Company on Form 8-K during the fiscal
quarter ended September 30, 1998.
<PAGE> 12
SIGNATURES
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 19th day of
March, 1999.
GEOGRAPHICS, INC.
By: /s/ Richard C. Gockelman
-------------------------------------
Richard C. Gockelman
President and Chief Executive Officer
<PAGE> 13
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998...................F-2
Consolidated Statements of Operations for the three months and six
months ended September 30, 1998 and September 30, 1997....................................F-3
Consolidated Statements of Cash Flows for the three months and
six months ended September 30, 1998 and September 30, 1997................................F-4
Notes to Consolidated Financial Statements................................................F-5
</TABLE>
<PAGE> 14
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(Unaudited) (Audited)
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 205,394 $ 316,078
Accounts receivable
Trade receivables, net 4,386,667 4,164,861
Other receivables 271,337 148,050
Inventory, net of allowance for obsolete inventory
of $381,007 at September 30, 1998 and $586,000 at
March 31, 1998 5,640,285 6,763,508
Prepaid expenses, deposits, and other current assets 674,914 731,307
------------ -----------
Total current assets 11,178,597 12,123,804
PROPERTY, PLANT AND EQUIPMENT, net 12,069,454 12,881,118
OTHER ASSETS 382,201 340,043
------------ -----------
TOTAL ASSETS $ 23,630,252 $25,344,965
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 232,189 $ 301,716
Note payable to bank 4,877,400 11,300,808
Accounts payable 3,106,540 3,285,467
Accrued liabilities 2,428,117 2,680,594
Notes payable to officers and directors -- --
Current portion of long-term debt 3,350,344 3,350,344
------------ -----------
Total current liabilities 13,994,590 20,918,929
LONG-TERM DEBT 4,184,689 4,853,254
------------ -----------
Total liabilities 18,179,279 25,772,183
STOCKHOLDERS' EQUITY
No par common stock -- 100,000,000 authorized,
9,857,252 and 9,857,252 issued and outstanding at
September 30, 1998 and March 31, 1998, respectively 15,769,018 15,769,018
Foreign currency translation adjustment -- 33,899
Retained earnings (accumulated deficit) (10,318,045) (16,230,135)
------------ -----------
Total stockholders' equity 5,450,973 (427,218)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,630,252 $25,344,965
============ ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-2
<PAGE> 15
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT 30, 1997
<S> <C> <C> <C> <C>
Sales $ 5,323,712 $ 8,363,293 $ 11,322,662 $ 15,971,552
Cost of Sales 2,406,166 5,667,473 5,244,372 11,560,845
------------ ------------ ------------ ------------
Gross Margin 2,917,546 2,695,820 6,078,340 4,410,707
Selling, General and
Administrative Expenses 2,479,499 4,239,023 5,172,146 8,242,323
------------ ------------ ------------ ------------
Income (Loss) from Operations 438,047 (1,543,203) 906,194 (3,831,616)
Other Income (Expenses)
Interest Expense (270,429) (419,873) (607,910) (848,197)
Other (24,641) (14,288) 5,617,366 (33,328)
------------ ------------ ------------ ------------
Operating Income (Loss) (295,070) (434,161) 5,009,456 (881,525)
Income (Loss) Before Provision
for Income Taxes 142,977 (1,977,364) -- (4,713,140)
Income Tax Provision -- -- -- --
Net Income (Loss)
142,977 (1,977,364) 5,915,650 (4,713,140)
Earnings Per Common and Common
Equivalent Share
Primary $.01 $(.21) $.60 $(.50)
Assuming full dilution $.01 $(.21) $.60 $(.50)
Shares Used in Computing
Earnings Per Common and Common
Equivalent Share
Primary 9,857,252 9,467,877 9,857,252 9,467,877
Assuming full dilution 9,857,252 9,467,877 9,857,252 9,467,877
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 16
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
------------- -------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,915,650 $(4,713,140)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 888,177 892,340
Deferred income taxes -- --
(Gain) loss on sales of property and equipment -- 1,740
Changes in noncash operating assets and liabilities
Trade receivables (221,805) 1,483,904
Related party receivables -- --
Other receivables (123,287) 172,904
Inventory 1,123,223 (29,924)
Prepaid expenses, deposits and other current assets 10,668 129,079
Accounts payable (178,927) 1,739,780
Accrued liabilities (252,477) 431,548
Income tax payable -- --
----------- -----------
Net cash flows from operating activities 7,161,222 107,672
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts (69,527) 159,308
Net borrowings on note payable to bank (6,423,408) 2,105,805
Proceeds from long-term debt borrowings -- --
Repayment of long-term debt (668,565) (596,877)
Repayments of notes payable to officers and directors -- (850,000)
Proceeds from issuance of common stock -- (584)
Foreign currency translation (33,899) 8,075
----------- -----------
Net cash flows from financing activities (7,195,399) 825,726
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (76,508) (1,215,600)
Proceeds from sales of equipment -- --
Net advances from (repayments to) partnerships -- --
Change in other assets -- --
----------- -----------
Net cash flows from investing activities (76,508) (1,215,600)
----------- -----------
(110,686) (282,201)
NET CHANGE IN CASH
316,078 408,757
CASH, beginning of year
$ 205,394 126,556
CASH, end of quarter
----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment -- $ 1,677,918
----------- -----------
Assets acquired directly in acquisition of business -- --
----------- -----------
</TABLE>
See accompanying notes to these consolidated financial statements
F-4
<PAGE> 17
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements
of Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position and the
results of operations and cash flows for the interim periods presented. The
results of operations for these interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's consolidated
financial statements and notes thereto for the fiscal year ended March 31,
1998.
The consolidated financial statements include the accounts of
Geographics and its wholly-owned subsidiaries: Geographics Marketing Canada
Inc., Geographics (Europe) Limited and Geographics Australia, Pty. Limited.
All intercompany balances and transactions have been eliminated.
Certain of the Company's subsidiaries calculated cost of sales using
an estimated gross profit method for interim periods. Cost of sales at
these subsidiaries are adjusted based on physical inventories which are
performed no less than quarterly.
Reclassifications -- Certain prior year amounts have been reclassified
to conform to current year presentation. Such reclassifications had no
effect on previously reported earnings or financial position.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES
Leases -- The Company conducts certain operations in leased facilities, under
leases that are classified as operating leases for financial statement
purposes. The leases provide for the Company to pay real estate taxes,
common area maintenance, and certain other expenses. Lease terms, excluding
renewal option periods exercisable by the Company at escalated rents,
expire in April 1999. The total minimum lease commitment is $64,770 in
1999.
There are various additional claims, lawsuits, and pending actions
against the Company incident to the operations of its business. It is the
opinion of management that the ultimate resolution of these matters and any
future unidentified claims will not have a material effect on the Company's
financial position, results of operations or liquidity.
Contingency for Year 2000 Issues - The Company has not yet made an
assessment of the impact of the year 2000 on their computer software,
hardware and other systems, including those of vendors, customers and other
third parties. The
<PAGE> 18
potential expense to ensure that all of the computer and other systems are
year 2000 compliant cannot be determined until such an assessment is made.
Employment Contracts -- Subsequent to year end, the Company entered
into employment contracts with Richard C. Gockelman, the Company's Chief
Executive Officer and President. The employment arrangement with Mr.
Gockelman expires on _______, 2000 and provides for severance payments in
the event his employment is terminated for certain specified reasons during
the contract period.
NOTE 3 -- GOING CONCERN
As a result of the $8,649,618 loss incurred by the Company for the
year ended March 31, 1998, a decline in gross profit margins, the Company's
failure to comply with covenants under its line of credit and other
factors, the report of the Company's auditors, dated September 22, 1998,
relating to the Company's Consolidated Financial Statements for the year
ended March 31, 1998 states that there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying
financial statements have been prepared assuming the Company will continue
as a going concern and do not include any adjustments that might result
from the outcome this uncertainty.
Although the Company's lender has permitted borrowings under the
revolving credit facility, there can be no assurance that it will continue
to do so. Accordingly, the Company is continuing to seek extended payment
terms from its vendors, delaying purchases of raw materials, instituting
internal cost reduction measures and taking 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.
Further, there can be no assurance that the Company will be able to
obtain additional sources of working capital when and as needed or that the
terms of any such funding will be acceptable to the Company. Any equity
financing may involve substantial dilution to the interests of the
Company's shareholders.
The failure to obtain an increase in borrowing availability under, and
to extend the expiration date of, the revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy its 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.
<PAGE> 1
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
1998 1997
---------- -----------
<S> <C> <C>
Net income (loss) $ 142,977 $(1,977,364)
Primary weighted average common shares 9,857,252 9,467,877
outstanding
Primary earnings per share $ .01 $ (.21)
Fully diluted weighted average common shares 9,857,252 9,467,877
outstanding
Fully diluted earnings per share $ .01 $ (.21)
</TABLE>
