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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
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
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P. O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
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 May 21, 1999 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 May 21, 1999 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
FORWARD-LOOKING STATEMENTS.........................................................1
BACKGROUND.........................................................................2
INDUSTRY...........................................................................3
PRODUCTS...........................................................................4
SALES BY PRODUCT CATEGORY..........................................................4
BUSINESS CONCENTRATIONS............................................................6
PURCHASING.........................................................................6
DISTRIBUTION.......................................................................7
MANAGEMENT INFORMATION SYSTEMS--INTEGRATED OPERATIONS SOFTWARE.....................7
MANAGEMENT INFORMATION SYSTEMS--ELECTRONIC DATA INTERCHANGE (EDI)..................8
MANAGEMENT INFORMATION SYSTEMS--Year 2000 Compliance...............................8
MANUFACTURING OPERATIONS - EQUIPMENT INTEGRATION...................................8
COMPETITION........................................................................8
TRADEMARKS AND COPYRIGHTS..........................................................9
SEASONALITY.......................................................................10
BACKLOG...........................................................................10
EMPLOYEES.........................................................................10
EXECUTIVE OFFICERS................................................................10
INVESTIGATION OF FORMER MANAGEMENT................................................10
RISK FACTORS......................................................................12
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY;
NEED FOR ADDITIONAL WORKING CAPITAL...............................................12
COMPETITION.......................................................................13
CUSTOMER CONCENTRATIONS...........................................................14
DEPENDENCE ON KEY VENDORS.........................................................14
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS........................................14
IMPLEMENTATION OF AUTOMATED PRODUCTION EQUIPMENT..................................15
MANAGEMENT INFORMATION SYSTEMS....................................................15
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TABLE OF CONTENTS
(CONTINUED)
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ELECTRONIC DATA INTERCHANGE.......................................................16
DEPENDENCE ON KEY PERSONNEL.......................................................16
TECHNOLOGY CHANGES AFFECTING PRODUCTS.............................................16
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS..............................16
CHANGING CONSUMER PREFERENCES AND INTERESTS.......................................17
INTERNATIONAL SUBSIDIARIES........................................................17
FOREIGN EXCHANGE AND INTERNATIONAL TRADE..........................................17
STOCK EXCHANGE LISTING REQUIREMENTS - POSSIBLE DELISTING ON TORONTO STOCK
EXCHANGE..........................................................................18
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION...........................18
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY....................................19
VOLATILITY OF STOCK PRICE.........................................................19
YEAR 2000 ISSUES..................................................................19
ITEM 2. DESCRIPTION OF PROPERTIES.......................................................20
ITEM 3. LEGAL...........................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................21
PART II .........................................................................................21
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........21
PRICE RANGE OF COMMON STOCK.......................................................21
DIVIDENDS.........................................................................22
SALES OF UNREGISTERED SECURITIES..................................................22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................25
OVERVIEW..........................................................................25
RESULTS OF OPERATIONS.............................................................27
1999 COMPARED TO 1998.............................................................27
1998 COMPARED TO 1997.............................................................29
LIQUIDITY AND CAPITAL RESOURCES...................................................30
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ACCOUNT MARKET RISK
FOREIGN CURRENCY.........................................................................31
INFLATION.........................................................................31
ITEM 8. FINANCIAL STATEMENTS............................................................31
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TABLE OF CONTENTS
(CONTINUED)
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.....................................................................32
PART III.........................................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................32
BOARD AND COMMITTEE MEETINGS......................................................33
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...........................33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................33
EMPLOYMENT AGREEMENTS.............................................................33
ITEM 11. EXECUTIVE COMPENSATION.........................................................34
STOCK OPTION GRANTS...............................................................34
DIRECTOR COMPENSATION.............................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................34
PART IV .........................................................................................35
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K..............35
SIGNATURE........................................................................................39
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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, poster boards 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.
There has been a significant change in the composition of the Company's
senior management and the Board of Directors in the past two years. As of March
31, 1997, the Board of Directors of the Company consisted of Mr. Ronald S.
Deans, Mr. Mark G. Deans, Mr. R. Scott Deans, Mr. Luis Alberto Morato, Mr. Alan
D. Tuck, Jr. and Mr. Robert S. Parker. During the year ended March 31, 1998,
Messrs. Mark Deans, Scott Deans, Morato and Tuck resigned from the Board and
were replaced by Mr. David P. McCleery and Mr. Raymond P. Maxon. In July 1998,
Messrs. Ron Deans, McCleery and Maxon resigned from the Board and were replaced
by Richard C. Gockelman, who became the sole director, President and Chief
Executive Officer of the Company. In December 1998, Messrs. William T. Graham,
C. Joseph Barnette, John F. Kuypers, William S. Hanneman and David C. Lentz were
appointed as directors. On April 16, 1999, the Company held a special meeting of
shareholders (the "Special Meeting") At the Special Meeting, the shareholders
removed Messrs. Gockelman, Hanneman, Lentz and Kuypers as Directors, re-elected
Messrs. Graham and Barnette as Directors and elected Mr. James L. Dorman as
Director. The newly appointed Board of Directors appointed Mr. Dorman as
Chairman and Chief Executive Officer and placed Mr. Gockelman, the Company's
President, on paid administrative leave.
The Company's former directors and officers did not comply with the
Company's obligations to timely file its reports under the Securities Exchange
Act of 1934, as amended, including the filing of the 1998 Annual Report on Form
10-K. Further, although Messrs. Graham and Barnette served on the Board during
the last four months of the fiscal year ended March 31, 1999, former management
did not provide them with current information on the Company. Therefore, the
information contained in this Annual Report on Form 10-K is based solely upon
the Company's books and records and upon the audit report of Moss Adams LLP
attached hereto. Although the current Board of Directors believes that the
information contained in this Annual Report on Form 10-K is materially accurate,
they are unable to independently verify such information at this time.
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 changes 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, or modify its management
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information system, including the 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 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 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; 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, poster boards and paper cubes
which, in North America, are sold primarily to office supply superstores,
including Office Depot, and mass market retailers, such as Wal-Mart, and which
are also distributed internationally through the Company's subsidiaries in
Europe and Australia. On May 4th of 1998, the Company sold substantially all of
its signage and lettering operating assets to Identity Group, Inc. for total
consideration of $6,820,000. Consequently, the specialty papers group now
constitutes the Company's principal business, with approximately 96% of the
Company's total sales in fiscal 1999 attributable to sales of Geopaper products.
The Company continues to experience substantial growth in this product group
with net sales increasing from $14,028,746 for fiscal 1997 to $19,237,062 in
fiscal 1999, representing an increase of 37%.
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
and unanticipated additional expenses in the installation of the production
equipment and the management information system. These unanticipated expenses
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 losses for
fiscal 1997 and 1998. In fiscal 1999, efforts were expended to overcome the
difficulties associated with these operational matters. Current Management is
reviewing these areas and believes further improvements will be necessary in
order to experience the full benefit expected from the original investment.
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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 default
under the Company's mortgage loans and equipment lease facilities. The report of
the Company's auditors included in this Report states that the Company's fiscal
1998 and 1999 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. Current Management is focussed on resolution of this issue,
and has received indication of an extension of forbearance until June 30, 1999
and an extension of credit over and above the borrowing base by $750,000.
Discussions with alternate lenders are currently under way. It is management's
intention to restructure all debt to terms that are consistent with the
Company's cash flow, and to raise $3,000,000 to $5,000,000 of debt, equity, or a
combination of both via private placement offering for recapitalization of the
Company.
The amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. 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 "-Risk Factors--Dependence on Key Vendors." In addition, the
Company is actively pursuing possible sources of additional capital , which
could include the issuance of debt or equity securities or both. As of the date
of this Report, the Company has received preliminary commitments with respect to
obtaining additional capital. However, 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 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 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. See "--Risk Factors--Ability to Continue as a Going Concern; Defaults
under Credit Facility; Need for Additional Working Capital" and "Item 7.
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, posters 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, and direct mail, which is estimated to represent approximately
75% of the market. 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
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sells its specialty paper products exclusively in the retail segment of the
preprint market, primarily to office supply superstores such as Office Depot 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 the factors such as pricing,
monetary requirements for the retailers 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", "--Risk Factors--Maintenance of Large Inventory of
Products" and "--Risk Factors--Customer Concentrations."
PRODUCTS
The Company manufacturers specialty papers which are paper on which
photographs or other art images are printed and which are 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, posters and paper cubes. These specialty paper products are designed to be
used with personal computer printers.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total Net 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
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CLASS OF PRODUCT
FISCAL YEAR
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1999 1998 1997
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Designer stationeries and specialty papers 96% 75% 67%
Lettering, signage, stencil and graphic art
products 4% 25% 33%
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STATED IN U.S. DOLLARS (ROUNDED)
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CLASS OF PRODUCT
FISCAL YEAR
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1999 1998 1997
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Designer stationeries and specialty papers $19,237,062 $19,976,290 $14,028,746
Lettering, signage, stencil and graphic art $752,000 $6,599,000 $6,789,000
products
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NET SALES/ASSETS BY GEOGRAPHIC LOCATION
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Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows:
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REGION FISCAL YEAR
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1999 1998 1997
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Sales to Domestic and Foreign Customers
United States(1) $ 12,384,952 $ 14,152,403 $ 9,065,101
Canada 3,285,559 3,630,446 3,422,621
United Kingdom 1,021,474 613,192 351,327
Other European Countries 1,054,000 584,000 364,000
Australia 1,491,077 996,249 825,697
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Total $ 19,237,062 $ 19,976,290 $ 14,028,746
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Operating profit or (loss):
United States(1) $ (3,121,684) $ (7,261,961) $ (6,587,756)
Canada 610,277 (301,179) (473,296)
United Kingdom (550,609) (489,263) (727,467)
Australia (34,090) 40,684 189,715
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Total $ (3,096,106) $ (8,011,719) $ (7,598,804)
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Long-lived assets:
United States(2) $ 9,778,864 $ 12,646,878 $ 10,559,587
Canada -- 36,510 71,886
Europe 108,793 148,200 164,399
Australia 57,977 49,621 36,359
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Total $ 9,945,634 $ 12,881,118 $ 10,832,231
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(1) In this table sales are stated as "net sales," meaning gross sales less
discounts, allowances, returns and back-end credits. Sales in prior
Annual Reports on Form 10-K were reported as gross sales less returns.
(2) Effective May 4, 1998, the Company sold substantially all of its signage
and lettering operating assets, licenses, inventory, and other rights to
Identity Group, Inc.
International sales accounted for approximately 36%, 29%, and 35% of the
Company's total net sales in fiscal 1999, 1998 and 1997, respectively.
International sales were concentrated in Canada,
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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."
BUSINESS CONCENTRATIONS
The Company had two customers in 1999 and three customers in 1998 and
1997 which individually exceeded 10% of Sales and in the aggregate accounted for
approximately 45%, 57%, and 67% of sales in 1999, 1998 and 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 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 700 vendors, it historically has
practiced a "sole source" approach to vendor selection in that it typically
relied 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 related products accounted
for a significant portion of the Company's total merchandise purchases made in
fiscal 1999, 1998, and 1997.
This key vendor has provided the Company an immediately available and
uninterrupted supply of paper. In addition, other key vendors have granted the
Company significant amounts of trade credit. 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:
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o Geographics Marketing Canada, Inc. ("Geographics--Canada") was
incorporated as a British Columbia, Canada corporation on July
31, 1995. The offices of Geographics--Canada are located at
17735 1st Ave., Suite 1, Surrey, B.C. V4P 2K1, Canada, and its
telephone number is 800-426-5923. Geographics--Canada 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.
MANAGEMENT INFORMATION SYSTEMS--INTEGRATED OPERATIONS SOFTWARE
The Company is currently planning completion of the installation of an
integrated Operations Management software package. This software includes MRP
and master scheduling capabilities and is integrated with the Company's
financial systems. An attempt was made in 1996 and 1997 to install this system.
That effort was abandoned in 1997. Current Management anticipates reviewing
needs in this area in fiscal 2000. The Company may be required to make a
significant investment of resources to implement the system in fiscal 2000 and
possibly in future periods. Also, the Company will rely heavily on the support
of a local Value Added Reseller for the successful installation of this system.
MANAGEMENT INFORMATION SYSTEMS--ELECTRONIC DATA INTERCHANGE (EDI)
The Company currently utilizes EDI to transact business with its largest
customers. Presently, approximately 70% to 80% of customer orders and invoices
are transacted by EDI. In fiscal 1999, the Company began development of in-house
EDI expertise to support critical EDI requirements. Currently, the Company is
not in compliance with EDI ASN 4010, which relates electronic transmission of
advanced shipping notice information. The Company is currently in process of
achieving compliance and expects to achieve this in fiscal 2000. Compliance with
this standard is critical to the Company's ability to transact business with its
largest customers. Consequently, significant resources may be required to gain
compliance within fiscal 2000.
MANAGEMENT INFORMATION SYSTEMS--YEAR 2000 COMPLIANCE
The year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than 4) to define the applicable
year. Computers programs that have or use date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the risks associated with this issue, and is in the process of
assessing related risks and costs.
The Company categorizes its Y2K efforts into the following areas: hardware,
software, embedded processors, vendors, and customers. Each area is assessed and
tracked in phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Y2K project is
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progressing and internal remediation work is expected to be completed by
October 31 of this year. The Company is using both internal and external
resources to effect remediation and to test systems.
The Company will initiate communications with significant vendors and customers
in June of 1999 to determine the Company's vulnerability if these companies fail
to remediate their Y2K issues. There can be no guarantee that the systems of
other companies will be timely remedied, or that other companies failure to
remedy Y2K issues would not have a material impact on the Company. The Company
is developing contingency plans to mitigate risks associated with
vendor/customer Y2K issues.
Costs incurred and expected to be incurred have been/will be expensed, and are
not expected to exceed a total of $75,000. Although the Company is not aware of
any internal operational Y2K issues, the Company cannot provide assurances that
the computer systems, products, services, or other systems on which the Company
depends will be Y2K ready on schedule, that the costs of remediation of Y2K
issues will not be greater than expected, or that the Company's contingency
plans will be adequate. The Company is currently unable to evaluate the
magnitude, if any, of the Y2K related issues of its vendors or customers. If
such risks materialize, the Company could experience serious consequences, which
could have a material adverse effect on its financial condition, operations, and
liquidity.
MANUFACTURING OPERATIONS - EQUIPMENT INTEGRATION
In 1996 and 1997, the Company purchased an integrated printing line
combining a high speed press with a slitter and packaging line. As the system
consisted of major components from different manufacturers, an outside firm was
retained to perform system integration services. Management does not believe
that the system is capable of producing the full scope of product for which its
design was intended at this time. Alternative manufacturing techniques have been
developed which are currently in place. In addition, an integrated packaging
line was also installed in 1996. This line has experienced similar issues with
respect to its ability to perform as envisioned, and consequently alternate
manufacturing techniques have been employed. Significant resources may be
required for modification of these systems in order to achieve the manufacturing
efficiencies and cost targets originally envisioned.
COMPETITION
The Company operates in a highly competitive environment The Company's
designer stationery products compete in most of the Company's markets with
Domtar Papers, Great Papers, Action Communications, Inc., Avery Dennison Office
Products, First Base, Paper Direct, 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 distinguish the Company from its competitors. However, many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. 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 "--Risk Factors--Competition" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
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The Company may determine that future price increases are necessary in
order to offset increases of the costs of raw materials, direct labor,
production overhead or other components of the Company's product costs and to
improve or maintain gross profit margins. There can be no assurance that any
future price increases will be successfully implemented. The Company operates in
a highly competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
price levels. Either the potential failure to successfully increase prices, or
the potentially diminished competitive position once a price increase is
successfully implemented could have material adverse effect on the Company's
business, financial condition or results of operations. See "-Risk
Factors--Competition."
TRADEMARKS AND COPYRIGHTS
The Company maintains twelve registered trademarks in the United States,
Canada and Australia: and has applied for two additional marks. 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 is expected to continue to experience,
seasonal fluctuations in its operating results based upon past purchasing
patterns.
BACKLOG
The Company's backlog of orders as of March 31,1999 was approximately
$512,000. The Company expects to fill substantially all of these orders during
the second quarter of 1999. The Company includes in backlog the value of all
purchase orders received from customers for product not yet shipped and
invoiced. The Company's backlog is subject to fluctuations as a result of the
seasonal nature in the Company's business and other factors and is, therefore,
not necessarily indicative of future sales. There can be no assurance that
current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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EMPLOYEES
At March 31, 1999, the Company had approximately 112 employees, 99 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 As of the date of this Report,
none of the Company's employees were subject to a collective bargaining
agreement.
EXECUTIVE OFFICERS
The information concerning certain executive officers of the Company
which is set forth in "Item 10. Directors and Executive Officers" of Part III of
this Report is incorporated into this Item 1 of Part I of this Report by this
reference.
INVESTIGATION OF FORMER MANAGEMENT
Background
In January 1998, the Company's board of directors appointed a special
committee to conduct an examination of the performance and conduct of the
Company's management (the "Special Committee"). The Special Committee engaged
independent counsel to assist with this examination. The focus of the
examination has been on the adequacy of documentation related to a number of
expenses incurred, the tax reporting and accounting for certain stock option
exercises, the basis for compliance with the registration requirements of
applicable securities laws, and certain other securities-secured matters. The
current Board of Directors is continuing to investigate these matters. 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. Certain of the findings and recommendations
of the Special Committee and the subsequent Board of Directors are summarized
below.
Expenses
Based on a review of expenses reimbursed or paid by the Company in 1997,
it appears that a substantial portion of the approximately $125,000 of expenses
reimbursed lacked adequate documentation for tax purposes. Based on a limited
review of expense accounts for 1996, it appears that most of the approximately
$150,000 in reimbursed expenses in that year also lack adequate documentation
for tax purposes. Pending further review of Company records and possible
explanation by former Management, the Special Committee requested that former
Management reimburse the Company $100,000 with respect to 1997 and 1996 and
agree to provide further reimbursement to the Company if and to the extent that
expenses paid or reimbursed by the Company in excess of that amount are later
determined not to be deductible for tax purposes. As of the date of this report,
the Special Committee and former Management have not reached agreement on either
the amount to be paid or the proposed method of payment. To the extent that it
is determined that additional expenses were not properly substantiated, former
Management has agreed to reimburse the Company for such additional amounts.
Further, the Special Committee has required management to implement policies
that will insure proper expense reporting in the future.
Stock Option Exercises
In January 1996, former Management exercised certain non-qualified stock
options to purchase shares of the Company's common stock. The difference between
the exercise prices of the options exercised and the market value of the shares
of the Company's common stock issued upon exercise of
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such options yielded a gain of $1,089,049 in the aggregate as of the date of
exercise. Although this gain likely should have been reported for tax purposes
as income by former Management and recorded as an expense by the Company in that
year, it was not. With respect to these option exercises, the Special Committee
has (i) directed the Company to issue amended 1996 Form W-2 to include
previously unreported income associated with such exercises and to instruct the
Company's tax preparer to seek a deduction for the Company in that amount, and
(ii) asked former Management to include such amounts on amended tax returns for
the tax year 1996. It is the Company's understanding that former Management has
agreed to comply with the direction issued by the Special Committee.
Issuance of Common Stock
In July 1996, October 1997 and November 1997, former Management caused
the Company to issue shares of common stock in three separate transactions. It
appears that the Company may not have complied with the registration
requirements of federal and state securities laws in connection with such
transactions. The Company initially made certain disclosures regarding the 1996
transaction in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997. If it is determined that these issuances of stock did not
comply with an exemption from the registration requirements of applicable
securities laws, the Company may be subject to penalties or liability for
damages.
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. The Company has experienced working capital
shortfalls, 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 1999, operating losses totaled
$3,096,106, and the Company experienced positive operating cash flows of
$1,554,310.
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 $5.5 million
subject to a borrowing base limitation of 70% of the value of the Company's
eligible accounts and 55% of the value of its inventory, net of certain
reserves. Borrowings under the facility bear interest at the prime rate plus
1.5% 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.
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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 default under these other loans.
The report of the Company's auditors included in this Report states that the
Company's fiscal 1999 and 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 report also states that in April
1999, the Company appointed a new President and CEO who is planning to take
steps necessary to enable the Company to continue as a going-concern.
The amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. 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. In addition, the Company is actively pursuing possible sources of
additional capital, which could include the issuance of debt or equity
securities or both. As of the date of this Report, the Company has received
preliminary commitments with respect to obtaining additional capital. However,
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 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 "Item 7. 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 distinguish the Company from its competitors. However, many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. 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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources."
The Company may determine that future price increases are necessary in
order to offset increases of the costs of raw materials, direct labor,
production overhead or other components of the Company's product costs and to
improve or maintain gross profit margins. There can be no assurance that any
future price increases will be successfully implemented. The Company operates in
a highly competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
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price levels. Either the potential failure to successfully increase prices or
the potentially diminished competitive position once a price increase is
successfully implemented could have material adverse effect on the Company's
business, financial condition or results of operations.
CUSTOMER CONCENTRATIONS
The Company's three largest customers in the aggregate accounted for
approximately 51% and 48% of the Company's total sales for fiscal 1999 and
fiscal 1998, 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, may have a material adverse effect on
the Company's business, financial condition and results of operations.
As a result of the consolidation 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.
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 700 vendors, it historically has
practiced a "sole source" approach to vendor selection in that it typically
relied 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 related products accounted
for a significant portion of the Company's total merchandise purchases made in
fiscal 1999, 1998, and 1997.
This key vendor has provided the Company an immediately available and
uninterrupted supply of paper. In addition, other key vendors have granted the
Company significant amounts of trade credit. 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.
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS
As of March 31, 1999, the Company maintained an inventory of specialty
papers of $4,394,555. The Company believes that it is sound business practice to
maintain inventory in sufficient quantities to afford the Company flexibility in
responding to incoming orders, to maintain its reputation as a major supplier in
the industry and to offer certain economies of scale in its purchasing program.
The maintenance of this inventory requires a substantial outlay of funds, which
may not be recovered for extended periods of time. In addition, the Company has
generally observed that raw materials prices change more rapidly than pricing
for the Company's products. Consequently, the Company may be required to absorb
price increases on raw materials before it is able to pass through such
increases to its customer base. Also, to the extent that purchasing preferences
of the Company's customers change over time, such inventory may become less
marketable, which may require the Company to dispose of such
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inventory at a reduced price. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Result of Operations." The Company has reserved
$861,871 for obsolete inventory, and is currently reviewing options for the
economic disposal of excess inventories. If the Company were unable to recover a
substantial portion of its investment in inventory, this would result in a
material adverse effect on the Company's business, financial condition and
results of operations.
IMPLEMENTATION OF AUTOMATED PRODUCTION EQUIPMENT
The efficient manufacture of designer stationery and specialty papers is
highly capital intensive. In 1996 and 1997, the Company purchased an integrated
printing line combining a high speed press with a slitter and packaging line. As
the system consisted of major components from different manufacturers, an
outside firm was retained to perform system integration services. Management
does not believe that the system is capable of producing the full scope of
product for which its design was intended at this time. Alternative
manufacturing techniques have been developed which are currently in place. In
addition, an integrated packaging line was also installed in 1996. This line has
experienced similar issues with respect to its ability to perform as envisioned,
and consequently alternate manufacturing techniques have been employed.
Significant resources may be required for modification of these systems in order
to achieve the manufacturing efficiencies and cost targets originally
envisioned. There can be no assurance that the machinery will be fully and
successfully implemented and perform at the level required to deliver the
efficiencies expected when the machinery was purchased, or that the Company will
be successful in its future plans for implementing any new production machinery
that it may require, either of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
MANAGEMENT INFORMATION SYSTEMS
Over the course of fiscal 1996 and fiscal 1997, the Company invested
significant financial and operational resources in the installation of
integrated hardware and software systems designed to integrate all major aspects
of the Company's business including sales, electronic data interchange (EDI),
warehousing, manufacturing, distribution, purchasing, inventory control,
merchandise planning and replenishment, and various financial systems. The
Company also invested significant financial resources in outside consultants for
the design, installation and ongoing refinement of this system. In fiscal 1998,
the Company determined the need to replace this system and therefore elected to
write-off effectively all of its investment in the system software, consulting
fees and certain other implementation expenditures through March 31, 1997. The
Company has determined that it will need to invest further significant resources
to implement a new system of integrated hardware and software over the course of
fiscal 1998 and possibly future periods. There can be no assurance that the
current package will perform at the minimum level required to adequately support
the operations of the Company until implementation of a new system is completed,
or that the Company will be successful in its future plans for implementing a
new system, either of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
ELECTRONIC DATA INTERCHANGE
The Company currently utilizes EDI to transact business with its largest
customers. Presently, approximately 70% to 80% of customer orders and invoices
are transacted by EDI. In fiscal 1999, the Company began development of in-house
EDI expertise to support critical EDI requirements. Currently, the Company is
not in compliance with EDI ASN 4010, which relates electronic transmission of
advanced shipping notice information. The Company is currently in process of
achieving compliance and expects to achieve this in fiscal 2000. Compliance with
this standard is critical to the Company's ability to transact business with its
largest customers. Consequently, significant resources may be required to gain
compliance within fiscal 2000.
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DEPENDENCE ON KEY PERSONNEL
At the present time, the Company is highly dependent on the continued
services of James L. Dorman and William T. Graham, who serve as the Company's
principal executive officers as well as directors of the Company. There can be
no assurances that the Company will be able to replace either of these key
executives in the event their services become unavailable. The loss of other key
members of the Company's management team could also have a material adverse
effect on the Company's business, financial condition or results of operations.
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, 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.
CHANGING CONSUMER PREFERENCES AND INTERESTS
The success of the Company's business depends to a significant extent on
consumer preferences and spending habits. Consumer preferences are influenced by
a number of factors, including general economic conditions affecting disposable
consumer income, such as employment, business conditions, interest rates and
taxation. Any significant decline in such general economic conditions or
uncertainties regarding future economic prospects that adversely affect
discretionary consumer spending generally
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could have a material adverse effect on the Company's business, prospects,
financial condition or results of operations. Moreover, while the Company
believes that its designs, configurations and related artwork have received
substantial acceptance by its targeted market, there can be no assurances that
consumers and other purchasers of these materials will continue to favor the
Company's products in light of the constant shifting that occurs with regard to
consumer preferences and interests.
INTERNATIONAL SUBSIDIARIES
The Company has made substantial efforts to increase its product line
sales to international markets during fiscal 1996 and 1997. The Company has
established three wholly owned foreign subsidiaries to conduct business outside
the United States. The Company derives a significant percentage of its total
sales from these subsidiaries, and collectively they generated an operating
profit on a consolidated basis in fiscal 1999. There can be no assurances that
the results of these operations, individually or collectively, will yield either
net profits or positive cash flows in the foreseeable future. As a result, the
operations and requirements of the Company's foreign subsidiaries may have
material adverse effect on the Company's business, financial condition and
results of operations.
FOREIGN EXCHANGE AND INTERNATIONAL TRADE
International sales accounted for approximately 36% of the Company's
total net sales in fiscal 1999. See "Sales/Assets by Geographic Location." 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 various other import or
export trade barriers, political and economic instability, difficulties in
receivable collections, difficulties in staffing and managing foreign subsidiary
and branch operations and potentially adverse tax consequences. The Company is
also subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of stationery, specialty papers and
office supply products. The Company cannot predict whether quotas, duties, taxes
or other charges or restrictions will be implemented by the United States,
Canada, Australia or any other country upon the importation or exportation of
the Company's products in the future. There can be no assurance that any of
these factors or adoption of restrictive policies will not have a material
adverse effect on the Company's business, financial condition or result of
operations.
STOCK EXCHANGE LISTING REQUIREMENTS - POSSIBLE DELISTING ON TORONTO STOCK
EXCHANGE
The Company's securities were delisted from the NASDAQ National Market
and subsequently the NASDAQ Smallcap Market during fiscal 1998. Trading of the
Company's securities has continued on the NASDAQ OTC Electronic Bulletin Board.
However, the delistings may restrict marketability of the Company's common
stock. Further, 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. As the Common Stock is not listed on the Nasdaq National Market or
the Nasdaq SmallCap Market, it may be deemed to be "penny stock" and thus may be
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.
In addition, the common shares of the company were suspended from
trading on The Toronto Stock Exchange on June 11, 1998 due to the failure of the
Company to provide the required financial information and filings. Securities
suspended from trading on the Toronto Exchange which have not
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been approved for reinstatement will be automatically delisted after a period of
one year. To obtain approval for reinstatement, suspended companies are required
to fulfill original listing requirements for new listings. During the term of
the suspension, the original listing requirements of The Toronto Stock Exchange
were revised and increased. Under these requirements, companies suspended from
trading are required to fulfil listing requirements made of new listings. The
Company does not currently meet the minimum net worth requirement of Cdn.
$7,500,000. However, management expects the Company to be able to meet this
requirement following its anticipated private placement of a combination of debt
and/or equity in the amount of $3,000,000 to $5,000,000. See "Liquidity and
Capital Resources." Consequently, management expects to move forward with a new
listing application following completion of the recapitalization efforts
referenced above.
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of March 31, 1999, there were outstanding warrants for the purchase
of 1,395,121 shares of Common Stock at $6.50 per share. On May 27, 1999 the
Company's Board of Directors approved a one-year extension of the expiration
date to June 1, 2000. The exercise price of the warrants was equal to the market
price of the stock at the date the warrants were issued. In addition, as of
March 31, 1999 there were outstanding options granted under the Company's stock
option plan to purchase up to 263,500 shares of Common Stock at exercise prices
ranging from up to $2.00 (176,000 outstanding) and from $2.00 to $4.00 (87,500
outstanding). 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 a diluting 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 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
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.
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 "Item 5. 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
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<PAGE> 22
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 year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than 4) to define the applicable
year. Computers programs that have or use date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the risks associated with this issue, and is in the process of
assessing related risks and costs.
The Company categorizes its Y2K efforts into the following areas: hardware,
software, embedded processors, vendors, and customers. Each area is assessed and
tracked in phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Y2K project is progressing
and internal remediation work is expected to be completed by October 31 of this
year. The Company is using both internal and external resources to effect
remediation and to test systems.
The Company will initiate communications with significant vendors and customers
in June of 1999 to determine the Company's vulnerability if these companies fail
to remediate their Y2K issues. There can be no guarantee that the systems of
other companies will be timely remedied, or that other companies failure to
remedy Y2K issues would not have a material impact on the Company. The Company
is developing contingency plans to mitigate risks associated with
vendor/customer Y2K issues.
Costs incurred and expected to be incurred have been/will be expensed, and are
not expected to exceed a total of $75,000. Although the Company is not aware of
any internal operational Y2K issues, the Company cannot provide assurances that
the computer systems, products, services, or other systems on which the Company
depends will be Y2K ready on schedule, that the costs of remediation of Y2K
issues will not be greater than expected, or that the Company's contingency
plans will be adequate. The Company is currently unable to evaluate the
magnitude, if any, of the Y2K related issues of its vendors or customers. If
such risks materialize, the Company could experience serious consequences, which
could have a material adverse effect on its financial condition, operations, and
liquidity.
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 square feet to
49,000 square feet in December 1994. The facility was increased to its current
size during fiscal year 1996. Management believes the facility is suitable and
adequate for the Company's business. Additional warehouse space may be required
for storage of seasonal program requirements. Management believes production
facility capacity is adequate. Seasonal sales programs may periodically require
the Company to utilize additional warehouse space.
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<PAGE> 23
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 $13,600,
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 in
Marrickville, Australia. The lease requires lease payments of $3,100 per month,
triple net (with annual review of the rental rate beginning in August 1997), and
expires on July 1, 1999.
ITEM 3. LEGAL
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 an
agreement to settle the lawsuits, which had previously been consolidated as one
lawsuit (the "Settlement"). On October 30, 1998, the judge presiding over this
lawsuit approved the Settlement. Under the terms of the Settlement, the
plaintiffs received a cash payment of $1.6 million without any admission of
liability or wrongdoing by the defendants. In light of the defendants' insurance
carrier's proposed substantial contribution to any final settlement amount, the
Company does not believe that the funding of the settlement will 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.
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<PAGE> 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
quarter ended March 31, 1999. On April 16, 1999, the Company held a special
meeting of shareholders on the following matters:
<TABLE>
<CAPTION>
ITEM FOR AGAINST ABSTAIN
---- --- ------- -------
<S> <C> <C> <C>
1. To remove the current members of the Board of 5,635,680 672,205 0
Directors.
2. To establish the number of members of the Board 5,649,180 653,705 5,000
of Directors at three.
3. To elect the following persons as Directors:
William T. Graham 5,649,180 658,705*
James L. Dorman 5,649,180 658,705*
C. Joseph Barnette 5,649,180 658,705*
4. To authorize the reimbursement of reasonable 5,507,350 790,535 10,000
expenses incurred by Messrs. Graham, Dorman and
Barnette in connection with their proxy solicitation.
</TABLE>
* Withheld
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 traded on the Nasdaq National Market from
March 8, 1997 until November 18, 1997. Between November 19, 1997 and December
23, 1997, the Company's Common Stock traded on the Nasdaq SmallCap Market. Since
December 24, 1997, the Company's Common Stock traded on the NASDAQ OTC Bulletin
Board.
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<PAGE> 25
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, the Nasdaq SmallCap Market 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, 1998.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter (June 30, 1997) $3.44 $ .88
Second Quarter(September 30, 1997) $1.16 $ .44
Third Quarter (December 31, 1997) $1.00 $ .33
Fourth Quarter (March 31, 1998) $ .63 $ .27
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter (June 30, 1998) $ .75 $ .20
Second Quarter(September 30, 1998) $ .63 $ .27
Third Quarter (December 31, 1998) $ .53 $ .28
Fourth Quarter (March 31, 1999) $ .50 $ .31
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions. As of
March 31, 1999, 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, 1999. The Company anticipates that 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. Specifically,
the Company's current bank facilities restrict its ability to pay dividends.
SALES OF UNREGISTERED SECURITIES
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes (the "Notes") pursuant to exemption under Section
4(2) of the Securities Act of 1933, as amended. One $50,000 Note was issued to
Mr. James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, and one $50,000 Note was issued to William T. Graham, a Director of the
Company. The Notes bear interest at a rate equal to the prime rate (as
determined by U.S. Bank National Association ("U.S. Bank")) plus two percent
(2%) per annum. The Notes are subordinated to the Company's senior indebtedness
to U.S. Bank and are convertible into shares of the Company's common stock at
$0.3927 per share. Proceeds from the sale of the Notes were used to fund the
Company's operations when the Company had reached its borrowing limit under its
credit facilities with U.S. Bank and had no other sources of working capital.
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<PAGE> 26
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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's 1999 Consolidated Financial Statements and notes
thereto contained elsewhere in this Report.
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<PAGE> 27
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA
- -------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 10,186,136 $ 22,613,635 $ 14,028,746 $ 19,976,290 19,237,062
Cost of sales 5,881,649 14,194,505 16,522,236 21,035,139 11,931,097
Gross margin 4,304,487 8,419,130 (2,493,490) (1,058,849) 7,305,965
Selling, general and administrative 2,873,476 5,734,901 5,105,314 6,952,870 9,086,546
Amortization of goodwill 639,067 159,768 -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 791,944 2,524,461 (7,598,804) (8,011,719) (1,780,581)
Other income (expense) 15,398 130,684 24,907 (38,365) 31,291
Gain (loss) on sales of property and
equipment (13,468) (594) (86,048) (159,406) (126,121)
Reserve for impairment on EDP
installation-in-progress -- -- (620,759) -- --
Interest expense (457,499) (787,848) (805,079) (1,413,219) (1,220,695)
------------ ------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes 336,375 1,866,703 (9,085,783) (9,622,709) (3,096,106)
Income tax provision (benefit) (411,367) 634,679 (55,972) -- --
Net income from and gain on sale of
discontinued operations (net of tax) -- -- 1,079,510 973,091 5,607,580
Cumulative effect of accounting
change -- -- -- -- (1,071,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 747,742 $ 1,232,024 $ (7,950,301) $ (8,649,618) $ 1,440,474
============ ============ ============ ============ ============
Net income (loss) per average common
share outstanding $ 0.16 $ 0.19 $ (0.85) $ (0.90) $ 0.15
Weighted average shares outstanding
used in computing per share data 4,549,101 6,606,499 9,322,278 9,626,335 9,857,252
SUPPLEMENTAL OPERATING DATA:
EBITDA(1) $ 2,087,206 $ 3,649,460 $ (6,226,512) $ (6,125,013) $ 4,325
</TABLE>
(1) As used herein, "EBITDA" is defined as operating income plus
depreciation and amortization. EBITDA is commonly used to assess
the non-cash effect on earnings of generally high levels of both
amortization and depreciation expenses associated with capital
equipment and acquisitions. EBITDA does not purport to represent
cash provided by operating activities as reflected in the
Company's consolidated statements of cash flow, is not a measure
of financial performance
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<PAGE> 28
under generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
AS OF MARCH 31,
BALANCE SHEET DATA:
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 1,836,436 $ 5,886,703 $ 401,550 $ (8,795,125) $ (5,714,569)
Total assets 10,614,673 24,738,041 30,245,701 25,344,965 18,278,761
Long-term obligations,
less current portion 3,319,948 3,690,360 4,322,371 4,853,254 3,776,432
Stockholders' equity 2,803,341 9,989,852 7,917,023 (427,218) 822,134
</TABLE>
On April 16, 1999, James L. Dorman was named Chief Executive Officer of
the Company. Mr. Dorman is currently leading the effort to recapitalize the
Company, restructure the Company's debt with U.S. Bank, and is reviewing all
operating departments within the Company for possible restructure. Mr. Dorman is
focussed on making changes deemed necessary to effect a financial turn-around of
the Company.
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.
OVERVIEW
Geographics, Inc. 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 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 and mass market
retailers, and which are also distributed internationally through the Company's
subsidiaries in Canada, Europe and Australia. On May 4, 1998, the Company sold
substantially all of its signage and lettering operating assets, licenses,
inventory and other rights to Identity Group, Inc. for total consideration of
$6,820,000. The specialty papers group now constitutes the entirety of the
Company's business and has continued to grow, with net sales increasing from
$14,028,746 for fiscal 1997 to $19,236,712 for fiscal 1999, an increase of 37%.
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
and unanticipated additional expenses in the installation of the production
equipment
-24-
<PAGE> 29
and the management information system. These unanticipated expenses 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 losses for
fiscal 1997 and 1998. In fiscal 1999, efforts were expended to overcome the
difficulties associated with these operational matters. Current Management is
reviewing these areas and believes further improvements will be necessary in
order to experience the full benefit expected from the original investment.
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 default
under the Company's mortgage loans and equipment lease facilities. The report of
the Company's auditors included in this Report states that the Company's fiscal
1998 and 1999 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. Current Management is focussed on resolution of this issue,
and has preliminarily received indication of an extension of forbearance until
June 30, 1999 and an extension of credit over and above the borrowing base by
$750,000. Discussions with alternate lenders are currently under way. It is
management's intention to restructure all debt to terms that are consistent with
the Company's cash flow, and to raise $3,000,000 to $5,000,000 of debt, equity,
or a combination of both via private placement offering for recapitalization of
the Company.
The exact amount and timing of the Company's capital requirements will
be determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. 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 "-Risk Factors--Dependence on Key Vendors." In addition, the
Company is actively pursuing possible sources of additional capital, which could
include the issuance of debt or equity securities or both. As of the date of
this Report, the Company has received preliminary commitments with respect to
obtaining additional capital. However, 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 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.
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 is expected to continue to experience,
seasonal fluctuations in its operating results. See "Item 1. Business--
Seasonality."
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
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<PAGE> 30
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. See "Item 1. Business--Risk
Factors--Fluctuations of Quarterly Results; Seasonality."
Backlog
The Company's backlog of orders as of March 31,1999 was approximately
$512,000. The Company expects to fill substantially all of these orders during
the second quarter of 1999. The Company includes in backlog the value of all
purchase orders received from customers for product not yet shipped and
invoiced. The Company's backlog is subject to fluctuations as a result of the
seasonal nature in the Company's business and other factors and is, therefore,
not necessarily indicative of future sales. There can be no assurance that
current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 1. Business--Backlog."
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>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.0 105.3 117.8
Gross margin 38.0 (5.3) (17.8)
Selling, general and administrative expenses 47.2 34.8 36.4
Income from operations (9.2) (40.1) (54.2)
Interest expense (6.4) (7.1) (5.7)
Other income (expense) (0.5) (1.0) (4.9)
Income before provision for income taxes (16.1) (48.2) (64.8)
Cumulative effect of accounting change (5.6) -- --
Income from and gain on sale of discontinued 29.2 4.9 7.7
operations
Income tax provision (benefit) -- -- .4
Net income 7.5% (43.3)% (56.7)%
</TABLE>
-26-
<PAGE> 31
1999 COMPARED TO 1998
NET SALES. Net sales decreased 3.7% to $19,237,062 in fiscal 1999 from
$19,976,290 in fiscal 1998. The small decrease was primarily attributable to the
loss of sales to a key account, which declined due to loss of sales with the
sale of the signage and lettering business and due to price competition.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
increased to 38.0% in fiscal 1999, from (5.3)% in fiscal 1998. The higher gross
margin is primarily attributable to a decline in operating expenses as a result
of the implementation of automated production machinery and the reduction of
direct and indirect labor due to efficiency improvements in the manufacture the
Company's paper products.
It is management's intention to explore the option of sub-contracting a
portion of manufacturing and fulfillment operations to determine whether further
improvements in gross margin would be available.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses increased to $9,086,546 (47.2% of net sales) in fiscal 1999 from
$6,952,870 (34.8% of sales) in fiscal 1998. This increase is primarily
attributable to an increase in the Company's legal fees, the proper recording of
reserves against receivables, employee severance costs, and an overall increase
in the SG&A expenses of the Company's three foreign subsidiaries in Canada,
Europe and Australia.
Management intends to review freight expense and to explore options for
reduction of this expense via change in the manner in which products are
consolidated for shipment and in shipping origination points.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from operations
in fiscal 1999 of $1,780,581 compared to an operating loss of $8,011,719 during
fiscal 1998. The improvement was the result of significantly higher gross
margins.
OTHER INCOME (EXPENSE). Other expense for fiscal 1999 amounted to
$94,830 compared to $197,771 in fiscal 1998.
INTEREST EXPENSE. Interest expense decreased to $1,220,695 (6.4% of net
sales) during fiscal 1999, compared to $1,413,219 (7.1% of net sales) during
fiscal 1998. The lower interest costs were caused by a decrease in borrowings by
the Company to support the operations. The decrease in borrowings was attributed
to positive cash flow generated by operations and the sale of the lettering and
signage segment of the Company.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before provision
for income taxes was $3,096,106 (16.1% of net sales) in fiscal 1999 compared to
a loss of $9,622,709 (48.2% of net sales) in fiscal 1998. The improvement in
1999 was primarily the result of the Company's increase in gross margin.
INCOME TAX PROVISION (BENEFIT). There is no income tax provision for
fiscal 1998. Income taxes provided in 1999 were $50,000 representing alternative
minimum taxes owing as a result of the sale of the Core Business.
-27-
<PAGE> 32
INCOME FROM AND GAIN ON SALE OF DISCONTINUED OPERATIONS. The company
classified its sign and lettering division as discontinued in fiscal 1998
pending sale and disposition (which occurred in May 1998). The income and gain
attributed to this segment amounted to $5,607,580 in fiscal 1999 versus income
of $973,091 in fiscal 1998.
NET INCOME/LOSS. Net income of $1,440,474 in fiscal 1999, or 7.5% of net
sales, compares to a net loss of $8,649,618 in fiscal 1998, or (43.3)% of sales.
1998 COMPARED TO 1997
NET SALES. Net sales increased 42.4% to $19,976,290 in fiscal 1998 from
$14,028,746 in fiscal 1997. This increase was primarily attributable to the
continued growth of the Geopaper product line. 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.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
increased to (5.3)% in fiscal 1998 from (17.8)% in fiscal 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 continuing shift
in mix of sales to higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to
$6,952,870 (34.8% of sales) in fiscal 1998 from $5,105,314(36.4% of sales) in
fiscal 1997. This increase is primarily attributable to increases in salaries
and wages of administrative, and sales and 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 1998 of $9,622,709 compared to an operating loss of $9,029,811 during
fiscal 1997. The operating loss was the result of significantly lower gross
margins and significantly higher sales, general and administrative expenses.
OTHER INCOME (EXPENSE). Other expense decreased to $197,771 in fiscal
1998 compared to 681,900 in 1997. The difference was attributed to a $620,759
reserve for impairment of EDP installation-in-process that was recognized in
1997.
INTEREST EXPENSE. Interest expense increased to $1,413,219 (7.1% of net
sales) during fiscal year 1998, compared to $805,079 (5.7% of net 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. The higher
interest costs were caused by increased borrowings to support the Company's
operating losses, the acquisition of equipment used in the manufacture of
Geopaper and facilities expansion.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before provision
for income taxes was $9,622,709 (48.2% of net sales) in fiscal 1998 compared to
a loss before provision for income taxes of $9,085,783 (64.8% of sales) in
fiscal 1997.
INCOME TAX PROVISION (BENEFIT). There is no ITP for 1998 in fiscal 1998.
In fiscal 1997, the Company recorded a current income tax benefit of $55,972.
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<PAGE> 33
NET INCOME/LOSS. Net loss of $8,649,618 in fiscal 1998, or 43.3% of net
sales compared to net loss of $7,950,301 in fiscal 1997, or 56.7% of net sales.
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 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. The Company has experienced working capital
shortfalls, 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 1999, operating losses totaled
$3,096,106, and the Company experienced positive operating cash flows of
$1,554,310.
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 $5.5 million
subject to a borrowing base limitation of 70% of the value of the Company's
eligible accounts 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.
Since May 1997, the Company's borrowings under its revolving credit
facility has exceeded the permitted borrowing base limitations. In addition, the
Company has failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under the revolving credit facility. 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 default under these other loans. The report of the Company's
auditors included in this Report states that the Company's fiscal 1999 and 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.
In May of 1999, the Company secured agreement from its principal lender,
U.S. Bank, to extend the fifth forbearance agreement until June 30, 1999.
Further, an extension of credit over and above the borrowing base in the amount
of $750,000 has been granted. Discussions with alternate lenders are currently
under way. It is management's intention to restructure all debt to terms that
are consistent with the Company's cash flow, and to raise $3,000,000 to
$5,000,000 of debt, equity, or a combination of both via private placement
offering for recapitalization of the Company.
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. See "Item 1. Business--Risk Factors--Ability to Continue as a Going
Concern; Defaults under Credit Facility; Need for Additional Working Capital."
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ACCOUNT 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 US
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
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<PAGE> 34
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. The Company does not
currently utilize foreign currency hedging contracts.
The Company also have foreign exchange translation exposures resulting from the
translation of foreign currency-denominated earnings into U.S. dollars in the
Company's consolidated financial statements. Foreign currency transaction
exposure arises when an operating unit transacts business denominated in a
currency that is not its own functional currency. The Company's transaction
risks are attributable primarily to inventory purchases from third party
vendors. The introduction of the Euro has significantly reduced such risks, and
transaction exposures on an overall basis are not significant.
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 $517,000 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 effect on its results,
operations or liquidity.
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, 1999 and 1998 F-3
(c) Consolidated Statements of Income for the years ended March 31, 1999, 1998
and 1997 F-4
(d) Consolidated Statements of Stockholders' Equity for the years ended March
31, 1999, 1998 and 1997 F-5
(e) Consolidated Statements of Cash Flows for the years ended March 31, 1999,
1998 and 1997 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>
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<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions with the
Company of the executive officers and Directors of the Company as of May 24,
1999. None of the current directors were directors during the year ended March
31, 1998. Directors are elected for one year terms or until their successors are
elected and qualified. Officers are elected by the Board and their terms of
office are at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James L. Dorman 66 Chairman of the Board of Directors and Chief
Executive Officer
William T. Graham 74 Director
C. Joseph Barnette 57 Director
</TABLE>
James L. Dorman is the Chairman and Chief Executive Officer Chairman of
the Board of Intercontinental Trading, Ltd., a position he has held President
and Chief Executive Officer since 1984. Intercontinental Trading specializes in
assisting smaller companies with importing and exporting issues. In addition,
Mr. Dorman is the Chairman and Chief Executive Officer of Amalga Composites,
Inc., a position he has held since 1989. Amalga designs, engineers and
manufacturers composite components parts. Mr. Dorman is also a stockholder,
director and officer of Panint Electric Ltd. of Hong Kong, a developer and
manufacturer of consumer home products.
William T. Graham was a shareholder, officer and director and co-founder
of Uniek, Inc. from 1987 until July 1998. Uniek is engaged in the business of
crafts, photo frames and photo albums which are distributed to the mass market
and office superstores. Mr. Graham sold his interest in Uniek in July, 1998. In
1949, Mr. Graham founded W.T. Rogers, Inc. ("W.T. Rogers"). Under Mr. Graham's
leadership, W.T. Rogers became a leading manufacturer and supplier of office
products to mass market retailers and office superstores. In 1990, the year
before W.T. Rogers was merged with a wholly-owned subsidiary of Newell, Inc.,
its sales had reached $45,000,000 annually.
C. Joseph Barnette is the co-founder and President of Kent Adhesive
Products Company ("KAPCO"), a privately held adhesive products company, a
position he has held since KAPCO's beginning in 1972.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 1999, there were four meetings of
the Board. Each of the current directors attended at least 75% of the meetings
of the Board. In the near future, the Board of Directors anticipated creating
two new board committees: a compensation committee and an audit committee. No
compensation committee or comparable report is included since none of the
current directors were involved in compensation decisions during the fiscal year
ended March 31, 1999.
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<PAGE> 36
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because of the complexity of the reporting requirements imposed on the
Company's directors and executive officers under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"), the former special securities counsel
to the Company had recommended that the Company assume responsibility for
preparing and filing the periodic reports of changes in beneficial ownership
required of these persons by statute. However, as of April 16, 1999, the date of
the Special Meeting, this undertaking had not yet been completed. Promptly after
the election of the new Board of Directors and the retentions of new corporate
counsel, the new Board of Directors filed their Initial Statements of
Beneficiary Ownership on Form 3.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes (the "Notes"). One $50,000 Note was issued to Mr.
James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, and one $50,000 Note was issued to William T. Graham, a Director of the
Company. The Notes bear interest at a rate equal to the prime rate (as
determined by U.S. Bank National Association ("U.S. Bank")) plus two percent
(2%) per annum. The Notes are subordinated to the Company's senior indebtedness
to U.S. Bank and are convertible into shares of the Company's common stock at
$0.3927 per share. Proceeds from the sale of the Notes were used to fund the
Company's operations when the Company had reached its borrowing limit under its
credit facilities with U.S. Bank when the Company had no other sources of
working capital.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with James L.
Dorman effective as of April 16, 1999. Pursuant to the Employment Agreement, Mr.
Dorman is entitled to receive a base salary of $75,000 per year. In addition,
Mr. Dorman is entitled to receive two separate tranches of options to purchase
800,000 shares of common stock. Options with respect to the first tranche of
300,000 options vest immediately and have a price of $.30 per share. The second
tranche of 500,000 options vest evenly over eighteen months and have a price of
$.50 per share.
Mr. Dorman's employment is not for a definitive term and may be
terminated by either Mr. Dorman or the Company at any time. However, if Mr.
Dorman is terminated by the Company other than for cause, all of his options
automatically vest.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended March 31, 1997, 1998 and 1999 to (a) the
Company's Chief Executive Officer, (b) the four most highly compensated
individuals (other than the Chief Executive Officer) who were serving as
executive officers of the Company at March 31, 1999 and whose total annual
salary and bonus for the fiscal year ended March 31, 1999 exceeded $100,000; and
(c) up to two additional individuals who would have been included under item (b)
above but for the fact that the individual was not serving as an executive
officer of the Company at March 31, 1999 (collectively, the "Named Executive
Officers").
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<PAGE> 37
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and All Other
Principal Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Richard Gockelman, 1999 $102,698 $0 $0
Former President & CEO 1998 $0 $0 $0
1997 $0 $0 $0
Ronald S. Deans, 1999 $84,236 $0 $1,505 (1)
Former President & CEO 1998 $249,160 $22,863 $5,559 (2)
1997 $204,967 $86,379 $0
</TABLE>
(1) Represents life insurance premiums paid by the Company in the
amount of $1,084 and 401(k) matching amounts of $421.
(2) Represents life insurance premiums paid by the Company in the
amount of $4,680 and 401(k) matching amounts of $879.
STOCK OPTION GRANTS
In the fiscal year ended March 31, 1999, the company granted options to
purchase up to 100,000 shares of common stock at $0.47 per share that are
exercisable between January 1, 2000 and June 30, 2000. There were no grants of
options to purchase common stock made by the Company during the fiscal years
ended March 31, 1997 and 1998.
DIRECTOR COMPENSATION
The Company pays each non-employee director a fee of $500 per month and
$750 for each meeting of the Company's Board of Directors attended and options
to purchase up to 60,000 shares of the Company's common stock. Directors are
entitled to reimbursement for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance of meetings of the Company's Board of
Directors. Directors of the Company who are also employees of the Company do not
receive fees for their services as directors.
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<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as May 21, 1999 with respect to (i) each
shareholder known by the Company to be the beneficial owner of more than five
percent (5%) of the outstanding Common Stock; (ii) each director of the Company;
(iii) each of the Named Executive Officers; and (iv) all current directors and
executive officers as a group. Unless otherwise noted, the Company believes that
the beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable. This table is based upon information supplied to the Company
by directors, officers, and principal shareholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- ------------------------------------ ------------------ -------
<S> <C> <C>
Dean Family Limited Partnership (1) 1,225,537 12.5%
8373 Semiahmoo Drive
Blaine, WA 98230
Fidel Garcia Carrancedo (2) 1,001,968 10.2%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
Wellington Management Company LLP (3) 780,000 7.9%
75 State Street
Boston, MA 02109
William T. Graham (4) 446,678 4.5%
4918 Femrite Drive
Madison, WI 53716
James L. Dorman (5) 510,011 4.9%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
C. Joseph Barnette 0 *
1000 Cherry St.
Kent, OH 44240-7520
Total Executive Officers and Directors as a Group 956,689 9.1%
(3 persons) (6)
</TABLE>
(1) The Deans Family Limited Partnership has not filed a Schedule 13D or
Schedule 13G with respect to its holdings. The share ownership of The
Deans Family Limited Partnership is based solely upon information
previously provided to the Company, and the Company is unable to
independently verify such information. The Company had been previously
informed that these shares are held for the benefit of Ronald S. Deans,
Mark G. Deans and R. Scott Deans. Ronald Deans was the Company's former
Chief Executive Officer. Mark Deans and Scott Deans are former officers
of the Company.
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<PAGE> 39
(2) Fidel Garcia Carrancedo has not filed a recent Schedule 13D or Schedule
13G with respect to his holdings. The share ownership of Fidel Garcia
Carrancedo is based solely upon information previously provided to the
Company, and the Company is unable to independently verify this
information.
(3) This information is based on a report on Schedule 13G dated February 9,
1999 (the "Schedule 13G") filed by Wellington Management Company LLP.
Based on the Schedule 13G, these shares are held of record by clients of
Wellington Management LLP. Such clients have the power to receive, or
the power to direct the receipt of, dividends from, or the proceeds from
the sale of, such shares. Based upon the Schedule 13G, no client of
Wellington Management Company LLP is known to have such right or power
with respect to more than 5% of the shares.
(4) Includes 126,678 shares of Common Stock issuable upon conversion of the
$50,000 Convertible Subordinated Note. See "Certain Relationships and
Related Transactions."
(5) Consists of currently exercisable options to purchase 327,778 shares of
Common Stock, options that become exercisable within 60 days to purchase
55,555 shares of Common Stock and 126,678 shares of Common Stock
issuable upon conversion of the $50,000 Convertible Subordinated Note.
See "Certain Relationships and Related Transactions."
(6) Includes currently exercisable options to purchase 327,778 shares of
Common Stock options that became exercisable within 60 days to purchase
55,555 shares of Common Stock and 253,356 shares of Common Stock
issuable upon conversion of the two $50,000 Convertible Subordinated
Notes. See "Certain Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
(i) Report of Moss Adams LLP regarding Financial Statements
(ii) Consolidated Balance Sheets as of March 31, 1999 and
1998
(iii) Consolidated Statements of Income for the years ended
March 31, 1999, 1998 and 1997
(iv) Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997
(v) Consolidated Statements of Cash Flows for the years
ended March 31, 1999, 1998 and 1997
(vi) Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
(i) Report of Moss Adams LLP regarding Schedule
II--Valuation of Qualifying Accounts
(ii) 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
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<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
3.1 Restated Articles of Incorporation of Geographics,
Inc. (incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form 10, as amended,
filed on September 12, 1995).
3.2 Restated Bylaws of Geographics, Inc. (incorporated
by reference to Exhibit 3.2 to the Registration
Statement on Form 10, as amended, filed on
September 12, 1995).
10.1 Business Loan Agreement, dated as of February 13,
1996 (the "Loan Agreement"), between Geographics,
Inc. and U.S. Bank of Washington, N.A.
(incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.2 Promissory Note, dated February 13, 1996, made by
Geographics, Inc. payable to U.S. Bank of
Washington, N.A., pursuant to the Loan Agreement
(incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.3 Loan and Security Agreement, dated as of July 10,
1992, between Geographics, Inc. and U.S. Bank of
Washington, N.A. (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997).
10.4 Master Equipment Lease Agreement, dated as of May
22, 1996 (the "Master Lease"), between
Geographics, Inc. and KeyCorp Leasing Ltd.
(incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.5 Subordination Agreement, dated as of May 22, 1996,
among U.S. Bank of Washington, N.A., c/o U.S.
Bancorp Mortgage Company and KeyCorp Leasing Ltd.
(incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.6 Equipment Schedule No. 4 to the Master Lease,
dated as of December 4, 1996, between Geographics,
Inc. and KeyCorp Leasing Ltd. (incorporated by
reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
10.7 Equipment Schedule No. 4 to the Master Lease,
dated as of May 23, 1997, between Geographics,
Inc. and KeyCorp Leasing Ltd. (incorporated by
reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
</TABLE>
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<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
10.8 Agreement for Sale of Business, dated November 26,
1996, between Geographics, Inc. and Graham's
Graphics Pty. Ltd. (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997).
10.9 Form of Stock Option Agreement relating to options
granted by Geographics, Inc. prior to the adoption
of the Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.10 Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the
Company's Registration Statement on Form S-8 filed
on November 26, 1996).
10.11 Form of Stock Option Agreements issued pursuant to
the Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the
Company's Registration Statement on Form S-8 filed
on November 26, 1996).
10.12 Form of Subscription Agreement (the "Subscription
Agreement") between Geographics, Inc. and each of
the persons participating in a private placement
of units consisting of common stock and warrants
completed in May 1996 (the "Private Placement")
(incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.13 Warrant Indenture, dated as of February 4, 1997
(the "Warrant Agreement") between Geographics,
Inc. and Montreal Trust Company of Canada relating
to the warrants issued in the Private Placement
(incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.14 Form of Warrant to Purchase Common Stock issued in
the Private Placement pursuant to the Warrant
Agreement (incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997).
10.15 Form of Registration Rights Agreement between
Geographics, Inc. and each purchaser of units sold
in the Private Placement (incorporated by
reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
10.16 Financial Advisory Agreement, dated August 6,
1997, between Geographics, Inc. and Cruttenden
Roth, Incorporated (incorporated by reference to
Exhibit 10.16 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1997).
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
10.17 Subscription Agreement, dated October 9, 1997,
between Geographics, Inc. and First Prudential
Investment Fund, Inc. (incorporated by reference
to Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1997).
10.18 Amended and Restated Asset Purchase Agreement by
and among Geographics, Inc., Identity Group, Inc.,
and U.S. Bank National Association, dated May 4,
1998 (incorporated by reference to Exhibit 10.18
to the Company's Report on Form 8-K filed on June
29, 1998).
10.19 Escrow Agreement by and among Geographics, Inc.,
Identity Group, Inc., U.S. Bank National
Association and Lawyers Title Insurance
Corporation, dated May 4, 1998 (incorporated by
reference to Exhibit 10.19 to the Company's Report
on Form 8-K filed on June 29, 1998).
10.20 Third Forbearance Agreement, between U.S. Bank,
N.A. and Geographics, Inc., dated May 1, 1998
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.21 Fourth Forbearance Agreement, between U.S. Bank,
N.A. and Geographics, Inc., dated November 1, 1998
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998) (incorporated by
reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K/A for the year ended March 31,
1998).
10.22 Fifth Forbearance Agreement, between U.S. Bank,
N.A. and Geographics, Inc., dated as of March 31,
1999, filed herewith.
10.23 Convertible Subordinated Note between Geographics,
Inc. and James L. Dorman, dated April 29, 1999
(incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K/A for the
year ended March 31, 1998).
10.24 Convertible Subordinated Note between Geographics,
Inc. and William T. Graham, dated April 29, 1999
(incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K/A for the
year ended March 31, 1998).
10.25 Employment Agreement between Geographics, Inc. and
James L. Dorman, dated April 16, 1999, filed
herewith.
11.1 Statement regarding 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>
(B) No Current Reports on Form 8-K were filed during the quarter ended March
31, 1999.
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<PAGE> 43
SIGNATURE
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 29th day of
June, 1999.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
-------------------------------
James L. Dorman
Chairman, Chief Executive Officer
Each person whose individual signature appears below hereby authorizes
and appoints James L. Dorman with full power of substitution and full power to
act without the other, as his true and lawful attorney-in-fact and agent to act
in his name, place and stead and to execute in the name and on behalf of such
person, individually and in the capacity of such person stated below, and to
file any and all amendments to this Report together with any exhibits thereto
and any other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
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/ James L. Dorman
-------------------------------
James L. Dorman
Chief Executive Officer
and Chairman of the Board
/s/ William T. Graham
-------------------------------
William T. Graham
Director
/s/ C. Joseph Barnette
-------------------------------
C. Joseph Barnette
Director
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<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Moss Adams LLP regarding Financial Statements F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended March 31, 1999,
1998, and 1997. F-4
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1999, 1998, and 1997. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1999,
1998, and 1997. F-6
Notes to Consolidated Financial Statements. F-7
Report of Moss Adams LLP regarding Schedule II--Valuation and Qualifying
Accounts S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
GEOGRAPHICS, INC.
- --------------------------------------------------------------------------------
<PAGE> 45
TABLE OF CONTENTS
MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT..............................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet........................................................................2
Statement of Operations..............................................................3
Statement of Stockholders' Equity (Deficit) and Comprehensive Income.................4
Statement of Cash Flows..............................................................5
Notes to Financial Statements........................................................5
</TABLE>
<PAGE> 46
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated balance sheets of Geographics,
Inc. as of March 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income, and cash
flows for each of the years ended March 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above, present
fairly in all material respects, the consolidated financial position of
Geographics, Inc. as of March 31, 1999 and 1998 and the consolidated results of
its operations and its cash flows for each of the years ended March 31, 1999,
1998 and 1997 in conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the Company changed its
method of accounting for the purchase of display racks in the year ended March
31, 1999.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the financial statements, the Company has incurred substantial operating losses
in 1999 and 1998 and is out of compliance with its borrowing agreements, which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Moss Adams LLP
Bellingham, Washington
May 7, 1999
1
<PAGE> 47
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 130,967 $ 316,078
Accounts receivable
Trade receivables, net of allowance for doubtful
accounts, sales returns and cash discounts of
$757,891 in 1999 and $930,958 in 1998 3,187,527 4,164,861
Other receivables 261,091 148,050
Inventory, net of allowance for obsolete inventory
of $862,000 in 1999 and $586,000 in 1998 3,532,684 6,763,508
Prepaid expenses, deposits, and other current assets 853,357 731,307
------------ ------------
Total current assets 7,965,626 12,123,804
PROPERTY, PLANT AND EQUIPMENT, net 9,945,634 12,881,118
OTHER ASSETS 367,501 340,043
------------ ------------
TOTAL ASSETS $ 18,278,761 $ 25,344,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdrafts $ 253,425 $ 301,716
Note payable to bank 4,896,912 11,300,808
Accounts payable 2,961,079 3,285,467
Accrued liabilities 2,496,178 2,680,594
Current portion of long-term debt 3,072,601 3,350,344
------------ ------------
Total current liabilities 13,680,195 20,918,929
LONG-TERM DEBT 3,776,432 4,853,254
------------ ------------
Total liabilities 17,456,627 25,772,183
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
No par common stock - 100,000,000 authorized, 9,857,252
issued and outstanding in 1999 and 1998 15,769,018 15,769,018
Accumulated other comprehensive income (157,223) 33,899
Accumulated deficit (14,789,661) (16,230,135)
------------ ------------
Total stockholders' equity (deficit) 822,134 (427,218)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 18,278,761 $ 25,344,965
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 2
- --------------------------------------------------------------------------------
<PAGE> 48
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
SALES
Sales $ 23,127,452 $ 25,884,553 $ 18,669,472
Less sales discounts and allowances 1,669,349 1,786,708 1,618,330
Less back-end selling expenses 2,221,041 4,121,555 3,022,396
------------ ------------ ------------
Net sales 19,237,062 19,976,290 14,028,746
COST OF SALES 11,931,097 21,035,139 16,522,236
------------ ------------ ------------
Gross margin 7,305,965 (1,058,849) (2,493,490)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,086,546 6,952,870 5,105,314
------------ ------------ ------------
Income (loss) from operations (1,780,581) (8,011,719) (7,598,804)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income -- -- 24,907
Miscellaneous expense 31,291 (38,365) --
Loss on sales of property and equipment (126,121) (159,406) (86,048)
Reserve for impairment on EDP installation-in-progress -- -- (620,759)
Interest expense (1,220,695) (1,413,219) (805,079)
------------ ------------ ------------
Total other income (expense) (1,315,525) (1,610,990) (1,486,979)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,096,106) (9,622,709) (9,085,783)
INCOME TAX PROVISION (BENEFIT) -- -- (55,972)
------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (3,096,106) (9,622,709) (9,029,811)
DISCONTINUED OPERATIONS
Income from operations of Core Business 110,476 973,091 1,079,510
Gain on disposal of Core Business, net of
alternative minimum tax of $50,000 5,497,104 -- --
------------ ------------ ------------
5,607,580 973,091 1,079,510
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 2,511,474 (8,649,618) (7,950,301)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,071,000) -- --
------------ ------------ ------------
NET INCOME (LOSS) $ 1,440,474 $ (8,649,618) $ (7,950,301)
============ ============ ============
BASIC EARNINGS PER SHARE
Loss from continuing operations $ (0.31) $ (1.00) $ (0.97)
Discontinued operations 0.57 0.10 0.12
Cumulative effect of accounting change (0.11) -- --
------------ ------------ ------------
Net income (loss) $ 0.15 $ (0.90) $ (0.85)
============ ============ ============
DILUTED EARNINGS PER SHARE
Loss from continuing operations $ (0.31) $ (1.00) $ (0.97)
Discontinued operations 0.57 0.10 0.12
Cumulative effect of accounting change (0.11) -- --
------------ ------------ ------------
Net income (loss) $ 0.15 $ (0.90) $ (0.85)
============ ============ ============
SHARES USED IN COMPUTING EARNINGS PER SHARE
Basic 9,857,252 9,626,335 9,322,278
============ ============ ============
Diluted 9,857,252 9,626,335 9,322,278
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
- --------------------------------------------------------------------------------
<PAGE> 49
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT) AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other Total Total
--------------------------- Earnings Comprehensive Stockholders' Comprehensive
Shares Amount (Deficit) Income (Loss) Equity Income
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 8,004,584 $ 9,620,068 $ 369,784 $ 9,989,852
Comprehensive income
Net income (loss) -- -- (7,950,301) -- (7,950,301) $ (7,950,301)
Other comprehensive income
Foreign currency translation
adjustment- -- -- -- (76,478) (76,478) (76,748)
------------
Total other comprehensive income -- -- -- -- -- (76,748)
------------
Comprehensive income -- -- -- -- -- $ (8,027,049)
============
Proceeds from issuance of common stock 1,269,293 6,114,062 -- -- 6,114,062
Notes payable, converted to common stock 30,000 52,005 -- -- 52,005
Common stock issued for acquisition
of subsidiary 50,000 200,000 -- -- 200,000
Common stock issued for cash on exercise
of stock options and warrants 114,000 345,883 -- -- 345,883
Revision of estimate of income
tax benefit from exercise of
stock options and warrants -- (758,000) -- -- (758,000)
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1997 9,467,877 15,574,018 (7,580,517) (76,478) 7,917,023
Comprehensive income
Net income (loss) -- -- (8,649,618) -- (8,649,618) $ (8,649,618)
Other comprehensive income
Foreign currency translation
adjustment -- -- -- 110,377 110,377 110,377
------------
Total other comprehensive income -- -- -- -- -- 110,377
------------
Comprehensive income -- -- -- -- -- $ (8,539,241)
============
Issuance of common stock 389,375 195,000 -- -- 195,000
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1998 9,857,252 15,769,018 (16,230,135) 33,899 (427,218)
Comprehensive income
Net income (loss) -- -- 1,440,474 -- 1,440,474 $ 1,440,474
Other comprehensive income
Foreign currency translation
adjustment -- -- -- (191,122) (191,122) (191,122)
------------
Total other comprehensive income -- -- -- -- -- (191,122)
------------
Comprehensive income -- -- -- -- -- $ 1,249,352
------------ ------------ ------------ ------------ ------------ ============
BALANCE, March 31, 1999 9,857,252 $ 15,769,018 $(14,789,661) $ (157,223) $ 822,134
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
- --------------------------------------------------------------------------------
<PAGE> 50
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,440,474 $ (8,649,618) $ (7,950,301)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,784,906 1,849,706 1,372,292
Deferred income taxes -- -- 404,000
Gain on sale of core business (5,497,104) -- --
Loss on sales and disposal of property and equipment 126,121 159,406 86,048
Reserve for impairment on EDP installation-in-progress -- -- 620,759
Services rendered in exchange for common stock -- 195,000 --
Loss on cumulative effect of change in accounting principle 1,071,000 -- --
Changes in noncash operating assets and liabilities
Trade receivables 977,334 2,489,639 (1,500,098)
Related party receivables -- -- 899,422
Other receivables (113,041) 845,193 (930,671)
Inventory 2,395,474 2,694,366 (121,153)
Prepaid expenses, deposits and other current assets (122,050) 162,176 (44,402)
Accounts payable (324,388) 863,699 (212,830)
Accrued liabilities (184,416) 535,564 920,286
Income tax payable -- -- (145,278)
------------ ------------ ------------
Net cash flows from operating activities 1,554,310 1,145,131 (6,601,926)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in (repayment of) bank overdrafts (48,291) (165,729) 467,445
Net borrowings (repayment of) on note payable to bank (6,403,896) 2,651,418 3,326,451
Proceeds from long-term debt borrowings -- -- 2,333,526
Repayment of long-term debt (1,354,565) (1,790,535) (875,134)
Repayments of notes payable to officer/directors -- (850,000) (362,706)
Proceeds from issuance of common stock -- -- 6,459,945
Foreign currency translation (191,122) 110,377 (76,478)
------------ ------------ ------------
Net cash flows from financing activities (7,997,874) (44,469) 11,273,049
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of core business 6,594,891 -- --
Purchase of plant and equipment (308,980) (1,933,911) (4,159,500)
Proceeds from sales of equipment -- 75,000 50,887
Net repayments to partnerships -- -- (34,484)
(Increase) decrease in other assets (27,458) 665,570 (169,297)
------------ ------------ ------------
Net cash flows from investing activities 6,258,453 (1,193,341) (4,312,394)
------------ ------------ ------------
NET CHANGE IN CASH (185,111) (92,679) 358,729
CASH, beginning of year 316,078 408,757 50,028
------------ ------------ ------------
CASH, end of year $ 130,967 $ 316,078 $ 408,757
============ ============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ -- $ 2,199,088 $ 1,989,895
============ ============ ============
Issuance of common stock in exchange for services rendered $ -- $ 195,000 $ --
============ ============ ============
Issuance of common stock on conversion of notes payable,
debentures and other liabilities $ -- $ -- $ 52,005
============ ============ ============
Issuance of common stock for acquisition of subsidiary $ -- $ -- $ 200,000
============ ============ ============
Income tax benefit (expense) related to exercise of stock
options and warrants $ -- $ -- $ (758,000)
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
- --------------------------------------------------------------------------------
<PAGE> 51
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its
offices and main manufacturing facilities located in Blaine, Washington.
The Company also has warehouse/distribution facilities near London,
England, and Sydney, Australia and a warehouse/distribution facility in
Bellingham, Washington. The Company is a manufacturer of designer
stationary and value-added papers and considers itself to have only one
reporting segment. (See Note 3 regarding the sale of certain business
operations.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Geographics (Europe) Limited, Geographics Pty. Limited and Geographics
Marketing Canada Inc. Significant intercompany transactions have been
eliminated in consolidation.
CASH AND EQUIVALENTS - For purposes of the statement of cash flows, cash
and equivalents include cash on deposit with banks and other highly
liquid investments with original maturities of ninety days or less.
CASH AND OVERDRAFT BALANCES - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
The nature and content of bank overdrafts include disbursements from the
payroll checking account, which are covered via transfers of funds from
the general operating cash account as payroll checks are presented for
payment. The Company also has an account for which the bank funds
disbursements as they are presented for payment via an overnight
investment sweep account.
ACCOUNTS RECEIVABLE - The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for doubtful
accounts to be fully collectible. Accounts receivable are not
collateralized.
INVENTORY - Inventory is valued at the lower of cost on a first-in,
first-out (FIFO) basis or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at historical cost. Depreciation is provided based on useful lives of
three to forty years, using primarily the straight-line method.
Betterments, renewals and repairs that extend the life of assets are
capitalized. Repairs and maintenance items are expensed when incurred.
Depreciation and amortization expense on equipment, including
amortization expense on capitalized leased equipment, was $1,705,372,
$1,729,706 and $1,280,801 during the years ended March 31, 1999, 1998 and
1997, respectively.
FEDERAL INCOME TAXES - The Company accounts for income taxes using the
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable
amounts attributed to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
This method also allows recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not previously been recorded. The tax benefits
recognized as assets must be reduced by a valuation allowance where it is
more likely than not the benefits may not be realized.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
non-U.S. subsidiaries whose "functional" currencies are other than U.S.
dollars are translated at current rates of exchange. Income and expense
items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded as other comprehensive
income within the statement of stockholders' equity. Certain other
translation adjustments and transaction gains and losses are reported in
net income in the period they are realized.
F-6
<PAGE> 52
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The following significant estimates are included in the financial
statements.
o DEPRECIATION - Depreciation represents an expense allocation
matching asset costs to revenue earned over the estimated lives of
assets owned by the Company. Periodically, the Company
re-evaluates the lives and methods of depreciation applied to its
property and equipment and considers such things as general
condition and utility, technological status and economic
viability. Such evaluations may result in the Company's revision
and adjustment of asset carrying values in relatively short-term
time periods.
o PROPERTY, PLANT AND EQUIPMENT - It is the Company's policy to
record property, plant and equipment and other long-lived assets
at historical cost and depreciate these assets over their expected
useful life. The Company has sustained significant losses as shown
in the accompanying consolidated financial statements and
described in Note 16, and may be unable to continue as a going
concern. It is reasonably possible that the Company's estimate
that it will recover the carrying amount of long-lived assets from
future operations will change in the near term.
o INCOME TAXES - The Company operates in a number of taxing
jurisdictions and endeavors to comply with all tax laws as
applicable, consistent with minimizing taxes paid by the Company
where possible. To comply with these laws the Company must
allocate and prorate certain items of revenue and expense in
addition to establishing appropriate transfer pricing policies.
These allocations and policies are subject to scrutiny and audit
which may result in the Company's need to adjust its tax accruals
and provisions as a result of its interactions with taxing
authorities.
o SALES RETURNS AND ALLOWANCES - The Company currently estimates an
allowance for sales returns as a percentage of sales, based on
historical information. Changes in market conditions and demand
for the Company's products could result in customers returning
products in an amount greater than that currently allowed for.
Depending upon the volume of sales returns, such amounts could
impact future gross margins.
o INVENTORY - The Company makes provisions for obsolete inventory by
reviewing recent sales information, inventory turnover rates and
volumes on hand. The Company will often offer substantial dealer
discounts and may enter into agreements with discount distributors
to sell slower moving product lines. The provision for obsolete
inventory attempts to account for reduced margins expected on
slower moving products, however, it is possible that additional
discounts or incentives may be necessary to liquidate slow-moving
inventory and the provisions for obsolete inventory will need to
be increased.
ADVERTISING COSTS - Advertising costs are charged to expense in the
period in which they occur except for direct response advertising which
is capitalized and amortized over its expected period of future benefits.
Direct response advertising consists primarily of advertisements placed
with industry related catalogs and are amortized over the period
following the mailing date at a rate approximating the rate and timing of
customer response. Unamortized advertising costs of $75,109 and $149,609
are included in other assets at March 31, 1999 and 1998, respectively.
The Company also participates with its customers in cooperative
advertising and other promotional programs, in which the Company
reimburses the customers for a portion of their advertising costs.
Advertising expense amounted to $242,899, $1,393,001 and $1,924,442 in
1999, 1998 and 1997, respectively.
F-7
<PAGE> 53
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE - Basic earnings per share amounts are computed based
on the weighted average number of shares outstanding during the period
after giving retroactive effect to stock dividends and stock splits.
Diluted earnings per share amounts are computed by determining the number
of additional shares that are deemed outstanding due to stock options and
warrants under the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standard ("SFAS") No. 107, Disclosure About Fair Value Of Financial
Instruments, requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized,
in the consolidated balance sheet of the Company for which it is
practicable to estimate fair value. The estimated fair values of
financial instruments that are presented herein have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of amounts the
Company could realize in a current market exchange.
The following methods and assumptions were used to estimate fair value:
CASH, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - The
carrying amounts of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to their short-term nature.
NOTES PAYABLE AND LONG-TERM DEBT - Discounted cash flows using current
interest rates for financial instruments with similar characteristics and
maturity were used to determine the fair value of notes payable and
long-term debt.
There were no significant differences as of March 31, 1999 and 1998 in
the carrying value and fair value of financial instruments.
STOCK OPTION PLANS - The Company recognizes the financial effects of
stock options in accordance with Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees (APB 25). Normally, stock
options are issued at a price equal to the fair value of the Company's
stock as of the grant date. Under APB 25 options issued in this manner do
not result in the recognition of employee compensation in the Company's
financial statements.
NEW ACCOUNTING STANDARDS - During fiscal year 1999, the Company
implemented the requirements of SFAS No. 130, Comprehensive Income and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting about operating segments, products and services,
geographic areas, and major customers. These standards have been applied
to all periods presented and resulted in some changes in the presentation
of financial information but does not have a material impact on its
reported financial condition or results of operation.
RECLASSIFICATIONS - Concurrent to the preparation of the financial
statements for the year ending March 31, 1999, the Company's management
has reclassified certain items contained in the financial statements.
Certain back-end selling expenses are now reported as a reduction of
gross sales instead of being reported as a component of general and
administrative expenses. Management now views back-end selling costs as
allowances directly tied to sales volumes that are properly netted
against gross sales to better reflect net sales. Such allowances, by
contract, are stated as a percent of sales delivered to specific
customers. The Company also reclassified the prior year amounts to
conform to current year presentation. Such reclassifications had no
effect on the Company's previously reported earnings or financial
position.
F-8
<PAGE> 54
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CHANGE IN ACCOUNTING PRINCIPLE - During the fourth quarter of the current
fiscal year, the Company changed its method of accounting for the
purchase of display racks. The Company now expenses the purchase of
display racks in the period in which the costs were incurred. The Company
has implemented this policy due to the increasing difficulty in managing
of the racks once they have been delivered to a customer for use in
displaying merchandise, and also because the Company had difficulty
controlling the duration, location or extent of use within the customers'
stores. Accordingly, the Company has expensed racks purchased for
customers during 1999 and written-off the remaining racks on the
Company's financial statements as of year end.
The pro forma effect of this change on net loss from continuing
operations for each of the three years for which a statement of
operations is presented is as follows:
<TABLE>
<CAPTION>
Reduction
(Increase) in
Loss From Effect on
Year Ended Continuing Earnings
March 31, Operations Per Share
--------- ---------- ---------
<S> <C> <C>
1999 $ 436,175 $ 0.04
1998 (479,020) (0.05)
1997 (89,474) (0.01)
</TABLE>
NOTE 3 - DIVESTITURE
On May 4, 1998, the Company sold substantially all of its signage and
lettering operating assets, licenses, inventory and other rights
(collectively the "Core Business") to Identity Group, Inc. for total
consideration of $6,820,000. In connection with the sale, the Company
recorded a gain of $5,497,104 or $.57 per share in the first quarter of
1999. The available net proceeds from the sale were used to reduce the
outstanding balance on the Company's revolving credit line.
Summarized results of operations for the Core Business for fiscal years
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- --------
<S> <C> <C> <C>
Net sales $ 751,539 $6,598,881 $ 6,789,364
=========== ========== ===========
Operating income $ 139,035 $1,222,688 $ 1,337,506
=========== ========== ===========
Income from discontinued operations $ 110,476 $ 973,091 $ 1,079,510
=========== ========== ===========
</TABLE>
NOTE 4 - INVENTORY
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Raw materials $ 513,090 $ 609,183
Work-in-progress 671,946 1,483,308
Finished goods 3,209,519 5,257,515
---------- -----------
4,394,555 7,350,006
Less allowance for obsolete inventory 861,871 586,498
---------- -----------
$3,532,684 $ 6,763,508
========== ===========
</TABLE>
F-9
<PAGE> 55
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated
Depreciation Net Book Value
And -----------------------
Cost Amortization 1999 1998
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Land $ 114,563 $ -- $ 114,563 $ 114,563
Buildings 3,874,478 944,568 2,929,910 3,021,655
Machinery & equipment 3,207,792 1,638,057 1,569,735 2,050,279
Machinery & equipment under capital
lease 7,000,573 1,850,064 5,150,509 5,832,538
Display racks -- -- -- 1,627,688
Computers and software 111,428 61,596 49,832 169,154
Automobiles 106,452 84,789 21,663 47,476
Leasehold improvements -- -- -- 17,765
EDP installation-in-progress 109,422 -- 109,422 --
----------- ----------- ---------- -----------
$14,524,708 $ 4,579,074 $9,945,634 $12,881,118
=========== =========== ========== ===========
</TABLE>
NOTE 6 - OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other $ 233,266 $ 205,808
Trademarks 134,235 134,235
----------- ----------
$ 367,501 $ 340,043
=========== ==========
</TABLE>
NOTE 7 - FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Installment notes payable to a bank, fixed interest rates
ranging from 8.825% to 10%, payable in monthly installments
through November 2010, collateralized by real estate. $2,018,898 $2,200,029
Capital lease obligations collateralized by certain equipment
and fixtures, with imputed interest at rates ranging from 8.25%
to 11.42%. 4,808,965 5,877,633
Installment notes payable to banks, interest rates ranging from
fixed at 9.75% to variable rates from prime plus 1% to prime
plus 1.5%, payable in monthly installments through October
2000, collateralized by certain equipment. 21,171 125,936
---------- ----------
6,849,034 8,203,598
Less current portion 3,072,602 3,350,344
---------- ----------
$3,776,432 $4,853,254
========== ==========
</TABLE>
The prime rate was 7.75% and 8.50% at March 31, 1999 and 1998,
respectively.
The Company had a revolving credit agreement with a bank for up to
$12,000,000 (modified as described below), subject to borrowing base
limitations of 80% of eligible accounts receivable and 55% of
inventories, net of reserves. Interest on outstanding advances is payable
monthly at 1.50% above the bank's prime rate, with a stated due date of
April 15, 1998. Total outstanding advances under the revolving credit
agreement were $4,896,912 and $11,300,808 at March 31, 1999 and 1998,
respectively. The revolving credit agreement and installment notes are
collateralized by substantially all of the assets of the Company.
F-10
<PAGE> 56
NOTE 7 - FINANCING ARRANGEMENTS (Continued)
The revolving credit agreement and term debt (included in installment
notes payable above) with the same bank were subject to the "Second
Forbearance Agreement" with the bank which acknowledged the Company's
default with respect to the original terms of the debt obligations, but
allowed continued borrowing pursuant to the terms of the forbearance
agreement which expired April 15, 1998. On May 1, 1998, the Company and
the bank entered into the "Third Forbearance Agreement" which required
the Company to sell its signage and lettering, intangible and operating
assets (the "Core Business" - see Note 3) to a corporation for total
consideration of approximately $6.8 million, the net proceeds of which
were to be applied to the revolving credit obligation. The Third
Forbearance Agreement expired November 1, 1998 and reduced the maximum
borrowings under the revolving agreement to $5.5 million during May
through July 1998 and $6.0 million during August through October of 1998.
The advance rate against eligible accounts receivable was reduced to 70%,
and the maximum advance rate against eligible inventory was reduced to
$3.5 million. On November 1, 1998, the Company and the bank entered into
the "Fourth Forbearance Agreement" which limited the Company's borrowings
under the Revolving Loan to $5,500,000 and limited the advance against
eligible inventory to $2,750,000. The Fourth Forbearance Agreement
expired on March 31, 1999, at which time the Company and the bank entered
into the "Fifth Forbearance Agreement", which essentially was an
extension of the Fourth Forbearance Agreement and expired on April 30,
1999.
Subsequent to the expiration of the Fifth Forbearance Agreement, the
Company has negotiated with the bank to provide the Company with a
$750,000 extension of credit over and above the borrowing base
calculation established by the Fourth Forbearance Agreement as well as to
extend the due date. All outstanding obligations with this bank have been
shown as currently due, pursuant to the terms of the forbearance
agreements.
At March 31, 1999, the terms of the agreements provide principal payments
on long-term debt and capital lease obligations as follows:
<TABLE>
<S> <C>
2000 $3,072,602
2001 1,086,976
2002 932,681
2003 691,268
2004 689,821
Thereafter 375,686
----------
$6,849,034
==========
</TABLE>
Future minimum lease payments under capital leases, together with the
present value of minimum lease payments as of March 31, 1999, are as
follows:
<TABLE>
<S> <C>
2000 $1,546,712
2001 1,409,104
2002 1,106,711
2003 823,276
2004 820,199
Thereafter 354,911
----------
Total minimum lease payments 6,060,913
Less amount representing imputed interest 1,251,948
----------
Present value of minimum lease payments $4,808,965
==========
</TABLE>
F-11
<PAGE> 57
NOTE 8 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- ---------
<S> <C> <C> <C>
Current provision (benefit) $ -- $ -- $(459,972)
Deferred provision (benefit) -- -- 404,000
----------- -------- ---------
Total income tax provision (benefit) $ -- $ -- $ (55,972)
=========== ======== =========
</TABLE>
Income taxes are allocated between continuing and discontinued operation
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ --------
<S> <C> <C> <C>
Total income tax provision (benefit) $ -- $ -- $(55,972)
Amounts applicable to discontinued operations -- -- --
------ ------ --------
Taxes allocated to continuing operations $ -- $ -- $(55,972)
====== ====== ========
</TABLE>
The total tax provision differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- --------------------------
Amount % Amount % Amount %
----------- ---- ----------- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at
statutory rate on continuing
operations $(1,212,000) (34.0)% $(3,272,000) (34.0)% $(3,089,000) (34.0)%
Exercise of stock options
and warrants -- -- 367,000 3.8 (758,000) (8.2)
Other differences, net 240,000 6.7 548,000 5.6 (350,972) (3.4)
Change in valuation
allowance for deferred
tax assets (902,000) (25.3) 2,027,000 21.1 3,774,000 41.5
Alternative minimum tax
allocated to discontinued
operations (50,000) (1.4) -- -- -- --
Benefit absorbed by income
from discontinued operations 1,924,000 54.0 330,000 3.5 368,000 4.0
----------- ---- --------- ----- ----------- -----
Total income tax
provision (benefit) $ -- -- % $ -- -- % $ (55,972) (.1)%
=========== ==== ========= ===== =========== =====
</TABLE>
The significant components of deferred income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in valuation allowance for deferred tax
assets $ (902,000) $ 2,027,000 $ 3,774,000
Depreciation of plant and equipment (138,000) 302,000 244,000
Amortization of goodwill and intangibles 78,000 17,000 31,000
Change in allowance for doubtful accounts 79,000 (259,000) (8,000)
Inventory differences (24,000) 239,000 (416,000)
Effect of net operating loss carryforwards 903,000 (2,314,000) (3,162,000)
Other differences, net 4,000 (12,000) (59,000)
----------- ----------- -----------
Total deferred income tax expense (benefit) $ -- $ -- $ 404,000
=========== =========== ===========
</TABLE>
F-12
<PAGE> 58
NOTE 8 - FEDERAL INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Net operating losses $ 4,573,000 $ 5,476,000
Inventory, principally due to additional cost inventoried for
tax purposes 260,000 236,000
and financial statement allowances
Goodwill and intangible assets, principally due to
amortization differences 254,000 332,000
Accruals for financial reporting purposes 91,000 68,000
Alternative minimum tax credit carryforwards 83,000 70,000
Accounts receivable, due to allowance for doubtful accounts 238,000 317,000
Other differences, net 22,000 62,000
----------- -----------
Net deferred tax assets 5,521,000 6,561,000
Deferred Tax Liabilities
Plant and equipment, principally due to depreciation
differences 622,000 760,000
----------- -----------
Net deferred tax assets before valuation allowance 4,899,000 5,801,000
Valuation allowance (4,899,000) (5,801,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
Net deferred tax assets $ - $ Based on the Company's current operating
income and expectations for the future, management determined that
future operating and taxable income may not be sufficient to fully
recognize all deferred tax assets existing at March 31, 1999 and 1998.
As a result, the carrying value of net deferred tax assets was reduced
to $-0- at March 31, 1999 and 1998 by increasing the valuation against
deferred tax assets.
Net operating loss carryforwards approximating $12,000,000 are available
to offset future taxable income through 2013. In addition, net operating
losses on foreign operations of approximately $1,800,000 are available
to the Company subject to foreign tax rules.
NOTE 9 - STOCKHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE PLANS - As of March 31, 1999, the Company had
reserved 1,000,000 shares of common stock for issuance to key employees,
officers and directors pursuant to the 1996 Stock Option Plan. Options
granted under the Plan qualify as incentive stock options and will
generally not be taxable to the holder until the share subject to the
option is ultimately sold by the holder of the option. There were no
shares granted pursuant to this Plan as of March 31, 1999. Options to
purchase the Company's common stock are granted at a price equal to or
greater than the market price of the stock at the date of grant, and are
exercisable pursuant to the terms of the grant. All options expire no
more than ten years after the date of grant. Prior to the formation of
the 1996 Stock Option Plan, the Company granted nonqualified stock
options on a case-by-case basis as deemed appropriate by the Board of
Directors.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation. The pro forma information
recognizes, as compensation, the estimated present value of stock
options granted using an option valuation model. Pro forma earnings per
share amounts also reflect an adjustment for an assumed purchase of
stock from proceeds deemed obtained from the issuance of stock options.
The fair value of options issued in 1999 is estimated at $36,000. There
were no options issued in 1998 or 1997 and therefore no presentation is
required for 1998 or 1997.
F-13
<PAGE> 59
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
The following assumptions were used to estimate the fair value of the
options:
<TABLE>
<CAPTION>
1999
------
<S> <C>
Risk-free interest rate 5.19%
Dividend yield rate - %
Price volatility 2.0551
Weighted average expected life of options .5 yr.
</TABLE>
Management believes that the assumptions used in the option pricing
model are highly subjective and represent only one estimate of possible
value, as there is no active market for the options granted. The fair
value of the options granted that are recognized in pro forma earnings
is shown below:
Pro forma disclosures
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Net income as reported $1,440,474
Additional compensation for fair value of stock options $ 36,000
Pro forma net income $1,476,474
Pro forma earnings per share
Basic $ 0.15
Diluted $ 0.15
</TABLE>
The changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
Nonqualified
Common Stock Option Price
Options Per Share
------------ ------------
<S> <C> <C>
BALANCE, March 31, 1996 320,000
Granted --
Exercised (144,000) $ .73 to 2.56
Expired (2,500) $ 3.04
---------
BALANCE, March 31, 1997 173,500
Granted --
Exercised --
Expired --
---------
BALANCE, March 31, 1998 173,500
Granted 100,000 $ .47
Exercised --
Expired (10,000) $ .83
---------
BALANCE, March 31, 1999 263,500
=========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Up to $1 100,000 1.25 years $0.47 100,000 $0.47
$1 to $2 76,000 1.29 years $1.44 76,000 $1.44
$2 to $4 87,500 1.54 years $2.75 87,500 $2.75
</TABLE>
F-14
<PAGE> 60
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
In addition, warrants to purchase 1,395,121 shares of common stock at
$6.50 per share were outstanding at March 31, 1999. Warrants to purchase
1,419,121 shares of common stock at prices ranging from $.77 to $6.50,
were outstanding as of March 31, 1998. The exercise price of the warrants
was equal to the market price of the stock at the date the warrants were
issued. On May 27, 1999 the Company's Board of Directors approved a
one-year extension of the expiration date to June 1, 2000.
During the year ended March 31, 1997, the Company's shareholders and its
Board of Directors approved a resolution to increase the Company's
authorized shares from ten million to one hundred million.
NOTE 10 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) (numerator) $ 1,440,474 $(8,649,618) $(7,950,301)
=========== =========== ===========
Shares used in the calculation (denominator)
Weighted average shares outstanding 9,857,252 9,626,335 9,322,278
Effect of dilutive stock options -- -- --
----------- ----------- -----------
Diluted shares 9,857,252 9,626,335 9,322,278
=========== =========== ===========
</TABLE>
As described in Note 9, the Company has granted stock options and
warrants to purchase up to 1,658,621 shares. The potential dilutive
effects of these potential shares outstanding were disregarded in 1998
and 1997 because the Company reported losses in those years and the
effects of the instruments would have been anti-dilutive to the reported
per share losses. The dilutive effects of these shares were disregarded
in 1999 as the exercise price for the shares are higher than the market
price of the Company's stock making their effects antidilutive. In future
periods, these instruments may reduce the reported net income per share
once profitable operations are attained and the market price of the
Company's stock improves.
NOTE 11 - RELATED PARTY TRANSACTIONS
At March 31, 1996, a certain officer and directors had advanced the
Company $1,264,711 in the form of uncollateralized notes payable. As of
March 31, 1997, the balance remaining on these notes payable to a certain
officer totaled $850,000, which was paid in full during fiscal 1998.
Total interest costs associated with these notes were approximately $0,
$11,200 and $92,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
The Company has approximately $204,787 due to Guildmark, Inc., a company
related through common ownership, included in accounts payable at March
31, 1999 and 1998.
NOTE 12 - EMPLOYEE BENEFIT PLANS
On April 1, 1995, the Board of Directors approved a retirement savings
plan, which permits eligible employees to make contributions to the plan
on a pretax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. The Company makes a matching
stock contribution of 10% of the employee's pretax contribution. Eligible
employees may contribute up to 18% of their pretax compensation. Total
expense related to this plan was $16,884 and $11,471 during the year
ended March 31, 1999 and 1998, respectively.
F-15
<PAGE> 61
NOTE 13 - 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 require 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 at various times through 2004. At March 31, 1999, the
Company had future minimum lease commitments of $51,285. Rental expense
under all operating leases were $86,235, $320,000 and $257,000 in 1999,
1998 and 1997, respectively.
Litigation - In July 1997, three related class action suits were filed in
the United States District Court for the Western District of Washington
against the Company, its former President, Chief Executive Officer and
Chairman of its Board of Directors, and the Company's Vice President of
Finance and Chief Financial Officer. In August 1998, the Company, its
insurance company and the plaintiffs reached an agreement to settle the
suits. The settlement is subject to review by the court prior to being
ratified. In October 1998, the court ratified the settlement. The Company
has recorded its portion of the settlement, representing the deductible
on its insurance policy. The total settlement was $1.6 million.
Special Committee Investigation - In the Company's 10 Q filed for the
third quarter ending December 31, 1997, the Company announced that a
special committee of its audit committee was appointed to examine the
performance and conduct of the Company's management. As a result of their
examination, issues were raised concerning the adequacy of documentation
for certain travel and entertainment expenses submitted to the Company
for payment in prior periods, the propriety of certain issuances of
common stock, and appropriate treatment and reporting of taxable income
associated with stock options. The Company is continuing to evaluate
these matters and believes they will be resolved in a manner that will
not result in a material impact to the Company's financial position or
results of operations. However, the ultimate outcome of these matters is
uncertain.
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 categorizes its Year 2000
efforts into the following areas: hardware, software, embedded,
processors, vendors, and customers. Each area is assessed and tracked in
phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Year 2000 project
is progressing and internal remediation work is expected to be completed
by October 31, of this year. The Company is using both internal and
external resources to effect remediation and to test systems.
The Company will initiate communications with significant vendors and
customers in June of 1999 to determine the Company's vulnerability if
these companies fail to remediate their Year 2000 issues. There can be no
guarantee that the systems of other companies will be timely remedied, or
that other companies' failure to remedy Year 2000 issues would not have a
material impact on the Company. The Company is developing contingency
plans to mitigate risks associated with vendor/customer Year 2000 issues.
Costs incurred and expected to be incurred have been/will be expensed,
and are not expected to exceed a total of $75,000. Although the Company
is not aware of any internal operational Year 2000 issues, the Company
cannot provide assurances that the computer systems, products, services,
or other systems on which the Company depends will be Year 2000 ready on
schedule, that the costs of remediation of Year 2000 issues will not be
greater than expected, or that the Company's contingency plans will be
adequate. The Company is currently unable to evaluate the magnitude, if
any, of the Year 2000 related issues of its vendors or customers. If such
risks materialize, the Company could experience serious consequences,
which could have a material adverse effect on its financial condition,
operations, and liquidity.
F-16
<PAGE> 62
NOTE 14 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $3,950,254 and $5,095,819 at March 31, 1999
and 1998, respectively. The Company's trade customers are concentrated in
the retail office products industry and mass market retail stores.
Amounts due from three customers approximated 63% and 74% of the total
accounts receivable at March 31, 1999 and 1998, respectively.
Historically, a substantial portion of the Company's sales has been to a
limited number of customers. Concentration of sales to the Company's five
largest customers were 60% in 1999, 66% in 1998 and 67% in 1997. 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 these few customers. 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 customers, including reductions due to market, economic
or competitive conditions in the designer stationary or specialty papers
industry, may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company purchases goods from approximately 700 vendors. One vendor
accounted for a significant portion of the Company's total merchandise
purchases during the years ended March 31, 1999, 1998 and 1997. The
Company purchases commodity paper and other related products from this
broker/vendor that could be supplied by other sources. There can be no
assurances that the relationship between the Company and this vendor will
continue and the loss of the purchasing power the Company has established
with this company would likely have a material adverse effect on the
Company. The Company does not consider itself dependent on any single
source for materials to manufacture its products.
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows. Foreign
sales are attributed to the country where product delivery is specified
by the customer.
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
Net sales to domestic and foreign customers 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
United States $ 12,384,952 $ 14,152,403 $ 9,065,101
Canada 3,285,559 3,630,446 3,422,621
United Kingdom 1,021,474 613,192 351,327
Other European Countries 1,054,000 584,000 364,000
Australia 1,491,077 996,249 825,697
------------ ------------ ------------
Total $ 19,237,062 $ 19,976,290 $ 14,028,746
============ ============ ============
Operating profit or (loss)
United States $ (3,121,684) $ (7,261,961) $ (6,587,756)
Canada 610,277 (301,179) (473,296)
United Kingdom (550,609) (489,263) (727,467)
Australia (34,090) 40,684 189,715
------------ ------------ ------------
Total $ (3,096,106) $ (8,011,719) $ (7,598,804)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Long-lived assets
United States $ 9,778,864 $ 12,646,787 $ 10,559,587
Canada -- 36,510 71,886
United Kingdom 108,793 148,200 164,399
Australia 57,977 49,621 36,359
------------ ------------ ------------
Total $ 9,945,634 $ 12,881,118 $ 10,832,231
============ ============ ============
</TABLE>
F-17
<PAGE> 63
NOTE 14 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
International sales accounted for approximately 36%, 29% and 35% of the
Company's total net sales in fiscal years 1999, 1998, and 1997,
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.
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 1,044,421 $ 1,659,150 $ 995,691
============ ============ ============
Net cash paid (refund) during the year for
income taxes $ -- $ (371,528) $ 304,303
============ ============ ============
</TABLE>
Interest expense of approximately $27,800, $250,000 and $258,000 was
included in income from discontinued operations during 1999, 1998 and
1997, respectively.
NOTE 16 - LIQUIDITY AND OPERATIONS
As shown in the accompanying financial statements, the Company incurred
a net loss from continuing operations of $3,096,106 and $9,622,709 for
the years ended March 31, 1999 and 1998, respectively. As a result of
these losses, the Company's failure to comply with certain covenants
under its line of credit and other factors, the report of the Company's
auditors 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 does not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty.
As described in Note 17, in April 1999 the Company appointed a new
President and CEO who is planning to take steps necessary to enable the
Company to continue as a going-concern. This includes the development of
a detailed business plan that will enable the Company to identify and
focus on profitable products and the profitability of its current market
share positions, thereby reducing the demand for Company resources on
unprofitable business. In addition, the Company will take steps to
identify and reduce unnecessary selling, general and administrative
expenses, continue to improve the operating efficiency of its
manufacturing processes and reduce its raw material costs, in order to
return the Company to profitability. Management anticipates that these
steps will enable the Company to better estimate the correct levels of
working capital required and supporting debt and equity financing
necessary to stabilize the Company and position it for profitable and
controlled growth. The Company then plans to cost effectively refinance
its equity and debt funding in amounts necessary to meet its objectives.
The successful development and execution of this plan is dependent upon
the Company's ability to achieve adequate gross margins on sales,
maintain its liquidity through its current borrowing arrangements,
maintain adequate working relationships with its vendors, customers and
employees, and the successful management of contingencies and
uncertainties affecting the viability of the Company. The outcome of
these matters is uncertain.
F-18
<PAGE> 64
NOTE 17 - SUBSEQUENT EVENTS
On April 16, 1999, the Company's Shareholders elected a new Board of
Directors. Subsequently, the new Board of Directors appointed a new
President and CEO.
Subsequent to year end, the Company and the Company's former president
and CEO agreed to modify a stock option award previously authorized by
the Board of Directors during fiscal year 1999, by reducing the total
shares under option to 100,000 and increasing the option price to $.47
per share. The options are fully vested and may be exercised during the
period from January 1, 2000 to June 30, 2000.
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes. One director and the Company's Chief
Executive Officer, who is also a director, were issued $50,000 notes
each, with the proceeds used to fund the Company's operations. The notes
bear interest at 2.0% above the US Bank's prime lending rate, and the
notes are subordinated to the Company's senior indebtedness to US Bank.
The notes are also convertible into shares of the Company's common stock
at $0.3927 per share.
Effective April 16, 1999, the Company entered into an employment
agreement with its new Chief Executive Officer. Pursuant to the
agreement, the CEO is entitled to receive a base salary of $75,000 per
year and two separate tranches of stock options to purchase 800,000
shares of the Company's common stock. The first tranche of 300,000
options vest immediately and have a price of $.30 per share. The second
tranche of 500,000 options vest evenly over eighteen months and have a
price of $.50 per share. The CEO's employment is at will and may be
terminated at any time by either party. However, if the CEO is
terminated by the Company other than for cause, all options granted
shall automatically vest.
NOTE 18 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
As a result of management's year end closing procedures, and review of
accounting practices and estimates, significant year end adjustments
were recorded. These adjustments included an increase in the reserve for
inventory reserves and costing corrections of approximately $700,000 and
a change in accounting principle for the write-off of store racks of
approximately $1.1 million. Note 2 contains additional information
concerning the change in accounting principle. Adjustments reducing net
income were also made to allow for certain bad debts and to increase the
allowance for sales returns and allowances by approximately $500,000, as
well as an adjustment to reduce certain computer consulting expenditures
previously capitalized of approximately $125,000.
NOTE 19 - STOCK EXCHANGE LISTING REQUIREMENTS
The Company's securities were delisted from the Nasdaq National Market
and subsequently the Nasdaq SmallCap Market during fiscal 1998. Trading
of the Company's securities has continued on the Nasdaq's OTC Electronic
Bulletin Board. However, the delistings may restrict marketability of
the Company's common stock. In addition, the common shares of the
Company were suspended from trading on the Toronto Stock Exchange on
June 11, 1998 due to the failure of the Company to provide the required
financial information and filings. Securities suspended from trading on
the Toronto Exchange which have not been approved for reinstatement will
be automatically delisted after a period of one year. The Company is
taking steps to gain the necessary approvals for reinstatement of the
Company's securities in order to avoid being delisted from the Toronto
Exchange.
F-19
<PAGE> 65
SCHEDULE II
GEOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED MARCH 31 APRIL 1 ADDITIONS DEDUCTIONS MARCH 31
------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts,
Sales Returns and Cash Discounts
1997 146,926 772,221 104,306 814,841
1998 814,841 1,395,706 1,279,589 930,958
1999 930,958 1,372,748 1,545,815 757,891
Allowance for Obsolete Inventory
1997 100,000 1,190,000 - 1,290,000
1998 1,290,000 963,309 1,666,811 586,498
1999 586,498 753,639 478,266 861,871
</TABLE>
S-1
<PAGE> 66
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the consolidated financial statements of Geographics, Inc. as of
March 31, 1999 and 1998 and for each of the three years in the period ended
March 31, 1999, and have issued our report thereon dated May 7, 1999; such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Geographics, listed in
Item 14. These financial statements schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ MOSS ADAMS LLP
Bellingham, Washington
May 7, 1999
S-2
<PAGE> 1
EXHIBIT 10.22
FIFTH FORBEARANCE AGREEMENT
This Fifth Forbearance Agreement ("Agreement") shall be deemed
effective as of March 31, 1999. The parties to this Agreement are U.S. Bank
National Association ("Bank"), Geographics, Inc. ("Borrower"), and Geographics
Marketing Canada ("Guarantor").
THIS AGREEMENT IS MADE WITH RESPECT TO THE FOLLOWING RECITALS. THE
TRUTH, ACCURACY AND COMPLETENESS OF EACH OF THE RECITED FACTS IS
EXPRESSLY ACKNOWLEDGED BY THE PARTIES, AND THIS ACKNOWLEDGEMENT IS
INTENDED TO BE CONTRACTUALLY BINDING UPON THE PARTIES.
A. Geographics is currently indebted to Bank under a promissory note dated
August 30, 1996, and a related business loan agreement pursuant to which Bank
provided Geographics a Revolving Line of Credit in the maximum amount of
$12,000,000 (the "Revolving Loan"). In addition to the Revolving Loan,
Geographics is indebted to Bank for various real estate and equipment loans
(the "Term Loans"). The amounts owed on the Revolving Loan and the Term
Loans as of May 18, 1999 (calculated without accounting for the interest rate
adjustment and Banker's Acceptance fees provided below, and not including
attorney's fees and costs) are set forth on attached Exhibit A to this
Agreement. Bank has continued to accept payments on the Term Loans, including
a matured real estate loan (No. 9289934), pending execution of this Fifth
Forbearance Agreement. Further, interest, fees and other charges continue to
accrue on the Revolving Loan and the Term Loans. Geographics' entire
indebtedness to Bank shall be referred to herein as the "Indebtedness."
B. The Indebtedness is secured by security interests in substantially all of
Geographics' assets, including but not limited to accounts, inventory,
equipment, and general intangibles.
C. Guarantor has guaranteed all of Geographics' Indebtedness to Bank, which
guaranty remains outstanding.
D. The Revolving Loan and the Term Loans are in default, and Bank has declared
all of the Indebtedness, including principal and accrued but unpaid interest,
to be immediately due and payable. Geographics and Guarantor hereby
acknowledge that the Loans are in default, that the Indebtedness is currently
due and owing, and that there are no defenses or offsets that exist to the
repayment of said Indebtedness.
E. Bank and Geographics entered into prior Forbearance Agreements, under which
Bank agreed to forbear from the exercise of its rights and remedies as a
result of the defaults described above. The most recent such agreement (the
"Fourth Forbearance Agreement") expired on March 31, 1999.
FIFTH FORBEARANCE AGREEMENT - PAGE 1
<PAGE> 2
F. Borrower and Guarantor have requested that Bank further forbear for a
period of time from the exercise of its rights and remedies as a result of
the events of default described above. Bank is willing to forbear for a
limited time only, as set forth in greater detail hereinbelow.
G. Geographics currently operates a "Specialty Paper Business," which is
engaged in the development, manufacture, marketing and distribution of
designer stationery, business cards, brochures, letterhead, memo pads and
paper cubes. Prior to May 1998, Geographics was also engaged in the
business of developing, manufacturing, marketing, supporting and
distributing various rub-on and stick-on lettering, stencils, graphic arts
products, non-electric and electric signs and other signage products (the
"Core Business"). For over a year, Geographics had been attempting to sell
the Core Business. After considering all offers, Geographics agreed in
December 1997 to sell the assets associated with the Core Business to
Identity Group, Inc. ("Identity"). The parties reached agreement on price
and terms. However, Geographics determined it would be unable to satisfy
all of the conditions in the offer by the closing deadline.
H. At the time the parties entered into the Second Forbearance Agreement, it
was expected that Geographics would close the sale to Identity prior to
expiration of the second forbearance period on April 15, 1998. At that
time Geographics had been in default for almost a year. To avoid losing
the sale to Identity, Bank had demanded, and obtained Geographics'
cooperation in allowing Bank to foreclose on the Core Business assets
through private sale to Identity pursuant to RCW 62A.9-504. That sale
consummated by the parties on or around May 4, 1998. At that time Identity
paid to Bank the sum of $6,620,000, which amount was used, after payment
of certain costs incurred in connection with the sale of the Core Business
assets, to pay down the Indebtedness and to reduce permanently the maximum
amount of the Revolving Loan to $6,000,000. In addition, on or around
October 23, 1998, Bank received $449,187.47 from an escrow established in
connection with the sale of the Core Business to Identity.
I. Geographics desires to continue, and is continuing, the Specialty Paper
Business. At a special meeting of Geographics' shareholders on April 16,
1999, William T. Graham, James L. Dorman and C. Joseph Barnette were
elected as Geographics' sole directors. The directors appointed James L.
Dorman as Chairman of the Board and Chief Executive Officer. The Board has
carefully studied Geographics' financial condition and has determined
Geographics' short-term borrowing needs. As a result, Geographics has
requested a further forbearance by Bank of its rights with respect to the
Indebtedness, along with a change in the maturity date for, and a
modification of the borrowing base calculation relating to, the
Indebtedness, all as further set forth below. Geographics believes this
will give it a chance to refinance its obligations to Bank, to convince
Bank to extend further financing accommodations, or to otherwise satisfy
its obligations to Bank.
NOW THEREFORE IT IS HEREBY AGREED:
1. Acknowledgment of Default. On and as of the date hereof:
(i) material events of default existed and continue to exist under the Revolving
Loan and the Term Loans, including, without limitation, those events of default
identified in the Recitals to this Forbearance Agreement; (ii) timely, adequate
and proper notice of the occurrence of such Existing Defaults
FIFTH FORBEARANCE AGREEMENT - Page 2
<PAGE> 3
(collectively, "the Existing Defaults") has been received by the Borrower and
Guarantor from Bank (and Borrower and Guarantor waive any requirement that any
such notice be in writing); (iii) all grace periods, if any, applicable to the
cure of defaults after receipt of such notices have expired; (iv) each of the
Existing Defaults was and is continuing without timely cure by Borrower; and (v)
Bank had not and has not waived, in any respect, any or all the Existing
Defaults or its respective rights and remedies with respect thereto.
2. Acknowledgment of Bank's Right to Accelerate. On and as of the date
hereof, Bank has accelerated and declared the Indebtedness evidenced by the
Revolving Loan and Term Loans to be immediately due and payable and has made
demand upon Borrower and Guarantor for the full payment of all such
Indebtedness. Such acceleration and demand for payment is in all respects
adequate and proper. Borrower and Guarantor waive any and all further notice,
presentment, and notice of dishonor or demand with respect to such Indebtedness.
3. Acknowledgment of Indebtedness. On and as of the date hereof,
Borrower is indebted to Bank in the amounts set forth in the Recitals to this
Forbearance Agreement. All such amounts remain outstanding and unpaid. All such
amounts are due and payable in full, without offset, deduction or counterclaim
of any kind or character whatsoever, but are subject to increase or other
adjustment as a result of any and all interest, fees, and other charges,
including without limitation, attorneys fees and costs of collection, which are
payable to Bank under the Revolving Loan and Term Loan documents.
4. Forbearance. On the terms and conditions as set forth in this
Forbearance Agreement, Bank shall forbear from taking any action to enforce its
rights under the Revolving Loan and Term Loans, arising from the Existing
Defaults, through June 30, 1999 ("Forbearance Period").
5. Conditions of Forbearance. The Forbearance Period shall terminate
upon the earliest occurring of any of the following:
(a) The end of the Forbearance Period;
(b) Any default by the Borrower or the Guarantor under this
Forbearance Agreement; or
(c) Any default by the Borrower or the Guarantor under the Term Loans
or the Revolving Loan (as modified hereby) after the date of this
Agreement.
6. Forbearance on Default Interest. Bank further will waive collection
and forgive payment of any default interest now accrued and/or owing under the
Revolving Loan if there is no default under this Agreement.
7. Extension of Revolving Loan. During the Forbearance Period, the
Revolving Loan shall continue under its current terms and conditions with the
following modifications:
(a) All Indebtedness thereunder shall be due and payable without
demand on the earlier of the end of the Forbearance Period or June 30,
1999.
FIFTH FORBEARANCE AGREEMENT - Page 3
<PAGE> 4
(b) Bank will issue Bankers Acceptances in accordance with Bank's
standard procedures and policies, and provided that Borrower is in
compliance with the terms and conditions of this Agreement (including,
without limitation, the aggregate borrowing limitations set forth in this
Paragraph 7). Borrower shall pay to Bank a monthly fee, equal to three
percent (3%) per annum of the amounts of all Bankers Acceptances that are
outstanding during the prior month.
(c) The maximum amount of the Revolving Loan, including any and all
outstanding Bankers Acceptances, shall not exceed $5,500,000. At all times
during the Forbearance Period, the maximum outstanding amount of the
Revolving Loan, including any and all outstanding Bankers Acceptances, (i)
shall not exceed the maximum amount allowable pursuant to applicable
borrowing formulae set forth in the business loan agreement and the
"Operating Provisions Accounts Receivable and Inventory Secured Lines"
attached hereto as Exhibit B (the "Operating Provisions"), plus $750,000,
and (ii) as advanced against eligible inventory, shall not in any event
exceed the amount of $3,500,000.
(d) The interest rate to be applied to the unpaid principal balance
under the Revolving Loan shall be 1.500 percentage points over the rate of
interest which Bank from time to time establishes as its prime rate.
(c) The following person(s) are authorized to request advances under
the Revolving Loan until Bank receives from Geographics written notice of
revocation of his authority: James L. Dorman, Chairman of the Board and
C.E.O., only.
(f) The parties acknowledge that the following fees to Bank are
unpaid and outstanding as of the date of this Agreement and shall be paid
by Geographics promptly on execution of this Agreement:
(i) Loan fee: $13,750.00;
(ii) Attorneys' fees: $54,036.09; and
(iii) Collateral examination fees: $4,255.50.
In addition to the above, Geographics agrees to pay all legal fees and
expenses of Bank in connection with the preparation and negotiation of this
Agreement.
(g) All other provisions and limitations in the Operating Provisions
shall apply.
(h) Notwithstanding any prior course of dealing between the parties,
Bank shall not make or permit any overadvances under the Revolving Loan
beyond the maximum amounts available under the terms of this Fifth
Forbearance Agreement.
8. It is expressly understood and agreed that upon the maturity of the
Indebtedness on June 30, 1999, or earlier acceleration of the Indebtedness as
provided for herein, all such Indebtedness shall be immediately payable in
full, AND BANK SHALL HAVE NO
FIFTH FORBEARANCE AGREEMENT -- Page 4
<PAGE> 5
FURTHER OBLIGATIONS OR COMMITMENTS TO BORROWER TO EXTEND, RENEW OR REFINANCE ANY
OF SUCH INDEBTEDNESS, REGARDLESS OF ANY RENEWALS, EXTENSIONS OR FLEXIBILITY
WHICH BANK MAY IN GOOD FAITH AND FAIR DEALING HAVE PREVIOUSLY ALLOWED IN
CONNECTION WITH SUCH INDEBTEDNESS.
9. Acknowledgment that Agreements Continue in Full Force and Effect. The
Revolving Loan and Term Loans, and all notes, security agreements, trust deeds
and other agreements related thereto, shall, except as expressly modified herein
during the forbearance period, remain in full force and effect, and shall not be
released, impaired, diminished, or in any other way modified or amended as a
result of the execution and delivery of this forbearance agreement.
10. Grant of Cross Security. All of the security agreements, deeds of
trust, and other security instruments and collateral which secure the Revolving
Loan, Term Loans and guarantees shall continue to remain in full force and
effect and each shall secure repayment of all Indebtedness and obligations owed
by Borrower and Guarantor, respectively to Bank, including those obligations
arising under this Forbearance Agreement.
11. Further Cooperation. Borrower and Guarantor agree to cooperate fully
and to take all further actions and to execute all further instruments that Bank
deems necessary or appropriate to carry out the purposes of this Agreement,
including, without limitation, corporate resolutions of Borrower authorizing the
transactions contemplated by this Agreement, similar in substance to those
resolutions attached hereto as Exhibit C.
12. Cross Default. Any failure by Borrower to observe and perform any of
the covenants or agreements contained herein or in any other agreement between
the Borrower and Bank will constitute an event of default under this Agreement
and each other agreement between Borrower and Bank. Upon the happening of any
event of default, Bank shall have the right to demand immediate payment of any
and all Indebtedness owing to it by the Borrower and the Guarantor and to
exercise any or all of its rights under the law and pursuant to the terms of
this Agreement and all of the other agreements in effect between the parties.
13. No Waiver. Any waiver by Bank of a default in any of the terms and
conditions of this Agreement or in any other agreement referred to herein shall
not be deemed a waiver of any subsequent or other default or of any of Bank's
rights as a result of breaches or defaults by the Borrower.
14. Status of Prior Agreements. Except as modified or supplemented hereby
and except as inconsistent herewith, all unexpired prior agreements entered into
between the parties hereto remain in full force and effect pursuant to their
original terms and said agreements are hereby ratified and confirmed.
15. Amendments in Writing. Each and every word and portion of this
Agreement is contractual and not merely a recital. This Agreement may not be
amended or supplemented, canceled or discharged and no provision hereof may be
waived, except by subsequent written agreement between the parties.
FIFTH FORBEARANCE AGREEMENT -- Page 5
<PAGE> 6
16. No Oral Waivers or Modifications. Borrower acknowledges that, in
general, borrowers who experience difficulties honoring loan obligations, in an
effort to inhibit or impede lenders from exercising the rights and remedies
available pursuant to mortgages, notes, loan agreements or other instruments
evidencing or affecting loan transactions, frequently allege or argue that some
loan officer or administrator of a lender made an oral modification or made
some statement which could be interpreted as a consent, waiver, extension,
modification or amendment of one or more debt instruments or could be
interpreted as an agreement to take or forbear from taking some action and that
the borrower relied to its detriment upon such consent, waiver, oral
modification or statement. For that reason, and in order to protect Bank from
such allegations and arguments in connection with the transactions contemplated
by this Agreement, it is agreed and acknowledged that all instruments referred
to herein or executed or delivered in connection herewith can be extended,
modified or amended, and a consent or waiver can be given and an agreement can
be altered or entered into, only in writing. None of the rights, powers,
remedies or benefits of Bank can be released, waived, extended, modified or
amended and no consent can be given or any agreement altered or entered into
except in writing signed by an agent of Bank. Borrower further acknowledges its
understanding that no officer or employee of Bank has the power or authority to
make an oral consent or an oral release, extension, modification or amendment
in respect to this Agreement or of any of the documents referred to herein or
executed or delivered in connection herewith or to make any oral waiver or to
alter or enter into any oral agreement on behalf of Bank.
17. Complete Agreement. This writing is intended by the parties as a
final and complete expression of the parties' agreement and of all matters
relating to this Agreement. No prior course of dealing or negotiations between
the parties, and no oral or extrinsic evidence of any nature shall be used to
supplement or modify any term of this Agreement.
18. Attorney Fees. In the event any suit or action is instituted to
enforce or interpret any of the terms of this Agreement, including any action
or participation in or in connection with a case or proceeding under any
Chapter of Bankruptcy Code or any successor statute, the prevailing party shall
be entitled to such sum as the court may adjudge reasonable as attorney fees
and costs in such suit, action or proceeding, or upon any appeal from any
judgment, order or decree entered therein, and whether or not such fees and
costs are prescribed by statute. Whether or not any court action is involved,
Borrower agrees to pay all reasonable attorney fees and costs incurred by Bank
that are necessary at any time in Bank's opinion for the protection of its
interests or enforcement of its rights hereunder.
19. Remedies cumulative. Each and every right, remedy and power hereby
granted to Bank or allowed it by law or other agreement, shall be cumulative
and shall not be exclusive of any other rights, remedy and power and may be
exercised concurrently, consecutively or separately by Bank. No failure nor
neglect on the part of Bank to exercise and no delay in exercising any right,
remedy or power hereunder, under any other agreement, any other document, or by
law, shall in any way release or reduce Borrower's liability to Bank hereunder,
or in any way reduce, condition or limit Borrowers obligations hereunder.
20. No Partnership. The Bank and Borrower intend that their relationship
shall be solely that of creditor and debtor. Nothing contained herein or in any
document referred to herein or executed or delivered in connection herewith
shall be deemed or construed to create a
FIFTH FORBEARANCE AGREEMENT--Page 6
<PAGE> 7
partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by
or between Bank and Borrower. The Bank shall not be in any way responsible or
liable for the debts, losses, obligations or duties of Borrower with respect to
its business or otherwise. All obligations to pay real property or other taxes,
assessments, insurance premiums, and all other fees and charges arising from
the ownership, operation, or occupancy of the business and property of
Borrower, and to perform all other agreements and contracts relating thereto,
shall be the sole responsibility of Borrower consistent with the terms and
provisions of this Agreement and the documents referred to above, Borrower
shall be free to determine and follow its own policies and practices in the
conduct of its respective business.
21. Discussions with Others. Borrowers, Guarantor and Bank acknowledge
and agree that the parties may, in the sole discretion of Bank, discuss various
means for repayment of the Indebtedness owing to Bank, and that Borrower may
enter into discussions and negotiations with prospective fourth-party lenders to
Borrower, fourth-party creditors of Borrower, or potential investors in Borrower
or other fourth persons. If Borrower asks Bank to enter into or participate in
any such discussions or negotiations, Borrower agrees that Bank may, in the
course of such discussions, reveal information about the Borrower that would
normally be considered confidential between Bank and the Borrower. Borrower
agrees that, if such discussions do take place, they shall in no way obligate or
commit Bank to agree to any secured or unsecured financing, to subordinate any
lien or to release any collateral, to lend any additional funds to Borrower, to
extend any other form of credit to Borrower, to forbear from exercising any
rights, powers and remedies of Bank, or to provide any letters of credit or
other credit support on behalf of Borrower. Borrower waives, releases and
discharges any right it may have to assert any claim or contention that Bank has
made any oral or written offer, promise, or commitment to cooperate with any
fourth-party lender to Borrower or fourth-party creditor of Borrower, or any
other fourth person, to agree to any secured or unsecured financing or to
otherwise subordinate any lien or to release any collateral, to lend any
additional funds to Borrower or provide any other form of credit to Borrower, to
forbear from exercising any rights, powers and remedies of Bank, to provide any
letters of credit or other credit support on behalf of Borrower, or to take (or
refrain from taking) any other action whatsoever with respect to Borrower,
except as provided in this Agreement.
22. Advice of Counsel, etc. The parties declare that they have been
advised by counsel in connection with the execution of this Agreement and
acknowledge that they are not relying on any representations or advice of Bank
or its lawyers, that they are not acting under any misrepresentation or
misapprehension as to this Agreement's legal effect, and that this Agreement has
not been executed under duress.
23. Construction. It is understood that the rule of construction that a
written agreement is construed against the party preparing or drafting such
agreement shall specifically not be applicable to the interpretation of this
Agreement.
24. Successors. All the covenants, agreements, conditions and terms
contained in this Agreement shall be binding upon, apply, and inure to the
benefit of the successors and assigns of the respective parties hereto.
FIFTH FORBEARANCE AGREEMENT - Page 7
<PAGE> 8
25. GOVERNING LAW; JURISDICTION. The laws of the State of Washington
shall govern the rights, liabilities, duties and responsibilities of the
parties. At Bank's request, and subject to the provisions on Mandatory
Arbitration below, if there is a lawsuit, Borrower under/or Guarantor shall
submit themselves to the exclusive jurisdiction of the courts of King County,
State of Washington.
26. MANDATORY ARBITRATION. Lender and Borrower agree that all disputes,
claims and controversies between them, whether individual, joint, or class in
nature, arising from this Agreement or otherwise, including without limitation
contract and ?? disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association, upon request of either party. No act to take
or dispose of any Collateral shall constitute a waiver of this arbitration
agreement or be prohibited by this arbitration agreement. This includes,
without limitation, obtaining injunctive relief or a temporary restraining
order, invoking a power of sale under any deed of trust or mortgage; obtaining
a writ of attachment or imposition of a receiver; or exercising any rights
relating to personal property, including taking or disposing of such property
with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any exercise of any right, concerning any Collateral,
including any claim to rescind, reform, or otherwise modify any agreement
relating to the Collateral, shall also be arbitrated, provided however that no
arbitrator shall have the right or the power to enjoin or restrain any act of
any party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for these
purposes. The Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision.
27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument.
Any counterpart that may be delivered by facsimile transmission shall be deemed
the equivalent of an originally signed counterpart and shall be fully
admissible in any enforcement proceeding regarding this Agreement.
28. RELEASE. As additional consideration to Bank for entering into this
Agreement, Borrower and Guarantor hereby release and forever discharge Bank,
its officers, directors, employees, agents, successors and assigns, from any
and all liability, or claims of liability, whether known or unknown, of
whatsoever nature arising out of or based in whole or in part upon any
agreement, act, or omission of Bank, or of any person or entity acting, or
purporting to act on behalf of Bank, occurring prior to the effective date of
this Agreement.
29. TIME. Time is of the essence under this Forbearance Agreement.
30. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Bank as of the date of this Agreement.
FIFTH FORBEARANCE AGREEMENT - Page 8
<PAGE> 9
(a) Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Washington. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
(b) Authorization. The execution, and performance of this Agreement
and all related documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument biding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
(c) Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
(d) Survival of Representations, Releases and Warranties. Borrower
understands and agrees that Bank is relying upon the above
representations, releases and warranties in entering into this Forbearance
Agreement. Borrower further agrees that the foregoing representations,
releases and warranties shall be continuing in nature and shall remain in
full force and effect until such time as Borrower's obligations to Bank
shall be paid in full.
31. No Representations or Warranties by Lender. Except as expressly set
forth herein, Bank makes no representations, warranties, promises, or
communications to loan money, extend credit, or forbear from enforcing
repayment in connection with any of the documents or transactions contemplated
hereunder. Borrower and the Guarantor acknowledge that they have received the
following notice.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
BORROWER AND GUARANTOR ACKNOWLEDGE RECEIPT OF A COPY OF THIS AGREEMENT.
FIFTH FORBEARANCE AGREEMENT -- Page 9
<PAGE> 10
IN WITNESS WHEREOF, the parties executed this FIFTH FORBEARANCE AGREEMENT
as of the date first written above.
GEOGRAPHICS, INC. GEOGRAPHICS MARKETING CANADA
By: /s/ JAMES L. DORMAN By: /s/ JAMES L. DORMAN
---------------------------------- ----------------------------------
James L. Dorman
Chairman of the Board/CEO Its: President
---------------------------------
U.S. NATIONAL BANK,
NATIONAL ASSOCIATION
By: /s/ ROGER LUNDEEN
---------------------------------
Roger Lundeen
Vice President
FIFTH FORBEARANCE AGREEMENT -- Page 10
<PAGE> 1
EXHIBIT 10.25
EXECUTIVE
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of
April 16, 1999 by and between James L. Dorman ("Executive") and Geographics,
Inc., a Wyoming corporation (the "Company"). Capitalized terms not otherwise
defined in the text of this Agreement have the meanings set forth in Appendix A,
which is incorporated into this Agreement by reference.
WITNESSETH:
WHEREAS, in view of Executive's experience and demonstrated skills and
abilities and his unique qualifications that are needed by the Company, the
Company has determined that it is in the best interests of the Company and its
stockholders to engage Executive as the Company's Chairman of the Board of
Directors (the "Board") and Chief Executive Officer; and
WHEREAS, the Company recognizes the need to provide a level of
compensation and relative security that is competitive with that of other
publicly held companies and that provides the necessary economic and performance
incentives that will be of benefit to the Company stockholders in the long term.
In consideration of each of the specific premises set forth above and
in further consideration of the mutual agreements set forth herein, the parties
agree as follows:
ARTICLE I
EMPLOYMENT
1.1 Employment by the Company of Executive and Acceptance by Executive.
The Company hereby employs Executive during the term of this Agreement in such
capacities and upon such conditions concerning rates of compensation, benefits
and other matters as are hereinafter stated. Executive hereby accepts such
employment and agrees faithfully, diligently and to the best of his ability to
discharge the responsibilities of the offices that he shall, as provided herein,
occupy.
1.2 Capacity. Executive shall be employed during the term of this
Agreement as Chairman of the Board and Chief Executive Officer of the Company
with such duties, functions, responsibilities and authority that are
commensurate with and appropriate for such position and as are from time-to-time
set forth in the Bylaws of the Company and otherwise delegated to Executive by
the Board. Notwithstanding the foregoing, while performing services under this
Agreement, Executive does not have to reside in the State of Washington.
1.3 Term. Subject to the other provisions of this Agreement, the term
of this Agreement and Executive's employment hereunder shall be deemed to have
commenced on the date of this Agreement and shall continue until the occurrence
of an Event of Termination (as defined in Section 3.1).
<PAGE> 2
ARTICLE II
COMPENSATION, BENEFITS AND EXPENSE REIMBURSEMENT
2.1 Compensation and Benefits. For services rendered pursuant to this
Agreement, Executive's compensation and benefits will consist of the following:
(a) Base Salary. As salary compensation to Executive for his
performance of the services to be rendered hereunder and for his
acceptance of the responsibilities described herein and for his
performance of all the usual obligations of employment, the Company
agrees to pay to Executive, and Executive agrees to accept, during the
term of this Agreement an annual base salary of not less than Seventy
Five Thousand Dollars ($75,000) per year or such greater amount as the
Board or the appropriate committee thereof may from time-to-time
determine (the "Base Salary"). At least annually the Board or the
appropriate committee thereof shall review the Base Salary to determine
whether it should be increased based on Executive's performance, the
performance of the Company, or other circumstances then prevailing. The
results of each review shall be communicated to and discussed with
Executive by the Board or the appropriate committee thereof.
(b) Benefits. Executive shall, during the term of this
Agreement (and thereafter to the extent provided herein or in such
plans), be eligible to participate in the Company's pension and
retirement plans, insurance and death benefits in effect for all
salaried employees, together with any future improvements in such plans
and benefits. In addition, Executive shall be entitled during the term
of this Agreement (and thereafter to the extent provided for herein or
in any such plan) to receive such other and further benefits,
including, without limitation, benefits under stock option plans,
supplemental retirement plans, performance unit plans, deferred
compensation and salary continuation plans, medical, health, life,
accident and disability insurance programs, pension benefits,
vacations, and any and all other benefits as are generally made
applicable to key executive employees of the Company, and such
additional benefits, as may be granted to him from time-to-time by the
Board or the appropriate committee thereof.
(c) Stock Options. The Company shall grant options to purchase
three hundred thousand (300,000) shares of the Company's common stock
(the "Salary Options") to Executive at an exercise price of $0.30 per
share, with such Salary Options being immediately vested and
exercisable. The Company shall also grant Executive options to purchase
Five Hundred Thousand (500,000) shares of the Company's common stock
(the "Bonus Options") to Executive at an exercise price of $0.50 with
one-eighteenth (1/18th) such Bonus Options vesting and becoming
exercisable on May 1, 1999 and each monthly anniversary thereafter.
2.2 Expenses. The Company shall reimburse Executive for all reasonable
expenses incurred in the course of the performance of Executive's duties and
responsibilities pursuant to this Agreement and consistent with the Company's
policies with respect to travel, entertainment and miscellaneous expenses, and
the requirements with respect to the reporting of such
-2-
<PAGE> 3
expenses. In addition, the Company shall reimburse Executive for housing or
hotel accommodations in the Blaine, Washington area during the term of this
Agreement.
2.3 Withholding. The Company shall be entitled to withhold from amounts
to be paid to Executive hereunder any federal, state or local withholding or
other taxes or charges that it is from time-to-time required to withhold. The
Company shall be entitled to rely on an opinion of counsel if any questions as
to the amount or requirement of any such withholding shall arise.
ARTICLE III
TERMINATION
3.1 Right to Terminate; Automatic Termination. Each of the following
events shall be considered an "Event of Termination":
(a) Termination By the Company. Subject to Section 3.2, the
Company may terminate Executive's employment and all of the Company's
obligations under this Agreement at any time and for any reason. The
termination will be in effect at such time as designated by the Company
but not less than two weeks after notice is given.
(b) Termination by Death or Disability. Subject to Section
3.2, Executive's employment and the Company's obligations under this
Agreement shall terminate as follows: (i) automatically, effective
immediately and without any notice being necessary, upon Executive's
death; and (ii) in the event that Executive becomes Disabled, by the
Company giving notice of termination to Executive.
(c) Executive Resigns or Voluntarily Terminates Employment.
Subject to Section 3.2, Executive may terminate his employment under
this Agreement if Executive provides the Company at least two weeks
advance written notice.
(d) Executive Terminates Employment for Good Reason or due to
a Change in Control. Subject to Section 3.2, Executive may terminate
his employment immediately for Good Reason or upon a Change in Control.
3.2 Rights Upon Termination.
(a) Section 3.1(a), Section 3.1(b) or Section 3.1(d)
Terminations. If Executive's employment is terminated pursuant to
Section 3.1 (a) Section 3.1(b) or Section 3.1(d), notwithstanding the
other terms of this Agreement, Executive shall have no further rights
against the Company hereunder, except for the right to receive (i) any
unpaid Base Salary with respect to the period prior to the effective
date of termination (ii) reimbursement of expenses to which Executive
is entitled under Section 2.2 hereof, and (iii) any unvested Salary
Options or Bonus Options owned by Executive will become fully vested.
(b) Section 3.1(c) Termination. If Executive's employment is
terminated pursuant to Section 3.1(c), notwithstanding the other terms
of this Agreement, Executive shall have no further rights against the
Company hereunder, except for the right to
-3-
<PAGE> 4
receive (i) any unpaid Base Salary with respect to the period prior to
the effective date of termination and (ii) reimbursement of expenses to
which Executive is entitled under Section 2.2 hereof.
(c) Exclusive Remedy. To the extent permitted by applicable
law, the payments contemplated by this Section 3.2 shall constitute the
exclusive and sole remedy for any termination of Executive's employment
with the Company (whether pursuant to, or in violation of, the terms of
this Agreement), and Executive covenants not to assert or pursue any
remedies, other than an action to enforce the payments due to Executive
under this Agreement, at law or in equity, with respect to any
termination of employment.
ARTICLE IV
CONFIDENTIALITY; NONCOMPETITION
4.1 Covenant Against Competition.
(a) Noncompetition. Without the prior written consent of the
Company, Executive, for a two-year period following his resignation,
shall not become involved directly or indirectly, as an employee,
officer, director, partner, consultant, owner (other than a minority
shareholder interest of not more than 5% of a company whose equity
interests are publicly traded on a nationally recognized stock exchange
or over-the-counter) or in any other capacity, in any activity on
behalf of a Competitor of the Company.
(b) Non-Solicitation. For a period of two years after the
termination of Executive's employment, Executive will not solicit, or
assist another person to solicit, any employee, supplier or other
person having business relations with the Company to terminate such
employee's employment or terminate or curtail such supplier's or other
person's business relationship with the Company.
4.2 Confidentiality Information. Executive acknowledges that
he has been required to use his personal intellectual skills on behalf of the
Company, its subsidiaries and affiliates (the term "Company" as used in this
Section 4.2 shall include such subsidiaries and affiliates) and that it is
reasonable and fair that the fruits of such skills should inure to the sole
benefit of the Company. Executive further acknowledges that he has acquired
information of a confidential nature relating to the operation, finances,
business relationships and trade secrets of the Company. Therefore, for a period
of two years following termination of employment, Executive will not use (except
in response to a request by an officer of the Company), publish, disclose or
authorize anyone else to use, publish or disclose, without the prior written
consent of the Company, within the geographical area in which such use,
publication or disclosure could harm the Company's existing or potential
business interests, any Confidential Information or trade secrets; provided,
however, that following termination of Executive's employment, Executive shall
be prohibited from ever using, publishing, disclosing or authorizing anyone else
to use, publish or disclose, any information that constitutes a trade secret
under applicable law. Executive shall not remove or retain any figures,
calculations, formulae, letters, papers, software, abstracts, summaries,
drawings, blueprints, diskettes or any other material, or copies thereof,
-4-
<PAGE> 5
which contain or embody any Confidential Information or trade secrets of the
Company, except for use in the course of Executive's regular authorized duties
on behalf of the Company. The foregoing notwithstanding, Executive has no
obligation to refrain from using, publishing or disclosing any such Confidential
Information that is or hereafter shall become available to the public, other
than by use, publication or disclosure by Executive. This prohibition also does
not prohibit Executive's use of general skills and know-how acquired during and
prior to employment with the Company, as long as such use does not involve the
use, publication or disclosure of the Company's Confidential Information or
trade secrets.
ARTICLE V
GENERAL PROVISIONS
5.1 Notices. Any and all notices provided for in this
Agreement shall be given in writing and shall be deemed given to a party at the
earlier of (i) when actually delivered to such party, or (ii) when mailed to
such party by registered or certified mail (return receipt requested) or sent to
such party by courier, confirmed by receipt, and addressed to such party at the
address designated below for such party as follows (or to such other address for
such party as such party may have substituted by notice pursuant to this Section
5.1):
(a) If to the Company:
Geographics, Inc.
1555 Odell Road
P.O. Box 1750
Blaine, WA 98231
Attn: Board of Directors
with a copy to:
Tod B. Linstroth
Michael Best & Friedrich LLP
P.O. Box 1806
Madison, WI 53701-1806
(b) If to Executive:
James L. Dorman
5260 South Landings Drive
Ariel 1608
Ft. Meyers, FL 33919
-5-
<PAGE> 6
with a copy to:
James R. Lowe
Whyte Hirschboeck Dudek SC
111 East Wisconsin Avenue, #2100
Milwaukee, WI 53202-4861
Any purported notice of Event of Termination pursuant to Section 3.1 shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated. No such
purported termination shall be effective unless the notice meets the
requirements of this Section 5.1.
5.2 Entire Agreement. This Agreement contains the entire understanding
and the full and complete agreement of the parties and supersedes and replaces
any prior understandings and agreements among the parties, with respect to the
subject matter hereof.
5.3 Amendment; Headings. This Agreement may be altered, amended or
modified only in a writing, signed by both of the parties hereto. Headings
included in this Agreement are for convenience only and are not intended to
limit or expand the rights of the parties hereto. References to Sections herein
shall mean sections of the text of this Agreement, unless otherwise indicated.
5.4 Assignability. This Agreement and the rights and duties set forth
herein may not be assigned by Executive, but may be assigned by the Company, in
whole or in part. This Agreement shall be binding on and inure to the benefit of
each party and such party's respective heirs, legal representatives, successors
and permitted assigns.
5.5 Severability. If any court of competent jurisdiction determines
that any provision of this Agreement is invalid or unenforceable, then such
invalidity or unenforceability shall have no effect on the other provisions
hereof, which shall remain valid, binding and enforceable and in full force and
effect, and such invalid or unenforceable provision shall be rewritten or
construed in a manner so as to give the maximum valid and enforceable effect to
the intent of the parties expressed herein.
5.6 Waiver of Breach. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
5.7 Governing Law; Construction. This Agreement and the obligations
hereunder shall be interpreted, construed and enforced in accordance with the
laws of the State of Washington (without regard to its conflict of laws
principles). Any ambiguities in this Agreement shall not be strictly construed
against the drafter of the language, but rather shall be resolved by applying
the most reasonable interpretation under the circumstances, giving full
consideration to the intentions of the parties.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written above.
/s/ James L. Dorman
-----------------------------
James L. Dorman
GEOGRAPHICS, INC.
By: /s/ William T. Graham
-----------------------------
Title: Executive Vice President
(Signature Page of Executive Employment Agreement)
<PAGE> 8
APPENDIX A
DEFINITIONS
"Change in Control" shall mean the occurrence any of the following:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 50% of more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(a), the following acquisitions shall not constitute a Change in
Control: (i) any acquisition by the Company, (ii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (iii) any
acquisition by any corporation pursuant to a transaction that complies
with clauses (i), (ii) and (iii) of subsection (c);
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least two-thirds (2/3) of the directors then comprising
the Incumbent Board shall be considered as though such individual were
a member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or any other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board;
(c) Consummation of a reorganization, merger or consolidation
or a sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination") in each case, unless,
following such Business Combination, (i) all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
Outstanding Company Common Stock and the combined voting power of the
then Outstanding Company Voting Securities after the Business
Combination, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related
trusts) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 40% or more of
either the Outstanding Company Common Stock or the Outstanding Company
Voting Securities except to the extent that such ownership existed
prior to the Business Combination and (iii) at least two-thirds (2/3)
of the members of the board of directors of the corporation resulting
from such Business Combination were
Appendix-1
<PAGE> 9
members of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
"Competitor" shall mean an organization identified in Appendix B or the
successor to such an organization or an organization not identified but which is
engaged in the development, manufacture, marketing, sale or distribution of
stationary paper products or any other products the Company may undertake to
develop, manufacture, sell or distribute (collectively, "Products") or which is
formed, created, or initiated by Executive, either individually or in concert
with others, with a purpose, plan or activity to develop, manufacture, market,
sell or distribute Products.
"Confidential Information" shall mean information that is possessed by or
developed for the Company and that relates to the Company's existing or
potential business or technology, which information is generally not
known to the public and which information the Company seeks to protect
from disclosure to its existing or potential competitors or others,
including, without limitation, the following: business plans,
strategies, existing or proposed bids, costs, technical developments,
existing or proposed research projects, financial or business
projections, investments, marketing plans, negotiation strategies,
training information and materials, information generated for client
engagements and information stored or developed for use in or with
computers. Confidential Information also includes information received
by the Company from others for which the Company has an obligation to
treat as confidential, including all information obtained in connection
with client engagements.
"Disabled" shall mean that Executive is unable to perform his services under
this Agreement for a continuous period of six months by reason of his
physical or mental illness or incapacity. If there is any dispute as to
whether Executive is or was physically or mentally unable to perform
his duties under this Agreement, such question shall be submitted to a
licensed physician agreed to by Executive (or any legal guardian
lawfully appointed) and the Company, or, if they are unable to so
agree, appointed by the senior judge of the Milwaukee County Circuit
Court at the request of either Executive (or such legal guardian) or
the Company. Executive shall submit to such examinations and provide
such information as such physician may reasonably request and the
determination of such physician as to Executive's physical or mental
condition shall be binding and conclusive upon Executive and the
Company.
"Good Reason" shall mean a basis for termination of this Agreement by
Executive (1) for any reason within three (3) months following a Change
in Control), or (2) any material breach by the Company of the terms of
this Agreement.
Appendix-2
<PAGE> 10
APPENDIX B
LIST OF COMPETITORS
1. Paper Direct, Inc.
2. Taylor, Inc.
3. American Pad & Paper Company
4. Z-International, Inc.
Appendix B - 1
<PAGE> 1
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $7,440,474 $(8,649,618) $(7,950,301)
Weighted average common shares outstanding $9,857,252 $ 9,620,335 9,322,278
---------- ----------- -----------
Net income (loss) per share $ 0.15 $ (0.90) $ (0.85)
========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
GEOGRAPHICS, INC.
LIST OF SUBSIDIARIES
1. Geographics Marketing Canada, Inc., incorporated under the laws of Canada
and doing business in the name of Geographics Marketing Canada, Inc.
2. Geographics Europe Limited, incorporated under the laws of the United
Kingdom and doing business in the name of Geographics Europe Limited
3. Geographics Pty. Limited, incorporated under the laws of Australia and
doing business in the name of Geographics Pty. Limited
<PAGE> 1
MOSS ADAMS LLP
- --------------
CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-8 of Geographics, Inc. of our report dated May 7, 1999 incorporated by
reference in the Annual Report on Form 10K of Geographics, Inc. for the fiscal
year ended March 31, 1999.
/s/ Moss Adams LLP
Bellingham, Washington
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 130,967
<SECURITIES> 0
<RECEIVABLES> 3,945,418
<ALLOWANCES> 757,891
<INVENTORY> 3,532,684
<CURRENT-ASSETS> 7,965,626
<PP&E> 14,524,708
<DEPRECIATION> 4,591,074
<TOTAL-ASSETS> 18,278,761
<CURRENT-LIABILITIES> 13,680,195
<BONDS> 3,776,432
0
0
<COMMON> 15,769,018
<OTHER-SE> (14,946,884)
<TOTAL-LIABILITY-AND-EQUITY> 18,278,761
<SALES> 19,237,062
<TOTAL-REVENUES> 19,237,062
<CGS> 11,931,097
<TOTAL-COSTS> 9,086,546
<OTHER-EXPENSES> 94,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,220,107
<INCOME-PRETAX> (3,096,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,096,106)
<DISCONTINUED> 5,602,580
<EXTRAORDINARY> 0
<CHANGES> (1,071,000)
<NET-INCOME> 1,440,474
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
