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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
________________
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 PAGE
ITEM 1.
BUSINESS 1
GENERAL 1
LATE-FILING; SUBSEQUENT EVENTS & FILINGS 1
FORWARD-LOOKING STATEMENTS 2
BACKGROUND 2
INDUSTRY 3
PRODUCTS 4
SALES BY PRODUCT CATEGORY 4
SALES/ASSETS BY GEOGRAPHIC LOCATION 5
BUSINESS CONCENTRATIONS 6
PURCHASING 6
DISTRIBUTION 7
COMPETITION 7
TRADEMARKS AND COPYRIGHTS 8
SEASONALITY 8
EMPLOYEES 8
EQUIPMENT INTEGRATION 9
INVESTIGATION OF FORMER MANAGEMENT 9
RISK FACTORS 11
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER
CREDIT FACILITY; NEED FOR ADDITIONAL WORKING CAPITAL 11
COMPETITION 12
CUSTOMER CONCENTRATIONS 12
DEPENDENCE ON KEY VENDORS 13
TECHNOLOGY CHANGES AFFECTING PRODUCTS 13
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS 13
DELISTING FROM NASDAQ SMALLCAP MARKET AND TORONTO
STOCK EXCHANGE 14
APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK 14
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION 14
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY 15
VOLATILITY OF STOCK PRICE 15
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TABLE OF CONTENTS
(continued)
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PAGE
YEAR 2000 ISSUES 15
ITEM 2. DESCRIPTION OF PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II 17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 17
PRICE RANGE OF COMMON STOCK 17
DIVIDENDS 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
RESULTS OF OPERATIONS 20
1998 COMPARED TO 1997 21
1997 COMPARED TO 1996 22
LIQUIDITY AND CAPITAL RESOURCES 23
ITEM 8. FINANCIAL STATEMENTS 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III 25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 25
BOARD AND COMMITTEE MEETINGS 26
BOARD INTERLOCKS AND INSIDER PARTICIPATION 26
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE 26
ITEM 11. EXECUTIVE COMPENSATION 27
STOCK OPTION GRANTS AND EXERCISES 27
DIRECTOR COMPENSATION 27
EMPLOYMENT AGREEMENTS 27
ITEM 12. STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER
HOLDERS 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
PART IV 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K 28
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TABLE OF CONTENTS
(continued)
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SIGNATURES 30
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PART I
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") was incorporated as a
Wyoming corporation on September 20, 1974. The Company is engaged in the
development, manufacture, marketing and distribution of specialty paper
products, generally made using pre-printed designs, including stationery,
business cards, brochures, memo pads and paper cubes.
The Company's fiscal year end is March 31. The Company's executive
offices and domestic operations are located at 1555 Odell Road, Blaine,
Washington 98231, and its telephone number is (360) 332-6711.
LATE-FILING; SUBSEQUENT EVENTS & FILINGS
The Company has not timely filed all reports required to be filed by it by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, despite the fact that it has been subject to such filing
requirements for the past 90 days.
INFORMATION SET FORTH IN THIS FORM 10-K GENERALLY COVERS THE COMPANY'S FISCAL
YEAR ENDED MARCH 31, 1998 AND MUST ONLY BE READ IN CONJUNCTION WITH THE
COMPANY'S MOST RECENT REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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") (the first
shareholders' meeting in over two years). 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 this Annual Report on Form
10-K. None of current directors served on the Board during the fiscal year
ended March 31, 1998. 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.
Potential investors should realize that material, subsequent developments
with respect to the Company's business, operations and financial condition
which have occurred from and after March 31,
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1998 are more fully described in each of the following reports filed by the
Company on or before March 23, 1999:
1. Form 10-Q for the period ending December 31, 1998;
2. Form 10-Q for the period ending September 30, 1998; and
3. Form 10-Q for the period ending June 30, 1998.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of specialty paper
products as a percentage of revenue; the Company's ability to increase its
market share within the preprint industry; the ability of the Company to
successfully implement price 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
information system, including its electronic data interchange system, adequate
to meet operations requirements in the future and to improve its internal
controls; the ability of the Company to refinance its existing revolving credit
facility, to identify potential buyers for all or part of its business or to
raise additional debt or equity financing sufficient to meet its working
capital requirements; and the ability of the Company to continue operations as
a going concern.
Relevant risks and uncertainties include, but are not 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
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Company's subsidiaries in Europe and Australia. The specialty papers group
constitutes the Company's principal business, with approximately 78% of the
Company's total sales in fiscal year 1998 attributable to sales of Geopaper
products. On May 4, 1998, the Company sold substantially all of its assets
related to its signage and lettering operating assets to Identity Group, Inc.
for aggregate consideration of $16,820,000. Primarily as a result of sales
generated by the specialty papers group, the Company experienced growth, with
total sales increasing from $6,900,875 from fiscal year 1994 to $24,097,845 for
fiscal year 1998, an increase of 246%.
Primarily to develop its specialty papers group, the Company made
substantial investments to expand facilities, purchase and install automated
production equipment and an integrated management information system and
enhance administrative and other infrastructure systems. The Company
experienced delays and unanticipated additional expenses in the installation of
the production equipment and its management information system. Unanticipated
expenses relating to problems with the installment of the company's management
information systems and operational inefficiencies, together with price
reductions for the Company's products and cost increases for certain raw
materials, had a negative impact on the Company's gross margins and contributed
to a substantial net loss for fiscal year 1998.
Since May 1997, the Company has been in default of several financial
covenants under its revolving credit facility, the Company's primary source of
working capital, and borrowings under the facility have exceeded permitted
borrowing base limitations. The existence of these defaults constitutes a
default under the Company's mortgage loans and equipment lease facilities. The
report of the Company's auditors included in this Form 10-K states that the
Company's fiscal year 1998 losses and non-compliance with covenants under its
revolving credit facility raise and continue to raise substantial doubt about
the Company's ability to continue as a going concern.
The Company has been able to successfully negotiate a forbearance
agreement with its revolving credit lender. However, a failure by the Company
to obtain (a) an increase in borrowing availability under the revolving credit
facility, (b) an extension to its forbearance agreement and (c) additional,
alternative funds when and as needed to satisfy its working capital
requirements may force the Company to curtail operations, seek extended payment
terms from its vendors or seek protection under the federal bankruptcy law.
See "Risk Factors--Ability to Continue as a Going Concern; Defaults under
Credit Facility; Need for Additional Working Capital" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut
sheet papers used for letterheads, brochures, flyers and bulletins. Suppliers
within the preprint industry also offer combination sets made up of multiple
products such as matching letterhead, envelopes and business cards, or software
packages that improve ease of use of preprints by the consumer. New designs
and a large variety of preprints and related specialty products have been
important elements of success and growth for businesses in the preprint market.
The preprint market is segmented among two major methods of distribution:
retail and direct mail. Within the retail segment of the preprint market there
are numerous sub-segments, including office supply superstores, mass market
retailers, arts & crafts stores, party stores, specialty paper retailers, and
office supply business-to-business retailers. The Company sells its specialty
paper
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products exclusively in the retail segment of the preprint market, primarily to
office supply superstores such as Office Depot and Office Max and mass market
retailers such as Wal-Mart.
Large retailers somewhat dominate the retail segment of the preprint
industry, and as such, exert considerable influence over the operations of the
relatively smaller suppliers, such as the Company, that service them in the
preprint market. Of particular importance are factors such as pricing,
monetary requirements for retailer's selling programs (including such expenses
as volume rebates and advertising allowances), prompt order turnaround which in
turn requires the maintenance of large inventories, and payment terms,
including prompt pay discounts and extended and seasonal terms. See "Risk
Factors--Competition", "--Maintenance of Large Inventory of Products" and
"--Customer Concentrations."
Compared to the preprint market, during fiscal year 1998, the market for
the Company's lettering and signage products was smaller, more mature,
slower-growing and more narrowly focused on the office supply and arts and
crafts market. Though the total dollar volume of this market segment is
unknown, the Company experienced little or no growth in its lettering and
signage revenues over the past five years.
PRODUCTS
After the sale of its signage and lettering business on May 4, 1998, the
Company's product line is specialty papers.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total sales attributable to
each class of product offered by the Company for the last three years is set
forth below.
AS A PERCENTAGE OF SALES
<TABLE>
<CAPTION>
CLASS OF PRODUCT FISCAL YEAR
- ---------------- ----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Designer stationaries and specialty papers 75% 67% 71%
Lettering, signage, stencil and graphic art products 25% 33% 29%
</TABLE>
STATED IN U.S. DOLLARS (ROUNDED)
<TABLE>
<CAPTION>
CLASS OF PRODUCT FISCAL YEAR
- ---------------- --------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Designer stationeries and specialty papers $19,976,920 $14,028,746 $16,075,000
Lettering, signage, stencil and graphic art products $ 6,599,000 $ 6,789,000 $ 6,500,000
</TABLE>
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SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows:
<TABLE>
<CAPTION>
CLASS OF PRODUCT FISCAL YEAR
- ---------------- ------------------------------------------------
1998 1997 1996
------------ ------------- --------------
<S> <C> <C> <C>
Sales to Domestic and Foreign
Customers
United States $17,774,299 $11,637,497 $12,939,098
Canada(1) $ 4,082,664 $ 3,872,621 $ 2,854,935
Europe $ 1,197,192 $ 715,327 $ 281,330
Australia $ 1,043,690 $ 825,697 0
----------- ------------ --------------
Total $24,097,845 $17,051,142 $16,075,363
=========== ============ ==============
Operating profit or (loss):
United States (7,261,961) (6,587,756) $ 944,157
Canada(1) (301,179) (473,296) $ 377,328
Europe (489,263) (727,467) $ 65,316
Australia $ 40,684 $ 189,715 0
------------ --------------
Total (8,011,719) (7,598,804) $ 1,386,801
=========== ============ ==============
Identifiable assets:
United States $21,677,859 $27,464,715 $24,263,181
Canada(1) $ 1,122,452 $ 940,046 $ 410,060
Europe $ 1,321,662 $ 1,058,046 $ 64,800
Australia $ 1,222,992 $ 782,894 0
----------- ------------ --------------
Total $25,344,965 $30,245,701 $24,738,041
=========== ============ ==============
</TABLE>
(1) Effective April 1, 1996, Geographics--Canada succeeded Martin Distribution,
Inc. ("Martin Distribution") as the exclusive importer of Geographics products
into Canada. Martin Distribution was at the time owned and controlled by one
of the Company's then-acting directors. All export sales to Canada in fiscal
year 1997 were to Geographics--Canada. All export sales to Canada in fiscal
year 1996 and fiscal 1995 were to Martin Distribution.
International sales accounted for approximately 20%, 32%, and 26% of the
Company's total net sales in fiscal years 1996, 1997 and 1998, respectively.
International sales were concentrated in Canada, Europe and Australia. As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers, political
and economic instability and other risks. See "--Risk Factors-International
Subsidiaries" and "--Risk Factors--Foreign Exchange and International Trade."
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BUSINESS CONCENTRATIONS
Historically, a substantial portion of the Company's sales have been to a
limited number of customers. Concentration of sales to the Company's five
largest customers is detailed below:
<TABLE>
<CAPTION>
CUSTOMER FISCAL YEAR ENDED MARCH 31,
- -------- -------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Office Depot Inc 31% 31% 40%
Office Max Inc 15% 26% 24%
Business Depot, Inc(1) 11% 10% 13%
United Stationers Inc 3% 0% 0%
Wal-Mart Stores, Inc 6% 0% 0%
-------- -------- --------
66% 67% 77%
======== ======== ========
</TABLE>
(1) Business Depot, Inc. (Staples of Canada) sales were included in sales of
Martin Distribution for 1996 and 1995.
The Company expects that sales to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable future and
believes that its financial results will continue to depend in significant part
upon the success of these few customers. See "Risk Factors--Customer
Concentrations."
PURCHASING
The Company's principal purchases are materials for use in the manufacture
of specialty paper. In particular, the Company routinely purchases sheets,
rolls and reams of commodity paper, as well as other direct materials involved
in the printing and packaging of its Geopaper product lines, such as inks,
packaging film, labels, shipping boxes and other materials. Certain of the
products used in the manufacture of the Company's products are considered
commodities, and as such can vary significantly in cost from time to time.
Though prices may vary, the Company has not experienced and does not currently
anticipate any market shortages of supply of the specific raw materials that it
purchases and uses in the manufacture of its products.
The Company's success depends in large part on reliable and uninterrupted
supply of raw materials from its major vendors. Although the Company purchases
goods from approximately 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 related products is Unisource Corporation, a broker/vendor
from whom a significant portion of the Company's total purchases during the
fiscal years 1998 and 1997.
Unisource has provided the Company an immediately available and
uninterrupted supply of paper. In addition, Unisource and other key vendors
have granted the Company significant amounts of trade credit, along with
favorable pricing and payment terms. Although the Company may be able to find
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other sources of supply for commodity paper and other major raw material
categories, there can be no assurance that potential new vendors, once sourced,
would provide an uninterrupted supply of raw materials or adequate levels of
trade credit, competitive prices or acceptable payment terms. See "Risk
Factors-Dependence on Key Vendors."
DISTRIBUTION
The Company sells its products on a wholesale basis primarily to
retailers, including office supply superstores, mass market retailers, arts &
crafts stores, party stores, specialty paper retailers, and office supply
business-to-business catalog retailers. The Company also markets its products
to office supply distributors in the U.S. and to distributors in those
countries where the Company does not service retailers directly. Historically,
the Company has sold a substantial portion of its products to a limited number
of retail customers, and the Company believes that this trend can be expected
to continue in the future. See "--Business Concentrations" and "Risk
Factors-Customer Concentrations."
The Company conducts its export operations through three subsidiaries:
o Geographics Marketing Canada, Inc. ("Geographics--Canada") was
incorporated as a British Columbia, Canada corporation on July 31, 1995,
and was established to import the Company's products into Canada and
market them to wholesale and retail distribution channels.
o Geographics (Europe) Limited ("Geographics--Europe") was incorporated in
England on December 12, 1995. The offices of Geographics--Europe are
located at 4 Iceni Court, Letchworth, Herts SG6 1TN, England, and its
telephone number is 01462-487100. Geographics--Europe was established to
import, warehouse, market and distribute the Company's products throughout
Europe.
o Geographics Australia Pty. Ltd. ("Geographics--Australia") was
incorporated in Brisbane, Australia on June 28, 1996. The offices of
Geographics--Australia are located at 3/32 Lillian Fowler Place,
Marrickville NSW 2204, Australia and its telephone number is
61-2-9519-4488. Geographics--Australia was organized to import,
warehouse, market and distribute the Company's products throughout
Australia.
COMPETITION
The Company operates in a highly competitive environment. The Company's
designer stationery products compete in most of the Company's markets with
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 distinguishes 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
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financing will be available on terms acceptable to the Company, or at all. See
"--Risk Factors--Competition" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation--Liquidity and Capital
Resources."
TRADEMARKS AND COPYRIGHTS
The Company maintains 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".
BACKLOG
The Company's backlog of orders as of September 8, 1998 was $2,180,117.
The Company expects to fill substantially all of these orders during the second
quarter of 1998. The Company includes in backlog the value of all purchase
orders received from customers for product not yet shipped and invoiced.
Because the Company only recently implemented internal controls necessary to
determine backlog, the Company is unable to determine backlog at March 31, 1998
or at the end of any prior period. The Company's backlog is subject is subject
to fluctuations as a result of seasonality 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.
SEASONALITY
A significant portion of the Company's customer orders are placed between
August and October of each year for shipment during the Company's third fiscal
quarter, which includes the Christmas season, with the largest levels of sales
historically occurring in the second half of the calendar year. As a result,
the Company has experienced, and expects to continue experiencing, seasonal
fluctuations in its operating results based upon past purchasing patterns.
EMPLOYEES
At March 31, 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
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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.
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.
INVESTIGATION OF FORMER MANAGEMENT
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 by Mr. Ronald L. Deans, the Company's former President and
Chief Executive Officer, and other members of management which were paid or
reimbursed by the Company, whether such expenses were business or personal in
nature, the tax reporting and accounting for certain stock option exercises by
Mr. Deans and his sons in January 1996, the basis for compliance with the
registration requirements of applicable securities laws in connection with
three separate issuances of common stock by the Company in 1996 and 1997 and
certain other securities-secured mattes.
In March 1998, based on the findings of the Special Committee to that
point in time, the Special Committee requested that Mr. Deans undertake certain
corrective measures and implement certain policies and procedures. Certain of
the findings and recommendations of the Special Committee are summarized below.
Expenses
Based on a review by the accountants hired by independent counsel for the
Special Committee of Company records of expenses reimbursed or paid by the
Company in 1997, it appears that a substantial portion of the approximately
$125,000 of expenses reimbursed or paid by the Company in 1997 for Mr. Deans
lacked adequate documentation for tax purposes and/or appeared to be primarily
personal in nature. Based on a limited review of Mr. Deans' expense accounts
for 1996 by independent counsel, it appears that most of the approximately
$150,000 in reimbursed expenses for Mr. Deans in that year also lacked adequate
documentation for tax purposes or appeared to be personal expenses. Pending
further review of Company records and possible explanation by Mr. Deans, the
Special Committee requested that Mr. Deans 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
for him in excess of that amount are later determined not to be deductible for
tax purposes. Mr. Deans reviewed certain of his expense records and agreed
that certain expenses may not have been properly substantiated and, pending his
further review of the remainder of his expense records, he has offered to
reimburse the Company $32,000 with respect to 1997 and 1996 by reducing a note
payable by the Company to a company affiliated with Mr. Deans. As of the date
of this report, the Board of Directors and Mr. Deans have not reached agreement
on either the amount to be paid by Mr. Deans or Mr. Deans'
-9-
<PAGE> 14
proposed method of payment. In addition, to the extent that it is determined
that additional expenses were not properly substantiated, Mr. Deans has agreed
to reimburse the Company for such additional amounts. The accountants engaged
by independent counsel also found that the documentation related to a
substantial portion of reimbursed expenses of several other corporate officers
is inadequate, and the Special Committee has directed that those employees also
reimburse the Company for those expenses that are personal or lack adequate
documentation. The new Board of Directors has implemented policies that will
insure proper expense reporting in the future.
To the extent it is determined that expenses paid or reimbursed by the
Company for the benefit of Mr. Deans or any other officer were personal in
nature or not adequately documented, such expenses may not be deductible for
tax purposes and the Company may owe additional tax, together possibly with
interest and penalties, for prior periods in which it otherwise did not incur a
loss for tax purposes. In addition, the net income reported by the Company for
periods in which the expenses were deducted may have been overstated to the
extent of the tax savings realized from the deduction of expenses which are
later determined to be nondeductible, if any. Also, unless these expenses are
repaid, the amount of income for such individuals reported in prior Securities
and Exchange Commission reports may have been understated to the extent such
expenses were personal in nature. Due to the volume of transactions and the
complexity of the questions involved, it is not possible at this time to
quantify such amounts.
Stock Option Exercises
In January 1996, Mr. Deans, his sons, Scott and Mark Deans, and other
Company personnel 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 by the Deans the market value of the shares of
the Company's common stock issued upon exercise of 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 the Deans in
1996 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 Mr.
Deans to cause the Company to issue amended 1996 Form W-2s to himself, Mark and
Scott Deans 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 Mr. Deans, Mark Deans and Scott
Deans each to include such amounts on amended tax returns for the tax year
1996. Mr. Deans has agreed to instruct the Controller to issue an amended Form
W-2 to himself and his sons, and to instruct the Company's accountants to seek
the appropriate deduction. Mr. Deans also agreed to include the appropriate
income on his tax return and request Mark and Scott Deans to do the same. The
deemed gain associated with these options exercises should have been, but was
not, reported in the Company's annual report on Form 10-K for the fiscal year
ended March 31, 1996.
Issuance Of Common Stock
In July 1996, October 1997 and November 1997, Mr. Deans 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. It is not
possible to determine at this time whether the issuance of stock will subject
the Company to liability.
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.
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<PAGE> 15
RISK FACTORS
PROSPECTIVE INVESTORS ARE STRONGLY CAUTIONED THAT AN INVESTMENT IN THE
COMPANY INVOLVES A VERY HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD NOT
DISMISS, AS "BOILERPLATE" OR "CUSTOMARY," DISCLOSURE OF THE RISK FACTORS SET
FORTH BELOW. THE CONTINGENCIES AND OTHER RISKS DISCUSSED BELOW COULD AFFECT
THE COMPANY IN WAYS NOT PRESENTLY ANTICIPATED BY ITS MANAGEMENT AND THEREBY
HAVE A MATERIAL ADVERSE EFFECT ON THE VALUE OF ITS COMMON STOCK. A CAREFUL
REVIEW AND UNDERSTANDING OF EACH OF THE RISK FACTORS SET FORTH BELOW, AS WELL
AS THE OTHER INFORMATION CONTAINED IN THIS REPORT IS ESSENTIAL FOR AN INVESTOR
SEEKING TO MAKE AN INFORMED DECISION WITH RESPECT TO THE COMPANY.
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY; NEED
FOR ADDITIONAL WORKING CAPITAL
As a result of the rapid growth of the Company's specialty papers group,
capital expenditures relating to the purchase and installation of an automated
production system and a management information system, operating losses and
other factors, the Company has required, and continues to require, substantial
external working capital. Moreover, subsequent to the end of fiscal year 1998,
the Company experienced working capital short-falls which required the Company
to delay payments to certain vendors, delay purchases, institute internal cost
reduction measures and take other steps to conserve operating capital.
At the end of fiscal year 1998, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation,--Liquidity and Capital Resources." Since May 1997, the
Company has failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under the revolving credit facility, and borrowings under
the facility exceeded the permitted borrowing base limitations. The Company's
lender has also provided the Company with several mortgage loans and equipment
loans, and the existence of the defaults under the revolving credit facility
constitutes a default under these other loans. The report of the Company's
auditors included in this Report states that the Company's fiscal year 1998
losses and non-compliance with covenants under its revolving credit facility
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company entered into a forbearance agreement with its lender,
effective August 31, 1997, pursuant to which the lender agreed to extend the
expiration date of the revolving credit facility to October 31, 1997, to
increase the $12.0 million commitment by a $300,000 stand-by letter of credit,
to permit borrowings of up to $2.25 million in excess of the applicable
borrowing base limitation (not to exceed the $12.0 million revolving credit
facility commitment) and to forbear from asserting its rights with respect to
the Company's non-compliance with the financial covenants as well as the
defaults under the Company's mortgage loans and equipment loans. However, on
September 12, 1997, the Company was required to request borrowings in excess of
the amended borrowing limits in order to meet payroll and other expenses.
Although the Company's lender permitted the requested borrowings, it did not
formally waive this additional default. The Company is continuing to seek
extended payment terms from its vendors, delayed purchases of raw materials,
internal cost reduction measures and other steps to conserve operating capital.
As a result, the Company's vendors may place the Company on credit hold or
take other actions against the Company, including the termination of their
relationship with the Company or the initiation of collection proceedings. See
"--Dependence on Key Vendors." In addition, the Company will continue to
actively pursue additional sources of working capital, which could include the
issuance of debt or equity securities or the sale of some or all of the
Company's assets. However, at the
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<PAGE> 16
end of fiscal year 1998, the Company had received no firm commitments with
respect to any such transactions and there can be no assurance that any such
transaction will be identified. Further, there can be no assurance that the
Company will be able to obtain more sources of additional working capital when
and as needed or that the terms of any such funding will be acceptable to the
Company or in the best long-term interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and to
extend the expiration date of, the Company's revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy the Company's
working capital requirements could force the Company to curtail operations,
seek extended payment terms from its vendors or seek protection under the
federal bankruptcy laws. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized, more established and have substantially greater
financial, marketing and human resources. Moreover, the development and
manufacture of new designer stationeries and specialty papers are highly
capital intensive. In order to remain competitive, the Company may be required
to continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities, investments in systems, procedures
and controls, expansions of operations and research and development, among many
other items. Additional financing might be required to fund the Company's
investments in those areas. There can be no assurance that additional
financing will be available on terms acceptable to the Company, or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
CUSTOMER CONCENTRATIONS
The Company's three largest customers, Office Depot Inc., Office Max, Inc.
and Business Depot, Inc., in the aggregate accounted for approximately 55% and
67% of the Company's total sales for fiscal year 1998 and fiscal year 1997,
respectively. The Company expects that sales to relatively few customers will
continue to account for a high percentage of its net sales in the foreseeable
future and believes that its financial results depend in significant part upon
the success of a limited number of customers. See "Business Concentrations."
Although the composition of the group comprising the Company's largest
customers may vary from period to period, the loss of a significant customer or
any reduction in orders by any significant customer, including reductions due
to market, economic or competitive conditions in the designer stationery or
specialty papers industry, would have a material adverse effect on the
Company's business, financial condition and results of operations.
As a result of the concentration occurring in the office supply industry
in which the major office megastores are accounting for a greater percentage of
industry-wide sales, it is anticipated that an increasing number of the smaller
outlets and retail stores will discontinue operations in the years ahead.
While the Company anticipates that certain of such sales will be transferred to
the larger megastores to which the Company currently supplies its products,
there can be no assurance that any loss of sales to smaller outlets and retail
stores will be replaced in this manner.
-12-
<PAGE> 17
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 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 related products is Unisource, a broker/vendor from whom significant
portions of the Company's total purchases during the fiscal years 1998 and
1997.
Unisource has provided the Company an immediately available and
uninterrupted supply of paper. In addition, Unisource and other key vendors
have granted the Company significant amounts of trade credit, along with
favorable pricing and payment terms. Although the Company may be able to find
other sources of supply for commodity paper and other major raw material
categories, there can be no assurance that potential new vendors, once sourced,
would provide an uninterrupted supply of raw materials or adequate levels of
trade credit, competitive prices or acceptable payment terms.
TECHNOLOGY CHANGES AFFECTING PRODUCTS
The design and manufacture of production equipment used in the designer
stationery and specialties paper industries has undergone and continues to
undergo rapid and significant technological change. In particular,
developments in the software industry may afford customers and consumers with
the ability to produce paper products which offer quality characteristics
comparable with that provided by the Company. Any such developments may,
therefore, have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's business is,
to a significant degree, dependent on the enhancement of its current products
and development of new products. Product development and enhancement involve
substantial expenditures and a high degree of risks, and there is no assurance
that product development efforts of the Company will be successful, will have
sufficient utility or will be superior to efforts by others, including current
customers and consumers of the Company's products. There can be no assurances
that future technological developments will not render existing or proposed
products of the Company uneconomical or obsolete, or that the Company will not
be adversely affected by the future development of commercially viable products
by others. The development of superior products by others could have a
material adverse effect on the Company's business, financial condition or
results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of trademarks and copyrights, and certain of the
Company's proprietary manufacturing processes are protected by trade secrets.
There can be no assurance that the Company's trade secrets, trademarks,
copyrights or other proprietary rights will be effective in discouraging
competition or held valid if subsequently challenged, or that others will not
assert rights in, or ownership of, any of such proprietary rights. In
addition, there can be no assurance that the actions taken by the Company to
protect its proprietary rights will be adequate to prevent imitation of its
products, that the Company's proprietary information will not become known to
competitors or that others will not independently develop products
substantially equivalent or superior to the Company's products without
infringing on the Company's proprietary rights. There can be no assurance that
any pending trademark application will result in the issuance or a registered
trademark. In addition, the laws of certain foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States.
While the Company has made reasonable efforts to protect all of its trade
secrets, trademarks, copyrights and other proprietary rights, to the extent
such protections are inadequate, the
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<PAGE> 18
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.
DELISTING FROM NASDAQ SMALLCAP MARKET AND 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 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.
APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5 per share, subject to certain exceptions.
Unless the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, it will be deemed to be "penny stock" and will continue to 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 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.
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of March 31, 1998, there were outstanding warrants for the purchase of
an aggregate of 1,342,293 shares of Common Stock at an exercise price of $.77
to $6.50 per share. In addition, as of March 31, 1998, there were outstanding
options granted under the Company's stock option plan to purchase up to 173,500
shares of Common Stock at exercise prices ranging from Cdn. $1.00 to Cdn.
$4.15 per share. In the event that the outstanding warrants and options are
exercised, the holders will be
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<PAGE> 19
given the opportunity to profit from a rise in the market price of the
underlying shares. This may have certain dilutive effects on, and a materially
depressive effect on, the market price for the Common Stock. The terms on
which the Company could obtain additional capital during the life of such
warrants and options may be adversely affected because the holders may be
expected to exercise them at a time when the Company might otherwise be able to
obtain comparable additional capital in a new offering of securities at a price
per share greater than the exercise price of such options and warrants. As a
result, the existence and possible exercise of such options or warrants could
have a material adverse effect on the Company's ability to raise capital
through the sale of its equity securities.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
Management continues to expect that the Company's financial results may
vary materially from period to period. Most of the Company's customers order
products for immediate delivery. As a result, a substantial amount of the
Company's net sales in each quarter results from orders received in that
quarter. The Company's net sales and operating results may, therefore, vary
significantly as a result of, among other things, volume and timing of orders
received during the quarter, variations and sales mix, and delays in production
schedules. Accordingly, the Company's historical financial performance is not
necessarily a meaningful indicator of future results. Moreover, a significant
portion of the Company's customer orders are placed between August and October
of each year in anticipation for shipment during the Company's third fiscal
quarter (i.e., the Christmas period). As a result, the Company has experienced
and is expected to continue to experience seasonal fluctuations in its
operating results based on such purchasing patterns. See "--Seasonality."
These fluctuations in quarterly operating results could have a material adverse
effect on, among other things, the market price for the Company's Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue
to be, volatile. See Market for Registrant's Common Equity and Related
Stockholder Matters." The market price of the Common Stock could fluctuate,
perhaps substantially, in response to a number of factors, such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships
with its customers or suppliers, changes in the general condition of, or trends
in, the designer stationery and specialty paper industry, paper prices, changes
in governmental regulations, or changes in securities analysts' estimates of
the Company's or its competitors' or industry's, future performance. In
addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, including the Company's,
have experienced extreme price and volume volatility, which has had a
substantial effect on the market prices of securities of many smaller public
companies for reasons frequently unrelated to the operating performance of such
companies. These broad market fluctuations may have a material adverse effect
on the market price of the Common Stock.
YEAR 2000 ISSUES
The Company uses three principal software packages at its North American
production, warehousing and administrative facilities. These include an
operating system, an electronic data interchange software and an integrated
operations and accounting application package. Of particular importance, the
Company's operations and accounting applications were determined to not be Year
2000 ready. Accordingly, the Company is in negotiations to secure a new
operating and accounting software package with installation to be scheduled as
soon as practicable. The Company estimates that the costs of acquiring and
installing this new software package will range between $125,000 and $150,000.
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<PAGE> 20
The Company continues to evaluate its remaining principle software
packages and believes that existing available upgrades will mitigate the risk
of significant operational problems. However, the Company has not completed an
assessment of its hardware and other systems, including those of vendors,
customers and other third parties. Until a complete assessment is completed,
the Company is unable to estimate the total expense of assuring that all of its
software and hardware are Year 2000 compliant. The Company plans to complete
these assessments no later than June 1999.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company considers its properties to be suitable and adequate for their
intended uses for the foreseeable future. These properties consist of the
following:
Executive Offices And Domestic Facilities
The Company's headquarters and manufacturing facility in Blaine,
Washington has approximately 96,500 square feet of office, warehouse and
manufacturing space located on ten and one-half acres of Company-owned land.
The Company's Blaine, Washington facility was increased from 34,000 sq. ft to
49,000 sq. ft in December 1994. The facility was increased to its current size
during fiscal year 1996.
Other Whatcom County Facilities
During 1998 and 1997, the Company also leased 4 additional 10,000 sq. ft.
buildings at a business park facility near Ferndale, Washington, each facility
on a renewable six month lease of $15,000 per month, triple net.
European Facilities
In connection with the distribution of the Company's products in Europe,
Geographics--Europe leases 6,700 square feet of warehouse space near London,
England. The lease requires quarterly lease payments of approximately $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
near Brisbane, Australia. The lease requires lease payments of $3,400 per
month, triple net (with annual review of the rental rate beginning in August
1997), and expires on August 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
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
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<PAGE> 21
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National Market
under the symbol "GGIT" on March 8, 1996. From May 5, 1995 to March 7, 1996
the Company's Common Stock traded on the OTC Bulletin Board under the symbol
"GGIT".
The following table sets forth the high and low closing bid prices or
closing sales prices, as the case may be, of the Common Stock, as reported on
the OTC Bulletin Board or the Nasdaq National Market System, as the case may
be, for each fiscal quarter beginning with the first fiscal quarter of the
fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter (June 30, 1996) $6.94 $4.75
Second Quarter (September 30, 1996) $5.96 $2.88
Third Quarter (December 31, 1996) $5.38 $2.75
Fourth Quarter (March 31, 1997) $5.25 $3.25
</TABLE>
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter (June 30, 1997) $3.48 $0.88
Second Quarter (September 30, 1997) $1.16 $0.44
Third Quarter (December 31, 1997) $1.00 $0.33
Fourth Quarter (March 31, 1998) $0.63 $0.27
</TABLE>
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<PAGE> 22
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. As
of March 31, 1998, there were approximately 272 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company has not paid dividends at any time during the two fiscal year
period ending on March 31, 1998. The Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Specifically, the Company's current bank facilities restrict its ability to pay
dividends.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's Consolidated Financial Statements for the periods indicated. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's 1998 Consolidated Financial Statements and notes thereto
contained elsewhere in this Report.
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<PAGE> 23
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 6,901,845 $10,186,136 $16,075,363 $17,051,142 $24,097,845
Cost of sales 4,488,176 5,881,649 10,343,463 16,522,236 21,035,139
Gross margin 2,413,669 4,304,487 5,731,900 528,906 3,062,706
Selling, general and
administrative 2,981.861 2,873,476 4,185,331 8,127,710 11,074,425
Amortization of goodwill 479,300 639,067 159,768 -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations (1,047,492) 791,944 1,386,801 (7,598,804) (8,011,719)
Other income (expense) 209,521 15,398 130,684 24,907 (38,365)
Gain (loss) on sales of
property and equipment (12,687) (13,468) (594) (86,048) (159,406)
Reserve for impairment
on EDP
installation-in-progress -- -- (620,759) --
Interest expense (356,060) (457,499) (539,394) (805,079) (1,413,219)
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes (1,206,718) 336,375 977,497 (9,085,783) (9,622,709)
Income tax provision
(benefit) 34,800 (411,367) 332,350 (55,972) --
----------- ----------- ----------- ----------- -----------
Income (loss)
From Continuing
Operations 1,241,518 747,742 645,147 (9,029,811) (9,622,709)
=========== =========== =========== =========== ===========
Income (loss) from
continuing operations per
average common share
outstanding $ (0.28) $ 0.16 $ 0.10 $ (0.97) $ (1.00)
=========== =========== =========== =========== ===========
Income from discontinued
operations per average
common share outstanding -- -- $ 0.09 $ 0.12 $ 0.10
=========== =========== =========== =========== ===========
Income From
Discontinued Operations
net of income taxes in
1996 of $302,329* 586,877 1,079,510 973,091
Net Income (loss) $(1,241,518) $ 747,742 $ 1,232,024 $(7,950,301) $(8,649,618)
Net income (loss) per
average common share
outstanding $ (0.28) $ 0.16 $ 0.19 $ (0.85) $ (0.90)
Weighted average shares
outstanding used in
computing per share
data 4,424,535 4,549,101 6,606,499 9,322,278 9,626,335
</TABLE>
* Substantially all sales in years 1995, 1994 were from Lettering Signage.
-19-
<PAGE> 24
BALANCE SHEET DATA:
<TABLE>
<S> <C> <C> <C> <C> <C>
For the year ended: 1994 1995 1996(1) 1997(1) 1998
---------- ----------- ----------- ----------- ------------
Working capital $ 869,651 $ 1,836,436 $ 5,886,703 $ 401,550 ($8,795,125)
Total assets 6,788,067 10,614,673 24,738,041 30,245,701 25,344,965
Long-term
obligations, less
current portion 2,484,634 3,319,948 3,690,360 4,322,371 4,853,254
Stockholders' equity 1,471,514 2,803,341 9,989,852 7,917,023 (427,218)
</TABLE>
(1) Certain amounts for the fiscal year ended March 31, 1996 and 1997 have been
reclassified to conform to the current year presentation of the fiscal year
ended March 31, 1998 amounts. Such reclassifications had no effect on
previously reported earnings or financial position.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto
appearing elsewhere on this Report.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.3 96.9 64.3
Gross margin 12.7 3.1 35.7
Selling, general and
Administrative expenses 45.9 47.7 26.0
Amortization of goodwill -- -- 0.9
Income from operations (33.2) (44.6) 8.6
Other income -- .1 .8
Interest expense (5.9) (4.7) (3.4)
Total other income (expense) (6.7) (8.7) (2.5)
Income before provision for
Income taxes (39.9) (53.3) 6.1
Income tax provision
(benefit) -- (.3) 2.1
Income From Discontinued
Operations 4.0 6.3 3.6
Net income (35.9) (46.6) 7.7
</TABLE>
-20-
<PAGE> 25
1998 COMPARED TO 1997
NET SALES. Net sales increased 41.3% to $24,097,845 in fiscal year 1998
from $17,051,142 in fiscal year 1997. This increase was primarily attributable
to the continued growth of the Geopaper product line, which offset certain
factors in the third and fourth quarters that negatively impacted fiscal year
1998 sales. Revenue growth with respect to the Geopaper product line slowed
compared to the two prior years. Geopaper sales increases in 1998 were due
primarily to sales for new store openings by Office Depot, and initial
shipments of Geopaper products to new customers, including Wal-Mart, Target and
Kmart. In addition, Geopaper sales increased due to the introduction of the
Geoposterboard product line in over 900 Wal-Mart stores, 500 Office Depot
stores in the United States and Canada, and 80 Staples/Business Depot stores in
Canada.
The shift in the Company's sales mix toward Geopaper and related products
continued in fiscal year 1998. In 1998, the percentage of total Company sales
represented by Geopaper increased to 78%, compared to 71% of total sales in
fiscal year 1997, while signage and lettering sales declined to 22% of total
sales. In fiscal year 1997, the sales mix of signage and lettering was 29% of
sales. Sales for signage and lettering products are not presented with net
sales in the Statement of Operations, but are included in discontinued
operations, which is discussed later in this section.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross profit as a percentage of sales
increased to 12.7% in fiscal year 1998, from 3.1% in fiscal year 1997. The
higher gross margin is primarily attributable to an increase in selling prices
for the Company's paper products coupled with modest cost decreases and a
continuing shift in mix of sales to higher margin products
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses increased to $11,074,425 (45.9% of sales) in fiscal year 1998 from
$8,127,710 (47.7% of sales) in fiscal year 1997. The SG&A expense for fiscal
year 1998 was attributable to an increase in advertising rebates and other
rebates and promotions to customers, and increases in salaries and wages of
administrative, and sales & marketing personnel and an increase in legal
expenses incurred by the Company.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from operations
in fiscal year 1998 of $8,011,719 compared to an operating loss of $7,598,804
during fiscal year 1997. The operating loss was the result of higher gross
margins more than offset by significantly higher sales, general and
administrative expenses.
OTHER INCOME (EXPENSE). There was no other income in fiscal year 1998
compared to $24,907 in fiscal year 1997. In previous years, this category
included such items such as management fees, foreign exchange gains, gains on
disposition of fixed assets, and other miscellaneous items.
INTEREST EXPENSE. Interest expense increased to $1,413,219 (5.9% of
sales) during fiscal year 1998, compared to $805,079 (4.7% of sales) during
fiscal year 1997. The higher interest costs were caused by increased average
borrowings to support the Company's operating losses, and the acquisition of
equipment used in the manufacture of Geopaper in 1998 and 1997.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before provision
for income taxes was $9,622,709 (39.9% of sales) in fiscal year 1998 compared
to the loss before provision for
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<PAGE> 26
income taxes of $9,085,783 (53.3% of sales) in fiscal year 1997. The 1998 loss
before provision for income taxes was primarily the result of the Company's
operating losses and increased interest expense.
The Company did not recognize a tax benefit resulting from its loss from
continuing operations in 1998 because of uncertainty concerning the use of this
loss to reduce future taxes. A portion of the loss was used to reduce taxes
that would have been attributable to income from discontinued operations. The
amount of taxes eliminated on discontinued operations was estimated to be
approximately $330,000. As of March 31, 1998, the total deferred tax assets
estimated to be available to the Company were $5,801,000 which had been reduced
in their entirety by a valuation allowance.
DISCONTINUED OPERATIONS. On May 4, 1998, the Company sold substantially
all of its signage and lettering operating assets, licenses, inventory and
other rights to a corporation for total consideration of $6,820,000.
Signage and lettering net sales for fiscal year 1998 decreased 3% to
approximately $6,598,000 from $6,789,000 in fiscal year 1997. The decline in
the sales of the signage and lettering product lines was attributable to a
general decline in the demand for products of this type and increased
management attention on the development of the specialty papers group.
Management believes that sales of signage and lettering products will continue
to decline in the future as the computerization of homes and offices will allow
the efficient production of lettering and signage products by current
end-users.
NET INCOME/LOSS. Net loss of $8,649,618 in fiscal year 1998, or 35.9% of
sales, compares to net income of $7,950,301 in fiscal year 1997, 46.6% of
sales.
1997 COMPARED TO 1996
NET SALES. Net sales increased 6.1% to $17,051,142 in fiscal year 1997
from $16,075,363 in fiscal year 1996. This increase was primarily attributable
to the acceptance of the Geopaper product line. Geopaper experienced a sales
increase of 665% in fiscal year 1996 to $16,075,363 compared to $2,100,000 for
fiscal 1995. Geopaper sales increases in fiscal year 1996 were due to shipments
of Geopaper products to all Office Depot Inc. and OfficeMax stores in North
America, as well as shipments of Geopaper products to 248 Wal-Mart stores in
March 1996.
Signage and lettering sales for fiscal year 1997 increased 4% to
$6,789,364 from $6,538,272 in fiscal year 1996. The majority of the increase
in signage and lettering sales was due to increased sales to OfficeMax.
The sales mix of Geopaper products remained unchanged in fiscal year 1997
and 1996. Lettering and signage sales also remained unchanged for the same
periods.
GROSS MARGIN. Gross margin as a percentage of sales decreased to 3.1% in
fiscal year 1997, from 35.7% in fiscal year 1996. The decrease in the gross
margin was the result of a change in sales mix to products with lower gross
margins. Geopaper represented 71% of sales while lettering and signage
represented 29% of sales in 1997, compared to 71% and 29% of sales in 1996,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased in
fiscal year 1997 to $8,127,710 (47.7% of sales) from $4,185,331 (26.0% of
sales) in fiscal year 1996.
AMORTIZATION OF GOODWILL. Goodwill amortization declined to $0 from
$159,768 (.98% of sales) for fiscal years 1997 and 1996 respectively. The
decrease was due to the completion of the amortization of the goodwill related
to the 1993 purchase of the lettering division of E-Z Industries.
-22-
<PAGE> 27
INCOME FROM OPERATIONS. Income from operations decreased to $(7,598,804)
(44.6% of sales) during fiscal year 1997, a decrease from $1,386,801 (8.6% of
sales) in fiscal year 1996.
OTHER INCOME. Other income was $24,907 (0.14% of sales) in fiscal year
1997, compared to $130,684 (0.8% of sales) during fiscal year 1996.
INTEREST EXPENSE. Interest expense increased to $805,079 (4.7% of sales)
during fiscal year 1997, compared to $539,394 (3.4% of sales) for fiscal year
1996. The acquisition of equipment used in the manufacture of Geopaper, in
addition to higher bank debt related to facilities expansion and working
capital requirements resulted in higher interest costs during fiscal year 1997.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes declined to $(9,085,783) (53.2% of sales) in fiscal year 1997
compared to $977,497 (6.1% of sales) in fiscal year 1996.
INCOME TAX PROVISION/BENEFIT. There is no ITP in fiscal year 1998. In
fiscal year 1997, the Company recorded a current income tax benefit of $55,972,
which represents the amount of income tax recoverable from net operating loss
carry-backs. The total potential income tax benefit for fiscal year 1997, and
corresponding increase in the Company's deferred tax asset as of March 31,
1997, was an estimated $3,162,000. The total potential deferred tax asset
(before valuation allowance) as of March 31, 1997 was $3,774,000. Based on the
Company's current operating income and available projections for operating
income, the Company determined that future operating and taxable income may not
be sufficient to fully or partially recognize the deferred tax asset of
$3,774,000 at March 31, 1997. As a result, the Company decided to provide a
valuation allowance on all of its deferred tax assets at March 31, 1997. This
valuation analysis was recorded in the fourth quarter and totaled $3,774,000.
The income tax provision in fiscal year 1996 was 2.1% of sales in fiscal year
1996. This provision was 34% of pre-tax net income.
NET INCOME. Net income of $(7,950,301) in fiscal year 1997 (46.6% of
sales) compares to net income of $1,232,024 in fiscal year 1996 (7.7% of
sales).
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
$3,347,175, and the Company experienced positive operating cash flows of
$8,297,015.
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, borrowings under the Company's revolving credit facility
exceeded the permitted borrowing limitations. In addition, the Company has
failed to comply with the net worth, debt-
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<PAGE> 28
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 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-1
(b) Consolidated Balance Sheets as of March 31, 1998 and 1997 F-2
(c) Consolidated Statements of Income for the years ended March 31, 1998,
1997 and 1996 F-3
(d) Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1998, 1997 and 1996 F-4
(e) Consolidated Statements of Cash Flows for the years ended March 31,
1998, 1997 and 1996 F-5
(f) Notes to Consolidated Financial Statements F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets for 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, 1998, there were two meetings of
the Board. Each of the incumbent directors attended at least 75% of the
meetings of the Board.
As of the end of the fiscal year ended March 31, 1998, the Company had
established two standing committees of the Board: an Audit Committee and a
Compensation Committee.
The Audit Committee's function is to make recommendations concerning the
effectiveness of the Company's internal auditing methods and procedures, to
determine through discussions with independent auditors whether any limitations
or restrictions have been placed upon them connection with either the scope of
the audit or its implementation, review the Company's financial statements and
related notes with the auditors to ensure that the statements and notes fully
disclose all material facts of the Company, and to recommend approval or
non-approval of such financial statements and related notes. The Audit
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<PAGE> 30
Committee met one time during the fiscal year ended March 31, 1998, with all
members attending such meeting.
The Compensation Committee's function is to monitor and make
recommendations with respect to compensation of senior officers, as well as the
granting of stock options and stock awards. The Compensation Committee met one
time during the fiscal year ended 1998, with all members attending such
meeting.
No Compensation Committee report is included since the members of the
Compensation Committee during the year ended March 31, 1998 are no longer
directors of the Company.
BOARD INTERLOCKS AND INSIDER PARTICIPATION
During the year ended March 31, 1998, Ronald S. Deans served as a member
of the Compensation Committee. During that fiscal year, Mr. Deans was the
President, Chief Executive Officer, Chief Financial Officer and Secretary of
the Company and the Chairman of the Company's Board of Directors. Mr. Deans is
also the father of Mark G. Deans and R. Scott Deans, former Executive Vice
President--Sales and Marketing and Executive Vice President--Operations,
respectively, of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, certain officers and persons
who own more than ten percent (10%) of the Company's outstanding Common Stock
("Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting Persons
are required by Commission regulations to furnish the Company with copies of
all Section 16(a) reports.
To the Company's knowledge, based solely on its review of copies of all
Section 16(a) reports furnished to the Company and written representations that
no other reports were required, all Section 16(a) filing requirements
applicable to the Company's directors and officers were complied with during
the fiscal year ended March 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended March 31, 1996, 1997 and 1998 to (a) the
Company's Chief Executive Officer and (b) the two most highly compensated
individuals (other than the Chief Executive Officer) who were serving as
executive officers of the Company at March 31, 1998 and whose total annual
salary and bonus for the fiscal year ended March 31, 1998 exceeded $100,000
(collectively, the "Named Executive Officers"). None of the current directors
or executive officer was an executive officer during these periods.
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<PAGE> 31
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION LONG-TERM
-------------------------- COMPENSATIONS
AWARDS
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(1)
- -------------------- ---- ---------- -------------- -------------------- ---------------
Ronald S. Deans, 1998 $264,018 $ 0 0 $5,559
Chairman, President 1997 $275,000 86,379 0 --
& CEO 1996 $234,000 87,629 30,0000 --
Mark G. Deans
Executive Vice
1998 $130,738 $ 0 0 $ 674
President-Sales and 1997 $149,903 $29,531 0 --
Marketing 1996 $111,694 $28,184 32,000 --
R. Scott Deans 1998 $124,969 $ 0 0 $ 674
Executive Vice 1997 $149,221 $29,531 0 --
President-Operations 1996 $111,694 $28,184 32,000 --
</TABLE>
(1) The amount reported for Ronald S. Deans includes $4,680 life insurance
premium paid by the Company on Mr. Deans' behalf. All other amounts
reflected in the column reflect 401(k) matching amounts paid by the
Company. The Company matches employee 401(k) contributions with Common
Stock.
STOCK OPTION GRANTS AND EXERCISES
The Company did not grant any stock options during the fiscal year ended
March 31, 1998. In addition, none of the Named Executive Officers exercised
any stock options held by any of them during the fiscal year ended March 31,
1998.
DIRECTOR COMPENSATION
The Company pays each director a fee of $500 per month plus $750 for each
meeting of the Company's Board of Directors attended. 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.
EMPLOYMENT AGREEMENTS
The Company had no written employment agreements with any of its directors
or officers as of March 31, 1998.
ITEM 12. STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER HOLDERS
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
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<PAGE> 32
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)
8373 Semiahmoo Drive
Blaine, WA 98230 1,225,537 12.5%
Fidel Garcia Carrancedo (2)
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231 1,001,968 10.2%
Wellington Management Company LLP (3)
75 State Street
Boston, MA 02109 780,000 7.9%
William T. Graham (4)
4918 Femrite Drive
Madison, WI 53716 446,678 4.5%
James L. Dorman (5)
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231 510,011 4.9%
C. Joseph Barnette
1000 Cherry St.
Kent, OH 44240-7520 0 *
Total Executive Officers and Directors as a Group
(3 persons) (6) 956,689 9.1%
</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.
(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.
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<PAGE> 33
(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 exerciable 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."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. List of documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
(a) Report of Moss Adams LLP regarding Financial
Statements
(b) Consolidated Balance Sheets as of March 31, 1998
and 1997
(c) Consolidated Statements of Operations for the
years ended March 31, 1998, 1997 and 1996
(d) Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1998, 1997 and 1996
(e) Consolidated Statements of Cash Flows for the
years ended March 31, 1998, 1997 and 1996
(f) Notes to Consolidated Financial Statements
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.
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<PAGE> 34
2. EXHIBITS FILED AS PART OF THIS REPORT
<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>
-30-
<PAGE> 35
<TABLE>
<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>
-31-
<PAGE> 36
<TABLE>
<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).
10.22 Convertible Subordinated Note between Geographics, Inc. and James L.
Dorman, dated April 29, 1999, filed herewith.
10.23 Convertible Subordinated Note between Geographics, Inc. and William T.
Graham, dated April 29, 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.
-32-
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 9th day of
June, 1999.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
-------------------
James L. Dorman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
/s/ 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
-33-
<PAGE> 38
GEOGRAPHICS, INC.
TABLE OF CONTENTS
MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT. . . . . . . . . . . . . . . . . F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . F-2
Statement of Operations . . . . . . . . . . . . . . . . . F-3
Statement of Stockholders' Equity (Deficit) . . . . . . . F-4
Statement of Cash Flows . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . F-
</TABLE>
<PAGE> 39
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated balance sheets of Geographics,
Inc. as of March 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
ended March 31, 1998, 1997 and 1996. 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, 1998 and 1997 and the consolidated results of
its operations and its cash flows for each of the years ended March 31, 1998,
1997 and 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the financial statements, the Company has incurred substantial losses in 1998
and 1997 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.
Bellingham, Washington
September 22, 1998
F-1
<PAGE> 40
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $316,078 $408,757
Accounts receivable
Trade receivables, net of allowance for doubtful
accounts, sales returns and cash discounts of
$930,958 in 1998 and $814,841 in 1997 4,164,861 6,654,500
Other receivables 148,050 993,243
Inventory, net of allowance for obsolete inventory
of $586,000 in 1998 and $1,290,000 in 1997 6,763,508 9,457,874
Prepaid expenses, deposits, and other current assets 731,307 893,483
----------- -----------
Total current assets 12,123,804 18,407,857
PROPERTY, PLANT AND EQUIPMENT, net 12,881,118 10,832,231
OTHER ASSETS 340,043 1,005,613
----------- -----------
TOTAL ASSETS $25,344,965 $30,245,701
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Bank overdrafts $301,716 $467,446
Note payable to bank 11,300,808 8,649,390
Accounts payable 3,285,467 2,421,768
Accrued liabilities 2,680,594 2,145,030
Note payable to officer/director - 850,000
Current portion of long-term debt 3,350,344 3,472,674
---------- ----------
Total current liabilities 20,918,929 18,006,307
LONG-TERM DEBT 4,853,254 4,322,371
---------- ----------
Total liabilities 25,772,183 22,328,678
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
No par common stock - 100,000,000 authorized, 9,857,252 and
9,467,877 issued and outstanding in 1998 and 1997, respectively 15,769,018 15,574,018
Foreign currency translation adjustment 33,899 (76,478)
Accumulated deficit (16,230,135) (7,580,517)
----------- -----------
Total stockholders' equity (deficit) (427,218) 7,917,023
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $25,344,965 $30,245,701
=========== ===========
</TABLE>
F-2
<PAGE> 41
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
SALES
Wholesale sales $24,097,845 $17,051,142 $13,220,428
Related party sales - - 2,854,935
------------ ------------ -------------
Total sales 24,097,845 17,051,142 16,075,363
COST OF SALES 21,035,139 16,522,236 10,343,463
------------ ------------ -------------
Gross margin 3,062,706 528,906 5,731,900
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,074,425 8,127,710 4,185,331
AMORTIZATION OF GOODWILL - - 159,768
------------ ------------ -------------
Income (loss) from operations (8,011,719) (7,598,804) 1,386,801
------------ ------------ -------------
OTHER INCOME (EXPENSE)
Other income - 24,907 130,684
Miscellaneous expense (38,365) - -
Loss on sales of property and equipment (159,406) (86,048) (594)
Reserve for impairment on EDP
installation-in-progress - (620,759) -
Interest expense (1,413,219) (805,079) (539,394)
------------ ------------ -------------
Total other income (expense) (1,610,990) (1,486,979) (409,304)
------------ ------------ -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (9,622,709) (9,085,783) 977,497
INCOME TAX PROVISION (BENEFIT) - (55,972) 332,350
------------ ------------ -------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (9,622,709) (9,029,811) 645,147
INCOME FROM DISCONTINUED OPERATIONS,
net of income taxes in 1996 of $302,329 973,091 1,079,510 586,877
------------ ------------ -------------
NET INCOME (LOSS) $(8,649,618) $(7,950,301) $ 1,232,024
============ ============ =============
BASIC EARNINGS PER SHARE
Income (loss) from continuing operations $(1.00) $(0.97) $ 0.10
============ ============ =============
Discontinued operations $0.10 $0.12 $ 0.09
============ ============ =============
Net income (loss) $(0.90) $(0.85) $ 0.19
============ ============ =============
DILUTED EARNINGS PER SHARE
Income (loss) from continuing operations $(1.00) $(0.97) $ 0.09
============ ============ =============
Discontinued operations $0.10 $0.12 $ 0.08
============ ============ =============
Net income (loss) $(0.90) $(0.85) $ 0.17
============ ============ =============
SHARES USED IN COMPUTING EARNINGS PER SHARE
Basic 9,626,335 9,322,278 6,606,499
============ ============ =============
Diluted 9,626,335 9,322,278 7,204,220
============ ============ =============
</TABLE>
F-3
<PAGE> 42
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Foreign
Currency Retained
Common Stock Translation Earnings
------------
Shares Amount Adjustment (Deficit) Total
------ ------ ---------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1995 5,176,213 $ 3,665,581 $ - $ (862,240) $ 2,803,341
Proceeds from issuance
of common stock 520,000 1,986,100 - - 1,986,100
Notes payable, debentures and other
liabilities converted to common
stock 1,540,371 2,169,233 - - 2,169,233
Common stock issued for cash on
exercise of stock options and
warrants,
including income tax benefit 768,000 1,799,154 - - 1,799,154
Net income - - - 1,232,024 1,232,024
- - - ------------ -----------
BALANCE, March 31, 1996 8,004,584 9,620,068 - 369,784 9,989,852
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)
Foreign currency translation
adjustment - - (76,478) - (76,478)
Net loss - - - (7,950,301) (7,950,301)
- - - ------------ -----------
BALANCE, March 31, 1997 9,467,877 15,574,018 (76,478) (7,580,517) 7,917,023
Proceeds from issuance of common
stock 389,375 195,000 - - 195,000
Foreign currency translation
adjustment - - 110,377 - 110,377
Net loss - - - (8,649,618) (8,649,618)
--------- ----------- -------- ------------ -----------
BALANCE, March 31, 1998 9,857,252 $15,769,018 $ 33,899 $(16,230,135) $ (427,218)
========= =========== ======== ============= ===========
</TABLE>
F-4
<PAGE> 43
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(8,649,618) $(7,950,301) $ 1,232,024
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,849,706 1,372,292 1,124,999
Deferred income taxes - 404,000 125,000
Loss on sales of property and equipment 159,406 86,048 594
Reserve for impairment on EDP installation-in-progress - 620,759 -
Services rendered in exchange for common stock 195,000 - -
Changes in noncash operating assets and liabilities
Trade receivables 2,489,639 (1,500,098) (2,561,832)
Related party receivables - 899,422 (560,447)
Other receivables 845,193 (930,671) (3,357)
Inventory 2,694,366 (121,153) (6,238,118)
Prepaid expenses, deposits and other current assets 162,176 (44,402) (517,278)
Accounts payable 863,699 (212,830) 1,315,997
Accrued liabilities 535,564 920,286 814,756
Income tax payable - (145,278) 336,645
----------- ----------- -----------
Net cash flows from operating activities 1,145,131 (6,601,926) (4,931,017)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in (repayment of) bank overdrafts (165,729) 467,445 -
Net borrowings on note payable to bank 2,651,418 3,326,451 3,139,463
Proceeds from long-term debt borrowings - 2,333,526 1,003,029
Repayment of long-term debt (1,790,535) (875,134) (467,986)
Proceeds from notes payable to officers and directors - - 2,452,573
Repayments of notes payable to officer/directors (850,000) (362,706) (398,629)
Proceeds from issuance of common stock - 6,459,945 2,827,254
Foreign currency translation 110,377 (76,478) -
----------- ----------- -----------
Net cash flows from financing activities (44,469) 11,273,049 8,555,704
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (1,933,911) (4,159,500) (3,296,165)
Proceeds from sales of equipment 75,000 50,887 16,741
Net advances from (repayments to) partnerships - (34,484) (56,786)
(Increase) decrease in other assets 665,570 (169,297) (253,797)
----------- ----------- -----------
Net cash flows from investing activities (1,193,341) (4,312,394) (3,590,007)
----------- ----------- -----------
NET CHANGE IN CASH (92,679) 358,729 34,680
CASH, beginning of year 408,757 50,028 15,348
----------- ----------- -----------
CASH, end of year $ 316,078 $ 408,757 $ 50,028
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ 2,199,088 $ 1,989,895 $ 1,110,242
=========== =========== ===========
</TABLE>
F-5
<PAGE> 44
<TABLE>
<C> <C> <C> <C>
Issuance of common stock in exchange for $195,000 $ - $ -
======== ========= ==========
services rendered
Issuance of common stock on conversion of
notes payable,
debentures and other liabilities $ - $ 52,005 $2,169,233
======== ========= ==========
Issuance of common stock for acquisition of $ - $ 200,000 $ -
======== ========= ==========
subsidiary
Income tax benefit (expense) related to
exercise of stock
options and warrants $ - $(758,000) $ 958,000
======== ========= ==========
</TABLE>
<PAGE> 45
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
stationeries, value-added papers, lettering, signage and graphic art
products (see Note 16 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. On July 1, 1996, a merger between the Company
and Grahams Graphics Pty. Ltd., an Australian distributor, was completed.
In connection with this transaction, the Company issued 50,000 shares of
common stock, valued at approximately $200,000 (approximate market value),
assumed liabilities of approximately $150,000 and paid cash of $40,000.
This merger was accounted for as a purchase, with no goodwill recognized
on the transaction.
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
expense was $1,729,706, $1,280,801 and $894,570 during the years ended
March 31, 1998, 1997 and 1996, 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
See accompanying notes to these consolidated statements.
F-6
<PAGE> 46
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 directly into a separate
component of stockholders' equity, if significant. Certain other
translation adjustments and transaction gains and losses are reported in
net income in the period they are realized.
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 15, 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
2
<PAGE> 47
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 $149,609 and $40,950 are
included in other assets at March 31, 1998 and 1997, 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 $1,393,001, $1,924,442 and $867,198 in
1998, 1997 and 1996, respectively.
EARNINGS PER SHARE - During fiscal 1998 the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This
Statement superseded Accounting Principles Board (APB) No. 15 Earnings Per
Share and establishes standards for computing and presenting earnings per
share. All prior years presented have been restated to conform with the
new requirements.
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 which 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, 1998 and 1997 in the
carrying value and fair value of financial instruments.
NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS No. 130,
Comprehensive Income and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information.
3
<PAGE> 48
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. The standards become effective for
fiscal years beginning after December 15, 1997. Management plans to adopt
these standards in the year ending March 31, 1999. Management believes
that adoption of these standards will result in some changes in the
presentation of its financial information but will not have a material
impact on its reported financial condition or results of operation.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to current year presentation. Such reclassifications had no effect
on previously reported earnings or financial position.
NOTE 3 - INVENTORY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 609,183 $ 672,635
Work-in-progress 1,483,308 3,396,754
Finished goods 5,257,515 6,678,485
---------- -----------
7,350,006 10,747,874
Less allowance for obsolete inventory 586,498 1,290,000
---------- -----------
$6,763,508 $ 9,457,874
========== ===========
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated
Depreciation
and Net Book Value
--------------
Cost Amortization 1998 1997
---- ------------ ---- ----
<S> <C> <C> <C> <C>
Land $ 114,563 $ - $114,563 $ 114,563
Buildings 3,874,478 852,823 3,021,655 3,070,234
Machinery and equipment 3,706,786 1,656,507 2,050,279 1,635,018
Machinery and equipment
under capital lease 7,107,475 1,274,937 5,832,538 4,281,155
Display racks 3,287,340 1,659,652 1,627,688 1,155,824
Computers and software 499,615 330,461 169,154 224,229
Automobiles 187,615 140,139 47,476 258,340
Leasehold improvements 32,415 14,650 17,765 26,790
EDP installation-in-progress - - - 66,078
----------- ---------- ----------- -----------
$18,810,287 $5,929,169 $12,881,118 $10,832,231
=========== ========== =========== ===========
</TABLE>
NOTE 5 - OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Other $205,808 $236,168
Trademarks 134,235 109,480
Equipment deposits - 556,390
Setup costs - 103,575
-------- ----------
$340,043 $1,005,613
======== ==========
</TABLE>
NOTE 6 - FINANCING ARRANGEMENTS
4
<PAGE> 49
<TABLE>
<CAPTION>
1998 1997
---- ----
<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. $2,200,029 $2,408,948
Capital lease obligations collateralized by certain
equipment and fixtures. 5,877,633 5,133,327
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. 125,936 252,770
---------- ----------
8,203,598 7,795,045
Less current portion 3,350,344 3,472,674
---------- ----------
$4,853,254 $4,322,371
========== ==========
</TABLE>
The prime rate was 8.5% at March 31, 1998 and 1997.
The Company has a revolving credit agreement with a bank for up to
$12,000,000, 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 the bank's prime rate, with a
stated due date of April 15, 1998. Total outstanding advances under the
revolving credit agreement were $11,300,808 and $8,649,390 at March 31,
1998 and 1997, respectively. The revolving credit agreement and
installment notes are collateralized by substantially all of the assets of
the Company.
The revolving credit agreement and term debt (included in installment
notes payable above) with the same bank are subject to the "Second
Forbearance Agreement" with the bank which acknowledges the Company's
default with respect to the original terms of the debt obligations, but
allows continued borrowing pursuant to the terms of the forbearance
agreement which expires 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 16) 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 expires November 1, 1998 and reduces 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. All outstanding obligations with this bank have been shown
as currently due, pursuant to the terms of the forbearance agreements.
At March 31, 1998, the terms of the agreements provide principal payments
on long-term debt and capital lease obligations as follows:
5
<PAGE> 50
<TABLE>
<C> <C>
1998 $3,350,344
1999 1,124,757
2000 1,175,066
2001 957,129
2002 705,189
Thereafter 891,113
----------
$8,203,598
==========
</TABLE>
Future minimum lease payments under capital leases together with the
present value of minimum lease payments as of March 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $1,586,211
2000 1,557,436
2001 1,483,659
2002 1,122,109
2003 829,847
Thereafter 825,919
----------
Total minimum lease payments 7,405,181
Less amount representing imputed interest 1,527,548
----------
Present value of minimum lease payments $5,877,633
==========
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit) $ - $(459,972) $509,679
Deferred provision (benefit) - 404,000 125,000
---- --------- --------
Total income tax provision (benefit) $ - $ (55,972) $634,679
==== ========= ========
</TABLE>
Income taxes are allocated between continuing and discontinued operation
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total income tax provision (benefit) $ - $(55,972) $634,679
Amounts applicable to discontinued operations - - 302,329
---- -------- --------
Taxes allocated to continuing operations $ - $(55,972) $332,350
==== ======== ========
</TABLE>
The total tax provision differs from the amount computed using the
statutory federal income tax rate as follows:
6
<PAGE> 51
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at
statutory
rate on continuing
operations $(3,272,000) (34.0)% $(3,089,000) (34.0)% $332,350 34.0%
Exercise of stock options
and warrants 367,000 3.8 (758,000) (8.2) - -
Other differences, net 548,000 5.6 (350,972) (3.4) - -
Change in valuation
allowance
for deferred tax assets 2,027,000 21.1 3,774,000 41.5 - -
Benefit absorbed by
income from
discontinued operations 330,000 3.5 368,000 4.0 - -
------------ ------- -------------- ------ -------- -----
Total income tax
provision
(benefit) $ - - % $(55,972) (.1)% $332,350 34.0%
============ ======= ============= ====== ======== =====
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Change in valuation allowance for deferred tax
assets $ 2,027,000 $ 3,774,000 $ -
Depreciation of plant and equipment 302,000 244,000 88,000
Change in tax credit carryforward - 34,000 105,000
Amortization of goodwill and intangibles 17,000 31,000 (31,000)
Other differences, net (13,000) (4,000) (20,000)
Change in allowance for doubtful accounts (259,000) (8,000) (38,000)
Increase in cash surrender value of life insurance (2,000) (35,000) -
Accruals for financial reporting purposes 3,000 (50,000) -
Inventory differences 239,000 (416,000) (10,000)
Effect of net operating loss carryforwards (2,214,000) (3,162,000) -
----------- ----------- --------
Total deferred income tax expense (benefit) $ - $ 404,000 $125,000
=========== =========== ========
</TABLE>
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>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets
Net operating losses $5,476,000 $3,162,000
Inventory, principally due to additional cost inventoried
for tax purposes
and financial statement allowances 236,000 475,000
Goodwill and intangible assets, principally due to
amortization differences 332,000 349,000
Accruals for financial reporting purposes 68,000 71,000
Alternative minimum tax credit carryforwards 70,000 70,000
Accounts receivable, due to allowance for doubtful accounts 317,000 58,000
Cash surrender value of life insurance 37,000 35,000
Other differences, net 25,000 12,000
---------- ----------
</TABLE>
7
<PAGE> 52
<TABLE>
<S> <C> <C>
Net deferred tax assets 6,561,000 4,232,000
Deferred Tax Liabilities
Plant and equipment, principally due to depreciation differences 760,000 458,000
---------- ----------
Net deferred tax assets before valuation allowance 5,801,000 3,774,000
Valuation allowance (5,801,000) (3,774,000)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
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, 1998 and 1997. As a result, the carrying value of net deferred
tax assets was reduced to $-0- at March 31, 1998 and 1997 by increasing
the valuation against deferred tax assets.
Net operating loss carryforwards approximating $14,200,000 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 8 - STOCKHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE PLANS - As of March 31, 1998, 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, 1998. 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 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 for options issued in 1996 is
estimated at $181,000, net of tax. There were no options issued in 1998 or
1997 and therefore no presentation is required for 1998 or 1997.
The following assumptions were used to estimate the fair value of the
options:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Risk-free interest rate 6.26%
Dividend yield rate -%
Price volatility .6787
Weighted average expected life of options 1.60 yr.
</TABLE>
8
<PAGE> 53
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 in 1996 are recognized in the period issued because
they are immediately exercisable.
Pro forma disclosures:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Net income as reported $1,232,024
Additional compensation for fair value of stock options $ 181,000
Pro forma net income $1,051,024
Pro forma earnings per share
Basic $ .16
Diluted $ .15
</TABLE>
The changes in stock options outstanding are as follows:
<TABLE>
<S> <C> <C>
Nonqualified
Common Stock Option Price
Options Per Share
------- ---------
BALANCE, March 31, 1995 452,000
Granted 496,000 $1.47 to 3.57
Exercised (628,000) $.73 to 2.56
--------------
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
===============
</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 $2 86,000 2.07 years $1.46 86,000 $1.46
$2 to 4 87,500 2.55 years 2.93 87,500 2.93
</TABLE>
9
<PAGE> 54
In addition, warrants to purchase 1,342,293 and 24,000 shares of common
stock at prices ranging from $.77 to $6.50, and $.75 to $4.77, were
outstanding as of March 31, 1997 and 1996, respectively. These warrants
are exercisable upon issuance and expire from April 15, 1998 to December
1, 2001. The exercise price of the warrants was equal to the market price
of the stock at the date the warrants were issued.
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. The Company
filed the Articles of Amendment during the current year end.
NOTE 9 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) (numerator) $(8,649,618) $(7,950,301) $1,232,024
============ ============ ==========
Shares used in the calculation (denominator)
Weighted average shares outstanding 9,626,335 9,322,278 6,604,499
Effect of dilutive stock options - - 599,721
------------ ------------ ----------
Diluted shares 9,626,335 9,322,278 7,204,220
============ ============ ==========
</TABLE>
As described in Note 8, the Company has granted stock options and warrants
to purchase up to 1,515,793 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. In future periods, these instruments may reduce the reported net
income per share once profitable operations are attained.
NOTE 10 - RELATED PARTY TRANSACTIONS
On September 15, 1995, officers and directors converted debentures in an
aggregate face amount of $200,000 into 219,178 common shares. The
debentures were convertible at the holder's option into common shares of
the Company at Cdn. $1.25 per share, to a maximum of 219,178 common
shares. There is no remaining balance of debentures outstanding at March
31, 1997.
The Company issued $996,000 of convertible debentures payable to officers
and directors on September 26, 1995. The debentures were convertible at
the holder's option into common shares of the Company at Cdn. $4.45 per
share, to a maximum 274,233 common shares. On December 22, 1995, these
debentures were converted into 274,233 common shares, and are no longer
outstanding.
At March 31, 1996, a certain officer and directors had advanced the
Company $1,264,711 in the form of uncollateralized notes payable. The
notes are payable on demand and are classified as current liabilities.
Interest on these notes are payable monthly at the rate of prime plus 1%.
As of March 31, 1997, the balance remaining on these notes payable to a
certain officer totaled $850,000, which was paid in full subsequent to
year end.
Total interest costs associated with these notes and debentures was
approximately $11,200 and $92,000 for the years ended March 31, 1998 and
1997, respectively, and $60,000 during the year ended March 31, 1996.
10
<PAGE> 55
On January 23, 1996, the Company completed a private placement of 500,000
common shares to officers and directors at a price of Cdn. $5.75. Total
cash received, net of issuance costs, totaled $1,986,100.
Effective April 1, 1996, the Company transferred to Geographics Marketing
Canada, Inc., a wholly-owned subsidiary, the exclusive rights to market
and distribute the Company's products in Canada. These marketing and
distribution rights were previously maintained by Martin Distribution,
Inc. ("Martin"), a company related through common directorship. As such,
the financial results of Geographics Marketing Canada, Inc. have been
included in the consolidated results of Geographics, Inc. for the fiscal
years ended March 31, 1998 and 1997, with all material intercompany
transactions eliminated.
Sales to Martin amounted to $2,854,935 during the year ended March 31,
1996. No sales to Martin were made during the years ended March 31, 1998
and 1997, and there were no amounts due from Martin as of those dates.
International Geographics of Ontario recorded purchases from Martin in the
aggregate amount of $118,659 during the year ended March 31, 1996. No
purchases were made from Martin during the years ended March 31, 1998 and
1997.
The Company has approximately $32,800 and $210,000 due to Guildmark, Inc.,
a company related through common ownership, included in accounts payable
at March 31, 1998 and 1997.
NOTE 11 - 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 $11,471 and $36,296 during the year ended
March 31, 1998 and 1997, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases - The Company conducts certain operations in a leased facility,
under a lease that is classified as an operating lease for financial
statement purposes. The lease requires the Company to pay real estate
taxes, common area maintenance, and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated
rents, expire in 1999. The total minimum lease commitment is $64,770 in
1999. Rental expense under all operating leases were $320,000, $257,000
and 100,000 in 1998, 1997 and 1996, 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, which is expected to occur in October 1998. The Company has
recorded its portion of the settlement to be paid, representing the
deductible on its insurance policy. The total settlement was $1.6 million.
11
<PAGE> 56
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 uses three principal
software packages at its North American production, warehousing and
administrative facilities. These include an operating system, an
electronic data interchange software and an integrated operations and
accounting application package. Of particular importance, the Company's
operations and accounting applications were determined to not be Year 2000
ready. Accordingly, the Company is in negotiations to secure a new
operating and accounting software package with installation to be
scheduled as soon as practicable. The Company estimates that the costs of
acquiring and installing this new software package will range between
$125,000 and $150,000.
The Company continues to evaluate its remaining principle software
packages and believes that existing available upgrades will mitigate the
risk of significant operational problems. However, the Company has not
completed an assessment of its hardware and other systems, including those
of vendors, customers and other third parties. Until a complete assessment
is completed, the Company is unable to estimate the total expense of
assuring that all of its software and hardware are Year 2000 compliant.
The Company plans to complete these assessments no later than March 1999.
NOTE 13 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $4,164,861 and $6,654,500 at March 31, 1998
and 1997, respectively. The Company's trade customers are concentrated in
the retail office products industry and mass market retail stores. Sales
to four major customers approximated 72%, 74% and 80% of total sales for
the years ended March 31, 1998, 1997 and 1996, respectively. Amounts due
from three customers approximated 74% and 89% of the total accounts
receivable at March 31, 1998 and 1997, respectively.
Historically, a substantial portion of the Company's sales have been to a
limited number of customers. Concentration of sales to the Company's five
largest customers is detailed below:
12
<PAGE> 57
<TABLE>
<CAPTION>
Fiscal Year
-----------
Customer 1998 1997 1996
---- ----------- ----
<S> <C> <C> <C>
Office Depot Inc. 31% 31% 40%
Office Max, Inc. 15 26 24
Business Depot, Inc. 11 10 0
Wal-Mart Stores 6 0 0
United Stationers Inc. 3 0 0
Martin Distribution, Inc. 0 0 13
---- ----------- ----
66% 67% 77%
==== =========== ====
</TABLE>
Effective April 1, 1996, Geographics-Canada succeeded Martin Distribution
as the exclusive Importer of Geographics products into Canada.
Business Depot, Inc. (Staples of Canada) sales were included in sales of
Martin Distribution for 1996.
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 following table represents approximate sales and trade accounts
receivable related to the geographic regions in which the Company
operates.
<TABLE>
<CAPTION>
1998
----
Total United States Canada Other
----- ------------- ------ -----
<S> <C> <C> <C> <C>
Sales 100% 79% 13% 8%
==== ==== ==== ===
Accounts receivable 100% 73% 18% 9%
==== ==== ==== ===
1997
----
Total United States Canada Other
----- ------------- ------ -----
Sales 100% 78% 16% 6%
==== ==== ==== ===
Accounts receivable 100% 86% 9% 5%
==== ==== ==== ===
1996
----
Total United States Canada Other
----- ------------- ------ -----
Sales 100% 86% 13% 1%
==== ==== ==== ===
Accounts receivable 100% 83% 15% 2%
==== ==== ==== ===
</TABLE>
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, 1998, 1997 and 1996. 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
13
<PAGE> 58
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:
<TABLE>
<CAPTION>
Fiscal Year
------------
Sales to Domestic and Foreign Customers 1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
United States $17,774,299 $11,637,497 $12,939,098
Canada 4,082,664 3,872,621 2,854,935
Europe 1,197,192 715,327 281,330
Australia 1,043,690 825,697 -
------------ ------------ -----------
Total $24,097,845 $17,051,142 $16,075,363
============ ============ ===========
Operating profit or (loss):
United States $(7,261,961) $(6,587,756) $944,157
Canada (301,179) (473,296) 377,328
Europe (489,263) (727,467) 65,316
Australia 40,684 189,715 -
------------ ------------ -----------
Total $(8,011,719) $(7,598,804) $1,386,801
============ ============ ===========
Identifiable assets:
United States $21,677,859 $27,464,715 $24,263,181
Canada 1,122,452 940,046 410,060
Europe 1,321,662 1,058,046 64,800
Australia 1,222,992 782,894 -
------------ ------------ -----------
Total $25,344,965 $30,245,701 $24,738,041
============ ============ ===========
</TABLE>
Effective April 1, 1996, Geographics - Canada succeeded Martin
Distribution, Inc. ("Martin Distribution") as the exclusive importer of
Geographics products into Canada. Martin Distribution was at the time
owned and controlled by one of the Company's then-acting directors. All
export sales to Canada in fiscal 1997 were to Geographics - Canada. All
export sales to Canada in fiscal 1996 and fiscal 1995 were to Martin
Distribution.
International sales accounted for approximately 20%, 32%, and 26% of the
Company's total net sales in fiscal years 1996, 1997, and 1998,
respectively. International sales were concentrated in Canada, Europe and
Australia. As a result of such international sales, a significant portion
of the Company's revenues will be subject to certain risks, including
unexpected changes in regulatory requirements, exchange rates, tariffs and
other barriers, political and economic instability and other risks. See
"-Risk Factors-International Subsidiaries" and "-Risk Factors-Foreign
Exchange and International Trade."
NOTE 14 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest $1,659,150 $995,691 $812,416
=========== ======== ========
Net cash paid (refund) during the year for
income taxes $ (371,528) $304,303 $173,034
=========== ======== ========
</TABLE>
14
<PAGE> 59
Interest expense of approximately $250,000, $258,000 and $248,000 was
included in income from discontinued operations during 1998, 1997 and
1996, respectively.
NOTE 15 - LIQUIDITY AND OPERATIONS
As shown in the accompanying financial statements, the Company incurred a
net loss of $8,649,618 and $7,950,301 for the years ended March 31, 1998
and 1997, respectively. As a result of these losses, a decline in gross
profit margins, 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 16, in July 1998 the Company appointed a new
President and CEO who was 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.
NOTE 16 - SUBSEQUENT EVENTS
Subsequent to year end, the Company sold substantially all of its signage
and lettering operating assets, licenses, inventory and other rights
(collectively the, "Core Business") to a corporation for total
consideration of $6,820,000. Total assets sold, which are included in the
year end balance sheet, were approximately $1.0 million. The signage and
lettering operations which have been discontinued accounted for
approximately 22% of consolidated total revenues during the year ended
March 31, 1998. The remaining 78% of total consolidated revenues are
generated from the Company's ongoing paper product operations. The gain of
approximately $5.5 million from the sale of the Core Business will be
included in the Company's 1999 statement of operations. The available net
proceeds from the sale were used to reduce the outstanding balance on the
Company's revolving line of credit.
Summarized results of operations for the Core Business for fiscal years
1998, 1997 and 1996 are as follows:
15
<PAGE> 60
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $6,598,881 $6,789,364 $6,538,272
========== ========== ==========
Operating income $1,222,688 $1,337,506 $1,137,660
========== ========== ==========
Income from discontinued operations before
provision for income taxes $ 973,091 $1,079,510 $ 889,206
========== ========== ==========
</TABLE>
In July 1998, the Company's Board of Directors appointed a new President
and CEO who also became the sole director of the Company. The terms for
employment were established pursuant to a board resolution which provides
for a three-year employment contract at a specified salary, reimbursement
for out-of-pocket costs incurred in relocation and 500,000 stock options
at a strike price of $.43 per share. The resolution also provides for the
creation of an incentive compensation arrangement to be ratified by a
newly established board of directors to be recruited for the Company.
NOTE 17 - 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.
16
<PAGE> 1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE, LOCAL OR FOREIGN SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE, LOCAL OR FOREIGN
SECURITIES LAW, IS AVAILABLE. THIS NOTE AND THE RIGHTS, REMEDIES AND
OBLIGATIONS OF THE HOLDER OF THIS NOTE ARE SUBJECT TO THE RIGHT TO COMPEL THE
HOLDER TO EXECUTE AND DELIVER A SUBORDINATION AGREEMENT ON SUCH DATE AND
CONDITIONS AS U.S. BANK NATIONAL ASSOCIATION MAY REQUIRE.
GEOGRAPHICS, INC.
CONVERTIBLE SUBORDINATED NOTE
$50,000.00 James L. Dorman
Blaine, Washington
Dated April 29, 1999
Due and payable on or before September 30, 2001
GEOGRAPHICS, INC., a Wyoming corporation (the "Company"), for value
received, hereby promises to pay to James L. Dorman (the "Creditor"), or his
successors and assigns, on or before September 30, 2001, the principal sum of
$50,000 payable pursuant to the terms and conditions set forth herein, and to
pay interest (computed on the basis of a 360-day year consisting of twelve
30-day months, for actual days elapsed) from the date hereof on the unpaid
balance of such principal amount from time to time outstanding at the prime
rate of U.S. Bank N.A. as announced from time to time plus 2% per annum, such
interest to be due, payable and adjusted as provided below.
1. Principal Payments.
(a) The unpaid principal balance under this Note shall be repaid on the
dates (in each case, a "Principal Payment Date") and in the amounts (in each
case, a "Principal Payment Amount") set forth on Schedule I attached hereto,
with a final payment of all outstanding and unpaid principal due on September
30, 2001. Notwithstanding the immediately preceding sentence, the Company
shall not make any payment of principal hereunder until the earliest to occur
of (a) the payment in full of all Senior Indebtedness (as hereinafter defined),
(b) the Company ceasing to be in default, or operating under a forbearance, in
respect of any Senior Indebtedness, or (c) the written consent of the holders
of Senior Indebtedness to such payment.
(b) On and after any Principal Payment Date on which any principal in
respect hereof is paid, the principal amount of this Note so paid shall not be
convertible as provided in Section 3; provided, however, that if any such
principal amount is not paid, this Note shall continue to be convertible in
respect of the amount not paid as provided in Section 3, with the adjustment to
the Conversion Price provided in Section 3(e). Payments pursuant to this
Section 1 shall be made to the holder of this Note in immediately available
funds on the applicable payment date.
<PAGE> 2
2. Interest Payments.
(a) Interest on this Note shall accrue and compound monthly on the last
day of each calendar month. All accrued, but unpaid, compound interest shall
be payable monthly on the last day of each calendar month (each, an "Interest
Payment Date"). The Company shall not make any payment of interest hereunder
until the earliest to occur of (a) the payment in full of all Senior
Indebtedness (as hereinafter defined), (b) the Company ceasing to be in
default, or operating under a forbearance, in respect of any Senior
Indebtedness, or (c) the written consent of the holders of Senior Indebtedness
to such payment. Thereafter, the Company shall pay interest on each subsequent
Interest Payment Date in an amount equal to twice the current interest amount
owed until the accrued, but unpaid, compound interest then owing is paid.
Interest shall accrue on the principal amount and, to the maximum extent
permitted under applicable law, all accrued, but unpaid, interest on this Note.
(b) On and after any Interest Payment Date on which any accrued, but
unpaid, compound interest in respect hereof is paid, the interest amount so
paid shall not be convertible as provided in Section 3; provided, however, that
if any such interest amount is not paid, this Note shall continue to be
convertible in respect of the amount not paid as provided in Section 3, with
the adjustment to the Conversion Price provided in Section 3(e). Payments
pursuant to this Section 2 shall be made to the holder of this Note in
immediately available funds on the applicable payment date.
3. Conversion.
(a) Conversion.
(i) Option of the Holder. The holder of this Note may convert this
Note, in whole or in part, into shares of the Company's common stock
("Shares") at any time upon ten (10) days prior written notice to the
Company; provided, however, that if this Note is converted in part, it
shall be converted in the minimum amount of $20,000 and integral
multiples of $5,000 in excess of such amount. On or before the date
fixed for conversion set forth in such notice of conversion, the holder
shall surrender this Note at the Company's address set forth in Section
9(e)(ii) hereof, together with a statement of the holder's name (with
address) in which the Shares which shall be issuable on such conversion
shall be issued.
(ii) Option of the Company. The Company may convert this Note, in
whole or in part, into Shares at any time upon ninety (90) days prior
written notice to the holder of this Note; provided, however, that if
this Note is converted in part, it shall be converted in the minimum
amount of $20,000 and integral multiples of $5,000 in excess of such
amount; provided, further, that the Company shall not convert this Note
into Shares until (A) the Company shall have successfully raised, after
the date of this Note, not less than $3 million in the aggregate through
the sale of the Company's equity securities, or (B) the Company ceases to
be in default, or operating under a forbearance, in respect of any Senior
Indebtedness. On or before the date fixed for conversion set forth in
such notice of conversion, the holder shall surrender this Note at the
place designated in such notice,
- 2 -
<PAGE> 3
together with a statement of the holder's name (with address) in which
the Shares which shall be issuable on such conversion shall be issued.
(b) Conversion Price and Shares Issuable.
(i) Number of Shares. The number of Shares in the Company issued
pursuant to a conversion of this Note shall be determined by dividing (x)
the amount payable under this Note to be converted (including, without
limitation, principal and/or interest), by (y) the Conversion Price then
in effect.
(ii) Initial Conversion Price. The Conversion Price on the date of
original issue of this Note is $0.3927.
(iii) Adjustments. If the number of Shares of the Company
outstanding at any time after the date hereof is increased by a
distribution payable in Shares or by a subdivision or split-up of Shares,
then, on the date such payment is made or such change is effective, the
Conversion Price then in effect shall be proportionately decreased and
the number of Shares issuable on conversion of this Note shall be
proportionately increased. If the number of Shares outstanding at any
time after the date hereof is decreased by a combination of the
outstanding Shares then, on the effective date of such combination, the
Conversion Price shall be proportionately increased and the number of
Shares issuable on conversion of this Note shall be proportionately
decreased.
(iv) Minimal Adjustments. No adjustment to the Conversion Price
need be made if such adjustment would result in a change in a Conversion
Price of less than $0.00001. Any adjustment of less than $0.00001 which
is not made shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.00001 or more in Conversion Price.
(v) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of a Conversion Price pursuant to this Section
3, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish
to the holder of this Note a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Company shall, upon written request at any
time of the holder of this Note, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and
readjustments, (B) the applicable Conversion Price at the time in effect,
and (C) the number of Shares and the amount, if any, of other property
which at the time would be received upon conversion of this Note.
(c) Surrender of Note and Delivery of Evidence of Shares. When
surrendered for conversion this Note shall be duly endorsed by, or accompanied
by instruments of transfer in form satisfactory to the Company duly executed
by, the holder or the holder's duly authorized attorney. As promptly as
practicable after the surrender of this Note for conversion, the Company shall
deliver or cause to be delivered at its principal executive office to the
holder, or on the holder's written order, evidence of the Shares issuable upon
the conversion of this Note in
- 3 -
<PAGE> 4
accordance with the provisions hereof. Such conversion shall be deemed to have
been made at the time of the closing (the "Conversion Date"), and the holder in
whose name any Shares shall be issuable upon such conversion shall be deemed to
have become on the Conversion Date the holder of the Shares represented
thereby. All Shares of the Company issued upon conversion of this Note shall
be fully paid and non-assessable.
(d) Fractional Shares. No fractional Shares shall be issuable upon
conversion of this Note, but a payment in cash will be made in respect of any
fraction of a Share which would otherwise be issuable upon the surrender of
this Note, or portion hereof, for conversion. Such payment shall be based on
the price at which this Note is converted to Shares.
(e) Adjustment to Conversion Price Upon Certain Defaults. If the Company
fails to make any principal payment on this Note on the date and in the amounts
provided in Section 1 the Conversion Price shall be reduced at the end of each
ninety (90) day period to ninety percent (90%) of the Conversion Price in
effect prior to such further reduction.
4. Subordination.
The indebtedness evidenced by this Note, and the payment of all amounts
hereunder, are wholly subordinated, junior and subject in right of payment, to
the extent and in the manner hereinafter provided, to the prior payment of
certain senior indebtedness of the Company now outstanding or hereinafter
incurred in favor of U.S. Bank N.A. The holder hereof shall upon the request
of the Company or U.S. Bank N.A. execute and deliver an agreement to
subordinate the right of payment and collection to U.S. Bank N.A. on terms
required by U.S. Bank N.A.
5. Prepayment.
The Company shall not be permitted to prepay this Note without first
obtaining the express written consent of the holder of this Note. Any
permitted prepayment shall be applied to the unpaid principal repayment
installments in the inverse order of maturity. Each permitted prepayment of
principal shall include interest accrued to the date of such prepayment on the
principal amount being prepaid.
6. Default.
Subject to the subordination provisions of Section 4, and notwithstanding
the provisions of Sections 1 and 2, the entire unpaid principal of this Note
and the interest then accrued on this Note shall, upon written notice by the
holder of this Note to the Company, become and be immediately due and payable
without any further notice or demand of any kind or any presentment or protest,
if any one of the following events shall occur:
(a) If default shall be made in the payment of any principal or interest
under this Note; or
(b) The Company shall fail to perform or observe any agreement, covenant
or obligation arising under any other provision under this Note for a period of
ten (10) days after written notice thereof to the Company by the holder of this
Note; or
- 4 -
<PAGE> 5
(c) Any representation or warranty made by the Company herein or in any
statement or certificate furnished by the Company to the holder of this Note in
connection with the issuance and sale of this Note or any securities issuable
pursuant to the terms hereof proves untrue in any material respect as of the
date of the issuance or making thereof; or
(d) The Company shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any indebtedness in the aggregate principal
amount of $25,000 or more, or shall default in the performance or observance of
any obligation or condition with respect to any such indebtedness or any other
event shall occur or condition exist, if the effect of such default, event or
condition is to accelerate the maturity of any such indebtedness or to permit
(without regard to any required notice or lapse of time) the holder or holders
thereof, or any trustee or agent for such holders, to accelerate the maturity
of any such indebtedness, or any such indebtedness shall become or be declared
to be due and payable prior to its stated maturity other than as a result of a
regularly scheduled payment (provided, however, that any such default existing
and continuing on the date of this Note in respect of the Senior Indebtedness
shall not constitute a default hereunder until and unless the Company shall
cease to have the benefit of a forbearance of the holders of the Senior
Indebtedness in respect of such default); or
(e) (i) The Company shall commence a voluntary case concerning itself
under the Bankruptcy Code; (ii) an involuntary case is commenced against the
Company and the petition is not controverted within ten (10) days, or is not
dismissed within thirty (30) days, after commencement of the case; (iii) a
custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge
of, all or substantially all of the property of the Company or the Company
commences any other proceedings under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction whether now or hereafter in effect relating
to the Company or there is commenced against the Company any such proceeding
which remains undismissed for a period of sixty (60) days; (iv) any order of
relief or other order approving any such case or proceeding is entered; (v) the
Company is adjudicated insolvent or bankrupt; (vi) the Company suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of thirty (30) days;
(vii) the Company makes a general assignment for the benefit of creditors;
(viii) the Company shall fail to pay, or shall state that it is unable to pay,
or shall be unable to pay, its debts generally as they become due; (ix) the
Company shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; (x) the Company shall by any act or
failure to act consent to, approve of or acquiesce in any of the foregoing;
(xi) any action is taken by the Company for the purpose of effecting any of the
foregoing; (xii) the Company files Articles of Dissolution or the Company's
Board of Directors or shareholders approve any such filing; (xiii) the Company
is dissolved or any administration proceeding is commenced to dissolve the
Company; or
(f) Any judgment, writ or warrant of attachment or of any similar
post-judgment process in an amount in excess of $25,000 shall be entered or
filed against the Company or against any of its properties or assets and remain
unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days.
- 5 -
<PAGE> 6
7. Representation Warranties and Covenants of the Company. To induce the
holder of this Note (or his, her or its predecessor in interest) to make a loan
in the principal amount of $50,000 which is evidenced by this Note, the Company
represents and warrants to the holder of this Note as follows:
(a) Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Wyoming, and has
full power and authority, corporate and otherwise, to execute, deliver and
issue, and to perform its obligations under, this Note.
(b) Authorization. The Company's execution, delivery and issuance of,
and the performance of its obligations under, this Note have been duly
authorized by all necessary corporate action on the part of the Company.
(c) Enforceability. This Note constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
8. Representations and Warranties of the Holder. To induce the Company to
execute and deliver this Note, the holder of this Note, by accepting this Note,
represents and warrants to the Company, and its officers and directors, as
follows:
a. The holder of this Note has been furnished with all materials which
such holder considers relevant to an investment in the Company and has had a
full opportunity to ask questions of and receive answers from the Company or
any person or persons acting on its behalf concerning the terms and conditions
of this Note and, if converted, the Shares.
b. The holder of this Note is acquiring this Note and, if converted, any
Shares for the holder's own account for investment, and not with a view of
distribution or resale, and agrees not to dispose of this Note any Shares
unless they have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and applicable state, local or foreign securities laws
or, in the opinion of counsel for the Company, an exemption from the
registration requirements of the Securities Act and state, local or foreign
securities laws (as applicable) is available.
c. The holder of this Note has adequate means of providing for his, her or
its current financial needs, including possible future personal financial
contingencies, and anticipate no need in the foreseeable future to sell the
Note or, if converted, the Shares. The holder is able to bear the economic
risks of this investment and, without limiting the generality of the foregoing,
is able to hold this Note and, if converted, the Shares for an indefinite
period of time and has sufficient net worth to sustain a loss of the holder's
entire investment in the Company. The holder does not anticipate any changes
in circumstances which would cause the holder to sell this Note or, if
converted, the Shares.
d. If the holder of this Note is an individual, such holder is (i) over 21
years of age, (ii) a citizen of the United States, (iii) a resident of the
State of Wisconsin, and (iv) legally competent to accept this Note, to make the
loan evidenced hereby and to make the representations and warranties contained
herein.
- 6 -
<PAGE> 7
e. If the holder of this Note is an entity other than an individual, (i)
such holder is duly organized, validly existing and in good standing under the
laws of the United States of America or a state thereof, (ii) such holder has
the requisite power and authority to accept this Note and make the loan
evidenced hereby and the representations and warranties contained herein, (iii)
such holder has duly authorized the acceptance of this Note and the making of
the loan evidenced hereby and the representations and warranties contained
herein, (iv) such holder's acceptance of this Note, the making of the loan
evidenced hereby and the representations and warranties contained herein do not
violate the organizational documents of such holder or any applicable law.
f. The holder of this Note, acting on his, her or its own behalf or in
conjunction with such holder's authorized legal, financial or other advisors,
has such knowledge and experience in financial and business matters that such
holder is capable of evaluating the merits and risks of this Note and, if
converted, the Shares.
g. The holder of this Note qualifies as an "Accredited Investor" within
the meaning of Regulation D ("Regulation D") promulgated under the Securities
Act, as evidenced by meeting at least one of the standards set forth below:
(i) Such holder is a natural person and has an individual income
(exclusive of any income attributable to your spouse) of more than
$200,000 in each of the two most recent years and reasonably expects to
have an individual income in excess of $200,000 for the current year; or
(ii) Such holder is a natural person and such holder and his or her
spouse have a combined income of more than $300,000 in each of the two
most recent years and such holder reasonably expects to have a combined
income in excess of $300,000 for the current year; or
(iii) Such holder is a natural person and has an individual net
worth, or such holder and his or her spouse have a combined net worth, in
excess of $1,000,000; or
(iv) Such holder is a trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of accepting and
acquiring this Note or, if converted, the Shares, and whose acceptance of
this Note or, if converted, the Shares is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) promulgated under the
Securities Act; or
(v) Such holder is a director or executive officer of the Company;
or
(vi) Such holder is (A) an organization described in section
501(c)(3) of the Internal Revenue Code, (B) a corporation, (C) a
Massachusetts or similar business trust, or (D) a partnership, not formed
for the specific purpose of accepting and acquiring this Note or, if
converted, the Shares; or
(vii) Such holder is a private business development company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940, as
amended; or
- 7 -
<PAGE> 8
(viii) Such holder is (A) a bank (as defined in section 3(a)(2) of
the Securities Act) or a savings and loan association or other
institution (as defined in section 3(a)(5)(A) of the Securities Act)
whether acting in its individual or fiduciary capacity; (B) a broker or
dealer registered pursuant to section 15 of the Securities Exchange Act
of 1934, as amended; (C) an insurance company as defined in section 2(13)
of the Securities Act; (D) an investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), or a
business development company as defined in section 2(a)(48) of the 1940
Act; (E) a Small Business Investment Company licensed by the U.S. Small
Business Administration under section 301(c) or (d) of the Small Business
Investment Act of 1958, as amended; (F) any plan (1) established and
maintained by a state, its political subdivisions, or an agency or
instrumentality of a state or its political subdivisions, for the
benefits of its employees and (2) having total assets in excess of
$5,000,000; or (G) an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended, where the
investment decision is made by a plan fiduciary, as defined in section
3(21) of the Securities Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if
such employee benefit plan has total assets in excess of $5,000,000 or,
if a self-directed plan, with investment decisions made solely by persons
that are "accredited investors" within the meaning of Regulation D.
For purposes of determining the individual income or the combined income
of the holder and his or her spouse under this Section 8(g), "income"
means any individual adjusted gross income for federal income tax
purposes, plus (x) any deductions for long term capital gains, plus (y)
any deductions for depletion, plus (z) any tax exempt interest.
9. General.
(a) Successors and Assigns. This Note, and the obligations and rights of
the Company and the holder hereof hereunder, shall be binding upon and inure to
the benefit of the Company, the holder of this Note, and their respective
heirs, personal representatives, successors and assigns.
(b) Recourse. Recourse under this Note shall be to the general unsecured
assets of the Company only and in no event to the shareholders, officers,
directors, employees, agents or representatives of the Company.
(c) Changes. Any change or amendment to this Note or any waiver hereunder
shall be effective only if in writing and signed by the party or parties
against whom such change, amendment or waiver is sought to be enforced.
(d) Currency. All payments shall be made in immediately available funds
in such coin or currency of the United States of America as at the time of
payment shall be legal tender therein for the payment of public and private
debts.
(e) Notices. All notices, requests, consents and demands shall be made in
writing and shall be mailed postage prepaid, or delivered by hand, to the
Company or to the holder hereof at
- 8 -
<PAGE> 9
their respective addresses set forth below or to such other addresses as may be
furnished in writing to the other party hereto:
(i) If to the holder: James L. Dorman
Chairman and CEO
Almalga Composites, Inc.
10600 W. Mitchell St.
West Allis, WI 53214
(ii) If to the Company: Geographics, Inc.
Attn: Chairman
1555 Odell Road
P.O. Box 1755
Blaine, WA 98231
(f) Governing Law. This Note shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the
interest laws of the State of Washington.
[The remainder of this page is intentionally blank]
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, this Note has been executed and delivered in Blaine,
Washington, on the date first above written by the duly authorized
representative of the Company.
GEOGRAPHICS, INC.,
a Wyoming Corporation
By: /s/ William T. Graham
---------------------
William T. Graham
Executive Vice President
e:\xf\client\41246\0087\blm6884.w52|
- 10 -
<PAGE> 1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE, LOCAL OR FOREIGN SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE, LOCAL OR FOREIGN
SECURITIES LAW, IS AVAILABLE. THIS NOTE AND THE RIGHTS, REMEDIES AND
OBLIGATIONS OF THE HOLDER OF THIS NOTE ARE SUBJECT TO THE RIGHT TO COMPEL THE
HOLDER TO EXECUTE AND DELIVER A SUBORDINATION AGREEMENT ON SUCH DATE AND
CONDITIONS AS U.S. BANK NATIONAL ASSOCIATION MAY REQUIRE.
GEOGRAPHICS, INC.
CONVERTIBLE SUBORDINATED NOTE
$50,000.00 William T. Graham
Blaine, Washington
Dated April 29, 1999
Due and payable on or before September 30, 2001
GEOGRAPHICS, INC., a Wyoming corporation (the "Company"), for value
received, hereby promises to pay to William T. Graham (the "Creditor"), or his
successors and assigns, on or before September 30, 2001, the principal sum of
$50,000 payable pursuant to the terms and conditions set forth herein, and to
pay interest (computed on the basis of a 360-day year consisting of twelve
30-day months, for actual days elapsed) from the date hereof on the unpaid
balance of such principal amount from time to time outstanding at the prime
rate of U.S. Bank N.A. as announced from time to time plus 2% per annum, such
interest to be due, payable and adjusted as provided below.
1. Principal Payments.
(a) The unpaid principal balance under this Note shall be repaid on the
dates (in each case, a "Principal Payment Date") and in the amounts (in each
case, a "Principal Payment Amount") set forth on Schedule I attached hereto,
with a final payment of all outstanding and unpaid principal due on September
30, 2001. Notwithstanding the immediately preceding sentence, the Company
shall not make any payment of principal hereunder until the earliest to occur
of (a) the payment in full of all Senior Indebtedness (as hereinafter defined),
(b) the Company ceasing to be in default, or operating under a forbearance, in
respect of any Senior Indebtedness, or (c) the written consent of the holders
of Senior Indebtedness to such payment.
(b) On and after any Principal Payment Date on which any principal in
respect hereof is paid, the principal amount of this Note so paid shall not be
convertible as provided in Section 3; provided, however, that if any such
principal amount is not paid, this Note shall continue to be convertible in
respect of the amount not paid as provided in Section 3, with the adjustment to
the Conversion Price provided in Section 3(e). Payments pursuant to this
Section 1 shall be made to the holder of this Note in immediately available
funds on the applicable payment date.
<PAGE> 2
2. Interest Payments.
(a) Interest on this Note shall accrue and compound monthly on the last
day of each calendar month. All accrued, but unpaid, compound interest shall
be payable monthly on the last day of each calendar month (each, an "Interest
Payment Date"). The Company shall not make any payment of interest hereunder
until the earliest to occur of (a) the payment in full of all Senior
Indebtedness (as hereinafter defined), (b) the Company ceasing to be in
default, or operating under a forbearance, in respect of any Senior
Indebtedness, or (c) the written consent of the holders of Senior Indebtedness
to such payment. Thereafter, the Company shall pay interest on each subsequent
Interest Payment Date in an amount equal to twice the current interest amount
owed until the accrued, but unpaid, compound interest then owing is paid.
Interest shall accrue on the principal amount and, to the maximum extent
permitted under applicable law, all accrued, but unpaid, interest on this Note.
(b) On and after any Interest Payment Date on which any accrued, but
unpaid, compound interest in respect hereof is paid, the interest amount so
paid shall not be convertible as provided in Section 3; provided, however, that
if any such interest amount is not paid, this Note shall continue to be
convertible in respect of the amount not paid as provided in Section 3, with
the adjustment to the Conversion Price provided in Section 3(e). Payments
pursuant to this Section 2 shall be made to the holder of this Note in
immediately available funds on the applicable payment date.
3. Conversion.
(a) Conversion.
(i) Option of the Holder. The holder of this Note may convert this
Note, in whole or in part, into shares of the Company's common stock
("Shares") at any time upon ten (10) days prior written notice to the
Company; provided, however, that if this Note is converted in part, it
shall be converted in the minimum amount of $20,000 and integral
multiples of $5,000 in excess of such amount. On or before the date
fixed for conversion set forth in such notice of conversion, the holder
shall surrender this Note at the Company's address set forth in Section
9(e)(ii) hereof, together with a statement of the holder's name (with
address) in which the Shares which shall be issuable on such conversion
shall be issued.
(ii) Option of the Company. The Company may convert this Note, in
whole or in part, into Shares at any time upon ninety (90) days prior
written notice to the holder of this Note; provided, however, that if
this Note is converted in part, it shall be converted in the minimum
amount of $20,000 and integral multiples of $5,000 in excess of such
amount; provided, further, that the Company shall not convert this Note
into Shares until (A) the Company shall have successfully raised, after
the date of this Note, not less than $3 million in the aggregate through
the sale of the Company's equity securities, or (B) the Company ceases to
be in default, or operating under a forbearance, in respect of any Senior
Indebtedness. On or before the date fixed for conversion set forth in
such notice of conversion, the holder shall surrender this Note at the
place designated in such notice,
- 2 -
<PAGE> 3
together with a statement of the holder's name (with address) in which
the Shares which shall be issuable on such conversion shall be issued.
(b) Conversion Price and Shares Issuable.
(i) Number of Shares. The number of Shares in the Company issued
pursuant to a conversion of this Note shall be determined by dividing (x)
the amount payable under this Note to be converted (including, without
limitation, principal and/or interest), by (y) the Conversion Price then
in effect.
(ii) Initial Conversion Price. The Conversion Price on the date of
original issue of this Note is $0.3927.
(iii) Adjustments. If the number of Shares of the Company
outstanding at any time after the date hereof is increased by a
distribution payable in Shares or by a subdivision or split-up of Shares,
then, on the date such payment is made or such change is effective, the
Conversion Price then in effect shall be proportionately decreased and
the number of Shares issuable on conversion of this Note shall be
proportionately increased. If the number of Shares outstanding at any
time after the date hereof is decreased by a combination of the
outstanding Shares then, on the effective date of such combination, the
Conversion Price shall be proportionately increased and the number of
Shares issuable on conversion of this Note shall be proportionately
decreased.
(iv) Minimal Adjustments. No adjustment to the Conversion Price
need be made if such adjustment would result in a change in a Conversion
Price of less than $0.00001. Any adjustment of less than $0.00001 which
is not made shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.00001 or more in Conversion Price.
(v) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of a Conversion Price pursuant to this Section
3, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish
to the holder of this Note a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Company shall, upon written request at any
time of the holder of this Note, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and
readjustments, (B) the applicable Conversion Price at the time in effect,
and (C) the number of Shares and the amount, if any, of other property
which at the time would be received upon conversion of this Note.
(c) Surrender of Note and Delivery of Evidence of Shares. When
surrendered for conversion this Note shall be duly endorsed by, or accompanied
by instruments of transfer in form satisfactory to the Company duly executed
by, the holder or the holder's duly authorized attorney. As promptly as
practicable after the surrender of this Note for conversion, the Company shall
deliver or cause to be delivered at its principal executive office to the
holder, or on the holder's written order, evidence of the Shares issuable upon
the conversion of this Note in
- 3 -
<PAGE> 4
accordance with the provisions hereof. Such conversion shall be deemed to have
been made at the time of the closing (the "Conversion Date"), and the holder in
whose name any Shares shall be issuable upon such conversion shall be deemed to
have become on the Conversion Date the holder of the Shares represented
thereby. All Shares of the Company issued upon conversion of this Note shall
be fully paid and non-assessable.
(d) Fractional Shares. No fractional Shares shall be issuable upon
conversion of this Note, but a payment in cash will be made in respect of any
fraction of a Share which would otherwise be issuable upon the surrender of
this Note, or portion hereof, for conversion. Such payment shall be based on
the price at which this Note is converted to Shares.
(e) Adjustment to Conversion Price Upon Certain Defaults. If the Company
fails to make any principal payment on this Note on the date and in the amounts
provided in Section 1 the Conversion Price shall be reduced at the end of each
ninety (90) day period to ninety percent (90%) of the Conversion Price in
effect prior to such further reduction.
4. Subordination.
The indebtedness evidenced by this Note, and the payment of all amounts
hereunder, are wholly subordinated, junior and subject in right of payment, to
the extent and in the manner hereinafter provided, to the prior payment of
certain senior indebtedness of the Company now outstanding or hereinafter
incurred in favor of U.S. Bank N.A. The holder hereof shall upon the request
of the Company or U.S. Bank N.A. execute and deliver an agreement to
subordinate the right of payment and collection to U.S. Bank N.A. on terms
required by U.S. Bank N.A.
5. Prepayment.
The Company shall not be permitted to prepay this Note without first
obtaining the express written consent of the holder of this Note. Any
permitted prepayment shall be applied to the unpaid principal repayment
installments in the inverse order of maturity. Each permitted prepayment of
principal shall include interest accrued to the date of such prepayment on the
principal amount being prepaid.
6. Default.
Subject to the subordination provisions of Section 4, and notwithstanding
the provisions of Sections 1 and 2, the entire unpaid principal of this Note
and the interest then accrued on this Note shall, upon written notice by the
holder of this Note to the Company, become and be immediately due and payable
without any further notice or demand of any kind or any presentment or protest,
if any one of the following events shall occur:
(a) If default shall be made in the payment of any principal or interest
under this Note; or
(b) The Company shall fail to perform or observe any agreement, covenant
or obligation arising under any other provision under this Note for a period of
ten (10) days after written notice thereof to the Company by the holder of this
Note; or
- 4 -
<PAGE> 5
(c) Any representation or warranty made by the Company herein or in any
statement or certificate furnished by the Company to the holder of this Note in
connection with the issuance and sale of this Note or any securities issuable
pursuant to the terms hereof proves untrue in any material respect as of the
date of the issuance or making thereof; or
(d) The Company shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any indebtedness in the aggregate principal
amount of $25,000 or more, or shall default in the performance or observance of
any obligation or condition with respect to any such indebtedness or any other
event shall occur or condition exist, if the effect of such default, event or
condition is to accelerate the maturity of any such indebtedness or to permit
(without regard to any required notice or lapse of time) the holder or holders
thereof, or any trustee or agent for such holders, to accelerate the maturity
of any such indebtedness, or any such indebtedness shall become or be declared
to be due and payable prior to its stated maturity other than as a result of a
regularly scheduled payment (provided, however, that any such default existing
and continuing on the date of this Note in respect of the Senior Indebtedness
shall not constitute a default hereunder until and unless the Company shall
cease to have the benefit of a forbearance of the holders of the Senior
Indebtedness in respect of such default); or
(e) (i) The Company shall commence a voluntary case concerning itself
under the Bankruptcy Code; (ii) an involuntary case is commenced against the
Company and the petition is not controverted within ten (10) days, or is not
dismissed within 30 days, after commencement of the case; (iii) a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Company or the Company commences any
other proceedings under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
there is commenced against the Company any such proceeding which remains
undismissed for a period of sixty (60) days; (iv) any order of relief or other
order approving any such case or proceeding is entered; (v) the Company is
adjudicated insolvent or bankrupt; (vi) the Company suffers any appointment of
any custodian or the like for it or any substantial part of its property to
continue undischarged or unstayed for a period of thirty (30) days; (vii) the
Company makes a general assignment for the benefit of creditors; (viii) the
Company shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; (ix) the Company shall
call a meeting of its creditors with a view to arranging a composition or
adjustment of its debts; (x) the Company shall by any act or failure to act
consent to, approve of or acquiesce in any of the foregoing; (xi) any action is
taken by the Company for the purpose of effecting any of the foregoing; (xii)
the Company files Articles of Dissolution or the Company's Board of Directors
or shareholders approve any such filing; (xiii) the Company is dissolved or any
administration proceeding is commenced to dissolve the Company; or
(f) Any judgment, writ or warrant of attachment or of any similar
post-judgment process in an amount in excess of $25,000 shall be entered or
filed against the Company or against any of its properties or assets and remain
unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days.
- 5 -
<PAGE> 6
7. Representation Warranties and Covenants of the Company. To induce the
holder of this Note (or his, her or its predecessor in interest) to make a loan
in the principal amount of $50,000 which is evidenced by this Note, the Company
represents and warrants to the holder of this Note as follows:
(a) Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Wyoming, and has
full power and authority, corporate and otherwise, to execute, deliver and
issue, and to perform its obligations under, this Note.
(b) Authorization. The Company's execution, delivery and issuance of,
and the performance of its obligations under, this Note have been duly
authorized by all necessary corporate action on the part of the Company.
(c) Enforceability. This Note constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
8. Representations and Warranties of the Holder. To induce the Company to
execute and deliver this Note, the holder of this Note, by accepting this Note,
represents and warrants to the Company, and its officers and directors, as
follows:
a. The holder of this Note has been furnished with all materials which
such holder considers relevant to an investment in the Company and has had a
full opportunity to ask questions of and receive answers from the Company or
any person or persons acting on its behalf concerning the terms and conditions
of this Note and, if converted, the Shares.
b. The holder of this Note is acquiring this Note and, if converted, any
Shares for the holder's own account for investment, and not with a view of
distribution or resale, and agrees not to dispose of this Note any Shares
unless they have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and applicable state, local or foreign securities laws
or, in the opinion of counsel for the Company, an exemption from the
registration requirements of the Securities Act and state, local or foreign
securities laws (as applicable) is available.
c. The holder of this Note has adequate means of providing for his, her or
its current financial needs, including possible future personal financial
contingencies, and anticipate no need in the foreseeable future to sell the
Note or, if converted, the Shares. The holder is able to bear the economic
risks of this investment and, without limiting the generality of the foregoing,
is able to hold this Note and, if converted, the Shares for an indefinite
period of time and has sufficient net worth to sustain a loss of the holder's
entire investment in the Company. The holder does not anticipate any changes
in circumstances which would cause the holder to sell this Note or, if
converted, the Shares.
d. If the holder of this Note is an individual, such holder is (i) over 21
years of age, (ii) a citizen of the United States, (iii) a resident of the
State of Wisconsin, and (iv) legally competent to accept this Note, to make the
loan evidenced hereby and to make the representations and warranties contained
herein.
- 6 -
<PAGE> 7
e. If the holder of this Note is an entity other than an individual, (i)
such holder is duly organized, validly existing and in good standing under the
laws of the United States of America or a state thereof, (ii) such holder has
the requisite power and authority to accept this Note and make the loan
evidenced hereby and the representations and warranties contained herein, (iii)
such holder has duly authorized the acceptance of this Note and the making of
the loan evidenced hereby and the representations and warranties contained
herein, (iv) such holder's acceptance of this Note, the making of the loan
evidenced hereby and the representations and warranties contained herein do not
violate the organizational documents of such holder or any applicable law.
f. The holder of this Note, acting on his, her or its own behalf or in
conjunction with such holder's authorized legal, financial or other advisors,
has such knowledge and experience in financial and business matters that such
holder is capable of evaluating the merits and risks of this Note and, if
converted, the Shares.
g. The holder of this Note qualifies as an "Accredited Investor" within
the meaning of Regulation D ("Regulation D") promulgated under the Securities
Act, as evidenced by meeting at least one of the standards set forth below:
(i) Such holder is a natural person and has an individual income
(exclusive of any income attributable to your spouse) of more than
$200,000 in each of the two most recent years and reasonably expects to
have an individual income in excess of $200,000 for the current year; or
(ii) Such holder is a natural person and such holder and his or her
spouse have a combined income of more than $300,000 in each of the two
most recent years and such holder reasonably expects to have a combined
income in excess of $300,000 for the current year; or
(iii) Such holder is a natural person and has an individual net
worth, or such holder and his or her spouse have a combined net worth, in
excess of $1,000,000; or
(iv) Such holder is a trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of accepting and
acquiring this Note or, if converted, the Shares, and whose acceptance of
this Note or, if converted, the Shares is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) promulgated under the
Securities Act; or
(v) Such holder is a director or executive officer of the Company;
or
(vi) Such holder is (A) an organization described in section
501(c)(3) of the Internal Revenue Code, (B) a corporation, (C) a
Massachusetts or similar business trust, or (D) a partnership, not formed
for the specific purpose of accepting and acquiring this Note or, if
converted, the Shares; or
(vii) Such holder is a private business development company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940, as
amended; or
- 7 -
<PAGE> 8
(viii) Such holder is (A) a bank (as defined in section 3(a)(2) of
the Securities Act) or a savings and loan association or other
institution (as defined in section 3(a)(5)(A) of the Securities Act)
whether acting in its individual or fiduciary capacity; (B) a broker or
dealer registered pursuant to section 15 of the Securities Exchange Act
of 1934, as amended; (C) an insurance company as defined in section 2(13)
of the Securities Act; (D) an investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), or a
business development company as defined in section 2(a)(48) of the 1940
Act; (E) a Small Business Investment Company licensed by the U.S. Small
Business Administration under section 301(c) or (d) of the Small Business
Investment Act of 1958, as amended; (F) any plan (1) established and
maintained by a state, its political subdivisions, or an agency or
instrumentality of a state or its political subdivisions, for the
benefits of its employees and (2) having total assets in excess of
$5,000,000; or (G) an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended, where the
investment decision is made by a plan fiduciary, as defined in section
3(21) of the Securities Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if
such employee benefit plan has total assets in excess of $5,000,000 or,
if a self-directed plan, with investment decisions made solely by persons
that are "accredited investors" within the meaning of Regulation D.
For purposes of determining the individual income or the combined income
of the holder and his or her spouse under this Section 8(g), "income"
means any individual adjusted gross income for federal income tax
purposes, plus (x) any deductions for long term capital gains, plus (y)
any deductions for depletion, plus (z) any tax exempt interest.
9. General.
(a) Successors and Assigns. This Note, and the obligations and rights of
the Company and the holder hereof hereunder, shall be binding upon and inure to
the benefit of the Company, the holder of this Note, and their respective
heirs, personal representatives, successors and assigns.
(b) Recourse. Recourse under this Note shall be to the general unsecured
assets of the Company only and in no event to the shareholders, officers,
directors, employees, agents or representatives of the Company.
(c) Changes. Any change or amendment to this Note or any waiver hereunder
shall be effective only if in writing and signed by the party or parties
against whom such change, amendment or waiver is sought to be enforced.
(d) Currency. All payments shall be made in immediately available funds
in such coin or currency of the United States of America as at the time of
payment shall be legal tender therein for the payment of public and private
debts.
(e) Notices. All notices, requests, consents and demands shall be made in
writing and shall be mailed postage prepaid, or delivered by hand, to the
Company or to the holder hereof at
- 8 -
<PAGE> 9
their respective addresses set forth below or to such other addresses as may be
furnished in writing to the other party hereto:
(i) If to the holder: William T. Graham
4918 Femrite Drive
Madison, WI 53716
(ii) If to the Company: Geographics, Inc.
Attn: Chairman
1555 Odell Road
P.O. Box 1755
Blaine, WA 98231
(f) Governing Law. This Note shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the
interest laws of the State of Washington.
[The remainder of this page is intentionally blank.]
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, this Note has been executed and delivered in Blaine,
Washington, on the date first above written by the duly authorized
representative of the Company.
GEOGRAPHICS, INC.,
a Wyoming Corporation
By: /s/ James L. Dorman
-------------------
Chairman and Chief Executive Officer
e:\xf\client\41246\0087\blm6883.w52|
- 10 -
<PAGE> 1
EXHIBIT 11.1
Year Ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $(8,649,618) $(17,950,301) $ 1,232,024
Weighted average common shares
outstanding 9,626,335 9,322,278 6,606,499
------------ ------------ ------------
Net income (loss) per share $ (6.90) $ (0.85) $ 0.l9
============ ============ ============
</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 reverence in this Registration
Statement on Form S-8 of Geographics, Inc. of our report dated
September 22, 1998 incorporated by reference in the Annual Report on
Form 10K of Geographics, Inc. for the fiscal year ended March 31,
1998.
/s/ Moss Adams LLP
Bellingham, Washington
June 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> MAR-31-1998
<CASH> 316,078
<SECURITIES> 0
<RECEIVABLES> 5,085,819
<ALLOWANCES> 930,850
<INVENTORY> 6,763,508
<CURRENT-ASSETS> 12,123,804
<PP&E> 18,810,287
<DEPRECIATION> 5,929,169
<TOTAL-ASSETS> 25,344,965
<CURRENT-LIABILITIES> 20,818,929
<BONDS> 4,853,254
0
0
<COMMON> 15,769,018
<OTHER-SE> (16,186,236)
<TOTAL-LIABILITY-AND-EQUITY> 25,344,965
<SALES> 24,097,845
<TOTAL-REVENUES> 24,097,845
<CGS> 21,035,159
<TOTAL-COSTS> 11,074,425
<OTHER-EXPENSES> 197,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,413,219
<INCOME-PRETAX> (9,622,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,622,709)
<DISCONTINUED> 973,091
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,649,618)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
