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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO.1
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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WYOMING 87-0305614
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P. O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (360) 332-6711
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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 |X| No [ ]
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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EXPLANATORY NOTE
Geographics, Inc. (the "Company") has determined to restate its annual
consolidated financial statements and its condensed consolidated quarterly
financial statements for the fiscal year ending March 31, 1999, and condensed
consolidated quarterly financial statements for the interim quarters of fiscal
2000. This amendment includes in Item 1 such restated condensed consolidated
financial statements for the three and six months ended September 30, 1998, and
other information relating to such restated condensed consolidated financial
statements. Item 2 includes the Company's amended and restated discussion and
analysis of financial condition and results of operations.
Except for Items 1 and 2 and Exhibits 11 and 27.1, no other information included
in the original report on Form 10-K is amended by this amendment, and such
information is not included as part of this Amendment. For current information
regarding risks, uncertainties and other factors that may affect the Company's
future performance, please see "Risk Factors" included in Item 7 of the
Company's Annual Report on Form 10-K for the year ended March 31, 2000.
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TABLE OF CONTENTS
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PART I....................................................................................................1
ITEM 1. BUSINESS...................................................................................1
GENERAL....................................................................................1
FORWARD-LOOKING STATEMENTS.................................................................1
BACKGROUND.................................................................................2
INDUSTRY...................................................................................3
PRODUCTS...................................................................................4
SALES BY PRODUCT CATEGORY..................................................................4
BUSINESS CONCENTRATIONS....................................................................6
PURCHASING.................................................................................6
DISTRIBUTION...............................................................................7
MANAGEMENT INFORMATION SYSTEMS--INTEGRATED OPERATIONS
SOFTWARE...................................................................................7
MANAGEMENT INFORMATION SYSTEMS--ELECTRONIC DATA
INTERCHANGE (EDI)..........................................................................8
MANAGEMENT INFORMATION SYSTEMS--YEAR 2000 COMPLIANCE.......................................8
MANUFACTURING OPERATIONS - EQUIPMENT INTEGRATION...........................................8
COMPETITION................................................................................8
TRADEMARKS AND COPYRIGHTS..................................................................9
SEASONALITY...............................................................................10
BACKLOG...................................................................................10
EMPLOYEES.................................................................................10
EXECUTIVE OFFICERS........................................................................10
INVESTIGATION OF FORMER MANAGEMENT........................................................10
RISK FACTORS..............................................................................12
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER
CREDIT FACILITY; NEED FOR ADDITIONAL WORKING CAPITAL......................................12
COMPETITION...............................................................................13
CUSTOMER CONCENTRATIONS...................................................................14
DEPENDENCE ON KEY VENDORS.................................................................14
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS................................................14
IMPLEMENTATION OF AUTOMATED PRODUCTION EQUIPMENT..........................................15
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MANAGEMENT INFORMATION SYSTEMS............................................................15
ELECTRONIC DATA INTERCHANGE...............................................................16
DEPENDENCE ON KEY PERSONNEL...............................................................16
TECHNOLOGY CHANGES AFFECTING PRODUCTS.....................................................16
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS......................................16
CHANGING CONSUMER PREFERENCES AND INTERESTS...............................................17
INTERNATIONAL SUBSIDIARIES................................................................17
FOREIGN EXCHANGE AND INTERNATIONAL TRADE..................................................17
STOCK EXCHANGE LISTING REQUIREMENTS - POSSIBLE DELISTING
ON TORONTO STOCK EXCHANGE.................................................................18
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION...................................18
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY............................................19
VOLATILITY OF STOCK PRICE.................................................................19
YEAR 2000 ISSUES..........................................................................19
ITEM 2. DESCRIPTION OF PROPERTIES.................................................................20
ITEM 3. LEGAL.....................................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................21
PART II................................................................................................ 21
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................................................................21
PRICE RANGE OF COMMON STOCK...............................................................21
DIVIDENDS.................................................................................22
SALES OF UNREGISTERED SECURITIES..........................................................22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................................................25
OVERVIEW..................................................................................25
RESULTS OF OPERATIONS.....................................................................27
1999 COMPARED TO 1998.....................................................................27
1998 COMPARED TO 1997.....................................................................29
LIQUIDITY AND CAPITAL RESOURCES...........................................................30
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ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ACOUNT MARKET RISK
FOREIGN CURRENCY...................................................................................31
INFLATION.................................................................................31
ITEM 8. FINANCIAL STATEMENTS......................................................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................................................32
PART III................................................................................................ 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................32
BOARD AND COMMITTEE MEETINGS..............................................................33
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...................................33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................33
EMPLOYMENT AGREEMENTS.....................................................................33
ITEM 11. EXECUTIVE COMPENSATION....................................................................34
STOCK OPTION GRANTS.......................................................................34
DIRECTOR COMPENSATION.....................................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................................................34
PART IV................................................................................................ 35
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K...........................................................................................35
SIGNATURE................................................................................................39
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PART I
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") was incorporated as
a Wyoming corporation on September 20, 1974. The Company is engaged in the
development, manufacture, marketing and distribution of specialty paper
products, generally made using pre-printed designs, including stationery,
business cards, brochures, memo pads, poster boards and paper cubes.
The Company's fiscal year end is March 31. The Company's executive
offices and domestic operations are located at 1555 Odell Road, Blaine,
Washington 98231, and its telephone number is (360) 332-6711.
There has been a significant change in the composition of the Company's
senior management and the Board of Directors in the past two years. As of March
31, 1997, the Board of Directors of the Company consisted of Mr. Ronald S.
Deans, Mr. Mark G. Deans, Mr. R. Scott Deans, Mr. Luis Alberto Morato, Mr. Alan
D. Tuck, Jr. and Mr. Robert S. Parker. During the year ended March 31, 1998,
Messrs. Mark Deans, Scott Deans, Morato and Tuck resigned from the Board and
were replaced by Mr. David P. McCleery and Mr. Raymond P. Maxon. In July 1998,
Messrs. Ron Deans, McCleery and Maxon resigned from the Board and were replaced
by Richard C. Gockelman, who became the sole director, President and Chief
Executive Officer of the Company. In December 1998, Messrs. William T. Graham,
C. Joseph Barnette, John F. Kuypers, William S. Hanneman and David C. Lentz were
appointed as directors. On April 16, 1999, the Company held a special meeting of
shareholders (the "Special Meeting") At the Special Meeting, the shareholders
removed Messrs. Gockelman, Hanneman, Lentz and Kuypers as Directors, re-elected
Messrs. Graham and Barnette as Directors and elected Mr. James L. Dorman as
Director. The newly appointed Board of Directors appointed Mr. Dorman as
Chairman and Chief Executive Officer and placed Mr. Gockelman, the Company's
President, on paid administrative leave.
The Company's former directors and officers did not comply with the
Company's obligations to timely file its reports under the Securities Exchange
Act of 1934, as amended, including the filing of the 1998 Annual Report on Form
10-K. Further, although Messrs. Graham and Barnette served on the Board during
the last four months of the fiscal year ended March 31, 1999, former management
did not provide them with current information on the Company. Therefore, the
information contained in this Annual Report on Form 10-K is based solely upon
the Company's books and records and upon the audit report of Moss Adams LLP
attached hereto. Although the current Board of Directors believes that the
information contained in this Annual Report on Form 10-K is materially accurate,
they are unable to independently verify such information at this time.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of specialty paper
products as a percentage of revenue; the Company's ability to increase its
market share within the preprint industry; the ability of the Company to
successfully implement price
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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 the electronic
data interchange system, adequate to meet operations requirements in the future
and to improve its internal controls; the ability of the Company to refinance
its existing revolving credit facility to raise additional debt or equity
financing sufficient to meet its working capital requirements; and the ability
of the Company to continue operations as a going concern.
Relevant risks and uncertainties include, but are not limited to,
slower than anticipated growth of the preprint papers market; loss of certain
key customers; insufficient consumer acceptance of the Company's specialty paper
products; unanticipated actions, including price reductions, by the Company's
competitors; unanticipated increases in the costs of raw materials used to
produce the Company's products; loss of favorable trade credit, supply terms,
reliable and immediately available raw material supply and other favorable terms
with certain key vendors, greater than expected costs incurred in connection
with the implementation of a management information system; failure to realize
expected economic efficiencies of the Company's automated production system; the
inability to hire and retain key personnel; unexpected increases in the overall
costs of production as a result of collective bargaining arrangements;
unfavorable determinations of pending lawsuits or disputes; and inability to
secure additional working capital when and as needed.
Additional risks and uncertainties include those described under "Risk
Factors" below and those described from time to time in the Company's other
filings with the Securities and Exchange Commission, press releases and other
communications.
BACKGROUND
From its inception in 1974 until fiscal 1991, the Company was engaged
exclusively in the manufacture and wholesale marketing of various rub-on and
stick-on lettering, stencils, graphics arts products and other signage products.
In 1991, the Company began the development of "pre-print" or "specialty" paper
products consisting of paper on which photographs or other art images are
printed and which is then cut to size. In 1992, the Company introduced its first
specialty paper product under the Geopaper brand name. The Company now has
several specialty paper products made using Geopaper designs, including
stationery, business cards, brochures, memo pads, poster boards and paper cubes
which, in North America, are sold primarily to office supply superstores,
including Office Depot, and mass market retailers, such as Wal-Mart, and which
are also distributed internationally through the Company's subsidiaries in
Europe and Australia. On May 4th of 1998, the Company sold substantially all of
its signage and lettering operating assets to Identity Group, Inc. for total
consideration of $6,820,000. Consequently, the specialty papers group now
constitutes the Company's principal business, with approximately 96% of the
Company's total sales in fiscal 1999 attributable to sales of Geopaper products.
The Company continues to experience substantial growth in this product group
with net sales increasing from $17,051,142 for fiscal 1997 to $20,055,014 in
fiscal 1999, representing an increase of 17.6%.
Primarily to develop its specialty papers group, the Company made
substantial investments to expand facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company experienced delays
and unanticipated additional expenses in the installation of the production
equipment and the management information system. These unanticipated expenses
and operational inefficiencies, together with price reductions for the Company's
products and cost increases for certain raw materials, had a negative impact on
the Company's gross margins and contributed to a substantial net losses for
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fiscal 1997 and 1998. In fiscal 1999, efforts were expended to overcome the
difficulties associated with these operational matters. Current Management is
reviewing these areas and believes further improvements will be necessary in
order to experience the full benefit expected from the original investment.
Since May 1997, the Company has been in default of several financial
covenants under its revolving credit facility, the Company's primary source of
working capital, and borrowings under the facility have exceeded permitted
borrowing base limitations. The existence of these defaults constitutes default
under the Company's mortgage loans and equipment lease facilities. The report of
the Company's auditors included in this Report states that the Company's fiscal
1998 and 1999 losses and non-compliance with covenants under its revolving
credit facility raise substantial doubt about the Company's ability to continue
as a going concern. Current Management is focussed on resolution of this issue,
and has received indication of an extension of forbearance until June 30, 1999
and an extension of credit over and above the borrowing base by $750,000.
Discussions with alternate lenders are currently under way. It is management's
intention to restructure all debt to terms that are consistent with the
Company's cash flow, and to raise $3,000,000 to $5,000,000 of debt, equity, or a
combination of both via private placement offering for recapitalization of the
Company.
The amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. The Company's vendors may place the Company on
credit hold or take other actions against the Company, including the termination
of their relationship with the Company or the initiation of collection
proceedings. See "-Risk Factors--Dependence on Key Vendors." In addition, the
Company is actively pursuing possible sources of additional capital , which
could include the issuance of debt or equity securities or both. As of the date
of this Report, the Company has received preliminary commitments with respect to
obtaining additional capital. However, there can be no assurance that any such
transaction will be identified. Further, there can be no assurance that the
Company will be able to obtain sources of additional working capital when and as
needed or that the terms of any such funding will be acceptable to the Company
or in the best long-term interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and
to extend the expiration date of, the revolving credit facility, or to otherwise
obtain sufficient funds when and as needed to satisfy its working capital
requirements could force the Company to curtail operations, seek extended
payment terms from its vendors or seek protection under the federal bankruptcy
laws. See "--Risk Factors--Ability to Continue as a Going Concern; Defaults
under Credit Facility; Need for Additional Working Capital" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut
sheet papers used for letterheads, brochures, flyers, posters and bulletins.
Suppliers within the preprint industry also offer combination sets made up of
multiple products such as matching letterhead, envelopes and business cards, or
software packages that improve ease of use of preprints by the consumer. New
designs and a
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large variety of preprints and related specialty products have been important
elements of success and growth for businesses in the preprint market.
The preprint market is segmented among two major methods of
distribution: retail, making up approximately 25% of the current total domestic
preprint market, and direct mail, which is estimated to represent approximately
75% of the market. Within the retail segment of the preprint market there are
numerous sub-segments, including office supply superstores, mass market
retailers, arts & crafts stores, party stores, specialty paper retailers, and
office supply business-to-business retailers. The Company sells its specialty
paper products exclusively in the retail segment of the preprint market,
primarily to office supply superstores such as Office Depot and mass-market
retailers such as Wal-Mart.
Large retailers somewhat dominate the retail segment of the preprint
industry, and as such, exert considerable influence over the operations of the
relatively smaller suppliers, such as the Company, that service them in the
preprint market. Of particular importance are the factors such as pricing,
monetary requirements for the retailers selling programs (including such
expenses as volume rebates and advertising allowances), prompt order turnaround
which in turn requires the maintenance of large inventories, and payment terms,
including prompt pay discounts and extended and seasonal terms. See "--Risk
Factors--Competition", "--Risk Factors--Maintenance of Large Inventory of
Products" and "--Risk Factors--Customer Concentrations."
PRODUCTS
The Company manufacturers specialty papers which are paper on which
photographs or other art images are printed and which are then cut to size. In
1992, the Company introduced its first specialty paper product under the
Geopaper brand name. The Company now has several specialty paper products made
using Geopaper designs, including stationery, business cards, brochures, memo
pads, posters and paper cubes. These specialty paper products are designed to be
used with personal computer printers.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total Net Sales
attributable to each class of product offered by the Company for the last three
years is set forth below.
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AS A PERCENTAGE OF SALES
CLASS OF PRODUCT
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FISCAL YEAR
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1999 1998 1997
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Designer stationeries and specialty papers 96% 75% 67%
Lettering, signage, stencil and graphic art products 4% 25% 33%
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STATED IN U.S. DOLLARS (ROUNDED)
CLASS OF PRODUCT
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FISCAL YEAR
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1999 1998 1997
Restated Restated
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Designer stationeries and specialty papers $20,055,014 $22,015,900 $14,028,746
Lettering, signage, stencil and graphic art products $ 752,000 $ 6,599,000 $ 6,789,000
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NET SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows:
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REGION FISCAL YEAR
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1999 1998 1997
Restated Restated
Sales to
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Domestic and Foreign Customers
United States(1) $ 12,858,017 $ 16,399,838 $ 12,087,497
Canada 3,630,446 3,422,621 3,422,621
United Kingdom 1,021,474 613,192 351,327
Other European Countries 1,054,000 584,000 364,000
Australia 1,491,077 996,249 825,697
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Total $ 20,055,014 $ 22,015,900 $ 17,051,142
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Operating profit or (loss):
North America $ (2,581,464) $ (7,559,198) $ (8,074,735)
United Kingdom (550,609) (489,263) (727,467)
Australia (34,090) 40,684 189,715
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Total $ (3,166,163) $ (8,089,245) $ (9,085,783)
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Long-lived assets:
United States(2) $ 9,778,864 $ 12,646,878 $ 10,559,587
Canada - 36,510 71,886
Europe 108,793 148,200 164,399
Australia 57,977 49,621 36,359
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Total $ 9,945,634 $ 12,881,118 $ 10,832,231
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(1) In this table sales are stated as "net sales," meaning gross sales less
discounts, allowances, returns and back-end credits. Sales in prior
Annual Reports on Form 10-K were reported as gross sales less returns.
(2) Effective May 4, 1998, the Company sold substantially all of its
signage and lettering operating assets, licenses, inventory, and other
rights to Identity Group, Inc.
International sales accounted for approximately 36%, 34%, and 35% of
the Company's total net sales in fiscal 1999, 1998 and 1997, respectively.
International sales were concentrated in Canada, Europe and Australia. As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers, political
and economic instability and other risks. See "--Risk Factors-International
Subsidiaries" and "--Risk Factors--Foreign Exchange and International Trade."
BUSINESS CONCENTRATIONS
The Company had two customers in 1999 and three customers in 1998 and
1997 which individually exceeded 10% of Sales and in the aggregate accounted for
approximately 43%, 52%, and 67% of sales in 1999, 1998 and 1997 respectively.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. See "--Risk Factors--Customer Concentrations."
PURCHASING
The Company's principal purchases are materials for use in the
manufacture of specialty paper. In particular, the Company routinely purchases
sheets, rolls and reams of commodity paper, as well as other direct materials
involved in the printing and packaging of its Geopaper product lines, such as
inks, packaging film, labels, shipping boxes and other materials. Certain of the
products used in the manufacture of the Company's products are considered
commodities, and as such can vary significantly in cost from time to time.
Though prices may vary, the Company has not experienced and does not currently
anticipate any market shortages of supply of the specific raw materials that it
purchases and uses in the manufacture of its products.
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. Although the
Company purchases goods from approximately 700 vendors, it historically has
practiced a "sole source" approach to vendor selection in that it typically
relied on a single vendor for all purchases on its various categories of
production materials, and other major categories of purchased goods and
services. One key vendor of commodity paper and other related products accounted
for a significant portion of the Company's total merchandise purchases made in
fiscal 1999, 1998, and 1997.
This key vendor has provided the Company an immediately available and
uninterrupted supply of paper. In addition, other key vendors have granted the
Company significant amounts of trade credit. Although the Company may be able to
find other sources of supply for commodity paper and other major raw material
categories, there can be no assurance that potential new vendors, once sourced,
would provide an uninterrupted supply of raw materials or adequate levels of
trade credit, competitive prices or acceptable payment terms. See "--Risk
Factors-Dependence on Key Vendors."
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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:
- Geographics Marketing Canada, Inc. ("Geographics--Canada") was
incorporated as a British Columbia, Canada corporation on July
31, 1995. The offices of Geographics--Canada are located at 17735
1st Ave., Suite 1, Surrey, B.C. V4P 2K1, Canada, and its
telephone number is 800-426-5923. Geographics--Canada was
established to import the Company's products into Canada and
market them to wholesale and retail distribution channels.
- 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.
- Geographics Australia Pty. Ltd. ("Geographics--Australia") was
incorporated in Brisbane, Australia on June 28, 1996. The offices
of Geographics--Australia are located at 3/32 Lillian Fowler
Place, Marrickville NSW 2204, Australia and its telephone number
is 61-2-9519-4488. Geographics--Australia was organized to
import, warehouse, market and distribute the Company's products
throughout Australia.
MANAGEMENT INFORMATION SYSTEMS--INTEGRATED OPERATIONS SOFTWARE
The Company is currently planning completion of the installation of an
integrated Operations Management software package. This software includes MRP
and master scheduling capabilities and is integrated with the Company's
financial systems. An attempt was made in 1996 and 1997 to install this system.
That effort was abandoned in 1997. Current Management anticipates reviewing
needs in this area in fiscal 2000. The Company may be required to make a
significant investment of resources to implement the system in fiscal 2000 and
possibly in future periods. Also, the Company will rely heavily on the support
of a local Value Added Reseller for the successful installation of this system.
MANAGEMENT INFORMATION SYSTEMS--ELECTRONIC DATA INTERCHANGE (EDI)
The Company currently utilizes EDI to transact business with its
largest customers. Presently, approximately 70% to 80% of customer orders and
invoices are transacted by EDI. In fiscal 1999, the Company began development of
in-house EDI expertise to support critical EDI requirements. Currently, the
Company is not in compliance with EDI ASN 4010, which relates electronic
transmission of advanced shipping notice information. The Company is currently
in process of achieving compliance and expects to achieve this in fiscal 2000.
Compliance with this standard is critical to the Company's
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ability to transact business with its largest customers. Consequently,
significant resources may be required to gain compliance within fiscal 2000.
MANAGEMENT INFORMATION SYSTEMS--YEAR 2000 COMPLIANCE
The year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than 4) to define the applicable
year. Computers programs that have or use date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the risks associated with this issue, and is in the process of
assessing related risks and costs.
The Company categorizes its Y2K efforts into the following areas: hardware,
software, embedded processors, vendors, and customers. Each area is assessed and
tracked in phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Y2K project is progressing
and internal remediation work is expected to be completed by October 31 of this
year. The Company is using both internal and external resources to effect
remediation and to test systems.
The Company will initiate communications with significant vendors and customers
in June of 1999 to determine the Company's vulnerability if these companies fail
to remediate their Y2K issues. There can be no guarantee that the systems of
other companies will be timely remedied, or that other companies failure to
remedy Y2K issues would not have a material impact on the Company. The Company
is developing contingency plans to mitigate risks associated with
vendor/customer Y2K issues.
Costs incurred and expected to be incurred have been/will be expensed, and are
not expected to exceed a total of $75,000. Although the Company is not aware of
any internal operational Y2K issues, the Company cannot provide assurances that
the computer systems, products, services, or other systems on which the Company
depends will be Y2K ready on schedule, that the costs of remediation of Y2K
issues will not be greater than expected, or that the Company's contingency
plans will be adequate. The Company is currently unable to evaluate the
magnitude, if any, of the Y2K related issues of its vendors or customers. If
such risks materialize, the Company could experience serious consequences, which
could have a material adverse effect on its financial condition, operations, and
liquidity.
MANUFACTURING OPERATIONS - EQUIPMENT INTEGRATION
In 1996 and 1997, the Company purchased an integrated printing line
combining a high speed press with a slitter and packaging line. As the system
consisted of major components from different manufacturers, an outside firm was
retained to perform system integration services. Management does not believe
that the system is capable of producing the full scope of product for which its
design was intended at this time. Alternative manufacturing techniques have been
developed which are currently in place. In addition, an integrated packaging
line was also installed in 1996. This line has experienced similar issues with
respect to its ability to perform as envisioned, and consequently alternate
manufacturing techniques have been employed. Significant resources may be
required for modification of these systems in order to achieve the manufacturing
efficiencies and cost targets originally envisioned.
COMPETITION
The Company operates in a highly competitive environment The Company's
designer stationery products compete in most of the Company's markets with
Domtar Papers, Great Papers, Action Communications, Inc., Avery Dennison Office
Products, First Base, Paper Direct, Inc., American Pad and Paper, Inc.,
Z-International, Inc., and REDIFORM, Inc. (a division Moore Corp Ltd.). The
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Company's designer stationery products compete for limited shelf space in the
office products superstores, office product stores, mass market stores, contract
stationers, wholesalers, office product catalogs and mail order catalogs.
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguish the Company from its competitors. However, many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. In order to remain
competitive, the Company may be required to continue to make significant
expenditures for capital equipment, sales, service, training and support
capabilities, investments in systems, procedures and controls, expansions of
operations and research and development, among many other items. Additional
financing might be required to fund the Company's investments in those areas.
There can be no assurance that additional financing will be available on terms
acceptable to the Company. See "--Risk Factors--Competition" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
The Company may determine that future price increases are necessary in
order to offset increases of the costs of raw materials, direct labor,
production overhead or other components of the Company's product costs and to
improve or maintain gross profit margins. There can be no assurance that any
future price increases will be successfully implemented. The Company operates in
a highly competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
price levels. Either the potential failure to successfully increase prices, or
the potentially diminished competitive position once a price increase is
successfully implemented could have material adverse effect on the Company's
business, financial condition or results of operations. See "-Risk
Factors--Competition."
TRADEMARKS AND COPYRIGHTS
The Company maintains twelve registered trademarks in the United
States, Canada and Australia: and has applied for two additional marks. The
Company's trademarks have various expiration dates from 2002 to 2006 in the
U.S., expiration dates in 2005 in Canada, and expiration dates in 2011 in
Australia.
The Company considers consumer awareness of its products and brand
names an important factor in creating demand for its products among office
supply stores and other existing or prospective customers. Part of the Company's
strategy for increasing consumer awareness is to establish consistent brand
identity across all of its major product lines. The Company believes that its
trademarks and copyrights play an important role in this effort.
While the Company has made reasonable efforts to protect its
intellectual property, including registering them as trademarks and copyrights
in the countries where the product lines are marketed, to the extent that such
protections are inadequate, the Company could lose all or a part of these rights
which, in turn, could result in the diminution of the Company's overall brand
identity or individual product line identities. Either the loss of intellectual
property rights or the diminution of the Company's brand identities could have a
material adverse effect on the Company. See "Risk Factors--Uncertain Protection
of Intellectual Property Rights".
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SEASONALITY
A significant portion of the Company's customer orders are placed
between August and October of each year for shipment during the Company's third
fiscal quarter, which includes the Christmas season, with the largest levels of
sales historically occurring in the second half of the calendar year. As a
result, the Company has experienced, and is expected to continue to experience,
seasonal fluctuations in its operating results based upon past purchasing
patterns.
BACKLOG
The Company's backlog of orders as of March 31,1999 was approximately
$512,000. The Company expects to fill substantially all of these orders during
the second quarter of 1999. The Company includes in backlog the value of all
purchase orders received from customers for product not yet shipped and
invoiced. The Company's backlog is subject to fluctuations as a result of the
seasonal nature in the Company's business and other factors and is, therefore,
not necessarily indicative of future sales. There can be no assurance that
current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
At March 31, 1999, the Company had approximately 112 employees, 99 of
whom were employed at its headquarters in Blaine, Washington, 6 of whom were
employed at the Company's facilities in the United Kingdom, and 7 of whom were
employed at the Company's facilities in Australia As of the date of this Report,
none of the Company's employees were subject to a collective bargaining
agreement.
EXECUTIVE OFFICERS
The information concerning certain executive officers of the Company
which is set forth in "Item 10. Directors and Executive Officers" of Part III of
this Report is incorporated into this Item 1 of Part I of this Report by this
reference.
INVESTIGATION OF FORMER MANAGEMENT
Background
In January 1998, the Company's board of directors appointed a special
committee to conduct an examination of the performance and conduct of the
Company's management (the "Special Committee"). The Special Committee engaged
independent counsel to assist with this examination. The focus of the
examination has been on the adequacy of documentation related to a number of
expenses incurred, the tax reporting and accounting for certain stock option
exercises, the basis for compliance with the registration requirements of
applicable securities laws, and certain other securities-secured matters. The
current Board of Directors is continuing to investigate these matters. The
Company's management believes that the ultimate resolution of these matters will
not have a material adverse effect on the Company's business, financial
condition or results of operations. Certain of the findings and recommendations
of the Special Committee and the subsequent Board of Directors are summarized
below.
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Expenses
Based on a review of expenses reimbursed or paid by the Company in
1997, it appears that a substantial portion of the approximately $125,000 of
expenses reimbursed lacked adequate documentation for tax purposes. Based on a
limited review of expense accounts for 1996, it appears that most of the
approximately $150,000 in reimbursed expenses in that year also lack adequate
documentation for tax purposes. Pending further review of Company records and
possible explanation by former Management, the Special Committee requested that
former Management reimburse the Company $100,000 with respect to 1997 and 1996
and agree to provide further reimbursement to the Company if and to the extent
that expenses paid or reimbursed by the Company in excess of that amount are
later determined not to be deductible for tax purposes. As of the date of this
report, the Special Committee and former Management have not reached agreement
on either the amount to be paid or the proposed method of payment. To the extent
that it is determined that additional expenses were not properly substantiated,
former Management has agreed to reimburse the Company for such additional
amounts. Further, the Special Committee has required management to implement
policies that will insure proper expense reporting in the future.
Stock Option Exercises
In January 1996, former Management exercised certain non-qualified
stock options to purchase shares of the Company's common stock. The difference
between the exercise prices of the options exercised and the market value of the
shares of the Company's common stock issued upon exercise of such options
yielded a gain of $1,089,049 in the aggregate as of the date of exercise.
Although this gain likely should have been reported for tax purposes as income
by former Management and recorded as an expense by the Company in that year, it
was not. With respect to these option exercises, the Special Committee has (i)
directed the Company to issue amended 1996 Form W-2 to include previously
unreported income associated with such exercises and to instruct the Company's
tax preparer to seek a deduction for the Company in that amount, and (ii) asked
former Management to include such amounts on amended tax returns for the tax
year 1996. It is the Company's understanding that former Management has agreed
to comply with the direction issued by the Special Committee.
Issuance of Common Stock
In July 1996, October 1997 and November 1997, former Management caused
the Company to issue shares of common stock in three separate transactions. It
appears that the Company may not have complied with the registration
requirements of federal and state securities laws in connection with such
transactions. The Company initially made certain disclosures regarding the 1996
transaction in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997. If it is determined that these issuances of stock did not
comply with an exemption from the registration requirements of applicable
securities laws, the Company may be subject to penalties or liability for
damages.
RISK FACTORS
PROSPECTIVE INVESTORS ARE STRONGLY CAUTIONED THAT AN INVESTMENT IN THE
COMPANY INVOLVES A VERY HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD NOT
DISMISS, AS "BOILERPLATE" OR "CUSTOMARY," DISCLOSURE OF THE RISK FACTORS SET
FORTH BELOW. THE CONTINGENCIES AND OTHER RISKS DISCUSSED BELOW COULD AFFECT THE
COMPANY IN WAYS NOT PRESENTLY ANTICIPATED BY ITS MANAGEMENT AND THEREBY HAVE A
MATERIAL ADVERSE EFFECT ON THE VALUE OF ITS COMMON STOCK. A CAREFUL REVIEW AND
UNDERSTANDING OF EACH OF THE RISK
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<PAGE> 17
FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
REPORT IS ESSENTIAL FOR AN INVESTOR SEEKING TO MAKE AN INFORMED DECISION WITH
RESPECT TO THE COMPANY.
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY; NEED FOR
ADDITIONAL WORKING CAPITAL
As a result of the rapid growth of the Company's specialty papers
group, capital expenditures relating to the purchase and installation of an
automated production system and a management information system, operating
losses and other factors, the Company has required, and continues to require,
substantial external working capital. The Company has experienced working
capital shortfalls, which have required the Company to delay payments to certain
vendors, institute internal cost reduction measures and take other steps to
conserve operating capital. During fiscal 1999, operating losses totaled
$3,334,778, and the Company experienced positive operating cash flows of
$1,554,310.
At the date of this Report, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. The revolving credit facility permits borrowings of up to $5.5 million
subject to a borrowing base limitation of 70% of the value of the Company's
eligible accounts and 55% of the value of its inventory, net of certain
reserves. Borrowings under the facility bear interest at the prime rate plus
1.5% and are secured by substantially all of the Company's assets. Under the
terms of the facility, the Company is required to comply with a number of
financial covenants relating to, among other things, the maintenance of minimum
net worth, debt-to-equity ratios and cash flow coverage ratios.
Since May 1997, the Company has failed to comply with the net worth,
debt-to-equity ratios and cash flow coverage ratios under the revolving credit
facility, and borrowings under the facility exceeded the permitted borrowing
base limitations. The Company's lender has also provided the Company with
several mortgage loans and equipment loans, and the existence of the defaults
under the revolving credit facility constitutes default under these other loans.
The report of the Company's auditors included in this Report states that the
Company's fiscal 1999 and 1998 losses and non-compliance with covenants under
its revolving credit facility raise substantial doubt about the Company's
ability to continue as a going concern. The report also states that in April
1999, the Company appointed a new President and CEO who is planning to take
steps necessary to enable the Company to continue as a going-concern.
The amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. The Company's vendors may place the Company on
credit hold or take other actions against the Company, including the termination
of their relationship with the Company or the initiation of collection
proceedings. In addition, the Company is actively pursuing possible sources of
additional capital, which could include the issuance of debt or equity
securities or both. As of the date of this Report, the Company has received
preliminary commitments with respect to obtaining additional capital. However,
there can be no assurance that any such transaction will be identified. Further,
there can be no assurance that the Company will be able to obtain sources of
additional working capital when and as needed or that the terms of any such
funding will be acceptable to the Company or in the best long-term interests of
the Company's shareholders.
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<PAGE> 18
The failure to obtain an increase in borrowing availability under, and
to extend the expiration date of the Company's revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy the Company's
working capital requirements could force the Company to curtail operations, seek
extended payment terms from its vendors or seek protection under the federal
bankruptcy laws. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguish the Company from its competitors. However, many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. In order to remain
competitive, the Company may be required to continue to make significant
expenditures for capital equipment, sales, service, training and support
capabilities, investments in systems, procedures and controls, expansions of
operations and research and development, among many other items. Additional
financing might be required to fund the Company's investments in those areas.
There can be no assurance that additional financing will be available on terms
acceptable to the Company. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources."
The Company may determine that future price increases are necessary in
order to offset increases of the costs of raw materials, direct labor,
production overhead or other components of the Company's product costs and to
improve or maintain gross profit margins. There can be no assurance that any
future price increases will be successfully implemented. The Company operates in
a highly competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
price levels. Either the potential failure to successfully increase prices or
the potentially diminished competitive position once a price increase is
successfully implemented could have material adverse effect on the Company's
business, financial condition or results of operations.
CUSTOMER CONCENTRATIONS
The Company's three largest customers in the aggregate accounted for
approximately 49% and 44% of the Company's total sales for fiscal 1999 and
fiscal 1998, respectively. The Company expects that sales to relatively few
customers will continue to account for a high percentage of its net sales in the
foreseeable future and believes that its financial results depend in significant
part upon the success of a limited number of customers. See "--Business
Concentrations." Although the composition of the group comprising the Company's
largest customers may vary from period to period, the loss of a significant
customer or any reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the designer
stationery or specialty papers industry, may have a material adverse effect on
the Company's business, financial condition and results of operations.
As a result of the consolidation occurring in the office supply
industry in which the major office megastores are accounting for a greater
percentage of industry-wide sales, it is anticipated that an increasing number
of the smaller outlets and retail stores will discontinue operations in the
years ahead. While the Company anticipates that certain of such sales will be
transferred to the larger megastores to which the Company currently supplies its
products, there can be no assurance that any loss of sales to smaller outlets
and retail stores will be replaced in this manner.
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DEPENDENCE ON KEY VENDORS
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. Although the
Company purchases goods from approximately 700 vendors, it historically has
practiced a "sole source" approach to vendor selection in that it typically
relied on a single vendor for all purchases on its various categories of
production materials, and other major categories of purchased goods and
services. One key vendor of commodity paper and other related products accounted
for a significant portion of the Company's total merchandise purchases made in
fiscal 1999, 1998, and 1997.
This key vendor has provided the Company an immediately available and
uninterrupted supply of paper. In addition, other key vendors have granted the
Company significant amounts of trade credit. Although the Company may be able to
find other sources of supply for commodity paper and other major raw material
categories, there can be no assurance that potential new vendors, once sourced,
would provide an uninterrupted supply of raw materials or adequate levels of
trade credit, competitive prices or acceptable payment terms.
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS
As of March 31, 1999, the Company maintained an inventory of specialty
papers of $4,394,555. The Company believes that it is sound business practice to
maintain inventory in sufficient quantities to afford the Company flexibility in
responding to incoming orders, to maintain its reputation as a major supplier in
the industry and to offer certain economies of scale in its purchasing program.
The maintenance of this inventory requires a substantial outlay of funds, which
may not be recovered for extended periods of time. In addition, the Company has
generally observed that raw materials prices change more rapidly than pricing
for the Company's products. Consequently, the Company may be required to absorb
price increases on raw materials before it is able to pass through such
increases to its customer base. Also, to the extent that purchasing preferences
of the Company's customers change over time, such inventory may become less
marketable, which may require the Company to dispose of such inventory at a
reduced price. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Result of Operations." The Company has reserved $861,871 for
obsolete inventory, and is currently reviewing options for the economic disposal
of excess inventories. If the Company were unable to recover a substantial
portion of its investment in inventory, this would result in a material adverse
effect on the Company's business, financial condition and results of operations.
IMPLEMENTATION OF AUTOMATED PRODUCTION EQUIPMENT
The efficient manufacture of designer stationery and specialty papers
is highly capital intensive. In 1996 and 1997, the Company purchased an
integrated printing line combining a high speed press with a slitter and
packaging line. As the system consisted of major components from different
manufacturers, an outside firm was retained to perform system integration
services. Management does not believe that the system is capable of producing
the full scope of product for which its design was intended at this time.
Alternative manufacturing techniques have been developed which are currently in
place. In addition, an integrated packaging line was also installed in 1996.
This line has experienced similar issues with respect to its ability to perform
as envisioned, and consequently alternate manufacturing techniques have been
employed. Significant resources may be required for modification of these
systems in order to achieve the manufacturing efficiencies and cost targets
originally envisioned. There can be no assurance that the machinery will be
fully and successfully implemented and perform at the level required to deliver
the efficiencies expected when the machinery was purchased, or that the Company
will be successful in its future plans for implementing any new production
machinery that it
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may require, either of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
MANAGEMENT INFORMATION SYSTEMS
Over the course of fiscal 1996 and fiscal 1997, the Company invested
significant financial and operational resources in the installation of
integrated hardware and software systems designed to integrate all major aspects
of the Company's business including sales, electronic data interchange (EDI),
warehousing, manufacturing, distribution, purchasing, inventory control,
merchandise planning and replenishment, and various financial systems. The
Company also invested significant financial resources in outside consultants for
the design, installation and ongoing refinement of this system. In fiscal 1998,
the Company determined the need to replace this system and therefore elected to
write-off effectively all of its investment in the system software, consulting
fees and certain other implementation expenditures through March 31, 1997. The
Company has determined that it will need to invest further significant resources
to implement a new system of integrated hardware and software over the course of
fiscal 1998 and possibly future periods. There can be no assurance that the
current package will perform at the minimum level required to adequately support
the operations of the Company until implementation of a new system is completed,
or that the Company will be successful in its future plans for implementing a
new system, either of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
ELECTRONIC DATA INTERCHANGE
The Company currently utilizes EDI to transact business with its
largest customers. Presently, approximately 70% to 80% of customer orders and
invoices are transacted by EDI. In fiscal 1999, the Company began development of
in-house EDI expertise to support critical EDI requirements. Currently, the
Company is not in compliance with EDI ASN 4010, which relates electronic
transmission of advanced shipping notice information. The Company is currently
in process of achieving compliance and expects to achieve this in fiscal 2000.
Compliance with this standard is critical to the Company's ability to transact
business with its largest customers. Consequently, significant resources may be
required to gain compliance within fiscal 2000.
DEPENDENCE ON KEY PERSONNEL
At the present time, the Company is highly dependent on the continued
services of James L. Dorman and William T. Graham, who serve as the Company's
principal executive officers as well as directors of the Company. There can be
no assurances that the Company will be able to replace either of these key
executives in the event their services become unavailable. The loss of other key
members of the Company's management team could also have a material adverse
effect on the Company's business, financial condition or results of operations.
TECHNOLOGY CHANGES AFFECTING PRODUCTS
The design and manufacture of production equipment used in the designer
stationery and specialties paper industries has undergone and continues to
undergo rapid and significant technological change. In particular, developments
in the software industry may afford customers and consumers with the ability to
produce paper products, which offer quality characteristics comparable with that
provided by the Company. Any such developments may, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's business is, to a significant degree,
dependent on the enhancement of its current products and development of new
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products. Product development and enhancement involve substantial expenditures
and a high degree of risks, and there is no assurance that product development
efforts of the Company will be successful, will have sufficient utility or will
be superior to efforts by others, including current customers and consumers of
the Company's products. There can be no assurances that future technological
developments will not render existing or proposed products of the Company
uneconomical or obsolete, or that the Company will not be adversely affected by
the future development of commercially viable products by others. The
development of superior products by others could have a material adverse effect
on the Company's business, financial condition or results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of trademarks and copyrights, and certain of
the Company's proprietary manufacturing processes are protected by trade
secrets. There can be no assurance that the Company's trade secrets, trademarks,
copyrights or other proprietary rights will be effective in discouraging
competition or held valid if subsequently challenged, or that others will not
assert rights in, or ownership of, any of such proprietary rights. In addition,
there can be no assurance that the actions taken by the Company to protect its
proprietary rights will be adequate to prevent imitation of its products, that
the Company's proprietary information will not become known to competitors or
that others will not independently develop products substantially equivalent or
superior to the Company's products without infringing on the Company's
proprietary rights. There can be no assurance that any pending trademark
application will result in the issuance or a registered trademark. In addition,
the laws of certain foreign countries do not protect proprietary rights to the
same extent as do the laws of the United States. While the Company has made
reasonable efforts to protect all of its trade secrets, trademarks, copyrights
and other proprietary rights, to the extent such protections are inadequate, the
Company could lose a part or all of these rights which, in turn, could have a
material adverse effect on the Company's business, financial condition or
results of operations.
CHANGING CONSUMER PREFERENCES AND INTERESTS
The success of the Company's business depends to a significant extent
on consumer preferences and spending habits. Consumer preferences are influenced
by a number of factors, including general economic conditions affecting
disposable consumer income, such as employment, business conditions, interest
rates and taxation. Any significant decline in such general economic conditions
or uncertainties regarding future economic prospects that adversely affect
discretionary consumer spending generally could have a material adverse effect
on the Company's business, prospects, financial condition or results of
operations. Moreover, while the Company believes that its designs,
configurations and related artwork have received substantial acceptance by its
targeted market, there can be no assurances that consumers and other purchasers
of these materials will continue to favor the Company's products in light of the
constant shifting that occurs with regard to consumer preferences and interests.
INTERNATIONAL SUBSIDIARIES
The Company has made substantial efforts to increase its product line
sales to international markets during fiscal 1996 and 1997. The Company has
established three wholly owned foreign subsidiaries to conduct business outside
the United States. The Company derives a significant percentage of its total
sales from these subsidiaries, and collectively they generated an operating
profit on a consolidated basis in fiscal 1999. There can be no assurances that
the results of these operations, individually or collectively, will yield either
net profits or positive cash flows in the foreseeable future. As a result, the
operations and requirements of the Company's foreign subsidiaries may have
material adverse effect on the Company's business, financial condition and
results of operations.
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FOREIGN EXCHANGE AND INTERNATIONAL TRADE
International sales accounted for approximately 36% of the Company's
total net sales in fiscal 1999. See "Sales/Assets by Geographic Location." As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and various other import or
export trade barriers, political and economic instability, difficulties in
receivable collections, difficulties in staffing and managing foreign subsidiary
and branch operations and potentially adverse tax consequences. The Company is
also subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of stationery, specialty papers and
office supply products. The Company cannot predict whether quotas, duties, taxes
or other charges or restrictions will be implemented by the United States,
Canada, Australia or any other country upon the importation or exportation of
the Company's products in the future. There can be no assurance that any of
these factors or adoption of restrictive policies will not have a material
adverse effect on the Company's business, financial condition or result of
operations.
STOCK EXCHANGE LISTING REQUIREMENTS - POSSIBLE DELISTING ON TORONTO STOCK
EXCHANGE
The Company's securities were delisted from the NASDAQ National Market
and subsequently the NASDAQ Smallcap Market during fiscal 1998. Trading of the
Company's securities has continued on the NASDAQ OTC Electronic Bulletin Board.
However, the delistings may restrict marketability of the Company's common
stock. Further, the Securities and Exchange Commission has adopted regulations
which generally define a "penny stock" to be any equity security that has a
market price (as defined) of less than $5 per share, subject to certain
exceptions. As the Common Stock is not listed on the Nasdaq National Market or
the Nasdaq SmallCap Market, it may be deemed to be "penny stock" and thus may be
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. These rules could adversely effect the
ability and willingness of broker-dealers to sell the Common Stock, which could
reduce the liquidity of the Common Stock and have a material adverse effect on
the trading market and the market price for the Common Stock.
In addition, the common shares of the company were suspended from
trading on The Toronto Stock Exchange on June 11, 1998 due to the failure of the
Company to provide the required financial information and filings. Securities
suspended from trading on the Toronto Exchange which have not been approved for
reinstatement will be automatically delisted after a period of one year. To
obtain approval for reinstatement, suspended companies are required to fulfill
original listing requirements for new listings. During the term of the
suspension, the original listing requirements of The Toronto Stock Exchange were
revised and increased. Under these requirements, companies suspended from
trading are required to fulfil listing requirements made of new listings. The
Company does not currently meet the minimum net worth requirement of Cdn.
$7,500,000. However, management expects the Company to be able to meet this
requirement following its anticipated private placement of a combination of debt
and/or equity in the amount of $3,000,000 to $5,000,000. See "Liquidity and
Capital Resources." Consequently, management expects to move forward with a new
listing application following completion of the recapitalization efforts
referenced above.
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of March 31, 1999, there were outstanding warrants for the purchase
of 1,395,121 shares of Common Stock at $6.50 per share. On May 27, 1999 the
Company's Board of Directors approved a
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one-year extension of the expiration date to June 1, 2000. The exercise price of
the warrants was equal to the market price of the stock at the date the warrants
were issued. In addition, as of March 31, 1999 there were outstanding options
granted under the Company's stock option plan to purchase up to 263,500 shares
of Common Stock at exercise prices ranging from up to $2.00 (176,000
outstanding) and from $2.00 to $4.00 (87,500 outstanding). In the event that the
outstanding warrants and options are exercised, the holders will be given the
opportunity to profit from a rise in the market price of the underlying shares.
This may have a diluting and a materially depressive effect on, the market price
for the Common Stock. The terms on which the Company could obtain additional
capital during the life of such warrants and options may be adversely affected
because the holders may be expected to exercise them at a time when the Company
might otherwise be able to obtain comparable additional capital in a new
offering of securities at a price per share greater than the exercise price of
such options and warrants. As a result, the existence and possible exercise of
such options or warrants could have a material adverse effect on the Company's
ability to raise capital through the sale of its equity securities.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
The Company's operating results may fluctuate significantly from period
to period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distributions channel, and competitive
pricing. Consequently, the Company's revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations.
These fluctuations in quarterly operating results could have a material adverse
effect on, among other things, the market price for the Company's Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to
continue to be, volatile. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters." The market price of the Common Stock could
fluctuate, perhaps substantially, in response to a number of factors, such as
actual or anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers or suppliers, changes in the general condition of, or trends in,
the designer stationery and specialty paper industry, paper prices, changes in
governmental regulations, or changes in securities analysts' estimates of the
Company's or its competitors' or industry's, future performance. In addition, in
recent years the stock market in general, and the market for shares of small
capitalization stocks in particular, including the Company's, have 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.
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<PAGE> 24
YEAR 2000 ISSUES
The year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than 4) to define the applicable
year. Computers programs that have or use date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the risks associated with this issue, and is in the process of
assessing related risks and costs.
The Company categorizes its Y2K efforts into the following areas: hardware,
software, embedded processors, vendors, and customers. Each area is assessed and
tracked in phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Y2K project is progressing
and internal remediation work is expected to be completed by October 31 of this
year. The Company is using both internal and external resources to effect
remediation and to test systems.
The Company will initiate communications with significant vendors and customers
in June of 1999 to determine the Company's vulnerability if these companies fail
to remediate their Y2K issues. There can be no guarantee that the systems of
other companies will be timely remedied, or that other companies failure to
remedy Y2K issues would not have a material impact on the Company. The Company
is developing contingency plans to mitigate risks associated with
vendor/customer Y2K issues.
Costs incurred and expected to be incurred have been/will be expensed,
and are not expected to exceed a total of $75,000. Although the Company is not
aware of any internal operational Y2K issues, the Company cannot provide
assurances that the computer systems, products, services, or other systems on
which the Company depends will be Y2K ready on schedule, that the costs of
remediation of Y2K issues will not be greater than expected, or that the
Company's contingency plans will be adequate. The Company is currently unable to
evaluate the magnitude, if any, of the Y2K related issues of its vendors or
customers. If such risks materialize, the Company could experience serious
consequences, which could have a material adverse effect on its financial
condition, operations, and liquidity.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company considers its properties to be suitable and adequate for
their intended uses for the foreseeable future. These properties consist of the
following:
Executive Offices And Domestic Facilities
The Company's headquarters and manufacturing facility in Blaine,
Washington has approximately 96,500 square feet of office, warehouse and
manufacturing space located on ten and one-half acres of Company-owned land. The
Company's Blaine, Washington facility was increased from 34,000 square feet to
49,000 square feet in December 1994. The facility was increased to its current
size during fiscal year 1996. Management believes the facility is suitable and
adequate for the Company's business. Additional warehouse space may be required
for storage of seasonal program requirements. Management believes production
facility capacity is adequate. Seasonal sales programs may periodically require
the Company to utilize additional warehouse space.
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<PAGE> 25
European Facilities
In connection with the distribution of the Company's products in
Europe, Geographics--Europe leases 6,700 square feet of warehouse space near
London, England. The lease requires quarterly lease payments of approximately
$13,600, triple net, and expires on February 14, 2006.
Australian Facilities
In connection with the distribution of the Company's products in
Australia, Geographics--Australia leases 5,000 square feet of warehouse space in
Marrickville, Australia. The lease requires lease payments of $3,100 per month,
triple net (with annual review of the rental rate beginning in August 1997), and
expires on July 1, 1999.
ITEM 3. LEGAL
In its Form 10-Q filed with the Securities and Exchange Commission on
April 29, 1998 for the period ending December 31, 1997, the Company reported
that in July 1997, three related class actions were filed against it, its then
Chairman of the Board, Ronald S. Deans, and its then chief financial officer,
Terry A. Fife. These suits alleged that the defendants violated Section 10(b) of
the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In August 1998, the Company, its insurance carrier and the plaintiffs reached an
agreement to settle the lawsuits, which had previously been consolidated as one
lawsuit (the "Settlement"). On October 30, 1998, the judge presiding over this
lawsuit approved the Settlement. Under the terms of the Settlement, the
plaintiffs received a cash payment of $1.6 million without any admission of
liability or wrongdoing by the defendants. In light of the defendants' insurance
carrier's proposed substantial contribution to any final settlement amount, the
Company does not believe that the funding of the settlement will have a material
impact on its financial condition or operations.
In addition to the litigation matter described above, the Company is
subject to additional claims and actions incident to the operation of its
business. It is the opinion of management that the ultimate resolution of these
matters and any future unidentified claims will not have a material adverse
effect on the Company's business, financial condition or results of operations.
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<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
quarter ended March 31, 1999. On April 16, 1999, the Company held a special
meeting of shareholders on the following matters:
<TABLE>
<CAPTION>
ITEM FOR AGAINST ABSTAIN
---- --- ------- -------
<C> <C> <C> <C>
1. To remove the current members of the Board of 5,635,680 672,205 0
Directors.
2. To establish the number of members of the Board 5,649,180 653,705 5,000
of Directors at three.
3. To elect the following persons as Directors:
William T. Graham 5,649,180 658,705*
James L. Dorman 5,649,180 658,705*
C. Joseph Barnette 5,649,180 658,705*
4. To authorize the reimbursement of reasonable expenses 5,507,350 790,535 10,000
expenses incurred by Messrs. Graham, Dorman and Barnette
in connection with their proxy solicitation.
</TABLE>
* Withheld
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock traded on the Nasdaq National Market from
March 8, 1997 until November 18, 1997. Between November 19, 1997 and December
23, 1997, the Company's Common Stock traded on the Nasdaq SmallCap Market. Since
December 24, 1997, the Company's Common Stock traded on the NASDAQ OTC Bulletin
Board.
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<PAGE> 27
The following table sets forth the high and low closing bid prices or
closing sales prices, as the case may be, of the Common Stock, as reported on
the OTC Bulletin Board, the Nasdaq SmallCap Market or the Nasdaq National Market
System, as the case may be, for each fiscal quarter beginning with the first
fiscal quarter of the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
1998 HIGH LOW
<S> <C> <C>
First Quarter (June 30, 1997) $3.44 $.88
Second Quarter (September 30, 1997) $1.16 $.44
Third Quarter (December 31, 1997) $1.00 $.33
Fourth Quarter (March 31, 1998) $ .63 $.27
1999 HIGH LOW
First Quarter (June 30, 1998) $.75 $.20
Second Quarter (September 30, 1998) $.63 $.27
Third Quarter (December 31, 1998) $.53 $.28
Fourth Quarter (March 31, 1999) $.50 $.31
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions. As of
March 31, 1999, there were approximately 272 holders of record of the Company's
Common Stock.
DIVIDENDS
The Company has not paid dividends at any time during the two fiscal
year period ending on March 31, 1999. The Company anticipates that future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends. Specifically,
the Company's current bank facilities restrict its ability to pay dividends.
SALES OF UNREGISTERED SECURITIES
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes (the "Notes") pursuant to exemption under Section
4(2) of the Securities Act of 1933, as amended. One $50,000 Note was issued to
Mr. James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, and one $50,000 Note was issued to William T. Graham, a Director of the
Company. The Notes bear interest at a rate equal to the prime rate (as
determined by U.S. Bank National Association ("U.S. Bank")) plus two percent
(2%) per annum. The Notes are subordinated to the Company's senior indebtedness
to U.S. Bank and are convertible into shares of the Company's common stock at
$0.3927 per share. Proceeds from the sale of the Notes were used to fund the
Company's
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<PAGE> 28
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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's 1999 Consolidated Financial Statements and notes
thereto contained elsewhere in this Report.
-23-
<PAGE> 29
YEARS ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
Restated Restated Restated
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $10,186,136 $22,613,635 $17,051,142 $22,015,900 20,055,014
Cost of sales 5,881,649 14,194,505 16,522,236 21,035,139 11,931,097
Gross margin 4,304,487 8,419,130 (528,906) 980,761 8,123,917
Selling, general and administrative 2,873,476 5,734,901 8,127,7 9,070,006 11,290,080
Amortization of goodwill 639,067 159,768 -- -- --
----------- ----------- ----------- ----------- ----------
Income (loss) from operations 791,944 2,524,461 (7,598,804) (8,089,245) (3,166,163)
Other income (expense) 15,398 130,684 24,907 (38,365) 31,291
Gain (loss) on sales of property and (13,468) (594) (86,048) (159,406) (126,121)
equipment
Reserve for impairment on EDP -- -- (620,759) -- --
installation-in-progress
Interest expense (457,499) (787,848) (805,079) (1,413,219) (1,220,695)
----------- ----------- ----------- ----------- ----------
Income (loss) before provision for income 336,375 1,866,703 (9,085,783) (9,700,235) (4,481,688)
taxes
Income tax provision (benefit) (411,367) 634,679 (55,972) -- --
Net income from and gain on sale of -- 1,079,510 973,091 5,460,762
discontinued operations (net of tax) --
Net income (loss) $747,742 $1,232,024 $(7,950,301) $(8,727,144) $979,074
======== ========== =========== =========== ==========
Net income (loss) per average common share $0.16 $0.19 $(0.85) $(0.91) $0.10
outstanding
Weighted average shares outstanding used in 4,549,101 6,606,499 9,322,278 9,626,335 9,857,252
computing per share data
SUPPLEMENTAL OPERATING DATA: EBITDA(1) $2,087,206 $3,649,460 $(6,226,512) $(5,464,219) $(294,611)
</TABLE>
(1) As used herein, "EBITDA" is defined as operating income plus
interest, depreciation and amortization. EBITDA is commonly used to
assess the non-cash effect on earnings of generally high levels of both
amortization and depreciation expenses associated with capital
equipment and acquisitions. EBITDA does not purport to represent cash
provided by operating activities as reflected in the Company's
consolidated statements of cash flow, is not a measure
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<PAGE> 30
of financial performance under generally accepted accounting principles
and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
AS OF MARCH 31,
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Restated Restated
<S> <C> <C> <C> <C> <C>
Working capital $1,836,436 $5,886,703 $401,550 $(8,872,651) ($6,253,495)
Total assets 10,614,673 24,738,041 30,245,701 25,325,764 18,139,989
Long-term obligations, less 3,319,948 3,690,360 4,322,371 4,853,254 3,776,432
current portion
Stockholders' equity 2,803,341 9,989,852 7,917,023 (504,744) 283,208
</TABLE>
On April 16, 1999, James L. Dorman was named Chief Executive Officer of
the Company. Mr. Dorman is currently leading the effort to recapitalize the
Company, restructure the Company's debt with U.S. Bank, and is reviewing all
operating departments within the Company for possible restructure. Mr. Dorman is
focussed on making changes deemed necessary to effect a financial turn-around of
the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto appearing
elsewhere on this Report.
OVERVIEW
Geographics, Inc. was incorporated as a Wyoming corporation on
September 20, 1974. From its inception until fiscal 1991, the Company was
engaged exclusively in the manufacture and wholesale marketing of various rub-on
and stick-on lettering, stencils, graphics arts products and other signage
products. In 1991, the Company began the development of "pre-print" or
"specialty" paper products consisting of paper on which photographs or other art
images are printed and which is then cut to size. In 1992, the Company
introduced its first specialty paper product under the Geopaper brand name. The
Company now has several specialty paper products made using Geopaper designs,
including stationery, business cards, brochures, memo pads and paper cubes,
which, in North America, are sold primarily to office supply superstores and
mass market retailers, and which are also distributed internationally through
the Company's subsidiaries in Canada, Europe and Australia. On May 4, 1998, the
Company sold substantially all of its signage and lettering operating assets,
licenses, inventory and other rights to Identity Group, Inc. for total
consideration of $6,820,000. The specialty papers group now constitutes the
entirety of the Company's business and has continued to grow, with net sales
increasing from $17,051,142 for fiscal 1997 to $20,055,014 for fiscal 1999, an
increase of 18%.
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<PAGE> 31
Primarily to develop its specialty papers group, the Company made
substantial investments to expand facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company experienced delays
and unanticipated additional expenses in the installation of the production
equipment and the management information system. These unanticipated expenses
and operational inefficiencies, together with price reductions for the Company's
products and cost increases for certain raw materials, had a negative impact on
the Company's gross margins and contributed to a substantial net losses for
fiscal 1997 and 1998. In fiscal 1999, efforts were expended to overcome the
difficulties associated with these operational matters. Current Management is
reviewing these areas and believes further improvements will be necessary in
order to experience the full benefit expected from the original investment.
Since May 1997, the Company has been in default of several financial
covenants under its revolving credit facility, the Company's primary source of
working capital, and borrowings under the facility have exceeded permitted
borrowing base limitations. The existence of these defaults constitutes default
under the Company's mortgage loans and equipment lease facilities. The report of
the Company's auditors included in this Report states that the Company's fiscal
1998 and 1999 losses and non-compliance with covenants under its revolving
credit facility raise substantial doubt about the Company's ability to continue
as a going concern. Current Management is focussed on resolution of this issue,
and has preliminarily received indication of an extension of forbearance until
June 30, 1999 and an extension of credit over and above the borrowing base by
$750,000. Discussions with alternate lenders are currently under way. It is
management's intention to restructure all debt to terms that are consistent with
the Company's cash flow, and to raise $3,000,000 to $5,000,000 of debt, equity,
or a combination of both via private placement offering for recapitalization of
the Company.
The exact amount and timing of the Company's capital requirements will
be determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. In effort to relieve pressure on cash
requirements, the Company is continuing to seek extended payment terms from its
vendors, is reviewing all operations departments for internal cost reduction
measures which may be instituted immediately and is taking other steps to
conserve operating capital. The Company's vendors may place the Company on
credit hold or take other actions against the Company, including the termination
of their relationship with the Company or the initiation of collection
proceedings. See "-Risk Factors--Dependence on Key Vendors." In addition, the
Company is actively pursuing possible sources of additional capital, which could
include the issuance of debt or equity securities or both. As of the date of
this Report, the Company has received preliminary commitments with respect to
obtaining additional capital. However, there can be no assurance that any such
transaction will be identified. Further, there can be no assurance that the
Company will be able to obtain sources of additional working capital when and as
needed or that the terms of any such funding will be acceptable to the Company
or in the best long-term interests of the Company's shareholders.
Seasonality
A significant portion of the Company's customer orders are placed
between August and October of each year for shipment during the Company's third
fiscal quarter, which includes the Christmas season, with the largest levels of
sales historically occurring in the second half of the calendar year. As a
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<PAGE> 32
result, the Company has experienced, and is expected to continue to experience,
seasonal fluctuations in its operating results. See "Item 1.
Business--Seasonality."
Quarterly Fluctuations
The Company's operating results may fluctuate significantly from period
to period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the Company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company and its competitors, technological factors,
variations in sales by product and distributions channel, and competitive
pricing. Consequently, the Company's revenues may vary significantly by quarter
and the Company's operating results may experience significant fluctuations. See
"Item 1. Business--Risk Factors--Fluctuations of Quarterly Results;
Seasonality."
Backlog
The Company's backlog of orders as of March 31,1999 was approximately
$512,000. The Company expects to fill substantially all of these orders during
the second quarter of 1999. The Company includes in backlog the value of all
purchase orders received from customers for product not yet shipped and
invoiced. The Company's backlog is subject to fluctuations as a result of the
seasonal nature in the Company's business and other factors and is, therefore,
not necessarily indicative of future sales. There can be no assurance that
current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 1. Business--Backlog."
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Restated Restated Restated
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.5 95.5 96.9
Gross margin 40.5 4.5 3.1
Selling, general and administrative expenses 56.3 41.2 47.7
Income from operations (15.8) (36.7) (44.6)
Interest expense (6.1) (6.4) (4.7)
Other income (expense) (.5) (.9) (4.0)
Income (loss) before provision for income taxes (22.3) (44.1) (53.3)
</TABLE>
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<PAGE> 33
<TABLE>
<S> <C> <C> <C>
Income from and gain on sale of discontinued operations 27.2 4.4 (.3)
Income tax provision (benefit) -- -- 6.3
Net income (loss) 4.9% (39.6)% (46.6)%
</TABLE>
1999 COMPARED TO 1998
NET SALES. Net sales decreased 10.6% to $20,055,014 in fiscal 1999 from
$22,015,900 in fiscal 1998. The small decrease was primarily attributable to the
loss of sales to a key account, which declined due to loss of sales with the
sale of the signage and lettering business and due to price competition.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
increased to 40.5% in fiscal 1999, from 4.5% in fiscal 1998. The higher gross
margin is primarily attributable to a decline in operating expenses as a result
of the implementation of automated production machinery and the reduction of
direct and indirect labor due to efficiency improvements in the manufacture the
Company's paper products.
It is management's intention to explore the option of sub-contracting a
portion of manufacturing and fulfillment operations to determine whether further
improvements in gross margin would be available. Management intends to review
freight expense and to explore options for reduction of this expense via change
in the manner in which products are consolidated for shipment and in shipping
origination points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses increased to $11,290,080 (56.3% of net sales) in fiscal 1999 from
$9,070,006 (41.2% of sales) in fiscal 1998. This increase is primarily
attributable to an increase in the Company's legal fees, the proper recording of
reserves against receivables, and an overall increase in the SG&A expenses of
the Company's three foreign subsidiaries in Canada, Europe and Australia.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from
operations in fiscal 1999 of $3,166,163 compared to an operating loss of
$8,089,245 during fiscal 1998. The improvement was the result of significantly
higher gross margins.
OTHER INCOME (EXPENSE). Other expense for fiscal 1999 amounted to
$94,830 compared to $197,771 in fiscal 1998.
INTEREST EXPENSE. Interest expense decreased to $1,220,695 (6.4% of net
sales) during fiscal 1999, compared to $1,413,219 (6.4% of net sales) during
fiscal 1998. The lower interest costs were caused by a decrease in borrowings by
the Company to support the operations. The decrease in borrowings was attributed
to positive cash flow generated by operations and the sale of the lettering and
signage segment of the Company.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before
provision for income taxes was $4,481,688 (22.3% of net sales) in fiscal 1999
compared to a loss of $9,700,235
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<PAGE> 34
(44.1% of net sales) in fiscal 1998. The improvement in 1999 was primarily the
result of the Company's increase in gross margin.
INCOME TAX PROVISION (BENEFIT). There is no income tax provision for
fiscal 1998. Income taxes provided in 1999 were $50,000 representing alternative
minimum taxes owing as a result of the sale of the Core Business.
INCOME FROM AND GAIN ON SALE OF DISCONTINUED OPERATIONS. The company
classified its sign and lettering division as discontinued in fiscal 1998
pending sale and disposition (which occurred in May 1998). The income and gain
attributed to this segment amounted to $5,460,762 in fiscal 1999 versus income
of $973,091 in fiscal 1998.
NET INCOME/LOSS. Net income of $979,074 in fiscal 1999, or 4.9% of net
sales, compares to a net loss of $8,727,144 in fiscal 1998, or (39.6)% of sales.
1998 COMPARED TO 1997
NET SALES. Net sales increased 29.1% to $22,015,900 in fiscal 1998 from
$17,051,142 in fiscal 1997. This increase was primarily attributable to the
continued growth of the Geopaper product line. Geopaper sales increases in 1998
were due primarily to sales for new store openings by Office Depot, and initial
shipments of Geopaper products to new customers, including Wal-Mart, Target and
Kmart. In addition, Geopaper sales increased due to the introduction of the
Geoposterboard product line in over 900 Wal-Mart stores, 500 Office Depot stores
in the United States and Canada, and 80 Staples/Business Depot stores in Canada.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
increased to (4.5% of net sales) in fiscal 1998 from (3.1% of net sales) in
fiscal 1997. The higher gross margin is primarily attributable to an increase in
selling prices for the Company's paper products coupled with modest cost
decreases and continuing shift in mix of sales to higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
to $9,070,006 (41.2% of net sales) in fiscal 1998 from $8,127,710 (47.7% of net
sales) in fiscal 1997. This increase is primarily attributable to increases in
salaries and wages of administrative, and sales and marketing personnel and an
increase in legal expenses incurred by the Company.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from
operations in fiscal 1998 of $8,089,245 compared to an operating loss of
$7,598,804 during fiscal 1997. The operating loss was the result of
significantly lower gross margins and significantly higher sales, general and
administrative expenses.
OTHER INCOME (EXPENSE). Other expense decreased to $197,771 in fiscal
1998 compared to $681,900 in 1997. The difference was attributed to a $620,759
reserve for impairment of EDP installation-in-process that was recognized in
1997.
INTEREST EXPENSE. Interest expense increased to $1,413,219 (6.4% of net
sales) during fiscal year 1998, compared to $805,079 (4.7% of net sales) during
fiscal year 1997. The higher interest costs were caused by increased average
borrowings to support the Company's operating losses, and the acquisition of
equipment used in the manufacture of Geopaper in 1998 and 1997.
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<PAGE> 35
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before
provision for income taxes was $9,700,235 (44.1% of net sales) in fiscal 1998
compared to a loss before provision for income taxes of $9,085,783 (53.3% of
sales) in fiscal 1997.
INCOME TAX PROVISION (BENEFIT). There is no income tax provision in
fiscal 1998. In fiscal 1997, the Company recorded a current income tax benefit
of $55,972.
NET INCOME/LOSS. Net loss of $8,822,144 in fiscal 1998, or 40.1 % of
net sales compared to net loss of $7,950,301 in fiscal 1997, or 56.7% of net
sales.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers
group, capital expenditures relating to the purchase and installation of an
automated production system and a management information system, operating
losses and other factors, the Company has required, and continues to require,
substantial external working capital. The Company has experienced working
capital shortfalls, which have required the Company to delay payments to certain
vendors, institute internal cost reduction measures and take other steps to
conserve operating capital. During fiscal 1999, operating losses totaled
$3,166,163, and the Company experienced positive operating cash flows of
$1,701,128.
At the date of this Report, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. The revolving credit facility permits borrowings of up to $5.5 million
subject to a borrowing base limitation of 70% of the value of the Company's
eligible accounts and 55% of the value of its inventory, net of certain
reserves. Borrowings under the facility bear interest at the prime rate and are
secured by substantially all of the Company's assets. Under the terms of the
facility, the Company is required to comply with a number of financial covenants
relating to, among other things, the maintenance of minimum net worth,
debt-to-equity ratios and cash flow coverage ratios.
Since May 1997, the Company's borrowings under its revolving credit
facility has exceeded the permitted borrowing base limitations. In addition, the
Company has failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under the revolving credit facility. The Company's lender
has also provided the Company with several mortgage loans and equipment loans,
and the existence of the defaults under the revolving credit facility
constitutes default under these other loans. The report of the Company's
auditors included in this Report states that the Company's fiscal 1999 and 1998
losses and non-compliance with covenants under its revolving credit facility
raise substantial doubt about the Company's ability to continue as a going
concern.
In May of 1999, the Company secured agreement from its principal
lender, U.S. Bank, to extend the fifth forbearance agreement until June 30,
1999. Further, an extension of credit over and above the borrowing base in the
amount of $750,000 has been granted. Discussions with alternate lenders are
currently under way. It is management's intention to restructure all debt to
terms that are consistent with the Company's cash flow, and to raise $3,000,000
to $5,000,000 of debt, equity, or a combination of both via private placement
offering for recapitalization of the Company.
The failure to obtain an increase in borrowing availability under, and
to extend the expiration date of, the revolving credit facility, or to otherwise
obtain sufficient funds when and as needed to satisfy its working capital
requirements could force the Company to curtail operations, seek extended
payment terms from its vendors or seek protection under the federal bankruptcy
laws. See "Item 1. Business --
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<PAGE> 36
Risk Factors -- Ability to Continue as a Going Concern; Defaults under Credit
Facility; Need for Additional Working Capital."
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ACOUNT MARKET RISK FOREIGN
CURRENCY
Substantially all of the revenue and operating expenses of the
Company's foreign subsidiaries are denominated in local currencies and
translated into US dollars at rates of exchange approximating those existing at
the date of the transactions. Foreign currency translation impacts primarily
revenue and operating expenses as a result of foreign exchange rate
fluctuations. The Company's foreign currency transaction risk is primarily
limited to amounts receivable from its foreign subsidiaries, which are
denominated in local currencies. To minimize foreign currency transaction risk,
the Company ensures that its foreign subsidiaries remit amounts to the U.S.
parent in a timely manner. The Company does not currently utilize foreign
currency hedging contracts.
The Company also have foreign exchange translation exposures resulting from the
translation of foreign currency-denominated earnings into U.S. dollars in the
Company's consolidated financial statements. Foreign currency transaction
exposure arises when an operating unit transacts business denominated in a
currency that is not its own functional currency. The Company's transaction
risks are attributable primarily to inventory purchases from third party
vendors. The introduction of the Euro has significantly reduced such risks, and
transaction exposures on an overall basis are not significant.
If the U.S. dollar uniformly increases in strength by 10% in 1999
relative to the currencies in which the Company's sales are denominated, income
before taxes would decrease by $517,000 for the fiscal year ending March 31,
1999. This calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting
sales, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency prices.
INFLATION
Although the Company cannot accurately anticipate the effects of
inflation on its financial condition or operations, the Company does not believe
inflation has had or is likely to have a material effect on its results,
operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc.
are incorporated into this Item 8 by reference to another section of this Report
as follows:
(a) Report of Moss Adams LLP regarding Financial Statements F-2
(b) Consolidated Balance Sheets as of March 31, 1999 and 1998 F-3
(c) Consolidated Statements of Income for the years ended March 31,
1999, 1998 and 1997 F-4
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<PAGE> 37
(d) Consolidated Statements of Stockholders' Equity for the years F-5
ended March 31, 1999, 1998 and 1997
(e) Consolidated Statements of Cash Flows for the years ended March 31, F-6
1999, 1998 and 1997
(f) Notes to Consolidated Financial Statements F-7
(g) Report of Moss Adams LLP regarding Schedule II - Valuation and S-1
Qualifying Accounts
(h) Schedule II - Valuation and Qualifying Accounts S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions with the
Company of the executive officers and Directors of the Company as of May 24,
1999. None of the current directors were directors during the year ended March
31, 1998. Directors are elected for one year terms or until their successors are
elected and qualified. Officers are elected by the Board and their terms of
office are at the discretion of the Board.
NAME AGE POSITION
James L. Dorman 66 Chairman of the Board of Directors and Chief
Executive Officer
William T. Graham 74 Director
C. Joseph Barnette 57 Director
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
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<PAGE> 38
retailers and office superstores. In 1990, the year before W.T. Rogers was
merged with a wholly-owned subsidiary of Newell, Inc., its sales had reached
$45,000,000 annually.
C. Joseph Barnette is the co-founder and President of Kent Adhesive
Products Company ("KAPCO"), a privately held adhesive products company, a
position he has held since KAPCO's beginning in 1972.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 1999, there were four meetings
of the Board. Each of the current directors attended at least 75% of the
meetings of the Board. In the near future, the Board of Directors anticipated
creating two new board committees: a compensation committee and an audit
committee. No compensation committee or comparable report is included since none
of the current directors were involved in compensation decisions during the
fiscal year ended March 31, 1999.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because of the complexity of the reporting requirements imposed on the
Company's directors and executive officers under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"), the former special securities counsel
to the Company had recommended that the Company assume responsibility for
preparing and filing the periodic reports of changes in beneficial ownership
required of these persons by statute. However, as of April 16, 1999, the date of
the Special Meeting, this undertaking had not yet been completed. Promptly after
the election of the new Board of Directors and the retentions of new corporate
counsel, the new Board of Directors filed their Initial Statements of
Beneficiary Ownership on Form 3.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes (the "Notes"). One $50,000 Note was issued to Mr.
James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, and one $50,000 Note was issued to William T. Graham, a Director of the
Company. The Notes bear interest at a rate equal to the prime rate (as
determined by U.S. Bank National Association ("U.S. Bank")) plus two percent
(2%) per annum. The Notes are subordinated to the Company's senior indebtedness
to U.S. Bank and are convertible into shares of the Company's common stock at
$0.3927 per share. Proceeds from the sale of the Notes were used to fund the
Company's operations when the Company had reached its borrowing limit under its
credit facilities with U.S. Bank when the Company had no other sources of
working capital.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with James L.
Dorman effective as of April 16, 1999. Pursuant to the Employment Agreement, Mr.
Dorman is entitled to receive a base salary of $75,000 per year. In addition,
Mr. Dorman is entitled to receive two separate tranches of options to purchase
800,000 shares of common stock. Options with respect to the first tranche of
300,000 options vest immediately and have a price of $.30 per share. The second
tranche of 500,000 options vest evenly over eighteen months and have a price of
$.50 per share.
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<PAGE> 39
Mr. Dorman's employment is not for a definitive term and may be
terminated by either Mr. Dorman or the Company at any time. However, if Mr.
Dorman is terminated by the Company other than for cause, all of his options
automatically vest.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended March 31, 1997, 1998 and 1999 to (a) the
Company's Chief Executive Officer, (b) the four most highly compensated
individuals (other than the Chief Executive Officer) who were serving as
executive officers of the Company at March 31, 1999 and whose total annual
salary and bonus for the fiscal year ended March 31, 1999 exceeded $100,000; and
(c) up to two additional individuals who would have been included under item (b)
above but for the fact that the individual was not serving as an executive
officer of the Company at March 31, 1999 (collectively, the "Named Executive
Officers").
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and All Other
Principal Position Year Salary Bonus Compensation
------------------ ---- ------ ------ ------------
<S> <C> <C> <C> <C>
Richard Gockelman, 1999 $102,698 $0 $0
Former President & CEO 1998 $0 $0 $0
1997 $0 $0 $0
Ronald S. Deans, 1999 $84,236 $0 $1,505 (1)
Former President & CEO 1998 $249,160 $22,863 $5,559 (2)
1997 $204,967 $86,379 $0
</TABLE>
(1) Represents life insurance premiums paid by the Company
in the amount of $1,084 and 401 (k) matching amounts of
$421
(2) Represents life insurance premiums paid by the Company in
the amount of $4,680 and 401(k) matching amounts of $879.
STOCK OPTION GRANTS
In the fiscal year ended March 31, 1999, the company granted options to
purchase up to 100,000 shares of common stock at $0.47 per share that are
exercisable between January 1, 2000 and June 30, 2000. There were no grants of
options to purchase common stock made by the Company during the fiscal years
ended March 31, 1997 and 1998.
DIRECTOR COMPENSATION
The Company pays each non-employee director a fee of $500 per month and
$750 for each meeting of the Company's Board of Directors attended and options
to purchase up to 60,000 shares of the Company's common stock. Directors are
entitled to reimbursement for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance of meetings of the Company's Board of
Directors. Directors of the Company who are also employees of the Company do not
receive fees for their services as directors.
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<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as May 21, 1999 with respect to (i) each
shareholder known by the Company to be the beneficial owner of more than five
percent (5%) of the outstanding Common Stock; (ii) each director of the Company;
(iii) each of the Named Executive Officers; and (iv) all current directors and
executive officers as a group. Unless otherwise noted, the Company believes that
the beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable. This table is based upon information supplied to the Company
by directors, officers, and principal shareholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
------------------------------------ ------------------ -------
<S> <C> <C>
Dean Family Limited Partnership (1) 1,225,537 12.5%
8373 Semiahmoo Drive
Blaine, WA 98230
Fidel Garcia Carrancedo (2) 1,001,968 10.2%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
Wellington Management Company LLP (3) 780,000 7.9%
75 State Street
Boston, MA 02109
William T. Graham (4) 446,678 4.5%
4918 Femrite Drive
Madison, WI 53716
James L. Dorman (5) 510,011 4.9%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
C. Joseph Barnette 0 *
1000 Cherry St.
Kent, OH 44240-7520
Total Executive Officers and Directors as a Group 956,689 9.1%
(3 persons) (6)
</TABLE>
(1) The Deans Family Limited Partnership has not filed a Schedule 13D or
Schedule 13G with respect to its holdings. The share ownership of The
Deans Family Limited Partnership is based solely upon information
previously provided to the Company, and the Company is unable to
independently verify such information. The Company had been previously
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<PAGE> 41
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.
(3) This information is based on a report on Schedule 13G dated February 9,
1999 (the "Schedule 13G") filed by Wellington Management Company LLP.
Based on the Schedule 13G, these shares are held of record by clients
of Wellington Management LLP. Such clients have the power to receive,
or the power to direct the receipt of, dividends from, or the proceeds
from the sale of, such shares. Based upon the Schedule 13G, no client
of Wellington Management Company LLP is known to have such right or
power with respect to more than 5% of the shares.
(4) Includes 126,678 shares of Common Stock issuable upon conversion of the
$50,000 Convertible Subordinated Note. See "Certain Relationships and
Related Transactions."
(5) Consists of currently exercisable options to purchase 327,778 shares of
Common Stock, options that become exercisable within 60 days to
purchase 55,555 shares of Common Stock and 126,678 shares of Common
Stock issuable upon conversion of the $50,000 Convertible Subordinated
Note. See "Certain Relationships and Related Transactions."
(6) Includes currently exercisable options to purchase 327,778 shares of
Common Stock options that became exercisable within 60 days to purchase
55,555 shares of Common Stock and 253,356 shares of Common Stock
issuable upon conversion of the two $50,000 Convertible Subordinated
Notes. See "Certain Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
(i) Report of Moss Adams LLP regarding Financial
Statements
(ii) Consolidated Balance Sheets as of March 31, 1999 and
1998
(iii) Consolidated Statements of Income for the years
ended March 31, 1999, 1998 and 1997
(iv) Consolidated Statements of Stockholders' Equity for
the years ended March 31, 1999, 1998 and 1997
(v) Consolidated Statements of Cash Flows for the years
ended March 31, 1999, 1998 and 1997
(vi) Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
(i) Report of Moss Adams LLP regarding Schedule
II--Valuation of Qualifying Accounts
(ii) Schedule II--Valuation of Qualifying Accounts
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<PAGE> 42
All other schedules have been omitted because the required information
is included in the financial statements or the notes thereto, or is not
applicable or required.
3. EXHIBITS FILED AS PART OF THIS REPORT
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
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).
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<PAGE> 43
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).
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).
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<PAGE> 44
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).
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.
10.24 Employment Agreement between Geographics, Inc. and
James L. Dorman, dated April 16, 1999, filed
herewith.
11.1 Statement regarding computation of per share
earnings.
21.1 List of the subsidiaries of Geographics, Inc.
23.1 Consent of Moss Adams LLP.
27.1 Financial Data Schedule.
(B) No Current Reports on Form 8-K were filed during the quarter ended
March 31, 1999.
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<PAGE> 45
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No.1 on Form
10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized
on this 7th day of August, 2000.
GEOGRAPHICS, INC.
By:
------------------------------------
James L. Dorman
Chairman, Chief Executive Officer
Each person whose individual signature appears below hereby authorizes
and appoints James L. Dorman with full power of substitution and full power to
act without the other, as his true and lawful attorney-in-fact and agent to act
in his name, place and stead and to execute in the name and on behalf of such
person, individually and in the capacity of such person stated below, and to
file any and all amendments to this Report together with any exhibits thereto
and any other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
------------------------------------
James L. Dorman
Chief Executive Officer
and Chairman of the Board
------------------------------------
William T. Graham
Director
------------------------------------
C. Joseph Barnette
Director
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<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
Report of Moss Adams LLP regarding Financial Statements F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended March 31, 1999, F-4
1998, and 1997.
Consolidated Statements of Stockholders' Equity for the years ended F-5
March 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended March 31, F-6
1999, 1998, and 1997.
Notes to Consolidated Financial Statements. F-7
Report of Moss Adams LLP regarding Schedule II--Valuation and S-1
Qualifying Accounts
Schedule II--Valuation and Qualifying Accounts S-2
<PAGE> 47
GEOGRAPHICS, INC.
TABLE OF CONTENTS
MARCH 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT..................................................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet...........................................................................................2
Statement of Operations.................................................................................3
Statement of Stockholders' Equity (Deficit) and Comprehensive Income....................................4
Statement of Cash Flows.................................................................................5
Notes to Financial Statements..........................................................................18
</TABLE>
<PAGE> 48
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated balance sheets of Geographics,
Inc. as of March 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income, and cash
flows for each of the years ended March 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above, present
fairly in all material respects, the consolidated financial position of
Geographics, Inc. as of March 31, 1999 and 1998 and the consolidated results of
its operations and its cash flows for each of the years ended March 31, 1999,
1998 and 1997 in conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the Company changed its
method of accounting for the purchase of display racks in the year ended March
31, 1999.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the financial statements, the Company has incurred substantial operating losses
in 1999 and 1998 and is out of compliance with its borrowing agreements, which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Bellingham, Washington
May 7, 1999
1
<PAGE> 49
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND 1998
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
As Restated As Restated
(Note 3) (Note 3)
<S> <C> <C>
CURRENT ASSETS
Cash $ 130,967 $ 316,078
Accounts receivable
Trade receivables, net of allowance for doubtful
accounts, sales returns and cash discounts of
$896,663 in 1999 and $950,159 in 1998 3,048,755 4,145,660
Other receivables 261,091 148,050
Inventory, net of allowance for obsolete inventory
of $862,000 in 1999 and $586,000 in 1998 3,532,684 6,763,508
Prepaid expenses, deposits, and other current assets 853,357 731,307
------------------- --------------------
Total current assets 7,826,854 12,104,603
PROPERTY, PLANT AND EQUIPMENT, net 9,945,634 12,881,118
OTHER ASSETS 367,501 340,043
------------------- --------------------
TOTAL ASSETS $ 18,139,989 $ 25,325,764
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdrafts $ 253,425 $ 301,716
Note payable to bank 4,896,912 11,300,808
Accounts payable 2,961,079 3,285,467
Accrued liabilities 2,896,332 2,738,919
Current portion of long-term debt 3,072,601 3,350,344
------------------- --------------------
Total current liabilities 14,080,349 20,977,254
LONG-TERM DEBT 3,776,432 4,853,254
------------------- --------------------
Total liabilities 17,856,781 25,830,508
------------------- --------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
No par common stock - 100,000,000 authorized, 9,857,252
issued and outstanding in 1999 and 1998 15,769,018 15,769,018
Accumulated other comprehensive income (157,223) 33,899
Accumulated deficit (15,328,587) (16,307,661)
------------------- --------------------
Total stockholders' equity (deficit) 283,208 (504,744)
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 18,139,989 $ 25,325,764
=================== ====================
</TABLE>
See accompanying notes to these consolidated financial statements. 2
--------------------------------------------------------------------------------
<PAGE> 50
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -----------------
As Restated As Restated As Restated
(Note 3) (Note 3) (Note 3)
<S> <C> <C> <C>
SALES
Sales $ 23,127,452 $ 25,884,553 $ 18,669,472
Less sales discounts and allowances 3,072,438 3,868,653 1,618,330
--------------- --------------- -----------------
Net sales 20,055,014 22,015,900 17,051,142
COST OF SALES 11,931,097 21,035,139 16,522,236
--------------- --------------- -----------------
Gross margin 8,123,917 980,761 528,906
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,290,080 9,070,006 8,127,710
--------------- --------------- -----------------
Income (loss) from operations (3,166,163) (8,089,245) (7,598,804)
--------------- --------------- -----------------
OTHER INCOME (EXPENSE)
Other income - - 24,907
Miscellaneous expense 31,291 (38,365) -
Loss on sales of property and equipment (126,121) (159,406) (86,048)
Reserve for impairment on EDP installation-in-progress - - (620,759)
Interest expense (1,220,695) (1,413,219) (805,079)
--------------- --------------- -----------------
Total other income (expense) (1,315,525) (1,610,990) (1,486,979)
--------------- --------------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,481,688) (9,700,235) (9,085,783)
INCOME TAX PROVISION (BENEFIT) - - (55,972)
--------------- --------------- -----------------
NET LOSS FROM CONTINUING OPERATIONS (4,481,688) (9,700,235) (9,029,811)
DISCONTINUED OPERATIONS
Income from operations of Core Business 110,476 973,091 1,079,510
Gain on disposal of Core Business, net of
alternative minimum tax of $50,000 5,350,286 - -
--------------- --------------- -----------------
NET INCOME FROM DISCONTINUED OPERATIONS 5,460,762 973,091 1,079,510
--------------- --------------- -----------------
NET INCOME (LOSS) $ 979,074 $ 8,727,144 $ (7,950,301)
=============== ================ =================
BASIC EARNINGS PER SHARE
Loss from continuing operations $ (0.45) $ (1.01) $ (0.97)
Discontinued operations 0.55 0.10 0.12
--------- -------- ---------
Net income (loss) $ 0.10 $ (0.91) $ (0.85)
========= ======== =========
DILUTED EARNINGS PER SHARE
Loss from continuing operations $ (0.45) $ (1.01) $ (0.97)
Discontinued operations 0.55 0.10 0.12
--------- -------- ---------
Net income (loss) $ 0.10 $ (0.91) $ (0.85)
========= ======== =========
SHARES USED IN COMPUTING EARNINGS PER SHARE
Basic 9,857,252 9,626,335 9,322,278
=============== ================ =================
Diluted 9,857,252 9,626,335 9,322,278
=============== ================ =================
</TABLE>
See accompanying notes to these consolidated financial statements. 3
--------------------------------------------------------------------------------
<PAGE> 51
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Retained Other Total Total
Common Stock Earnings Comprehensive Stockholders' Comprehensive
---------------------- (Deficit) Income (Loss) Equity Income
Shares Amount ------------- -------------- ------------- --------------
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 8,004,584 $9,620,068 $ 369,784 $ - $ 9,989,852
Comprehensive income
Net income (loss) - - (7,950,301) - (7,950,301) $ (7,950,301)
Other comprehensive income
Foreign currency translation adjustment - - - (76,478) (76,478) (76,748)
--------------
Total other comprehensive income - - - - - (76,748)
--------------
Comprehensive income - - - - - $ (8,027,049)
==============
Proceeds from issuance of common stock 1,269,293 6,114,062 - - 6,114,062
Notes payable, converted to common stock 30,000 52,005 - - 52,005
Common stock issued for acquisition
of subsidiary 50,000 200,000 - - 200,000
Common stock issued for cash on exercise
of stock options and warrants 114,000 345,883 - - 345,883
Revision of estimate of income tax benefit from
exercise of stock options and warrants - (758,000) - - (758,000)
---------- ---------- ------------- -------------- -------------
BALANCE, March 31, 1997 9,467,877 15,574,018 (7,580,517) (76,478) 7,917,023
Comprehensive income
Net income (loss) - - (8,727,144) - (8,727,144) $ (8,727,144)
Other comprehensive income
Foreign currency translation adjustment - - - 110,377 110,377 110,377
--------------
Total other comprehensive income - - - - - 110,377
--------------
Comprehensive income - - - - - $ (8,616,767)
==============
Issuance of common stock 389,375 195,000 - - 195,000
---------- ---------- ------------- -------------- -------------
BALANCE, March 31, 1998 (as restated note 3) 9,857,252 15,769,018 (16,307,661) 33,899 (504,744)
Comprehensive income
Net income (loss) - - 979,074 - 979,074 $ 979,074
Other comprehensive income
Foreign currency translation adjustment - - (191,122) (191,122) (191,122)
--------------
Total other comprehensive income - - - - - (191,122)
--------------
Comprehensive income - - - - - $ 787,952
---------- ---------- ------------- -------------- ------------- ==============
BALANCE, March 31, 1999 (as restated note 3) 9,857,252 $15,769,018 $(15,328,587) $ (157,223) $ 283,208
========== ========== ============= ============== =============
</TABLE>
See accompanying notes to these consolidated financial statements. 4
--------------------------------------------------------------------------------
<PAGE> 52
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -----------------
As Restated As Restated
(Note 3) (Note 3)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 979,074 $ (8,727,144) $ (7,950,301)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 2,855,906 1,849,706 1,372,292
Deferred income taxes - - 404,000
Gain on sale of core business (5,350,286) - -
Loss on sales and disposal of property and equipment 126,121 159,406 86,048
Reserve for impairment on EDP installation-in-progress - - 620,759
Services rendered in exchange for common stock - 195,000 -
Changes in noncash operating assets and liabilities
Trade receivables 1,096,906 2,508,840 (1,500,098)
Related party receivables - - 899,422
Other receivables (113,041) 845,193 (930,671)
Inventory 2,395,474 2,694,366 (121,153)
Prepaid expenses, deposits and other current assets (122,050) 162,176 (44,402)
Accounts payable (324,388) 863,699 (212,830)
Accrued liabilities 157,412 593,889 920,286
Income tax payable - - (145,278)
--------------- --------------- -----------------
Net cash flows from operating activities 1,701,128 1,145,131 (6,601,926)
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in (repayment of) bank overdrafts (48,291) (165,729) 467,445
Net borrowings (repayment of) on note payable to bank (6,403,896) 2,651,418 3,326,451
Proceeds from long-term debt borrowings - - 2,333,526
Repayment of long-term debt (1,354,565) (1,790,535) (875,134)
Repayments of notes payable to officer/directors - (850,000) (362,706)
Proceeds from issuance of common stock - - 6,459,945
Foreign currency translation (191,122) 110,377 (76,478)
--------------- --------------- -----------------
Net cash flows from financing activities (7,997,874) (44,469) 11,273,049
--------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of core business 6,448,073 - -
Purchase of plant and equipment (308,980) (1,933,911) (4,159,500)
Proceeds from sales of equipment - 75,000 50,887
Net repayments to partnerships - - (34,484)
(Increase) decrease in other assets (27,458) 665,570 (169,297)
--------------- --------------- -----------------
Net cash flows from investing activities 6,111,635 (1,193,341) (4,312,394)
--------------- --------------- -----------------
NET CHANGE IN CASH (185,111) (92,679) 358,729
CASH, beginning of year 316,078 408,757 50,028
--------------- --------------- -----------------
CASH, end of year $ 130,967 $ 316,078 $ 408,757
=============== =============== =================
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ - $ 2,199,088 $ 1,989,895
=============== =============== =================
Issuance of common stock in exchange for services rendered $ - $ 195,000 $ -
=============== =============== =================
Issuance of common stock on conversion of notes payable,
debentures and other liabilities $ - $ - $ 52,005
=============== =============== =================
Issuance of common stock for acquisition of subsidiary $ - $ - $ 200,000
=============== =============== =================
Income tax benefit (expense) related to exercise of stock
</TABLE>
See accompanying notes to these consolidated financial statements. 5
--------------------------------------------------------------------------------
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
options and warrants $ - $ - $ (758,000)
=============== =============== =================
</TABLE>
See accompanying notes to these consolidated financial statements. 6
--------------------------------------------------------------------------------
<PAGE> 54
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its
offices and main manufacturing facilities located in Blaine, Washington.
The Company also has warehouse/distribution facilities near London,
England, and Sydney, Australia and a warehouse/distribution facility in
Bellingham, Washington. The Company is a manufacturer of designer
stationary and value-added papers and considers itself to have only one
reporting segment. (See Note 3 regarding the sale of certain business
operations.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Geographics (Europe) Limited, Geographics Pty. Limited and Geographics
Marketing Canada Inc. Significant intercompany transactions have been
eliminated in consolidation.
CASH AND EQUIVALENTS - For purposes of the statement of cash flows, cash
and equivalents include cash on deposit with banks and other highly
liquid investments with original maturities of ninety days or less.
CASH AND OVERDRAFT BALANCES - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
The nature and content of bank overdrafts include disbursements from the
payroll checking account, which are covered via transfers of funds from
the general operating cash account as payroll checks are presented for
payment. The Company also has an account for which the bank funds
disbursements as they are presented for payment via an overnight
investment sweep account.
ACCOUNTS RECEIVABLE - The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for
doubtful accounts to be fully collectible. Accounts receivable are not
collateralized.
INVENTORY - Inventory is valued at the lower of cost on a first-in,
first-out (FIFO) basis or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at historical cost. Depreciation is provided based on useful lives of
three to forty years, using primarily the straight-line method.
Betterments, renewals and repairs that extend the life of assets are
capitalized. Repairs and maintenance items are expensed when incurred.
Depreciation and amortization expense on equipment, including
amortization expense on capitalized leased equipment, was $2,776,372,
$1,729,706 and $1,280,801 during the years ended March 31, 1999, 1998
and 1997, respectively.
FEDERAL INCOME TAXES - The Company accounts for income taxes using the
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable
amounts attributed to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
This method also allows recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences
for which tax benefits have not previously been recorded. The tax
benefits recognized as assets must be reduced by a valuation allowance
where it is more likely than not the benefits may not be realized.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
non-U.S. subsidiaries whose "functional" currencies are other than U.S.
dollars are translated at current rates of exchange. Income and expense
items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded as other comprehensive
income within the statement of stockholders' equity. Certain other
translation adjustments and transaction gains and losses are reported in
net income in the period they are realized.
F-7
<PAGE> 55
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The following significant estimates are included in the financial
statements.
- 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.
- PROPERTY, PLANT AND EQUIPMENT - It is the Company's policy to record
property, plant and equipment and other long-lived assets at
historical cost and depreciate these assets over their expected
useful life. The Company has sustained significant losses as shown
in the accompanying consolidated financial statements and described
in Note 16, and may be unable to continue as a going concern. It is
reasonably possible that the Company's estimate that it will recover
the carrying amount of long-lived assets from future operations will
change in the near term.
- 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.
- 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.
- INVENTORY - The Company makes provisions for obsolete inventory by
reviewing recent sales information, inventory turnover rates and
volumes on hand. The Company will often offer substantial dealer
discounts and may enter into agreements with discount distributors
to sell slower moving product lines. The provision for obsolete
inventory attempts to account for reduced margins expected on slower
moving products, however, it is possible that additional discounts
or incentives may be necessary to liquidate slow-moving inventory
and the provisions for obsolete inventory will need to be increased.
ADVERTISING COSTS - Advertising costs are charged to expense in the
period in which they occur except for direct response advertising which
is capitalized and amortized over its expected period of future
benefits. Direct response advertising consists primarily of
advertisements placed with industry related catalogs and are amortized
over the period following the mailing date at a rate approximating the
rate and timing of customer response. Unamortized advertising costs of
$75,109 and $149,609 are included in other assets at March 31, 1999 and
1998, respectively.
The Company also participates with its customers in cooperative
advertising and other promotional programs, in which the Company
reimburses the customers for a portion of their advertising costs.
Advertising expense amounted to $242,899, $1,393,001 and $1,924,442 in
1999, 1998 and 1997, respectively.
2
<PAGE> 56
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE - Basic earnings per share amounts are computed based
on the weighted average number of shares outstanding during the period
after giving retroactive effect to stock dividends and stock splits.
Diluted earnings per share amounts are computed by determining the
number of additional shares that are deemed outstanding due to stock
options and warrants under the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standard ("SFAS") No. 107, Disclosure About Fair Value Of Financial
Instruments, requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized,
in the consolidated balance sheet of the Company for which it is
practicable to estimate fair value. The estimated fair values of
financial instruments that are presented herein have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of amounts the Company could realize in a current market
exchange.
The following methods and assumptions were used to estimate fair value:
CASH, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - The
carrying amounts of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to their short-term nature.
NOTES PAYABLE AND LONG-TERM DEBT - Discounted cash flows using current
interest rates for financial instruments with similar characteristics
and maturity were used to determine the fair value of notes payable and
long-term debt.
There were no significant differences as of March 31, 1999 and 1998 in
the carrying value and fair value of financial instruments.
STOCK OPTION PLANS - The Company recognizes the financial effects of
stock options in accordance with Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees (APB 25). Normally, stock
options are issued at a price equal to the fair value of the Company's
stock as of the grant date. Under APB 25 options issued in this manner
do not result in the recognition of employee compensation in the
Company's financial statements.
NEW ACCOUNTING STANDARDS - During fiscal year 1999, the Company
implemented the requirements of SFAS No. 130, Comprehensive Income and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131
establishes standards for reporting about operating segments, products
and services, geographic areas, and major customers. These standards
have been applied to all periods presented and resulted in some changes
in the presentation of financial information but does not have a
material impact on its reported financial condition or results of
operation.
3
<PAGE> 57
NOTE 3 - RESTATEMENTS AND RECLASSIFICATIONS
The Company has restated its annual consolidated financial statements
for the years ended March 31, 1999 and 1998. The following sets forth
the effect and explanation of the adjustments and reclassifications
described in (a)-(h) below:
<TABLE>
<CAPTION>
As Previously As
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C> <C>
At March 31, 1999:
Accounts receivable, net $ 3,187,527 $ (138,772) (a) $ 3,048,755
Current assets 7,965,626 (138,772) (a) 7,826,854
Total Assets 18,278,761 (138,772) (a) 18,139,989
-
Accrued Liabilities 2,496,178 400,154 (b)(c)(d)(e)(g) 2,896,332
Current Liabilities 3,680,195 400,154 (b)(c)(d)(e)(g) 14,080,349
Total Liabilities 7,456,627 400,154 (b)(c)(d)(e)(g) 17,856,781
Accumulated Deficit (14,789,661) (538,926) (a)(c)(d)(e)(f)(g) (15,528,587)
Stockholders' Equity 822,134 (538,926) (a)(c)(d)(e)(f)(g) 283,208
Total Liabilities and Stockholders' $ 18,278,761 $ (138,772) $18,139,989
Equity
</TABLE>
<TABLE>
<CAPTION>
As Previously Adjustments and As
Reported Reclassifications restated
-----------------
<S> <C> <C> <C> <C>
For the year ended March 31, 1999:
Sales returns and allowances $ 3,890,390 $ (817,952) (a)(b)(h) $ 3,072,438
Net sales 19,237,062 817,952 (a)(b)(h) 20,055,014
Gross margin 7,305,965 817,952 (a)(b)(h) 8,123,917
Selling, General and Administrative
Expenses 9,086,546 2,203,534 (c)(d)(e)(f)(h) 11,290,080
Income (loss) from operations (1,780,581) (1,385,582) (a)(b)(c)(d)(e)(f)(h) (3,166,163)
Income (loss) from Continuing
Operations (3,096,106) (1,385,582) (a)(b)(c)(d)(e)(f)(h) (4,481,688)
Gain and disposal of Core Business 5,497,104 (146,818) (g) 5,350,286
Income Before Effect of Accounting
Change 2,511,474 (1,532,400) 979,074
Cumulative effect of Accounting Change (1,071,000) 1,071,000 (f) -
Net Income 1,440,474 (461,400) 979,074
Basic and diluted earnings (loss) per
share $ 0.15 $ $ 0.10
For the year ended March 31, 1998:
</TABLE>
4
<PAGE> 58
NOTE 3 - RESTATEMENTS AND RECLASSIFICATIONS (CONTINUED)
<TABLE>
<CAPTION>
As Previously Adjustments and As
Reported Reclassifications Restated
-----------------
<S> <C> <C> <C> <C>
Sales returns and allowances 5,908,263 (2,039,610) (a)(b)(h) 3,868,653
Net sales 19,976,290 2,039,610 (a)(b)(h) 22,015,900
Gross Margin (1,058,849) 2,039,610 (a)(b)(h) 980,761
Selling, General and Administrative
Expenses 6,952,870 2,117,136 (h) 9,070,006
Income (loss) from Operations (8,011,719) (77,526) (a)(b)(h) (8,089,245)
Income (loss) from Continuing
Operations (9,622,709) (77,526) (9,700,235)
Net Income (Loss) (77,526) (8,727,144)
Net Income (Loss) Per Share $ (0.90) $ $ (0.91)
</TABLE>
(a) In preparing its prior financial statements, the Company relied on
information of a former sales manager to estimate sales returns. The
Company later discovered that the sales manager failed to correctly
identify the amount of sales returns that were due a particular
customer. This resulted in an understatement of sales returns for the
years ended March 31, 1998 and 1999 of $19,201 and 119,571,
respectively.
(b) Geomarketing Canada ("GMC"), a wholly-owned subsidiary of the Company,
is required to pay Canadian goods and services tax on the value of
items sold in Canada. Subsequent to June 30, 1999, the Company
discovered that GMC was declaring the goods at Canadian customs at a
value that is less than the amount charged to its customers. This
resulted in an overstatement of sales and understatement of liabilities
for the years ended March 31, 1998 and 1999 by $58,325 and $166,201,
respectively.
(c) At March 31, 1999, the Company over accrued $132,500 of severance costs
for certain former executives. The restatement reflects a correction of
this error.
(d) At March 31, 1999, the Company accrued an amount of $200,000 for
unbilled legal expenses. It was later confirmed that the actual
incurred legal expenses were approximately $100,000 and the accrual has
been reduced in the corrected financial statements.
(e) During the fiscal quarter ended March 31, 1999, the Company implemented
a new accounting program to calculate costs associated with customer
promotions. Subsequently, the Company discovered that the pro gram was
not accurate in calculating these costs. This error resulted in an
understatement of sales, general and administrative expenses for the
year ended March 31, 1999 by $261,310.
5
<PAGE> 59
NOTE 3 - RESTATEMENTS AND RECLASSIFICATIONS (CONTINUED)
(f) The Company provides display racks to customers for use in stores to
display its products. The Company's accounting practice was to
capitalize such racks and depreciate the racks over a five year period.
The Company conducted a review of the rack program and decided to
change its accounting for racks by expensing them as they are
purchased. This change was made because the Company's rapid growth and
deployment of new racks made it difficult to maintain detailed
accounting records to assure continued control and measurement of
recorded amounts. And, the increasing pace of change in business and
adoption of new selling techniques increased the probabilities that
such racks would be rendered obsolete much earlier. Accordingly, the
Company eliminated racks as an asset and expensed the balance that had
not yet been depreciated of $1,071,000. This amount was previously
written off in the fourth quarter of the fiscal year ended March 31,
1999. In the corrected financial statements for the fiscal year ended
March 31, 1999, the amount written off has been reclassified as an
element of results from operations within the category selling, general
and administrative expenses.
(g) In connection with the sale of its sign business in the year ended
March 31, 1999, the Company mistakenly received $146,818 in escrowed
amounts that it was not entitled to. The Company initially kept the
escrowed funds after the escrow company made an initial attempt to have
the funds returned. However, the Company did not make a reserve for the
potential return of the funds. This resulted in an overstatement of the
gain on disposal of Core Business for the year ended March 31, 1999 of
$146,818.
(h) Reflects a reclassification of "back-end selling expenses" or certain
advertising and promotional expenses, as sales, general and
administrative expenses, rather than sales returns and allowances for
the years ended March 31, 1998 and 1999 in the amounts of $2,117,136
and $1,103,724 respectively.
6
<PAGE> 60
NOTE 4 - DIVESTITURE
On May 4, 1998, the Company sold substantially all of its signage and
lettering operating assets, licenses, inventory and other rights
(collectively the "Core Business") to Identity Group, Inc. for total
consideration of $6,820,000. In connection with the sale, the Company
recorded a gain of $5,497,104 or $.57 per share in the first quarter of
1999. The available net proceeds from the sale were used to reduce the
outstanding balance on the Company's revolving credit line.
Summarized results of operations for the Core Business for fiscal years
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales $ 751,539 $ 6,598,881 $ 6,789,364
============== ============== =============
Operating income $ 139,035 $ 1,222,688 $ 1,337,506
============== ============== =============
Income from discontinued operations $ 110,476 $ 973,091 $ 1,079,510
============== ============== =============
</TABLE>
NOTE 5 - INVENTORY
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Raw materials $ 513,090 $ 609,183
Work-in-progress 671,946 1,483,308
Finished goods 3,209,519 5,257,515
-------------- -------------
4,394,555 7,350,006
Less allowance for obsolete inventory 861,871 586,498
-------------- -------------
$ 3,532,684 $ 6,763,508
============== =============
</TABLE>
7
<PAGE> 61
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated
Depreciation Net Book Value
And ----------------------------
Cost Amortization 1999 1998
------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Land $ 114,563 $ - $ 114,563 $ 114,563
Buildings 3,874,478 944,568 2,929,910 3,021,655
Machinery & equipment 3,207,792 1,638,057 1,569,735 2,050,279
Machinery & equipment under capital lease 7,000,573 1,850,064 5,150,509 5,832,538
Display racks - - - 1,627,688
Computers and software 111,428 61,596 49,832 169,154
Automobiles 106,452 84,789 21,663 47,476
Leasehold improvements - - - 17,765
EDP installation-in-progress 109,422 - 109,422 -
-------------- --------------- ------------- ------------
$ 14,524,708 $ 4,579,074 $ 9,945,634 $ 12,881,118
============== =============== ============= ============
</TABLE>
NOTE 7 - OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Other $ 233,266 $ 205,808
Trademarks 134,235 134,235
-------------- -------------
$ 367,501 $ 340,043
============== =============
</TABLE>
NOTE 8 - FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Installment notes payable to a bank, fixed interest rates ranging from
8.825% to 10%, payable in monthly installments through November 2010,
collateralized by real estate. $ 2,018,898 $ 2,200,029
Capital lease obligations collateralized by certain equipment and fixtures,
with imputed interest at rates ranging from 8.25% to 11.42%. 4,808,965 5,877,633
Installment notes payable to banks, interest rates ranging from fixed at
9.75% to variable rates from prime plus 1% to prime plus 1.5%, payable in
monthly installments through October 2000, collateralized by certain equipment. 21,171 125,936
-------------- -------------
6,849,034 8,203,598
Less current portion 3,072,602 3,350,344
-------------- -------------
$ 3,776,432 $ 4,853,254
============== =============
</TABLE>
The prime rate was 7.75% and 8.50% at March 31, 1999 and 1998,
respectively.
The Company had a revolving credit agreement with a bank for up to
$12,000,000 (modified as described below), subject to borrowing base
limitations of 80% of eligible accounts receivable and 55% of
inventories, net of reserves. Interest on outstanding advances is
payable monthly at 1.50% above the bank's prime rate, with a stated due
date of April 15, 1998. Total outstanding advances under the revolving
credit agreement were $4,896,912 and $11,300,808 at March 31, 1999 and
1998, respectively. The revolving credit agreement and installment notes
are collateralized by substantially all of the assets of the Company.
8
<PAGE> 62
NOTE 8 - FINANCING ARRANGEMENTS (Continued)
The revolving credit agreement and term debt (included in installment
notes payable above) with the same bank were subject to the "Second
Forbearance Agreement" with the bank which acknowledged the Company's
default with respect to the original terms of the debt obligations, but
allowed continued borrowing pursuant to the terms of the forbearance
agreement which expired April 15, 1998. On May 1, 1998, the Company and
the bank entered into the "Third Forbearance Agreement" which required
the Company to sell its signage and lettering, intangible and operating
assets (the "Core Business" - see Note 3) to a corporation for total
consideration of approximately $6.8 million, the net proceeds of which
were to be applied to the revolving credit obligation. The Third
Forbearance Agreement expired November 1, 1998 and reduced the maximum
borrowings under the revolving agreement to $5.5 million during May
through July 1998 and $6.0 million during August through October of
1998. The advance rate against eligible accounts receivable was reduced
to 70%, and the maximum advance rate against eligible inventory was
reduced to $3.5 million. On November 1, 1998, the Company and the bank
entered into the "Fourth Forbearance Agreement" which limited the
Company's borrowings under the Revolving Loan to $5,500,000 and limited
the advance against eligible inventory to $2,750,000. The Fourth
Forbearance Agreement expired on March 31, 1999, at which time the
Company and the bank entered into the "Fifth Forbearance Agreement",
which essentially was an extension of the Fourth Forbearance Agreement
and expired on April 30, 1999.
Subsequent to the expiration of the Fifth Forbearance Agreement, the
Company has negotiated with the bank to provide the Company with a
$750,000 extension of credit over and above the borrowing base
calculation established by the Fourth Forbearance Agreement as well as
to extend the due date. All outstanding obligations with this bank have
been shown as currently due, pursuant to the terms of the forbearance
agreements.
At March 31, 1999, the terms of the agreements provide principal
payments on long-term debt and capital lease obligations as follows:
<TABLE>
<S> <C>
2000 $ 3,072,602
2001 1,086,976
2002 932,681
2003 691,268
2004 689,821
Thereafter 375,686
--------------
$ 6,849,034
</TABLE>
Future minimum lease payments under capital leases, together with the
present value of minimum lease payments as of March 31, 1999, are as
follows:
<TABLE>
<S> <C>
2000 $ 1,546,712
2001 1,409,104
2002 1,106,711
2003 823,276
2004 820,199
Thereafter 354,911
--------------
Total minimum lease payments 6,060,913
Less amount representing imputed interest 1,251,948
--------------
Present value of minimum lease payments $ 4,808,965
==============
</TABLE>
9
<PAGE> 63
NOTE 9 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Current provision (benefit) $ - $ - $ (459,972)
Deferred provision (benefit) - - 404,000
-------------- -------------- -------------
Total income tax provision (benefit) $ - $ - $ (55,972)
============== ============== =============
</TABLE>
Income taxes are allocated between continuing and discontinued
operation as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Total income tax provision (benefit) $ - $ - $ (55,972)
Amounts applicable to discontinued operations - - -
-------------- -------------- -------------
Taxes allocated to continuing operations $ - $ - $ (55,972)
============== ============== =============
</TABLE>
The total tax provision differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ --------------------- ----------------------
Amount % Amount % Amount %
------------ --------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at statutory
rate on continuing operations $ (1,524,000) (34.0) $(3,298,000) (34.0) $ (3,089,000) (34.0)
Exercise of stock options
and warrants - - 367,000 3.8 (758,000) (8.2)
Other differences, net 240,000 5.3 548,000 5.6 (350,972) (3.4)
Change in valuation allowance
for deferred tax assets (592,000) (13.2) 2,053,000 21.1 3,774,000 41.5
Alternative minimum tax allocated
to discontinued operations (50,000) (1.1)
Benefit absorbed by income from
discontinued operations 1,926,000 43.0 330,000 3.5 368,000 4.0
------------ ------- ----------- ------ ------------ --------
Total income tax provision
(benefit) $ - - $ - - $ (55,972) (.1)
============ ======= =========== ====== ============ ========
</TABLE>
The significant components of deferred income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Change in valuation allowance for deferred tax assets $ (592,000) $ 2,053,000 $ 3,774,000
Depreciation of plant and equipment (138,000) 302,000 244,000
Amortization of goodwill and intangibles 78,000 17,000 31,000
Change in allowance for doubtful accounts 79,000 (259,000) (8,000)
Inventory differences (24,000) 239,000 (416,000)
Effect of net operating loss carryforwards 593,000 (2,340,000) (3,162,000)
Other differences, net 4,000 (12,000) (59,000)
-------------- -------------- -------------
Total deferred income tax expense (benefit) $ - $ - $ 404,000
============== ============== =============
</TABLE>
10
<PAGE> 64
NOTE 9 - FEDERAL INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred Tax Assets
Net operating losses $ 4,970,000 $ 5,570,000
Inventory, principally due to additional cost inventoried for tax purposes
and financial statement allowances 260,000 236,000
Goodwill and intangible assets, principally due to amortization differences 254,000 332,000
Accruals for financial reporting purposes 30,000 -
Alternative minimum tax credit carryforwards 83,000 70,000
Accounts receivable, due to allowance for doubtful accounts 238,000 317,000
Other differences, net 22,000 62,000
-------------- -------------
Net deferred tax assets 5,857,000 6,587,000
Deferred Tax Liabilities
Plant and equipment, principally due to depreciation differences 622,000 760,000
-------------- -------------
Net deferred tax assets before valuation allowance 5,235,000 5,827,000
Valuation allowance (5,235,000) (5,827,000)
-------------- -------------
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, 1999 and 1998. As a result, the carrying value of
net deferred tax assets was reduced to $-0- at March 31, 1999 and 1998
by increasing the valuation against deferred tax assets.
Net operating loss carryforwards approximating $11,600,000 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 10 - STOCKHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE PLANS - As of March 31, 1999, the Company had
reserved 1,000,000 shares of common stock for issuance to key employees,
officers and directors pursuant to the 1996 Stock Option Plan. Options
granted under the Plan qualify as incentive stock options and will
generally not be taxable to the holder until the share subject to the
option is ultimately sold by the holder of the option. There were no
shares granted pursuant to this Plan as of March 31, 1999. Options to
purchase the Company's common stock are granted at a price equal to or
greater than the market price of the stock at the date of grant, and are
exercisable pursuant to the terms of the grant. All options expire no
more than ten years after the date of grant. Prior to the formation of
the 1996 Stock Option Plan, the Company granted nonqualified stock
options on a case-by-case basis as deemed appropriate by the Board of
Directors.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation. The pro forma information
recognizes, as compensation, the estimated present value of stock
options granted using an option valuation model. Pro forma earnings per
share amounts also reflect an adjustment for an assumed purchase of
stock from proceeds deemed obtained from the issuance of stock options.
The fair value of options issued in 1999 is estimated at $36,000. There
were no options issued in 1998 or 1997 and therefore no presentation is
required for 1998 or 1997.
11
<PAGE> 65
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
The following assumptions were used to estimate the fair value of the
options:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Risk-free interest rate 5.19%
Dividend yield rate - %
Price volatility 2.0551
Weighted average expected life of options .5 yr.
</TABLE>
Management believes that the assumptions used in the option pricing
model are highly subjective and represent only one estimate of possible
value, as there is no active market for the options granted. The fair
value of the options granted that are recognized in pro forma earnings
is shown below:
Pro forma disclosures
<TABLE>
<CAPTION>
1999
--------------
<S> <C>
Net income as reported $ 701,459
Additional compensation for fair value of stock options $ 36,000
Pro forma net income $ 737,459
Pro forma earnings per share
Basic $ 0.07
Diluted $ 0.07
</TABLE>
The changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
Nonqualified
Common Stock Option Price
Options Per Share
---------------- ----------------------
<S> <C> <C>
BALANCE, March 31, 1996 320,000
Granted -
Exercised (144,000) $ .73 to 2.56
Expired (2,500) $ 3.04
----------------
BALANCE, March 31, 1997 173,500
Granted -
Exercised -
Expired -
----------------
BALANCE, March 31, 1998 173,500
Granted 100,000 $ .47
Exercised -
Expired (10,000) $ .83
----------------
BALANCE, March 31, 1999 263,500
================
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------------- --------------- ----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Up to $1 100,000 1.25 years $0.47 100,000 $0.47
$1 to $2 76,000 1.29 years $1.44 76,000 $1.44
</TABLE>
12
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C> <C>
$2 to $4 87,500 1.54 years $2.75 87,500 $2.75
</TABLE>
13
<PAGE> 67
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
In addition, warrants to purchase 1,395,121 shares of common stock at
$6.50 per share were outstanding at March 31, 1999. Warrants to purchase
1,419,121 shares of common stock at prices ranging from $.77 to $6.50,
were outstanding as of March 31, 1998. The exercise price of the
warrants was equal to the market price of the stock at the date the
warrants were issued. On May 27, 1999 the Company's Board of Directors
approved a one-year extension of the expiration date to June 1, 2000.
During the year ended March 31, 1997, the Company's shareholders and its
Board of Directors approved a resolution to increase the Company's
authorized shares from ten million to one hundred million.
NOTE 11 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- -----------------
<S> <C> <C> <C>
Net income (loss) (numerator) $ 979,074 $ (8,727,144) $ (7,950,301)
================ ================ ==================
Shares used in the calculation (denominator)
Weighted average shares outstanding 9,857,252 9,626,335 9,322,278
Effect of dilutive stock options - - -
---------------- --------------- -----------------
Diluted shares 9,857,252 9,626,335 9,322,278
================ =============== =================
</TABLE>
As described in Note 9, the Company has granted stock options and
warrants to purchase up to 1,658,621 shares. The potential dilutive
effects of these potential shares outstanding were disregarded in 1998
and 1997 because the Company reported losses in those years and the
effects of the instruments would have been anti-dilutive to the reported
per share losses. The dilutive effects of these shares were disregarded
in 1999 as the exercise price for the shares are higher than the market
price of the Company's stock making their effects antidilutive. In
future periods, these instruments may reduce the reported net income per
share once profitable operations are attained and the market price of
the Company's stock improves.
NOTE 12 - RELATED PARTY TRANSACTIONS
At March 31, 1996, a certain officer and directors had advanced the
Company $1,264,711 in the form of uncollateralized notes payable. As of
March 31, 1997, the balance remaining on these notes payable to a
certain officer totaled $850,000, which was paid in full during fiscal
1998. Total interest costs associated with these notes were
approximately $0, $11,200 and $92,000 for the years ended March 31,
1999, 1998 and 1997, respectively.
The Company has approximately $204,787 due to Guildmark, Inc., a company
related through common ownership, included in accounts payable at March
31, 1999 and 1998.
NOTE 13 - EMPLOYEE BENEFIT PLANS
On April 1, 1995, the Board of Directors approved a retirement savings
plan, which permits eligible employees to make contributions to the plan
on a pretax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. The Company makes a
matching stock contribution of 10% of the employee's pretax
contribution. Eligible employees may contribute up to 18% of their
pretax compensation. Total expense related to this plan was $16,884 and
$11,471 during the year ended March 31, 1999 and 1998, respectively.
14
<PAGE> 68
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases - The Company conducts certain operations in leased facilities,
under leases that are classified as operating leases for financial
statement purposes. The leases require the Company to pay real estate
taxes, common area maintenance, and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated
rents, expire at various times through 2004. At March 31, 1999, the
Company had future minimum lease commitments of $51,285. Rental expense
under all operating leases were $86,235, $320,000 and $257,000 in 1999,
1998 and 1997, respectively.
Litigation - In July 1997, three related class action suits were filed
in the United States District Court for the Western District of
Washington against the Company, its former President, Chief Executive
Officer and Chairman of its Board of Directors, and the Company's Vice
President of Finance and Chief Financial Officer. In August 1998, the
Company, its insurance company and the plaintiffs reached an agreement
to settle the suits. The settlement is subject to review by the court
prior to being ratified. In October 1998, the court ratified the
settlement. The Company has recorded its portion of the settlement,
representing the deductible on its insurance policy. The total
settlement was $1.6 million.
Special Committee Investigation - In the Company's 10 Q filed for the
third quarter ending December 31, 1997, the Company announced that a
special committee of its audit committee was appointed to examine the
performance and conduct of the Company's management. As a result of
their examination, issues were raised concerning the adequacy of
documentation for certain travel and entertainment expenses submitted to
the Company for payment in prior periods, the propriety of certain
issuances of common stock, and appropriate treatment and reporting of
taxable income associated with stock options. The Company is continuing
to evaluate these matters and believes they will be resolved in a manner
that will not result in a material impact to the Company's financial
position or results of operations. However, the ultimate outcome of
these matters is uncertain.
There are various additional claims, lawsuits, and pending actions
against the Company incident to the operations of its business. It is
the opinion of management that the ultimate resolution of these matters
and any future unidentified claims will not have a material effect on
the Company's financial position, results of operations or liquidity.
Contingency For Year 2000 Issues - The Company categorizes its Year 2000
efforts into the following areas: hardware, software, embedded,
processors, vendors, and customers. Each area is assessed and tracked in
phases including assessment, identification of non-compliance,
remediation, testing, and verification. The Company's Year 2000 project
is progressing and internal remediation work is expected to be completed
by October 31, of this year. The Company is using both internal and
external resources to effect remediation and to test systems.
The Company will initiate communications with significant vendors and
customers in June of 1999 to determine the Company's vulnerability if
these companies fail to remediate their Year 2000 issues. There can be
no guarantee that the systems of other companies will be timely
remedied, or that other companies' failure to remedy Year 2000 issues
would not have a material impact on the Company. The Company is
developing contingency plans to mitigate risks associated with
vendor/customer Year 2000 issues.
Costs incurred and expected to be incurred have been/will be expensed,
and are not expected to exceed a total of $75,000. Although the Company
is not aware of any internal operational Year 2000 issues, the Company
cannot provide assurances that the computer systems, products, services,
or other systems on which the Company depends will be Year 2000 ready on
schedule, that the costs of remediation of Year 2000 issues will not be
greater than expected, or that the Company's contingency plans will be
adequate. The Company is currently unable to evaluate the magnitude, if
any, of the Year 2000 related issues of its vendors or customers. If
such risks materialize, the Company could experience serious
consequences, which could have a material adverse effect on its
financial condition, operations, and liquidity.
15
<PAGE> 69
NOTE 15 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $3,950,254 and $5,095,819 at March 31,
1999 and 1998, respectively. The Company's trade customers are
concentrated in the retail office products industry and mass market
retail stores. Amounts due from three customers approximated 63% and 74%
of the total accounts receivable at March 31, 1999 and 1998,
respectively.
Historically, a substantial portion of the Company's sales has been to a
limited number of customers. Concentration of sales to the Company's
five largest customers were 60% in 1999, 66% in 1998 and 67% in 1997.
The Company expects that sales to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable
future and believes that its financial results depend in significant
part upon the success of these few customers. Although the composition
of the group comprising the Company's largest customers may vary from
period to period, the loss of a significant customer or any reduction in
orders by any significant customers, including reductions due to market,
economic or competitive conditions in the designer stationary or
specialty papers industry, may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company purchases goods from approximately 700 vendors. One vendor
accounted for a significant portion of the Company's total merchandise
purchases during the years ended March 31, 1999, 1998 and 1997. The
Company purchases commodity paper and other related products from this
broker/vendor that could be supplied by other sources. There can be no
assurances that the relationship between the Company and this vendor
will continue and the loss of the purchasing power the Company has
established with this company would likely have a material adverse
effect on the Company. The Company does not consider itself dependent on
any single source for materials to manufacture its products.
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales) is as follows. Foreign
sales are attributed to the country where product delivery is specified
by the customer.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------
Net sales to domestic and foreign customers 1999 1998 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
North America $ 16,488,463 $ 19,822,459 $ 15,510,118
United Kingdom 1,021,474 613,192 351,327
Other European Countries 1,054,000 584,000 364,000
Australia 1,491,077 996,249 825,697
--------------- --------------- -----------------
Total $ 20,055,014 $ 22,015,900 $ 17,051,142
=============== =============== =================
Operating profit or (loss)
North America $ (2,581,464) $ (7,559,298) $ (8,548,031)
United Kingdom (550,609) (489,263) (727,467)
Australia (34,090) 40,684 189,715
--------------- --------------- -----------------
Total $ (3,166,163) $ (8,089,245) $ (9,085,783)
=============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------
1999 1998 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Long-lived assets
United States $ 9,778,864 $ 12,646,787 $ 10,559,587
Canada - 36,510 71,886
United Kingdom 108,793 148,200 164,399
Australia 57,977 49,621 36,359
--------------- --------------- -----------------
Total $ 9,945,634 $ 12,881,118 $ 10,832,231
=============== =============== =================
</TABLE>
16
<PAGE> 70
NOTE 15 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
International sales accounted for approximately 36%, 29% and 35% of the
Company's total net sales in fiscal years 1999, 1998, and 1997,
respectively. International sales were concentrated in Canada, Europe
and Australia. As a result of such international sales, a significant
portion of the Company's revenues will be subject to certain risks,
including unexpected changes in regulatory requirements, exchange rates,
tariffs and other barriers, political and economic instability and other
risks.
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 1,044,421 $ 1,659,150 $ 995,691
================ =============== ================
Net cash paid (refund) during the year for income taxes $ - $ (371,528) $ 304,303
================ =============== ================
</TABLE>
Interest expense of approximately $27,800, $250,000 and $258,000 was
included in income from discontinued operations during 1999, 1998 and
1997, respectively.
NOTE 17 - LIQUIDITY AND OPERATIONS
As shown in the accompanying financial statements, the Company incurred
a net loss from continuing operations of $4,481,688 and $9,700,235 for
the years ended March 31, 1999 and 1998, respectively. As a result of
these losses, the Company's failure to comply with certain covenants
under its line of credit and other factors, the report of the Company's
auditors states that there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial
statements have been prepared assuming the Company will continue as a
going concern and does not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty.
As described in Note 17, in April 1999 the Company appointed a new
President and CEO who is planning to take steps necessary to enable the
Company to continue as a going-concern. This includes the development of
a detailed business plan that will enable the Company to identify and
focus on profitable products and the profitability of its current market
share positions, thereby reducing the demand for Company resources on
unprofitable business. In addition, the Company will take steps to
identify and reduce unnecessary selling, general and administrative
expenses, continue to improve the operating efficiency of its
manufacturing processes and reduce its raw material costs, in order to
return the Company to profitability. Management anticipates that these
steps will enable the Company to better estimate the correct levels of
working capital required and supporting debt and equity financing
necessary to stabilize the Company and position it for profitable and
controlled growth. The Company then plans to cost effectively refinance
its equity and debt funding in amounts necessary to meet its objectives.
The successful development and execution of this plan is dependent upon
the Company's ability to achieve adequate gross margins on sales,
maintain its liquidity through its current borrowing arrangements,
maintain adequate working relationships with its vendors, customers and
employees, and the successful management of contingencies and
uncertainties affecting the viability of the Company. The outcome of
these matters is uncertain.
17
<PAGE> 71
NOTE 18 - SUBSEQUENT EVENTS
On April 16, 1999, the Company's Shareholders elected a new Board of
Directors. Subsequently, the new Board of Directors appointed a new
President and CEO.
Subsequent to year end, the Company and the Company's former president
and CEO agreed to modify a stock option award previously authorized by
the Board of Directors during fiscal year 1999, by reducing the total
shares under option to 100,000 and increasing the option price to $.47
per share. The options are fully vested and may be exercised during the
period from January 1, 2000 to June 30, 2000.
On April 29, 1999, the Company issued an aggregate of $100,000 in
convertible subordinated notes. One director and the Company's Chief
Executive Officer, who is also a director, were issued $50,000 notes
each, with the proceeds used to fund the Company's operations. The notes
bear interest at 2.0% above the US Bank's prime lending rate, and the
notes are subordinated to the Company's senior indebtedness to US Bank.
The notes are also convertible into shares of the Company's common stock
at $0.3927 per share.
Effective April 16, 1999, the Company entered into an employment
agreement with its new Chief Executive Officer. Pursuant to the
agreement, the CEO is entitled to receive a base salary of $75,000 per
year and two separate tranches of stock options to purchase 800,000
shares of the Company's common stock. The first tranche of 300,000
options vest immediately and have a price of $.30 per share. The second
tranche of 500,000 options vest evenly over eighteen months and have a
price of $.50 per share. The CEO's employment is at will and may be
terminated at any time by either party. However, if the CEO is
terminated by the Company other than for cause, all options granted
shall automatically vest.
NOTE 19 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
As a result of management's year end closing procedures, and review of
accounting practices and estimates, significant year end adjustments
were recorded. These adjustments included a change in accounting
principle for the write-off of store racks of approximately $1,071,000,
as described in Note 3. Adjustments reducing net income were also made
to reduce certain computer consulting expenditures previously
capitalized of approximately $125,000.
NOTE 20 - STOCK EXCHANGE LISTING REQUIREMENTS
The Company's securities were delisted from the Nasdaq National Market
and subsequently the Nasdaq SmallCap Market during fiscal 1998. Trading
of the Company's securities has continued on the Nasdaq's OTC Electronic
Bulletin Board. However, the delistings may restrict marketability of
the Company's common stock. In addition, the common shares of the
Company were suspended from trading on the Toronto Stock Exchange on
June 11, 1998 due to the failure of the Company to provide the required
financial information and filings. Securities suspended from trading on
the Toronto Exchange which have not been approved for reinstatement will
be automatically delisted after a period of one year. The Company is
taking steps to gain the necessary approvals for reinstatement of the
Company's securities in order to avoid being delisted from the Toronto
Exchange.
18
<PAGE> 72
SCHEDULE II
GEOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED MARCH 31 APRIL 1 ADDITIONS DEDUCTIONS MARCH 31
------------------- ------- --------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts,
Sales Returns and Cash Discounts
1997 146,926 772,221 104,306 814,841
1998 814,841 1,414,907 1,279,589 950,159
1999 930,958 1,511,520 1,545,815 896,663
Allowance for Obsolete Inventory
1997 100,000 1,190,000 - 1,290,000
1998 1,290,000 963,309 1,666,811 586,498
1999 586,498 753,639 478,266 861,871
</TABLE>
19
<PAGE> 73
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the consolidated financial statements of Geographics, Inc. as of
March 31, 1999 and 1998 and for each of the three years in the period ended
March 31, 1999, and have issued our report thereon dated May 7, 1999; such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Geographics, listed in
Item 14. These financial statements schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ MOSS ADAMS LLP
Bellingham, Washington
May 7, 1999
20
