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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, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
----- -----
Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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WYOMING 87-0305614
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P. O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (360) 332-6711
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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 Yes X No
such filing requirements for the past 90 days. ----- -----
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 July 12, 2000 was $16,468,434 based on a closing sales
price of $0.56 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 July 12, 2000 was 37,163,034.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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TABLE OF CONTENTS
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PAGE
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PART I ...............................................................................................................1
ITEM 1. BUSINESS..............................................................................................1
ITEM 2. DESCRIPTION OF PROPERTIES............................................................................11
ITEM 3. LEGAL................................................................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................12
PART II................................................................................................................12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.................................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................14
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND FOREIGN CURRENCY........................17
ITEM 8. FINANCIAL STATEMENTS.................................................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................18
PART III...............................................................................................................19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................................19
ITEM 11. EXECUTIVE COMPENSATION...............................................................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................24
PART IV................................................................................................................24
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K...................................24
SIGNATURE..............................................................................................................28
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PART I
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") is primarily 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.
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Geographics also engages in the development, manufacture, marketing and
distribution of plastic ready-to-assemble filing and storage cabinets.
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 makes several
specialty paper products 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. The specialty papers group now constitutes the Company's principal
business, with approximately 97% of the Company's total sales in fiscal 2000
attributable to sales of Geopaper products.
During the fiscal year ended March 31, 2000, the Company announced the
introduction of GeoFile Modular Storage and File System(TM) ("GeoFile"). GeoFile
is a flexible line of plastic ready-to-assemble filing and storage cabinets.
GeoFile(TM) will be sold primarily through the Company's existing office supply
superstore customers, including Office Depot and Wal-Mart.
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut
sheet papers used for letterheads, brochures, flyers, posters and bulletins.
Suppliers within the preprint industry also offer combination sets made up of
multiple products such as matching letterhead, envelopes and business cards, or
software packages that improve ease of use of preprints by the consumer. New
designs and a large variety of preprints and related specialty products have
been important elements of success and growth for businesses in the preprint
market.
The preprint market is segmented among two major methods of
distribution: retail and direct mail. Within the retail segment of the preprint
market there are numerous sub-segments, including office supply superstores,
mass market retailers, arts & crafts stores, party stores, specialty paper
retailers, and office supply business-to-business retailers. The Company sells
its specialty paper 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 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.
INTRODUCTION OF NEW PRODUCTS; VENDOR CONSOLIDATIONS
The Company is developing and expects to introduce additional new lines
of products to its customers through its existing distribution system.
Management believes these products will compliment the Company's current lines
and will have the effect of improving the profitability and to some extent
reducing the seasonal fluctuations of the Company's operating results.
Additionally, customers in the office products industry have pointedly
attempted to consolidate the number of vendors from whom they make purchases.
Consequently, the Company expects to be in a
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position to benefit from this industry phenomenon due to the existence of a
number of single line vendors whose products could readily be manufactured and
distributed by the Company.
Management believes the existence of additional complimentary lines and
the Company's ability to absorb additional lines strengthens the Company's
position with key customers. However, there can be no assurance that additional
complimentary lines will be successfully launched with customers, or that vendor
consolidations will result in additional product offerings by the Company.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total Net Sales
attributable to each class of product offered by the Company for the last three
years is set forth below.
AS A PERCENTAGE OF SALES
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CLASS OF PRODUCT
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FISCAL YEAR
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2000 1999 1998
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Designer stationeries and specialty papers 97% 96% 77%
Plastic filing and storage cabinets 3% 0% 0%
Lettering, signage, stencil and graphic art products 0% 4% 23%
STATED IN U.S. DOLLARS (ROUNDED)
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CLASS OF PRODUCT
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FISCAL YEAR
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2000 1999 1998
Restated Restated
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Designer stationery and specialty papers $26,463,998 $20,055,014 $22,015,900
Plastic filing and storage cabinets $ 790,784 $ 0 $ 0
Lettering, signage, stencil and graphic art products (1) $ 0 $ 752,000 $ 6,599,000
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(1) Related to discontinued operations
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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Net sales to domestic and foreign customers 2000 1999 1998
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United States $ 20,317,246 $ 12,858,017 $ 16,399,838
Canada 3,285,559 3,630,446 3,422,621
United Kingdom 2,152,093 1,021,474 613,192
Other European Countries 1,054,000 584,000
Australia 1,499,884 1,491,077 996,249
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Total $ 27,254,782 $ 20,055,014 $ 22,015,900
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Operating profit (loss)
North America $ 937,632 $ (2,581,464) $ (7,559,298)
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United Kingdom (344,869) (550,609) (489,263)
Australia 87,378 (34,090) (40,684)
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Total $ 680,141 $ (3,166,163) $ (8,089,245)
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Long-lived assets
United States $ 9,125,809 $ 9,778,864 $ 12,646,787
Canada - - 36,510
United Kingdom 126,159 108,793 148,200
Australia 52,896 57,977 49,621
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Total $ 9,304,864 $ 9,945,634 $ 12,881,118
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(1) In this table sales are stated as "net sales," meaning gross sales less
discounts, allowances, and returns. 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 25%, 36% and 26% of the
Company's total net sales in fiscal 2000, 1999 and 1998, respectively.
International sales were concentrated in Canada, Europe and Australia. As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers, political
and economic instability and other risks.
BUSINESS CONCENTRATIONS
The Company had three customers in 2000 and 1999 and two customers in
1998 which individually exceeded 10% of Sales and in the aggregate accounting
for approximately 32%, 57%, and 67% of sales in 2000, 1999 and 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 these few customers.
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 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 100 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 is a
broker/vendor from whom a significant portion of the Company's total merchandise
purchases were made in fiscal 2000, 1999 and 1998. This vendor has provided the
Company an immediately available and uninterrupted supply of paper. The Company
is attempting to develop relationships with other significant vendors.
In addition, this and other key vendors have granted the Company
significant amounts of trade credit. While management recognizes the loyalty
shown the Company from key vendors, it is management's intention to continue to
review all significant purchases, to solicit competitive bids from alternate
sources, and to evaluate these alternate suppliers for their ability to provide
products and service
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to the Company of the same or similar quality and on the same or more favorable
terms than those currently provided to the Company. 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.
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.
The Company conducts its export operations through two subsidiaries:
- 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.
The Company dissolved Geographics Marketing Canada, Inc. during fiscal 2000. All
business and distribution of Geographics Marketing Canada, Inc. is now conducted
by Geographics, Inc.
MANAGEMENT INFORMATION SYSTEMS - INTEGRATED OPERATIONS SOFTWARE
The Company is currently installing a comprehensive Operations
Management software system. This software includes MRP and master scheduling
capabilities and is integrated with the Company's financial systems. The Company
may be required to make a significant investment of resources to implement the
system in fiscal 2001 and possibly in future periods.
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. In fiscal 2000, the
Company achieved compliance with EDI ASN 4010, which relates electronic
transmission of advanced shipping notice information. Compliance with this
standard is critical to the Company's ability to transact business with its
largest customers.
MANUFACTURING OPERATIONS - EQUIPMENT INTEGRATION
The Company continues to invest in upgrading manufacturing and
distribution facilities. 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
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outside firm was retained to perform system integration services. Management
does not believe that the system is capable of producing the full scope of
products for which its design was intended at this time. Alternative and
successful 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 Great
Papers, Action Communications, Inc., Avery Dennison Office Products, First Base,
Paper Direct, Inc., American Pad and Paper, Inc., and Z-International, Inc. The
Company's designer stationery products compete for limited shelf space in the
office products superstores, office product stores, mass market stores, contract
stationers, wholesalers, office product catalogs and mail order catalogs.
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguish the Company from its competitors. However, many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. In order to remain
competitive, the Company may be required to continue to make significant
expenditures for capital equipment, sales, service, training and support
capabilities, investments in systems, procedures and controls, expansions of
operations and research and development, among many other items. Additional
financing might be required to fund the Company's investments in those areas.
There can be no assurance that additional financing will be available on terms
acceptable to the Company.
TRADEMARKS AND COPYRIGHTS
The Company maintains twelve registered trademarks in the United
States, Canada and Australia. 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."
SEASONAL
A significant portion of the Company's customer orders are placed
between June and October of each year for shipment during the Company's third
fiscal quarter, which includes the Christmas and Holiday 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.
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BACKLOG
The Company's backlog of orders as of March 31, 2000 was approximately
$1,448,533. 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, 2000, the Company had approximately 149 employees, 126 of
whom were employed at its headquarters in Blaine, Washington, 9 of whom were
employed at its Wisconsin sales and distribution facilities, 7 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.
SPECIAL NOTE REGARDING 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 include, but are not limited to,
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; anticipated consumer acceptance and sales of the GeoFile
plastic ready-to-assemble filing and storage cabinets; the Company's ability to
increase its market share within the preprint industry; the ability of the
Company to successfully implement price changes for the Company's products when
and as needed; trends relating to the Company's profitability and gross profits
margins; and the ability of the Company to increase its availability under its
existing revolving credit facility and to raise additional debt or equity
financing sufficient to meet its working capital requirements.
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 and the GeoFile filing and storage cabinets; 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;
supply terms, reliable and immediately available raw material supply and other
favorable terms with certain key vendors; 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 from time to
time in the Company's other filings with the Securities and Exchange Commission,
press releases and other communications.
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
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MANAGEMENT AND THEREBY HAVE A MATERIAL ADVERSE EFFECT ON THE VALUE OF ITS COMMON
STOCK. A CAREFUL REVIEW AND UNDERSTANDING OF EACH OF THE RISK FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM IS
ESSENTIAL FOR AN INVESTOR SEEKING TO MAKE AN INFORMED DECISION WITH RESPECT TO
THE COMPANY.
LACK OF LISTING ON AN EXCHANGE
The Company's common stock, no par value per share ("Common Stock"),
trades on the NASDAQ OTC Electronic Bulletin Board. However, the lack of listing
on a national or regional exchange may restrict marketability of 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.
APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5 per share, subject to certain exceptions.
Unless the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, it will be deemed to be "penny stock" and will continue to be
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. These rules adversely effect the ability and
willingness of broker-dealers to sell the Common Stock, which could reduce the
liquidity of the Common Stock and have a material adverse effect on the trading
market and the market price for the Common Stock.
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of March 31, 2000, there were outstanding warrants for the purchase
of an aggregate of 1,395,121 shares of Common Stock at an exercise price of
$6.50 per share. These warrants expired as of June 1, 2000. In addition, as of
March 31, 2000, there were outstanding warrants to purchase up to 135,000 shares
of Common Stock at an exercise price of $0.33 1/3 per share and options to
purchase up to 1,810,000 shares of Common Stock at exercise prices ranging from
$0.30 to $0.50 per share. In the event that the outstanding warrants and options
are exercised, the holders will be given the opportunity to profit from a rise
in the market price of the underlying shares. This may have certain dilutive
effects on, and a materially depressive effect on, the market price for the
Common Stock. The terms on which the Company could obtain additional capital
during the life of such warrants and options may be adversely affected because
the holders may be expected to exercise them at a time when the Company might
otherwise be able to obtain comparable additional capital in a new offering of
securities at a price per share greater than the exercise price of such options
and warrants.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to
continue to be, volatile. 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, specialty paper and office products industries, 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
Common Stock, have experienced extreme price and volume volatility, which has
had a
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substantial effect on the market prices of securities of many smaller public
companies for reasons frequently unrelated to the operating performance of such
companies.
LACK OF DIVIDENDS
The Company's ability to pay a dividend to holders of the Company's
Common Stock is limited by its existing credit facility with U.S. Bank. In
addition, the Company currently anticipates that all of its earnings will be
needed for the on-going operation of the business and does not anticipate paying
any cash dividends on shares of the Company's Common Stock in the foreseeable
future.
DEPENDENCE UPON 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.
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized, more established and have substantially greater
financial, marketing and human resources. 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.
CUSTOMER CONCENTRATIONS
The Company had three customers in 2000 and 1999 and two customers in
1998 which individually exceeded 10% of sales and in the aggregate accounted for
approximately 32%, 57% and 67% of sales in 2000, 1999 and 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 these few customers. Although the composition of the Company's largest
customers may vary from period to period, the loss of a significant customer or
any reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the designer stationery or
specialty papers industry, would have a material adverse effect on the Company's
business, financial condition and results of operations.
As a result of the concentration occurring in the office supply
industry in which the major office megastores are accounting for a greater
percentage of industry-wide sales, it is anticipated that an increasing number
of the smaller outlets and retail stores will discontinue operations in the
years ahead. The Company anticipates that certain of such sales will be
transferred to the larger megastores or wholesale distributors to which the
Company currently supplies its products.
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS
As of March 31, 2000, the Company maintained an inventory (net of
allowance for obsolescence) of specialty papers and other products of
$5,301,171. The Company believes that it is sound business
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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 material 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.
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 100 vendors, it historically
practiced a "sole source" approach to vendor selection in that it typically
relied on a single vendor for all purchases on its various categories of
production materials, and other major categories of purchased goods and
services. One key vendor of commodity paper and related products is a
broker/vendor from whom significant portions of the Company's total purchases
were made during the fiscal years 2000, 1999 and 1998.
This vendor has provided the Company an immediately available and
uninterrupted supply of paper. In addition, this and other key vendors have
granted the Company significant amounts of trade credit, along with favorable
pricing and payment terms. Although the Company may be able to find other
sources of supply for commodity paper and other major raw material categories,
there can be no assurance that potential new vendors, once sourced, would
provide an uninterrupted supply of raw materials or adequate levels of trade
credit.
TECHNOLOGY CHANGES AFFECTING PRODUCTS
The design and manufacture of production equipment used in the designer
stationery and specialties paper industries has undergone and continues to
undergo rapid and significant technological change. In particular, developments
in the software industry may afford customers and consumers with the ability to
produce paper products, which offer quality characteristics comparable with that
provided by the Company. Any such developments may, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's business is, to a significant degree,
dependent on the enhancement of its current products and development of new
products. Product development and enhancement involve a high degree of risks,
and there is no assurance that product development efforts of the Company will
be successful. 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
The Company owns a number of trademarks and copyrights, and certain of
the Company's proprietary manufacturing processes are protected by trade
secrets. 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.
-10-
<PAGE> 12
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
Management continues to expect that the Company's financial results may
vary materially from period to period. Most of the Company's customers order
products for immediate delivery. As a result, a substantial amount of the
Company's net sales in each quarter result from orders received in that quarter.
The Company's net sales and operating results may, therefore, vary significantly
as a result of, among other things, volume and timing of orders received during
the quarter, variations and sales mix, and delays in production schedules.
Accordingly, the Company's historical financial performance is not necessarily a
meaningful indicator of future results. Moreover, a significant portion of the
Company's customer orders are placed between June and October of each year in
anticipation for shipment during the Company's third fiscal quarter (i.e., the
Holiday period). As a result, the Company has experienced and is expected to
continue to experience seasonal fluctuations in its operating results based on
such purchasing patterns. 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.
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 also leases approximately 2,000 square feet of office space in
Milwaukee, Wisconsin and 12,633 and 40,750 square feet of warehouse space in
Madison, Wisconsin and Windsor, Wisconsin, respectively. Management believes
these facilities are suitable and adequate for the Company's business.
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, and expires on August 31, 2002.
ITEM 3. LEGAL
The Company is subject to claims and actions incident to the
operation of its business. It is the opinion of management that the ultimate
resolution of these matters and any future unidentified claims will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2000.
-11-
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Since December 24, 1997, the Company's Common Stock traded on the
NASDAQ OTC Bulletin Board. 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 for each fiscal quarter beginning
with the first fiscal quarter of the fiscal year ended March 31, 2000.
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year 1999
---------------- ----------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First (June 30) $.69 $.34 $.75 $.20
Second (September 30) $.56 $.41 $.63 $.27
Third (December 31) $.56 $.34 $.53 $.28
Fourth (March 31) $1.47 $.44 $.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, 2000, there were approximately 345 holders of record of the Company's
Common Stock.
SALES OF UNREGISTERED SECURITIES
Since April 1, 2000, the Company has issued 9,225,223 shares of Common
Stock in a private placement at $0.45 per share, pursuant to an exemption from
registration under Sections 4(2) and 4(6) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. The following executive officers
and directors of the Company purchased shares pursuant to the offering:
<TABLE>
Name Position Shares
---- -------- ------
<S> <C> <C>
William T. Graham Director and Executive Vice President 3,333,333
James L. Dorman Chairman and Chief Executive Officer 1,111,111
---------
Total 4,444,444
</TABLE>
The balance of the shares were issued to accredited investors who had been
solicited by officers, directors and shareholders of the Company.
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 2000 consolidated Financial Statements and notes
thereto contained elsewhere in this Report.
-12-
<PAGE> 14
YEARS ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA (AS RESTATED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
Restated(2) Restated(2)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $22,613,635 $14,028,746 $22,015,900 $20,055,014 $27,254,782
Gross margin 8,419,130 (2,493,490) 980,761 8,123,917 8,256,070
Income (loss) from operations 2,524,461 (7,598,804) (8,089,245) (3,166,163) 680,141
Net income (loss) $ 1,232,024 $(7,950,301) $(8,727,144) $ 979,074 $ 236,153
============ ============ ============ ============ ============
Net income (loss) per share - Diluted $ 0.19 $ (0.85) $ (0.91) $ 0.10 $ 0.01
Weighted average shares outstanding used in
computing diluted share data 6,606,499 9,322,278 9,626,335 9,857,252 20,599,160
SUPPLEMENTAL OPERATING DATA: EBITDA(1) $ 3,649,460 $(6,226,512) $(5,464,219) $ 5,105,675 $ 2,492,988
</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 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.
(2) Refer to Note 3 - "Restatement Of Prior Years' Financial Statements" in
the fiscal 2000 audited consolidated financial statements included
herein.
AS OF MARCH 31,
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Restated(1) Restated(1)
<S> <C> <C> <C> <C> <C>
Working capital $5,886,703 $401,550 $(8,872,651) $(6,253,495) $(872,053)
Total assets 24,738,041 30,245,701 25,325,764 18,139,989 22,367,444
Long-term obligations, less 3,690,360 4,322,371 4,853,254 3,776,432 3,539,926
current portion
Stockholders' equity 9,989,852 7,917,023 (504,744) 283,208 5,652,073
</TABLE>
(1) Refer to Note 3 - "Restatement Of Prior Years' Financial Statements" in
the Fiscal 2000 audited consolidated financial statements included
herein.
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.
-13-
<PAGE> 15
RESULTS OF OPERATION
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>
2000 1999 1998
---- ---- ----
Restated Restated
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 69.7 59.5 95.5
Gross margin 30.3 40.5 4.5
Selling, general and administrative expenses 27.8 56.3 41.2
Income (loss) from operations 2.5 (15.8) (36.7)
Interest expense (3.4) (6.1) (6.4)
Other income (expense), excluding interest expense 1.8 0.5 (0.9)
Net Income (loss) from continuing operations 0.9 (22.3) (44.1)
Income from and gain on sale of discontinued
operations -- 27.2 4.4
Net income (loss) 0.9% 4.9% (39.6)%
</TABLE>
2000 COMPARED TO 1999
NET SALES. Net sales increased 35.9% to $27,254,782 in fiscal 2000 from
$20,055,014 in fiscal 1999. The increase was primarily attributable to increased
business with a major customer, the addition of a new significant customer, and
sales of ready-to-assemble files, a new product line acquired in early fiscal
2000.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
decreased to 30.3% in fiscal 2000, from 40.5% in fiscal 1999. The lower gross
margin is primarily attributable to increases in volume discounts due to
increased sales, increased freight and distribution costs, new product
introduction and startup costs.
Management continues to explore alternatives of sub-contracting
portions of manufacturing and fulfillment operations to determine whether
improvements in gross margin would be available. Management also continues 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 decreased to $7,575,929 (27.8% of net sales) in fiscal 2000 from
$11,290,080 (56.3% of sales) in fiscal 1999. This decrease is primarily
attributable to a decrease in the Company's legal fees, decreases in other
professional fees, salaries and
-14-
<PAGE> 16
benefits, offset by increases in promotional expenses, commissions, travel
expenses and European selling expenses.
INCOME (LOSS) FROM OPERATIONS. The Company recorded income from
operations in fiscal 2000 of $680,141 compared to an operating loss of
$3,166,163 during fiscal 1999. The improvement was the result of significantly
higher net sales and improved operating controls.
OTHER INCOME (EXPENSE). Other income (expense), other than interest
expense, for fiscal 2000 amounted to $483,330 compared to expense of $94,830 in
fiscal 1999.
INTEREST EXPENSE. Interest expense decreased to $927,318 (3.4% of net
sales) during fiscal 2000, compared to $1,220,695 (6.1% of net sales) during
fiscal 1999. The lower interest costs were caused by a decrease in borrowings by
the Company to support the operations. The decrease in borrowings is due to
improved operating income and capital infusion from the private stock offering
during fiscal 2000.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS. The net income from
continuing operations was $236,153 (0.9% of net sales) in fiscal 2000 compared
to a loss of $4,481,688 (22.3% of net sales) in fiscal 1999. The improvement in
2000 was primarily the result of the Company's improved overall operating
performance.
INCOME TAX PROVISION (BENEFIT). There is no income tax provision for
fiscal 2000. Income taxes provided in 1999 were $50,000 representing alternative
minimum taxes owing as a result of the sale of the Core Business.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The company classified
its sign and lettering division as discontinued in fiscal 1999 pending sale and
disposition in May, 1999.
NET INCOME (LOSS). Net income of $236,153 in fiscal 2000, or 0.9% of
net sales, compares to net income of $979,074 in fiscal 1999, or 4.9% of net
sales.
1999 COMPARED TO 1998
NET SALES. Net sales decreased 8.9% 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.
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 recording of
reserves against receivables, the write off of in-store display racks, increased
advertising and promotional allowances to customers, and an
-15-
<PAGE> 17
overall increase in the SG&A expenses of the Company's three foreign
subsidiaries in Canada, Europe and Australia.
Management intends to review freight expense and to explore options for
reduction of this expense via change in the manner in which products are
consolidated for shipment and in shipping origination points.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from
operations in fiscal 1999 of $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 expenses, other than interest expense,
for fiscal 1999 amounted to $94,830 compared to $197,771 in fiscal 1998.
INTEREST EXPENSE. Interest expense decreased to $1,220,695 (6.1% 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.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS. The net loss from
continuing operations was $4,481,688 (22.3% of net sales) in fiscal 1999
compared to a loss of $9,700,235 (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.
NET INCOME (LOSS) FROM 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.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers group
and the introduction of the plastic file cabinet and storage group, the Company
has required, and continues to require, substantial external working capital. 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 $9.5 million subject to a
borrowing base limitation of 75% of the value of the Company's eligible accounts
receivable and 50% of the value of its inventory, net of certain reserves.
Borrowings under the facility bear interest at LIBOR plus 2.5% 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. Borrowings under this facility were
$6,764,627 at March 31, 2000.
-16-
<PAGE> 18
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND 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 2000
relative to the currencies in which the Company's sales are denominated, income
before taxes would decrease by $172,199 for the fiscal year ending March 31,
2000. 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.
ITEM 8. FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc.
are incorporated into this Item 8 by reference to another section of this Report
as follows:
<TABLE>
<S> <C> <C>
(a) Report of KPMG LLP regarding Financial Statements F-2
(b) Consolidated Balance Sheets as of March 31, 2000 and 1999 F-3
(c) Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998 F-4
(d) Consolidated Statement of Stockholders' Equity and Comprehensive Income for the years ended F-5
March 31, 2000, 1999 and 1998
(e) Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998 F-6
(f) Notes to Consolidated Financial Statements F-7
(g) Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
-17-
<PAGE> 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 1, 2000, Geographics, Inc. (the "Company") dismissed Moss
Adams LLP ("Moss Adams") as its independent auditor and engaged KPMG LLP
("KPMG") as its independent auditor. The change in the Company's independent
auditor was approved by its Board of Directors.
Moss Adams' report on the Company's financial statements for the prior
two fiscal years did not contain an adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope, or accounting
principles, except that Moss Adams qualified its opinion as of and for the years
ended March 31, 1999 and March 31, 1998, by including a going concern
modification. Moss Adams qualified its opinion because the Company had incurred
substantial net operating losses in 1999 and 1998 and because the Company was
then out of compliance with its borrowing agreements, which raised a substantial
doubt about its ability to continue as a going concern.
In connection with the audits of the financial statements of the
Company for the years ended March 31, 1999 and March 31, 1998, the Company had
no disagreements with Moss Adams on matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moss Adams, would have
caused them to make reference to such disagreements in their report on the
Company's financial statements for such years. Subsequent to the issuance of the
audit report by Moss Adams for the fiscal year ended March 31, 1999, the Company
and Moss Adams had discussions on the following items:
- Appropriate accruals related to goods and services tax on a
Canadian subsidiary for the fiscal years ended March 31, 1998
and March 31, 1999;
- Appropriate reserves for customer program costs for the year
ended March 31, 1999;
- Appropriate reserves for customer credits for the years ended
March 31, 1998 and March 31, 1999;
- Appropriate reserves for customer returns for the years ended
March 31, 1998 and March 31, 1999; and
- Appropriate reserve for payment of escrowed funds from the
sale of its sign business for the year ended March 31, 1999.
The Company's Board of Directors discussed the matters set forth above.
At the time of dismissal of Moss Adams, the Company and Moss Adams had discussed
the above items. The Company has authorized Moss Adams to respond fully to the
inquiries of KPMG LLP concerning the items discussed above. The Company had
informal discussions with KPMG LLP on the above accounting matters.
Subsequently, the Securities and Exchange Commission conducted a
limited review of the items mentioned above and other accounting matters of the
Company. During the course of such review, the Company determined to restate its
annual consolidated financial statements for the years ended March 31, 1999 and
1998 as more fully set forth in Note 3 to the Company's consolidated financial
statements. Moss Adams concurs with such restatements.
-18-
<PAGE> 20
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 June 20,
2000. Directors are elected for one year terms or until their successors are
elected and qualified. Officers are elected by the Board and their terms of
office are at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James L. Dorman 67 Chairman of the Board of Directors, Chief
Executive Officer
William T. Graham 75 Director
C. Joseph Barnette 58 Director
Brian P. Sullivan 46 Executive Vice President and Chief Operating
Officer - Paper Products
David Schenker 34 Executive Vice President and Chief Operating
Officer - File and Storage Products
Daniel J. Regan 55 Vice President and Chief Financial Officer
</TABLE>
James L. Dorman. Mr. Dorman is currently a member of the Board of
Directors of the Company and serves as Chairman of the Board. He also is the
Chairman of the Board, President and Chief Executive Officer of Intercontinental
Trading, Ltd., a position he has held 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 component parts. Mr. Dorman also is a shareholder,
director and officer of Panint Electric Ltd. of Hong Kong, a developer and
manufacturer of consumer home products.
William T. Graham. Mr. Graham is currently a director of the Company
and was a shareholder, officer and director and co-founder of Uniek, Inc. from
1987 until July 1998. Uniek, Inc. 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, Inc. in July, 1998. In 1949,
Mr. Graham founded W.T. Rogers, Inc. ("W.T. Rogers"). Under Mr. Graham's
leadership, W.T. Rogers became a leading manufacturer and supplier of office
products to mass market retailers and office superstores. In 1991, 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. Mr. Barnette is currently a director of the
Company. He 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.
Brian P. Sullivan. Mr. Sullivan is the Company's Executive Vice
President and Chief Operating Officer - Paper Products, a position he has held
since April 2000. Previously, Mr. Sullivan served as the Vice President and
General Manager, Consumer Products Division, of Domtar Papers, a division of
Domtar, Inc., the seventh largest North American forest products company, from
1997 until joining the Company in March of 2000. Prior to 1997, Mr. Sullivan was
employed by Rolodex Corporation, an office products company, as the Vice
President of Sales.
David Schenker. Mr. Schenker is the Company's Executive Vice President
and Chief Operating Officer - File and Storage Products, a position he has held
since June 1999. Previously, he was employed as Vice President of Office
Products for Steelworks, Inc., an office products company, from 1997 until
joining the Company in 1999. Mr. Schenker also served as the Executive Vice
President of Retail
-19-
<PAGE> 21
Marketing Services, Inc., an office products company, from 1995 to 1997, and
prior to that as National Account Manager for At-A Glance Group, an office
products company, from 1994-1995. Mr. Schenker also served as Northern Regional
Sales Manager at Success Business Industries, Inc., an office products company,
from 1990 to 1994.
Daniel J. Regan. Mr. Regan is the Company's Vice President and Chief
Financial Officer, a position he has held since April 2000. Previously, Mr.
Regan served as the President of Executive/Financial Management Services, a
consulting company, from 1990 until joining the Company in 2000. During that
time Mr. Regan acted as executive manager serving clients in various
manufacturing industries and financial services. Previously, Mr. Regan served as
an executive officer of several companies.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 2000, there were four meetings
of the Board. Each of the directors attended all of the meetings of the Board.
By Unanimous Written Consent dated May 25, 1999 the Board created a Special
Finance Committee for the purpose of raising up to $2,000,000 in subordinated
debt and/or equity for the Company. In the near future, the Board of Directors
anticipates creating two new board committees: a compensation committee and an
audit committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that all Forms 3, 4 and 5 required to be filed by
its directors, officers and greater than 10% shareholders were filed on time
during fiscal 2000, except for the filing of Form 4s by each of James L. Dorman,
William T. Graham and C. Joseph Barnette with respect to the acquisition of
stock by each of them on January 5, 2000. All of these transactions were
reported in a timely manner on Form 5s.
EMPLOYMENT AGREEMENTS
The Company has entered into an Executive Restated Employment Agreement
with James L. Dorman effective as of May 13, 2000 (the "Restated Employment
Agreement"), which restates a prior employment agreement with Mr. Dorman
effective April 16, 1999. Pursuant to the Restated Employment Agreement, Mr.
Dorman is entitled to receive a base salary of $170,000 per year or such greater
amount as the Board or the appropriate committee thereof may from time-to-time
determine. In addition, Mr. Dorman is entitled an option to purchase 250,000
shares of Common Stock at a price of $.40 per share, with such option being
immediately vested. Under the terms of the Restated Employment Agreement, Mr.
Dorman's employment shall continue until April 17, 2003 or until terminated
according to the terms of the Restated Employment Agreement.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended March 31, 1998, 1999 and 2000 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, 2000 and whose total annual
salary and bonus for the fiscal year ended March 31, 2000 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").
-20-
<PAGE> 22
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- -------------------------
OTHER
YEAR ANNUAL
NAME AND PRINCIPAL ENDED COMPEN- SECURITIES UNDERLYING
POSITION MARCH 31 SALARY BONUS SATION OPTIONS
-------- --------- ------ ----- ------ -------
<S> <C> <C> <C> <C> <C>
James L. Dorman, 2000 $72,520 -- -- 800,000
Chairman & CEO 1999 -- -- -- --
1998 -- -- -- --
Richard Gockelman, 2000 $118,277 -- -- --
Former President and 1999 $102,698 -- -- 100,000
CEO 1998 -- -- -- --
</TABLE>
OPTION GRANTS IN FISCAL YEAR 2000
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING EXERCISE OR OPTION TERM
OPTION GRANTED BASE PRICE -------------------------------
NAME (#) ($/SH) EXPIRATION DATE 5% 10%
---- -------------- ------ --------------- -- ---
<S> <C> <C> <C> <C> <C>
James L. Dorman 500,000 $0.50 4/16/09 $137,832 $339,478
300,000 $0.30 4/16/09 49,620 122,215
</TABLE>
EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company's 1999 Stock Option Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options for the purchase of an
aggregate of 4,500,000 shares of common stock, subject to adjustment for stock
splits and similar capital changes. Employees and, in the case of non-qualified
stock options, directors, consultants or any affiliate are eligible to receive
grants under our plans. The Board has the authority to determine the terms of
options granted under the plan, including the price which will not be less than
the fair market value at the time of grant in the case of incentive stock
options. As of March 31, 2000, the Company had options outstanding to purchase
1,810,000 shares of common stock under the 1999 Stock Option Plan.
401(k) Plan
The Company has a 401(k) defined contribution retirement plan covering
substantially all full-time employees. The Company matches 10% of employee
pretax contributions up to 18% of employee pretax compensation. The Company
contributed approximately $9,801 to the plan during the fiscal year ended March
31, 2000.
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 each year.
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
-21-
<PAGE> 23
of Directors. Directors of the Company who are also employees of the Company do
not receive fees for their services as directors.
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 of July 12, 2000 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
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OWNED
------------------------------------ ------------------ -------------
<S> <C> <C>
Sandra J. Martin (1) 3,000,000 7.8%
4918 Femrite Drive
Madison, WI 53716
William T. Graham 5,447,333 14.2%
4918 Femrite Drive
Madison, WI 53716
James L. Dorman (2) 3,206,181 8.4%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
C. Joseph Barnette (3) 363,338 *
1000 Cherry St.
Kent, OH 44240-7520
David Schenker (4) 233,333 *
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
------------------------------------------------------------ ----------- --------
Total Executive Officers and Directors as a Group 9,250,185 24.1%
(4 persons) (5)
</TABLE>
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Sandra J. Martin has not filed a Schedule 13D or Schedule 13G with
respect to her holdings. The share ownership of Ms. Martin is based
solely upon information previously provided to the Company, and the
Company is unable to independently verify this information.
(2) Includes the following: (i) 166,667 shares owned beneficially by Mr.
Dorman's wife, (ii) 289,511 owned by Panint Electric Ltd., of which Mr.
Dorman is a stockholder, officer and director, (iii) currently
exercisable options to purchase 938,892 shares of Common Stock, and
(iv) currently exercisable warrants to purchase 100,000 shares of
Common Stock.
(3) Includes currently exercisable options to purchase 23,338 shares of
Common Stock, and 66,000 shares beneficially owned by Mr. Barnette's
wife.
-22-
<PAGE> 24
(4) Includes currently exercisable options to purchase 100,000 shares of
Common Stock.
(5) Includes currently exercisable options to purchase 1,062,230 shares of
Common Stock, currently exercisable warrants to purchase 100,000 shares
of Common Stock and 522,178 shares indirectly owned.
ITEM 13. 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 President, Chief Executive Officer and Chairman
of the Board, 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 convertible into shares of the Company's Common
Stock at $0.3927 per share. The Notes were paid in full for cash during fiscal
year 2000.
On April 19, 2000, the Company issued a $1,000,000 subordinated note to
Mr. James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, with the proceeds used to assist in acquiring certain assets of the
Consumer Products Business of the Communication Papers Division of Domtar, Inc.
of Canada. The note bore interest at the U.S. Bank's prime lending rate, and was
subordinate to the Company's senior indebtedness to U.S. Bank. The note was paid
in full on May 12, 2000, including accrued interest. In addition to interest on
the note, the Company issued a warrant to Mr. Dorman to purchase 100,000 shares
of Common Stock at $0.45 per share until April 30, 2002.
The Company leases a warehouse from Mr. William T. Graham, a Director
of the Company, under the terms of a lease until December 31, 2000. The lease is
extendable by the Company in annual increments until December 31, 2004. Monthly
rent under the terms of the lease, including taxes and utilities is
approximately $4,500.
The Company leases sales office space from Mr. James L. Dorman,
President, Chief Executive Officer and Chairman of the Board of the Company,
under the terms of a lease expiring December 31, 2002. Monthly rent under the
lease ranges from $1,675 to $1,775.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
(i) Report of KPMG LLP regarding Financial
Statements
(ii) Consolidated Balance Sheets as of March 31,
2000 and 1999
(iii) Consolidated Statements of Operations for
the years ended March 31, 2000, 1999 and
1998
(iv) Consolidated Statement of Stockholders'
Equity and Comprehensive Income for the
years ended March 31, 2000, 1999 and 1998
(v) Consolidated Statements of Cash Flows for
the years ended March 31, 2000, 1999 and
1998
-23-
<PAGE> 25
(vi) Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
(i) Schedule II-Valuation of Qualifying Accounts
All other schedules have been omitted because the required information
is included in the financial statements or the notes thereto, or is not
applicable or required.
3. EXHIBITS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
3.1 Restated Articles of Incorporation of Geographics, Inc. (incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form 10, as amended,
filed on September 12, 1995).
3.2 Restated Bylaws of Geographics, Inc. (incorporated by reference to Exhibit 3.2
to the Registration Statement on Form 10, as amended, filed on September 12,
1995).
10.1 Loan and Security Agreement, dated as of December 22, 1999, between
Geographics, Inc. and U.S. Bank N.A., Milwaukee, Wisconsin (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the year ended December 31, 1999).
10.2 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 10.2 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1997).
10.3 Equipment Schedule No. 4 to the Master Lease, dated as of December 4, 1996,
between Geographics, Inc. and KeyCorp Leasing Ltd. (incorporated by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1997).
10.4 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).
10.5 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).
10.6 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).
</TABLE>
-24-
<PAGE> 26
<TABLE>
<S> <C>
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 Form of Registration Rights Agreement between Geographics, Inc. and each
purchaser of units sold in the Private Placement (incorporated by reference
to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 Convertible Subordinated Note between Geographics, Inc. and James L. Dorman,
dated April 29, 1999 (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended March 31, 1999).
</TABLE>
-25-
<PAGE> 27
<TABLE>
<S> <C>
10.17 Convertible Subordinated Note between Geographics, Inc. and William T.
Graham, dated April 29, 1999 (incorporated by referenced to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended March 31, 1999).
10.18 Restated Employment Agreement between Geographics, Inc. and James L. Dorman,
dated as of May 13, 2000, filed herewith.
10.19 Asset Purchase Agreement dated as of April 1, 2000, by and between
Geographics, Inc. and Domtar Inc., filed herewith.
11.1 Statement regarding computation of per share earnings.
21.1 List of the subsidiaries of Geographics, Inc.
23.1 Consent of KPMG LLP.
23.2 Consent of Moss Adams LLP.
27.1 Financial Data Schedule.
</TABLE>
(B) The following reports were filed during the quarter ended March 31, 2000:
- Form 8-K (filed March 8, 2000) relating to the removal of Moss Adams LLP
as the company's independent auditors and the appointment of KPMG LLP as
the Company's independent auditors.
- Form 8-K/A (filed March 23, 2000) relating to the change of the
Company's independent auditors.
-26-
<PAGE> 28
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 14th day of
July, 2000.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
---------------------------------------------
James L. Dorman
Chairman, Chief Executive Officer
Each person whose individual signature appears below hereby authorizes
and appoints James L. Dorman with full power of substitution and full power to
act without the other, as his true and lawful attorney-in-fact and agent to act
in his name, place and stead and to execute in the name and on behalf of such
person, individually and in the capacity of such person stated below, and to
file any and all amendments to this Report together with any exhibits thereto
and any other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
/s/ James L. Dorman July 14, 2000
-----------------------------------------------
James L. Dorman
Chief Executive Officer
and Chairman of the Board
/s/ William T. Graham July 14, 2000
-----------------------------------------------
William T. Graham
Director
/s/ C. Joseph Barnette July 14, 2000
-----------------------------------------------
C. Joseph Barnette
Director
/s/ Daniel J. Regan July 14, 2000
-----------------------------------------------
Daniel J. Regan
Vice President and Chief Financial Officer
-27-
<PAGE> 29
GEOGRAPHICS, INC.
TABLE OF CONTENTS
MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT................................................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets..........................................................................................2
Statements of Operations................................................................................3
Statement of Stockholders' Equity and Comprehensive Income.............................................4
Statements of Cash Flows................................................................................5
Notes to Financial Statements.........................................................................6-21
</TABLE>
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Geographics, Inc.
We have audited the consolidated balance sheet of Geographics, Inc. and
subsidiaries as of March 31, 2000 and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for the
year then ended. In connection with our audit of the consolidated financial
statements, we also audited financial statement Schedule II included in Item 14
of the Company's annual report on Form 10-K. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
accompanying financial statements of Geographics, Inc. and subsidiaries as of
March 31, 1999 and for each of the years in the two year period ended March 31,
1999, were audited by other auditors whose report thereon dated May 7, 1999,
except as for note 3 as to which the date is June 22, 2000 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Geographics, Inc. and subsidiaries
as of March 31, 2000, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Chartered Accountants
Vancouver, Canada
July 13, 2000
1
<PAGE> 31
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
2000 1999
---------------- ---------------
(Note 3)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 360,612 $ 130,967
Accounts receivable
Trade receivables, net of allowance for doubtful
accounts, sales returns and cash discounts of
$1,587,469 in 2000 and $896,663 in 1999 6,053,810 3,048,755
Other receivables 25,555 261,091
Inventory, net of allowance for obsolete inventory
of $583,358 in 2000 and $861,871 in 1999 5,301,171 3,532,684
Prepaid expenses, deposits, and other current assets 562,244 853,357
---------------- ---------------
Total current assets 12,303,392 7,826,854
PROPERTY, PLANT AND EQUIPMENT, net 9,304,864 9,945,634
OTHER ASSETS 759,188 367,501
---------------- ---------------
TOTAL ASSETS $ 22,367,444 $ 18,139,989
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 259,551 $ 253,425
Note payable to bank 5,764,627 4,896,912
Accounts payable 3,699,532 2,961,079
Accrued liabilities 2,083,523 2,896,332
Current portion of long-term debt 1,368,212 3,072,601
---------------- ---------------
Total current liabilities 13,175,445 14,080,349
LONG-TERM DEBT 3,539,926 3,776,432
---------------- ---------------
Total liabilities 16,715,371 17,856,781
---------------- ---------------
STOCKHOLDERS' EQUITY
No par value common stock - 100,000,000 authorized; 26,965,589 and
9,857,252 issued and outstanding in 2000 and 1999, respectively 20,844,881 15,769,018
Additional paid-in capital 132,944 -
Accumulated other comprehensive income (233,318) (157,223)
Accumulated deficit (15,092,434) (15,328,587)
---------------- ---------------
Total stockholders' equity 5,652,073 283,208
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,367,444 $ 18,139,989
================ ===============
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENTS
</TABLE>
See accompanying notes to these consolidated financial statements. 2
-------------------------------------------------------------------------------
<PAGE> 32
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- ----------------
As Restated As Restated
(Note 3) (Note 3)
<S> <C> <C> <C>
SALES
Sales $ 32,019,946 $ 23,127,452 $ 25,884,553
Less sales returns and allowances 4,765,164 3,072,438 3,868,653
--------------- --------------- ----------------
Net sales 27,254,782 20,055,014 22,015,900
COST OF SALES 18,998,712 11,931,097 21,035,139
--------------- --------------- ---------------
Gross margin 8,256,070 8,123,917 980,761
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,575,929 11,290,080 9,070,006
--------------- --------------- ----------------
Income (loss) from operations 680,141 (3,166,163) (8,089,245)
--------------- --------------- ----------------
OTHER INCOME (EXPENSE)
Other income 484,792 - -
Miscellaneous expense - 31,291 (38,365)
Loss on sales of property and equipment (1,462) (126,121) (159,406)
Interest expense (927,318) (1,220,695) (1,413,219)
--------------- --------------- ----------------
Total other income (expense) (443,988) (1,315,525) (1,610,990)
--------------- --------------- ----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 236,153 (4,481,688) (9,700,235)
DISCONTINUED OPERATIONS
Income from operations of Core Business - 110,476 973,091
Gain on disposal of Core Business, net of
alternative minimum tax of $50,000 - 5,350,286 -
--------------- --------------- ----------------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS - 5,460,762 973,091
--------------- --------------- ----------------
NET INCOME (LOSS) $ 236,153 $ 979,074 $ (8,727,144)
=============== =============== ================
BASIC EARNINGS (LOSS) PER SHARE
Income (Loss) from continuing operations $ 0.01 $ (0.45) $ (1.01)
Discontinued operations - 0.55 0.10
--------------- --------------- ----------------
Net income (loss) $ 0.01 $ 0.10 $ (0.91)
=============== =============== ===============
DILUTED EARNINGS (LOSS) PER SHARE
Income (Loss) from continuing operations $ 0.01 $ (0.45) $ (1.01)
Discontinued operations - 0.55 0.10
--------------- --------------- ----------------
Net income (loss) $ 0.01 $ 0.10 $ (0.91)
=============== =============== ===============
SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE
Basic 19,442,115 9,857,252 9,626,335
=============== =============== ================
Diluted 20,599,160 9,857,252 9,626,335
=============== =============== ================
</TABLE>
See accompanying notes to these consolidated financial statements. 3
-------------------------------------------------------------------------------
<PAGE> 33
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Retained Other
---------------------------- paid-in Earnings Comprehensive
Shares Amount Capital (Deficit) Income (Loss)
------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 9,467,877 $15,574,018 $ - $ (7,580,517) $ (76,478)
Comprehensive income
Net income (loss) - - - (8,727,144) -
Foreign currency translation adjustment - - - - 110,377
Total other comprehensive income - - - - -
Comprehensive income - - - - -
Issuance of common stock 389,375 195,000 - - -
------------ ----------- ----------- ------------ ------------
BALANCE, March 31, 1998 As Restated (Note 3) 9,857,252 $15,769,018 $ - $(16,307,661) $ 33,899
============ =========== =========== ============ ============
Comprehensive income
Net income (loss) - - - 979,074 -
Foreign currency translation adjustment - - - - (191,122)
Total other comprehensive income - - - - -
Comprehensive income - - - - -
------------ ----------- ----------- ------------ ------------
BALANCE, March 31, 1999 As Restated (Note 3) 9,857,252 $15,769,018 $ - $(15,328,587) $ (157,223)
=========== =========== =========== ============ ============
Comprehensive income
Net income (loss) - - - 236,153
Foreign currency translation adjustment - - - - (76,095)
Total other comprehensive income - - - - -
Comprehensive income
Stock-based compensation awards - - 132,944 - -
Issuance of common stock 17,108,337 5,075,863
----------- ----------- ----------- ------------ ------------
BALANCE, March 31, 2000 26,965,589 $20,844,881 $ 132,944 $(15,092,434) $ (233,318)
=========== =========== =========== ============ ============
<CAPTION>
Total Total
Stockholders' Comprehensive
Equity Income
------------ -----------------
<S> <C> <C>
BALANCE, March 31, 1997 $ 7,917,023
Comprehensive income
Net income (loss) (8,727,144) $ (8,727,144)
Foreign currency translation adjustment 110,377 110,377
---------------
Total other comprehensive income - 110,377
---------------
Comprehensive income - $ (8,616,767)
Issuance of common stock 195,000 ===============
------------
BALANCE, March 31, 1998 As Restated (Note 3) $ (504,744)
============
Comprehensive income
Net income (loss) 979,074 $ 979,074
Foreign currency translation adjustment (191,122) (191,122)
---------------
Total other comprehensive income - (191,122)
---------------
Comprehensive income - 787,952
------------ ===============
BALANCE, March 31, 1999 As Restated (Note 3) $ 283,208
============
Comprehensive income
Net income (loss) 236,153 $ 236,153
Foreign currency translation adjustment (76,095) (76,095)
---------------
Total other comprehensive income - (76,095)
---------------
Comprehensive income $ 160,058
Stock-based compensation awards 132,944 ===============
Issuance of common stock 5,075,863
------------
BALANCE, March 31, 2000 $ 5,652,073
============
</TABLE>
See accompanying notes to these consolidated financial statements. 4
-------------------------------------------------------------------------------
<PAGE> 34
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------------- --------------- -----------------
As Restated As Restated
(Note 3) (Note 3)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 236,153 $ 979,074 $(8,727,144)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,329,517 2,855,906 1,849,706
Gain on sale of Core business - (5,350,286)
Loss on sales and disposal of property and equipment 1,462 126,121 159,406
Stock-based compensation 132,944 - 195,000
Changes in noncash operating assets and liabilities
Trade receivables (3,005,055) 1,096,906 2,508,840
Other receivables 235,536 (113,041) 845,193
Inventory (1,768,487) 2,395,474 2,694,366
Prepaid expenses, deposits and other current assets 291,113 (122,050) 162,176
Accounts payable 738,453 (324,388) 863,699
Accrued liabilities (812,809) 157,412 593,889
----------- ----------- -----------
Net cash flows from operating activities (2,621,173) 1,701,128 1,145,131
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in (repayment of) bank overdrafts 6,126 (48,291) (165,729)
Net borrowings (repayment of) on note payable to bank 1,867,715 (6,403,896) 2,651,418
Repayment of long-term debt (2,940,895) (1,354,565) (1,790,535)
Repayments of notes payable to officer/directors - (850,000)
Proceeds from issuance of common stock 4,875,583 - -
Foreign currency translation (75,017) (191,122) 110,377
----------- ----------- -----------
Net cash flows from financing activities 3,733,512 (7,997,874) (44,469)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of Core business - 6,448,073 -
Purchase of plant and equipment (444,479) (308,980) (1,933,911)
Purchase of Innovative Storage Design assets (60,883) - -
Proceeds from sales of equipment 14,355 - 75,000
(Increase) decrease in other assets (391,687) (27,458) 665,570
----------- ----------- -----------
Net cash flows from investing activities (882,694) 6,111,635 (1,193,341)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 229,645 (185,111) (92,679)
CASH AND CASH EQUIVALENTS, beginning of year 130,967 316,078 408,757
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 360,612 $ 130,967 $ 316,078
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ 135,982 - $ 2,199,088
=========== =========== ===========
Issuance of stock-based compensation awards 132,944 - 195,000
=========== =========== ===========
Issuance of common stock for Innovative Storage
Design assets 200,280 - -
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 875,272 $ 1,044,421 $ 1,659,150
=========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements. 5
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<PAGE> 35
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its
offices and main manufacturing and distribution facilities located in
Blaine, Washington. The Company also has sales, warehousing and
distribution facilities near London, England, Sydney, Australia, and
Madison, Wisconsin. The Company is a manufacturer of designer
stationery, value-added papers and ready-to-assemble filing and storage
systems. (See Note 4 regarding the sale of certain business operations
and product line acquisitions.)
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. (which was dissolved in October, 1999, with
operations continued by the Company). Significant intercompany
transactions and balances have been eliminated in consolidation.
CASH AND EQUIVALENTS - For purposes of the balance sheets and statements
of cash flows, cash and cash 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.
INVENTORY - Inventory is valued at the lower of cost on a first-in,
first-out (FIFO) basis or estimated net realizable value.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at historical cost. Depreciation and amortization is provided based on
useful lives of three to forty years, using primarily the straight-line
method. Betterments, renewals and repairs that extend the life of assets
are capitalized. Repairs and maintenance items are expensed when
incurred. Depreciation and amortization expense on equipment, including
amortization expense on capitalized leased equipment, was $1,329,517,
$2,855,906 and $1,849,706 during the years ended March 31, 2000, 1999
and 1998, respectively.
INCOME TAXES - The Company accounts for income taxes using the asset and
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. The
effect on deferred income tax assets and liabilities of a change in tax
rates is included in income in the period that includes the substantial
enactment date.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
non-U.S. subsidiaries is the applicable local currency. The translation
of the applicable foreign currency denominated financial statements into
the Company's functional currency, U.S. dollars, is calculated for
assets and liabilities at the exchange rates in effect as of the balance
sheet dates. 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
6
-------------------------------------------------------------------------------
<PAGE> 36
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of stockholders' equity. Other translation adjustments and transaction
gains and losses are reported in net income in the period they are
realized.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The following significant estimates are included in the financial
statements.
- DEPRECIATION - Depreciation represents an expense allocation 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, including estimated future cash flows from
the assets. 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.
- 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.
- 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
would need to be increased.
REVENUE RECOGNITION - Sales are recorded and recognized as revenue when
product is shipped to the customer.
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.
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 $755,074, $589,569 and $1,346,652 in
2000, 1999 and 1998, respectively.
7
-------------------------------------------------------------------------------
<PAGE> 37
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 and Cash Equivalents, Accounts Receivable, Bank Overdrafts,
Accounts Payable And Accrued Liabilities - The carrying amounts of cash
and cash equivalents, accounts receivable, bank overdrafts, accounts
payable and accrued liabilities approximate fair value due to their
short-term nature.
Note 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 the note payable
and long-term debt. There were no significant differences as of March
31, 2000 and 1999 in the carrying value and fair value of these
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.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
COMPREHENSIVE INCOME - The Company reports comprehensive income, which
includes the Company's net earnings or loss as well as changes in equity
from other non-owner sources. In the Company's case through the date of
the consolidated financial statements, the other changes in equity
included in comprehensive income comprise cumulative foreign currency
translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 1999, the SEC staff
released Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in
the financial statements. SAB 101 must be applied to the financial
statements no later than the fourth quarter of 2000. The Company does
not believe that the adoption of SAB 101 will have a material affect on
the Company's financial results.
8
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<PAGE> 38
NOTE 3 - RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
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>
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 (c)(d)(e)(f)(g) 2,896,332
Current Liabilities 13,680,195 400,154 (c)(d)(e)(f)(g) 14,080,349
Total Liabilities 17,456,627 400,154 (c)(d)(e)(f)(g) 17,856,781
Accumulated Deficit (14,789,661) (538,926) (a)(c)(d)(e)(f)(g) (15,328,587)
Stockholders' Equity 822,134 (538,926) (a)(c)(d)(e)(f)(g) 283,208
Total Liabilities and Stockholders' Equity $ 18,278,761 $ (138,772) $ 18,139,989
<CAPTION>
As Previously As
Reported Adjustments Restated
-------- ----------- --------
<S> <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
</TABLE>
9
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<PAGE> 39
NOTE 3 - RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As Previously As
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C>
For the year ended March 31, 1998:
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) (8,649,618) (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 program 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.
10
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<PAGE> 40
NOTE 3 - RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS (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.
11
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<PAGE> 41
NOTE 4 - ACQUISITION AND DIVESTITURE
Effective July 1, 1999, the Company acquired substantially all of the
assets of Innovative Storage Designs, consisting of inventories,
drawings, tooling, patents, know-how and certain other assets used in the
manufacturing and sale of ready-to-assemble file storage systems. The
purchase price, composed of cash, the assumption of certain liabilities
and issuance of 556,711 shares of common stock of the Company, amounted
to $261,000. In addition, the purchase agreement provides for the payment
of royalties on future sales of files at the rate of 1 1/2% on sales of
single drawer file cabinets and single drawer storage cabinets up to a
maximum of $150,000, and the issuance of common stock of the Company at
the rate of 25,000 shares for each $500,000 of the first $10,000,000 in
sales of the specified products.
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 $6,673,182 (as restated). In connection with the sale,
the Company recorded a gain of $5,350,286 or $.55 (as restated) 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 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Net sales $ 751,539 $ 6,598,881
============== =============
Operating income $ 139,035 $ 1,222,688
============== =============
Income from discontinued operations $ 110,476 $ 973,091
============== =============
<CAPTION>
NOTE 5 - INVENTORIES
Inventories at March 31, 2000 and 1999 consisted of the following:
2000 1999
-------------- -------------
<S> <C> <C>
Raw materials $ 619,463 $ 513,090
Work-in-progress 1,096,799 671,946
Finished goods 4,168,267 3,209,519
-------------- -------------
5,884,529 4,394,555
Less allowance for obsolete inventory 583,358 861,871
-------------- -------------
$ 5,301,171 $ 3,532,684
============== =============
</TABLE>
12
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<PAGE> 42
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------- Accumulated
Depreciation
And Net Book
Cost Amortization Value
---- ------------ -----
<S> <C> <C> <C>
Land $ 114,563 $ - $ 114,563
Buildings 3,881,071 1,037,638 2,843,433
Machinery & equipment 3,488,224 2,085,411 1,402,813
Machinery & equipment under capital lease 7,162,416 2,518,975 4,643,441
Computers and software 312,086 134,934 177,152
Vehicles 240,837 138,995 101,842
EDP installation-in-progress 21,620 - 21,620
------------- -------------- -------------
$ 15,220,817 $ 5,915,953 $ 9,304,864
============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------- Accumulated
Depreciation
And Net Book
Cost Amortization Value
---- ------------ -----
<S> <C> <C> <C>
Land $ 114,563 $ - $ 114,563
Buildings 3,874,478 944,568 2,929,910
Machinery & equipment 3,207,792 1,638,057 1,569,735
Machinery & equipment under capital lease 7,000,573 1,850,064 5,150,509
Computers and software 111,428 61,596 49,832
Vehicles 106,452 84,789 21,663
EDP installation-in-progress 109,422 - 109,422
------------- -------------- -------------
$ 14,524,708 $ 4,579,074 $ 9,945,634
============= ============== =============
</TABLE>
NOTE 7 - OTHER ASSETS
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Deferred finance costs and other $ 627,453 $ 233,266
Trademarks 131,735 134,235
-------------- -------------
$ 759,188 $ 367,501
============== =============
</TABLE>
13
--------------------------------------------------------------------------------
<PAGE> 43
NOTE 8 - FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<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
Capital lease obligations collateralized by certain equipment and fixtures,
with imputed interest at rates ranging from 8.25% to 11.42%. 3,908,138 4,808,964
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 - 21,171
equipment.
3,908,138 6,849,033
Less current portion (1,368,212) (3,072,601)
-------------- -------------
$ 2,539,926 $ 3,776,432
============== =============
</TABLE>
The prime rate was 9.00% and 7.75% at March 31, 2000 and 1999,
respectively.
The Company has a revolving credit agreement with a bank to borrow up to
$7,500,000, which was increased to $9,500,000, effective April 17, 2000.
The borrowings under the agreement are subject to borrowing base
limitations of 75% of eligible accounts receivable and 50% of
inventories, net of reserves. Interest on outstanding advances is
payable monthly at the bank's daily LIBOR rate plus 2.5%. Total
outstanding advances under the revolving credit agreement were
$6,764,627 and $4,896,912 at March 31, 2000 and 1999, respectively. The
revolving credit agreement is secured by substantially all of the assets
of the Company. At March 31, 2000, $1,000,000 under this facility is a
long-term obligation.
At March 31, 2000, the terms of the agreements provide principal payments on
long-term debt and capital lease obligations as follows:
<TABLE>
<S> <C>
2001 $ 1,368,212
2002 961,315
2003 759,813
2004 709,997
2005 108,801
--------------
$ 3,908,138
==============
</TABLE>
Future minimum lease payments under capital leases, together with the present
value of minimum lease payments which is included in the principal repayment
amounts in the table above, as of March 31, 2000 are as follows:
<TABLE>
<S> <C>
2001 $ 1,676,707
2002 1,162,712
2003 878,340
2004 752,854
2005 110,560
--------------
Total minimum lease payments 4,581,173
Less amount representing imputed interest 673,035
--------------
Present value of minimum lease payments $ 3,908,138
==============
</TABLE>
14
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<PAGE> 44
NOTE 9 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current provision (benefit) $ - $ - $ -
Deferred provision (benefit) - - -
-------------- -------------- --------------
Total income tax provision (benefit) $ - $ - $ -
============== ============== ==============
</TABLE>
Income taxes are allocated between continuing and discontinued operation
as follows:
<TABLE>
<CAPTION>
2000 1999 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Total income tax provision (benefit) $ - $ - $ -
Amounts applicable to discontinued operations - - -
-------------- -------------- --------------
Taxes allocated to continuing operations $ - $ - $ -
============== ============== ==============
</TABLE>
The total tax provision differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------
Amount % Amount % Amount %
------------ --------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at statutory
rate on continuing operations $ 80,240 34.0 $ (1,524,000) (34.0)% $(3,298,000) (34.0)%
Exercise of stock options
and warrants - - 367,000 3.8
Other differences, net (80,240) (34.0) 240,000 5.4 548,000 5.6
Change in valuation allowance
for deferred tax assets - - (573,000) (12.8) 2,053,000 21.1
Alternative minimum tax allocated
to discontinued operations - - - - - -
Benefit absorbed by income from
discontinued operations - - 1,857,000 41.4 330,000 3.5
------------ -------- ------------ ------- ----------- ------
Total income tax provision
(benefit) $ - - % $ - - % $ - - %
============ ======== ============ ======= =========== ======
</TABLE>
The significant components of deferred income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Change in valuation allowance for deferred tax assets $ 159,000 $ (592,000) $ 2,053,000
Depreciation of plant and equipment (229,000) (138,000) 302,000
Amortization of goodwill and intangibles 3,000 78,000 17,000
Change in allowance for doubtful accounts (45,000) 79,000 (259,000)
Inventory differences (52,000) (24,000) 239,000
Effect of net operating loss carryforwards - 593,000 (2,340,000)
Other differences, net 164,000 4,000 (12,000)
----------- ----------- -----------
Total deferred income tax expense (benefit) $ - $ - $ -
=========== =========== ===========
</TABLE>
15
<PAGE> 45
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>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Deferred Tax Assets
Net operating losses $ 4,970,000 $ 4,970,000 $ 5,570,000
Inventory, principally due to additional cost
inventoried for tax purposes and financial 312,000 260,000 236,000
statement allowances
Goodwill and intangible assets, principally due to
amortization differences 150,000 254,000 332,000
Accruals for financial reporting purposes 116,000 30,000 -
Alternative minimum tax credit carryforwards 83,000 83,000 70,000
Accounts receivable, due to allowance for doubtful
accounts 283,000 238,000 317,000
Other differences, net - 22,000 62,000
----------- ----------- -----------
Net deferred tax assets 5,914,000 5,857,000 6,587,000
Deferred Tax Liabilities
Plant and equipment, principally due to depreciation
differences 520,000 622,000 760,000
----------- ----------- -----------
Net deferred tax assets before valuation allowance 5,394,000 5,235,000 5,827,000
Valuation allowance (5,394,000) (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 has determined that future income will not be more
likely than not be sufficient to fully recognize all deferred tax assets
existing at March 31, 2000 and 1999. Accordingly, the Company does not
recognize any carrying value of net deferred tax assets.
Net operating loss carryforwards approximating $12,100,000 are available
to offset future taxable income through 2013. In addition, net operating
losses on foreign operations of approximately $1,900,000 are available
to the Company subject to foreign tax rules.
NOTE 10 - STOCKHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE PLANS - As of March 31, 2000, the Company had
reserved 2,000,000 shares of common stock for issuance to key employees,
officers and directors pursuant to the 1999 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. 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. Compensation expense
recognized in the accounts related to stock options in fiscal ended
March 31, 2000 was $132,944.
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 weighted fair value of options issued in 2000 and 1999 is estimated
at $0.30 and $0.36, respectively per option.
16
<PAGE> 46
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
The following assumptions were used to estimate the fair value of the
options:
<TABLE>
<CAPTION>
2000 1999
------ -------
<S> <C> <C>
Risk-free interest rate 5.06% 5.19%
Dividend yield rate - % - %
Price volatility 99% 205%
Weighted average expected life of options 2.0 yr. 0.5 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>
2000 1999
-------------------------------
<S> <C> <C>
Net income (loss) as reported $ 236,153 $ 979,074
Additional compensation expense for fair value of stock options $ 156,618 $ 36,000
Pro forma net income $ 79,535 $ 943,074
Pro forma earnings per share
Basic $ - $ 0.10
Diluted $ - $ 0.10
</TABLE>
The changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
Nonqualified Weighted
Common Stock Option Price
Options Per Share
------------- ------------
<S> <C> <C>
BALANCE, March 31, 1998 and 1997 173,500 $ 2.18
Granted 100,000 0.47
Exercised - -
Expired (10,000) 0.83
-------------
BALANCE, March 31, 1999 263,500 1.51
Granted 1,710,000 0.41
Exercised - -
Expired (163,500) 2.14
-------------
BALANCE, March 31, 2000 1,810,000 $ 0.41
=============
</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 $0.50 1,810,000 9.175 years $0.41 638,618 $0.40
</TABLE>
17
<PAGE> 47
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
SALES OF UNREGISTERED SECURITIES
During the quarter ended September 30, 1999, the Company issued
15,558,337 shares of common stock in a private placement at $.30 per
share, pursuant to an exemption from registration under Sections 4(2) and
4(6) of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. The following officers and directors of the Company purchased
shares pursuant to the offering:
<TABLE>
<CAPTION>
NAME POSITION SHARES
---- -------- ------
<S> <C> <C>
William T. Graham Director and Executive Vice President 2,000,000
James L. Dorman Chairman and Chief Executive Officer 956,178
C. Joseph Barnette Director 170,000
John G. Rossmiller Chief Operating Officer 150,000
Jeffrey M. Kildow Vice President - Sales 133,333
David Schenker Vice President - Sales 133,333
----------
Total 3,542,844
==========
</TABLE>
The balance of the shares were issued to accredited investors who had
been solicited by officers and directors of the Company. Further, the
Company has engaged Culverwell & Co., Inc. of Boston, Massachusetts to
use their best efforts to raise an additional $3,000,000 in a private
placement of common stock, with net proceeds to the Company of $0.30 per
share. The private placement offering remains open, and the Company
expects to receive additional commitments above and beyond what has been
received and issued as of the date of this report.
Effective November 17, 1999, the Company issued warrants to Culverwell &
Co. to purchase 135,000 shares of common stock at an exercise price of
$.33 1/3 per share, exercisable until August 31, 2001. These warrants
remain outstanding at March 31, 2000.
WARRANTS
In addition, warrants to purchase 1,395,121 shares of common stock at
$6.50 per share were outstanding at March 31, 2000. These warrants
expired as of June 1, 2000.
NOTE 11 - EARNINGS (LOSS) PER SHARE
The numerators and denominators of basic and diluted earnings (loss) per
share are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss) (numerator) $ 236,153 $ 979,074 $ (8,727,144)
================ =============== ===============
Shares used in the calculation (denominator)
Weighted average shares outstanding 19,442,115 9,857,252 9,626,335
Effect of dilutive stock options and warrants 1,157,045 - -
---------------- --------------- ---------------
Diluted shares 20,599,160 9,857,252 9,626,335
================ =============== ===============
</TABLE>
The potential dilutive effects of outstanding stock options and warrants
were disregarded in 1998 because the Company reported a loss in 1998 and
the effects of the instruments would have been anti-dilutive to the
reported per share losses. The dilutive effects of outstanding stock
options warrants were disregarded in 1999 as the exercise price for the
shares were higher than the market price of the Company's stock making
the effect of these options 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.
18
--------------------------------------------------------------------------------
<PAGE> 48
NOTE 12 - RELATED PARTY TRANSACTIONS
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 U.S. Bank's prime lending rate, and the
notes are subordinated to the Company's senior indebtedness to U.S.
Bank. The notes are also convertible into shares of the Company's common
stock at $0.3927 per share. The notes were repaid in full for cash
during 2000.
On April 19, 2000, the Company issued a $1,000,000 subordinated note to
the Company's Chief Executive Officer, with the proceeds used to assist
in acquiring certain assets of the Consumer Products Business of the
Communication Papers Division of Domtar, Inc. of Canada. The note bore
interest at U.S. Bank's prime lending rate, and the note was
subordinated to the Company's senior indebtedness to U.S. Bank. The note
was paid in full on May 12, 2000, including accrued interest. In
addition to interest on the note, the Company issued a warrant to
purchase 100,000 shares of common stock at $0.45 per share until April
30 2002.
The Company leases a warehouse from a director under the terms of a
lease until December 31, 2000. The lease is extendable by the Company in
annual increments until December 31, 2004. Monthly rent under the terms
of the lease, including taxes and utilities is approximately $4,500.
The Company leases office space from another director under the terms of
a lease expiring December 31, 2002. Monthly rent under the lease ranges
from $1,675 to $1,775.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has 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 $9,801, $16,884 and $11,471 during the year ended March
31, 2000, 1999 and 1998, respectively.
19
<PAGE> 49
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 2002. At March 31, 2000, the
Company had future minimum lease commitments of $310,000. Rental expense
under all operating leases was $125,838, $86,235 and $320,000 in 2000,
1999 and 1998, respectively.
NOTE 15 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $6,053,810 and $2,909,982 (as restated) at
March 31, 2000 and 1999, 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 69% and 63%
of the total accounts receivable at March 31, 2000 and 1999,
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 65% in 2000, 60% in 1999 and 66% in 1998.
The Company expects that sales to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable
future and believes that its financial results 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 many vendors. One vendor accounted for
a significant portion of the Company's total merchandise purchases
during the years ended March 31, 2000, 1999 and 1998. The Company
purchases commodity paper and other related products from this
broker/vendor that could be supplied by other sources. 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 2000 1999 1998
--------------- --------------- --------------
<S> <C> <C> <C>
North America $ 23,602,305 $ 16,488,463 $ 19,822,459
United Kingdom 2,152,093 1,021,474 613,192
Other European Countries - 1,054,000 584,000
Australia 1,499,884 1,491,077 996,249
--------------- --------------- --------------
Total $ 27,254,782 $ 20,055,014 $ 22,015,900
=============== =============== ==============
Operating profit (loss)
North America $ 937,632 $ (2,581,464) $ (7,559,298)
United Kingdom (344,869) (550,609) (489,263)
Australia 87,378 (34,090) (40,684)
--------------- --------------- --------------
Total $ 680,141 $ (3,166,163) $ (8,089,245)
=============== =============== ==============
</TABLE>
20
<PAGE> 50
NOTE 15 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Long-lived assets
United States $ 9,125,809 $ 9,778,864 $ 12,646,787
Canada - - 36,510
United Kingdom 126,159 108,793 148,200
Australia 52,896 57,977 49,621
-------------- -------------- --------------
Total $ 9,304,864 $ 9,945,634 $ 12,881,118
============== ============== ==============
</TABLE>
International sales accounted for approximately 25%, 36% and 26% of the
Company's total net sales in fiscal years 2000, 1999, and 1998,
respectively. International sales were concentrated in Canada, Europe
and Australia. As a result of such international sales, a significant
portion of the Company's revenues will be subject to certain risks,
including unexpected changes in regulatory requirements, exchange rates,
tariffs and other barriers, political and economic instability and other
risks.
NOTE 16 - SUBSEQUENT EVENTS
From April 1, 2000 to May 31, 2000, the Company has issued 9,225,223 shares
of common stock totaling $4,151,350 in a private placement at $0.45 per
share, pursuant to an exemption from registration under Sections 4(2) and
4(6) of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. This private offering remains open as of the date of this
report. The following officers and directors of the Company purchased
shares pursuant to the offering:
<TABLE>
<CAPTION>
Shares
------
<S> <C> <C>
James L. Dorman CEO & Director 1,111,111
William Graham Director 3,333,333
---------
Totals 4,444,444
</TABLE>
Effective as of April 1, 2000, the Company acquired substantially all of
the assets of the Consumer Products Business of the Communication Papers
Division of Domtar, Inc. of Canada, for a total cash consideration of
$4,557,786. Under the provisions of the Agreement, the Company was granted
an exclusive world-wide license to convert, distribute and sell products
under certain exclusive Domtar trademarks, and a non-exclusive license to
use the Domtar Trademark. The initial term of the licenses is for a three
year period extending to March 31, 2003, extendable for an additional three
year period. The licenses remain exclusive providing annual sales achieve
certain minimum sales levels. The Agreement also provides for the payment
of royalties on sales of the Domtar products at the rate of 4 to 5% of
annual sales of the products.
NOTE 17 - STOCK EXCHANGE LISTING
The Company's securities are traded on the Over-The-Counter Bulletin
Board, under the trading symbol GGIT.
21
