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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended June 30, 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)
----------------
WYOMING 87-0305614
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (360) 332-6711
----------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
The aggregate market value of the common stock held by nonaffiliates of
the registrant as of August 14, 2000 was $18,493,246 based on a closing sales
price of $0.6406 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 August 14, 2000 was 37,709,255.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION..........................................................................................1
ITEM 1. FINANCIAL STATEMENTS..................................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................1
FORWARD-LOOKING STATEMENTS............................................................................1
RESULTS OF OPERATIONS.................................................................................2
LIQUIDITY AND CAPITAL RESOURCES.......................................................................2
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...............................................3
PART II - OTHER INFORMATION.............................................................................................3
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................3
SALES OF UNREGISTERED SECURITIES......................................................................3
ITEM 5 - OTHER INFORMATION.....................................................................................4
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K......................................................................4
SIGNATURE...............................................................................................................4
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Report and by this reference incorporated herein the consolidated balance sheets
as of June 30, 2000 (unaudited) and March 31, 2000, the unaudited statements of
operations for the three months ended June 30, 2000 and June 30, 1999, and the
unaudited consolidated statements of cash flows for the three months ended June
30, 2000 and June 30, 1999, together with the notes thereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Report.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of specialty paper
products as a percentage of revenue; the Company's ability to increase its
market share within the preprint industry; the ability of the Company to
successfully implement price changes for the Company's products when and as
needed; trends relating to the Company's profitability and gross profits
margins; the ability of the Company to implement, or modify its management
information system, including the electronic data interchange system, adequate
to meet operations requirements in the future and to improve its internal
controls; and the ability of the Company to refinance its existing revolving
credit facility to raise additional debt or equity financing sufficient to meet
its working capital requirements.
Relevant risks and uncertainties include, but are not limited to,
slower than anticipated growth of the preprint papers market; loss of certain
key customers; insufficient consumer acceptance of the Company's specialty paper
products; unanticipated actions, including price reductions, by the Company's
competitors; unanticipated increases in the costs of raw materials used to
produce the Company's products; loss of favorable trade credit, supply terms,
reliable and immediately available raw material supply and other favorable terms
with certain key vendors, greater than expected costs incurred in connection
with the implementation of a management information system; failure to realize
expected economic efficiencies of the Company's automated production system; the
inability to hire and retain key personnel; unexpected increases in the overall
costs of production as a result of collective bargaining arrangements;
unfavorable determinations of pending lawsuits or disputes; and inability to
secure additional working capital when and as needed. Additional risks and
uncertainties include those described under "Risk Factors" in Part I of the
Company's Annual Report on Form 10-K for the year ended March 31, 2000 and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission, press releases and other communications. All forward
looking statements contained in this Report reflect the Company's expectations
at the time of this Report only, and the Company disclaims any responsibility to
revise or update any such forward-looking statement except as may be required
law.
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RESULTS OF OPERATIONS
NET SALES. Net sales increased 84.6% to $9,204,674 in the quarter ended
June 30, 2000 from $4,986,364 in the quarter ended June 30, 1999. The increase
was attributable to sales of new products beginning April 1, 2000 after the
acquisition of certain inventory and rights from Domtar, which accounted for
13.2% of the total increase and increased sales of the Company's
ready-to-assemble plastic storage and filing cabinets which accounted for 7.2%
of the total increase. The Company made higher accruals for sales returns and
allowances ($1,233,669 or 11.8% of gross sales for the quarter ended June 30,
2000 compared to $559,052 or 10.1% of gross sales for the quarter ended June 30,
1999). The Company provides for sales returns and allowances throughout the year
as sales are recorded, consistent with historical experience and specific sales
arrangements.
GROSS MARGIN. Gross margin as a percentage of gross sales decreased to
25.9% in the quarter ended June 30, 2000, from 26.9% in the same period in
fiscal 1999. The lower gross margin is primarily attributable to the increase in
accruals for returns and allowances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2,134,858 (20.5% of gross sales) in the
quarter ended June 30, 2000 from $1,428,923 (25.8% of gross sales) in the
quarter ended June 30, 1999. This increase is primarily attributable to
increases in sales staffing, advertising and promotional costs, sales
commissions, and travel associated with the startup of the ready-to-assemble
plastic storage and filing cabinets, as well as the integration of the Domtar
product line acquired as of April 1, 2000.
OTHER INCOME (EXPENSE). Other expense for the quarter ended June 30,
2000 amounted to $14,398 compared to income of $172,392 for the quarter ended
June 30, 1999. Other expense in fiscal 2000 is principally realized foreign
exchange losses, whereas other income in fiscal 1999 arose from the favorable
settlement of debts with creditors.
INTEREST EXPENSE. Interest expense decreased to $221,815 (2.1% of
gross sales) during the quarter ended June 30, 2000, compared to $237,745 (4.3%
of gross sales) during the same period in fiscal 1999. The lower interest costs
were caused by a decrease in borrowings by the Company to support the
operations. The decrease in borrowings was primarily attributable to positive
cash flow generated by operations and additional equity raised through the sale
of stock.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers
group, the introduction of the plastic file cabinet and storage group, and the
acquisition of certain assets from Domtar, the Company has required, and
continues to require, substantial external working capital. At the date of this
Report, in addition to sales of unregistered securities, the Company's only
other 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 $6,852,652 at June 30, 2000.
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 has 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 material.
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 approximately $40,000 for the quarter ended June
30, 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2000, the Company has issued
9,641,888 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>
<CAPTION>
Name Position Shares
---- -------- ------
<S> <C> <C>
William T. Graham Director 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 5 - OTHER INFORMATION
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Effective as of April 1, 2000, the Company acquired certain inventory,
licenses and trademark rights of the Consumer Products Business of the
Communication Papers Division of Domtar, Inc. of Canada, for a total cash
consideration of $4,606,924, including legal costs of approximately $49,000.
Under the provisions of the agreement with Domtar, 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 at the Company's option 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.
On April 19, 2000, the Company issued a $1,000,000 subordinated note
payable to the Company's Chief Executive Officer, with the proceeds used as
partial interim financing for the acquisition of the Domtar product line. The
note bear interest at the US Bank's prime lending rate, and the notes are
subordinated to the Company's senior indebtedness to US 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule for the quarter ended June 30, 2000.
(b) There were no reports on Form 8-K filed during the quarter
ended June 30, 2000.
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 21st day of
August, 2000.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
-------------------------------------
James L. Dorman
President and Chief Executive Officer
By: /s/ Daniel J. Regan
-------------------------------------
Daniel J. Regan
Vice President and Chief Financial Officer
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GEOGRAPHICS, INC
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND MARCH 31, 2000
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
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(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 559,174 $ 360,612
Accounts receivable
Trade receivables, net of allowances of $993,000 and $897,000
at June 30 and March 31, 2000, respectively 6,623,212 6,053,810
Other receivables 48,828 25,555
Inventory, net of allowance for obsolete inventory of
$575,000 and $583,000 at June 30 and March 31, 2000, respectively 7,978,993 5,301,171
Prepaid expenses, deposits, and other current assets 537,528 562,244
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Total current assets 15,747,735 12,303,392
PROPERTY, PLANT AND EQUIPMENT, NET 9,073,515 9,304,864
LICENSES, TRADEMARKS AND OTHER INTANGIBLE ASSETS 3,267,586 317,170
OTHER ASSETS 215,236 442,018
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TOTAL ASSETS $ 28,304,072 $ 22,367,444
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 828,679 $ 259,551
Note payable to bank 5,852,652 5,764,627
Accounts payable 3,982,738 3,699,532
Accrued liabilities 2,767,211 2,083,523
Current portion of long-term debt 1,132,084 1,368,212
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Total current liabilities 14,563,364 13,175,445
LONG-TERM DEBT 3,389,567 3,539,926
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Total liabilities 17,952,931 16,715,371
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STOCKHOLDERS' EQUITY
No par common stock - 100,000,000 shares authorized; 36,607,477 and 26,965,589
shares issued and outstanding at June 30 and March 31, 2000, respectively 25,183,731 20,844,881
Additional paid-in capital 159,638 132,944
Accumulated other comprehensive income (234,007) (233,318)
Accumulated deficit (14,758,221) (15,092,434)
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Total stockholders' equity 10,351,141 5,652,073
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,304,072 $ 22,367,444
================== =====================
</TABLE>
F-1
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GEOGRAPHICS, INC
Consolidated Statements of Operations
Three Months Ended June 30, 2000 and June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
2000 1999
--------------- ----------------
<S> <C> <C>
SALES $ 10,438,343 $ 5,545,416
Returns and Allowances (1,233,669) (559,052)
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Net Sales 9,204,674 4,986,364
COST OF SALES 6,499,410 3,496,369
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Gross Margin 2,705,264 1,489,995
S.G.& A. EXPENSES 2,134,858 1,428,923
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Operating Income (Loss) 570,406 61,072
OTHER INCOME (EXPENSE)
Interest Expense (221,815) (237,745)
Other Income (Expense) (14,378) 172,392
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Total Other Income (Expense) (236,193) (65,353)
--------------- ----------------
NET INCOME (LOSS) BEFORE TAX 334,213 (4,281)
PROVISION FOR INCOME TAXES - -
--------------- ----------------
NET INCOME (LOSS) $ 334,213 $ (4,281)
=============== ================
EARNINGS PER COMMON SHARE
Basic $ 0.01 $ (0.00)
=============== ================
Diluted $ 0.01 $ (0.00)
=============== ================
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE
Basic 35,831,552 9,857,252
=============== ================
Diluted 36,711,254 9,857,252
=============== ================
</TABLE>
F-2
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GEOGRAPHICS, INC.
Consolidated Statements of Cash flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
2000 1999
---------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 334,213 $ (4,281)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities
Depreciation and amortization 407,313 341,812
Loss on sale/disposal of property and equipment - 1,770
Stock-based compensation 26,694 -
Changes in noncash operating assets and liabilities
Trade receivables (569,402) 553,817
Other receivables (23,273) 135,828
Inventories (1,120,036) 345,174
Prepaid expenses, deposits and other assets (74,067) 371,143
Licenses, trademarks and other intangible assets 67,241 2,500
Other assets 258,263 10,745
Accounts payable 283,206 303,718
Accrued liabilities 683,688 (1,175,397)
---------------------- -------------------
Net cash flows from operating activities 273,840 886,829
---------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts 569,128 25,696
Net borrowings on note payable to bank 88,025 (575,723)
Repayment of long-term debt (386,487) (328,400)
Proceeds from notes payable to officers and directors 1,000,000 100,000
Repayment of notes payable to officers and directors (1,000,000) -
Proceeds from issuance of common stock 4,338,850 -
Net change, foreign currency translation (689) 601
---------------------- -------------------
Net cash flows from financing activities 4,608,827 (777,826)
---------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (77,181) (80,202)
Acquisition of Domtar Consumer Products assets for cash (4,606,924) -
---------------------- -------------------
Net cash flows from investing activities (4,684,105) (80,202)
---------------------- -------------------
NET CHANGE IN CASH 198,562 28,801
CASH, BEGINNING OF PERIOD 360,612 130,967
---------------------- -------------------
CASH, END OF PERIOD $ 559,174 $ 159,768
====================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 207,248 $ 237,745
====================== ===================
</TABLE>
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NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements of
Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such interim statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and the results of operations and cash flows for
the interim periods presented. The results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year. These statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company's
consolidated financial statements and notes thereto for the fiscal year ended
March 31, 2000, including the amendment to previously issued financial
statements described in Note 3 therein. The appropriate adjustments and
reclassifications have been reflected in the statements of operations and cash
flows for the three month period ended June 30, 1999.
The consolidated financial statements include the accounts of
Geographics and its wholly-owned subsidiaries: Geographics Marketing Canada Inc.
(inactive), Geographics (Europe) Limited and Geographics Australia, Pty.
Limited. All intercompany balances and transactions have been eliminated.
F-4
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GEOGRAPHICS, INC.
FORM 10-Q
EXHIBIT INDEX
FOR THE QUARTER ENDED JUNE 30, 1999
Exhibit
Number
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27.1 Financial Data Schedule
