<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 3 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
For the quarter period ended January 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
For the transition period from ______ to ______
Commission File No.: 0-18935
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ORGANIK TECHNOLOGIES, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
WASHINGTON 81-0440517
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
1919 70TH AVENUE WEST, TACOMA, WASHINGTON 98466
------------------------------------------------
(Address of principal executive offices.)
Issuer's telephone number: (206) 564-1400
--------------
Indicate by check mark 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 .
--- ---
6,650,698 SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 8, 1996
----------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Organik Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, 1996 July 31, 1995
-------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash on hand and cash equivalents $ 718,884 $ 134,920
Accounts receivable less allowance for
doubtful accounts of $64,690 and $13,142,
respectively 563,316 28,961
Other receivables 22,952 7,622
Inventories, net 693,224 994,118
Prepaid expenses 62,278 103,359
-------------------- --------------------
Total current assets 2,060,654 1,268,980
Property and equipment, net of accumulated
depreciation 524,613 755,732
Other assets:
Purchased cotton technology net of accumulated
amortization of $142,500 and $127,500,
respectively 157,500 172,500
Other 120,999 196,746
-------------------- --------------------
Total assets $ 2,863,766 $ 2,393,958
-------------------- --------------------
-------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to others $ 3,780 $ 126,898
Accounts payable 45,446 262,799
Accrued payroll and related liabilities 89,988 231,517
Other accrued expenses 227,561 325,098
-------------------- --------------------
Total current liabilities 366,775 946,312
Long-term indebtedness - -
Shareholders' equity (deficit):
Preferred stock, no par value, 10,000,000
shares authorized, 11,500 shares outstanding 100,317 100,317
Common stock, and additional paid-in capital,
no par value, 50,000,000 shares authorized,
6,650,698 and 5,180,523 shares issued and
outstanding, respectively 15,904,304 12,363,989
Accumulated deficit (13,507,630) (11,016,660)
-------------------- --------------------
Total shareholders' equity 2,496,991 1,447,646
-------------------- --------------------
Commitments and contingencies - -
Total liabilities and shareholders' equity $ 2,863,766 $ 2,393,958
-------------------- --------------------
-------------------- --------------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
Organik Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 497,710 $ 1,480,575 $ 1,561,035 $ 2,949,825
Cost of sales 981,205 1,584,991 2,410,606 3,163,402
------------ ------------ ------------ ------------
Gross profit (483,495) (104,416) (849,571) (213,577)
Selling, general and administrative expenses 912,866 511,109 1,620,359 991,572
------------ ------------ ------------ ------------
Income (loss) from operations (1,396,361) (615,525) (2,469,930) (1,205,149)
Other income (expense)
Interest income (expense) 16,248 2,162 28,273 14,052
Loan fees and other (2,761) (2,970) (43,563) (5,470)
------------ ------------ ------------ ------------
Net (loss) $(1,382,874) $ (616,333) $(2,485,220) $(1,196,567)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share $ (0.21) $ (0.14) $ (0.39) $ (0.27)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding 6,650,698 4,376,502 6,344,370 4,376,502
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
Organik Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
---------------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,485,220) $ (1,196,567)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock and warrants issued for
services provided and other costs 6,000 -
Depreciation and amortization 281,186 111,409
Consulting fees 83,625 -
Changes in:
Accounts receivable (534,355) (248,471)
Other receivables (15,330) (2,544)
Inventories 300,894 254,615
Prepaid expenses 41,081 89,424
Accounts Payable (217,353) 5,456
Accrued Expenses (239,066) (22,458)
-------------------- --------------------
Net cash used in operating activities (2,778,538) (1,009,136)
-------------------- --------------------
Cash flows from investing activities:
Purchase of property and equipment (51,172) (275,103)
Proceeds from disposal of property and
equipment 16,105 -
Other 1,316 1,133
-------------------- --------------------
Net cash (used) in investing activities (33,751) (273,970)
-------------------- --------------------
Cash flows from financing activities:
Prepaid consulting fees (75,000) -
Proceeds from short-term debt incurred 255,377 -
Retirement of short-term debt (378,495) -
Gross proceeds from issuance of common
stock and warrants 3,822,442 -
Common stock and warrant offering costs (325,627) -
Payment of deferred offering costs 103,306 (46,440)
Payment of preferred stock dividends (5,750) (5,750)
-------------------- --------------------
Net cash (used) provided by financing
activities 3,396,253 (52,190)
-------------------- --------------------
Net increase (decrease) in cash 583,964 (1,335,296)
Beginning cash and cash equivalents 134,920 1,641,803
-------------------- --------------------
Ending cash and cash equivalents $ 718,884 $ 306,507
-------------------- --------------------
-------------------- --------------------
</TABLE>
See notes to Consolidated Financial Statements.
4
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and disclosures
required by generally accepted accounting principles for annual financial
statements. Users of these interim consolidated financial statements should
refer to the consolidated annual financial statements for additional information
and disclosure.
In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have been
included. Interim operating results are not necessarily indicative of the
results that may be expected for a full year.
The Company has experienced significant losses since July 31, 1995.
Management believes that the Company has adequate resources to continue at the
present level of operations, should it choose to do so, through the end of its
current fiscal year (July 31, 1996), subject to a reduction of operating losses.
However, the Company's internal forecasts indicate that it may have need for
additional funds through equity or debt financing in order for the Company to
fully manufacture its backlog of ORGANIK-TM- apparel orders. The Company is
currently negotiating for approximately $500,000 of interim seasonal debt
financing from Honduran sources. Should the Company not be able to obtain this
or other suitable financing, or if the Company's operating results should be
significantly different than anticipated, the Company may elect to scale back
its operations by taking one or more of the following actions: liquidating non-
essential equipment and inventories, deferring capital expenditures, and
decreasing personnel expenditures through reduction of administrative support
staff and deferral of certain management salaries. There can be no assurance
that any such measures, if taken, would be adequate to reduce costs to an
acceptable level or would not unduly damage the Company's credibility as a
supplier to its major customers to an extent that would not preclude its ability
to timely recover operations to an acceptable level.
NOTE 2. INVENTORIES
Inventories at January 31, 1996 and July 31, 1995, net of reserves of
$300,000 and $45,000, respectively, consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
-------------- --------------
<S> <C> <C>
Raw materials $430,817 $763,997
Work in process 223,287 153,465
Finished Goods 39,120 76,656
-------- --------
$693,224 $994,118
-------- --------
-------- --------
</TABLE>
NOTE 3. EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number
of common shares outstanding for each period. The potential effect of common
shares contingently issuable have not been included in the calculation as their
effect would be antidilutive. The net loss per share for the three and six
month periods have been adjusted for dividends paid to the holders of the
Company's preferred stock.
5
<PAGE>
NOTE 4. CONVERTIBLE PROMISSORY NOTE
On August 16, 1995, the Company issued a $255,377 convertible promissory
note and repaid the note in full August 25, 1995 with proceeds from the July 17,
1995 offering. (See Note 5) The note bore interest at 9% annually. In
connection therewith the Company issued warrants to purchase 25,538 shares of
the Company's common stock at $1.75 per share. The warrants, valued at $6,000,
are included in loan fees expensed for the six months ended January 31, 1996.
NOTE 5. SHAREHOLDERS' EQUITY
On July 17, 1995 and for a period of time initially expiring August 18,
1995, which was extended until September 12, 1995 (the "Special Offering
Period"), the Company allowed warrantholders to exercise the outstanding Class A
and Class B Warrants at $3.25 per warrant, and receive one and one-quarter share
of Common Stock and a Class C Warrant. Each Class C Warrant entitles the
warrantholder to purchase one share of Common Stock for $5.00 and expires in
March 1999. As of September 12, 1995, 245,552, or 86% of the then outstanding
Class A Warrants and 921,584 or 84% of the outstanding Class B Warrants were
exercised generating net proceeds to the Company of $3,496,815. The proceeds
from the exercise of the Class A and Class B Warrants were added to working
capital for general corporate purposes, including financing the manufacture of
the Company's products off-shore and the implementation of a marketing program
for obtaining additional orders for ORGANIK-TM- garments. This offering may or
may not limit the Company's ability to utilize net operating loss carryforwards
due to changes in ownership.
In October 1995, the Company entered into an agreement with the
underwriter of its 1994 stock offering, Whale Securities Co., LP, to extend its
current consulting agreement which expires in March 1996, another two years.
The terms include $75,000 of previously paid cash compensation and a warrant to
purchase 150,000 shares of common stock at a price of $3.23 per share. The
warrants were valued at $37,500.
NOTE 6. RELATED PARTY TRANSACTIONS
In December 1995 the Company amended the employment agreement of John
McNulty, the Company's former Chief Executive Officer, to provide for
one year of consulting by him. As part of this amendment non-vested stock
options previously granted Mr. McNulty became immediately fully vested.
NOTE 7. STOCK OPTIONS
In October 1995, the Company granted, subject to certain conditions, a
director and Board Vice Chairman a non-qualified stock option to purchase 75,000
shares at $3.23 per share, vesting between April 1996 and April 1998. During
the first half of 1996 warrants were granted to a consultant and a lender to
purchase 175,538 shares at prices ranging from $1.75 to $3.23 per share. Non-
qualified stock options to purchase an additional 130,000 shares at prices
ranging from $2.65 to $3.23 per share were granted, subject to certain
conditions, in October and December to employees of the Company.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Included in cash and cash equivalents is a $100,000 short-term certificate
of deposit. This deposit is collateral for a standby letter of credit issued to
the Company's factor as security against potential chargebacks, if any,
allowable under contract with one of its customers.
6
<PAGE>
NOTE 9. SUBSEQUENT EVENTS
In February 1996 the Company entered into an employment agreement with
William L. Bryson, the Company's new Chief Executive Officer. Under the
agreement Mr. Bryson was granted stock options to purchase 60,000 shares of
Common Stock at $1.13, which was the market value at the date of the grant, and
30,000 shares at the market value seven months from the date of the grant, with
33% vesting immediately, 66% vesting at the end of six months and 100% at the
end of 13 months.
NOTE 10. CONSOLIDATED STATEMENT OF CASH FLOWS - supplemental disclosure
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In October 1995 warrants were issued to Whale Securities Co., LP, valued at
$37,500, were recorded as an increase to both common stock and deferred
consulting fees.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
During the first half of 1996 the Company experienced substantial quality
control problems and production difficulties during the start-up phase of the
Central American operation. These difficulties combined with liquidity
limitations in August and September 1995 resulted in a significant number of
order cancellations, customer chargebacks and defective products. The Company
anticipates that during the remainder of fiscal 1996, its workforce will become
trained and stabilized, supplier relations will be further developed, and
production and accounting controls and procedures will be improved. However,
there can be no assurance that the Company will be successful in eliminating
manufacturing losses in the future, or that its off-shore manufacturing
operations or cost-reduction strategies will result in increased revenues or
profitable operations. Expenditures of various types related to the
establishment of Central American manufacturing operations are expected to
continue at least through the fourth quarter of fiscal 1996.
In February 1996, which is subsequent to the accounting period covered by
this report, the Board of Directors appointed William L. Bryson as President and
Chief Executive Officer and William F. Gould as Chief Financial Officer
replacing Jeff Harden as Chief Executive Officer, John Lindsey as President and
Greg McWade as interim Chief Financial Officer. In February and March 1996 the
Company terminated the employment of 34 employees and hired 10 replacements for
a net reduction in annual payroll expense of $235,000.
In March 1996 the Board of Directors authorized the Vice Chairman to
investigate opportunities to license the Company's proprietary shrinkfree cotton
fabric and to hold discussions with interested potential purchasers of the
Company.
At March 11, 1996, the backlog of orders for ORGANIK-TM- apparel was
approximately $3,100,000 which represents an increase of approximately 33% over
the backlog a year ago.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JANUARY 31, 1996 COMPARED TO THREE AND SIX
MONTHS ENDED JANUARY 31, 1995
In accordance with its cost reduction strategy the Company closed its
domestic sewing operations in June 1995 and relocated the manufacture of its
ORGANIK-TM- products off-shore which, as expected, affected revenues during this
transitional period. Net sales for the three and six months ended January 31,
1996 were $497,710 and $1,561,035, a decrease of $982,865 (66.4%) and $1,388,790
(47.1%) as compared to the three and six months ended January 31, 1995,
respectively. The decrease in net sales for the most recent six months was
substantially attributable to a decrease in domestic contract manufacturing
services of $2,184,407, partially offset by an increase in ORGANIK-TM- product
sales of $835,281.
8
<PAGE>
The following table sets forth information relating to the dollar amounts
and percentages of revenues derived from the Company's principal activities.
<TABLE>
<CAPTION>
Six Months ended January 31,
----------------------------
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
ORGANIK-TM- Products $1,547,170 99.1% $ 711,889 24.1%
Contract Manufacturing 13,865 .9% 2,198,272 74.5%
Other - - % 39,664 1.4%
---------- ------ ---------- ------
$1,561,035 100.0% $2,949,825 100.0%
---------- ------ ---------- ------
---------- ------ ---------- ------
</TABLE>
Gross losses for the three and six months ended January 31, 1996 were
$483,495 and $849,571 as compared to gross losses of $104,416 and $213,577 for
the three and six months ended January 31, 1995 The gross loss also increased
as a percent of sales from 7.0% and 7.2% for the three and six months ending
January 31, 1995 to 97.1% and 54.4% for the same periods in 1996. The decreases
were the result of substantial quality and production inefficiencies associated
with start-up operations in Central America. The Company also increased
inventory reserves for potential losses on goods either which do not meet
quality standards, or which may be overstated as inventory due to production
waste, theft, or inventory error, all of which are presently under review. The
Company anticipates that during the remainder of fiscal 1996, its workforce
will become trained and stabilized, supplier relations will be further
developed, and production and accounting controls and procedures will be
improved.
Selling, general and administrative expenses for the three and six months
ended January 31, 1996 were $912,866 and $1,620,359 an increase of $401,757
(78.6%) and $628,787 (63.4%) from the same periods of the prior year. This
increase reflects the Company's increased focus on marketing, filling several
management positions primarily related to the offshore operations, significant
travel and other costs associated with the development of off-shore sourcing and
manufacturing capabilities, and air freight to customers due to late deliveries.
In December the Company terminated the services of a consultant and
recorded as a current expense $46,875 of prepaid consulting fees.
The Company has determined that certain computer software which related to
the Tacoma manufacturing operation would not be needed in the future and
accordingly has fully written-off the remaining book value of $98,830. The
Company also reduced the carrying value, by a charge to depreciation expense of
$66,164, of computer hardware, which it expects to be able to utilize in the
future in the Central American manufacturing operation, to current estimated
market value.
For the six months ended January 31, 1996, loan fees of $39,530 were
related to bridge loans funded and repaid in August 1995.
As a result of the foregoing, for the three and six months ended January
31, 1996 the Company incurred a net loss of $1,382,874 or $0.21 per share, and
$2,485,220 or $0.39 per share, compared to a net loss of $616,333, or $0.14 per
share and $1,196,567 or $0.27 per share, for the same periods ended January 31,
1995.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy to reduce costs, including the establishment of off-
shore operations, has required significant up front expenditures. This strategy
has been financed through a public stock offering in March 1994 and warrant
exercises in May 1995 and September 1995. Since inception, the Company has been
substantially dependent upon the sales of its securities and various borrowings
in order to finance its working capital requirements and expects to be
substantially dependent on such sales and borrowings for the foreseeable future.
The Company had working capital of $1,693,879 on January 31, 1996, as
compared to working capital of $322,668 on July 31, 1995. Subsequent to July
31, 1995, working capital was substantially increased when the Company received
net proceeds of approximately $3,500,000 through the exercise of its outstanding
Class A and Class B Warrants. Accounts receivable increased from $28,961 at
July 31, 1995 to $563,316 at January 31, 1996 due to low levels of shipments in
June and July associated with closing the domestic manufacturing operation as
compared to start-up shipments from the Honduran manufacturing during first half
of 1996. The allowance for doubtful accounts was increased from $13,142 at July
31, 1995 to $64,690 due to returns and markdowns associated with late deliveries
and quality control problems. Because of the start-up phase of Honduran
operations, there can be no assurance that reserves for doubtful accounts will
prove to be adequate. The reduction in inventory from $994,118 at July 31, 1995
to $693,224 at January 31, 1996 reflects the increase in inventory reserves from
$45,00 to $300,000. Reserves were increased for potential losses on goods not
which do not meet quality standards, or which may be overstated as inventory due
to production waste, theft, or inventory error, all of which are presently under
review. Reserves will be reduced as the Company trains and develops a stable
workforce, develops supplier relations, sells excess and poor quality
inventories, and substantially improves production and accounting controls.
During the six months ended January 31, 1996 net cash used in operations
was $2,778,538. Losses from the Company's start-up manufacturing operations
were $2,485,220 During the transition from domestic contract manufacturing to
private label off-shore production, the Company, as anticipated, experienced a
substantial reduction in revenues, income, liquidity, and cash flow.
Net cash used by investing activities was $33,751 for the six months ended
January 31, 1996. During the six months ended January 31, 1996, net cash
provided by financing activities was $3,396,253, reflecting the proceeds
received from the exercise of the Company's outstanding Class A and Class B
Warrants, together with the borrowing and repayment of bridge financing.
In January 1995, the Company entered into a factoring agreement secured by
the Company's accounts receivable and other collateral. Advances under the
agreement may be made for up to 80% to 90% of the eligible accounts receivable
and bear interest at prime plus 4% to 7%, depending on the outstanding balance.
As of January 31, 1996, the Company had advances of $3,780 against receivables
and incurred interest of $2,625 at a weighted average interest rate of 16% under
this agreement during six months then ended. The high credit under the
agreement was $226,885 and the average credit was $33,097. Encumbrance of
certain of the Company's assets pledged to secure the above factoring agreement
has resulted in such assets, which excludes inventory and the process
technology, not being available to secure additional indebtedness, which may
adversely affect the Company's ability to borrow in the future, including the
ability to obtain a working capital loan.
On July 17, 1995 and for a period of time initially expiring August 18,
1995, which was extended until September 12, 1995 (the "Special Offering
Period"), the Company allowed warrantholders to exercise the outstanding Class A
and Class B Warrants at $3.25 per warrant, and receive an additional one-quarter
share of Common Stock and a Class C Warrant. As of September 12, 1995, 254,552,
or 86% of the then
10
<PAGE>
outstanding Class A Warrants and 921,584, or 84% of the outstanding Class B
Warrants were exercised generating net proceeds to the Company of approximately
$3,500,000. The proceeds from the exercise of the Class A and Class B Warrants
are being used to refine and enhance the Company's process technology, purchase
equipment, finance production of ORGANIK-TM- products, expand sales and
marketing, and otherwise for working capital and general corporate purposes.
In July 1995, the Company entered into a $100,000 unsecured note payable
bearing interest at 14% with its Honduran landlord. During the six months ended
January 31, 1996, the note was paid in full.
On August 16, 1995, the Company issued a $255,377 convertible promissory
note and repaid the note in full August 25, 1995 with proceeds from the July 17,
1995 offering. (See Note 5) The note bore interest at 9% annually. In
connection therewith the Company issued warrants to purchase 25,538 shares of
the Company's common stock at $1.75 per share.
The Company's cash flow and capital requirements are significantly affected
by the seasonal nature of its business. The timing of production orders for
private label products and manufacturing services are also generally seasonal,
with product shipments heavily concentrated in advance of the fall and spring
seasons. Unanticipated events, including insufficient funds to purchase, or
delays in securing, adequate raw materials at the time of peak sales or
significant decreases in sales during such periods, could result in significant
losses which would not be easily reversed before the following year.
The Company is not currently generating sufficient cash flow to fund its
operations and is dependent on the net proceeds from the recent exercises of the
Class A and Class B Warrants to meet its backlog of ORGANIK-TM- apparel orders,
and further implement its cost reduction strategy. In the event that these net
proceeds, together with the current factoring agreement, prove to be
insufficient to fund operations (due to seasonal customer product demands,
unanticipated expenses, technical difficulties, problems or otherwise), the
Company will require additional financing until such time as the Company is able
to generate sufficient profits to fund operations. The Company is currently
negotiating for approximately $500,000 of interim seasonal debt financing from
Honduran sources. Should the Company not be able to obtain this or other
additional suitable financing, or if the Company's actual operating results
should be significantly different than anticipated, the Company may elect to
scale back its operations. To this regard, the Company has periodically
experienced liquidity constraints (including in recent months) which have
resulted in the deferral or cancellation of orders. There can be no assurance
that any measures taken would be adequate to reduce costs and increase cash flow
to an acceptable level or would not unduly damage the Company's credibility as a
supplier to its major customers.
At March 11, 1996, the Company had cash of approximately $711,000,
receivables of approximately $96,000 and no borrowings against receivables.
To provide incentive to employees, officers, directors, lenders and
consultants of the Company, as well as to minimize cash expenditures, the
Company has traditionally issued options and warrants as a means of compensation
or payment for services. During the six months ended January 31, 1996,
officers, directors, employees, a consultant and a lender were granted options
and warrants to purchase an aggregate of 380,538 shares of Common Stock at
prices ranging from $1.75 to $3.23 per share. The Company has and intends to
continue this form of compensation or payment for services in fiscal 1996.
11
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
At July 31, 1995, the Company had net operating loss carryforwards for
federal tax purposes of $10,562,000 to offset future taxable income. Due to a
change in ownership, the Company is subject to an annual limitation of
approximately $350,000 on its ability to utilize net operating loss
carryforwards for losses prior to July 31, 1994. Utilization of these
carryforwards is dependent on future taxable income. The July 17, 1995 Warrant
Offering may or may not limit the Company's ability to utilize net operating
loss carryforwards due to changes in ownership.
INFLATION
Inflation has historically not had a material effect on the Company's
operations.
12
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
On August 2, 1995 the Company was served with a complaint by John Michael
Liviakis and Liviakis Financial Communications in the Superior Court for
Sacramento County, California (Case No. 95AS04187) against the Company, five
directors and one former director. The lawsuit alleges that during the period
from the summer of 1993 through the spring of 1994 defendants committed fraud,
negligent misrepresentation, interference with and conspiracy to interfere with
prospective economic advantage, and breach of contract, in connection with
the entering into and cancellation of a financial public relations agreement
with Liviakis Financial Communications and the refusal by the Company to
remove a stop-transfer order against transfer of 172,778 shares of common
stock issued to Mr. Liviakis pursuant to the agreement. The Company canceled
the contract in April, 1994 and had previously demanded that Mr. Liviakis
return the shares for, among other reasons, failure of performance by
Liviakis Financial Communications under the agreement; however, Mr. Liviakis
has refused to do so. Plaintiff seeks a temporary restraining order and
preliminary and permanent injunctions, and claims that he has suffered
damages aggregating in excess of $4 million. The Company intends to
vigorously defend this lawsuit and to counterclaim for the return and
cancellation of the shares; however, there can be no assurance as to the
outcome of this litigation or the amount of expenses that will ultimately be
incurred in its defense and prosecution.
Other than the foregoing, the Company is unaware of any legal proceedings
other than those arising in the normal course of business, which, in the opinion
of the Company's management, are neither individually nor collectively material
to its business.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Number Description
- ---------------------------------------------------------------------
10.21 Amendment No.1, dated December 14, 1995
to Employment Agreement
27.1 Financial Data Schedule
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ORGANIK TECHNOLOGIES, INC.
- --------------------------
Registrant
/s/ William F. Gould March 15, 1996
- ---------------------------------------------- --------------
William F. Gould, Chief Financial Officer Date
14
<PAGE>
EXHIBIT 10.21
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (the "Agreement") dated
the 14th day of December, 1995 is by and between Organik Technologies, Inc. (the
"Company") and John McNulty ("McNulty");
WITNESSETH, THAT WHEREAS:
A. McNulty has been employed by the Company as the Company's Chief
Executive Officer pursuant to an Employment Agreement dated November 7, 1994
(the "Agreement"); and
B. Both NcNulty and the Company desire to amend the Agreement in
accordance with the terms and conditions set forth below;
NOW THEREFORE, in and for consideration of the mutual promises set
forth herein, the parties hereto do hereby agree as follows:
1. Sections 2 and 3 of the Agreement are hereby amended to provide
that McNulty's salary shall be $8,000 per month through June 30, 1996 and
thereafter shall be $5,000 per month through October 31, 1996, at which time the
salary and the term of McNulty's engagement shall cease. This amendment of the
Agreement shall not cause Section 6.2 to become applicable, and all payments to
McNulty shall cease at October 31, 1996 upon the Company's making of the
foregoing payments.
2. The first paragraph of Section 3.3 of the Agreement is hereby
amended to provide for immediate vesting of all stock options referred to in
paragraph, so that all such stock options may now be exercised in full without
further delay.
3. Sections 1 and 4 of the Agreement are hereby amended to provide
that McNulty shall consult with the Company as requested and to the extent
requested in order to provide an orderly transition to a new Chief Executive
Officer, with McNulty in good faith providing such information and support as
the Company may reasonably request for such purpose. McNulty shall no longer be
required to provide full time efforts on behalf of the Company, nor to bear the
responsibility of supervising and operating the Company to maximize its
profitability, nor to perform any other duties expected of a Chief Executive
Officer. However, McNulty shall continue to be bound by and to abide by the
terms of the Employee Confidentiality Agreement entered into in connection
with the Agreement
<PAGE>
4. McNulty hereby assigns to the Company any and all rights he may
have in and to the shares of capital stock of such foreign corporations,
including Organik Technologies S. D.E. R.L., an Honduran corporation, as may
have been formed under the laws of foreign jurisdictions to further the
Company's existing and proposed operations, which operations are described in
the Company's Form 10-KSB for the fiscal year ended July 31, 1995. McNulty
hereby agrees to sign and deliver to the Company such further documents of
assignment, including assignments in the Spanish language, as may be
necessary or desirable to effect such assignment to the Company under
applicable foreign law of the shares, as the Company may from time-to-time
request.
5. All other provisions of the Agreement not in conflict with this
Amendment shall be and remain in full force and effect, including the
registration rights referred to in the second paragraph of Section 3.3 of the
Agreement.
IN WITNESSETH WHEREOF, the parties have signed this Amendment as of
the day and date first above written.
ORGANIK TECHNOLOGIES, INC.
By: Jeffrey S. Harden
---------------------------------------
Its CEO
----------------------------------------
/s/ John McNulty
-------------------------------------------
(John McNulty)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary Financial Information extracted from Organik
Technologies, Inc. Consolidated Financial Statements in the 10QSB Filing for the
Second Quarter Ended January 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996<F1>
<CASH> 718,884
<SECURITIES> 0
<RECEIVABLES> 628,006
<ALLOWANCES> 64,690
<INVENTORY> 693,224
<CURRENT-ASSETS> 2,060,654
<PP&E> 1,218,994
<DEPRECIATION> 694,382
<TOTAL-ASSETS> 2,863,766
<CURRENT-LIABILITIES> 366,775
<BONDS> 0
0
100,317
<COMMON> 15,904,304
<OTHER-SE> (13,507,630)
<TOTAL-LIABILITY-AND-EQUITY> 2,863,766
<SALES> 1,561,035
<TOTAL-REVENUES> 1,561,035
<CGS> 2,410,606
<TOTAL-COSTS> 2,410,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,533
<INTEREST-EXPENSE> 6,273
<INCOME-PRETAX> (2,485,220)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,485,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,485,220)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
<FN>
<F1>See Notes to Consolidated Financial Statements in the corresponding 10QSB and
the most recent 10KSB for important additional disclosures.
</FN>
</TABLE>
