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 December 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)
----------------
DELAWARE 87-0305614
(State or Other Jurisdiction of (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, $.001 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 February 8, 2001 was $7,644,295 based on a closing sales price
of $0.28 per share on the NASDAQ OTC Bulletin Board on such date.
The number of shares outstanding of the registrant's common stock, $.001
par value, as of February 8, 2001 was 38,191,676.
DOCUMENTS INCORPORATED BY REFERENCE.
NONE
TABLE OF CONTENTS
PAGE
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............................................3
NEW ACCOUNTING PRONOUNCEMENTS..............................................3
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........4
PART II - OTHER INFORMATION.........................................................5
ITEM 3- DEFAULTS UPON SENIOR SECURITIES...................................5
ITEM 5 - OTHER INFORMATION.................................................5
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K..................................6
SIGNATURE...........................................................................6
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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 unaudited condensed
consolidated financial statements consisting of the consolidated balance sheets
as of December 31, 2000 and March 31, 2000, the consolidated statements of
operations and comprehensive income (loss) for the three and nine months ended
December 31, 2000 and 1999, and the consolidated statements of cash flows for
the nine months ended December 31, 2000 and 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
condensed 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 and file storage
markets; 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, adequately 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 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 paper market; loss of certain key
customers; insufficient consumer acceptance of the Company's specialty paper and
file storage 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; the
inability to hire and retain key personnel; unexpected increases in the overall
costs of production as a result of collective bargaining arrangements; 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
THREE MONTHS ENDED DECEMBER 31, 2000 VS. THREE MONTHS ENDED DECEMBER 31, 1999
NET SALES. Net sales increased 29.2% to $10,918,615 for the three
months ended December 31, 2000 from $8,453,312 in the quarter ended December 31,
1999. Net sales from new product lines due to the acquisition of Domtar's
specialty paper products line and the introduction of GeoFiles were the major
factors contributing to the net sales increase of $2,465,303, for the third
quarter. New product net sales from Domtar Specialty Paper and GeoFiles were
$839,251 and $637,401, respectively. Net sales of domestic and international
core paper products were up 11.0% and 24.1%, respectively.
GROSS MARGIN. Gross margin was $2,469,943 and $2,880,740 for the three
months ended December 31, 2000 and 1999, respectively. Gross margin as a
percentage of gross sales decreased to 20.0% in the quarter ended December 31,
2000, from 29.4% in the same period in fiscal 2000. The lower gross margin
percentage is attributable to higher product cost of sales due to product mix,
warehouse setup and transportation costs for the consolidation of distribution
to the Wisconsin distribution center, an increase in freight-in costs related to
GeoFiles, amortization of license fees, royalties on new products, and higher
freight and shipping costs related to the Domtar and GeoFiles product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were down 7.2% to $2,287,425 (18.5% of gross sales)
during the three months ended December 31, 2000 compared to $2,466,088 (25.2% of
gross sales) in the same period in fiscal 2000. Increases in, depreciation and
amortization $151,303, travel $49,463, audit and legal $88,829, were offset by
decreases in advertising and promotion and customer selling allowances.
OTHER INCOME (EXPENSE). Other expense for the three months ended
December 31, 2000 was $15,893 compared to other income of $72,970 for the
quarter ended December 31, 1999. Other expense during the third quarter of 2001
was attributable to an unfavorable exchange gain/loss of $15,923 compared to the
third quarter of 2000 which had a favorable exchange gain/loss of $24,207 and
miscellaneous income of $50,187 from favorable settlements with vendors.
INTEREST EXPENSE. Interest expense increased to $324,024 (2.6% of gross
sales) for the three months ended December 31, 2000, compared to $266,231 (2.7%
of net sales) during the same period in fiscal 2000. The higher interest expense
was due to an increase in borrowings from the Company's line of credit with its
bank.
NINE MONTHS ENDED DECEMBER 31, 2000 VS. NINE MONTHS ENDED DECEMBER 31, 1999
NET SALES. Net sales increased 48.7% to $30,443,025 in the nine months
ended December 31, 2000 from $20,475,102 in the nine months ended December 31,
1999. The increase in net sales of $9,967,923 was mainly attributable to new
products due to the acquisition of Domtar's specialty paper product line and the
introduction of the GeoFiles product line. Domtar Paper net sales of $2,845,136
and GeoFile net sales of $3,913,066 account for 28.5% and 39.3% of the net sales
increase, respectively. Net sales of domestic core paper products increased
$3,476,720, and international sales decreased $218,597.
GROSS MARGIN. Gross margin for the nine months ended December 31, 2000
was $7,298,813 compared to $6,404,058 for the nine months ended December 30,
1999. Gross margin as a percentage of gross sales decreased to 21.0% in the nine
months ended December 31, 2000, from 27.3% in the same period in fiscal 2000.
The lower gross margin percentage is attributable to higher customer program
costs, warehouse set-up costs for the distribution center in Wisconsin, increase
in freight-in expenses related to GeoFiles, amortization of license fees,
royalties on new products, higher shipping and handling costs and a one time air
freight charge relating to a special promotion on GeoFiles.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $6,717,797 (19.3% of gross sales) during
the nine months ended December 31, 2000 from $5,795,896 (24.7% of gross sales)
in the same period in fiscal 2000. The increase is primarily attributable to
sales volume related increases in commissions $138,313, trade shows $123,199,
other selling and marketing expenses $239,684, travel $100,388 and depreciation
and amortization $267,544.
OTHER INCOME (EXPENSE). Other income for the nine months ended December
31, 2000 amounted to $10,329 compared to $382,641 for the nine months ended
December 31, 1999. The reduction is due to the income recognized through
December 31, 1999 from favorable settlements of amounts owed to vendors.
INTEREST EXPENSE. Interest expense increased to $918,795 (2.6% of gross
sales) during the nine months ended December 31, 2000, compared to $687,800
(2.9% of gross sales) during the same period in fiscal 2000. The higher interest
expense was due to increased borrowings, primarily caused by the increases in
receivables and inventories supporting higher sales volumes.
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 and Z-International, the Company has
required, and continues to require, substantial externally provided working
capital. At the date of this Report, 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 eligible inventory.
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
$7,218,886 at December 31, 2000. It is the Company's intention to fund future
capital requirements through operating cash flows generated from efficiencies to
be gained from the consolidation of distribution and warehouse facilities,
product price increases and the adjustment of the credit facility.
Discounts and allowances that are extended to customers in the normal
course of business can have temporary, period effects on the Company's incoming
cash flow. Although the Company attempts to work with customers to mitigate and
smooth out the impacts of customer remittance deductions for such discounts and
allowances, such efforts are not always successful.
As of October 31, 2000, the Company entered into an agreement with
Atlanta Group BV, the European subsidiary of Smead Manufacturing Corporation to
sell certain assets of Geographics Europe, Ltd., the Company's European
subsidiary. The Company has received approximately $500,000 in initial proceeds,
and will receive royalties on future sales of the Smead/Atlanta Group at the
rate of 4 to 5% of paper products, and 3% of GeoFiles, with a minimum annual
royalty of $100,000.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended, is effective for fiscal years beginning after June 15, 2000.
SFAS No. 133, requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in
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current earnings or other comprehensive income (loss), depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not expect that the adoption of SFAS No.
133 will have a material impact on its consolidated financial statements.
In June 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101B. SAB 101B delays the effective date of SAB
101, "Revenue Recognition in Financial Statements," until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues. The
Company does not expect that the adoption of SAB 101 will have material impact
on its consolidated financial statements.
In September 2000, the Emerging Issues Task Force (EITF) reached
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." Issue No. 00-10 deals with the accounting for income billed and costs
related to shipping and handling charges on processing and delivery of customer
orders. Application of EITF 00-10 is required no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The EITF concluded
that amounts directly billed to customers for shipping and handling should be
classified as revenue. The Company does not expect that the adoption of EITF
00-10 will have material impact on its consolidated financial statements.
In January 2001, the EITF reached a consensus on certain issues within
Issue No. 00-22, "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or services to
be Delivered in the Future." Application of EITF 00-22 is required for interim
and annual periods ending after February 15, 2001. The EITF concluded that a
vendor should recognize a cash rebate or refund obligation as a reduction of
revenue based on a systematic and rational allocation of the cost of honoring
rebates or refunds earned and claimed to each of the underlying revenue
transactions. The Company does not expect that the adoption of EITF 00-22 will
have a material impact on its consolidated financial statements.
ITEM 3. QUANTITATIVE 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. 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 fiscal
year 2001 relative to the currencies in which the Company's sales are
denominated, loss before taxes would increase by $85,000 for the quarter ended
December 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
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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 3 - DEFAULTS UPON SENIOR SECURITIES
Under the provisions of the revolving credit facility with US Bank, the
Company is required to maintain a EBIT/Interest ratio of 1.10 to 1 at the end of
each fiscal quarter. For the quarter ended December 31, 2000, the Company's
EBIT/Interest ratio was 0.64 to 1. Pursuant to the Company's revolving credit
facility, US Bank has the option, without any prior notice or demand, to declare
all of the Company's outstanding obligations, which were $7,218,886, due and
payable. While the Company is currently in negotiations with US Bank for waiver
of this default, there is no assurance that US Bank will grant such waiver. If
US Bank elects to declare all of the Company's outstanding obligations due and
payable, it would result in a material adverse effect on the Company's business
and its future prospectus.
ITEM 5 - OTHER INFORMATION
REINCORPORATION IN DELAWARE
On October 16, 2000, the Company consummated its merger into a
wholly-owned Delaware subsidiary, pursuant to which each outstanding share of
common stock of the existing Wyoming corporation was converted into an equal
number of identical securities of the Delaware corporation. In connection with
the reincorporation, the par value of the Company's common stock was changed
from no par value to $.001 per share. The surviving entity, also named
Geographics, Inc. is a Delaware corporation with a Board of Directors and
shareholders identical to that of the former Geographics, Inc., which was a
Wyoming corporation. The reincorporation is more fully described in the
Company's Proxy Statement to Shareholders dated September 8, 2000.
NEW PRODUCTS AND DISTRIBUTION OPPORTUNITIES
To broaden its European distribution channels, as of October 31, 2000,
the Company entered into an agreement with Atlanta Group BV, the European
subsidiary of Smead Manufacturing Corporation to sell certain assets of
Geographics Europe, Ltd., the Company's European subsidiary. The assets sold
consist of inventory, customer files, customer records, sales history, sales
orders, supply contracts, goodwill and know-how, which represent all of the
assets necessary to operate the business. The Company has retained ownership of
its designs, copyrights and trademarks, and has provided an exclusive license to
Smead/Atlanta Group for the use of the Geographics brand for paper products and
a non-exclusive license to the Geofile brand for file and storage products in
exchange for royalty payments on sales of the licensed products. Atlanta Group
BV is headquartered Hoogezand, The Netherlands, and also has distribution
facilities in Austria, Belgium, England, France, Germany, Spain, Portugal and
Switzerland. Under the terms of the agreement, the Company has received
approximately $500,000 in initial proceeds, and will receive royalties on future
sales of the Smead/Atlanta Group at the rate of 4 to 5% of paper products, and
3% of GeoFiles, with a minimum annual royalty of $100,000.
To expand its product offerings and customer base, as of December 18,
2000, the Company entered into an agreement to acquire certain assets of the
Z-GRAFIX(R) brand image paper from Kansas City, Missouri based Z- International,
Inc. Under the terms of the agreement, the Company and Z-International entered
into a license agreement for the Company to use the Z-GRAPHIX name. Under the
terms of the agreement, the Company made an initial payment of $100,000, will
pay for the initial
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inventory as sold, and will negotiate for the payment of remaining inventory, if
any, at a future date. The agreement also provides for the payment of
commissions on net sales, which shall not exceed three years. The
Z-International product line acquisition was funded from the proceeds of the
Smead/Atlanta transaction.
The Company has also entered into an exclusive supply and distribution
agreement, effective as of November 28, 2000, for the production and
distribution of its products in Mexico. Under the agreement, the Company's paper
products will be printed and packaged in Mexico, and will be sold directly to
the Company's Mexican distributor in US dollars. This arrangement will greatly
enhance the Company's ability to service its customers in Mexico, such as Office
Depot and Wal-Mart, as well as enhancing the ability to reach traditional
Mexican retailers.
As of the date of this report, the Company has entered into
negotiations for a long-term lease of a warehouse and offices in Waukesha,
Wisconsin. The Company will be consolidating and moving its sales and warehouse
operations from Toronto, Canada, Dallas, Texas, Milwaukee, Madison and Windsor,
Wisconsin.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) There were no reports on Form 8-K filed during the quarter
ended December 31, 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 form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized on this 14th day of
February, 2001.
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
Condensed Consolidated Balance Sheets
December 31, 2000 and March 31, 2000
ASSETS
DECEMBER 31, MARCH 31,
2000 2000
------------ ------------
(UNAUDITED)
Current Assets
Cash $ 975,508 $ 360,612
Accounts receivable
Trade receivables, net of allowances of $1,221,725 and $1,587,469 at
December 31 and March 31, 2000, respectively 7,769,658 6,053,810
Other receivables 42,894 25,555
Inventories 8,709,744 5,301,171
Prepaid expenses, deposits, and other current assets 847,154 562,244
------------ ------------
Total current assets 18,344,958 12,303,392
PROPERTY, PLANT AND EQUIPMENT, NET 9,080,993 9,304,864
LICENSES, TRADEMARKS AND OTHER INTANGIBLE ASSETS,NET 3,188,704 317,170
OTHER ASSETS 188,894 442,018
------------ ------------
TOTAL ASSETS $ 30,803,549 $ 22,367,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 1,256,712 $ 259,551
Note payable to bank 7,218,886 5,764,627
Accounts payable 5,578,858 3,699,532
Accrued liabilities 3,377,189 2,083,523
Current portion of long-term debt 935,015 1,368,212
------------ ------------
Total current liabilities 18,366,660 13,175,445
LONG-TERM DEBT 1,914,274 3,539,926
------------ ------------
Total liabilities 20,280,934 16,715,371
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - 100,000,000 shares authorized, 38,191,676 and 26,965,589
shares issued and outstanding at December 31 and March 31, 2000, respectively 38,192 26,966
Additional paid-in capital 26,157,465 20,950,859
Accumulated other comprehensive loss (253,158) (233,318)
Accumulated deficit (15,419,884) (15,092,434)
------------ ------------
Total stockholders' equity 10,522,615 5,652,073
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,803,549 $ 22,367,444
============ ============
See accompanying notes to condensed consolidated financial statements.
F-1
GEOGRAPHICS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
SALES $ 12,380,639 $ 9,785,327 $ 34,755,272 $ 23,461,171
Returns and Allowances (1,462,024) (1,332,015) (4,312,247) (2,986,069)
------------ ------------ ------------ ------------
Net Sales 10,918,615 8,453,312 30,443,025 20,475,102
COST OF SALES 8,448,672 5,572,572 23,144,212 14,071,044
------------ ------------ ------------ ------------
Gross Margin 2,469,943 2,880,740 7,298,813 6,404,058
S.G.& A. EXPENSES 2,287,425 2,466,088 6,717,797 5,795,896
------------ ------------ ------------ ------------
Operating Income 182,518 414,652 581,016 608,162
OTHER INCOME (EXPENSE)
Interest Expense (324,024) (266,231) (918,795) (687,800)
Other Income (Expense) (15,893) 72,970 10,329 382,641
------------ ------------ ------------ ------------
Total Other Income (Expense) (339,917) (193,261) (908,466) (305,159)
NET INCOME (LOSS) BEFORE INCOME TAXES (157,399) 221,391 (327,450) 303,003
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) (157,399) 221,391 (327,450) 303,003
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) -
FOREIGN CURRENCY TRANSLATION 61,632 (54,103) (19,840) (105,407)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (95,767) $ 167,288 $ (347,290) $ 197,596
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Basic $ (0.00) $ 0.01 $ (0.01) $ 0.02
============ ============ ============ ============
Diluted $ (0.00) $ 0.01 $ (0.01) $ 0.02
============ ============ ============ ============
SHARES USED IN COMPUTING NET INCOME (LOSS) PER
COMMON AND COMMON EQUIVALENT SHARE
Basic 38,174,682 15,043,364 34,641,522 12,450,308
============ ============ ============ ============
Diluted 38,174,682 15,422,953 34,641,522 12,829,897
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-2
GEOGRAPHICS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $ (327,450) $ 303,003
Adjustments to reconcile net income (loss) to net
cash flows used by operating activities
Depreciation and amortization 1,347,540 989,450
Loss on sale/disposal of property and equipment -- 3,643
Stock based compensation 117,982 --
Interest on debentures 67,000 --
Revaluation of subsidiary inventories 99,000
Changes in operating assets and liabilities
Trade receivables (1,715,848) (655,128)
Other receivables (17,339) 136,122
Inventories (3,507,573) (1,099,747)
Prepaid expenses, deposits and other current assets (284,910) 201,446
Licenses, trademarks and other intangible assets 30,220 --
Other assets 128,257 (173,234)
Accounts payable 1,879,326 238,153
Accrued liabilities 1,293,666 (1,472,508)
----------- -----------
Net cash flows from operating activities (890,129) (1,528,800)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (751,418) (251,541)
Purchase of certain Innovative Storage Design assets -- (261,163)
Proceeds from sales of equipment -- 5,000
Purchase of certain Z International assets (100,000)
Purchase of certain Domtar Consumer Products assets (3,049,138) --
----------- -----------
Net cash flows from investing activities (3,900,556) (507,704)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdrafts 997,161 (91,923)
Net borrowings on note payable to bank 454,259 634,280
Repayment of long-term debt (1,058,849) (2,903,461)
Proceeds from notes payable to officers and directors 1,000,000 100,000
Repayment of notes payable to officers and directors (1,000,000) (100,000)
Proceeds from the issuance of common stock 5,032,850 4,951,648
----------- -----------
Net cash flows from financing activities 5,425,421 2,590,544
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (19,840) (41,662)
----------- -----------
NET CHANGE IN CASH 614,896 512,378
CASH, BEGINNING OF PERIOD 360,612 130,967
----------- -----------
CASH, END OF PERIOD $ 975,508 $ 643,345
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 787,880 $ 687,800
=========== ===========
Non-cash financing and investing activities -
common stock issued for assets $ -- $ 200,280
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-3
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited condensed consolidated financial
statements of Geographics, Inc. (the "Company" or "Geographics") have been
prepared in accordance with generally accepted accounting principles in the
United States of America 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 annual report on Form 10-K for the
fiscal year ended March 31, 2000.
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 in
consolidation.
NOTE 2- INVENTORIES
Inventories at December 31, 2000 and March 31, 2000 consisted of the
following:
December 31, March 31,
2000 2000
---- ----
Raw materials $ 844,490 $ 619,463
Work-in-process 1,033,917 1,096,799
Finished goods 6,831,337 3,584,909
-------------- --------------
$ 8,709,744 $ 5,301,171
============== ==============
NOTE 3- ASSET ACQUISITION AND COMMITMENTS
Effective as of April 1, 2000, the Company acquired certain assets of
the Consumer Products Business of the Communication Papers Division of Domtar,
Inc. of Canada, for total consideration of $4,781,140, plus expenses of $49,138.
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, and
automatically renewable thereafter, unless terminated by either party. The
license remains exclusive providing annual sales achieve certain minimum sales
levels, or the payment of minimum royalties. The Agreement also provides for the
payment of royalties on the sale of Domtar products, an option by Domtar to
repurchase the assets at a premium, and the purchase of paper from Domtar.
The total purchase price of these acquired assets, exclusive of
inventories is included in Licenses, Trademarks and Other Intangible Assets in
these condensed consolidated financial statements, and is being amortized to
cost of sales over a six to fifteen year period on the straight-line basis. The
purchase price was allocated to the assets based on their fair value.
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NOTE 4- NET SALES BY PRODUCT CATEGORY
The Company's operations are classified into two product categories:
Designer Stationery and Specialty Papers, and Plastic Filing and Storage
Cabinets. Net sales attributable to each class of product are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Designer Stationeries and Specialty Papers $10,281,214 $ 7,800,887 $26,529,959 $19,822,677
Plastic Filing and Storage Cabinets 637,401 652,425 3,913,066 652,425
----------- ----------- ----------- -----------
$10,918,615 $ 8,453,312 $30,443,025 $20,475,102
=========== =========== =========== ===========
NOTE 5- NET INCOME (LOSS) PER SHARE
The numerators and denominators of basic and diluted net income (loss)
per share are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income (loss) (numerator) $ (157,399) $ 221,391 $ (327,450) $ 303,003
============ ============ ============ ============
Shares used in the calculation (denominator)
Weighted average shares outstanding 38,174,682 15,043,364 34,641,522 12,450,308
Effect of dilutive stock options and warrants -- 379,589 -- 379,589
------------ ------------ ------------ ------------
38,174,682 15,422,953 34,641,522 12,829,897
============ ============ ============ ============
Outstanding stock options and warrants that could potentially dilute basic net
income (loss) per share in the future that were not included in the computation
of diluted net income (loss) per share in 2001 and 2000, because to do so would
have been antidilutive, were 3,405,000 and 1,565,411 shares, respectively.
NOTE 6- PAR VALUE OF COMMON STOCK
In conjunction with the October 16, 2000 reincorporation in the state
of Delaware, the Company's common stock was changed from a no par value to a par
value of $.001 per share. Accordingly, the reported values of common stock and
additional paid-in capital at December 31, 2000 and March 31, 2000 have been
reclassified to reflect a par value of $.001 per share of common stock.
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