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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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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 Act: COMMON STOCK, $0.001
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
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant [ ]
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the common stock held by nonaffiliates of
the registrant as of June 8, 2001 was $6,337,458 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,
$0.001 par value, as of June 8, 2001 was 38,191,676.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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TABLE OF CONTENTS
PAGE
PART I ........................................................................................................1
ITEM 1. BUSINESS.......................................................................................1
ITEM 2. PROPERTIES....................................................................................15
ITEM 3. LEGAL PROCEEDINGS.............................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................16
PART II .......................................................................................................16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS......................16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA..........................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ...................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........26
PART III .......................................................................................................26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........................................26
ITEM 11. EXECUTIVE COMPENSATION.......................................................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................................................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................31
PART IV .......................................................................................................31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................31
SIGNATURES......................................................................................................35
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PART I
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") is primarily engaged
in the development, manufacture, marketing and distribution of specialty paper
products, generally made using pre-printed designs, including stationery,
business cards, brochures, memo pads, and poster boards. Geographics is also
engaged in the development, marketing and distribution of plastic
ready-to-assemble filing and storage cabinets, and has entered into a direct
supply agreement with a Taiwanese manufacturer as of May 15, 2001, whereby the
company will earn a royalty based on sales of proprietary designs.
From its inception in 1974 until fiscal year 1991, the Company was
engaged exclusively in the manufacture and wholesale marketing of various rub-on
and stick-on lettering, stencils, graphics arts products and other signage
products. In 1991, the Company began the development of "pre-print" or
"specialty" paper products consisting of paper on which photographs or other art
images are printed and which is then cut to size. In 1992, the Company
introduced its first specialty paper product under the Geopaper brand name. The
Company makes several specialty paper products using Geopaper designs, including
stationery, business cards, brochures, memo pads, and poster boards which, in
North America, are sold primarily to office supply superstores, including Office
Depot, and mass market retailers, such as Wal-Mart, and which are also
distributed internationally through the Company's subsidiary in Australia, and
its European subsidiary through a license agreement dated October 31, 2000, with
Atlanta Group BV, the European subsidiary of Smead Manufacturing Corporation.
The specialty papers group now constitutes the Company's principal business,
with approximately 87% of the Company's total sales in fiscal 2001 attributable
to sales of Geopaper products.
During the fiscal year 2000, the Company announced the introduction of
GeoFile Modular Storage and File System(TM) ("GeoFile"). GeoFile is a flexible
line of plastic ready-to-assemble filing and storage cabinets. GeoFile(TM) were
sold primarily through the Company's existing office supply superstore
customers, including Office Depot and Wal-Mart. Subsequent to fiscal year 2001,
the Company has decided to cease reselling the GeoFile line and to focus its
sales and marketing efforts on its core specialty paper products. In connection
with these decisions, on May 15, 2001, the Company entered into an exclusive
direct supply agreement with a Taiwanese manufacturer to license the manufacture
and direct sale of GeoFile products.
Between March 2001 and June 2001, the Company has been in default of two
financial covenants under its revolving credit facility with U.S. Bank National
Association, the Company's primary source of working capital, and borrowings
under the facility have exceeded permitted borrowing base limitations. U.S. Bank
has waived these defaults effective as of June 30, 2001. The report of the
Company's independent auditors dated June 28, 2001 relating to the Company's
Consolidated Financial Statements for the fiscal year ended March 31, 2001
states that the Company's fiscal year 2001 net loss, working capital deficiency
and accumulated deficit at March 31, 2001 raise substantial doubt about the
Company's ability to continue as a going concern. See "Liquidity and Capital
Resources."
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REINCORPORATION IN DELAWARE
Prior to October 16, 2000, the Company was incorporated in Wyoming. On
October 16, 2000, the Company consummated a 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 shares of
common stock 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 and the Wyoming corporation ceased to have a
separate existence. The surviving entity, also named Geographics, Inc. is a
Delaware corporation with a Board of Directors and shareholders identical to
that of the former Wyoming corporation.
EXPANSION OF BOARD OF DIRECTORS
At a special meeting of the Board of Directors held on February 26,
2001, the Board determined that it is in the best interests of the Company and
the shareholders to increase the number of directors on the board from the then
current number of three directors up to five directors, pursuant to Section 3.2
of the Company's Bylaws. The Board also nominated and elected Mr. Roger R. Mayer
and Mr. Jack Stein to fill the newly created directorships pursuant to Section
3.3 of the Company's Bylaws.
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut
sheet papers used for letterheads, brochures, flyers, posters and bulletins.
Suppliers within the preprint industry also offer combination sets made up of
multiple products such as matching letterhead, envelopes and business cards, or
software packages that improve ease of use of preprints by the consumer. New
designs and a large variety of preprints and related specialty products have
been important elements of success and growth for businesses in the preprint
market.
The preprint market is segmented between two major methods of
distribution: retail and direct mail. Within the retail segment of the preprint
market there are numerous sub-segments, including office supply superstores,
mass market retailers, arts and crafts stores, party stores, specialty paper
retailers, and office supply business-to-business retailers. The Company sells
its specialty paper products exclusively in the retail segment of the preprint
market, primarily to office supply superstores such as Office Depot and
mass-market retailers such as Wal-Mart.
Large retailers somewhat dominate the retail segment of the preprint
industry, and as such, exert considerable influence over the operations of the
relatively smaller suppliers, such as the Company, that service them in the
preprint market. Of particular importance are factors such as pricing, monetary
requirements for the retailers selling programs (including such expenses as
volume rebates and advertising allowances), prompt order turnaround which in
turn requires the maintenance of large inventories, and payment terms, including
prompt pay discounts and extended and seasonal terms.
INTRODUCTION OF NEW PRODUCTS; VENDOR CONSOLIDATIONS
The Company is developing and expects to introduce additional new lines
of products to its customers through its existing distribution system.
Management believes these products will compliment the Company's current lines
and will have the effect of improving the profitability and to some extent
reducing the seasonal fluctuations of the Company's operating results.
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Introduction of New Products; Vendor Consolidations (continued)
Additionally, customers in the office products industry have pointedly
attempted to consolidate the number of vendors from whom they make purchases.
Consequently, the Company expects to be in a position to benefit from this
industry phenomenon due to the existence of a number of single line vendors
whose products could readily be manufactured and distributed by the Company.
Management believes the existence of additional complimentary lines and
the Company's ability to absorb additional lines strengthens the Company's
position with key customers. However, there can be no assurance that additional
complimentary lines will be successfully launched with customers, or that vendor
consolidations will result in additional product offerings by the Company.
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total Net Sales
attributable to each class of product offered by the Company for the last three
years is set forth below.
AS A PERCENTAGE OF NET SALES
CLASS OF PRODUCT FISCAL YEAR
- ---------------- -----------
2001 2000 1999
---- ---- ----
Designer stationery and specialty papers 87% 97% 96%
Plastic filing and storage cabinets 13% 3% 0%
Lettering, signage, stencil and graphic art products (1) 0% 0% 4%
NET SALES STATED IN U.S. DOLLARS
CLASS OF PRODUCT FISCAL YEAR
- ---------------- -----------
2001 2000 1999
---- ---- ----
Designer stationery and specialty papers $31,640,877 $26,463,998 $20,055,014
Plastic filing and storage cabinets $4,961,188 $790,784 $0
Lettering, signage, stencil and graphic art products (1) $0 $0 $752,000
(1) Related to discontinued operations
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Sales by Product Category (continued)
NET SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and
export sales is as follows:
REGION FISCAL YEAR
- ------ -----------
2001 2000 1999 (1)
--------------- -------------- ----------------
Net sales to domestic and foreign customers
North America $ 33,673,253 $ 23,602,805 $ 16,488,463
United Kingdom 1,528,235 2,152,093 1,021,474
Other European Countries - - 1,054,000
Australia 1,400,576 1,499,884 1,491,077
--------------- -------------- ----------------
Total $ 36,602,065 $ 27,254,782 $ 20,055,014
=============== ============== ================
Operating profit (loss)
North America $ (3,360,736) $ 937,632 $ (2,581,464)
United Kingdom (476,487) (344,869) (550,609)
Australia 6,743 87,378 (34,090)
--------------- -------------- ----------------
Total $ (3,830,481) $ 680,141 $ (3,166,163)
=============== ============== ================
Property, Plant and Equipment
United States $ 8,855,324 $ 9,125,809 $ 9,778,864
United Kingdom 39,938 126,159 108,793
Australia 81,973 52,896 57,977
--------------- -------------- ----------------
Total $ 9,007,234 $ 9,304,864 $ 9,945,634
=============== ============== ================
(1) Effective May 4, 1998, the Company sold substantially all of its
signage and lettering operating assets, licenses, inventory, and other
rights to Identity Group, Inc.
International sales accounted for approximately 21%, 25% and 36% of the
Company's total net sales in fiscal years 2001, 2000 and 1999, respectively.
International sales by the Company's subsidiaries were concentrated in Canada,
Europe and Australia. As a result of such international sales, a significant
portion of the Company's revenues were subject to certain risks, including
unexpected changes in regulatory requirements, exchange rates, tariffs and other
barriers, political and economic instability and other risks. To address this
and to broaden its European distribution channels, as of October 31, 2000, the
Company's European subsidiary entered into a licensing and distribution
agreement with Atlanta Group BV, the European subsidiary of Smead Manufacturing
Corporation, to sell certain assets of Geographics Europe, Ltd. Beginning in
November 2000, the Company also made arrangements to sub-contract printing and
packaging of its products in Australia to supply that subsidiary.
BUSINESS CONCENTRATIONS
The Company had two customers in fiscal year 2001, and three customers
in fiscal years 2000 and 1999 that individually exceeded 10% of net sales and in
the aggregate accounted for approximately 54%, 32%, and 57% of net sales in
2001, 2000 and 1999, respectively. The Company expects that sales to relatively
few customers will continue to account for a high percentage of its net sales in
the foreseeable future and believes that its financial results depend in
significant part upon the success of these few customers.
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PURCHASING
The Company's principal purchases are materials for use in the
manufacture of specialty paper. In particular, the Company routinely purchases
sheets and rolls of commodity paper, as well as other direct materials involved
in the printing and packaging of its Geopaper product lines, such as inks,
packaging film, labels, shipping boxes and other materials. Certain of the
products used in the manufacture of the Company's products are considered
commodities, and as such can vary significantly in cost from time to time.
Though prices may vary, the Company has not experienced and does not currently
anticipate any market shortages of the specific raw materials that it purchases
and uses in the manufacture of its products.
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. The Company
purchases goods from over 100 vendors, and historically has made a practice of
extensive use of a "primary" source for major categories of purchased goods and
services. Coincident with the April 1, 2000 acquisition of certain inventory,
licenses and trademark rights of the Consumer Products Business of the
Communication Papers Division of Domtar, Inc. of Canada, the Company also
entered into a preferred supply agreement with Domtar, Inc., pursuant to which
Domtar, Inc. has agreed to provide an immediately available and uninterrupted
supply of paper. The Company continues to develop relationships with other
significant vendors both as "primary" or "secondary" sources for other goods and
services.
In addition, key vendors have granted the Company significant amounts
of trade credit. While management recognizes the loyalty shown the Company from
key vendors, it is management's practice to review all significant purchases, to
solicit competitive bids from alternate sources, and to evaluate these alternate
suppliers for their ability to provide products and service to the Company of
the same or similar quality and on the same or more favorable terms than those
currently provided to the Company. Although the Company may be able to find
other sources of supply for commodity paper and other major raw material
categories, there can be no assurance that potential new vendors, once sourced,
would provide an uninterrupted supply of raw materials or adequate levels of
trade credit, competitive prices or acceptable payment terms.
DISTRIBUTION
The Company sells its products on a wholesale basis primarily to
retailers, including office supply superstores, mass market retailers, arts and
crafts stores, party stores, specialty paper retailers, and office supply
business-to-business catalog retailers. The Company also markets its products to
office supply distributors in the U.S. and to distributors in those countries
where the Company does not service retailers directly. Historically, the Company
has sold a substantial portion of its products to a limited number of retail
customers, and the Company believes that this trend can be expected to continue
in the future.
The Company has historically conducted its export operations through
two subsidiaries:
- Geographics (Europe) Limited ("Geographics-Europe") was
incorporated in England on December 12, 1995. To broaden its
European distribution channels, as of October 31, 2000,
Geographics-Europe entered into an agreement with Atlanta
Group BV, the European subsidiary of Smead Manufacturing
Corporation to sell certain assets of Geographics Europe, Ltd.
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
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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 in Hoogezand, The Netherlands, and
also has distribution facilities in Austria, Belgium, England,
France, Germany, Spain, Portugal and Switzerland. Under the
terms of the agreement, Geographics Europe has received
approximately $500,000 in initial proceeds, and will receive
royalties of 5% of the net sales of all of the Company's
products sold by the Smead/Atlanta Group.
- Geographics Australia Pty. Ltd. ("Geographics-Australia") was
incorporated in Brisbane, Australia on June 28, 1996. The
offices of Geographics-Australia are located at Unit 1, 31 -
41 Bridge Road, Stanmore, NSW 2048, Australia.
Geographics-Australia was organized to import, warehouse,
market and distribute the Company's products throughout
Australia. Beginning in November 2000, the Company made
arrangements to sub-contract printing and packaging of its
products in Australia to supply Geographics-Australia.
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. The Company believes that this
arrangement will greatly enhance its 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.
The Company dissolved Geographics Marketing Canada, Inc. during fiscal
year 2000. Geographics, Inc now conducts all business and distribution
previously conducted by Geographics Marketing Canada, Inc.
COMMERCIAL TERMS - MAJOR CUSTOMERS
On an annual basis, and in line with industry practice, the Company
negotiates terms of sale with certain of its major customers, including office
supply superstores, mass-market retailers, and office supply distributors. Items
negotiated may include payment terms, co-op advertising, slotting, new store
opening, cross dock and freight allowances, volume sales rebates, and
merchandise return policies. In limited cases, extended payment terms may be
offered. In other cases, sales may be made on a guaranteed basis, allowing the
customer to return unsold merchandise during an agreed period. These terms can
have a material impact on the net sales and profitability of sales programs with
major customers.
MANAGEMENT INFORMATION SYSTEMS - INTEGRATED OPERATIONS SOFTWARE
The Company is currently finalizing the installation of a comprehensive
Operations Management software system. The financial, customer service, and
purchasing portions of the system went on-line and are operational as of May
2001. Manufacturing and shop floor control systems are anticipated to go on-line
in fiscal year 2002. This software includes MRP and master scheduling
capabilities and will be integrated with the Company's financial systems. The
Company will be required to make an additional investment of resources to
implement the balance of the system in fiscal year 2002 and possibly in future
periods.
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MANAGEMENT INFORMATION SYSTEMS - ELECTRONIC DATA INTERCHANGE (EDI)
The Company currently utilizes EDI to transact business with its
largest customers. Presently, approximately 70% to 80% of customer orders and
invoices are transacted by EDI. Accordingly, the Company has developed in-house
EDI expertise to support critical EDI requirements. In fiscal year 2000, the
Company achieved compliance with EDI ASN 4010, which relates to electronic
transmission of advanced shipping notice information. In fiscal year 2001, the
Company achieved compliance with EDI ASN 4030, which relates to electronic
transmission of invoices to customers. Compliance with these standards is
critical to the Company's ability to transact business with its largest
customers.
MANUFACTURING OPERATIONS - SUPPLY AND DISTRIBUTION
As of March 1, 2001, the Company has entered into a long-term lease of
a warehouse and offices in Waukesha, Wisconsin. The Company has consolidated and
moved its sales and warehouse operations from Toronto, Canada, Dallas, Texas,
Milwaukee, Madison and Windsor, Wisconsin. The Company believes that this
consolidation will provide annual savings of approximately $200,000 in rent, and
allow the Company to more efficiently service its business east of the Rocky
Mountains in North America, which amounts to over 70% of its sales.
The Company has also made arrangements for local sub-contract supply of
certain of its paper products, which will provide considerable freight savings
versus servicing from its facility in Blaine, Washington.
COMPETITION
The Company operates in a highly competitive environment. The Company's
designer stationery products compete in most of the Company's markets with Great
Papers, Action Communications, Inc., Avery Dennison Office Products, First Base,
Paper Direct, Inc., and American Pad and Paper, Inc. The Company's designer
stationery products compete for limited shelf space in the office products
superstores, office product stores, mass-market stores, contract stationers,
wholesalers, office product catalogs and mail order catalogs.
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguish the Company from its competitors. While none of these
competitors are believed to be dominant in the Company's primary product lines,
many are larger, better capitalized and have substantially greater financial,
marketing and human resources. In order to remain competitive, the Company may
be required to continue to make significant expenditures for capital equipment,
sales, service, training and support capabilities, investments in systems,
procedures and controls, expansions of operations and research and development,
among many other items. Additional financing might be required to fund the
Company's investments in those areas. There can be no assurance that additional
financing will be available on terms acceptable to the Company.
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ACQUISITIONS
To strengthen its market position, the Company made two significant
acquisitions in fiscal year 2001.
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
consideration of $4,781,140 plus expenses of $49,138. Under the provisions of
the agreement with Domtar, the Company was granted an exclusive worldwide
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, and
annually thereafter, unless terminated by either party. The licenses remain
exclusive providing annual sales achieve certain minimum sales levels or minimum
royalty payments are made. The agreement also provides for the payment of
royalties on sales of the Domtar products, an option by Domtar to repurchase the
assets at a premium, and the purchase of paper from Domtar.
To expand its product offerings and customer base, as of December 18,
2000, the Company has entered into an agreement to acquire certain assets of the
Z-GRAFIX(R) brand image paper from Kansas City, Missouri based Z-International,
Inc. The Company and Z-International have entered into a license agreement for
the Company to use the Z-GRAFIX name. Under the terms of the agreement, the
Company has made an initial payment of $100,000, will pay for 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,
for a period not to exceed three years.
LICENSES, TRADEMARKS AND COPYRIGHTS
In connection with the acquisition of certain inventory, licenses and
trademark rights of the Consumer Products Business of the Communication Papers
Division of Domtar, Inc. of Canada, the Company was granted an exclusive
worldwide 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, and annually thereafter, unless terminated by either party.
The licenses remain exclusive providing annual sales achieve certain minimum
sales levels or minimum royalty payments are made. The agreement also provides
for the payment of royalties on sales of the Domtar products, an option by
Domtar to repurchase the assets at a premium, and the purchase of paper from
Domtar. In connection with the agreement to acquire certain assets of the
Z-GRAFIX(R) brand image paper from Kansas City, Missouri based Z-International,
Inc., the Company and Z-International have entered into a license agreement for
the Company to use the Z-GRAFIX(R) name.
The Company maintains twelve registered trademarks in the United
States, Canada and Australia. The Company's trademarks have various expiration
dates from 2002 to 2006 in the U.S., expiration dates in 2005 in Canada, and
expiration dates in 2011 in Australia. The Company considers consumer awareness
of its products and brand names an important factor in creating demand for its
products among office supply stores and other existing or prospective customers.
Part of the Company's strategy for increasing consumer awareness is to establish
consistent brand identity across all of its major product lines. The Company
believes that its trademarks and copyrights play an important role in this
effort.
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Licenses, Trademarks and Copyrights (continued)
While the Company has made reasonable efforts to protect its
intellectual property, including registering them as trademarks and copyrights
in the countries where the product lines are marketed, to the extent that such
protections are inadequate, the Company could lose all or a part of these rights
which, in turn, could result in the diminution of the Company's overall brand
identity or individual product line identities. Either the loss of intellectual
property rights or the diminution of the Company's brand identities could have a
material adverse effect on the Company. See "Risk Factors--Uncertain Protection
of Intellectual Property."
SEASONAL
A significant portion of the Company's customer orders are placed
between June and October of each year for shipment during the Company's third
fiscal quarter, which includes the Christmas and Holiday season, with the
largest levels of sales historically occurring in the second half of the
calendar year. As a result, the Company has experienced, and is expected to
continue to experience, seasonal fluctuations in its operating results based
upon past purchasing patterns.
BACKLOG
The Company's backlog of orders as of March 31, 2001 and March 31,
2000 was approximately $902,000 and $1,448,000 respectively. The Company
includes in backlog the value of all purchase orders received from customers for
product not yet shipped and invoiced. The Company's backlog is subject to
fluctuations as a result of the seasonal nature in the Company's business and
other factors and is, therefore, not necessarily indicative of future sales.
There can be no assurance that current backlog will necessarily lead to sales in
any future period. The Company's inability to ship product with respect to a
purchase order could result in cancellation of such purchase order and reduction
of backlog and could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
At March 31, 2001, the Company employed approximately 147 people; 121
at its headquarters in Blaine, Washington, 19 at its Wisconsin sales and
distribution facilities, and 7 at the Company's facilities in Australia. None of
the Company's employees are subject to a collective bargaining agreement.
SUBSEQUENT EVENT
On April 27, 2001, the Company issued $1,200,000 in 10% Convertible
Secured Subordinated Notes, due and payable on or before April 27, 2003 (the
"Notes"), to certain of the Company's existing shareholders. The Notes bear
interest at a rate of 10%, and are convertible at the holder's option into
shares of the Company's common stock, at a conversion price of $.20 per share.
The Notes will be subordinated to the Company's existing indebtedness owing to
U.S. Bank National Association ("U.S. Bank"). Proceeds from the Notes were used
to reduce the Company's existing indebtedness to U.S. Bank and for working
capital and other general corporate purposes.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements, which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements include, but are not limited to,
anticipated growth in the preprint paper market; anticipated growth in the
Company's sales; anticipated growth in sales of specialty paper products as a
percentage of revenue; the Company's ability to increase its market share within
the preprint industry; the ability of the Company to successfully implement
price changes for the Company's products when and as needed; trends relating to
the Company's profitability and gross profits margins; and the ability of the
Company to increase its availability under its existing revolving credit
facility and to raise additional debt or equity financing sufficient to meet its
working capital requirements.
Relevant risks and uncertainties include, but are not limited to, the
Company's lack of profitability and questions about its ability to continue as a
going concern, material weaknesses in the Company's internal controls, 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; supply terms, reliable and immediately available
raw material supply and other favorable terms with certain key vendors; failure
to realize expected economic efficiencies of the Company's automated production
system; the inability to hire and retain key personnel; unfavorable
determinations of pending lawsuits or disputes; the inability to secure
additional working capital when and as needed and other risks described herein
and in the Company's filings with the Securities and Exchange Commission.
Additional risks and uncertainties include those described from time to time in
the Company's other filings with the Securities and Exchange Commission, press
releases and other communications.
RISK FACTORS
PROSPECTIVE INVESTORS ARE STRONGLY CAUTIONED THAT AN INVESTMENT IN THE COMPANY
INVOLVES A VERY HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD NOT DISMISS,
AS "BOILERPLATE" OR "CUSTOMARY," DISCLOSURE OF THE RISK FACTORS SET FORTH BELOW.
THE CONTINGENCIES AND OTHER RISKS DISCUSSED BELOW COULD AFFECT THE COMPANY IN
WAYS NOT PRESENTLY ANTICIPATED BY ITS MANAGEMENT AND THEREBY HAVE A MATERIAL
ADVERSE EFFECT ON THE VALUE OF ITS COMMON STOCK. A CAREFUL REVIEW AND
UNDERSTANDING OF EACH OF THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM IS ESSENTIAL FOR AN INVESTOR
SEEKING TO MAKE AN INFORMED DECISION WITH RESPECT TO THE COMPANY.
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13
LACK OF PROFITABILITY; FINANCIAL WEAKNESSES; ABILITY TO CONTINUE AS A GOING
CONCERN
The Company incurred a net loss of $5,006,834 in fiscal year 2001 and
has a working capital deficiency of $4,992,359 and an accumulated deficit of
$20,099,268 at March 31, 2001. For fiscal year 2001, the Company's independent
auditor has included an explanatory paragraph is its audit report, regarding the
Company's ability to continue as a going concern. Among the factors cited by the
auditor that raised substantial doubt as to the Company's ability to continue as
a going concern, are the Company's net loss for fiscal year 2001, working
capital deficiency and accumulated deficit at March 31, 2001. In order for the
Company to continue as a going concern it must achieve profitability or obtain
adequate financing to fund its obligations as they become due.
The Company believes that the consolidation of multiple distribution
facilities into the Waukesha Wisconsin facility, licensing agreements with
Atlanta Group, BV, and Mexican distribution partner, the establishment of the
direct supply agreement for GeoFile products, and local manufacture of products
for the Australian subsidiary will greatly improve liquidity. The Company has
also prepared preliminary plans for further operational consolidations, should
the actions already taken prove insufficient to restore proper liquidity. The
Company also believes that the provider of the current credit facility is
willing to increase the current borrowing limit, and, if necessary, the Company
would optimistically pursue other public and private capital sources.
Although the Company believes it will achieve profitability, improve
its financial condition, and obtain any required financing, it may not be
successful. The Company's consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern. See "Liquidity and Capital Resources."
MATERIAL WEAKNESSES IN INTERNAL CONTROL
The Company had significant weaknesses in internal accounting controls
during fiscal year 2001, which could cause material errors in accounting and
financial reporting to occur and go undetected. The Company's independent
auditor has reported to the Company's board of directors the existence of
reportable conditions. Reportable conditions are matters coming to the
independent auditors attention that, in their judgement, relate to significant
deficiencies in the design or operation of internal control and could adversely
affect the Company's ability to record, process, summarize and report financial
data consistent with the assertions of management in the financial statements.
The Company believes that it has mitigated these weaknesses in its accounting
and financial reporting by the thorough review performed by its management. The
Company cannot be certain that its efforts to implement adequate internal
controls will in the future be successful.
CUSTOMER CONCENTRATIONS
The Company had two customers in fiscal year 2001, and three customers
in fiscal years 2000 and 1999 that individually exceeded 10% of net sales and in
the aggregate accounted for approximately 54%, 32%, and 57% of net sales in
2001, 2000 and 1999, respectively. The Company expects that sales to relatively
few customers will continue to account for a high percentage of its net sales in
the foreseeable future and believes that its financial results depend in
significant part upon the success of these few customers. Although the
composition of the Company's largest customers may vary from period to period,
the loss of a significant customer or any reduction in orders by any significant
customer, including reductions due to market, economic or competitive conditions
in the designer stationery or specialty papers industry, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Customer Concentrations (Continued)
As a result of the concentration occurring in the office supply
industry in which the major office mega-stores are accounting for a greater
percentage of industry-wide sales, it is anticipated that an increasing number
of the smaller outlets and retail stores will discontinue operations in the
years ahead. The Company anticipates that certain of such sales will be
transferred to the larger mega-stores or wholesale distributors to which the
Company currently supplies its products.
International sales accounted for approximately 21%, 25% and 36% of the
Company's total net sales in fiscal years 2001, 2000 and 1999, respectively.
International sales by the Company's subsidiaries were concentrated in Canada,
Europe and Australia. As a result of such international sales, a significant
portion of the Company's revenues were subject to certain risks, including
unexpected changes in regulatory requirements, exchange rates, tariffs and other
barriers, political and economic instability and other risks.
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguish the Company from its competitors. While none of these
competitors are believed to be dominant in the Company's primary product lines,
many are larger, better capitalized, and have substantially greater financial,
marketing and human resources. In order to remain competitive, the Company may
be required to continue to make significant expenditures for sales, service,
training and support capabilities, investments in systems, procedures and
controls, expansions of operations and research and development, among many
other items. Additional financing might be required to fund the Company's
investments in those areas. There can be no assurance that additional financing
will be available on terms acceptable to the Company, or at all.
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS
As of March 31, 2001, the Company maintained inventories of specialty
papers and other products of $6,634,321. The Company believes that it is sound
business practice to maintain inventories in sufficient quantities to afford the
Company flexibility in responding to incoming orders, to maintain its reputation
as a major supplier in the industry and to offer certain economies of scale in
its purchasing program. The maintenance of the inventories requires a
substantial outlay of funds, which may not be recovered for extended periods of
time. In addition, the Company has generally observed that raw material prices
change more rapidly than pricing for the Company's products. Consequently, the
Company may be required to absorb price increases on raw materials before it is
able to pass through such increases to its customer base. Also, to the extent
that purchasing preferences of the Company's customers change over time, such
inventory may become less marketable, which may require the Company to dispose
of such inventories at a reduced price.
DEPENDENCE ON KEY VENDORS
The Company's success depends in large part on reliable and
uninterrupted supply of raw materials from its major vendors. The Company
purchases goods from over 100 vendors, and historically has made a practice of
extensive use of a "primary" source for major categories of purchased goods and
services. In connection with the April 1, 2000 acquisition of certain inventory,
licenses and trademark rights of the Consumer Products Business of the
Communication Papers Division of Domtar, Inc. of Canada, the Company also
entered into a preferred supply agreement with Domtar, Inc., pursuant to which
Domtar, Inc. has agreed to provide an immediately available and uninterrupted
supply of paper.
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Dependence On Key Vendors (Continued)
The Company continues to develop relationships with other significant vendors
both as "primary" or "secondary" sources for other goods and services. The
interruption of supplies by Domtar, Inc. or any other key vendor could result in
the Company not being able to fulfill customer orders, resulting in the loss of
sales and future business.
TECHNOLOGY CHANGES AFFECTING PRODUCTS
Technology advances in the design and manufacture of personal computer
("PC") hardware and software have had a positive effect on the demand for
designer stationery and other specialty paper products marketed by the Company.
Significant advances in PC printer hardware combined with lower retail prices
have increased penetration rates for these printers. The average consumer now
has access to printers offering professional quality color print output at
retail prices starting well below the $200 price range. Increased penetration
rates have increased the end user demographic for designer stationery. This new
technology enables consumers to create products with design quality comparable
to the Company's own manufactured products. However, the Company believes that
current costs for color printer ink cartridges make mass production of
self-created designer papers prohibitively expensive at the present time. The
costs for printer ink cartridges as a consumable item related to the use of PC
hardware have remained stable in recent years. The Company believes that the
cost relationship between the PC printer and associated consumables like
replacement cartridges will remain at current ratios for the foreseeable future.
If technology continues to advance there can be no assurances that future
developments will not render existing or proposed products of the Company
uneconomical or obsolete, or that the Company will not be adversely affected by
the future development of commercially viable products by others. The
development of superior products by others could have a material adverse effect
on the Company's business, financial condition or results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
The Company owns a number of trademarks and copyrights, and certain of
the Company's proprietary manufacturing processes are protected by trade
secrets. While the Company has made reasonable efforts to protect all of its
trade secrets, trademarks, copyrights and other proprietary rights, to the
extent such protections are inadequate, the Company could lose a part or all of
these rights which, in turn, could have a material adverse effect on the
Company's business, financial condition or results of operations.
DEPENDENCE UPON KEY PERSONNEL
At the present time, the Company is highly dependent on the continued
services of its principal executive officers as well as Directors of the
Company. There can be no assurances that the Company will be able to replace any
of these key executives in the event their services become unavailable. The loss
of other key members of the Company's management team could also have a material
adverse effect on the Company's business, financial condition or results of
operations.
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LACK OF LISTING ON AN EXCHANGE
The Company's common stock, $0.001 par value per share ("Common
Stock"), trades on the NASDAQ OTC Electronic Bulletin Board. However, the lack
of listing on a national or regional exchange may restrict marketability of the
Common Stock, which could reduce the liquidity of the Common Stock and have a
material adverse effect on the trading market and the market price for the
Common Stock.
APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5 per share, subject to certain exceptions.
Unless the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, it will be deemed to be "penny stock" and will continue to be
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. These rules adversely effect the ability and
willingness of broker-dealers to sell the Common Stock, which could reduce the
liquidity of the Common Stock and have a material adverse effect on the trading
market and the market price for the Common Stock.
EXISTENCE OF WARRANTS, OPTIONS, CONVERTIBLE NOTES AND POSSIBLE DILUTION
As of March 31, 2001, there were outstanding warrants to purchase up to
235,000 shares of Common Stock at an exercise price of $.383 per share and
options to purchase up to 3,215,000 shares of Common Stock at exercise prices
ranging from $0.30 to $0.50 per share. As of April 27, 2001, the Company issued
a total of $1,200,000 in 10% Convertible Secured Subordinated Notes. At the
option of the holder, the notes may be converted into shares of the Company's
common stock at the rate of $.20 per share of stock. In the event that the
outstanding warrants and options are exercised and the notes are converted, the
holders will be given the opportunity to profit from a rise in the market price
of the underlying shares. This may have certain dilutive effects on, and a
materially depressive effect on, the market price for the Common Stock. The
terms on which the Company could obtain additional capital during the life of
such warrants, options and convertible notes, may be adversely affected because
the holders may be expected to exercise or convert them at a time when the
Company might otherwise be able to obtain comparable additional capital in a new
offering of securities at a price per share greater than the exercise price of
such options and warrants or conversion rate of such notes.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to
continue to be, volatile. The market price of the Common Stock could fluctuate,
perhaps substantially, in response to a number of factors, such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers or suppliers, changes in the general condition of, or trends in,
the designer stationery, specialty paper and office products industries, paper
prices, changes in governmental regulations, or changes in securities analysts'
estimates of the Company's or its competitors' or industry's future performance.
In addition, in recent years the stock
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Volatility of Stock Price (continued)
market in general, and the market for shares of small capitalization stocks in
particular, including the Company's Common Stock, have experienced extreme price
and volume volatility, which has had a substantial effect on the market prices
of securities of many smaller public companies for reasons frequently unrelated
to the operating performance of such companies.
LACK OF DIVIDENDS
The Company's ability to pay a dividend to holders of the Company's
Common Stock is limited by its existing credit facility with U.S. Bank. In
addition, the Company currently anticipates that all of its earnings will be
needed for the on-going operation of the business and does not anticipate paying
any cash dividends on shares of the Company's Common Stock in the foreseeable
future.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
Management continues to expect that the Company's financial results may
vary materially from period to period. Most of the Company's customers order
products for immediate delivery. As a result, a substantial amount of the
Company's net sales in each quarter result from orders received in that quarter.
The Company's net sales and operating results may, therefore, vary significantly
as a result of, among other things, volume and timing of orders received during
the quarter, variations and sales mix, and delays in production schedules.
Accordingly, the Company's historical financial performance is not necessarily a
meaningful indicator of future results. Moreover, significant portions of the
Company's customer orders are placed between June and October of each year in
anticipation for shipment during the Company's third fiscal quarter (i.e., the
Holiday period). As a result, the Company has experienced and is expected to
continue to experience seasonal fluctuations in its operating results based on
such purchasing patterns. These fluctuations in quarterly operating results
could have a material adverse effect on, among other things, the market price
for the Company's Common Stock.
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for
their intended uses for the foreseeable future. These properties consist of the
following:
Executive Offices And Domestic Facilities
The Company's headquarters and manufacturing facility in Blaine,
Washington has approximately 96,500 square feet of office, warehouse and
manufacturing space located on ten and one-half acres of Company-owned land. The
Company also leases approximately 118,000 square feet of warehouse and office
space in Waukesha, Wisconsin. The term of the lease is seven years, beginning on
March 1, 2001. The lease calls for annual base rent of $354,000, and allows for
an increase in base rent of 2% per year. Management believes these facilities
are suitable and adequate for the Company's business.
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Australian Facilities
In connection with the distribution of the Company's products in
Australia, Geographics-Australia leases 8,350 square feet of office and
warehouse space in Stanmore, Australia. The lease requires lease payments of
AUD$94,800 per year, triple net, and expires on May 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and actions incident to the operation
of its business. It is the opinion of management that the ultimate resolution of
these matters and any future unidentified claims will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since December 24, 1997, the Company's Common Stock traded on the
NASDAQ OTC Bulletin Board. The following table sets forth the high and low
closing bid prices or closing sales prices, as the case may be, of the Common
Stock, as reported on the OTC Bulletin Board for each fiscal quarter beginning
with the first fiscal quarter of fiscal year 2000.
Fiscal Year 2001 Fiscal Year 2000
---------------- ----------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First (June 30) $.94 $.47 $ .69 $.34
Second (September 30) $.72 $.44 $ .56 $.41
Third (December 31) $.36 $.17 $ .56 $.34
Fourth (March 31) $.41 $.20 $1.47 $.44
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions. As of
June 8, 2001, the Company believes there were approximately 3,000 holders of
record of the Company's Common Stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's Consolidated Financial Statements for the periods indicated. The
information set forth below should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's fiscal year 2001 consolidated Financial Statements
and notes thereto, and the Independent Auditors' Reports contained elsewhere in
this Report. The Independent Auditors' Report for fiscal year 2001 contains an
explanatory paragraph that states that the Company's net loss, working capital
deficiency, and accumulated deficit raise substantial doubt about the Company's
ability to continue as a going concern. The Company's consolidated financial
statements and the following selected consolidated financial data do not include
any adjustments that might result from the outcome of that uncertainty.
YEARS ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Sales $36,602,065 $27,254,782 $20,055,014 $22,015,900 $14,028,746
Gross margin 5,656,272 8,256,070 8,123,917 980,761 (2,493,490)
Income (loss) from operations (3,830,481) 680,141 (3,166,163) (8,089,245) (7,598,804)
Net income (loss) $(5,006,834) $236,153 $979,074 $(8,727,144) $(7,950,301)
Net income (loss) per share $(0.14) $ 0.01 $0.10 $(0.91) $(0.85)
Diluted
Weighted average shares 35,283,729 20,599,160 9,857,252 9,626,335 9,322,278
outstanding used in
computing diluted share data
SUPPLEMENTAL $(2,064,497) $2,492,988 $5,055,625 $(5,464,219) $(6,226,512)
OPERATING DATA:
EBITDA (1)
(1) As used herein, "EBITDA" is defined as net income plus interest, taxes,
depreciation and amortization. EBITDA is commonly used to assess the
non-cash effect on earnings of generally high levels of both
amortization and depreciation expenses associated with capital
equipment and acquisitions. EBITDA does not purport to represent cash
provided by operating activities as reflected in the Company's
consolidated statements of cash flow, is not a measure of financial
performance under generally accepted accounting principles and should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
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MARCH 31,
BALANCE SHEET DATA
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital $(4,992,359) $(872,053) $(6,253,495) $(8,872,651) $401,550
Total assets 27,335,496 22,367,444 18,139,989 25,325,764 30,245,701
Long-term obligations, 1,628,908 3,539,926 3,776,432 4,853,254 4,322,371
less current portion
Stockholders' equity 5,710,856 5,652,073 283,208 (504,744) 7,917,023
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto appearing
elsewhere on this Report.
RESULTS OF OPERATIONS
Years Ended March 31,
---------------------
The following table sets forth the percentages which 2001 2000 1999
the items in the Company's consolidated statements of ---- ---- ----
operations bear to net sales for the periods indicated:
Net sales 100.0% 100.0% 100.0%
Cost of sales 84.5 69.7 59.5
Gross margin 15.5 30.3 40.5
Selling, general and administrative expenses 25.9 27.8 56.3
Income (loss) from operations (10.5) 2.5 (15.8)
Interest expense (3.1) (3.4) (6.1)
Other income (expense), excluding interest expense (0.1) 1.8 (0.5)
Net Income (loss) from continuing operations (13.7) 0.9 (22.3)
Income from and gain on sale of discontinued -- -- 27.2
operations
Net income (loss) (13.7)% 0.9% 4.9%
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FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES. Net sales increased 34.3% to $36,602,065 in fiscal 2001
from $27,254,782 in fiscal 2000. The increase was primarily attributable to new
products associated with the acquisition of Domtar's specialty paper product
line and the introduction of the GeoFiles product line. Of the $9.3 million
increase, products acquired from Domtar contributed approximately $3.6 million,
and the GeoFile line contributed approximately $4.2 million. Store closures at
two major retailers coupled with customer efforts to reduce inventories yielded
a slower sales growth pace than experienced in previous years. Management
expects to experience continued sales growth in the Company's specialty papers
product lines through general volume increases, the introduction of new products
and price increases on existing products. As a result of the Company's decreased
emphasis on the GeoFile line, management anticipates that sales of GeoFiles will
decline in the future. However management expects an improvement in the gross
margin of this line due to the establishment of the direct supply agreement for
GeoFile products.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin decreased $2,599,798 to
$5,656,272 (15.5% of net sales) from $8,256,070 (30.3% of net sales) fiscal year
2001 compared to fiscal year 2000. The lower gross margin is primarily
attributable to higher customer program costs, warehouse set-up costs associated
with the Waukesha, Wisconsin facility, freight-in expenses for 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.
Management continues to explore alternatives of sub-contracting
portions of manufacturing operations to determine whether improvements in gross
margin would be available. Management also continues to review freight expense
and to explore options for reduction of this expense via change in the manner in
which products are consolidated for shipment and in shipping origination points.
Management believes that consolidation of multiple distribution facilities into
its Waukesha, Wisconsin facility will have a positive impact on gross margins.
Management further believes that licensing agreements with Atlanta Group, BV,
and its Mexican distribution partner, in addition to the direct supply agreement
for GeoFile products and local manufacturing of its products in Australia will
create additional positive impact on gross margins. However, it is not certain
that these improvements in gross margin will be realized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses increased to $9,486,753 (25.9% of net sales) in fiscal 2001 from
$7,575,929 (27.8% of net sales) in fiscal 2000. This increase is primarily
attributable to sales volume related increases in commissions, trade shows,
other selling and marketing expense, travel and depreciation and amortization
expense. While showing an increase in absolute terms, management believes that
the relative decrease in SG&A reflects an improvement in the efficiency of this
area over fiscal year 2000.
INCOME (LOSS) FROM OPERATIONS. The Company recorded a loss from
operations in fiscal 2001 of $(3,830,481) compared to income from operations of
$680,141 during fiscal 2000. The decline was primarily the result of the decline
in gross margins described above.
OTHER INCOME (EXPENSE). Other income (expense), other than interest
expense, for fiscal 2001 amounted to $(32,575) compared to income of $483,330 in
fiscal 2000, which was primarily derived from favorable settlements with trade
vendors. Exchange losses associated primarily with operations in Australia also
contributed to the unfavorable change.
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22
Fiscal 2001 Compared To Fiscal 2000 (continued)
Management believes that due to the agreement with Atlanta Group BV,
the European subsidiary of Smead Manufacturing Corporation, and establishment of
local manufacturing in Australia, that risk of similar exchange losses is
significantly lower going forward.
INTEREST EXPENSE. Interest expense increased to $1,143,777 (3.1% of
net sales) during fiscal 2001, compared to $927,318 (3.4% of net sales) during
fiscal 2000. The higher interest costs were caused by an increase in borrowings
by the Company to support operations. The increase in borrowings were
necessitated by reduced gross margins and increased investment in inventories to
support sales in new product lines.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS. The net loss from
continuing operations was $(5,006,834) ((13.7)% of net sales) in fiscal 2001
compared to net income of $236,153 (0.9% of net sales) in fiscal 2000. The
decline is primarily the result of costs incurred relating to the GeoFile
product line, freight, consolidation of warehouses, and gross margin erosion
described above.
INCOME TAX PROVISION (BENEFIT). An income tax benefit related to the
Company's net loss for fiscal year 2001 has not been recorded as realization of
such is not considered more likely than not.
NET INCOME (LOSS). Net Loss of $(5,006,834) ((13.7)% of net sales) in
fiscal year 2001 compares unfavorably to net income of $236,153 (0.9% of net
sales) in fiscal year 2000, for the reasons discussed above.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
NET SALES. Net sales increased 35.9% to $27,254,782 in fiscal 2000 from
$20,055,014 in fiscal 1999. The increase was primarily attributable to increased
business with a major customer, the addition of a new significant customer, and
sales of GeoFiles, a new product line acquired in early fiscal 2000.
GROSS MARGIN. Cost of sales includes product manufacturing costs,
occupancy and distribution costs. Gross margin as a percentage of net sales
decreased to 30.3% in fiscal 2000, from 40.5% in fiscal 1999. The lower gross
margin is primarily attributable to increases in volume discounts due to
increased sales, increased freight and distribution costs, new product
introduction and startup costs.
Management continues to explore alternatives of sub-contracting
portions of manufacturing and fulfillment operations to determine whether
improvements in gross margin would be available. Management also continues to
review freight expense and to explore options for reduction of this expense via
change in the manner in which products are consolidated for shipment and in
shipping origination points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses decreased to $7,575,929 (27.8% of net sales) in fiscal 2000 from
$11,290,080 (56.3% of net sales) in fiscal 1999. This decrease is primarily
attributable to a decrease in the Company's legal fees, decreases in other
professional fees, salaries and benefits, offset by increases in promotional
expenses, commissions, travel expenses and European selling expenses.
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23
Fiscal Year 2000 Compared To Fiscal Year 1999 (continued)
INCOME (LOSS) FROM OPERATIONS. The Company recorded income from
operations in fiscal 2000 of $680,141 compared to an operating loss of
$(3,166,163) during fiscal 1999. The improvement was the result of significantly
higher net sales and improved operating controls.
OTHER INCOME (EXPENSE). Other income (expense), other than interest
expense, for fiscal 2000 amounted to $483,330 compared to expense of $94,830 in
fiscal 1999.
INTEREST EXPENSE. Interest expense decreased to $927,318 (3.4% of net
sales) during fiscal 2000, compared to $1,220,695 (6.1% of net sales) during
fiscal 1999. The lower interest costs were caused by a decrease in borrowings by
the Company to support the operations. The decrease in borrowings is due to
improved operating income and capital infusion from the private stock offering
during fiscal 2000.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS. The net income from
continuing operations was $236,153 (0.9% of net sales) in fiscal 2000 compared
to a loss of $(4,481,688) ((22.3)% of net sales) in fiscal 1999. The improvement
in 2000 was primarily the result of the Company's improved overall operating
performance.
INCOME TAX PROVISION (BENEFIT). There is no income tax provision for
fiscal 2000. Income taxes provided in 1999 were $50,000 representing alternative
minimum taxes owing as a result of the sale of the Core Business.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The company classified
its sign and lettering division as discontinued in fiscal 1999 pending sale and
disposition in May, 1999.
NET INCOME (LOSS). Net income of $236,153 in fiscal 2000, or 0.9% of
net sales, compares to net income of $979,074 in fiscal 1999, or 4.9% of net
sales.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the addition of product lines from the Consumer Products
Business of the Communication Papers Division of Domtar, Inc. of Canada, and
from the Z-GRAFIX(R) brand image paper from Kansas City, Missouri based
Z-International, Inc., and the introduction of the plastic file cabinet and
storage group, the opening of its Waukesha, Wisconsin distribution facility, and
closing of four warehouse locations, the Company has required, and continues to
require, substantial external working capital. During fiscal 2001, operating
losses totaled $(3,830,481), and the Company experienced negative operating cash
flows of $(353,714).
At the date of this Report, the Company's only available source of
working capital consists of borrowings available under its revolving credit
facility, which expires on September 30, 2001. 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 qualified inventories. Borrowings under the facility bear interest
at LIBOR plus 2.5% and are secured by substantially all of the Company's assets.
Borrowings under this facility were $8,406,861 at March 31, 2001. 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, earnings, debt-to-equity ratios and cash flow coverage ratios.
21
24
Liquidity And Capital Resources (continued)
Between March 2001 and June 2001, the Company had been in default of
two financial covenants under its revolving credit facility with U.S. Bank
National Association, the Company's primary source of working capital, and
borrowings under the facility have exceeded permitted borrowing base
limitations. U.S. Bank has waived these defaults effective as of June 30, 2001.
U.S. Bank has waived the Company's violations of its financial
covenants as of June 30, 2001. In addition, the Company is in discussions with
U.S. Bank for an additional mortgage loan. There can be no assurance that U.S.
Bank will agree to the additional mortgage loan or that the Company will be able
to refinance or replace its revolving credit facility on acceptable terms when
and as needed.
Management believes that its consolidation of multiple distribution
facilities into its Waukesha, Wisconsin facility, licensing agreements with
Atlanta Group, BV, and with its Mexican distribution partner, the establishment
of the direct supply agreement for GeoFile products, and local manufacture of
products for its Australian subsidiary will improve liquidity and contribute
positively towards regaining compliance with financial covenants. Management has
also prepared preliminary plans for further operational consolidations, should
the actions already taken prove insufficient to restore compliance and necessary
liquidity. The failure to obtain an additional mortgage and to extend the
expiration date of the revolving credit facility, or to otherwise obtain
sufficient funds when and as needed to satisfy its working capital requirements
could force the Company to curtail operations, seek extended payment terms from
its vendors or seek protection under the federal bankruptcy laws.
The Company operates in a highly competitive environment. Many of the
Company's competitors are larger, better capitalized and have substantially
greater financial, marketing and human resources. The Company currently does not
have the financial ability to make significant expenditures for capital
equipment, sales, service, training and support capabilities, investments in
systems, procedures and controls, expansions of operations and research and
development, among many other items that may be necessary to remain competitive.
The Company issued a total of $1,200,000 in 10% Convertible
Subordinated Notes dated April 27, 2001. The notes are due and payable on or
before April 27, 2003 and are subordinated to indebtedness to the Company's
senior bank lender. At the option of the holder, the notes may be converted into
shares of the Company's common stock at the rate of $.20 per share of stock.
The report of the Company's auditors dated June 28, 2001 relating to
the Company's Consolidated Financial Statements for the fiscal year ended March
31, 2001 states that the Company's fiscal year 2001 net loss, working capital
deficiency and accumulated deficit at March 31, 2001, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
Consolidated Financial Statements for the fiscal year ended March 31, 2001 were
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this uncertainty.
22
25
NEW ACCOUNTING PRONOUNCEMENTS
In April, 2001, the Emerging Issues Task force (EITF) reached a
consensus on certain issues within Issue 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products".
The EITF concluded that consideration from a vendor to a reseller of the
vendor's products, such as cooperative advertising programs, should be
recognized as a reduction of revenue when recognized in the vendor's income
statement. Application of EITF 00-25 is required no later than in annual or
interim financial statement periods beginning after December 15, 2001. Upon
application of this Issue, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements. The Company has not yet determined the impact of the
adoption of this Issue on the Company's consolidated financial statements.
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 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.
ITEM 7A. 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. 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.
If the U.S. dollar uniformly increases in strength by 10% in fiscal
year 2002 relative to the currencies in which the Company's sales are
denominated, income before taxes would decrease by $172,199 for the fiscal year
2002. 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.
23
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc.
are incorporated into this Item 8 by reference to another section of this Report
as follows:
(a) Independent Auditors' Reports F-2
(b) Consolidated Balance Sheets as of March 31, 2001 and 2000 F-5
(c) Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999 F-6
(d) Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) for the years F-7
ended March 31, 2001, 2000 and 1999
(e) Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999 F-8
(f) Notes to Consolidated Financial Statements F-9
(g) Schedule II - Valuation and Qualifying Accounts S-1
SUPPLEMENTARY DATA: SELECTED QUARTERLY FINANCIAL DATA
Three Months Ended
June 30, September 30, December 31, March 31,
-------- ------------- ------------ ---------
2000 1999 2000 1999 2000 1999 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
(1)
Net Sales $ 9,204,674 $ 4,986,364 $ 10,319,736 $ 7,035,426 $ 10,438,753 $ 8,453,312 $ 6,638,902 $ 6,779,678
============================================================================================================
Gross Margin $ 2,705,264 $ 1,489,995 $ 2,243,873 $ 2,033,323 $ 2,240,216 $ 2,880,740 $ (1,533,081) $ 1,852,010
============================================================================================================
Net Income/(Loss) $ 334,213 $ (4,281) $ (504,264) $ 85,893 $ (534,776) $ 221,391 $ (4,302,007) $ (66,850)
============================================================================================================
Net income (loss) per common and common equivalent share:
- Basic $ 0.01 $ (0.00) $ (0.01) $ 0.01 $ (0.01) $ 0.01 $ (0.11) $ (0.00)
============================================================================================================
- Diluted $ 0.01 $ (0.00) $ (0.01) $ 0.01 $ (0.01) $ 0.01 $ (0.11) $ (0.00)
============================================================================================================
(1)As a result of correction of errors, amounts herein differ from those
previously reported in SEC Form 10-Q.
Net Sales decreased $479,862, Gross Margin decreased $229,727, and Net Loss
increased $377,377
24
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions with the
Company of the executive officers and Directors of the Company as of June 23,
2001. Directors are elected for one year terms or until their successors are
elected and qualified. Officers are elected by the Board and their terms of
office are at the discretion of the Board.
NAME AGE POSITION
- ---- --- --------
James L. Dorman 68 President, Chairman of the Board of Directors,
and Chief Executive Officer
William T. Graham 76 Director
C. Joseph Barnette 59 Director
Roger R. Mayer 61 Director
Jack Stein 74 Director
Brian P. Sullivan 47 Executive Vice President and Chief Operating
Officer - Paper Products
Brad D. Hall 38 Vice President -- Marketing
James L. Dorman. Mr. Dorman is currently a member of the Board of
Directors of the Company and serves as Chairman of the Board. He also is the
Chairman of the Board, President and Chief Executive Officer of Intercontinental
Trading, Ltd., a position he has held since 1984. Intercontinental Trading
specializes in assisting smaller companies with importing and exporting issues.
In addition, Mr. Dorman is the Chairman and Chief Executive Officer of Amalga
Composites, Inc., a position he has held since 1989. Amalga designs, engineers
and manufacturers composite component parts. Mr. Dorman also is a shareholder,
director and officer of Panint Electric Ltd. of Hong Kong, a developer and
manufacturer of consumer home products.
William T. Graham. Mr. Graham is currently a director of the Company
and was a shareholder, officer and director and co-founder of Uniek, Inc. from
1987 until July 1998. Uniek, Inc. is engaged in the business of crafts, photo
frames and photo albums, which are distributed to the mass market and office
superstores. Mr. Graham sold his interest in Uniek, Inc. in July 1998. In 1949,
Mr. Graham founded W.T. Rogers, Inc. ("W.T. Rogers"). Under Mr. Graham's
leadership, W.T. Rogers became a leading manufacturer and supplier of office
products to mass-market retailers and office superstores. In 1991, the year
before W.T. Rogers was merged with a wholly-owned subsidiary of Newell, Inc.,
its sales had reached $45,000,000 annually.
25
28
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
C. Joseph Barnette. Mr. Barnette is currently a director of the
Company. He is the co-founder and President of Kent Adhesive Products Company
("KAPCO"), a privately held adhesive products company, a position he has held
since KAPCO's beginning in 1972.
Roger R. Mayer. Mr. Mayer is currently a director of the Company. He
graduated in 1956 from the Milwaukee School of Engineering with a degree in
Industrial Engineering. In 1969, he joined with three partners to form
Manutronics, Inc., a printed circuit technology company. Mr. Mayer sold
Manutronics to Sanmina Corporation in 1999, after which he formed The Colerget
Group, LLC, an equity investment and management firm located in Kenosha,
Wisconsin.
Jack Stein. Mr. Stein is currently a director of the Company. He is
also the current Chairman of the Board of Stein Gardens & Gifts, a retail chain
of garden centers in Wisconsin. Mr. Stein started that company in 1956 and has
been owner and manager of the business. Mr. Stein has also been a member of the
board of directors of four Milwaukee banks, and is presently holding a position
on the board of several privately held companies, as well as a Director of
Universal Savings bank in Milwaukee.
Brian P. Sullivan. Mr. Sullivan is the Company's Executive Vice
President and Chief Operating Officer - Paper Products, a position he has held
since April 2000. Previously, Mr. Sullivan served as the Vice President and
General Manager, Consumer Products Division, of Domtar Papers, a division of
Domtar, Inc., the seventh largest North American forest products company, from
1997 until joining the Company in March of 2000. Prior to 1997, Mr. Sullivan was
employed by Rolodex Corporation, an office products company, as the Vice
President of Sales.
Brad D. Hall. Mr. Hall is the Company's Vice President of Marketing.
Mr. Hall holds a BA degree in Foreign Languages from Portland State University,
and an MBA in Marketing and International Business from Syracuse University.
Following his studies, Mr. Hall joined the consulting firm of ChaseDesign, as
Project Manager, Planning and Research. In 1991, he joined Keith Clark as
Business Development Manager. After a brief time as Product Manager for the
Globe-Weis brand of products for ATAPCO Office Products, in 1996, Mr. Hall
joined Samsonite in Denver, Colorado and became Director of Marketing - New
Business. In 1998, Mr. Hall joined SteelWorks, Inc. as Vice President of
Marketing.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 2001, there were five meetings
of the Board. Each of the directors attended all of the meetings of the Board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that all Forms 3, 4 and 5 required to be filed by
its directors, officers and greater than 10% shareholders were filed on time
during fiscal 2001, except that Messrs. Stein and Mayer were late in filing
their Form 3s.
26
29
EMPLOYMENT AGREEMENTS
The Company entered into an Executive Restated Employment Agreement
with James L. Dorman effective as of May 13, 2000 (the "Restated Employment
Agreement"), which restates a prior employment agreement with Mr. Dorman
effective April 16, 1999. Pursuant to the Restated Employment Agreement, Mr.
Dorman is entitled to receive a base salary of $170,000 per year or such greater
amount as the Board or the appropriate committee thereof may from time-to-time
determine. In addition, Mr. Dorman is entitled options to purchase 250,000
shares of Common Stock at a price of $.45 per share, 500,000 shares at $.50 per
share, and 300,000 shares at $.30 per share, with such option being vested on a
scheduled basis. Under the terms of the Restated Employment Agreement, Mr.
Dorman's employment shall continue until April 17, 2003 or until terminated
according to the terms of the Restated Employment Agreement.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years 2001, 2000 and 1999 to (a) the Company's Chief
Executive Officer, (b) the four most highly compensated individuals (other than
the Chief Executive Officer) who were serving as executive officers of the
Company at March 31, 2001 and whose total annual salary and bonus for the fiscal
year 2001 exceeded $100,000; and (c) up to two additional individuals who would
have been included under item (b) above but for the fact that the individual was
not serving as an executive officer of the Company at March 31, 2001
(collectively, the "Named Executive Officers").
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
------------ -------------------
YEAR
NAME AND PRINCIPAL ENDED SECURITIES UNDERLYING
POSITION MARCH 31 SALARY BONUS OPTIONS
-------- -------- ------ ----- -------
James L. Dorman, 2001 $169,998 -- 1,050,000
President, Chairman and
CEO 2000 $72,520 -- 800,000
1999 -- -- --
Brian P. Sullivan 2001 $138,470 -- --
Executive Vice President
and Chief Operating Officer
- - Paper Products 2000 -- -- --
1999 -- -- --
OPTION GRANTS IN FISCAL YEAR 2001
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE APPRECIATION FOR
UNDERLYING EXERCISE OR OPTION TERM
OPTION BASE PRICE -----------------------------
NAME GRANTED (#) ($/SH) EXPIRATION DATE 5% 10%
- ---- ----------- ------ --------------- -- ---
James L. Dorman 250,000 $0.45 6/20/10 $82,967 $198,749
Brian P. Sullivan 250,000 $0.40 6/20/10 $95,467 $211,249
27
30
EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company's 1999 Stock Option Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options for the purchase of an
aggregate of 4,500,000 shares of common stock, subject to adjustment for stock
splits and similar capital changes. Employees and, in the case of non-qualified
stock options, directors, consultants or any affiliate are eligible to receive
grants under our plans. The Board has the authority to determine the terms of
options granted under the plan, including the price, which will not be less than
the fair market value at the time of grant in the case of incentive stock
options. As of March 31, 2001, the Company had options outstanding to purchase
3,215,000 shares of common stock under the 1999 Stock Option Plan.
401(k) Plan
The Company has a 401(k) defined contribution retirement plan covering
substantially all full-time employees. The Company matches 10% of employee
pretax contributions up to 18% of employee pretax compensation. The Company
contributed approximately $4,919 to the plan during fiscal year 2001.
DIRECTOR COMPENSATION
The Company pays each non-employee director a fee of $500 per month and
$750 for each meeting of the Company's Board of Directors attended and options
to purchase up to 60,000 shares of the Company's Common Stock each year.
Directors are entitled to reimbursement for reasonable travel and other
out-of-pocket expenses incurred in connection with attendance of meetings of the
Company's Board of Directors. Directors of the Company who are also employees of
the Company do not receive fees for their services as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 12, 2001 with respect to (i)
each shareholder known by the Company to be the beneficial owner of more than
five percent (5%) of the outstanding Common Stock; (ii) each director of the
Company; (iii) each of the Named Executive Officers; and (iv) all current
directors and executive officers as a group. Unless otherwise noted, the Company
believes that the beneficial owners of the Common Stock listed below have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. This table is based upon information supplied to
the Company by directors, officers, and principal shareholders.
28
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued)
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OWNED
- ------------------------------------ ------------------ -------------
Sandra J. Martin (1) 3,000,000 7.9%
4918 Femrite Drive
Madison, WI 53716
William T. Graham 6,495,563 17.0%
4918 Femrite Drive
Madison, WI 53716
James L. Dorman (2) 3,217,289 8.4%
c/o Geographics, Inc.
1555 Odell Road
Blaine, WA 98231
C. Joseph Barnette (3) 370,000 1.0
1000 Cherry St.
Kent, OH 44240-7520
Roger R. Mayer 1,594,333 4.2%
PO Box 580410
Pleasant Prairie, WI 53158
L & D Investments, Jack Stein, Trustee 1,666,667 4.4%
- ------------------------------------------------------------
Total Executive Officers and Directors as a Group 13,343,852 34.9%
(4 persons) (5)
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Sandra J. Martin has not filed a Schedule 13D or Schedule 13G with
respect to her holdings. The share ownership of Ms. Martin is based
solely upon information previously provided to the Company, and the
Company is unable to independently verify this information.
(2) Includes the following: (i) 166,667 shares owned beneficially by Mr.
Dorman's wife, (ii) 289,511 owned by Panint Electric Ltd., of which Mr.
Dorman is a stockholder, officer and director, and (iii) currently
exercisable options to purchase 1,050,000 shares of Common Stock.
(3) Includes currently exercisable options to purchase 30,000 shares of
Common Stock, and 66,000 shares beneficially owned by Mr. Barnette's
wife.
(4) Includes currently exercisable options to purchase 100,000 shares of
Common Stock.
(5) Includes currently exercisable options to purchase 1,062,230 shares of
Common Stock, currently exercisable warrants to purchase 100,000 shares
of Common Stock and 522,178 shares indirectly owned.
29
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 19, 2000, the Company issued a $1,000,000 subordinated note to
Mr. James L. Dorman, the Company's Chairman of the Board and Chief Executive
Officer, with the proceeds used to assist in acquiring certain assets of the
Consumer Products Business of the Communication Papers Division of Domtar, Inc.
of Canada. The note bore interest at the U.S. Bank's prime lending rate, and was
subordinate to the Company's senior indebtedness to U.S. Bank. The note was paid
in full on May 12, 2000, including accrued interest. In addition to interest on
the note, the Company issued a warrant to Mr. Dorman to purchase 100,000 shares
of Common Stock at $0.45 per share until April 30, 2002. Subsequently, the
warrant was sold to L & D Investments, Jack Stein, Trustee. Mr. Stein is a
director of the Company.
The Company formed a supply relationship with KAPCO, an Ohio
Corporation owned by Mr. C. Joseph Barnett, Director of the Company, in January
of 2001. KAPCO supplies the Company with blank white business and greeting
cards, and won this business based on competitive price and terms. Products
purchased from KAPCO in fiscal year 2001 amounted to $112,261.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
(i) Independent Auditors' Reports
(ii) Consolidated Balance Sheets as of March 31, 2001 and
2000
(iii) Consolidated Statements of Operations for the years
ended March 31, 2001, 2000 and 1999
(iv) Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss) for the years ended March
31, 2001, 2000 and 1999
(v) Consolidated Statements of Cash Flows for the years
ended March 31, 2001, 2000 and 1999
(vi) Notes to Consolidated Financial Statements
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33
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued)
2. FINANCIAL STATEMENT SCHEDULES
(i) Schedule II-Valuation of Qualifying Accounts
All other schedules have been omitted because the required information
is included in the consolidated financial statements or the notes thereto, or is
not applicable or required.
3. EXHIBITS FILED AS PART OF THIS REPORT
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
3.1 Certificate of Incorporation of Geographics, Inc.
(incorporated by reference to Exhibit 3.1 to the
Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
3.2 Bylaws of Geographics, Inc. (incorporated by
reference to Exhibit 3.2 to the Quarterly Report
on Form 10-Q for the quarter ended September 30,
2000).
10.1 Loan and Security Agreement, dated as of December
22, 1999, between Geographics, Inc. and U.S. Bank
N.A., Milwaukee, Wisconsin (incorporated by
reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the year ended
December 31, 1999).
10.2 Master Equipment Lease Agreement, dated as of May
22, 1996 (the "Master Lease"), between
Geographics, Inc. and KeyCorp Leasing Ltd.
(incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.3 Equipment Schedule No. 4 to the Master Lease,
dated as of December 4, 1996, between Geographics,
Inc. and KeyCorp Leasing Ltd. (incorporated by
reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
10.4 Equipment Schedule No. 4 to the Master Lease,
dated as of May 23, 1997, between Geographics,
Inc. and KeyCorp Leasing Ltd. (incorporated by
reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
10.5 Agreement for Sale of Business, dated November 26,
1996, between Geographics, Inc. and Graham's
Graphics Pty. Ltd. (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997).
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34
10.6 Form of Stock Option Agreement relating to options
granted by Geographics, Inc. prior to the adoption
of the Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.7 Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the
Company's Registration Statement on Form S-8 filed
on November 26, 1996).
10.8 Form of Stock Option Agreements issued pursuant to
the Geographics, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the
Company's Registration Statement on Form S-8 filed
on November 26, 1996).
10.9 Warrant Indenture, dated as of February 4, 1997
(the "Warrant Agreement") between Geographics,
Inc. and Montreal Trust Company of Canada relating
to the warrants issued in the Private Placement
(incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1997).
10.10 Form of Warrant to Purchase Common Stock issued in
the Private Placement pursuant to the Warrant
Agreement (incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997).
10.11 Form of Registration Rights Agreement between
Geographics, Inc. and each purchaser of units sold
in the Private Placement (incorporated by
reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the year ended March 31,
1997).
10.12 Financial Advisory Agreement, dated August 6,
1997, between Geographics, Inc. and Cruttenden
Roth, Incorporated (incorporated by reference to
Exhibit 10.16 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1997).
10.13 Subscription Agreement, dated October 9, 1997,
between Geographics, Inc. and First Prudential
Investment Fund, Inc. (incorporated by reference
to Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1997).
10.14 Amended and Restated Asset Purchase Agreement by
and among Geographics, Inc., Identity Group, Inc.,
and U.S. Bank National Association, dated May 4,
1998 (incorporated by reference to Exhibit 10.18
to the Company's Report on Form 8-K filed on June
29, 1998).
10.15 Escrow Agreement by and among Geographics, Inc.,
Identity Group, Inc., U.S. Bank National
Association and Lawyers Title Insurance
Corporation, dated May 4, 1998 (incorporated by
reference to Exhibit 10.19 to the Company's Report
on Form 8-K filed on June 29, 1998).
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35
10.16 Convertible Subordinated Note between Geographics,
Inc. and James L. Dorman, dated April 29, 1999
(incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1999).
10.17 Convertible Subordinated Note between Geographics,
Inc. and William T. Graham, dated April 29, 1999
(incorporated by referenced to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1999).
10.18 Restated Employment Agreement between Geographics,
Inc. and James L. Dorman, dated as of May 13, 2000
(incorporated by referenced to Exhibit 10.18 to
the Company's Annual Report on Form 10-K for the
year ended March 31, 2000).
10.19 Asset Purchase Agreement dated as of April 1,
2000, by and between Geographics, Inc. and Domtar
Inc. (incorporated by referenced to Exhibit 10.19
to the Company's Annual Report on Form 10-K for
the year ended March 31, 2000).
10.20 $100,000 subordinated note from Geographics, Inc.
to James L. Dorman dated April 27, 2001.
10.21 $50,000 subordinated note from Geographics, Inc.
to William T. Graham dated April 27, 2001.
10.22 $100,000 subordinated note from Geographics, Inc.
to L&D Investments LLP dated April 27, 2001.
10.23 $50,000 subordinated note from Geographics, Inc.
to Roger R. Mayer dated April 27, 2001.
10.24 First Amendment, dated April 17, 2000, to Loan and
Security Agreement, dated as of December 22, 1999,
between Geographics, Inc. and U.S. Bank N.A.,
Milwaukee, Wisconsin.
10.25 Second Amendment, dated June 30, 2001, to Loan and
Security Agreement, dated as of December 22, 1999,
between Geographics, Inc. and U.S. Bank N.A.,
Milwaukee, Wisconsin.
23.1 Consent of KPMG LLP.
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36
SIGNATURES
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 16th day of
July, 2001.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
---------------------------------------------------------------
James L. Dorman
President, Chief Executive Officer
and Chairman of the Board
Each person whose individual signature appears below hereby authorizes
and appoints James L. Dorman with full power of substitution and full power to
act without the other, as his true and lawful attorney-in-fact and agent to act
in his name, place and stead and to execute in the name and on behalf of such
person, individually and in the capacity of such person stated below, and to
file any and all amendments to this Report together with any exhibits thereto
and any other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of the Registrant, and in the capacities and on
the date indicated have signed this Report below.
/s/ James L. Dorman July 16, 2001
-----------------------------------------------------
James L. Dorman
President, Chief Executive Officer
and Chairman of the Board
/s/ William T. Graham July 16, 2001
-----------------------------------------------------
William T. Graham
Director
/s/ C. Joseph Barnette July 16, 2001
-----------------------------------------------------
C. Joseph Barnette
Director
/s/ Roger R. Mayer July 16, 2001
-----------------------------------------------------
Roger R. Mayer
Director
34
37
SIGNATURES (continued)
/s/ Jack Stein July 16, 2001
-----------------------------------------------------
Jack Stein
Director
/s/ Michael Oakes July 16, 2001
-----------------------------------------------------
Michael Oakes
Controller
35
38
GEOGRAPHICS, INC.
TABLE OF CONTENTS
MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORTS.............................................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets.........................................................................................F-5
Statements of Operations...............................................................................F-6
Statement of Stockholders' Equity and Comprehensive Income (Loss)......................................F-7
Statements of Cash Flows...............................................................................F-8
Notes to Financial Statements..........................................................................F-9
F-1
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Geographics, Inc.:
We have audited the accompanying consolidated balance sheet of Geographics, Inc.
and subsidiaries as of March 31, 2001, and the related consolidated statements
of operations, stockholders' equity and comprehensive income (loss), and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement Schedule II
for the year ended March 31, 2001, included in Item 14 of the Company's annual
report on Form 10-K for the year ended March 31, 2001. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Geographics, Inc. as
of March 31, 2001, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in note 3 to the consolidated financial statements, the
Company has suffered a net loss, has a working capital deficiency and an
accumulated deficit that raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
June 28, 2001
Seattle, Washington
F-2
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Geographics, Inc.
We have audited the consolidated balance sheet of Geographics, Inc. and
subsidiaries as of March 31, 2000 and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss) and cash flows
for the year then ended. In connection with our audit of the consolidated
financial statements, we also audited financial statement Schedule II for the
year ended March 31, 2000, included in Item 14 of the Company's annual report on
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Geographics, Inc.
and subsidiaries as of March 31, 2000, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/S/ KPMG LLP
Chartered Accountants
Vancouver, Canada
July 13, 2000
F-3
41
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and comprehensive income, and cash flows of
Geographics, Inc. and subsidiaries for the year ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above, present
fairly in all material respects, the consolidated results of operations and cash
flows of Geographics, Inc. and subsidiaries for the year ended March 31, 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred substantial operating losses in
1999 and is out of compliance with its borrowing agreements, which raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ Moss Adams LLP
Bellingham, Washington
May 7, 1999
F-4
42
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
- --------------------------------------------------------------------------------
ASSETS
2001 2000
------------------- --------------------
CURRENT ASSETS
Cash and cash equivalents $ 421,049 $ 360,612
Accounts receivable
Trade receivables, net of allowance for doubtful
accounts, sales returns and cash discounts of
$1,041,696 and $1,587,469 in 2001 and 2000, respectively 7,188,772 6,053,810
Other receivables 155,281 25,555
Inventories 6,634,321 5,301,171
Prepaid expenses, deposits, and other current assets 603,950 562,244
------------------- --------------------
Total current assets 15,003,373 12,303,392
PROPERTY, PLANT AND EQUIPMENT, net 9,007,234 9,304,864
LICENSES, TRADEMARKS AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of $460,327 and $101,300 in 2001 and
2000, respectively 3,126,512 317,170
OTHER ASSETS 198,377 442,018
------------------- --------------------
TOTAL ASSETS $ 27,335,496 $ 22,367,444
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 975,489 $ 259,551
Note payable to bank 8,406,861 5,764,627
Accounts payable 5,401,482 3,699,532
Accrued liabilities 4,237,110 2,083,523
Current portion of long-term debt 974,790 1,368,212
------------------- --------------------
Total current liabilities 19,995,732 13,175,445
LONG-TERM DEBT 1,628,908 3,539,926
------------------- --------------------
Total liabilities 21,624,640 16,715,371
------------------- --------------------
STOCKHOLDERS' EQUITY
Common stock, $0.001par value - 100,000,000 shares authorized;
38,191,676 and 26,965,589 shares issued and outstanding in
2001 and 2000, respectively 38,192 26,966
Additional paid-in capital 26,190,460 20,950,859
Accumulated other comprehensive income (loss) (418,528) (233,318)
Accumulated deficit (20,099,268) (15,092,434)
-------------------- ----------------------
Total stockholders' equity 5,710,856 5,652,073
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,335,496 $ 22,367,444
=================== ====================
COMMITMENTS, CONTINGENCIES AND
SUBSEQUENT EVENT
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
43
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
SALES
Sales $ 43,148,879 $ 32,019,946 $ 23,127,452
Less sales returns and allowances 6,546,814 4,765,164 3,072,438
--------------- --------------- ----------------
Net sales 36,602,065 27,254,782 20,055,014
COST OF SALES 30,945,793 18,998,712 11,931,097
--------------- --------------- ----------------
Gross margin 5,656,272 8,256,070 8,123,917
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,486,753 7,575,929 11,290,080
--------------- --------------- ----------------
Income (loss) from operations (3,830,481) 680,141 (3,166,163)
---------------- --------------- -----------------
OTHER INCOME (EXPENSE)
Other income (expense) (34,294) 484,792 31,291
Gain (Loss) on sales of property and equipment 1,718 (1,462) (126,121)
Interest expense (1,143,777) (927,318) (1,220,695)
--------------- --------------- ----------------
Total other income (expense) (1,176,353) (443,988) (1,315,525)
--------------- --------------- ----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (5,006,834) 236,153 (4,481,688)
DISCONTINUED OPERATIONS
Income from operations of Core Business - - 110,476
Gain on disposal of Core Business, net of
alternative minimum tax of $50,000 - - 5,350,286
--------------- --------------- ----------------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS - - 5,460,762
--------------- --------------- ----------------
NET INCOME (LOSS) $ (5,006,834) $ 236,153 $ 979,074
================ =============== =================
BASIC INCOME (LOSS) PER SHARE
Income (Loss) from continuing operations $ (0.14) $ 0.01 $ (0.45)
Discontinued operations - - 0.55
--------------- --------------- ----------------
Net income (loss) $ (0.14) $ 0.01 $ 0.10
=============== =============== ================
DILUTED INCOME (LOSS) PER SHARE
Income (Loss) from continuing operations $ (0.14) $ 0.01 $ (0.45)
Discontinued operations - - 0.55
--------------- --------------- ----------------
Net income (loss) $ (0.14) $ 0.01 $ 0.10
================ =============== ================
SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE
Basic 35,283,729 19,442,115 9,857,252
=============== =============== ================
Diluted 35,283,729 20,599,160 9,857,252
=============== =============== ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
44
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Retained
Common stock Additional Earnings
------------ paid-in (Accumulated
Shares Amount Capital Deficit)
------ ------ ------- --------
BALANCE, March 31, 1998 9,857,252 $ 9,857 $15,759,161 $(16,307,661)
=========== ======= =========== ============
Comprehensive income
Net income -- -- -- 979,074
Foreign currency translation adjustment -- -- -- --
Comprehensive income -- -- -- --
----------- ------- ----------- ------------
BALANCE, March 31, 1999 9,857,252 $ 9,857 $15,759,161 $(15,328,587)
=========== ======= =========== ============
Comprehensive income
Net income -- -- -- 236,153
Foreign currency translation adjustment -- -- -- --
Comprehensive income
Stock-based compensation -- -- 132,944 --
Issuance of common stock 17,108,337 17,109 5,058,754 --
----------- ------- ----------- ------------
BALANCE, March 31, 2000 26,965,589 $26,966 $20,950,859 $(15,092,434)
=========== ======= =========== ============
Comprehensive income (loss)
Net income (loss) -- -- -- (5,006,834)
Foreign currency translation adjustment -- -- -- --
Comprehensive income (loss)
Stock-based compensation -- -- 217,976 --
Issuance of common stock 11,226,087 11,226 5,021,625 --
----------- ------- ----------- ------------
BALANCE, March 31, 2001 38,191,676 $38,192 $26,190,460 $(20,099,268)
=========== ======= =========== ============
Accumulated
Other Total Total
Comprehensive Stockholders' Comprehensive
Income (Loss) Equity Income (Loss)
------------- ------------- -------------
BALANCE, March 31, 1998 $ 33,899 $ (504,744)
Comprehensive income
Net income -- 979,074 $ 979,074
Foreign currency translation adjustment (191,122) (191,122) (191,122)
-----------
Comprehensive income -- -- $ 787,952
----------- ----------- ===========
BALANCE, March 31, 1999 $ (157,223) $ 283,208
=========== ===========
Comprehensive income
Net income 236,153 $ 236,153
Foreign currency translation adjustment (76,095) (76,095) (76,095)
-----------
Comprehensive income $ 160,058
===========
Stock-based compensation -- 132,944
Issuance of common stock -- 5,075,863
----------- -----------
BALANCE, March 31, 2000 $ (233,318) $ 5,652,073
=========== ===========
Comprehensive income (loss)
Net income (loss) (5,006,834) $(5,006,834)
Foreign currency translation adjustment (185,210) (185,210) (185,210)
-----------
Comprehensive income (loss) $(5,192,044)
===========
Stock-based compensation -- 217,976
Issuance of common stock -- 5,032,851
----------- -----------
BALANCE, March 31, 2001 $ (418,528) $ 5,710,856
=========== ===========
See accompanying notes to consolidated financial statements
F-7
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
--------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,006,834) $ 236,153 $ 979,074
Adjustments to reconcile net income (loss) to net
cash flows provided by (used in) operating activities
Depreciation and amortization 1,798,560 1,329,517 2,855,906
Gain on sale of Core business - - (5,350,286)
Disposal of property and equipment (1,718) 1,462 126,121
Stock-based compensation 150,976 132,944 -
Interest on debentures 67,000 - -
Inventory valuation adjustment 844,428 - -
Changes in operating assets and liabilities
Trade receivables (1,134,962) (3,005,055) 1,096,906
Other receivables (129,727) 235,536 (113,041)
Inventories (408,544) (1,768,487) 2,395,474
Prepaid expenses, deposits and other current assets (41,705) 291,113 (122,050)
Accounts payable 1,341,886 738,453 (324,388)
Accrued liabilities 2,166,926 (812,809) 157,412
----------- ----------- -----------
Net cash flows from operating activities (353,714) (2,621,173) 1,701,128
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of Core business - - 6,448,073
Purchase of plant and equipment (1,104,341) (444,479) (308,980)
Purchase of certain Innovative Storage Design assets - (60,883) -
Proceeds from sales of equipment 65,456 14,355 -
Other assets 98,322 (391,687) (27,458)
Purchase of certain Z International assets (100,000) - -
Purchase of certain Domtar Consumer Products assets (4,606,924) - -
----------- ----------- -----------
Net cash flows from investing activities (5,647,487) (882,694) 6,111,635
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in (repayment of) bank overdrafts 715,938 6,126 (48,291)
Net borrowings (repayment of) on note payable to bank 2,642,234 1,867,715 (6,403,896)
Repayment of long-term debt (2,304,440) (2,940,895) (1,354,565)
Proceeds from notes payable to officers and directors 1,000,000 - -
Repayments of notes payable to officer and directors (1,000,000) - -
Proceeds from issuance of common stock 5,032,851 4,875,583 -
----------- ----------- -----------
Net cash flows from financing activities 6,086,583 3,808,529 (7,806,752)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (24,945) (75,017) (191,122)
----------- ----------- -----------
NET CHANGE IN CASH 60,437 229,645 (185,111)
CASH, beginning of year 360,612 130,967 316,078
----------- ----------- -----------
CASH, end of year $ 421,049 $ 360,612 $ 130,967
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,138,929 $ 875,272 $ 1,044,421
=========== =========== ===========
Non-cash financing and investing activities -
Acquisition of fully reserved Domtar Inventory $ 223,354 $ - $ -
=========== =========== ===========
Acquisition of Z-International inventory for credit $ 360,063 $ - $ -
=========== =========== ===========
Common stock issued for assets $ - $ 200,280 $ -
=========== =========== ===========
Financing obtained in acquisition of equipment $ - $ 135,982 $ -
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-8
46
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Delaware corporation with its
offices and main manufacturing and distribution facilities located in
Blaine, Washington. The Company also has sales, warehousing and
distribution facilities near Sydney, Australia, and Waukesha, Wisconsin.
The Company is a manufacturer of designer stationery, value-added papers
and ready-to-assemble filing and storage systems. (See Note 4 regarding
the sale of certain business operations and product line acquisitions.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Geographics (Europe) Limited, Geographics Pty. Limited and Geographics
Marketing Canada Inc. (which was dissolved in October, 1999, with
operations continued by the Company). Significant intercompany
transactions and balances have been eliminated in consolidation.
CASH AND EQUIVALENTS - Cash and cash equivalents include cash on deposit
with banks and other highly liquid investments with original maturities
of ninety days or less.
CASH AND OVERDRAFT BALANCES - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
The nature and content of bank overdrafts include disbursements from the
payroll checking account, which are covered via transfers of funds from
the general operating cash account as payroll checks are presented for
payment. The Company also has an account for which the bank funds
disbursements as they are presented for payment via an overnight
investment sweep account.
ACCOUNTS RECEIVABLE - The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for
doubtful accounts to be fully collectible.
INVENTORIES - Inventories are valued at the lower of cost on a first-in,
first-out (FIFO) basis or estimated net realizable value.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at historical cost. Depreciation and amortization is provided based on
useful lives of the assets (buildings - fifteen to forty years;
machinery and equipment - three to fifteen years; computers and software
- three to ten years; vehicles - five to eight years), using primarily
the straight-line method. Betterments, renewals and repairs that extend
the life of assets are capitalized. Repairs and maintenance items are
expensed when incurred. Depreciation and amortization expense, including
amortization expense on capitalized leased equipment, was $1,257,153,
$1,329,517 and $2,855,906 during the years ended March 31, 2001, 2000
and 1999, respectively.
LICENSES, TRADEMARKS, AND OTHER INTANGIBLE ASSETS - Licenses, trademarks
and other intangible assets are stated at historical cost. Amortization
is provided on a straight-line basis based on useful lives of six to
fifteen years.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable
amounts attributed to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
This method also allows recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences
for which tax benefits have not previously been recorded. The tax
benefits recognized as assets must be reduced by a valuation allowance
where it is more likely than not the benefits may not be realized. The
effect on deferred income tax assets and liabilities of a change in tax
rates is included in income in the period that includes the substantial
enactment date.
F-9
47
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
non-U.S. subsidiaries is the applicable local currency. The translation
of the applicable foreign currency denominated financial statements into
the Company's functional currency, U.S. dollars, is calculated for
assets and liabilities at the exchange rates in effect as of the balance
sheet dates. Income and expense items are translated at the average
exchange rate for the year. The resulting translation adjustments are
recorded as other comprehensive income (loss) within the consolidated
statements of stockholders' equity and comprehensive income (loss).
Transaction gains and losses are reported in net income in the period
they are realized.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION - Goods are shipped to the customer, F.O.B.
destination. Sales are recorded and recognized as revenue when
product is received by the customer.
ADVERTISING COSTS - Advertising costs are charged to expense in the
period in which they occur except for direct response advertising which
is capitalized and amortized over its expected period of future
benefits. Direct response advertising consists primarily of
advertisements placed with industry related catalogs and are amortized
over the period following the mailing date at a rate approximating the
rate and timing of customer response.
The Company also participates with its customers in cooperative
advertising and other promotional programs, in which the Company
contributes to customers' advertising costs. Advertising expense
amounted to $1,384,315, $755,074 and $589,569 during the years ended
March 31, 2001, 2000 and 1999, respectively.
NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share amounts
are computed based on the weighted average number of shares outstanding
during the period after giving retroactive effect to stock dividends and
stock splits. Diluted net income (loss) per share amounts are computed
by determining the number of additional shares that are deemed
outstanding due to stock options and warrants under the treasury stock
method, and which are anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
instruments, other than cash, consist primarily of cash equivalents,
accounts receivable, bank overdrafts, accounts payable, accrued
liabilities, note payable and long-term debt. The fair value of these
instruments approximates their carrying amounts based upon their
short-term nature or current market indicators such as prevailing
interest rates.
STOCK-BASED COMPENSATION - The Company follows the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. This statement permits a company to choose
either a new fair-value method or the Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees,
intrinsic-value based method of accounting for stock-based compensation
arrangements. SFAS No 123 requires pro forma disclosure of net income
(loss) and income (loss) per share computed as if the fair-value based
method had been applied in financial statements of companies that
continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using
the APB Opinion No. 25 intrinsic-value-based method.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-10
48
COMPREHENSIVE INCOME (LOSS) - The Company reports comprehensive income
(loss), which includes the Company's net income (loss) as well as
changes in equity from other non-owner sources. In the Company's case
through the date of the consolidated financial statements, the other
changes in equity included in comprehensive income (loss) comprise
cumulative foreign currency translation adjustments.
RECENT 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 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 April, 2001, the Emerging Issues Task force (EITF) reached a
consensus on certain issues within Issue 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products". The EITF concluded that consideration from a vendor to a
reseller of the vendor's products, such cooperative advertising
programs, should be recognized as a reduction of revenue when recognized
in the vendor's income statement. Application of EITF 00-25 is required
no later than in annual or interim financial statement periods beginning
after December 15, 2001. Upon application of this Issue, financial
statements for prior periods presented for comparative purposes should
be reclassified to comply with the income statement display
requirements. The Company has not yet determined the impact of the
adoption of this Issue on the Company's consolidated financial
statements.
NOTE 3 - GOING CONCERN
The Company's consolidated financial statements have been prepared
assuming the company will continue as a going concern.
The Company incurred a net loss of $5,006,834 in fiscal year 2001, has a
working capital deficiency of $4,992,359 and an accumulated deficit of
$20,099,268 at March 31, 2001. In order for the Company to continue as a
going concern it must achieve profitability or obtain adequate financing
to fund its obligations as they become due.
The Company is focusing on initiatives that specifically address the need
to increase cash provided by operating activities. Some of these
initiatives include, but are not limited to consolidation of multiple
facilities into its Waukesha, Wisconsin facility, licensing agreements
with Atlanta Group, BV, and with its Mexican distribution partner, the
establishment of a direct supply agreement for GeoFile products, and
local manufacture of products for its Australian subsidiary. Management
has also prepared preliminary plans for further operational efficiency
improvements should the actions already taken prove insufficient to
restore profitability and improve liquidity.
The Company's ability to obtain additional cash if and when needed could
have a material adverse effect on its financial position, results of
operations and its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 4 - ACQUISITIONS AND DIVESTITURE
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
consideration of $4,781,140, plus expenses of $49,138. Under the
provisions of the agreement with Domtar, the Company was granted an
exclusive worldwide 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, and annually
thereafter, unless terminated by either party. The licenses remain
exclusive providing annual sales achieve certain minimum sales levels or
minimum royalty payments are made. The agreement also provides for the
payment of royalties on sales of the Domtar products, an option by Domtar
to repurchase the assets at a premium, and the purchase of paper from
Domtar.
F-11
49
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. The Company and Z-International have entered into a
license agreement for the Company to use the Z-GRAFIX name. Under the
terms of the agreement, the Company has made an initial payment of
$100,000, will pay for 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, for a period
not to exceed three years.
Effective July 1, 1999, the Company acquired substantially all of the
assets of Innovative Storage Designs, consisting of inventories,
drawings, tooling, patents, know-how and certain other assets used in the
manufacturing and sale of ready-to-assemble file storage systems. The
purchase price, composed of cash, the assumption of certain liabilities
and issuance of 556,711 shares of common stock of the Company, amounting
to $261,000. In addition, the purchase agreement provides for the payment
of royalties on future sales of files at the rate of 1 1/2% on sales of
single drawer file cabinets and single drawer storage cabinets up to a
maximum of $150,000, and the issuance of common stock of the Company at
the rate of 25,000 shares for each $500,000 of the first $10,000,000 in
sales of the specified products. No royalties are payable subsequent to
March 31, 2001.
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 of 5% of the sales of all of the Company's products sold by the
Smead/Atlanta Group.
On May 4, 1998, the Company sold substantially all of its signage and
lettering operating assets, licenses, inventory and other rights
(collectively the "Core Business") to Identity Group, Inc. for total
consideration of $6,673,182. In connection with the sale, the Company
recorded a gain of $5,350,286 or $.55 per share in the first quarter of
fiscal 1999. The available net proceeds from the sale were used to reduce
the outstanding balance on the Company's revolving credit line.
Summarized results of operations for the Core Business for the year ended
March 31,1999 are as follows:
1999
--------------
Net sales $ 751,539
==============
Income from operations $ 139,035
==============
Income from discontinued operations $ 110,476
==============
NOTE 5 - INVENTORIES
Inventories consisted of the following at March 31:
2001 2000
-------------- -------------
Raw materials $ 809,794 $ 619,463
Work-in-progress
1,121.778 1,096,799
Finished goods 4,702,749 3,584,909
-------------- -------------
$ 6,634,321 $ 5,301,171
============== =============
F-12
50
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
As of March 31, 2001
-------------------- Accumulated
Depreciation
And Net Book
Cost Amortization Value
------------- ------------ -----
Land $ 114,563 $ - $ 114,563
Buildings 3,999,757 1,127,006 2,872,751
Machinery & equipment 4,102,195 2,332,449 1,769,746
Machinery & equipment under capital lease 7,154,598 3,171,677 3,982,921
Computers and software 412,709 239,648 173,061
Vehicles 215,276 150,663 64,613
EDP installation-in-progress 29,579 - 29,579
------------- -------------- -------------
$ 16,028,677 $ 7,021,443 $ 9,007,234
============= ============== =============
As of March 31, 2000
-------------------- Accumulated
Depreciation
And Net Book
Cost Amortization Value
------------- ------------ -----
Land $ 114,563 $ - $ 114,563
Buildings 3,881,071 1,037,638 2,843,433
Machinery & equipment 3,488,224 2,085,411 1,402,813
Machinery & equipment under capital lease 7,162,416 2,518,975 4,643,441
Computers and software 312,086 134,934 177,152
Vehicles 240,837 138,995 101,842
EDP installation-in-progress 21,620 - 21,620
------------- -------------- -------------
$ 15,220,817 $ 5,915,953 $ 9,304,864
============= ============== =============
NOTE 7 - LEASES
The Company conducts certain operations in leased facilities, under
leases that are classified as operating leases for financial statement
purposes. The leases require the Company to pay real estate taxes,
common area maintenance, and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated
rents, expire at various times through 2008. At March 31, 2001, the
Company had future minimum lease commitments of $2,548,284. Rental
expense under all operating leases was $463,534, $125,838 and $86,235
during the years ended March 31, 2001, 2000 and 1999, respectively.
F-13
51
Future minimum lease payments for the noncancelable operating leases and
future minimum capital lease payments as of March 31, 2001 are:
YEAR ENDING MARCH 31 CAPITAL LEASES OPERATING LEASES
-------------------------------------------------- ------------------- -------------------
2002 $ 1,176,911 $ 400,054
2003 899,222 400,054
2004 767,164 361,676
2005 127,573 354,000
2006 - 354,000
Thereafter - 678,500
---------------- ----------------
Total minimum lease payments 2,970,870 $ 2,548,284
---------------- ================
Less amount representing interest (at rates
ranging from 8.25% to 11.42%) (367,172)
----------------
Present value of net minimum
capital lease payments 2,603,698
Less current installments of obligations under
capital leases 974,790
----------------
Obligations under capital leases,
excluding current installments $ 1,628,908
================
NOTE 8 - NOTE PAYABLE
The Company has a revolving credit agreement with a bank to borrow up to
$9,500,000. The credit facility expires and outstanding borrowings
thereunder are due as of September 30, 2001. The borrowings under the
agreement are subject to borrowing base limitations of 75% of eligible
accounts receivable and 50% of qualified inventories. Interest on
outstanding advances is payable monthly at the bank's daily LIBOR rate,
(5.1% at March 31, 2001) plus 2.5%. Total outstanding advances under the
revolving credit agreement were $8,406,861 and $6,764,627 at March 31,
2001 and 2000, respectively. The revolving credit agreement contains
restrictive covenants with which the Company was not in compliance at
March 31, 2001. The Company subsequently amended the credit facility and
received a waiver of prior defaults as of June 30, 2001. The revolving
credit agreement is secured by substantially all of the assets of the
Company and restricts the payment of dividends.
NOTE 9 - FEDERAL INCOME TAXES
The total tax provision for the years ended March 31, differs from the
amount computed using the statutory federal income tax rate as follows:
2001 2000 1999
------------------------- ----------------------- -------------------------
Amount % Amount % Amount %
------------ --------- ----------- -------- ------------ --------
Tax expense (benefit) at statutory
rate on continuing operations $ (1,702,000) (34.0) $ 80,240 34.0 $ (1,524,000) (34.0)
Other differences, net 506,000 10.1 (80,240) (34.0) 240,000 5.4
Change in valuation allowance
for deferred tax assets 1,196,000 23.9 - - (573,000) (12.8)
Benefit absorbed by income from
discontinued operations - - - - 1,857,000 41.4
------------ ------- ------------ ------- ------------ -------
Total income tax provision
(benefit) $ - -% $ - -% $ - -%
============ ======= ============ ======= ============ =======
F-14
52
The significant components of deferred income tax expense (benefit) for
the years ended March 31, are as follows:
2001 2000 1999
------------- ------------- -------------
Change in valuation allowance for deferred tax assets $ 1,196,000 $ 159,000 $ (592,000)
Depreciation of plant and equipment 388,000 (229,000) (138,000)
Amortization of goodwill and intangibles (11,000) 3,000 78,000
Change in allowance for doubtful accounts (64,000) (45,000) 79,000
Inventory differences 63,000 (52,000) (24,000)
Effect of net operating loss carryforwards (1,568,000) - 593,000
Other differences, net (4,000) 164,000 4,000
------------ ----------- ----------
Total deferred income tax expense (benefit) $ - $ - $ -
============ =========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31 are as follows:
2001 2000 1999
------------- ------------- -------------
Deferred Tax Assets
Net operating losses $ 6,538,000 $ 4,970,000 $ 4,970,000
Inventory, principally due to additional cost
inventoried for tax purposes and financial 249,000 312,000 260,000
statement allowances
Goodwill and intangible assets, principally due to
amortization differences 161,000 150,000 254,000
Accruals for financial reporting purposes 157,000 116,000 30,000
Alternative minimum tax credit carryforwards 33,000 83,000 83,000
Accounts receivable, due to allowance for doubtful
accounts 347,000 283,000 238,000
Other differences, net 13,000 - 22,000
----------- ------------ ------------
Net deferred tax assets 7,498,000 5,914,000 5,857,000
Deferred Tax Liabilities
Plant and equipment, principally due to depreciation
differences 908,000 520,000 622,000
----------- ------------ ------------
Net deferred tax assets before valuation allowance 6,590,000 5,394,000 5,235,000
Valuation allowance (6,590,000) (5,394,000) (5,235,000)
----------- ------------ ------------
Net deferred tax assets $ - $ - $ -
=========== ============ ============
Based on the Company's current operating income and expectations for the
future, management has determined that future income will not more
likely than not be sufficient to fully recognize all deferred tax assets
existing at March 31, 2001. Accordingly, the Company does not recognize
any carrying value of net deferred tax assets.
Net operating loss carryforwards approximating $17,200,000 are available
to offset future United States federal taxable income, and expire from
2012 through 2020. In addition, net operating losses on foreign
operations of approximately $2,300,000 are available to the Company to
offset future foreign taxable income, subject to foreign tax rules.
F-15
53
NOTE 10 - STOCKHOLDERS' EQUITY
REINCORPORATION - 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. These consolidated financial statements retroactively
reflect the change in par value of the Company's common stock for all
periods presented.
STOCK OPTION AND INCENTIVE PLANS - As of March 31, 2001, the Company had
reserved 4,500,000 shares of common stock for issuance to key employees,
officers and directors pursuant to the 1999 Stock Option Plan. Options
granted under the Plan qualify as incentive stock options and will
generally not be taxable to the holder until the share subject to the
option is ultimately sold by the holder of the option. Options to
purchase the Company's common stock are granted at a price equal to or
greater than the market price of the stock at the date of grant, and are
exercisable pursuant to the terms of the grant. All options expire no
more than ten years after the date of grant. Compensation expense
recognized in the accounts related to stock options during the years
ended March 31, 2001 and 2000 was $125,676 and $132,944, respectively.
No compensation expense was recognized during the year ended March 31,
1999.
Pro forma information regarding net income (loss) and income(loss) per
share is required by Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation. The pro forma information
recognizes, as compensation, the estimated present value of stock
options granted using an option valuation model. Pro forma income (loss)
per share amounts also reflect an adjustment for an assumed purchase of
stock from proceeds deemed obtained from the issuance of stock options
that are dilutive. The weighted fair value of options issued during the
years ended March 31, 2001 and 2000 is estimated at $0.29 and $0.30,
respectively per option.
The following assumptions were used during the years ended March 31 to
estimate the fair value of the options:
2001 2000 1999
---- ---- ----
Risk-free interest rate 5.81% 5.06% 5.19%
Dividend yield rate -% -% -%
Price volatility 100% 99% 205%
Weighted average expected life of options 2.0 yr. 2.0 yr. 0.5 yr
Management believes that the assumptions used in the option pricing
model are highly subjective and represent only one estimate of possible
value, as there is no active market for the options granted. The fair
value of the options granted that are recognized in pro forma net income
is shown below:
Pro forma disclosures for the years ended March 31 are as follows:
2001 2000 1999
---- ---- ----
Net income (loss) as reported $ (5,006,834) $ 236,153 $ 979,074
Additional compensation expense for fair value of
stock options 320,909 156,618 36,000
Pro forma net income (loss) $ (5,327,743) $ 79,535 $ 943,074
Pro forma net income (loss) per share
Basic $ (0.15) $ - $ 0.10
Diluted $ (0.15) $ - $ 0.10
F-16
54
The changes in stock options outstanding are as follows:
Nonqualified Weighted
Common Stock Option Price
Options Per Share
------------- -------------
BALANCE, March 31, 1998 173,500 $ 2.18
Granted 100,000 0.47
Exercised - -
Expired (10,000) 0.83
----------- ----------
BALANCE, March 31, 1999 263,500 1.51
Granted 1,710,000 0.41
Exercised - -
Expired (163,500) 2.14
----------- ----------
BALANCE, March 31, 2000 1,810,000 0.41
Granted 1,505,000 0.42
Exercised - -
Expired (100,000) 0.47
----------- ----------
BALANCE, March 31, 2001 3,215,000 $ 0.41
=========== ==========
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------------- --------------- ----------------- ---------------- --------------- ------------
Up to $0.50 3,215,000 9.42 years $0.41 1,542,500 $0.41
WARRANTS - Effective November 17, 1999, the Company issued warrants to
Culverwell & Co. to purchase 135,000 shares of common stock at an
exercise price of $.33 1/3 per share, exercisable until August 31, 2001.
These warrants remain outstanding at March 31, 2001.
In addition, as further described in Note 12, warrants to purchase
100,000 shares of common stock at $0.45 per share were outstanding at
March 31, 2001. These warrants expire as of April 30, 2002.
NOTE 11 - INCOME (LOSS) PER SHARE
The numerators and denominators of basic and diluted income (loss) per
share during the years ended March 31 are as follows:
2001 2000 1999
---------------- --------------- -----------------
Net income (loss) (numerator) $ (5,006,834) $ 236,153 $ 979,074
============= ============ ===========
Shares used in the calculation (denominator)
Weighted average shares outstanding 35,283,729 19,442,115 9,857,252
Effect of dilutive stock options and warrants - 1,157,045 -
------------- ------------ -----------
Diluted shares 35,283,729 20,599,160 9,857,252
============= ============ ===========
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 during the
year ended March 31, 2001 because to do so would have been
anti-dilutive, were 3,450,000 shares.
F-17
55
NOTE 12 - RELATED PARTY TRANSACTIONS
On April 19, 2000, the Company issued a $1,000,000 subordinated note to
the Company's Chief Executive Officer, with the proceeds used to fund
the Company's operations. The note bore interest at US Bank's prime
lending rate, and the note was 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 warrants to purchase 100,000 shares of common stock at
$0.45 per share until April 30 2002. These warrants were subsequently
purchased by L & D Investments, of which Mr. Jack Stein, a director is a
trustee. The fair market value of these warrants of $67,000 was recorded
as interest expense during the year ended March 31, 2001.
The Company leased a warehouse from Mr. William T. Graham, a director,
under the terms of a lease which expired December 31, 2000. Total rent
paid under the terms of the lease was approximately $64,000 and $20,253
during the years ended March 31, 2001 and 2000, respectively. No rent
was paid during the year ended March 31, 1999.
The Company leased office space from Mr. James L. Dorman, CEO President
and Director, under the terms of a lease which expired December 31,
2000. Total rent paid under the terms of the lease was approximately
$15,500 and $11,688 during the years ended March 31, 2001 and 2000,
respectively. No rent was paid during the year ended March 31, 1999.
Additionally, the Company leased certain equipment from a leasing
company of which Mr. Dorman was an officer and major shareholder. Total
lease payments amounted to $46,968 and $12,737 during the years ended
March 31, 2001 and 2000, respectively. No rent was paid during the year
ended March 31, 1999.
The Company engaged the services of Michael Best & Friedrich of Madison,
Wisconsin as general legal counsel during the years ended March 31, 2001
and 2000. Mr. Tod B. Linstroth, senior partner of Michael Best &
Freidrich, is also Corporate Secretary of the Company. The Company
incurred a total of $347,198 and $426,992 in legal expenses with Michael
Best & Friedrich during the years ended March 31, 2001 and 2000,
respectively. No expenses were incurred during the year ended March 31,
1999.
The Company formed a supply relationship with KAPCO, an Ohio Corporation
owned by Mr. C. Joseph Barnett, Director of the Company, in January of
2001. KAPCO supplies the Company with blank white business and greeting
cards, and won this business based on competitive price and terms from
the former supplier. Products purchased from KAPCO during the year ended
March 31, 2001 amounted to $112,261.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has a retirement savings plan, which permits eligible
employees to make contributions to the plan on a pretax salary reduction
basis in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. The Company makes a matching contribution of 10%
of the employee's pretax contribution. Eligible employees may contribute
up to 18% of their pretax compensation. Total expense related to this
plan was $4,919, $9,801 and $16,884 during the years ended March 31,
2001, 2000 and 1999, respectively.
NOTE 14 - OTHER COMMITMENTS AND CONTINGENCIES
The Company is occasionally subject and party to various legal actions
arising in the normal course of business. The Company believes the
ultimate liability, if any, arising from such claims or contingencies is
not likely to have a material adverse effect on the Company's
consolidated results of operations or financial condition.
F-18
56
NOTE 15- INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $7,188,772 and $6,053,810 at March 31,
2001 and 2000, respectively. The Company's trade customers are
concentrated in the retail office products industry and mass market
retail stores. Amounts due from three customers approximated 82% and 69%
of the total accounts receivable at March 31, 2001 and 2000,
respectively.
Historically, a substantial portion of the Company's sales have been to
a limited number of customers. Concentration of sales to the Company's
five largest customers were 80%, 65% and 60% during the years ended
March 31, 2001, 2000 and 1999, respectively. The Company expects that
sales to relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes
that its financial results depend in significant part upon the success
of these few customers. Although the composition of the group comprising
the Company's largest customers may vary from period to period, the loss
of a significant customer or any reduction in orders by any significant
customers, including reductions due to market, economic or competitive
conditions in the designer stationary or specialty papers industry, may
have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company purchases goods from many vendors. One vendor accounted for
a significant portion of the Company's total merchandise purchases
during the years ended March 31, 2001, 2000 and 1999. The Company
purchases commodity paper and other related products from this
broker/vendor that could be supplied by other sources. The Company does
not consider itself dependent on any single source for materials to
manufacture its products.
Financial information relating to foreign and domestic operations and
export sales is as follows. Sales are attributed to the country where
product delivery is specified by the customer.
Years ended March 31,
--------------------------------------------------
Net sales to domestic and foreign customers 2001 2000 1999
--------------- --------------- ---------------
North America $ 33,673,253 $ 23,602,305 $ 16,488,463
United Kingdom 1,528,235 2,152,093 1,021,474
Other European Countries - - 1,054,000
Australia 1,400,576 1,499,884 1,491,077
------------- ------------- -------------
Total $ 36,602,065 $ 27,254,782 $ 20,055,014
============= ============= =============
Operating profit (loss)
North America $ (3,360,736) $ 937,632 $ (2,581,464)
United Kingdom (476,487) (344,869) (550,609)
Australia 6,743 87,378 (34,090)
------------- ------------- -------------
Total $ (3,830,480) $ 680,141 $ (3,166,163)
============= ============= =============
March 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Property, Plant and Equipment
United States $ 8,855,324 $ 9,125,809 $ 9,778,864
United Kingdom 39,938 126,159 108,793
Australia 81,973 52,896 57,977
------------- ------------- ------------
Total $ 9,007,234 $ 9,304,864 $ 9,945,634
============= ============= ============
F-19
57
International sales accounted for approximately 21%, 25% and 36% of the
Company's total net sales during he years ended March 31, 2001, 2000,
and 1999, respectively. International sales were concentrated in Canada,
Europe and Australia. As a result of such international sales, a
significant portion of the Company's revenues will be subject to certain
risks, including unexpected changes in regulatory requirements, exchange
rates, tariffs and other barriers, political and economic instability
and other risks.
NOTE 16 - SUBSEQUENT EVENT
The Company issued a total of $1,200,000 in 10% Convertible Secured
Subordinated Notes dated April 27, 2001. The notes bear interest at the
rate of 10%, are due and payable on or before April 27, 2003 and are
subordinated to indebtedness to the Company's senior bank lender. At the
option of the holder, the notes may be converted into shares of the
Company's common stock at the rate of $.20 per share of stock, in the
minimum amount of $10,000 and $5,000 increments thereafter. The following
officers and directors of the Company acquired notes pursuant to the
offering:
James L. Dorman CEO & Director $100,000
William T. Graham Director 50,000
Jack Stein Director 100,000
Roger R. Mayer Director 50,000
--------
$300,000
========
F-20
58
SCHEDULE II
GEOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
YEAR ENDED MARCH 31 APRIL 1 ADDITIONS DEDUCTIONS MARCH 31
------------------- ---------- ----------- ---------- ----------
Allowance for Doubtful Accounts,
Sales Returns and Cash Discounts
Years ended March 31, 1999 $ 930,958 $ 1,511,520 $1,545,815 $ 896,663
Years ended March 31, 2000 896,663 1,204,618 375,039 1,587,469
Years ended March 31, 2001 1,587,469 2,608,112 3,153,885 1,041,696