<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q/A
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 0-26756
------------------------
GEOGRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
WYOMING 87-0305614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1750, 98231
BLAINE, WA
(Address of principal executive (Zip code)
offices)
</TABLE>
Registrant's telephone number including area code: (360) 332-6711
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
The Registrant had 9,467,877 shares of common stock, no par value,
outstanding at September 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
PAGE 1 OF 8 PAGES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Amendment and by this reference incorporated herein the consolidated balance
sheets as of June 30, 1997 (unaudited) and March 31, 1997, the unaudited
statements of operations for the three months ended June 30, 1997 and June 30,
1996, and the unaudited consolidated statements of cash flows for the three
months ended June 30, 1997 and June 30, 1996, together with the notes thereto
(collectively, the "Financial Statements"). The Financial Statements are filed
herewith in replacement of the financial statements originally filed with the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997 (the "Quarterly Report") in order to correct the reference in the Company's
consolidated balance sheets as of June 30, 1997 and March 31, 1997 to the number
of shares of the Company's common stock, no par value, issued and outstanding at
March 31, 1997. Except as set forth in the immediately preceding sentence, the
Financial Statements are identical to the financial statements originally filed
with the Quarterly Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is being included in this Amendment in order to
correct the references to fiscal years contained in the last two sentences of
the paragraph under the heading "Overview-- Overstatement of Gross Profits and
Inventory." Except as set forth in the immediately preceeding sentence, the
following discussion is identical to the discussion under Item 2 of the
Quarterly Report. The following discussion should be read in conjunction with
the Financial Statements appearing elsewhere in this Amendment.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning trends relating to the Company's profitability and gross
profits margins; the ability of the Company to increase the size and
capabilities of its accounting department, to implement a management information
system, including an electronic data interchange system, adequate to meet
operations requirements in the future and to improve its internal controls; the
ability of the Company to refinance its existing revolving credit facility, to
identify potential buyers for all or part of its business or to raise additional
debt or equity financing sufficient to meet its working capital requirements;
and the ability of the Company to continue operations as a going concern.
Relevant risks and uncertainties include, but are not limited to, slower than
anticipated growth of the pre-print market, loss of certain key customers,
insufficient market acceptance of the Company's specialty papers products;
unanticipated actions, including price reductions, by the Company's competitors;
unanticipated increases in the costs of raw materials used to produce the
Company's products; loss of favorable trade credit, supply terms, reliable and
immediately available raw material supply and other favorable terms with certain
key vendors; greater than expected costs incurred in connection with the
implementation of a management information system; inability to implement an
electronic data interchange system adequate to support the Company's operations;
failure to realize expected economic efficiencies of the Company's automated
production equipment; unexpected increases in the costs of production as a
result of collective bargaining arrangements; unfavorable determinations of
pending lawsuits or disputes; and inability to secure additional working capital
when and as needed. Additional risks and uncertainties include those described
under "Risk Factors" in Part I of the Company's Annual Report on Form 10-K for
the year ended March 31, 1997 and those described from time to time in the
Company's other filings with the Securities and Exchange Commission, press
releases and other communications.
Page 2 of 8 Pages
<PAGE>
OVERVIEW
Geographics was incorporated as a Wyoming corporation on September 20, 1974.
From its inception until fiscal 1991, the Company was engaged exclusively in the
manufacture and wholesale marketing of various rub-on and stick-on lettering,
stencils, graphics arts products and other signage products. In 1991, the
Company began the development of "pre-print" or "specialty" paper products
consisting of paper on which photographs or other art images are printed and
which is then cut to size. In 1992, the Company introduced its first specialty
paper product under the Geopaper brand name. The Company now has several
specialty paper products using Geopaper designs, including stationery, business
cards, brochures, memo pads and paper cubes, which, in North America, are sold
primarily to office supply superstores and mass market retailers, and which are
also distributed internationally through the Company's subsidiaries in Canada,
Europe and Australia. The specialty papers group now constitutes the Company's
principal business, with approximately 79% and 71% of the Company's total sales
in the quarter ended June 30, 1997 and the year ended March 31, 1997,
respectively, attributable to sales of Geopaper products. Primarily as a result
of sales generated by the specialty papers group, the Company has experienced
substantial growth, with total sales increasing from $6,900,875 for fiscal 1994
to $23,840,506 for fiscal 1997, an increase of 245%.
Primarily to develop its specialty papers group, the Company has made
substantial investments to expand its facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company has experienced
delays, set-backs and unanticipated additional expenses in the installation of
the production equipment and the management information system. Moreover, the
management information system has failed to perform as promised by vendors. As a
result, the Company has not yet realized the originally anticipated economic
benefits and efficiencies from these capital expenditures. These unanticipated
expenses and operational inefficiencies, together with price reductions for the
Company's products and cost increases for certain raw materials, have had a
negative impact on the Company's gross margins and contributed to a substantial
net loss for fiscal 1997 and the first quarter of fiscal 1998. In addition,
since May 1997, the Company has been in default of several financial covenants
under its revolving credit facility, the Company's primary source of working
capital, and borrowings under the facility have exceeded permitted borrowing
base limitations. The existence of these defaults constitutes a default under
the Company's mortgage loans and certain equipment lease facilities. The report
of the Company's auditors dated August 26, 1997 relating to the Company's
Consolidated Financial Statements for the fiscal year ended March 31, 1997
states that the Company's fiscal 1997 losses and non-compliance with covenants
under its revolving credit facility raise substantial doubt about the Company's
ability to continue as a going concern. See "--Liquidity and Capital Resources."
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Furthermore,
although the Company's lender has permitted borrowings under the revolving
credit facility in spite of existing defaults, there can be no assurance that it
will continue to do so. Accordingly, the Company is continuing to seek extended
payment terms from its vendors, delaying purchases of raw materials, instituting
internal cost reduction measures and taking other steps to conserve operating
capital. As a result, the Company's vendors may place the Company on credit hold
or take other actions against the Company, including the termination of their
relationship with the Company or the initiation of collection proceedings. In
addition, the Company is actively pursuing possible sources of additional
capital and has engaged an investment banker to assist in the evaluation and
pursuit of financing transactions, which could include the issuance of debt or
equity securities or the sale of all or part of the
Page 3 of 8 Pages
<PAGE>
Company's assets. However, as of the date of this Amendment, the Company had
received no firm commitments with respect to any such transaction and there can
be no assurance that any such transaction will be identified. Further, there can
be no assurance that the Company will be able to obtain additional sources of
working capital when and as needed or that the terms of any such funding will be
acceptable to the Company. Any equity financing may involve substantial dilution
to the interests of the Company's shareholders. See "--Liquidity and Capital
Resources."
OVERSTATEMENT OF GROSS PROFITS AND INVENTORY. In connection with the
Company's audit for the fiscal year ended March 31, 1997, management determined
that, during 1997, the use of certain accounting procedures and estimates based
on historical results caused an overstatement of gross margin and inventories on
an interim basis. Although the Company believes that the overstatements occurred
over the course of fiscal 1997, it has determined that, given the complexity of
the issues involved, it is not possible to allocate accurately the necessary
adjustment to any interim quarterly period. As a result, the adjustment to gross
margin and inventories was made at the end of fiscal 1997, and previously
reported quarterly information for fiscal 1997 has not been restated. The
cumulative effect in fiscal 1997 of the overstatement, when combined with
reserves for obsolete inventory, was a reduction of both gross margin and
inventory of approximately $5,600,000. The effect that an interim allocation of
such adjustments might have had on the results for the first quarter of fiscal
1997, if any, are not reflected in the period-to-period comparisons for gross
margin included in this Amendment. Accordingly the comparisons of gross margin
and inventory for each of the first three quarters of fiscal 1997 with the
corresponding quarters of fiscal 1998 and 1996 may not be entirely meaningful.
WEAKNESSES IN INTERNAL CONTROLS. In connection with the Company's audit for
the fiscal year ended March 31, 1997, management determined that several
weaknesses in the Company's internal controls occurred during fiscal 1997.
Management is taking steps to improve its internal controls, including
increasing the size and capabilities of its accounting department and improving
its management information systems. However, there can be no assurance that the
Company will be able to implement these steps or that the Company will not
encounter other internal control weaknesses. The failure of the Company's
accounting and finance systems to provide accurate information necessary to
monitor the Company's financial position, results of operations and liquidity
could have a material adverse effect on the Company's business, financial
condition and results of operations.
SEASONALITY. A significant portion of the Company's customer orders are
placed between August and October of each year for shipment during the Company's
third fiscal quarter, which includes the Christmas 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.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate
significantly from period to period as a result of a variety of factors,
including product returns, purchasing patterns of consumers, the length of the
Company's sales cycle to key customers and distributors, the timing of the
introduction of new products and product enhancements by the Company and its
competitors, technological factors, variations in sales by product and
distributions channel, and competitive pricing. Consequently, the Company's
revenues may vary significantly by quarter and the Company's operating results
may experience significant fluctuations.
BACKLOG. The Company's backlog of orders as of September 18, 1997 was
$2,010,643. Historically, the Company has generally filled its backlog of orders
within 2 weeks. The Company includes in backlog the value of all purchase orders
received from customers for product not yet shipped and invoiced. Because the
Company only recently implemented internal controls necessary to determine
backlog, the Company is unable to determine backlog at March 31, 1997 or at the
end of any prior period. The Company's backlog is subject to fluctuations as a
result of seasonality in the Company's business and other factors and is,
therefore, not necessarily indicative of future sales. There can be no assurance
that current
Page 4 of 8 Pages
<PAGE>
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.
COLLECTIONS OF ACCOUNTS RECEIVABLE. Difficulties encountered by the Company
in fiscal 1997 in connection with the installation and implementation of a new
electronic data intercharge ("EDI") software package resulted in significant
delays in the required electronic delivery of invoices to certain key customers.
These delays resulted in significant corresponding delays in the collection of
accounts receivable during the third and fourth quarters of fiscal 1997 which
contributed to a substantial increase in the Company's trade receivables balance
and negative operating cash flow at the end of fiscal 1997. While the Company
continues to work to improve its ability to reliably invoice via EDI, there can
be no assurance that the Company will be successful in adequately improving its
collection of accounts receivable in the foreseeable future. Continued invoicing
or collection difficulties could have a material adverse effect on the Company's
business, financial condition or results of operations.
MAINTENANCE OF LARGE INVENTORY. As of June 30, 1997, the Company maintained
an inventory of lettering, signage and specialty papers of $8,702,176. While the
Company believes that the maintenance of an extensive inventory provides it
substantial flexibility in responding to incoming orders, enhances its
reputation as a major supplier in the industry and offers certain economies of
scale in its purchasing program, the maintenance of an extensive inventory
requires a substantial outlay of funds which may not be recovered for extended
periods of time. In addition, the Company has generally observed that raw
materials prices change more rapidly than the 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, the Company's inventory may become less marketable, which may
require the Company to dispose of such inventory on an unprofitable basis. The
Company has made an effort to address these problems by increasing the reserves
for obsolete inventory during fiscal 1997 from $100,000 to $1,290,000. The
reserve remains at $1,290,000 as of June 30, 1997. However, if the Company were
not able to recover a substantial portion of its investment in inventory, this
would have a material adverse effect on the Company's business, financial
condition and results of operations.
RESULTS OF OPERATIONS
SALES. Sales increased 23% to $7,608,260 in the quarter ended June 30, 1997
from $6,171,067 in the quarter ended June 30, 1996. The increase in sales
compared to the same period in the prior year was due to increased sales of the
Company's products to major mass market retailers, and the continued market
acceptance of the Company's Geopaper products, including Geoposterboards.
Geopaper products were responsible for 79% of sales for the quarter ended
June 30, 1997, compared to 67% for the same period a year earlier. Sales of
Geopaper increased 44% to approximately $5,985,000 from approximately $4,150,000
for the periods ended June 30, 1997 and June 30, 1996, respectively.
Sales of the Company's lettering and signage products decreased 20% to
approximately $1,625,000 for the quarter ended June 30, 1997 compared to
approximately $2,020,000 for the quarter ended June 30, 1996. The Company
expects this product group to continue to decrease as a percentage of sales and
that sales of lettering and signage products as an industry will continue to
decline over time as the use of personal computers increases. The lettering and
signage products have decreased as a percentage of total sales to 21% from 33%
for the three months ended June 30, 1997 and 1996, respectively.
International sales of Geographics products were $1,684,119 for the quarter
ended June 30, 1997, an increase of 40% over international sales of $1,199,521
for the quarter ended June 30, 1996. International sales of Geographics products
represented 23% of the Company's total sales for the quarter ended June 30,
1997, compared to 19% of total sales for the same period in the prior year.
Page 5 of 8 Pages
<PAGE>
GROSS MARGIN. Gross profit margin as a percentage of sales was 7% for the
quarter ended June 30, 1997, compared to 39% for the same period in the prior
year. The decrease was primarily due to price reductions for the Company's
specialty paper products implemented in August 1996 and April 1997, coupled with
modest cost increases and a continuing shift in mix of sales to lower margin
products. In connection with the Company's audit for the fiscal year ended March
31, 1997, management determined that, during 1997, the use of certain accounting
procedures and estimates based on historical results caused an overstatement of
gross margin and inventories on an interim basis. The Company has determined
that, given the complexity of the issues involved, it is not possible to
allocate accurately the necessary adjustment to any interim quarterly period. As
a result, the adjustment to gross margin and inventories was made at the end of
fiscal 1997, and quarterly information for fiscal 1997 has not been restated.
Accordingly, gross profit margin for the quarter ended June 30, 1996 does not
reflect the effect, if any, that an interim allocation of this adjustment might
have had on the results for such period. The cumulative effect in fiscal 1997 of
the overstatement, when combined with reserves for obsolete inventory, was a
reduction of both gross margin and inventory of approximately $5,600,000. See
"--Overview--Overstatement of Gross Margin and Inventories."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
general and administrative expenses, which consist of payroll, advertising,
commissions, administrative, accounting, legal and other costs, increased as a
percentage of sales during the quarter ended June 30, 1997 to 37%, as compared
to 33% during the same period in the prior year. The increase as a percentage of
sales was primarily the result of increased costs associated with advertising
and other rebates and promotions to key customers.
INTEREST EXPENSE. The Company's interest expense for the quarter ended June
30, 1997 increased 224% to $428,324 compared to $190,771 for the same period in
the prior year. The increase in interest expense was primarily the result of
substantially increased borrowings under the Company's revolving credit facility
during the current year, due in part to delays in the collection of accounts
receivable, which resulted from problems encountered by the Company in the
electronic delivery of invoices to major customers. See "--Collections of
Accounts Receivable". Interest costs also increased as a result of additional
borrowings in the form of capital leases and mortgage loans related to equipment
purchases and expansions to the Company's Blaine manufacturing facility made
during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers group,
capital expenditures relating to the purchase and installation of automated
production equipment and a management information system, operating losses and
other factors, the Company has required, and continues to require, substantial
external working capital. Moreover, subsequent to the end of fiscal 1997, the
Company has experienced working capital short-falls which have required the
Company to delay payments to certain vendors, delay purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital. During fiscal 1997, operating losses totaled $6,261,298, and the
Company experienced negative operating cash flows of $6,601,926. During the
quarter ended June 30, 1997, operating losses totaled $2,288,409, and the
Company experienced negative operating cash flows of $1,107,618.
At the date of this Amendment, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. The revolving credit facility permits borrowings of up to $12.0
million subject to a borrowing base limitation of 80% of the value of the
Company's eligible accounts receivable and 55% of the value of its inventory,
net of certain reserves. Borrowings under the facility bear interest at the
prime rate and are secured by substantially all of the Company's assets. Under
the terms of the facility, the Company is required to comply with a number of
financial covenants relating to, among other things, the maintenance of minimum
net worth, debt-to-equity ratios and cash flow coverage ratios.
Page 6 of 8 Pages
<PAGE>
Since May 1997, the Company has failed to comply with the net worth,
debt-to-equity ratios and cash flow coverage ratios under the revolving credit
facility, and borrowings under the facility exceeded the permitted borrowing
base limitations. The Company's lender has also provided the Company with
several mortgage loans and equipment loans, and the existence of the defaults
under the revolving credit facility constitutes a default under these other
loans. The report of the Company's auditors dated August 26, 1997 relating to
the Company's Consolidated Financial Statements for the fiscal year ended March
31, 1997 states that the Company's fiscal 1997 losses and non-compliance with
covenants under its revolving credit facility raise substantial doubt about the
Company's ability to continue as a going concern. The Company's Consolidated
Financial Statements for the fiscal quarter ended March 31, 1997 (as well as the
Unaudited Consolidated Financial Statements for the fiscal quarter ended June
30, 1997 included in this Amendment) 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.
The Company entered into a forbearance agreement with its lender, effective
August 31, 1997, pursuant to which the lender agreed to extend the expiration
date of the revolving credit facility to October 31, 1997, to increase the $12.0
million commitment by a $300,000 stand-by letter of credit, to permit borrowings
of up to $2.25 million in excess of the applicable borrowing base limitation
(not to exceed the $12.0 million revolving credit facility commitment) and to
forbear from asserting its rights with respect to the Company's non-compliance
with the financial covenants as well as the defaults under the Company's
mortgage loans and equipment loans. However, in September 1997, the Company was
required to request borrowings in excess of the amended borrowing limits in
order to meet payroll and other expenses. Although the Company's lender
permitted the requested borrowings, it has not formally waived this additional
default. There can be no assurance that the lender will continue to permit
borrowings under the revolving credit facility, that the lender will agree to
extend the facility beyond the October 31, 1997 expiration date or that the
Company will be able to refinance or replace the facility on acceptable terms
when and as needed.
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Furthermore,
although the Company's lender has permitted borrowings under the revolving
credit facility, there can be no assurance that it will continue to do so.
Accordingly, the Company is continuing to seek extended payment terms from its
vendors, delaying purchases of raw materials, instituting internal cost
reduction measures and taking other steps to conserve operating capital. As a
result, the Company's vendors may place the Company on credit hold or take other
actions against the Company, including the termination of their relationship
with the Company or the initiation of collection proceedings. In addition, the
Company is actively pursuing possible sources of additional capital and has
engaged an investment banker to assist in the evaluation and pursuit of
financing transactions, which could include the issuance of debt or equity
securities or the sale of all or part of the Company's assets. However, as of
the date of this Amendment, the Company had received no firm commitments with
respect to any such transaction and there can be no assurance that any such
transaction will be identified. Further, there can be no assurance that the
Company will be able to obtain additional sources of working capital when and as
needed or that the terms of any such funding will be acceptable to the Company.
Any equity financing may involve substantial dilution to the interests of the
Company's shareholders.
The failure to obtain an increase in borrowing availability under, 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.
Page 7 of 8 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized on this 24th day of
September 1997.
<TABLE>
<S> <C> <C>
GEOGRAPHICS, INC.
By: /s/ RONALD S. DEANS
-----------------------------------------
Ronald S. Deans
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER
AND SECRETARY
</TABLE>
Page 8 of 8 Pages
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets as of June 30, 1997 and March 31, 1997.......................................... F-2
Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996..................... F-3
Consolidated Statements of Cash Flows for the three months ended June 30, 1997 and 1996..................... F-4
Notes to Consolidated Financial Statements.................................................................. F-5
</TABLE>
F-1
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997 AND MARCH 31, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash............................................................................ 332,381 408,757
Accounts receivable
Trade receivables, net........................................................ 7,133,293 6,654,500
Other receivables............................................................. 884,256 993,243
Inventory, net of allowance for obsolete inventory of $1,290,000 at June 30 and
March 31, 1997................................................................ 8,702,176 9,457,874
Prepaid expenses, deposits, and other current assets............................ 1,230,444 893,483
------------- --------------
Total current assets........................................................ 18,282,550 18,407,857
PROPERTY, PLANT AND EQUIPMENT, NET................................................ 11,111,317 10,832,231
OTHER ASSETS...................................................................... 1,021,515 1,005,613
------------- --------------
TOTAL ASSETS...................................................................... $ 30,415,382 $ 30,245,701
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts................................................................. $ 798,759 $ 467,445
Note payable to bank............................................................ 11,248,225 8,649,390
Accounts payable................................................................ 3,567,523 2,421,768
Accrued liabilities............................................................. 2,148,554 2,145,030
Notes payable to officers and directors......................................... -- 850,000
Current portion of long-term debt............................................... 3,400,293 3,472,674
------------- --------------
Total current liabilities..................................................... 21,163,354 18,006,307
LONG-TERM DEBT.................................................................... 4,112,868 4,322,371
------------- --------------
Total liabilities............................................................. 25,276,221 22,328,678
------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
No par common stock--100,000,000 authorized, 9,467,877 and 9,467,877 issued and
outstanding at June 30, 1997 and March 31, 1997, respectively................. 15,573,434 15,574,018
Foreign currency translation adjustment......................................... (117,984) (76,478)
Retained earnings (accumulated deficit)......................................... (10,316,289) (7,580,517)
------------- --------------
Total stockholders' equity.................................................... 5,139,161 7,917,023
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 30,415,382 $ 30,245,701
------------- --------------
------------- --------------
</TABLE>
See Accompanying Notes to These Financial Statements.
F-2
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
SALES.............................................................................. $ 7,608,260 $ 6,171,067
COST OF SALES...................................................................... 7,048,200 3,726,301
------------- -------------
Gross margin..................................................................... 560,060 2,444,766
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 2,848,469 2,034,005
------------- -------------
Income from operations........................................................... (2,288,409) 410,761
OTHER INCOME (EXPENSE)
Interest Expense................................................................. (428,324) (190,771)
Other............................................................................ (19,040) (3,776)
------------- -------------
(447,364) (194,547)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES.................................... (2,735,772) 216,214
INCOME TAX PROVISION............................................................... -- 70,037
------------- -------------
NET INCOME......................................................................... $ (2,735,772) $ 146,177
------------- -------------
------------- -------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary.......................................................................... $ (.29) $ 0.02
------------- -------------
------------- -------------
Assuming full dilution........................................................... $ (.29) $ 0.02
------------- -------------
------------- -------------
SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary.......................................................................... 9,467,877 8,965,795
------------- -------------
------------- -------------
Assuming full dilution........................................................... 9,467,877 8,968,244
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................. $ (2,735,772) $ 146,177
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES.......
Depreciation and amortization..................................................... 428,205 367,638
Deferred income taxes............................................................. -- (9,865)
(Gain) loss on sales of property and equipment.................................... 1,740 1,085
Reserve for impairment on EDP installation-in-progress............................
Changes in Noncash Operating Assets and Liabilities
Trade receivables................................................................. (478,793) 584,643
Related party receivables......................................................... -- 899,422
Other receivables................................................................. 108,987 (131,012)
Inventory......................................................................... 755,698 (2,771,078)
Prepaid expenses, deposits and other current assets............................... (336,962) (895,026)
Accounts payable.................................................................. 1,145,755 (346,678)
Accrued liabilities............................................................... 3,524 356,569
Income tax payable................................................................ -- (145,276)
------------ -----------
Net cash flows from operating activities...................................... (1,107,618) (1,943,203)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts....................................................... 331,314 835,117
Net borrowings on note payable to bank............................................ 2,598,835 (4,539,986)
Proceeds from long-term debt borrowings........................................... -- 225,000
Repayment of long-term debt....................................................... (281,884) (96,254)
Repayments of notes payable to officers and directors............................. (850,000) (121,672)
Net Proceeds (costs) from issuance of common stock................................ (584) 6,501,056
Foreign currency translation...................................................... (41,506) 3,719
------------ -----------
Net cash flows from financing activities...................................... 1,756,175 2,806,980
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment................................................... (674,956) (869,440)
Proceeds from sales of equipment.................................................. -- 1,887
Net advances from (repayments to) partnerships.................................... -- 25,226
Increase in other assets.......................................................... (49,977) (18,882)
------------ -----------
Net cash flows from investing activities...................................... (724,934) (881,209)
------------ -----------
NET CHANGE IN CASH.................................................................... (76,376) (17,342)
CASH, beginning of quarter............................................................ 408,757 50,028
CASH, end of quarter.................................................................. $ 332,381 $ 32,596
------------ -----------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment.................................... $ 0 $ 956,160
------------ -----------
------------ -----------
</TABLE>
See Accompanying Notes to These Consolidated Financial Statements
F-4
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements of
Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such interim statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and the results of operations and cash flows for
the interim periods presented. The results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's consolidated financial statements and notes thereto for the fiscal
year ended March 31, 1997.
The consolidated financial statements include the accounts of Geographics
and its wholly-owned subsidiaries: Geographics Marketing Canada Inc.,
Geographics (Europe) Limited and Geographics Australia, Pty. Limited. All
intercompany balances and transactions have been eliminated.
Certain of the Company's subsidiaries calculated cost of sales using an
estimated gross profit method for interim periods. Cost of sales at these
subsidiaries are adjusted based on physical inventories which are performed no
less than once a year.
NOTE 2--COMMITMENTS AND CONTINGENCIES
LEASES--The Company conducts certain operations in leased facilities, under
leases that are classified as operating leases for financial statement purposes.
The leases provide for 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 between August
1996 and February 2006. In addition to the base lease term, the Company has
various renewal option periods. In addition, certain equipment used in the
Company's operations is also leased under operating leases. A schedule of
noncancelable operating lease commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.......................................................... $ 365,103
1999.......................................................... 152,253
2000.......................................................... 67,403
2001.......................................................... 46,164
----------
$ 630,923
----------
----------
</TABLE>
EQUIPMENT DEPOSITS--On January 17, 1997, the Company placed an order for a
printing press and has a deposit of $219,000 which is included in other assets
at June 30, 1997. The cost of the press is approximately $2,190,000. The Company
obtained capital lease financing for this equipment in July 1997.
LITIGATION--In July 1997, three related class action suits were filed in the
United States District Court for the Western District of Washington against the
Company, its President, Chief Executive Officer and Chairman of its Board of
Directors, and the Company's former Vice President of Finance and Chief
Financial Officer (the "Defendants"). The suits allege that the Defendants
inflated the price of the Company's stock by intentionally or recklessly making
misrepresentations or omissions which deceived the
F-5
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--COMMITMENTS AND CONTINGENCIES (CONTINUED)
public about the Company's financial condition and prospects, thus misleading
shareholders who purchased shares between August 6, 1996 and June 12, 1997. The
complaints seek damages in unstated amounts.
Management intends to vigorously defend these complaints, however the
ultimate outcome of these actions cannot be predicted with certainty. The
Company owns insurance policies applicable to certain losses including costs of
defense. These insurance policies have an aggregate self-insurance retention of
$150,000. If the Company is determined to be liable for, or otherwise agrees to
settle or compromise, any claim, there is no assurance that any or all of such
liability, compromise or settlement would be covered by the Company's insurance.
If the amount of insurance is insufficient, or if the policies are determined to
be inapplicable, the Company could be required to make additional payment beyond
the self-insurance retention in the form of cash, indebtedness or equity
securities. A payment of this nature could have a negative material impact on
the Company's capital resources and issuance of additional equity securities
could have a negative material impact on the Company's existing shareholders.
The defense of this or any pending or future litigation, investigations or
disputes could result in substantial legal and professional costs to the
Company.
There are various additional claims, lawsuits, and pending actions against
the Company incident to the operations 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 effect on the Company's financial
position, results of operations or liquidity.
CONTINGENCY FOR YEAR 2000 ISSUES--The Company has not yet made an assessment
of the impact of the year 2000 on their computer software, hardware and other
systems, including those of vendors, customers and other third parties. The
potential expense to ensure that all of the computer and other systems are year
2000 compliant cannot be determined until such an assessment is made.
EMPLOYMENT CONTRACTS--Subsequent to year end, the Company entered into
employment contracts with certain employees for a period of up to three years.
The contracts provide for severance payments in the event these employees
terminate employment for certain specified reasons during the contract period.
NOTE 3--GOING CONCERN
As a result of the $7,950,301 loss incurred by the Company for the year
ended March 31, 1997, a decline in gross profit margins, the Company's failure
to comply with covenants under its line of credit and other factors, the report
of the Company's auditors, dated August 26, 1997, relating to the Company's
Consolidated Financial Statements for the year ended March 31, 1997 states that
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements have been prepared assuming the
Company will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements
F-6
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--GOING CONCERN (CONTINUED)
beyond mid-October 1997. Furthermore, although the Company's lender has
permitted borrowings under the Company's revolving credit facility, there can be
no assurance that it will continue to do so. Accordingly, the Company is
continuing to seek extended payment terms from its vendors, delaying purchases
of raw materials, instituting internal cost reduction measures and taking other
steps to conserve operating capital. As a result, the Company's vendors may
place the Company on credit hold or take other actions against the Company,
including the termination of their relationship with the Company or the
initiation of collection proceedings. In addition, the Company is actively
pursuing possible sources of additional capital and has engaged an investment
banker to assist in the evaluation and pursuit of financing transactions, which
could include the issuance of debt or equity securities or the sale of all or
part of the Company's assets. However, as of the date of this Amendment, the
Company had received no firm commitments with respect to any such transaction
and there can be no assurance that any such transaction will be identified.
Further, there can be no assurance that the Company will be able to obtain
additional sources of working capital when and as needed or that the terms of
any such funding will be acceptable to the Company. Any equity financing may
involve substantial dilution to the interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, 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.
F-7
