<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
-------- ------
Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
WYOMING 87-0305614
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (360) 332-6711
----------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON
STOCK, NO PAR VALUE
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ----
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of January 21, 2000 was $19,359,955 based on a closing sales price
of $0.71875 per share on the NASDAQ OTC Bulletin Board on such date.
The number of shares outstanding of the registrant's common stock, no par
value, as of January 21, 2000 was 26,935,589.
DOCUMENTS INCORPORATED BY REFERENCE.
NONE
<PAGE> 2
EXPLANATORY NOTE
Geographics, Inc. (the "Company") has determined to restate its annual
consolidated financial statements and its condensed consolidated quarterly
financial statements for the fiscal year ending March 31, 1999, and condensed
consolidated quarterly financial statements for the interim quarters of fiscal
2000. This amendment includes in Item 1 such restated condensed consolidated
financial statements for the three and nine months ended December, 1999, and
other information relating to such restated condensed consolidated financial
statements. Item 2 includes the Company's amended and restated discussion and
analysis of financial condition and results of operations.
Except for Items 1 and 2 and Exhibits 11 and 27.1, no other information included
in the original report on Form 10-Q is amended by this amendment, and such
information is not included as part of this Amendment. For current information
regarding risks, uncertainties and other factors that may affect the Company's
future performance, please see "Risk Factors" included in Item 7 of the
Company's Annual Report on Form 10-K for the year ended March 31, 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION..........................................................................................1
ITEM 1. FINANCIAL STATEMENTS..................................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................................1
FORWARD-LOOKING STATEMENTS.............................................................................1
RESULTS OF OPERATIONS..................................................................................2
LIQUIDITY AND CAPITAL RESOURCES........................................................................3
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...............................................4
PART II - OTHER INFORMATION.............................................................................................4
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................4
ITEM 5 - OTHER INFORMATION.....................................................................................5
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K......................................................................5
SIGNATURE...............................................................................................................5
</TABLE>
-i-
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Report and by this reference incorporated herein the consolidated balance sheets
as of December 31, 1999 (unaudited) and March 31, 1999 (audited), the unaudited
statements of operations for the three months and nine months ended December 31,
1999 and December 31, 1998, and the unaudited consolidated statements of cash
flows for the three months and nine months ended December 31, 1999 and December
31, 1998, together with the notes thereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Report.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of file and storage
cabinets 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 growing working capital requirements.
Relevant risks and uncertainties include, but are not limited to,
slower than anticipated growth of the preprint paper market; loss of certain key
customers; insufficient consumer acceptance of the Company's specialty paper
products and file and storage cabinets; 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; unexpected increases in the overall costs of production as a result
of collective bargaining arrangements; and inability to secure additional
working capital when and as needed. Additional risks and uncertainties include
those described under "Risk Factors" in Part I of the Company's Annual Report on
Form 10-K for the year ended March 31, 1999 and those described from time to
time in the Company's other filings with the Securities and Exchange Commission,
press releases and other communications. All forward looking statements
contained in this Report reflect the Company's expectations at the time of this
Report only, and the Company disclaims any responsibility to revise or update
any such forward-looking statement except as may be required law.
-1-
<PAGE> 5
RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 vs. Three Months Ended December 31, 1998
NET SALES. Net sales increased 82% to $8,453,312 in the quarter ended
December 31, 1999 from $4,657,676 in the quarter ended December 31, 1998. The
increase was primarily attributable to new business generated from Sam's Club
and a significant increase in the Company's seasonal programs at Office Depot
and Business Depot which collectively accounted for net sales for the quarter of
$2,240,025. In addition, the Company made higher accruals for customer program
costs and credits ($1,332,015 or 14% of gross sales for the quarter ended
December 31, 1999 compared to $408,240 or 8% of gross sales for the quarter
ended December 31, 1998). The higher accruals are primarily due to increased
sales return accruals due to the guaranteed sales associated with the seasonal
sales programs. The Company's new management has adopted a philosophy to accrue
the realistic amounts due under our customer programs throughout the year to
better reflect anticipated results.
GROSS MARGIN. Gross margin as a percentage of gross sales increased to
34% in the quarter ended December 31, 1999, from 30% in the same period in
fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. While selling, general
and administrative expenses increased to $2,466,088 in the quarter ended
December 31, 1999 from $1,459,595 in the same period in fiscal 1999, the Company
saw a decrease in these expenses as a percentage of gross sales to 25% in the
quarter ended December 31, 1999 from 29% during the quarter ended December 31,
1998. The increase is primarily attributable to an increase in administrative
salaries ($73,082), commissions and royalties ($66,875), catalog expenses
($80,124), and costs of refinancing ($85,316).
OTHER INCOME (EXPENSE). Other income for the quarter ended December 31,
1999 amounted to $72,970 compared to other income of $4,834 for the quarter
ended December 31, 1998. The change is due to the income recognized from
favorable settlements of amounts owed vendors and others.
INTEREST EXPENSE. Interest expense decreased to $266,231 (2.7% of gross
sales) during the quarter ended December 31, 1999, compared to $274,029 (5.4% of
gross sales) during the same period in fiscal 1999. The lower interest costs
were caused by a decrease in borrowings of the Company, which were refinanced
with the proceeds from the private placement of the Company's common stock,
partially offset by amounts borrowed for working capital. See "Liquidity and
Capital Resources."
NET INCOME. Net income for the quarter ended December 31, 1999 was
$221,391 or $0.01 per share compared to a loss of $331,832 or $.03 per share for
the quarter ended December 31, 1998, primarily due to the aforementioned
increase in sales and gross margin improvement.
Nine Months Ended December 31, 1999 vs. Nine Months Ended December 31, 1998
NET SALES. Net sales increased 33% to $20,475,102 in the nine months
ended December 31, 1999 from $15,422,540 in the nine months ended December 31,
1998. The increase was primarily attributable to new business generated from
Sam's Club and an increase in the Company's seasonal programs to Office Depot
and Business Depot which collectively accounted for net sales for the period of
$3,161,959. In addition, the Company made higher accruals for customer program
costs and credits ($2,986,069 or 13% of gross sales for the nine months ended
December 31, 1999 compared to $1,487,048 or 9% of gross sales for the nine
months ended December 31, 1998). The higher accruals are primarily due to
increased sales return accruals due to the guaranteed sales associated with the
seasonal sales programs. The Company's new management has adopted a philosophy
to accrue the realistic amounts due under our customer programs throughout the
year to better reflect anticipated results.
-2-
<PAGE> 6
GROSS MARGIN. Gross margin as a percentage of gross sales decreased to
27% in the nine months ended December 31, 1999, from 33% in the same period in
fiscal 1999. The lower gross margin percentage is primarily attributable to the
lower net sales as a result of the accruals of customer program costs as
explained above, an increase in the cost of the Company's paper, plant wages and
supplies, and an increase in freight accruals, and shipping costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $5,795,896 (25% of gross sales) during the
nine months ended December 31, 1999 from $5,046,548 (30% of gross sales) in the
same period in fiscal 1999. The increase is primarily attributable to an
increase in travel expenses ($108,603), commissions and royalties ($65,200),
refinancing costs ($81,575), and product development expenses ($51,180).
OTHER INCOME (EXPENSE). Other income for the nine months ended December
31, 1999 amounted to $382,641 compared to other expense of $35,380 for the nine
months ended December 31, 1998. The change is due to the income recognized from
favorable settlements of amounts owed to vendors and others.
INTEREST EXPENSE. Interest expense decreased to $687,800 (2.9% of gross
sales) during the nine months ended December 31, 1999, compared to $881,939
(5.2% of gross sales) during the same period in fiscal 1999. The lower interest
costs were caused by a decrease in borrowings of the Company which were
refinanced with the proceeds from the private placement of the Company's common
stock. See "Liquidity and Capital Resources."
NET INCOME. Net income decreased to $303,003 or $0.02 per share for the
nine months ended December 31, 1999 compared to net income of $5,103,196 for the
nine months ended December 31, 1998, primarily due to the gain on the sale of
the Core Business of $5,510,762 in 1998. On a comparable basis, for the nine
months ended December 31, 1999 results of continuing operations improved to a
net income of $303,003, or $.02 per share, compared to a net loss of $407,566,
or $0.04 per share, for the nine months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers,
capital expenditures relating to the purchase and installation of an automated
production system and a management information system, prior year operating
losses, the Company has required substantial external working capital. The
Company has previously experienced working capital shortfalls, which required
the Company to delay payments to certain vendors, institute internal cost
reduction measures and take other steps to conserve operating capital. The
recapitalization has alleviated this problem. For the year ended March 31, 1999,
operating losses totaled $3,166,163, however the Company experienced positive
operating cash flows of $1,701,128.
At the date of this Report, the Company's available source of working
capital consisted of borrowings available under its revolving credit facility.
On December 22, 1999, the Company successfully refinanced its revolving credit
facility with US Bank, Milwaukee, Wisconsin. The revolving credit facility
permits borrowings of up to $7.5 million subject to a borrowing base limitation
of 75% of the Company's eligible accounts receivable and 50% of the value of its
inventory, net of certain reserves. Borrowings under the facility bear interest
at LIBOR plus 2.5% and are secured by substantially all of the Company's assets.
Under the terms of the facility, the Company is required to comply with a number
of financial covenants relating to, among other things, the maintenance of
minimum net worth, debt-to-equity ratios and cash flow coverage ratios.
-3-
<PAGE> 7
As of January 21, 2000, Geographics has received over $5,150,000 in a
private placement of common stock through the Company and using Culverwell &
Co., Inc. as placement agent, with proceeds to the Company at $0.30 per share.
The offering prices were determined after giving effect to liquidity and
minority discounts. The Company estimates that the effect of the Company's
recapitalization plan will result in a decrease in interest expense in excess of
$600,000 on an annualized basis.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the revenue and operating expenses of the
Company's foreign subsidiaries are denominated in local currencies and
translated into US dollars at rates of exchange approximating those existing at
the date of the transactions. Foreign currency translation impacts primarily
revenue and operating expenses as a result of foreign exchange rate
fluctuations. The Company's foreign currency transaction risk is primarily
limited to amounts receivable from its foreign subsidiaries, which are
denominated in local currencies. To minimize foreign currency transaction risk,
the Company ensures that its foreign subsidiaries remit amounts to the U.S.
parent in a timely manner. The Company does not currently utilize foreign
currency hedging contracts.
The Company also has foreign exchange translation exposures resulting
from the translation of foreign currency-denominated earnings into U.S. dollars
in the Company's consolidated financial statements. Foreign currency transaction
exposure arises when an operating unit transacts business denominated in a
currency that is not its own functional currency. The Company's transaction
risks are attributable primarily to inventory purchases from third party
vendors. The introduction of the Euro has significantly reduced such risks, and
transaction exposures on an overall basis are not material.
If the U.S. dollar uniformly increases in strength by 3% in fiscal year
2000 relative to the currencies in which the Company's sales are denominated,
income before taxes would decrease by $52,000 for the quarter ended December 31,
1999. This calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting
sales, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency prices.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales Of Unregistered Securities
During the quarter ended December 31, 1999, the Company issued
1,520,000 shares of common stock in a private placement at $.30 per share,
pursuant to an exemption from registration under Sections 4(2) and 4(6) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The
following officers and directors of the Company purchased shares pursuant to the
offering:
<TABLE>
<CAPTION>
NAME POSITION SHARES
---- -------- ------
<S> <C> <C>
C. Joseph Barnette Director 170,000
-------
Total 170,000
=======
</TABLE>
The balance of the shares were issued to accredited investors who had been
solicited by Culverwell & Co., Inc. of Boston, Massachusetts. See "Liquidity and
Capital Resources."
-4-
<PAGE> 8
ITEM 5 - OTHER INFORMATION
New Products
The Company has received substantial orders and commitments from
several key customers for its line of plastic ready to assemble filing and
storage cabinets. The Company expects these commitments to enhance its revenues
beginning in the next two fiscal quarters.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Loan and Security Agreement dated as of December 22,
1999 between the Company and U.S. Bank N.A.
Milwaukee, Wisconsin
27.1 Financial Data Schedule for the quarter ended
December 31, 1999.
(b) There were no reports on Form 8-K filed during the quarter
ended December 31, 1999.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 on form 10-Q/A
to be signed on its behalf by the undersigned, thereunto duly authorized on this
7th day of August, 2000.
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
-------------------------------------
James L. Dorman
President and Chief Executive Officer
By: /s/ Daniel J. Regan
-------------------------------------
Daniel J. Regan
Vice President and Chief Financial Officer
-5-
<PAGE> 9
GEOGRAPHICS, INC.
FORM 10-Q
EXHIBIT INDEX
FOR THE QUARTER ENDED DECEMBER 31, 1999
Exhibit
Number
10.1 Loan and Security Agreement dated as of December 22, 1999 between the
Company and U.S. Bank N.A. Milwaukee, Wisconsin
27.1 Financial Data Schedule
<PAGE> 10
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999 AND MARCH 31, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
<S> <C> <C>
CURRENT ASSETS
Cash $ 643,345 $ 130,967
Accounts receivable
Trade receivables, net 3,703,883 3,048,755
Other receivables 124,969 261,091
Inventory, net of allowance for obsolete inventory of
$647,000 and $897,000 at December 31 and March 31, 1999 respectively 4,632,431 3,532,684
Prepaid expenses, deposits, and other current assets 651,911 853,357
------------ ------------
Total current assets 9,756,539 7,826,854
PROPERTY, PLANT AND EQUIPMENT, NET 9,383,396 9,945,634
OTHER ASSETS 818,014 367,501
------------ ------------
TOTAL ASSETS $ 19,957,949 $ 18,139,989
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdrafts $ 168,502 $ 253,425
Note payable to bank 5,531,192 4,896,912
Accounts payable 3,199,232 2,961,079
Accrued liabilities 1,415,895 2,896,332
Current portion of long-term debt 1,202,568 3,072,601
------------ ------------
Total current liabilities 11,517,389 14,080,349
LONG-TERM DEBT 2,743,004 3,776,432
------------ ------------
Total liabilities 14,260,393 17,856,781
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
No par common stock - 100,000,000 authorized, 26,935,589 and 9,857,252
issued and outstanding at December 31 and March 31, 1999 respectively 20,920,946 15,769,018
Accumulated other comprehensive income (262,630) (157,223)
Accumulated deficit (14,960,760) (15,328,587)
------------ ------------
Total stockholders equity (deficit) 5,697,556 283,208
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 19,957,949 $ 18,139,989
============ ============
</TABLE>
F-1
<PAGE> 11
GEOGRAPHICS, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------- ------------
RESTATED RESTATED RESTATED RESTATED
(NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2)
<S> <C> <C> <C> <C>
SALES $ 9,785,327 $ 5,065,916 $ 23,461,171 $ 16,909,588
Allowances and Credits (252,185) (311,817) (1,202,102) (934,725)
Sales Returns (1,079,830) (96,423) (1,783,967) (552,323)
------------ ------------ ------------- ------------
Net Sales 8,453,312 4,657,676 20,475,102 15,422,540
COST OF SALES 5,572,572 3,260,718 14,071,044 9,866,239
------------ ------------ ------------- ------------
Gross Margin 2,880,740 1,396,958 6,404,058 5,556,301
S.G.& A. EXPENSES 2,466,088 1,459,595 5,795,896 5,046,548
------------ ------------ ------------- ------------
Operating Income (Loss) 414,652 (62,637) 608,162 509,753
OTHER INCOME (EXPENSE)
Interest Expense (266,231) (274,029) (687,800) (881,939)
Other Income (Expense) 72,970 4,834 382,641 (35,380)
------------ ------------ ------------- ------------
Total Other Income (Expense) (193,261) (269,195) (305,159) (917,319)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 221,391 (331,832) 303,003 (407,566)
DISCONTINUED OPERATIONS
Income from and gain on disposal of Core Business -- -- -- 5,510,762
------------ ------------ ------------- ------------
NET INCOME (LOSS) $ 221,391 $ (331,832) $ 303,003 $ 5,103,196
============ ============ ============= ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic $ 0.01 $ (0.03) $ 0.02 $ 0.52
============ ============ ============= ============
Diluted $ 0.01 $ (0.03) $ 0.02 $ 0.52
============ ============ ============= ============
SHARES USED IN COMPUTING EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
Basic 15,043,364 9,857,252 12,450,308 9,857,252
============ ============ ============= ============
Diluted 15,422,953 9,857,252 12,829,897 9,857,252
============ ============ ============= ============
</TABLE>
F-2
<PAGE> 12
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- -------------
RESTATED RESTATED
(NOTE 2) (NOTE 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 303,003 $ 5,103,196
Adjustments to reconcile net income (loss) to net
cash flows from operating activities
Depreciation and amortization 989,450 1,138,905
(Gain) loss on sale/disposal of property and equipment 3,643 -
Changes in noncash operating assets and liabilities
Trade receivables (655,128) 949,842
Other receivables 136,122 76,663
Inventory (1,099,747) 1,748,355
Prepaid expenses, deposits and current assets 201,446 (84,168)
Accounts payable 238,153 (97,260)
Accrued liabilities (1,472,508) (853,164)
-------------- -------------
Net cash flows from operating activities (1,355,566) 7,982,369
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdrafts (91,923) 84,517
Net borrowings on note payable to bank 634,280 (6,721,970)
Repayment of long-term debt (2,903,461) (1,007,055)
Proceeds from notes payable to officers and directors 100,000
Repayment of notes payable to officers and directors (100,000) --
Proceeds from the issuance of common stock 4,951,648 --
Proceeds from the issuance of common stock for assets 200,280 --
Net change, foreign currency translation (41,662) (136,949)
-------------- -------------
Net cash flows from financing activities 2,749,162 (7,781,456)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (251,541) (76,508)
Purchase of Innovative Storage Design Assets (261,163) --
Proceeds from sales of equipment 5,000 --
Increase in other assets (373,514) --
-------------- -------------
NET CHANGE IN CASH 512,378 124,405
CASH, BEGINNING OF PERIOD 130,967 316,078
-------------- -------------
CASH, END OF PERIOD $ 643,345 $ 440,483
============== =============
</TABLE>
F-3
<PAGE> 13
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements of
Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such interim statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and the results of operations and cash flows for
the interim periods presented. The results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year. These statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company's
consolidated financial statements and notes thereto for the fiscal year ended
March 31, 1999.
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.
F-4
<PAGE> 14
NOTE 2- RESTATEMENT AND RECLASSIFICATIONS
The Company has determined to restate its annual consolidated financial
statements and its quarterly condensed consolidated financial statements for the
years ended March 31, 1999 and 1998, and interim quarters of 2000. The
following sets forth the effect and explanation of these adjustments and
reclassifications:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED ADJUSTMENTS RESTATED
-------- ----------- --------
<S> <C> <C> <C>
AT DECEMBER 31, 1999
Accounts receivable, net $ 3,842,655 $ (138,772) (a)(b) $ 3,703,883
Current assets 9,895,311 (138,772) (a)(b)(c) 9,756,539
Total Assets 20,096,721 (138,772) (a)(b)(c) 19,957,949
-
Accrued Liabilities 1,191,369 224,526 (d)(e) 1,415,895
Current Liabilities 11,292,863 224,526 (d)(e) 11,517,389
Total Liabilities 14,035,867 224,526 (d)(e) 14,260,393
Accumulated Deficit (14,597,462) (363,298) (a)(c)(d)(e) (14,960,760)
Stockholders' Equity 6,060,854 363,298 (a)(c)(d)(e) 5,697,556
Total Liabilities and Stockholders' Equity $ 20,114,272 $ (138,772) $ 19,975,500
</TABLE>
<TABLE>
<CAPTION>
AS PREVIOUSLY ADJUSTMENTS AND AS
REPORTED RECLASSIFICATIONS RESTATED
-------- ----------------- --------
<S> <C> <C> <C>
FOR THE QUARTER ENDED DECEMBER 31, 1999:
Net sales $ 7,734,460 $ 718,852 (b)(d)(f) $ 8,453,312
Gross Margin 2,161,888 $ 718,852 (b)(c)(d)(f)(g) 2,880,740
Selling, General and Administrative Expenses 1,747,236 $ 718,852 (b)(c)(d)(f)(g) 2,466,088
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999:
Net sales $ 18,826,679 $ 1,648,423 (b)(d)(f) $ 20,475,102
Gross Margin 4,755,635 $ 1,618,723 (b)(c)(d)(f)(g) 6,404,058
Selling, General and Administrative Expenses 4,323,101 $ 1,472,795 (b)(c)(d)(f)(g) 5,795,896
Income (loss) from Operations 432,534 $ 175,628 (b)(c)(d)(f)(g) 608,162
Net Income (loss) $ 127,375 $ 175,628 (b)(c)(d)(f)(g) $ 303,003
Net Income(Loss) Per Share $ 0.01 $ 0.01 $ 0.02
</TABLE>
F-5
<PAGE> 15
NOTE 2- RESTATEMENT AND RECLASSIFICATIONS (CONTINUED)
(a) In preparing its prior financial statements, Geographics relied on
information of a former sales manager. Geographics later discovered
that this former sales manager, who has since been terminated, failed
to correctly identify the amount of sales returns that were due a
particular customer. This resulted in an understatement of sales
returns for the years ended March 31, 1998 and 1999 of $19,201 and
119,571, respectively.
(b) Geomarketing Canada ("GMC"), a wholly-owned subsidiary of Geographics,
is required to pay Canadian goods and services tax on the value of
items sold in Canada. However, subsequent to June 30, 1999, Geographics
discovered that GMC was declaring the goods at Canadian customs at a
value that is less than the amount charged to its customers. This
resulted in an understatement sales, general and administrative
expenses for the years ended March 31, 1998 and 1999 by $78,828 and
$166,201, respectively.
(c) At March 31, 1999, Geographics accrued $132,500 severance costs for
certain former executives of Geographics. The restatement reflects
Geographics' change in its accounting practices so as to accrue these
expenses in the period in which they incurred in accordance with Staff
Accounting Bulletin 100, dated November 24, 1999.
(d) At March 31, 1999, Geographics accrued an estimated amount of $200,000
for incurred, but unbilled legal expenses. Subsequently, it was
confirmed that the actual incurred legal expenses was approximately
$100,000.
(e) During the fiscal quarter ended March 31, 1999, Geographics implemented
a new accounting program to calculate costs associated with customer
promotions. Subsequently, Geographics discovered that the program did
not accurate calculate these costs. This error resulted in an
understatement of sales, general and administrative expenses for the
year ended March 31, 1999 by $261,310.
(f) In connection with the sale of its sign business in the year ended
March 31, 1999, Geographics mistakenly received approximately $146,818
in escrowed amounts that it was not entitled to. Geographics initially
kept the escrowed funds after the escrow company made an initial
attempt to have the funds returned. However, Geographics never made a
reserve for the potential loss of the funds. This resulted in an
understatement of sales, general and administrative expenses from
discontinued operations for the year ended March 31, 1999 of $146,818.
(g) Reflects an accounting change to classify "back-end selling expenses,"
or certain advertising and promotional expenses, as sales, general and
administrative expenses, rather than sales returns and allowances for
the nine months ended December 31, 1999 in the amount of $1,387,113.
F-6
