<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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For the Fiscal Quarter Ended: December 31, 1998
Commission File Number: 0-26756
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GEOGRAPHICS, INC.
(Exact name of registrant as specified in its charter)
WYOMING 87-0305614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1755, BLAINE, WA 98231
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(Address of principal executive office and zip code)
(360) 332-6711
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(Registrant's telephone number including area code)
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 9,857,252 shares of common stock outstanding as of
December 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
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 31, 1998, 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.
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PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Report and by this reference incorporated herein the consolidated balance sheets
as of December 31, 1998 (unaudited) and March 31, 1998 (audited), the unaudited
statements of operations for the three months ended December 31, 1998 and
December 31, 1997, and the unaudited consolidated statements of cash flows for
the three months ended December 31, 1998 and December 31, 1997, 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 on this Report.
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, posterboards 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 only business for that quarter, with approximately
100% and 95% of the Company's total sales in the quarter ended December 31, 1998
and the year ended March 31, 1998, respectively, attributable to sales of
Geopaper products.
Upon arrival of the new management on July 27, 1998, it was determined
that no action had been taken to engage the company's auditors to perform the
annual audit for the fiscal year ended March 31, 1998. The new management
immediately moved to engage the company's auditors on July 27, 1998 to begin the
audit, which was completed on September 22, 1998. The audit was complicated by a
number of contingent liabilities that required considerable investigation.
The auditors recommended and the company established additional
reserves totaling $1,265,000 to more accurately reflect the market value of
inventories and receivables, fixed assets and other contingent claims.
<PAGE> 3
The audit report also reported the company was not in compliance with
covenants under its revolving credit facility, which caused them to qualify
their opinion as to the Company's ability to continue as a going concern.
On August 1, 1998, the new management provided a written request to the
former president and chief executive officer, Ronald S. Deans, who was then
still employed by the Company and asked for detailed explanations for a number
of the issues that had been previously been raised and identified in the
company's Form 10-Q for the period ending December 31, 1997, which was filed on
April 29, 1998.
The former Board of Directors had conducted an extensive investigation
on several of these matters, including improperly reimbursed expenses;
withholding taxes that had not been paid on stock options exercised in January
1996, and certain securities transactions involving the company's common stock.
In addition to the issues previously identified in the Form 10-Q of April 29,
1998 for the December 31, 1997 period, new management discovered a number of
additional potential issues that were included in the August 1, 1998 request
which Mr. Deans, the former president and CEO did not answer in a satisfactory
or complete manner.
The new management's evaluation of these unexplained issues and
liabilities was handicapped by a lack of proper corporate records, including the
absence of corporate meeting minutes in order to judge the decisions and
authorization of the Board regarding each of the issues identified by the new
management.
The new management judged each of these liabilities to be potentially
quite significant, and in the opinion of the new management required prompt
resolution and proper disclosure. The former management provided insufficient
information to enable the new management to bring these matters to a proper
conclusion.
Throughout the entire period, it was impractical for the new management
or its counsel to complete its required periodic filings, as the contingent
liabilities that had been identified were not fully examined, understood or
correctly documented. The Company had not been in proper reporting compliance
and the then existing conditions of the Company's records, coupled with the poor
cooperation of prior management, made proper filings of the Form 10-K and 10-Qs
an impractical matter. A substantial portion of the Company's resources and the
attention of its new management were forced into an otherwise unnecessary effort
to clearly understand the manner in which each of these liabilities was created,
the financial impact upon the Company, the potential legal exposure and the
materiality of such information. See "-Liquidity and Capital Resources."
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
second and third fiscal quarters, 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
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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.
RESULTS OF OPERATIONS
The Company's financial health was considerably anemic upon the
election of its new management. Prior management allowed an excessive amount of
old trade payables to accumulate and which required immediate attention so as to
prevent a considerable number of outside suppliers and vendors from converting
their extended payables into a series of lawsuits. Due to the ineffectiveness of
the then existing Management Information System ("MIS"), particularly the EDI
process, some $513,255 of otherwise good receivables had been written-off since
at that time, the EDI system was incapable of allowing the Company to properly
reconcile its records. In addition, the Company's product and market planning
was investing critically short cash resources into product inventory investments
for which there was very poor or almost no positive cashflow benefit. The
Company had made a practice of capitalizing its investments in merchandise racks
provided to customers and depreciating them over a number of years. The
effective useful life of such merchandise racks, in practical terms, is probably
not much more than a one-year period and the long-term depreciation approach had
the effect of maintaining an artificial asset value. The Company had begun to
focus its attention on inventory management through a more disciplined and
structured manufacturing, planning and control process. This effort had been
complicated by virtue of the non-integrated manner of the then operating MIS
systems. As part of the effort to improve the Company's inventory management
system, the Company had begun to focus its attention on the work-in-process
segment of its inventories which had traditionally been the source of its
inventory problems.
The Company initiated a reorganization of its Operations Group in
November, 1998 with the principal intention of creating a plant management
control system, with fewer supervisors and more sharply defined areas of
accountability and responsibility. The operating and manufacturing organization
that had been in place prior to the new management functioned in a largely
uncoordinated and a nonintegrated manner in which there was no uniformity with
respect to controlling the entire manufacturing process. A substantial portion
of the operating equipment installed in connection with prior management's
capital investment program had not attained optimum production rates and
performance efficiencies. The operations organization at that time lacked any
industrial engineering function and the financial constraints upon the Company
made it difficult for the necessary investments and expenses to be provided.
<PAGE> 5
The Company's approach to its purchasing function and the management of
its vendor relationships was not well organized and was largely ineffective.
There had not been any coordinated effort to reduce cost related to purchasing
raw materials and of process yields. There was no effort to maintain proper
market price benchmarking and competitive price bidding for its principal key
raw materials. While the Company had a large number of suppliers, its principal
raw material and service providers were concentrated on a few such providers
from which there were clear opportunities to extract significant cost benefits.
Inventories had accumulated to a total of $4,509,926 in July 1998 and
by December 1998, had been reduced to $3,674,750. In December 1998, inventory
turns had improved to 4.3 times versus the 3.5 turns that had been realized in
July 1998. The Daily Sales Outstanding ("DSO") was reduced from 72.9 days in
July 1998 to 60.8 days by December 1998. The previously established accounts
payable that had accumulated prior to the election of new management, reaching
$2,933,105 in July 1998, had been reduced to $3,003,610 by December 1998.
Whereas the prior receivables write-off of $513,255 was due to the EDI-based
systems problem described above, the receivables write-off had been reduced to
$112,044 at the end of December 1998. New management established a policy
pursuant to which merchandise racks would no longer be depreciated over a
long-term period. Instead, new rack expenditures would be expensed over the
12-month period in which they were placed into the market. The previously
existing value of depreciated racks is now being reduced over a more accelerated
short-term period and thereby is reducing the value of those assets to a more
manageable level. During the July 1998 to the December, 1998 period, the
combined total of the Company's capital leases, bank debt, and long-term debt
was reduced by $115,224, from $17,414,934 to $17,299,710.
As of July 31, 1998 the Company had capitalized intangible assets of
$470,363. These assets included various items including start-up costs,
trademarks, and other elements. Management is carefully reviewing the intangible
assets to insure that it is clear as to which of these are actually used or in
fact useful in the conduct of the Company's business.
As a consequence of these actions and the severe operating losses
experienced under past management, as of July 31, 1998 the Company was under a
severe liquidity crisis. Its debt obligations were significantly in excess of
the Company's ability to service such obligations on a current basis or
according to previously agreed terms. The Company, as of July 31, 1998, had been
put on credit hold by most of its suppliers and was only able to make purchases
on a "collect-on-delivery" basis. Although the Company had negotiated a third
extension of its forbearance agreement with its major secured lender, there had
been concern that certain past due creditors were considering the potential for
filing petitions for involuntary bankruptcy.
New management immediately took steps to ease the cash crisis. Efforts
were initially focused on negotiating payment plans with suppliers so as to
insure the
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continued flow of raw materials. New management also focused efforts
on accelerating the collection of accounts receivable which included beginning
toenforce the collection of improperly taken customer credits and/or discounts.
Part of the efforts initiated by the new management to improve gross
and operating margins were directed at the elimination of certain low margin
products, low margin accounts, the elimination of small customers and more
vigorous attention to the enforcement of credit terms provided to customers.
Additionally, the Company has begun to determine the appropriate changes that
are necessary for the Company's terms and conditions that are intended to cause
a significant reduction in the Company's total freight expenses which represent
close to 10.0% of sales. Minimum order size and freight pre-paid policies are
being changed to enable the Company to maintain its competitive position while
simultaneously preserving a practical economic outcome.
The Company instituted a travel and expense reporting control procedure
in September 1998. Prior management did not have an expense control policy. This
new policy insures that there is consistent and uniform control of all travel
and expense spending and insures timely and accurate reporting with clear
internal audit controls. Operating managers must review the expense reports of
those people reporting to them and the chief executive officer of the company
personally signs and reviews every expense report.
In December 1998, the Company implemented the second phase of its
reorganization plan and realigned its sales, marketing and administrative
support groups. This reorganization followed the same principals that were
implemented in November with the Operations Group wherein the principal
objective is intended to have significant reductions in the overall payroll
cost, while improving the focus and work content by enabling people to operate
against specified and clear objections. The Company has also established an
Operating Committee consisting of the Company's key managers and this is the
principal mechanism by which the Company operates on a daily basis and
establishes its short-term goals and develops budgets and longer-term strategic
plans.
The Company has eliminated certain outside resources that had been used
for long periods of time and which generated significant expense with
questionable value and performance for the services they were providing to the
Company. All outside resources and services now being provided are reviewed by
the Company's chief executive officer and are closely monitored by the
appropriate functional manager.
Sales. Sales decreased 43% to $4,657,676 in the quarter ended December
31, 1998 from $7,639,773 in the quarter ended December 31, 1997. Sales decreased
31% to $15,422,540 in the nine-month period ended December 31, 1998 from
$22,485,931 in the same period a year earlier. The decrease is primarily due to
the sale of the Core Business and the loss of Office Max.
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Geopaper products were responsible for 100% and 95% of sales for the
three and nine-month period ended December 31, 1998 respectively, compared to
81% in the corresponding three and nine-month periods of the prior year. Sales
of Geopaper have decreased 21% to $15,422,540 in the nine months ended December
31, 1998 from $19,466,190 in the corresponding nine-month period of the prior
year.
Sales of the Company's lettering and signage products decreased 84% to
approximately $751,539 for the nine-month period ended December 31, 1998
compared to approximately $4,615,387 for the quarter ended December 31, 1997.
International sales of Geographics products were $2,012,740 and
$5,758,050 for the quarter and nine-month period ended December 31, 1998,
respectively, and $2,182,775 and $5,920,028 for the quarter and nine-month
period ended December 31, 1997, respectively. International sales of Geographics
products represented 43% and 37% of the Company's total sales for the quarter
and nine-month period ended December 31, 1998, respectively, compared to 29% and
26%, respectively, of total sales for the same periods in the prior year.
Gross Margin. Gross profit margin as a percentage of sales was 30.0%
for the quarter ended December 31, 1998, compared to 24.8% for the same period
in the prior year. For the nine-month period ended December 31, 1998, gross
profit margin as a percentage of sales was 36.0%, compared to 11.0% for the same
period in the prior year.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative (S,G&A) expenses, which consist of payroll,
advertising, commissions, administrative, accounting, legal and other costs,
decreased as a percentage of sales during the quarter ended December 31, 1998 to
31.3%, as compared to 31.4% during the same period in the prior year. S,G&A
expenses increased as a percentage of sales to 32.7% for the nine-month period
ended December 31, 1998 as compared to 30.3% for the same period in the prior
year.
Interest Expense. The Company's interest expense for the quarter ended
December 31, 1998 decreased 35% to $274,029 compared to $418,388 for the same
period in the prior year. The company's interest expense for the nine-month
period ended December 31, 1998, decreased 30% to $881,939 compared to $1,266,585
for the same period in the prior year. The decrease in interest expense was
primarily the result of the pay-down of U.S. Bank from the sale of the Core
Business.
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 planned
purchases, institute internal cost reduction measures and take other steps to
conserve operating capital.
During fiscal 1998, operating losses totaled $8,089,245, and the Company
experienced positive operating cash flows of $1,145,131. During the quarter
ended December 31, 1998, operating loss totaled $62,637. The Company experienced
positive operating cash flows of $7,982,369 during the quarter ended December
31, 1998.
At the date of this Report, 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 $6.0 million
subject to a borrowing base limitation of 70% 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> 8
The Company entered into a short-term 4th forbearance agreement with
its lender, effective November 30, 1998, pursuant to which the lender agreed to
extend the expiration date of the revolving credit facility to April 1, 1999. to
permit borrowings of up to $5.5 million. The Company is seeking a longer
forbearance arrangement with its lender, although as of the date of this report,
no such longer-term agreement is in place. There can be no assurance that the
lender will continue to permit borrowings under the revolving credit facility,
that the lender will agree to further extend the facility's expiration date or
that the Company will be able to refinance or replace the facility on acceptable
terms when and as needed.
The Company has been 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY
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 US parent
in a timely manner. Foreign country short-term borrowing facilities are utilized
where necessary to ensure prompt payments. The Company does not currently
utilize foreign currency hedging contracts.
If the US dollar uniformly increases in strength by 10% in 1999
relative to the currencies in which the Company's sales are denominated, income
before taxes would decrease by $100,000.00 for the fiscal year ending March 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.
Although the Company cannot accurately anticipate the effects of
inflation on its financial condition or operations, the Company does not believe
inflation has had or is likely to have a material adverse effect on its results,
operations or liquidity.
<PAGE> 9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In its Form 10-Q filed with the Securities and Exchange Commission on
April 29, 1998 for the period ending December 31, 1997, the Company reported
that in July 1997, three related class actions were filed against it, its then
Chairman of the Board, Ronald S. Deans, and its then chief financial officer,
Terry A. Fife. These suits alleged that the defendants violated Section 10(b) of
the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In August 1998, the Company, its insurance carrier and the plaintiffs reached an
agreement to settle the lawsuits, which had previously been consolidated as one
lawsuit (the "Settlement"). On October 30, 1998, the judge presiding over this
lawsuit approved the Settlement. Under the terms of the Settlement, the
plaintiffs received a cash payment of $1.6 million without any admission of
liability or wrongdoing by the defendants. In light of the defendants' insurance
carrier's proposed substantial contribution to any final settlement amount, the
Company does not believe that the funding of the settlement will have a material
impact on its financial condition or operations.
In addition to the litigation matter described above, the Company is
subject to additional 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Shares of the Company's Common Stock continue to be traded solely on
the NASDAQ OTC Bulletin Board. This has had a material adverse effect on the
liquidity of the market for the Company's securities and could hinder the
ability of the Company to obtain additional equity financing.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As has been previously reported by the Company, the Company has, since
May 1997, failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under its existing revolving credit facility with its
lender. As at December 31, 1998, borrowings under the Company's revolving credit
facility aggregated approximately $4,578,838. The Company's lender has also
provided the Company with several mortgage loans and equipment loans and the
defaults under the revolving credit facility constitute cross-defaults under
these other loans. The Company has previously reported that these defaults,
coupled with its fiscal year 1998 losses, raise substantial doubt about the
Company's ability to continue as a going concern.
<PAGE> 10
On November 1, the Company and its lender entered into a fourth
forbearance agreement (the "Fourth Forbearance Agreement") pursuant to which the
lender agreed to extend the expiration date of the revolving credit facility to
March 31, 1999, and to forbear from asserting its rights with respect to the
Company's non-compliance with the revolving credit facility's financial
covenants. Although the Company's lender has permitted borrowings under the
revolving credit facility in excess of the borrowing base limitations set forth
in the agreement, there can be no assurance that the lender will continue to
allow such borrowings to occur. Over the course of the fiscal quarter ending
December 31, 1998, the Company continued to evaluate additional sources of
working capital, including, without limitation, additional equity investments,
in order to finance its ongoing business operations. The Company is firmly
committed to continuing that process for the remainder of the 1999 fiscal year.
In addition, the Company continues to have ongoing discussions with its lender
regarding the execution of a new forbearance agreement and/or a complete
restructuring of its obligations under its existing revolving credit facility.
See "Management's Discussion of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CHANGES IN CORPORATE GOVERNANCE AND MANAGEMENT. On October 12, 1998,
the Company terminated the employment of Ronald S. Deans, the Company's former
chairman, chief executive officer and president. In November 1998, Richard C.
Gockelman, the Company's present chief executive officer and president, began
implementing an organizational restructuring program aimed at rationalizing and
strengthening the Company's internal management structure. A component of this
program has been shifting the Company's operational model to a "Plant Manager
Control Model" in which the Company's purchasing, manufacturing and scheduling
departments have been merged into one, integrated entity. The Company believes
that this new approach will result in substantial cost-savings versus the former
managerial form.
In December 1998, Mr. Gockelman, as the Company's sole director and in
accordance with the Company's By-laws, appointed five outside individuals to
serve on the Company's Board of Directors. The new members of the Board of
Directors are as follows:
William T. Graham, Chairman. Mr. Graham was the founder, president and
chief executive officer of W.T. Rogers Company, which was merged into Newell
Corporation in 1992. Mr. Graham served as chairman of Newell Office Products
until 1992. He has founded and co-founded several office industry ventures and
participates in a number of public-service activities in his home state of
Wisconsin.
<PAGE> 11
C. Joseph Barnette, Director. Mr. Barnette is co-founder and president
of KAPCO, a privately-held adhesive products company in Kent, Ohio. Mr. Barnette
holds several patents on file in both the United States and in several foreign
countries. Mr. Barnette is a graduate of the University of Akron.
William S. Hanneman, Director. Mr. Hanneman is a founder and principal
in the firm of Zachary Scott & Company, an investment banking and financial
advisory firm located in Seattle, Washington. Mr. Hanneman previously served as
Vice President of Seafirst Bank, N.A.'s Mergers and Acquisitions Department. Mr.
Hanneman is a graduate of the University of Washington.
John F. Kuypers, Director. Mr. Kuypers is executive vice president of
sales and marketing for Pentech International, a writing instrument and related
products company based in Madison, Wisconsin. He was previously employed with
Newell Office Products and W.T. Rogers Company. Mr. Kuypers is a founding member
and director of SHOPA, a leading office products trade association. He is a
graduate of the University of Wisconsin.
David C. Lentz, Director. Mr. Lentz is chairman and principal of E-Z
Industries, Inc., an office product manufacturer located in Westminster,
Maryland. His prior experience includes employment in the banking industry and
Mr. Lentz served as the State Examiner for the State of Maryland. Mr. Lentz is a
graduate of the University of Baltimore and the University of Baltimore's law
school.
In addition to his duties as the Company's president and chief executive
officer, Mr. Gockelman will continue to serve as a director of the Company.
In the early part of 1999, the newly reconstituted Board of Directors
anticipated creating two new board committees: a finance committee and an audit
committee. In addition, the new Board of Directors has adopted as a high
priority the holding of an annual shareholders meeting, tentatively scheduled to
be held during the Company's second fiscal quarter of fiscal year 2000.
None of the new members of the Board of Directors is a party to any
transaction, series of similar transactions or any proposed transaction that
would require disclosure pursuant to Item 404 of Regulation S-K.
Because of the complexity of the reporting requirements imposed on the
Company's directors and executive officers under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"), special securities counsel to the
Company has recommended that the Company assume responsibility for preparing and
filing the periodic reports of changes in beneficial ownership required of these
persons by statute. As at December 31, 1998, however, this undertaking had not
yet been implemented. The Company has undertaken to quickly remedy this
situation and will file the periodic reports required by Section 16 of the
Exchange Act as soon as is reasonably practicable.
<PAGE> 12
EXAMINATION OF MANAGEMENT. The Company has previously reported that it is in an
on-going process of investigating certain activities engaged in, and
transactions effected by, the Company's former chief executive office, Ronald S.
Deans. The Company's initial findings played a substantial role in the
termination of Mr. Deans' employment in October 1998. The Company continued its
efforts with respect to resolving the matters under investigation throughout the
fiscal quarter ending December 31, 1998, and the Company fully anticipates such
efforts to continue into its next fiscal year. Several efforts have been made by
the Company, its general outside counsel and special securities counsel to
resolve all of the outstanding issues raised by the actions taken by Mr. Deans
or by the Company while under his direction and control. As has previously been
reported, however, Mr. Deans has proved to be much less cooperative that the
Company would have hoped.
In order to accelerate the resolution of the above-described matters,
the Company's Board of Directors has directed its newly formed audit committee,
subject to supervision by the Board of Directors, to vigorously pursue an end to
the Company's investigative efforts in this area. Bringing these matters to
closure may involve, but not be limited to, initiating one or more lawsuits
against Mr. Deans with respect to what the Company believes are serious
violations of Mr. Deans' fiduciary duties to the Company. In addition, the
Company's Board of Directors is seriously considering reporting its findings to
one or more federal and/or state agencies with jurisdiction over the matters at
issue. Regardless of the final decision, members of the Company's Board of
Directors and senior management remain committed to resolving fully these issues
and will timely file periodic reports with the Securities and Exchange
Commission as the above-described issues are resolved.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(b) No reports were filed by the Company on Form 8-K during the fiscal quarter
ended December 31, 1998.
<PAGE> 13
SIGNATURES
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 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
<PAGE> 14
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998 ............................................................F-2
Consolidated Statements of Operations for the three months and nine
months ended December 31, 1998 and December 31, 1997 ......................F-3
Consolidated Statements of Cash Flows for the three months and nine
months ended December 31, 1998 and December 31, 1997 ......................F-4
Notes to Consolidated Financial Statements ................................F-5
</TABLE>
F-1
<PAGE> 15
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND MARCH 31, 1998
(unaudited)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
Restated Restated
(Note 3) (Note 3)
(Unaudited) (Audited)
------------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 440,483 $ 316,078
Accounts receivable
Trade receivables, net 3,215,019 4,145,660
Other receivables 71,387 148,050
Inventory, net of allowance for obsolete inventory of $586,000 at
December 31, 1998 and March 31, 1998 5,015,153 6,763,508
Prepaid expenses, deposits, and other current assets 819,526 731,307
------------ ------------
Total current assets 9,561,568 12,104,603
PROPERTY, PLANT AND EQUIPMENT, net 11,818,733 12,881,118
OTHER ASSETS 335,992 340,043
------------ ------------
TOTAL ASSETS $ 21,716,293 $ 25,325,764
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 386,233 $ 301,716
Note payable to bank 4,578,838 11,300,808
Accounts payable 3,003,610 3,285,467
Accrued liabilities 2,134,486 2,738,919
Current portion of long-term debt 3,350,344 3,350,344
------------ ------------
Total current liabilities 13,453,511 20,977,254
LONG-TERM DEBT 3,846,199 4,853,254
------------ ------------
Total liabilities 17,299,710 25,830,508
------------ ------------
STOCKHOLDERS' EQUITY
No par common stock - 100,000,000 authorized, 9,857,252 and 9,852,252
issued and outstanding at December 31, 1998 and
March 31, 1998, respectively 15,769,018 15,769,018
Foreign currency translation adjustment (103,050) 33,899
Retained earnings (accumulated deficit) (11,249,385) (16,307,661)
------------ ------------
Total stockholders' equity 4,416,583 (504,744)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,716,293 $ 25,325,764
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-2
<PAGE> 16
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------------------------------
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
Restated Restated Restated Restated
(NOTE 3) (Note 3) (Note 3) (Note 3)
<S> <C> <C> <C> <C>
Sales $ 4,657,676 $ 7,639,773 $ 15,422,540 $ 22,485,931
Cost of Sales 3,260,718 5,745,909 9,866,239 20,005,730
------------ ------------ ------------ ------------
Gross Margin 1,396,958 1,893,864 5,556,301 2,480,201
Selling, General and Administrative
Expenses 1,459,595 2,398,457 5,046,548 6,816,417
------------ ------------ ------------ ------------
Income (Loss) From Operations (62,637) (504,593) 509,753 (4,336,216)
Other Income (Expenses)
Expense interest (274,029) (418,388) (881,939) (1,266,585)
Other 4,834 70,385 (35,380) 37,056
------------ ------------ ------------ ------------
Total Other Income (Expenses) (269,195) (348,003) (917,319) (1,229,529)
------------ ------------ ------------ ------------
Net Income (Loss) from Continuing Operations (331,832) (852,596) (407,566) (5,565,745)
Proceeds from Sale of Core Business -- -- 5,510,762 --
------------ ------------ ------------ ------------
Net Income (Loss) $ (331,832) $ (852,596) $ 5,103,196 $ (5,565,745)
============ ============ ============ ============
Earnings Per Common and Common
Equivalent Share
Basic $ (0.03) $ (.09) $ 0.52 $ (.57)
============ ============ ============ ============
Diluted $ (0.03) $ (.09) $ 0.52 $ (.57)
============ ============ ============ ============
Shares Used in Computing Earnings
Per Common and Common
Equivalent Share
Basic 9,857,252 9,467,877 9,857,252 9,742,334
============ ============ ============ ============
Diluted 9,857,252 9,467,877 9,857,252 9,742,334
============ ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 17
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
Restated
(Note 3)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,103,196 $(5,565,745)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,138,905 1,358,211
(Gain) loss on sales of property and equipment -- 1,740
Changes in noncash operating assets and liabilities
Trade receivables 949,842 1,841,403
Related party receivables -- --
Other receivables 76,663 452,976
Inventory 1,748,355 1,330,303
Prepaid expenses, deposits and other current assets (84,168) 18,753
Accounts payable (97,260) 1,614,867
Accrued liabilities (853,164) 556,364
----------- -----------
Net cash flows from operating activities 7,982,369 1,608,872
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts 84,517 (151,832)
Net borrowings on note payable to bank (6,721,970) 2,109,930
Proceeds from long-term debt borrowings -- --
Repayment of long-term debt (1,007,055) (918,699)
Repayments of notes payable to officers and directors -- (850,000)
Proceeds from issuance of common stock -- (584)
Foreign currency translation (136,948) (141,494)
----------- -----------
Net cash flows from financing activities (7,781,456) 47,321
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (76,508) (1,610,944)
----------- -----------
Net cash flows from investing activities (76,508) (1,610,944)
----------- -----------
NET CHANGE IN CASH 124,405 45,249
CASH, beginning of year 316,078 408,757
----------- -----------
CASH, end of quarter $ 440,483 $ 454,006
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ -- $ 1,677,918
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-4
<PAGE> 18
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, 1998.
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 quarterly.
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 in April
1999. The total minimum lease commitment is $64,770 in 1999.
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.
<PAGE> 19
Note 3 - Restatement and Reclassifications
The Company has determined to restate its annual consolidated financial
statements for the years ended March 31, 1999 and 1998. 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, 1998:
Accounts receivable, net $ 3,646,186 $ (431,167) (a)(b) $ 3,215,019
Inventory, net 5,322,270 (307,117) (c) 5,015,153
Current assets 10,299,852 (738,284) (a)(b)(c) 9,561,568
Total Assets 22,454,577 (738,284) (a)(b)(c) 21,716,293
-
Accrued Liabilities 1,872,363 262,123 (d)(e) 2,134,486
Current Liabilities 13,994,590 201,061 (d)(e) 14,195,651
Total Liabilities 13,191,388 262,123 (d)(e) 13,453,511
Accumulated Deficit (10,248,978) (1,000,407) (a)(c)(d)(e) (11,249,385)
Stockholders' Equity 5,416,990 (1,000,407) (a)(c)(d)(e) 4,416,583
Total Liabilities and Stockholders' Equity $ 22,454,577 $ (738,284) $ 21,716,293
<CAPTION>
AS PREVIOUSLY ADJUSTMENTS AND AS
REPORTED RECLASSIFICATIONS RESTATED
------------- ----------------------------- ---------------
<S> <C> <C> <C>
FOR THE QUARTER ENDED DECEMBER 31, 1998:
Net sales $ 5,310,126 $ (652,450) (b)(d)(f) $ 4,657,676
Cost of Sales 2,484,871 $ 775,847 (c)(g) 3,260,718
Gross Margin 2,825,255 $ (1,428,297) (b)(c)(d)(f)(g) 1,396,958
Selling, General and Administrative Expenses 2,469,634 $ (1,010,039) (b)(c)(d)(f)(g) 1,459,595
Income (loss) from Operations 355,621 $ (418,258) (b)(c)(d)(f)(g) (62,637)
Income (loss) from Continuing Operations 86,426 $ (418,258) (b)(c)(d)(f)(g) (331,832)
Net Income (loss) $ 86,426 $ (418,258) (b)(c)(d)(f)(g) $ (331,832)
Net Income Per Share $ 0.01 $ (0.04) $ (0.03)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998:
Net sales $ 16,693,816 $ (1,271,276) (b)(d)(f) $ 15,422,540
Cost of Sales 7,778,221 2,088,018 (c)(g) 9,866,239
Gross Margin 8,915,595 (3,359,294) (b)(c)(d)(f)(g) 5,556,301
Selling, General and Administrative Expenses 7,629,779 (2,583,231) (b)(c)(d)(f)(g) 5,046,548
Income (loss) from Operations 1,285,816 (776,053) (b)(c)(d)(f)(g) 509,763
Income (loss) from Continuing Operations 368,497 (776,063) (b)(c)(d)(f)(g) (407,566)
Proceeds from Sale of Core Business 5,657,580 (146,818) (e) 5,510,762
Net Income $ 6,026,077 $ (922,881) (b)(c)(d)(e)(f)(g) $ 5,103,196
Net Income Per Share $ 0.61 $ (0.09) $ 0.52
</TABLE>
(a) In preparing its prior financial statements, the Company relied on
information of a former sales manager to estimate sales returns. The
Company later discovered that the sales manager failed to correctly
<PAGE> 20
identify the amount of sales returns that were due a particular
customer. This resulted in an understatement of sales returns for the
nine months ended December 31, 1998 and year ended March 31, 1998 of
$19,201.
(b) The Company increased the allowance for doubtful accounts by $132,395
in the fourth quarter of fiscal 1999. This adjustment was subsequently
deemed to be more appropriately recorded in the fiscal quarter ended
December 31, 1998.
(c) The Company increased the allowance for doubtful accounts by $307,171
in the fourth quarter of fiscal 1999. Of this adjustment, $105,540 and
$205,491 was subsequently deemed to be more appropriately recorded in
the fiscal quarter and nine months, respectively, ended December 31,
1998.
(d) Geomarketing Canada ("GMC"), a wholly-owned subsidiary of the Company,
is required to pay Canadian goods and services tax on the value of
items sold in Canada. Subsequent to June 30, 1999, the Company
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 overstatement of sales and understatement of liabilities
for the nine months ended December 31, 1998 and year ended March 31,
1998 and 1999 of $58,325 and $166,201, respectively.
(e) In connection with the sale of its sign business in the quarter ended
June 30, 1998, the Company mistakenly received $146,818 in escrowed
amounts that it was not entitled to. The Company initially kept the
escrowed funds after the escrow company made an initial attempt to have
the funds returned. However, the Company did not make a reserve for the
potential return of the funds. This resulted in an overstatement of the
gain on disposal of Core Business for the quarter ended June 30, 1998
and nine months ended December 31, 1998 of $146,818.
(f) Reflects a reclassification of "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, 1998 of $622,908.
(g) Reflects a reclassification of freight and shipping expenses, as cost
of sales, rather than sales, general and administrative expenses for
the nine months ended December 31, 1998 of $1,155,658.
<PAGE> 21
NOTE 4 - GOING CONCERN
As a result of the $8,727,144 loss incurred by the Company for the year
ended March 31, 1998, the report of the Company's auditors, dated September 22,
1998, relating to the Company's Consolidated Financial Statements for the year
ended March 31, 1998 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 this uncertainty.
The Company has been 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. 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.
