<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26756
------------------------
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
--------------------------------------------------------------------------------
(Address of principal executive office and zip code)
(360) 332-6711
--------------------------------------------------------------------------------
(Registrant's telephone number including area code)
--------------------------
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 Registrant had 9,857,252 shares of common stock, no par value, outstanding
at June 30, 1998
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 months ended June 30, 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 Exhibit 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> 2
DOCUMENTS INCORPORATED BY REFERENCE
FORM 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 29, 1998
<TABLE>
<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
OVERVIEW.....................................................................................1
SEASONALITY..........................................................................2
QUARTERLY FLUCTUATIONS...............................................................2
RESULTS OF OPERATIONS........................................................................2
SALES................................................................................2
GROSS MARGIN.........................................................................2
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.........................................2
INTEREST EXPENSE.....................................................................2
LIQUIDITY AND CAPITAL RESOURCES..............................................................3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................3
FOREIGN CURRENCY.............................................................................3
INFLATION....................................................................................3
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K......................................................4
SIGNATURES...................................................................................................4
INDEX TO FINANCIAL STATEMENTS............................................................................... 5
CONSOLIDATED BALANCE SHEET.................................................................................F-1
CONSOLIDATED STATEMENT OF OPERATIONS.......................................................................F-2
CONSOLIDATED STATEMENT OF CASH FLOWS.......................................................................F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................F-4
</TABLE>
<PAGE> 3
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 June 30, 1998 (unaudited) and March 31, 1998, the unaudited statements of
operations for the three months ended June 30, 1998 and June 30, 1997, and the
unaudited consolidated statements of cash flows for the three months ended June
30, 1998 and June 30, 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 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 87% and 78% of the Company's total sales
in the quarter ended June 30, 1998 and the fiscal year ended March 31, 1998,
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 during fiscal
year 1994 to $25,884,553 for fiscal 1998, an increase of 275%.
On May 4, 1998, the Company and its primary lender, U.S. Bank of
Washington, National Association (the "Bank"), executed an Amended and Restated
Asset Purchase Agreement for the sale of the Company's lettering and signage
business (the "Transaction") to Identity Group, Inc., an unaffiliated Tennessee
corporation. The terms governing and the circumstances surrounding the
Transaction were previously disclosed by the Company in a Form 8-K filed with
the Securities and Exchange Commission on June 29, 1998. Such Form 8-K is hereby
incorporated by reference herein and made a part hereof.
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.
Since June 30, 1998, the Company has continued to seek extended payment
terms from its vendors, delayed purchases of raw materials, instituted internal
cost reduction measures and took other steps to conserve operating capital. As a
result, from and after June 30, 1998, the Company has faced the proposition that
its 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, since June 30, 1998, the
Company has continued to pursue possible sources of additional capital, which
could include the issuance of debt or equity securities or the sale of all or
part of the Company's assets. However, at the end of the period ending June 30,
1998, 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
-1-
<PAGE> 4
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."
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.
RESULTS OF OPERATIONS
SALES. Sales decreased 18% to $5,793,832 in the quarter ended June 30,
1998 from $7,087,490 in the quarter ended June 30, 1997. Geopaper products were
responsible for 87% of sales for the quarter ended June 30, 1998, compared to
76% for the same period a year earlier. Sales of Geopaper decreased 6% to
approximately $5,042,293 from approximately $5,363,291 for the periods ended
June 30, 1998 and June 30, 1997, respectively.
Due to the fact that the Company sold its lettering and signage business
during its first quarter, sales of the Company's lettering and signage products
decreased 55% to approximately $751,539 for the quarter ended June 30, 1998
compared to approximately $1,724,109 for the quarter ended June 30, 1997.
International sales of Geographics products were $1,746,621 for the
quarter ended June 30, 1998, an increase of 4% over international sales of
$1,684,119 for the quarter ended June 30, 1997. International sales of
Geographics products represented 25% of the Company's total sales for the
quarter ended June 30, 1998, compared to 23% of total sales for the same period
in the prior year.
GROSS MARGIN. Gross profit margin as a percentage of sales was 38% for
the quarter ended June 30, 1998, compared to (2)% for the same period in the
prior year.
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, 1998 to 33%, as compared
to 30% 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, 1998 decreased 21% to $337,480 compared to $428,324 for the same period
in the prior year. The decrease is mainly due to the $6.8 million pay-down of
the credit line 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 1998, 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
-2-
<PAGE> 5
capital. During fiscal 1998, operating losses totaled $8,011,719, and the
Company experienced positive operating cash flows of $1,145,131. During the
quarter ended June 30, 1998, operating income totaled $264,884, and the Company
experienced positive operating cash flows of $7,411,945.
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.
The Company's Consolidated Financial Statements for the fiscal year
ended March 31, 1998 (as well as the Unaudited Consolidated Financial Statements
for the fiscal quarter ended June 30, 1998 included in this Report) 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 third forbearance agreement with its lender,
effective May 1, 1998, pursuant to which the lender agreed to extend the
expiration date of the revolving credit facility to November 30, 1998.
Although the Company's lender has permitted borrowings under the
revolving credit facility, however, there can be no assurance that it will
continue to do so. Accordingly, for the foreseeable future the Company will
continue to seek extended payment terms from its vendors, delay purchases of raw
materials, institute 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 pursuing possible sources of
additional capital, 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 end of the quarter ended June 30, 1998, 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.
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.
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<PAGE> 6
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.
INFLATION
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 effect on its results,
operations or liquidity.
B. The following Current Reports on Form 8-K were filed by the
Company during the period covered by this Report:
1. Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 29, 1998
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 th day of July, 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
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<PAGE> 7
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998 F-1
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997 F-2
Consolidated Statements of Cash Flows for the three months ended
June 30, 1998 and 1997 F-3
Notes to Consolidated Financial Statements F-5
-5-
<PAGE> 8
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998 AND MARCH 31, 1997
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
ASSETS (UNAUDITED) (AUDITED)
Restated Restated
<S> <C> <C>
CURRENT ASSETS
Cash $ 190,339 $ 316,078
Accounts receivable
Trade receivables, net 3,492,837 4,145,660
Other receivables 271,516 148,050
Inventory, net of allowance for obsolete inventory
of $586,000 June 30, 1998 and March 31, 1998 5,244,394 6,763,508
Prepaid expenses, deposits, and other current assets 947,102 731,307
------------ ------------
Total current assets 10,146,188 12,104,603
PROPERTY, PLANT AND EQUIPMENT, NET 12,480,662 12,881,118
OTHER ASSETS 372,688 340,043
------------ ------------
TOTAL ASSETS $ 22,999,538 $ 25,325,764
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 198,943 $ 301,716
Note payable to bank 4,275,177 11,300,808
Accounts payable 3,223,934 3,285,467
Accrued liabilities 2,581,512 2,738,919
Notes payable to officers and directors -- --
Current portion of long-term debt 3,350,344 3,350,344
------------ ------------
Total current liabilities 13,629,910 20,977,254
------------ ------------
LONG-TERM DEBT 4,517,712 4,853,254
------------ ------------
Total liabilities 18,147,622 25,830,508
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
No par common stock--100,000,000 authorized,
9,857,252 and 9,857,252 issued
and outstanding at June 30, 1998 and March
31, 1998, respectively 15,759,353 15,769,018
Foreign currency translation adjustment 33,899
Retained earnings (accumulated deficit) (10,907,437) (16,307,661)
------------ ------------
Total stockholders' equity 4,851,916 (504,744)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,999,538 $ 25,325,764
============ ============
</TABLE>
See Accompanying Notes to These Financial Statements.
F-1
<PAGE> 9
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30
1998 1997
Restated
----------- -----------
<S> <C> <C>
SALES $ 5,793,832 $ 7,087,490
COST OF SALES 3,591,795 7,219,939
----------- -----------
Gross margin 2,202,037 (132,449)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,937,153 2,155,960
----------- -----------
Income from operations 264,884 (2,288,409)
OTHER INCOME (EXPENSE)
Interest Expense (337,480) (428,324)
Other (15,573) (19,040)
----------- -----------
(353,053) (447,364)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (88,169) (2,735,773)
INCOME TAX PROVISION -- --
PROCEEDS FROM SALE OF CORE BUSINESS 5,510,762 --
----------- -----------
NET INCOME (LOSS) $ 5,422,593 $(2,735,773)
=========== ===========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
BASIC $ .55 $ (0.29)
=========== ===========
DILUTED $ .55 $ (0.29)
=========== ===========
SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
BASIC 9,857,252 9,467,877
=========== ===========
DILUTED 9,857,252 9,467,877
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-2
<PAGE> 10
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
Restated
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,422,593 $(2,735,773)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES
Depreciation and amortization 432,261 428,205
Deferred income taxes -- --
(Gain) loss on sales of property and equipment -- 1,740
Reserve for impairment on EDP installation-in-progress
Changes in Non-cash Operating Assets and Liabilities
Trade receivables 652,823 (478,793)
Related party receivables -- --
Other receivables (123,466) 108,987
Inventory 1,519,114 755,698
Prepaid expenses, deposits and other current assets (248,440) (336,962)
Accounts payable (61,533) 1,145,755
Accrued liabilities (181,407) 3,524
Income tax payable -- --
----------- -----------
Net cash flows from operating activities 7,411,945 (1,107,619)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdrafts (102,772) 331,314
Net borrowings on note payable to bank (7,025,631) 2,598,835
Proceeds from long-term debt borrowings -- --
Repayment of long-term debt (335,542) (281,884)
Repayments of notes payable to officers and directors -- (850,000)
Net Proceeds (costs) from issuance of common stock -- (584)
Foreign currency translation (41,931) (41,505)
----------- -----------
Net cash flows from financing activities (7,505,876) 1,756,176
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (31,808) (674,956)
Proceeds from sales of equipment -- --
Net advances from (repayments to) partnerships -- --
Change in other assets (49,977)
----------- -----------
Net cash flows from investing activities (31,808) (724,933)
----------- -----------
NET CHANGE IN CASH (125,739) (76,376)
CASH, beginning of quarter 316,078 408,757
----------- -----------
CASH, end of quarter $ 190,339 $ 332,381
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ 0 $ 1,677,918
=========== ===========
</TABLE>
See Accompanying Notes to These Consolidated Financial Statements
F-3
<PAGE> 11
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 once a year.
Reclassifications - Certain prior year amounts have been reclassified to
conform to current Year presentations. Such reclassifications had no effect on
previously reported Earnings or financial position.
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 April 1999. The
minimum lease commitment is $64,770 in 1999.
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 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
-9-
<PAGE> 12
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.
-10-
<PAGE> 13
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 June 30, 1998:
Accounts receivable, net $ 3,644,433 $ (151,596)(a)(b) $ 3,492,837
Inventory, net 5,344,345 (99,951)(c) 5,244,394
Current assets 10,397,735 (251,547)(a)(b)(c) 10,146,188
Total Assets 23,251,085 (251,547)(a)(b)(c) 22,999,538
Accrued Liabilities 2,381,453 200,059 (d)(e) 2,581,512
Current Liabilities 13,429,851 200,059 (d)(e) 13,629,910
Total Liabilities 17,947,563 200,059 (d)(e) 18,147,622
Accumulated Deficit (10,455,831) (451,606)(a)(b)(c)(d)(e) (10,907,437)
Stockholders' Equity 5,303,522 (451,606)(a)(b)(c)(d)(e) 4,851,916
Total Liabilities and Stockholders' Equity $ 23,251,085 $ (251,547) $ 22,999,538
As Previously As
Reported Adjustments Restated
------------- ----------------------------- ------------
<S> <C> <C> <C>
For the three months ended June 30, 1998:
Net sales $ 6,059,978 $ (266,146)(b)(d)(f) $ 5,793,832
Cost of Sales 2,887,185 704,610 (c)(g) 3,591,795
Gross Margin 3,172,793 (970,756)(b)(c)(d)(f)(g) 2,202,037
Selling, General and Administrative 2,680,647 (743,494)(b)(c)(d)(f)(g) 1,937,153
Expenses
Income (loss) from Operations 492,146 (227,262)(b)(c)(d)(f)(g) 264,884
Income (loss) from Continuing Operations 139,093 (227,262)(b)(c)(d)(f)(g) (88,169)
Proceeds from Sale of Core Business 5,657,580 (146,818)(g) 5,510,762
Net Income $ 5,796,673 $ (374,080) $ 5,422,593
Net Income Per Share $ 0.59 $ (0.04) $ 0.55
</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
identify the amount of sales returns that were due a particular
customer. This resulted in an understatement of sales returns for the
quarter ended June 30, 1998 and year ended March 31, 1998 of $19,201
and 119,571, respectively.
(b) The company increased its 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
June 30, 1998.
(c) The Company increased the allowance for obsolete inventory by $99,951
in the fourth quarter of fiscal 1999. This adjustment was subsequently
deemed to be
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<PAGE> 14
more appropriately recorded in the fiscal quarter ended June 30, 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 years ended March 31, 1998 and 1999 by $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
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 three months ended June 30, 1998 of $271,230.
(g) Reflects a reclassification of freight and shipping expenses, as cost
of sales, rather than sales, general and administrative expenses for
the three months ended June 30, 1998 of $604,659.
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'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.
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