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, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-26756
GEOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
DELAWARE 87-0305614
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1555 ODELL ROAD, P. O. BOX 1750, BLAINE, WASHINGTON 98231
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (360) 332-6711
----------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of the common stock held by nonaffiliates of
the registrant as of February 15, 2002 was $1,687,746 based on a closing sales
price of $0.075 per share on the NASDAQ OTC Bulletin Board on such date.
The number of shares outstanding of the registrant's common stock,
$.001 par value, as of February 12, 2002 was 38,191,676.
DOCUMENTS INCORPORATED BY REFERENCE.
NONE
EXPLANATORY NOTE
Geographics, Inc. ("the Company") has determined to restate its condensed
consolidated quarterly financial statements for the fiscal year ending March 31,
2002, to adjust the useful life of the Domtar license and other intangibles from
fifteen years to six years, resulting in additional amortization expense of
$62,500 for the three months and $187,500 for the nine months ended December 31,
2001. This amendment includes in Item 1 such restated condensed consolidated
financial statements for the three and nine months ended December 31, 2001, 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, no other information included
in the original report on Form 10-Q is amended by this amendment. The following
items of the original report on Form 10-Q are amended: Item 1 "Financial
Statements" and the section "Results of Operations" of Item 2 "Management's
Discussion and analysis of Financial Condition and Results of Operations" 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/A for the year ended March 31, 2001.
TABLE OF CONTENTS
PAGE
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. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............................................4
PART II - OTHER INFORMATION.............................................................................................5
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.......................................................................5
ITEM 5 - OTHER INFORMATION.....................................................................................5
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K......................................................................6
SIGNATURE...............................................................................................................6
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has determined to
restate its condensed consolidated quarterly financial statements for the year
ended March 31, 2002 to adjust the useful life of the Domtar license and other
intangibles from 15 years to 6 years, resulting in additional amortization
expense of $62,500 for the three months and $187,500 for the nine months ended
December 31, 2001. The Company has attached to this Report and by this reference
incorporated herein the condensed consolidated financial statements consisting
of the consolidated balance sheets as of December 31, 2001 (restated and
unaudited) and March 31, 2001, the unaudited consolidated statements of
operations for the three and nine months ended December 31, 2001 (restated) and
2000, and the unaudited consolidated statements of cash flows for the nine
months ended December 31, 2001 (restated) and 2000, 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
condensed 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 and file storage
markets; anticipated growth in the Company's sales; anticipated growth in sales
of specialty paper products as a percentage of revenue; the Company's ability to
increase its market share within the preprint industry; the ability of the
Company to successfully implement price changes for the Company's products when
and as needed; trends relating to the Company's profitability and gross profits
margins; the ability of the Company to implement, or modify its management
information system, adequately to meet operations requirements in the future and
to improve its internal controls; and the ability of the Company to refinance
its existing revolving credit facility and to raise additional debt or equity
financing sufficient to meet its working capital requirements.
Relevant risks and uncertainties include, but are not limited to,
slower than anticipated growth of the preprint paper market; loss of certain key
customers; insufficient consumer acceptance of the Company's specialty paper and
file storage products; unanticipated actions, including price reductions, by the
Company's competitors; unanticipated increases in the costs of raw materials
used to produce the Company's products; loss of favorable trade credit; supply
terms, reliable and immediately available raw material supply and other
favorable terms with certain key vendors; greater than expected costs incurred
in connection with the implementation of a management information system; 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, 2001
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
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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.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2001 vs. Three Months Ended December 31, 2000
NET SALES. Net sales decreased 18.2% to $8,432,234 for the three months
ended December 31, 2001 from $10,438,833 in the quarter ended December 31, 2000.
Broken down by product category, paper products revenues were down $1,201,050
and GeoFiles revenues were down $564,630. Paper products revenues decreased 7.1%
in the United States and increased 7.4% in Australia. Paper products revenues
were down 96.4% in Europe, as a result of the Company's decision to convert from
a direct sales business to a licensing arrangement. The reduction in paper sales
in the United States was due to a soft market for paper products and a higher
percent sales allowance for volume rebates. The reduction in GeoFiles revenue
was due to the Company exiting direct sales of plastic products. The Company
sold off the remaining GeoFiles inventory during the third quarter of fiscal
year 2002 and does not expect any additional direct sales from that product
line.
GROSS MARGIN. Gross margin was $815,284 and $2,215,296 for the three
months ended December 31, 2001 and 2000, respectively. Gross margin as a
percentage of gross sales decreased to 8.5% in the quarter ended December 31,
2001, from 17.9% in the same period in fiscal 2001. The reduced gross margin is
due to margin lost on lower sales volume of $558,645, together with increased
distribution and production costs and the sale of discontinued products at or
below cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were down 23.4% to $1,752,374 (18.3% of gross sales)
during the three months ended December 31, 2001 compared to $2,435,075 (19.7% of
gross sales) in the same period in fiscal 2001. Decreases in depreciation and
amortization $-214,688, travel $-107,191, reduced headcount expenses $-151,941,
and an adjustment to the bad debt reserve $-180,000 were the major drivers for
the reduced spending in selling and general and administrative.
OTHER INCOME (EXPENSE). Other income of $40,047 for the three months
ended December 31, 2001 primarily represented foreign currency exchange gains
compared to other expense of $15,893 for the quarter ended December 31, 2000,
which was primarily made up of foreign currency losses.
INTEREST EXPENSE. Interest expense decreased to $183,718 (1.9% of gross
sales) for the three months ended December 31, 2001, compared to $324,024 (2.6%
of net sales) during the same period in fiscal 2001. The reduced interest
expense was attributable to lower interest rates and lower bank debt compared to
the same period last year.
Nine Months Ended December 31, 2001 vs. Nine Months Ended December 31, 2000
NET SALES. Net sales decreased 17.7% to $24,672,435 in the nine months
ended December 31, 2001 from $29,963,243 in the nine months ended December 31,
2000. The decrease in net sales of $5,290,808 was mainly attributable to exiting
the plastic products business $-3,334,435 and the transition to a licensing
arrangement in Europe $-1,457,962. For the first nine months of fiscal year 2002
paper product sales were down 1.4% in the United States and were up 3.3% in
Australia. The decrease in paper product sales year over year was due to weak
demand during the third quarter of 2002.
GROSS MARGIN. Gross margin for the nine months ended December 31, 2001
was $4,432,053 compared to $6,894,166 for the nine months ended December 31,
2000. Gross margin as a percentage of gross sales decreased to 15.5% in the nine
months ended December 31, 2001, from 19.8% in the same
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period in fiscal 2001. The lower gross margin is due to margin lost on lower
sales volume of $1,066,532, coupled with increased distribution and production
costs of $1,381,800 and the sale of discontinued products at or below cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $5,545,276 (19.4% of gross sales) during
the nine months ended December 31, 2001 from $6,865,447 (19.8% of gross sales)
in the same period in fiscal 2001. The decrease is primarily attributable to
sales volume related decreases in advertising and promotion expenses $-193,730,
lower depreciation and amortization expenses $-242,553, reduced travel and
entertainment expenses $-205,654, an adjustment to the bad debt reserve
$-180,000 and closing the European office and distribution center $-460,165.
OTHER INCOME (EXPENSE). Other income for the nine months ended December
31, 2001 amounted to $7,549 compared to $10,329 for the nine months ended
December 31, 2000.
INTEREST EXPENSE. Interest expense decreased to $595,612 (2.1% of gross
sales) during the nine months ended December 31, 2001, compared to $918,795
(2.6% of gross sales) during the same period in fiscal 2001. The lower interest
expense was attributable to reduced interest rates and lower bank debt compared
to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers
group, the introduction of the plastic file cabinet and storage group, the
opening of its Waukesha, Wisconsin distribution facility and the closing of four
warehouse locations, the Company has required, and continues to require,
substantial external working capital. During the nine months ended December 31,
2001, operating losses totaled ($1,150,722).
During the quarter ended December 31, 2001, the Company did not have
any consistently available source of working capital. The Company previously had
a revolving credit facility which expired on September 30, 2001. The credit
facility was extended by the execution of a forbearance agreement through
January 31, 2002.
As of the date of this Report, U.S. Bank continues to advance funds to
the Company based on the terms of the prior revolving credit facility. However,
U.S. Bank has no obligation to advance future funds to the Company after January
31, 2001. Although the Company is in discussions with U.S. Bank regarding an
additional forbearance agreement, U.S. Bank may declare the entire amount of the
borrowings due and payable at any time.
The prior revolving credit facility permitted borrowings of up to $9.5
million subject to a borrowing base limitation of 75% of the value of the
Company's eligible accounts receivable and 50% of the value of its qualified
inventories. Borrowings under the prior facility incurred interest at LIBOR plus
2.5% through December 17, 2001 and interest at LIBOR plus 3.0% thereafter and
are secured by substantially all of the Company's assets. Borrowings under this
facility were $8,304,950 at December 31, 2001.
During the quarter ended December 31, 2001 and during the period prior
to filing this Report, the Company entered into several arrangements with
Jonathan S. Miner in order for the Company to continue as a going concern,
including Mr. Miner loaning $500,000 to the Company and guaranteeing up to
$1,813,000 in payables to the Company's trade creditors. In February 2002, the
Company entered into a Subscription Agreement with Mr. Miner pursuant to which
Mr. Miner agreed to purchase 39,750,520 shares of the Company's common stock,
par value $0.001 per share ("Common Stock") from the
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Company, for $5,000,218 between February 18, 2002 and March 31, 2002. The
Company intends to use the proceeds from these funds to move the Company's
facilities from Blaine, Washington to Wisconsin, reduce amounts owing to U.S.
Bank, pay key trade creditors and for working capital and other corporate
purposes. The Company believes that these proceeds would be sufficient to fund
the Company's operations for the next twelve months.
Although Mr. Miner is contractually obligated to invest $5,000,218,
there is no guarantee that he will do so. The failure to obtain sufficient funds
from Mr. Miner or other sources to satisfy its working capital requirements
could force the Company to curtail operations, seek extended payment terms from
its vendors or seek protection under the federal bankruptcy laws.
The report of the Company's auditors dated June 28, 2001 relating to
the Company's Consolidated Financial Statements for the fiscal year ended March
31, 2001 states that the Company's fiscal year 2001 net loss, working capital
deficiency and accumulated deficit at March 31, 2001, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
Consolidated Financial Statements for the nine months ended December 31, 2001
were prepared assuming that the Company will continue as a going concern and do
not include any adjustments that might result from the outcome of this
uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the revenue and operating expenses of the
Company's foreign subsidiaries are denominated in local currencies and
translated into US dollars at rates of exchange approximating those existing at
the date of the transactions. Foreign currency translation impacts primarily
revenue and operating expenses as a result of foreign exchange rate
fluctuations. The Company's foreign currency transaction risk is primarily
limited to amounts receivable from its foreign subsidiaries, which are
denominated in local currencies. 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 10% in fiscal
year 2001 relative to the currencies in which the Company's sales are
denominated, loss before taxes would increase by $35,000 and $92,000 for the
three months and nine months ended December 31, 2001, respectively. 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.
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PART II - OTHER INFORMATION
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
As of December 31, 2001, the Company had borrowings of $8,304,950 on
its revolving credit facility with U.S. Bank. This revolving credit facility
expired on September 30, 2001. The Company entered into a forbearance agreement
with U.S. Bank that expired on January 31, 2002. The Company is currently
negotiating another forbearance agreement with U.S. Bank. Although U.S. Bank
continues to advance funds to the Company, U.S. Bank has no obligation to
continue doing so. Furthermore, U.S. Bank may declare all borrowings due and
payable at any time.
ITEM 5 - OTHER INFORMATION
During the quarter ended December 31, 2001 and during the period prior
to filing this Report, the Company entered into several arrangements with
Jonathan S. Miner including Mr. Miner loaning $500,000 to the Company and
guaranteeing up to $1,813,000 in payables to the Company's trade creditors (the
"Miner Guarantees").
In February 2002, the Company entered into a Subscription Agreement
with Mr. Miner pursuant to which Mr. Miner agreed to purchase an aggregate of
39,750,520 shares of the Company's Common Stock, representing approximately 51%
of the Company's outstanding Common Stock, between February 18, 2002 and March
31, 2002. The purchase price per share is $0.12579. The purchase date and
amounts of Mr. Miner's purchase of the Common Stock is set forth below:
PURCHASE DATE PAYMENT SHARES
------------- ------- ------
February 18, 2002 $500,000.00 3,974,878.77
February 25, 2002 $1,000,000.00 7,949,757.53
March 15, 2002 $1,500,000.00 11,924,636.30
March 31, 2002 $2,000,217.91 15,901,247.40
Mr. Miner made the first required payment on February 15, 2002. The payment of
$500,000 previously advanced by Mr. Miner will be used to satisfy a portion of
the March 31, 2002 payment.
Pursuant to the Subscription Agreement, the Company has an obligation
to release Mr. Miner from the Miner Guarantees. In addition, the Company agreed
to grant Mr. Miner warrants to purchase 50,000 shares of Common Stock in
exchange for the Miner Guarantees. These warrants are exercisable at $.20 per
share and expire in February 2004.
Pursuant to the Subscription Agreement, the Company agreed to (i)
expand its Board of Directors (which currently consists of five directors) to
seven directors, (ii) cause two of the Company's existing directors to resign
from the Company's Board of Directors and (iii) to the extent not inconsistent
with the fiduciary obligations of the Company's directors, cause the remaining
directors to fill the vacant positions on the Company's Board of Directors with
four individuals to be named by Mr. Miner.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Subscription Agreement dated as of February 14, 2002, by
and between Geographics, Inc. and Jonathan S. Miner.
10.2 Forbearance Agreement dated as of September 30, 2001,
between Geographics, Inc. and U.S. Bank National Association.
(b) There were no reports on Form 8-K filed during the quarter
ended December 31, 2001.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this form 10-Q/A to be signed on its
behalf by the undersigned, thereunto duly authorized on this th day of March,
2002
GEOGRAPHICS, INC.
By: /s/ James L. Dorman
-------------------------------------
James L. Dorman
President and Chief Executive Officer
By: /s/ Michael Oakes
-------------------------------------
Michael Oakes
Controller
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GEOGRAPHICS, INC.
FORM 10-Q
EXHIBIT INDEX
FOR THE QUARTER ENDED DECEMBER 31, 2000
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
10.1 Subscription Agreement dated as of February 14, 2002, by and
between Geographics, Inc. and Jonathan S. Miner.
10.2 Forbearance Agreement dated as of September 30, 2001, between
Geographics, Inc. and U.S. Bank National Association.
F-1
GEOGRAPHICS, INC
Condensed Consolidated Balance Sheets
December 31, 2001 and March 31, 2001
ASSETS
DECEMBER 31, 2001 MARCH 31, 2001
----------------- --------------
(RESTATED AND UNAUDITED)
Current Assets
Cash $ 477,379 $ 421,049
Accounts receivable
Trade receivables, net of allowances of $473,408 and $1,042,000 at
December 31 and March 31, 2001, respectively 5,428,842 7,188,772
Other receivables 204,966 155,281
Inventories 5,772,681 6,634,321
Prepaid expenses, deposits, and other current assets 488,062 603,950
------------ ------------
Total current assets 12,371,930 15,003,373
PROPERTY, PLANT AND EQUIPMENT, NET 8,528,599 9,007,234
LICENSES, TRADEMARKS AND OTHER INTANGIBLE ASSETS,NET 2,454,348 2,826,512
OTHER ASSETS 129,406 198,377
------------ ------------
TOTAL ASSETS $ 23,484,283 $ 27,035,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 538,113 $ 975,489
Note payable to bank 8,304,950 8,406,861
Accounts payable 4,979,226 5,401,482
Accrued liabilities 2,126,865 4,237,110
Current portion of long-term debt 782,456 974,790
------------ ------------
Total current liabilities 16,731,610 19,995,732
LONG-TERM DEBT 2,891,162 1,628,908
------------ ------------
Total liabilities 19,622,772 21,624,640
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - 100,000,000 shares authorized, 38,191,676 and 26,965,589
shares issued and outstanding at December 31 and March 31, 2001, respectively 38,192 38,192
Additional paid-in capital 26,209,571 26,190,460
Accumulated other comprehensive loss (335,699) (418,528)
Accumulated deficit (22,050,553) (20,399,268)
------------ ------------
Total stockholders' equity 3,861,511 5,410,856
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,484,283 $ 27,035,496
============ ============
See accompanying notes to condensed consolidated financial statements.
F-2
GEOGRAPHICS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
SALES $ 9,580,418 $ 12,380,639 $ 28,563,498 $ 34,755,272
Returns and Allowances (1,148,184) (1,941,806) (3,891,063) (4,792,029)
------------ ------------ ------------ ------------
Net Sales 8,432,234 10,438,833 24,672,435 29,963,243
COST OF SALES 7,616,950 8,223,537 20,240,382 23,069,077
------------ ------------ ------------ ------------
Gross Margin 815,284 2,215,296 4,432,053 6,894,166
S.G.& A. EXPENSES 1,752,374 2,435,075 5,545,275 6,865,447
------------ ------------ ------------ ------------
Operating Income (Loss) (937,090) (219,779) (1,113,222) 28,719
OTHER INCOME (EXPENSE)
Interest Expense (183,718) (324,024) (595,612) (918,795)
Other Income (Expense) 40,047 (15,893) 7,549 10,329
------------ ------------ ------------ ------------
Total Other Income (Expense) (143,671) (339,917) (588,063) (908,466)
NET INCOME (LOSS) BEFORE INCOME TAXES (1,080,761) (559,696) (1,701,285) (879,747)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,080,761) $ (559,696) $ (1,701,285) $ (879,747)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Basic $ (0.03) $ (0.01) $ (0.04) $ (0.03)
============ ============ ============ ============
Diluted $ (0.03) $ (0.01) $ (0.04) $ (0.03)
============ ============ ============ ============
SHARES USED IN COMPUTING NET INCOME (LOSS) PER
COMMON AND COMMON EQUIVALENT SHARE
Basic 38,191,676 38,174,682 38,191,676 34,641,522
============ ============ ============ ============
Diluted 38,191,676 38,174,682 38,191,676 34,641,522
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-3
GEOGRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
----------- -----------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $(1,701,285) $ (929,747)
Adjustments to reconcile net income (loss) to net
cash flows used by operating activities
Depreciation and amortization 1,543,754 1,572,540
Stock based compensation 19,112 117,982
Interest on debentures -- 67,000
Revaluation of subsidiary inventories -- 99,000
Changes in operating assets and liabilities
Trade receivables 1,759,930 (1,715,848)
Other receivables (49,684) (17,339)
Inventories 861,640 (3,850,977)
Prepaid expenses, deposits and other current assets 115,888 (284,910)
Licenses, trademarks and other intangible assets -- 30,220
Other assets 68,971 128,257
Accounts payable (422,255) 1,879,326
Accrued liabilities (2,012,530) 2,014,367
----------- -----------
Net cash flows from operating activities 183,541 (890,129)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (642,955) (751,418)
Purchase of certain Z International assets -- (100,000)
Purchase of certain Domtar Consumer Products assets -- (3,049,138)
----------- -----------
Net cash flows from investing activities (642,955) (3,900,556)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdrafts (437,376) 997,161
Net borrowings on note payable to bank (101,911) 454,259
Repayment of long-term debt (630,080) (1,058,849)
Proceeds from issuance of subordinated debt 1,700,000 --
Proceeds from notes payable to officers and directors -- 1,000,000
Repayment of notes payable to officers and directors -- (1,000,000)
Proceeds from the issuance of common stock -- 5,032,850
----------- -----------
Net cash flows from financing activities 530,633 5,425,421
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (14,889) (19,840)
----------- -----------
NET CHANGE IN CASH 56,330 614,896
CASH, BEGINNING OF PERIOD 421,049 360,612
----------- -----------
CASH, END OF PERIOD $ 477,379 $ 975,508
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 544,747 $ 787,880
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-4
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited condensed consolidated financial
statements of Geographics, Inc. (the "Company" or "Geographics") have been
prepared in accordance with generally accepted accounting principles in the
United States of America 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 annual report on Form 10-K for the
fiscal year ended March 31, 2001.
The consolidated financial statements include the accounts of
Geographics and its wholly-owned subsidiaries: Geographics Marketing Canada Inc.
(inactive), Geographics (Europe) Limited and Geographics Australia, Pty.
Limited. All intercompany balances and transactions have been eliminated in
consolidation.
NOTE 2 - FUTURE ACCOUNTING CHANGES
In April, 2001, the Emerging Issues Task force (EITF) reached a
consensus on certain issues within Issue 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products".
The EITF concluded that consideration from a vendor to a reseller of the
vendor's products, such cooperative advertising programs, should be recognized
as a reduction of revenue when recognized in the vendor's income statement.
Application of EITF 00-25 is required no later than in annual or interim
financial statement periods beginning after December 15, 2001. Upon application
of this Issue, financial statements for prior periods presented for comparative
purposes should be reclassified to comply with the income statement display
requirements. The Company has not yet determined the impact of the adoption of
this Issue on the Company's consolidated financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." SFAS No. 141 requires the use of the purchase method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how
intangible assets acquired outside of a business combination should be accounted
for upon acquisition and how goodwill and other intangible assets should be
accounted for after they have been initially recognized. SFAS No. 142 eliminates
the amortization for goodwill and other intangible assets with indefinite lives.
Other intangible assets with a finite life will be amortized over their useful
life. Goodwill and other intangible assets with indefinite useful lives shall be
tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset may be impaired. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Management, at this time,
cannot determine the effect that adoption of SFAS No. 142 may have on the
financial statements of the Corporation as the statement requires a
comprehensive review of previous combinations accounted for under the purchase
accounting method and an analysis of impairment as of the date of adoption. The
impairment analysis for goodwill and other intangible assets with an indefinite
useful life has not been completed. The impairment analysis will be completed
within the timelines outlined in SFAS No. 142.
F-5
NOTE 3 - RESTATEMENT
The Company has determined to restate its condensed consolidated quarterly
financial statements for the year ended March 31, 2002 to adjust the estimated
life of the Domtar license from 15 years to 6 years, resulting in additional
amortization expense of $62,500 for the three months and $187,500 for the nine
months ended December 31, 2001. The following sets forth the effect of this
adjustment:
At December 31, 2001:
Licenses, Trademarks and Other Intangible Assets $ 2,891,848 $ (437,500) $ 2,454,348
Total Assets 23,921,783 (437,500) 23,484,283
Accumulated Deficit (21,613,053) (437,500) (22,050,553)
Stockholders' Equity 4,299,011 (437,500) 3,861,511
Total Liabilities and Stockholders' Equity $ 23,921,783 $ (437,500) $ 23,484,283
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001:
Cost of Sales $ 7,554,450 $ 62,500 $ 7,616,950
Gross Margin 877,784 (62,500) 815,284
Income (Loss) Before Tax (1,018,261) (62,500) (1,080,761)
Net Income (Loss) $ (1,018,261) $ (62,500) $ (1,080,761)
Net Income (Loss) Per Share $ (0.03) $ -- $ (0.03)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001:
Cost of Sales $ 20,052,882 $ 187,500 $ 20,240,382
Gross Margin 4,619,553 (187,500) 4,432,053
Income (Loss) Before Tax (1,513,785) (187,500) (1,701,285)
Net Income (Loss) $ (1,513,785) $ (187,500) $ (1,701,285)
Net Income (Loss) Per Share $ (0.04) $ -- $ (0.04)
NOTE 4 - INVENTORIES
Inventories at December 31, 2001 and March 31, 2001 consisted of the
following:
December 31, March 31,
2001 2001
-------------- --------------
Raw materials $ 940,781 $ 809,794
Work-in-process 927,142 1,121,778
Finished goods 3,904,758 4,702,749
-------------- --------------
$ 5,772,681 $ 6,634,321
============== ==============
F-6
NOTE 5- NET SALES BY PRODUCT CATEGORY
The Company's operations are classified into two product categories:
Designer Stationery and Specialty Papers, and Plastic Filing and Storage
Cabinets. Net sales attributable to each class of product are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Restated) (Restated)
Designer Stationeries and Specialty Papers $ 8,363,290 $ 9,801,432 $24,097,653 $26,050,177
Plastic Filing and Storage Cabinets 68,944 637,401 574,782 3,913,066
----------- ----------- ----------- -----------
$ 8,432,234 $10,438,833 $24,672,435 $29,963,243
=========== =========== =========== ===========
NOTE 6- NET INCOME (LOSS) PER SHARE
The numerators and denominators of basic and diluted net income (loss)
per share are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Restated) (Restated)
Net income (loss) (numerator) $ (1,080,761) $ (559,696) $ (1,701,285) $ (879,747)
============ ============ ============ ============
Shares used in the calculation (denominator)
Weighted average shares outstanding 38,191,676 38,174,682 38,191,676 34,641,522
Effect of dilutive stock options and warrants -- -- -- --
------------ ------------ ------------ ------------
38,191,676 38,174,682 38,191,676 34,641,522
============ ============ ============ ============
Options to purchase shares of common stock under the Company's Nonqualified
Stock Option Plan were outstanding during the three and nine month periods
ending December 31, 2001 and 2000. However, some shares were not included in the
computation of diluted earnings per share if the exercise price of the options
was greater than the average market price of the common shares, because the
effect would therefore be antidilutive. The number of shares excluded from the
computation were 11,950,000 and 3,450,000 for the three and nine month periods
ended December 31, 2001 and 2000, respectively.
F-7
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Restated) (Restated)
Net income (Loss) $(1,080,761) $ (559,696) $(1,701,285) $ (879,747)
Other comprehensive income (loss)
Foreign currency translation 38,848 61,632 82,829 (19,840)
----------- ----------- ----------- -----------
Comprehensive Income (Loss) $(1,041,913) $ (498,064) $(1,618,456) $ (899,587)
=========== =========== =========== ===========
NOTE 8 - CHANGES IN ACCOUNTING ESTIMATES
The Company estimates provisions for bad debts based on management's
estimate of anticipated losses. During the quarter ended December 31, 2001 the
Company lowered its estimate of reserves required by $180,000, which increased
the results from operations by similar amounts.
The Company estimates provisions for slow moving and discontinued
product based on management's estimate of anticipated losses. During the quarter
ended September 30, 2001 the Company lowered its estimate of reserves required
by $200,000.00 which increased margins and the results from operations by
similar amounts.
F-8