-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CHGkzWM+I7ETX1+bsgerI6azzsJCqBldgPEw0+KJkYlwb0kKioIY+qfaMuRNe48i BiSZWr/uhtllk9ghtlLhWw== /in/edgar/work/20000907/0000950124-00-005454/0000950124-00-005454.txt : 20000922 0000950124-00-005454.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950124-00-005454 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 20000907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOGRAPHICS INC CENTRAL INDEX KEY: 0001000621 STANDARD INDUSTRIAL CLASSIFICATION: [5110 ] IRS NUMBER: 870305614 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-26756 FILM NUMBER: 717701 BUSINESS ADDRESS: STREET 1: 1555 ODELL RD STREET 2: P O BOX 1750 CITY: BLAINE STATE: WA ZIP: 98230 BUSINESS PHONE: 3603326711 MAIL ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 10-Q/A 1 c56533a1e10-qa.txt AMENDMENT NO. 1 TO FORM 10-Q 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. 2 DOCUMENTS INCORPORATED BY REFERENCE FORM 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1998 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
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- 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- 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. -3- 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 -4- 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- 8 GEOGRAPHICS, INC. CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND MARCH 31, 1997
JUNE 30, 1998 MARCH 31, 1998 ASSETS (UNAUDITED) (AUDITED) Restated Restated 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 ============ ============
See Accompanying Notes to These Financial Statements. F-1 9 GEOGRAPHICS, INC. CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (UNAUDITED)
THREE MONTHS ENDED JUNE 30 1998 1997 Restated ----------- ----------- 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 =========== ===========
See accompanying notes to these consolidated financial statements F-2 10 GEOGRAPHICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 INCREASE (DECREASE) IN CASH (UNAUDITED)
THREE MONTHS ENDED JUNE 30 1998 1997 Restated ----------- ----------- 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 =========== ===========
See Accompanying Notes to These Consolidated Financial Statements F-3 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- 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- 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:
As Previously As Reported Adjustments Restated ------------- ----------------------------- ------------ 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 ------------- ----------------------------- ------------ 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
(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 -11- 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. -12- EX-27.1 2 c56533a1ex27-1.txt FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 190,339 0 4,326,615 562,262 5,244,394 10,146,188 12,480,662 0 22,999,538 13,629,910 4,517,712 0 0 15,769,018 (10,907,437) 22,999,638 5,793,832 5,793,832 3,591,795 1,937,153 15,573 0 337,480 (88,169) 0 (88,169) 0 5,510,762 0 5,422,593 0.55 0.55
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