10-Q 1 c66231e10-q.txt QUARTERLY REPORT DATED 09/30/01 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Quarter Ended September 30, 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 November 13, 2001 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 November 13, 2001 was 38,191,676. DOCUMENTS INCORPORATED BY REFERENCE. NONE 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 NEW ACCOUNTING PRONOUNCEMENTS..................................................................................3 ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...............................................4 PART II - OTHER INFORMATION.............................................................................................4 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................5 ITEM 5 - OTHER INFORMATION.....................................................................................5 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K......................................................................6 SIGNATURE...............................................................................................................6
-i- 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 unaudited condensed financial statements consisting of the consolidated balance sheet as of September 30, 2001 and the audited balance sheet as of March 31, 2001, the statements of operations for the three and six months ended September 30, 2001 and 2000, and the consolidated statements of cash flows for the six months ended September 30, 2001 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 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; 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; 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 expectations at the time of this Report only, and the Company disclaims any responsibility to revise or update any such forward-looking statement except as may be required law. -1- RESULTS OF OPERATIONS Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000 NET SALES. Net revenues decreased 25.2% to $7,716,017 for the three months ended September 30, 2001 compared $10,319,736 in the quarter ended September 30, 2000. Paper product revenues were down $163,019 and GeoFiles revenues were down $2,440,700. Paper product revenues increased in the United States and Australia by 3.7 percent and 11.2 percent, respectively. Paper product revenues in Europe dropped by 95.1 percent, as a result of the Company's decision to convert from a direct sales business to a licensing arrangement. The dramatic drop in GeoFiles revenues was due to the company exiting the plastics product business. The Company expects to see lower GeoFiles revenue while the remaining inventory is sold off. GROSS MARGIN. Gross margin was $2,257,147 and $2,123,607 for the three months ended September 30, 2001 and 2000, respectively. Gross margin as a percentage of gross sales increased to 25.2% in the quarter ended September 30, 2001, from 17.8% in the same period in fiscal 2001. The higher gross margin percentage is attributable to better mix of more profitable paper product sales, reduced inventory provisions ($586,960), lower inbound freight expenses ($644,293) and lower distribution expenses ($855,879). The reduction in inbound freight in expenses was a direct result of exiting the plastic products business. The lower distribution expenses was a result of consolidating four distribution centers into one and fewer GeoFiles shipped. The aforementioned spending reductions were offset by reduced margins in Europe ($192,580) and Australia ($101,943) and lost standard margins due to lower sales in the United states ($1,523,824). SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased to $1,878,323 (21.0% of gross sales) during the three months ended September 30, 2001 from $2,295,515 (21.0% of gross sales) in the same period in fiscal 2001. The decrease is largely attributable to closing the European office and distribution center (-$187,274), coupled with lower travel expenses ($60,101) and lower legal and accounting expenses ($48,575). OTHER INCOME (EXPENSE). Other expense of $19,209 for the three months ended September 30, 2001 primarily represented foreign currency exchange losses compared to other income of $40,600 for the quarter ended September 30, 2000, representing realized foreign currency exchange gains in the period. INTEREST EXPENSE. Interest expense decreased to $193,630 (2.2% of gross sales) for the three months ended September 30, 2001, compared to $372,956 (3.1% of gross sales) during the same period in fiscal 2001. The reduced interest expense was attributable to lower interest rates compared to the same period last year. Six Months Ended September 30, 2001 vs. Six Months Ended September 30, 2000 NET SALES. Net sales decreased 16.8% to $16,240,201 in the six months ended September 30, 2001 from $19,524,410 in the six months ended September 30, 2000. The decrease in sales of $3,284,209 was mainly attributable to exiting the plastic products business (-$2,769,804) and the transition to a licensing arrangement in Europe (-$788,854). Paper product sales in the United States and Australia were up 1.8 % and 1.2 %, respectively. GROSS MARGIN. Gross margin for the six months ended September 30, 2001 was $3,741,770 compared to $4,828,871 for the six months ended September 30, 2000. Gross margin as a percentage of gross sales decreased to 19.7% in the six months ended September 30, 2001, from 21.6% in the same period in fiscal 2001. The lower gross margin was driven by lost standard margin due to lower sales in -2- the United States ($2,542,573) and reduced margins in Europe ($287,215) and Australia ($106,186). The reduced margins were offset by lower inbound freight expenses ($780,646), lower inventory provisions ($605,993), and lower distribution expenses ($623,839). SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased to $3,792,902 (20.0% of gross sales) during the six months ended September 30, 2001 from $4,430,373 (19.8% of gross sales) in the same period in fiscal 2001. The decrease is primarily attributable to sales volume related decreases in advertising and promotion ($-173,135), and the closing of the European office and distribution center ($-381,253). OTHER INCOME (EXPENSE). Other expense for the six months ended September 30, 2001 amounted to $-32,498 compared to other income of $26,222 for the six months ended September 30, 1999. The swing from other income to other expense was mainly attributable to a currency exchange loss of $-35,760 compared to a gain of $20,700 for the first six months of fiscal year 2002 and 2001, respectively. INTEREST EXPENSE. Interest expense decreased to $411,894 (2.2% of gross sales) during the six months ended September 30, 2001, compared to $594,771 (2.7% of gross sales) during the same period in fiscal 2001. The lower interest expense is the result of lower borrowing rates compared to 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 six months ended September 30, 2001, operating losses totaled $(51,132), however, the Company experienced positive operating cash flows of $124,446. At the date of this Report, the Company does not have any definitive available source of working capital. The Company previously had a revolving credit facility, which expired on September 30, 2001. 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. 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% and are secured by substantially all of the Company's assets. Borrowings under this facility were $8,502,587 at September 30, 2001. U.S. Bank has no obligation to advance future funds to the Company. Furthermore, U.S. Bank may declare the entire amount of the borrowings due and payable at any time. The Company is currently in discussions with U.S. Bank and other potential lenders regarding obtaining definitive sources of funds for working capital. However, there can be no assurance that these efforts will be successful. The failure to obtain funds when and as needed 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 Company operates in a highly competitive environment. Many of the Company's competitors are larger, better capitalized and have substantially greater financial, marketing and human resources. The Company currently does not have the financial ability to make significant expenditures for sales, service, training and support capabilities, investments in systems, procedures and controls, expansions of operations and research and development, among many other items that may be necessary to remain competitive. -3- 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 six months ended September 30, 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. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Substantially all of the revenue and operating expenses of the Company's foreign subsidiaries are denominated in local currencies and translated into US dollars at rates of exchange approximating those existing at the date of the transactions. Foreign currency translation impacts primarily revenue and operating expenses as a result of foreign exchange rate fluctuations. The Company's foreign currency transaction risk is primarily limited to amounts receivable from its foreign subsidiaries, which are denominated in local currencies. To minimize foreign currency transaction risk, the Company ensures that its foreign subsidiaries remit amounts to the U.S. parent in a timely manner. The Company does not currently utilize foreign currency hedging contracts. The Company also has foreign exchange translation exposures resulting from the translation of foreign currency-denominated earnings into U.S. dollars in the Company's consolidated financial statements. Foreign currency transaction exposure arises when an operating unit transacts business denominated in a currency that is not its own functional currency. The Company's transaction risks are attributable primarily to inventory purchases from third party vendors. The introduction of the Euro has significantly reduced such risks, and transaction exposures on an overall basis are not material. If the U.S. dollar uniformly increases in strength by 10% in 2001 relative to the currencies in which the Company's sales are denominated, income before taxes would decrease by approximately $57,000 for the six months ended September 30, 2001. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES As of September 30, 2001, the Company had borrowings of $8,502,587 on its revolving credit facility with U.S. Bank. This revolving credit facility expired on September 30, 2001. 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 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. - None -4- (b) The following reports on Form 8-K were filed during the quarter ended September 30, 2001: - Form 8-K relating to the resignation of KPMG LLP as the Company's independent auditors, filed August 2, 2001. - Form 8-K relating to the appointment of Wipfli Ullrich Bertleson LLP as the Company's independent auditors, filed August 13, 2001 SIGNATURES 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 to be signed on its behalf by the undersigned, thereunto duly authorized on this 19th day of November, 2001. GEOGRAPHICS, INC. By: /s/ James L. Dorman ------------------------------------- James L. Dorman President and Chief Executive Officer By: /s/ Michael Oakes ------------------------------------- Michael Oakes Controller -5- GEOGRAPHICS, INC Consolidated Balance Sheets As of September 30, 2001 and March 31, 2001 ASSETS
SEPTEMBER 30, 2001 MARCH 31, 2001 --------------------- --------------------- (UNAUDITED) CURRENT ASSETS Cash $ 195,843 $ 421,049 Accounts receivable Trade receivables, net of allowances of $596,000 and $1,042,000 at September 30 and March 31, 2001, respectively 5,907,672 7,188,772 Other receivables 178,302 155,281 Inventories 7,099,231 6,634,321 Prepaid expenses, deposits, and other current assets 694,153 603,950 --------------------- --------------------- Total current assets 14,075,201 15,003,373 PROPERTY, PLANT AND EQUIPMENT, NET 8,791,437 9,007,234 LICENSES, TRADEMARKS AND OTHER INTANGIBLE ASSETS 2,965,824 3,126,512 OTHER ASSETS 293,010 198,377 --------------------- --------------------- TOTAL ASSETS $ 26,125,472 $ 27,335,496 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdrafts $ 139,759 $ 975,489 Note payable to bank 8,502,587 8,406,861 Accounts payable 5,197,099 5,401,482 Accrued liabilities 3,612,267 4,237,110 Current portion of long-term debt 828,327 974,790 --------------------- --------------------- Total current liabilities 18,280,039 19,995,732 LONG-TERM DEBT 2,573,671 1,628,908 --------------------- --------------------- Total liabilities 20,853,710 21,624,640 --------------------- --------------------- STOCKHOLDERS' EQUITY Common stock, $0.001 par value - 100,000,000 shares authorized; 38,191,676 shares issued and outstanding at September 30 and March 31, 2001, respectively 38,192 38,192 Additional paid-in capital 26,202,909 26,190,460 Accumulated other comprehensive income (374,547) (418,528) Accumulated deficit (20,594,792) (20,099,268) --------------------- --------------------- Total stockholders' equity 5,271,762 5,710,856 --------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,125,472 $ 27,335,496 ===================== =====================
See accompanying notes to consolidated financial statements F-1 GEOGRAPHICS, INC Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- SALES $ 8,963,823 $ 11,936,290 $ 18,983,081 $ 22,374,633 Returns and Allowances (1,247,806) (1,616,554) (2,742,880) (2,850,223) ---------------- ---------------- ---------------- ---------------- Net Sales 7,716,017 10,319,736 16,240,201 19,524,410 COST OF SALES 5,458,870 8,196,129 12,498,431 14,695,539 ---------------- ---------------- ---------------- ---------------- Gross Margin 2,257,147 2,123,607 3,741,770 4,828,871 S.G.& A. EXPENSES 1,878,323 2,295,515 3,792,902 4,430,373 ---------------- ---------------- ---------------- ---------------- Operating Income (Loss) 378,824 (171,908) (51,132) 398,498 OTHER INCOME (EXPENSE) Interest Expense (193,630) (372,956) (411,894) (594,771) Other Income (19,209) 40,600 (32,498) 26,222 ---------------- ---------------- ---------------- ---------------- Total Other Income (Expense) (212,839) (332,356) (444,392) (568,549) NET INCOME (LOSS) BEFORE INCOME TAXES 165,985 (504,264) (495,524) (170,051) PROVISION FOR INCOME TAXES - - - - ---------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) $ 165,985 $ (504,264) $ (495,524) $ (170,051) ================ ================ ================ ================ NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Basic $ 0.00 $ (0.01) $ (0.01) $ (0.00) ================ ================ ================ ================ Diluted $ 0.00 $ (0.01) $ (0.01) $ (0.00) ================ ================ ================ ================ SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Basic 38,191,676 37,770,736 38,191,676 35,929,210 ================ ================ ================ ================ Diluted 38,602,482 37,770,736 38,191,676 35,929,210 ================ ================ ================ ================
See accompanying notes to condensed consolidated financial statements. F-2 GEOGRAPHICS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (Loss) $ (495,524) $ (170,051) Adjustments to reconcile net income (loss) to net cash flows from operating activities Depreciation and amortization 900,309 844,030 Stock based compensation 12,450 59,688 Interest on debentures - 67,000 Changes in operating assets and liabilities Trade receivables 1,281,100 (2,471,839) Other receivables (23,020) (400,015) Inventories (464,910) (3,718,977) Prepaid expenses, deposits and other current assets (90,205) (427,448) Licenses, trademarks and other intangible assets - (41,308) Other assets (166,507) 49,685 Accounts payable (204,382) 2,388,122 Accrued liabilities (624,845) 1,107,077 ------------------- ---------------- Net cash flows from operating activities 124,466 (2,714,036) ------------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and equipment (451,949) (426,671) Purchase of certain Domtar Consumer Products assets - (3,049,138) ------------------- ---------------- Net cash flows from investing activities (451,949) (3,475,809) ------------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in bank overdrafts (835,730) 117,553 Net borrowings on note payable to bank 95,726 1,702,161 Proceeds from issuance of subordinated debentures 1,200,000 - Repayment of long-term debt (401,700) (692,273) Proceeds from note payable to officer and director - 1,000,000 Repayment of note payable to officer and director - (1,000,000) Proceeds from the issuance of common stock - 5,032,850 ------------------- ---------------- Net cash flows from financing activities 58,296 6,160,291 ------------------- ---------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 43,981 95,277 ------------------- ---------------- NET CHANGE IN CASH (225,206) 65,723 CASH, BEGINNING OF PERIOD 421,049 360,612 ------------------- ---------------- CASH, END OF PERIOD $ 195,843 $ 426,335 =================== ================ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest $ 377,488 $ 464,256 =================== ================
See accompanying notes to condensed consolidated financial statements. F-3 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 - INVENTORIES Inventories at September 30, 2001 and March 31, 2001 consisted of the following:
September 30, March 31, 2001 2001 ---- ---- Raw materials $ 976,461 $ 809,794 Work-in-process 1,152,115 1,121,778 Finished goods 4,970,655 4,702,749 -------------- -------------- $ 7,099,231 $ 6,634,321 ============== ==============
NOTE 3 - 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, F-4 "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. NOTE 4 - 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 Six Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Designer Stationeries and Specialty Papers $ 7,542,133 $ 7,705,152 $16,357,441 $16,268,561 Plastic Filing and Storage Cabinets 173,884 2,614,584 505,838 3,255,849 ------------------ ------------------ ----------------- ------------------- $ 7,716,017 $ 10,319,736 $16,863,279 $19,524,410 ================== ================== ================= ===================
NOTE 5 - NET INCOME (LOSS) PER SHARE The numerators and denominators of basic and diluted net income (loss) per share are as follows:
Three Months Ended Six Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net income (loss) (numerator) $ 165,985 $ (504,264) $ (495,524) $ (170,051) ================= ================= ================= ================= Shares used in the calculation (denominator) Weighted average shares outstanding 38,191,676 37,770,736 38,191,676 35,929,210 Effect of dilutive stock options and warrants 410,806 - - - ----------------- ----------------- ----------------- ----------------- 38,602,482 37,770,736 38,191,676 35,929,210 ================= ================= ================= =================
F-5 Options to purchase shares of common stock under the Company's Nonqualified Stock Option Plan were outstanding during the three and six-month periods ending September 30, 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 3,450,000 and 3,405,000 for the three and six month periods ended September 30, 2001 and 2000, respectively. NOTE 6 - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net income (Loss) $ 165,985 $ (504,264) $ (495,524) $ (170,051) Other comprehensive income (loss) Foreign currency translation (13,048) (80,783) 43,981 (81,472) ----------------- ----------------- ----------------- ----------------- Comprehensive Income (Loss) $ 152,937 $ (585,047) $ (451,543) $ (251,523) ================= ================= ================= =================
NOTE 7 - RECLASSIFICATIONS Certain reclassifications have been made to the 2001 (preceding year) financial statements to conform to the 2002 classifications. The 2001 financial statements have been reclassified to conform to the 2002 presentation by increasing cost of sales and decreasing selling and general and administrative expenses by $120,266.00. NOTE 8 - CHANGES IN ACCOUNTING ESTIMATES 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-6