As filed with the Securities and Exchange Commission on August 13, 1996
Registration Statement No. 333-______________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GEOGRAPHICS, INC.
(Name of Small Business Issuer in its Charter)
Wyoming 2678 87-0305614
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classifi- Identification No.)
or organization) cation Code Number)
1555 Odell Road
Blaine, Washington 98230 1555 Odell Road
(360) 332-6711 Blaine, Washington 98230
(Address and telephone (Address of principal place
number of principal of business or intended principal
executive offices) place of business)
------------------
Ronald Deans
Geographics, Inc.
1555 Odell Road
Blaine, Washington 98230
(360) 332-6711
(Name, address and telephone number of agent for service)
------------------
With copies to:
James M. Schneider, Esq.
Gayle Coleman, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard
Suite 1900
Fort Lauderdale, Florida 33331
(954) 763-1200
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is to be filed to register additional shares for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier registration statement for the same offering:
[ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Proposed Proposed
Each Class Maximum Maximum
of Securities Amount Offering Aggregate Amount of
to be to be price Offering Registration
Registered Registered per Share(1) Price(1) Fee
- --------------------------------------------------------------------------------
Common Stock
no par value)(2) 1,268,293 $3.22 $4,083,903.50 $1408.25
Common Stock
Purchase Warrants 1,268,293 $.001 $1,268.30 $.44
Common Stock
issuable under
Warrants(2)(3) 1,268,293 $3.22 $4,083,903.50 $1408.25
Common Stock
Purchase Warrants(4) 126,828 $.001 $126,83 $.04
Common Stock(3)(5) 126,828 $3.22 $408,387 $140.83
Common Stock(3)(6) 126,828 $3.22 $408,387 $140.83
Total $3,098.64
================================================================================
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended.
(2) The price with respect to 1,268,293 shares was estimated and based on the
average of the high and low sale price for the Common Stock, no par value
per share (the "Common Stock") as reported by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market
System on August 7, 1996 which was $3.22. The price with respect to
1,268,293 shares additionally registered was estimated and is based on the
average of the high and low sale price on August 7, 1996.
(3) Represents shares issuable upon exercise of the Common Stock Purchase
Warrants registered hereby together with such additional indeterminate
number of shares as may be issued under such Warrants by reason of the
anti-dilution provisions contained therein.
(4) Represents shares issuable upon exercise of 6.5 units issued to the
to the Company's placement agent in connection with a private offering
(the "May 1996 Offering") of certain of the Company's securities
completed in May 1996, together with such additional indeterminate number
number of shares as may be issued upon exercise of such units by reason
of the anti-dilution provisions contained therein. Each unit consists of
19,512 shares of Common Stock and Warrants to purchase 19,512 shares of
Common Stock at $6.50 per Share.
(5) Represents warrants issuable upon the exercise of certain units issued to
the Company's placement agent in connection with the May 1996 Offering.
(6) Represents shares issuable upon the exercise of the Common Stock Purchase
Warrants included within the placement agent's Unit Purchase Warrants in
connection with the May 1996 Offering, together with an indeterminate
number of shares as may be issued upon exercise of such Warrants by reason
of the anti-dilution provisions contained therein.
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GEOGRAPHICS, INC.
------------------
Cross Reference Sheet for Prospectus Under Form SB-2
Form SB-2 Item No. and Caption Caption or Location in Prospectus
------------------------------ ---------------------------------
1. Front of Registration Cover Page; Cross Reference
Statement and Outside Sheet; Outside Front Cover
Front Cover of Prospectus Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Cover Page; Risk Factors
Price
6. Dilution Not Applicable
7. Selling Security-Holders Sales by Selling Security
Holders
8. Plan of Distribution Outside Front Cover Page of
Prospectus; Sales by Selling
Security Holders
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive
Officers, Promoters and
Control Persons Management
11. Security Ownership of
Certain Beneficial Owners
and Management Principal Stockholders
12. Description of Securities Description of Securities
13. Interest of Named Experts
and Counsel Legal Matters
14. Disclosure of Commission
Position on Indemnifica-
tion for Securities Act Indemnification of
Liabilities Officers and Directors
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15. Organization within Last
Five Years Not Applicable
16. Description of Business Business - Facilities
17. Management's Discussion Management's Discussion and
and Analysis and Plan of Analysis of Financial Condition
Operation and Results of Operations
18. Description of Property Business - Properties
19. Certain Relationships and Management-Certain Relationships
Related Transactions and Related Transactions
20. Market for Common Equity Price Range for Common Stock;
and Related Stockholder Description of Securities;
Matters Certain Market Information.
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and
Disagreements with
Accountants on Accounting
and Financial Disclosure Experts
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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<PAGE>
Preliminary Prospectus Dated August 13, 1996
Subject to Completion
GEOGRAPHICS, INC.
2,790,242 SHARES OF COMMON STOCK AND
1,395,121 COMMON STOCK PURCHASE WARRANTS
There are 2,790,242 shares of Common Stock, no par value per share ("Common
Stock" or "Shares") of Geographics, Inc. (the "Company") and 1,395,121 Common
Stock Purchase Warrants (the "Warrants") of the Company being offered by certain
stockholders of the Company (the "Selling Security Holders"), if at all, on a
delayed basis, including Shares issuable upon the exercise of the Warrants. An
aggregate of 1,395,121 shares of Common Stock, along with Warrants to purchase
1,395,121 Shares were acquired by certain of the Selling Security Holders in a
private placement during the first quarter of the Company's 1996 fiscal year at
$100,000 per unit (the "Unit")(each Unit consisting of 19,512 shares of Common
Stock and Warrants to purchase 19,512 Shares at $6.50 per Share), and the
balance of the shares of Common Stock were issued or will be issued upon
exercise of the Warrants at $6.50 per Share. (The shares of Common Stock, the
Warrants and the Shares issuable upon the exercise of the Warrants are sometimes
collectively referred to as the "Securities"). See "Sales by Selling Security
Holders" and "Description of Securities."
The Company's Common Stock is traded on the National Market System ("NMS") of
the National Association of Securities Dealers Automated Quotation System
("Nasdaq") under the symbol "GGIT" and on the Toronto Stock Exchange under the
symbol "GGI." On August 7, 1996, the average of the high and low price for the
Common Stock on the Nasdaq NMS was $3.22 and on the Toronto Stock Exchange was
Cdn$4.83. There can be no assurances that a substantial trading market for its
Common Stock will develop or be sustained in the future. At March 31, 1996, the
net tangible book value of the Company's Common Stock was approximately $1.25
per share. Accordingly, it is likely that the purchasers in this offering will
incur an immediate and substantial dilution from the purchase price of their
shares of Common Stock. See "Price Range of Common Stock."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. POTENTIAL PURCHASERS SHOULD NOT
INVEST IN THESE SECURITIES UNLESS THEY CAN AFFORD A LOSS OF THEIR ENTIRE
INVESTMENT HEREIN. SEE "RISK FACTORS DESCRIBED ON PAGES 10-16."
The Company has been advised by the Selling Security Holders that they may sell
all or a portion of the Securities offered hereby from time to time in the
over-the-counter market, in negotiated transactions, directly or through brokers
or otherwise, and that such shares will be sold at market prices prevailing at
the time of such sales or at negotiated prices. The Company will not receive any
of the proceeds from the sale of the Securities offered hereby except upon
exercise of the Warrants. In connection with such sales, the Selling Security
Holders and any brokers participating in such sales may be deemed to be
underwriters within the meaning of the Securities Act of 1933. See "Use of
Proceeds" and "Sales by Selling Security Holders."
All costs, expenses and fees in connection with the registration of the shares
of Common Stock offered hereby will be borne by the Company. Brokerage
commissions, if any, directly attributable to the sale of the Shares will be
borne by the Selling Security Holders.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offer
contained in this Prospectus, and if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or the Selling Security Holders. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy the Shares offered hereby in any
jurisdiction to any person to whom it is unlawful to make such
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<PAGE>
offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof.
The Company will not receive any proceeds from the sale of Common Stock for the
account of the Selling Security Holders. The Company has informed the Selling
Security Holders that the anti- manipulative rules under the Exchange Act of
1934, Rules 10b-6 and 10b-7, may apply to their sales in the market and has
furnished the Selling Security Holders with a copy of these rules. The Company
has also informed the Selling Security Holders of the need for delivery of
copies of this Prospectus in connection with any sale of securities registered
hereunder.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies
of such material may be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Copies of such material can be obtained upon written
request addressed to the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission. The
address of the Web site is (http://www.sec.gov).
The Company has previously and intends to furnish its stockholders with annual
reports containing audited financial statements and may distribute quarterly
reports containing unaudited summary financial information for each of the first
three quarters of each fiscal year.
This Prospectus, which constitutes part of a Registration Statement filed by the
Company with the Commission under the Securities Act of 1933, as amended (the
"Act"), omits certain information contained in the Registration Statement in
accordance with the rules and regulations of the Commission. Reference is hereby
made to the Registration Statement and to the exhibits relating thereto
for further information with respect to the Company and the securities offered
hereby.
3
<PAGE>
PROSPECTUS SUMMARY
The following is intended to summarize more detailed information and
financial statements and notes thereto which are set forth more fully elsewhere
in this Prospectus or incorporated herein by reference and, accordingly, should
be read in conjunction with such information. Unless otherwise indicated, all
figures contained herein are stated in U.S. Dollars. As of August 7, 1996, the
exchange rate of $.7291=Cdn.$1.00.
THE COMPANY
The Company, incorporated in 1974 as a Wyoming corporation, is engaged in
the development, manufacturing, marketing and distribution of designer
stationery, "value added papers", lettering, signage, stencil and graphic art
products throughout the United States, Canada, Australia, Europe, Israel and
Mexico. "Value added paper" is paper on which photographs and art images have
been applied during a printing process and then cut to size and includes, for
example, printed business cards, brochures, letterhead, memo pads and paper
cubes. The products manufactured by the Company are divided into two major
product groups: (1) specialty papers and (2) lettering and signage. The
specialty papers group is comprised primarily of designer stationery and other
value added papers. The lettering and signage group manufactures and distributes
rub-on and stick-on lettering, stencils, electronic moving message signs, ADA
(Americans with Disabilities Act) signs in Braille, and other signage products.
Most of the Company's marketing and sales efforts are performed by the Company's
wholly owned subsidiary, Geographics Marketing Canada Inc. and its marketing and
sales efforts in Europe is operated through Geographics (Europe) Limited.
The Company expects to concentrate its efforts on marketing its designer
stationeries and value added papers throughout North America since the majority
of mass merchandise chains, computer retailers and department stores do not
carry designer stationery or valued added paper. Additionally, the Company
intends to diversify its product line which has, in the past, been focused on
lettering and signage products. During fiscal year 1997, the Company will be
introducing educational and motivational products to be sold through the
Company's existing distribution channels and be introduced in new markets. The
Company will also continue to add complementary paper products to its existing
paper product line.
In addition to expanding its product line, the Company believes that
foreign markets may provide additional growth opportunities, and will explore
expanding it marketing efforts in Asia and the Pacific Rim countries.
4
<PAGE>
The Company's administrative office is located at 1555 Odell Road, Blaine,
Washington 98230 (telephone no. 360/332-6711; telecopier no. 360/332-6352). The
Company's fiscal year end is March 31.
THE OFFERING AND OUTSTANDING SECURITIES
Common Stock Outstanding
at July 31, 1996.................... 9,382,877 shares of Common
Stock(1)
Common Stock Offered
by Selling Security
Holders............................. 2,790,242 shares of Common
Stock(2)
Warrants Offered
by Selling Security
Holders.............................. 1,395,121 Warrants
Common Stock issued in a
private placement completed
in May 1996......................... 1,395,121 shares of Common
Stock(3)
Warrants issued in a private
placement completed in
May 1996............................ Warrants to purchase 1,395,121
shares of Common Stock(3)
Shares underlying all Warrants
and Options Outstanding at
July 31, 1996........................ 1,630,121 shares of Common
Stock(4)
Proceeds to be received upon
Exercise of Warrants
Offered by Selling Security
Holders............................. $9,586,286.50(4)
Risk Factors........................... Investment in these securities
involves a high degree of risk.
See "Risk Factors."
Nasdaq NMS and Toronto Exchange
Symbols, respectively(5)
Common Stock........................... GGIT, GGI
Warrants............................... GGIW, GGW
- --------------------
(1) As of July 31, 1996, the Company had 9,382,877 shares of Common Stock
outstanding, including 1,268,293 shares of Common Stock issued upon
completion of the "May 1996 Offering". Does not include (i) 126,828,
5
<PAGE>
shares of Common Stock issuable to the placement agent upon receipt of
$5.125.; (ii) 1,395,121 shares issuable upon the exercise of the Warrants,
which are a part of this offering; (iii) 211,000 shares
underlying options to purchase up to 211,000 shares of Common Stock at
prices ranging from Cdn$1.00 to Cdn$4.15 from August 10, 1996 to October
10, 2000; and (iv) warrants to purchase 24,000 shares of Common Stock at
prices ranging from Cdn$1.00 to Cdn$6.63 from April 15, 1998 to January
23, 1999. The exchange rate at August 7, 1996 was $.7291 equals Cdn$1.00.
(2) Includes 1,395,121 shares of Common Stock to be issued upon the exercise
of up to 1,395,121 Warrants on or prior to June 1, 1999 at $6.50 per Share
(for an aggregate of $9,068,186.50).
(3) Includes 126,828 shares of Common Stock underlying units issued to
placement agents in connection with the private offering completed by the
Company completed in May 1996 (the "May 1996 Offering") of certain of the
Company's securities. Each unit (the "Unit") consists of 19,512 Shares of
Common Stock and Warrants to purchase 19,512 Shares at $6.50 per Share.
(4) Includes 1,395,121 shares issuable upon the exercise of the Warrants on or
prior to June 1, 1999 at $6.50 per Share (for an aggregate of
$9,068,186.50), which are a part of this offering. Does not include (i)
211,000 shares underlying options to purchase up to 211,000 shares of
Common Stock at prices ranging from Cdn$1.00 to Cdn$4.15 from August 10,
1996 to October 10, 2000; and (ii) warrants to purchase 24,000 shares of
Common Stock at prices ranging from Cdn$1.05 to Cdn$6.63 from April 15,
1998 to January 23, 1999. The exchange rate at August 7, 1996 was $.7291
equals Cdn$1.00.
(5) The Company intends to apply for inclusion of its Warrants on Nasdaq at
such time as the price of the Company's Common Stock satisfies the Nasdaq
minimum bid requirement of $3.00 per share. While the Company's Common
Stock presently qualifies for inclusion based on the current price of the
Common Stock, the Company's Warrants do not and there can be no assurances
that the Warrants will qualify for inclusion at any time in the future.
Inclusion on Nasdaq does not imply that an established trading market will
develop or be sustained for the Common Stock or the Warrants.
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SUMMARY FINANCIAL INFORMATION
(Not covered by Accountant's Report)
SUMMARY OF SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information concerning the
Company and is qualified by reference to the audited consolidated financial
statements and notes thereto and unaudited quarterly financial statements
prepared by the Registrant incorporated herein by reference in this Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Year Ended March 31
1996 1995
---- ----
Operating revenues $22,613,635 $10,186,136
Net income
attributable to
Common Stock 1,232,024 747,742
Net income per
average common share
outstanding .19 .16
Weighted average
shares outstanding 6,606,499 4,549,101
- ----------------
BALANCE SHEET DATA:
At March 31
1996 1995
---- ----
Working capital $5,831,031 $1,836,436
Total assets 24,738,041 10,614,673
Long Term debt 3,690,360 3,519,948
Stockholders' equity 9,989,852 2,803,341
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RISK FACTORS
The securities offered hereby involve certain elements of risk. It is
impossible to foresee and describe all the risks and business, economic and
financial factors which may affect the Company. Prospective investors should
carefully consider the risk and investment factors, as well as other matters set
forth elsewhere in this Prospectus, before making an investment in the Company.
MANAGEMENT OF GROWTH. The Company has experienced substantial growth in recent
years with revenues and net income increasing substantially during this time.
There can be no assurance that such growth will continue. While management has
successfully managed such growth to date and the Company's infrastructure has
been sufficient to support such growth, there can be no assurances that, if such
growth continues, that the Company's infrastructure will continue to be
sufficient to support a larger enterprise.
CUSTOMER CONCENTRATION. During the years ended March 31, 1996 and 1995 the
Company's three largest customers accounted for approximately 77% and 59% of the
Company's sales. Accordingly, the loss of any one or more of such customers
could have a material adverse effect on the Company. In addition, as a result of
the concentration occurring in the office supply industry in which the major
office megastores are accounting for a greater percentage of industry-wide
sales, it is anticipated that an increasing number of the smaller outlets and
retail stores will discontinue operations in the years ahead. While the Company
anticipates that certain of such sales will be transferred to the larger
megastores to which the Company currently supplies its products, there can be no
assurance that any loss of sales to smaller outlets and retail stores will be
replaced in this manner.
CHANGING CONSUMER PREFERENCES AND INTERESTS. Sales of the Company's products are
in part, dependent upon designs and configurations developed by the Company for
such products. While the Company believes that its designs, configurations and
related artwork have received substantial acceptance by the consuming public,
there can be no assurances that consumers and other purchasers of these
materials will continue to favor the Company's products in light of the constant
shifting that occurs with regard to consumer preferences and interests.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY. Most of the Company's customers
order products for immediate delivery. Accordingly, a substantial amount of the
Company's net sales in each quarter results from orders received in that
quarter. The Company's net sales and operating results may, therefore, vary
significantly as a result of, among other things, volume and timing of orders
received during the quarter, variations and sales mix, and delays in production
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<PAGE>
schedules. Accordingly, the Company's historical financial performance is not
necessarily a meaningful indicator of future results and, in general, management
expects that the Company's financial results may vary materially from period to
period. A significant portion of the Company's customer orders are placed
between August and October of each year in anticipation for shipment during the
Company's third fiscal quarter (Christmas period). As a result, the Company has
experienced and is expected to continue to experience seasonal fluctuations in
its operating results based on such purchasing patterns.
COMPETITION. While the Company believes it has the largest market share in the
lettering and signage phase of its operations, the Company is a less significant
factor in the specialty papers industry which represents the second major
product group provided by the Company. In this phase of the industry, there are
several companies with total annual sales inclusive of their entire business of
in excess of $1 billion who compete in the value-added paper business, including
Avery/Dennison and Rediform. Such organizations have greater operations and more
significant financial, marketing and human resources capacities than the
Company, which may provide such competitors with competitive advantages,
including economies of scale and scope. No assurance can be given that the
Company will successfully compete in any market in which it conducts or may
conduct operations.
TECHNOLOGY CHANGES AFFECTING PRODUCTS. The design and manufacture of production
equipment has undergone and continues to undergo rapid and significant
technological change. In particular, developments in the software industry may
afford customers and consumers with the ability to produce paper products which
offer quality characteristics comparable with that provided by the Company. The
Company's business is, to a significant degree, dependent on the enhancement of
its current products and development of new products. Product development and
enhancement involve substantial expenditures and a high degree of risks, and
there is no assurance that product development efforts of the Company will be
successful, will have sufficient utility or will be superior to efforts by
others, including current customers and consumers of the Company's products. In
addition, there can be no assurances that future technological developments will
not render existing or proposed products of the Company uneconomical or
obsolete, or that the Company will not be adversely affected by competition or
by the future development of commercially viable products by others.
MAINTENANCE OF LARGE INVENTORY OF PRODUCTS. As of March 31, 1996, the Company
maintained an inventory of lettering and signage and specialty papers of in
excess of $9,139,273. While the Company believes that the maintenance of an
extensive inventory provides the Company with substantial flexibility in
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<PAGE>
responding to incoming orders, enhances the Company's reputation as a major
supplier in the industry and offers certain economies of scale in the Company's
purchasing program, the maintenance of an extensive inventory requires a
substantial outlay of funds which may not be recovered for extensive periods of
time. In addition, the Company has generally observed that raw materials prices
which it is required to pay, change more rapidly than the Company is able to
charge to its customers inasmuch as price changes are generally subject to
negotiations between the Company and its customers. Consequently, the Company
may be required to absorb price increases on raw materials before the Company is
able to pass through such charges to its customer base. In addition, to the
extent that purchasing preferences of the Company's customers change and evolve,
such inventory may become less desirable, which may require the Company to
dispose of such inventory on an unprofitable basis, even if such disposition
contributes to cash flow. In the event the Company were unable to recover a
substantial portion of its investment in its inventory, there would be a
material adverse effect on the Company's operations.
FOREIGN EXCHANGE AND INTERNATIONAL TRADE. The Company is selling a greater
proportion of its products in markets other than the United States and Canada.
At the present time, management estimates that approximately 14% of its sales
are to customers in non-domestic markets. Fluctuations in currency exchange
rates with the U.S. Dollar could have a material adverse effect on the Company's
operations. In addition, various import, export, tariff and other trade barriers
may be imposed in other countries could also have a material adverse effect on
the Company's business.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company believes that the net
proceeds from its recently completed private financing, in addition to funds
generated from operations, will enable the Company to satisfy its anticipated
financing needs for the foreseeable future. However, the Company may still be
required to secure additional financing in the future in order to effectively
manufacture and market its products. In addition, the Company may need to secure
public financing in order to continue to develop its market and expand its
operations. In the event that the Company needs additional equity or debt
financing, there can be no assurance that such financing will be available when
needed, or, if available, that it will be on terms acceptable to the Company or
in the interest of its shareholders.
CONTROL OF THE COMPANY BY MANAGEMENT. As of July 31, 1996, members of the Deans
family and the Carrancedo family own slightly in excess of 31% of the
outstanding shares of Common Stock of the Company, which, among other factors,
may enable them to elect the Company's entire Board of Directors for the
foreseeable future. Such concentration of ownership could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock, and could have the effect of making it more difficult for a third party
to acquire control of the Company.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL. At the present time, the Company is highly
dependent on the continued services of Ronald S. Deans, Mark G. Deans and R.
Scott Deans, who serve as the Company's principal executive officers as well as
directors of the Company. The Company has key man insurance on the lives of each
of Mark G. Deans and R. Scott Deans in the respective amounts of approximately
$800,000 and $560,000. There can be no assurances that the Company will be able
to replace any of these key executives in the event their services become
unavailable.
ARBITRARY EXERCISE PRICE OF THE WARRANTS. The exercise price of the Warrants
were determined by the Company, taking into consideration the Company's current
financial condition and prospects, market price of the Company's Common Stock,
and the general condition of the securities market, but do not necessarily bear
any relationship to the Company's assets, book value, earnings or other
established criterion of value.
STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS. Holders of the
Warrants have the right to exercise the Warrants only if the underlying Common
Stock are qualified, registered or exempt for sale under applicable securities
laws of the states in which the various holders of the Warrants reside. The
Company cannot issue shares of Common Stock to holders of the Warrants in states
where such shares are not qualified, registered or exempt. The Company has
undertaken, however, to qualify or register such shares (or to secure an
exemption for their issuance) in the following states: California,
Massachusetts, Michigan, New York, Texas, and Washington. See "Description of
Securities - Warrants."
REDEMPTION OF THE WARRANTS. Commencing December 1, 1996, the Company may redeem
the Warrants at a price of $.05 per underlying share provided the closing price
of the Company's Common stock is in excess of $10.00 per share for 10
consecutive trading day period immediately prior to the notice provided by the
Company. The Company's exercise of this right would force a holder of Warrants
to exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for the holder to do so, to sell the Warrants at the then
current market price when the holder might otherwise wish to hold the Warrants
for possible additional appreciation, or to accept the repurchase price, which
is likely to be substantially less than the market value of the Warrants in the
event of a repurchase call. Holders who do not exercise their Warrants prior to
the repurchase will forfeit their right to purchase the shares of Common Stock
underlying the Warrants. See "Description of Securities -- Warrants."
NECESSITY TO MAINTAIN CURRENT PROSPECTUS. The shares of Common Stock issuable
upon the exercise of the Warrants have been have been registered with the
Commission. The Company will be required, from time to time, to file
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<PAGE>
post-effective amendments to its registration statement in order to maintain a
current prospectus covering the issuance of such shares upon the exercise of the
Warrants. The Company has undertaken to make such filings and to use its best
efforts to cause such post-effective amendments to become effective. If for any
reason a required post-effective amendment is not filed or does not become
effective or is not maintained, the holders of the Warrants may be prevented
from exercising their Warrants. See "Description of Securities Warrants."
EXISTENCE OF WARRANTS AND OPTIONS; POSSIBLE DILUTION. Assuming the exercise of
the Warrants, there will still be outstanding options to purchase up to 211,000
shares of Common Stock of the Company exercisable at prices ranging from
Cdn$1.00 to Cdn$4.15 per share and warrants to purchase up to 24,000 shares of
Common Stock at prices ranging from Cdn$1.05 to Cdn$6.63 per Share. In the event
that the outstanding warrants and options are exercised, they may have certain
dilutive effects because the holders will be given the opportunity to profit
from a rise in the market price of the underlying shares. The terms on which the
Company could obtain additional capital during the life of such warrants may be
adversely affected because the holders may be expected to exercise them at a
time when the Company might otherwise be able to obtain comparable additional
capital in a new offering of securities at a price per share greater than the
exercise price of such options and warrants. See "Description of Securities."
NO DIVIDENDS ANTICIPATED TO BE PAID. The Company has not paid any cash dividends
on its Common Stock since its inception and does not anticipate paying cash
dividends in the foreseeable future. The future payment of dividends is directly
dependent upon future earnings of the Company, the capital requirements of the
Company, its financial requirements and other factors to be determined by the
Company's Board of Directors. For the foreseeable future, it is anticipated that
earnings, if any, which may be generated from the Company's operations will be
used to finance the growth of the Company, and that cash dividends will not be
paid to common stockholders. See "Dividend Policy."
IMMEDIATE SUBSTANTIAL DILUTION TO PURCHASERS IN THIS OFFERING. Initial
purchasers of the Common Stock of the Company offered hereby will incur an
immediate and substantial dilution from the purchase price of their shares. As
of March 31, 1996, the net tangible book value of the Company's Common Stock was
approximately $1.25 per share.
POSSIBLE RESALES OF SECURITIES BY CURRENT STOCKHOLDERS AND DEPRESSIVE EFFECT ON
MARKET. As of August 7, 1996, there were 9,382,877 shares of the Company's
Common Stock outstanding 1,446,123 of which were "restricted securities" as that
term is defined by Rule 144 under the Securities Act of 1933 as amended, (the
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<PAGE>
"Securities Act"), inclusive of shares being registered pursuant to this
Registration Statement of which this Prospectus is a part. Such shares will be
eligible for public sale only if registered under the Securities Act or if sold
in accordance with Rule 144. Under Rule 144, a person who has held restricted
securities for a period of two years may sell a limited number of shares to the
public in ordinary brokerage transactions. Sales under Rule 144 may have a
depressive effect on the market price of the Company's Common Stock due to the
potential increased number of publicly held securities. The timing and amount of
sales of Common Stock covered by the Registration Statement of which this
Prospectus is a part, as well as such subsequently filed registration statement,
could also have a depressive effect on the market price of the Company's Common
Stock. See "Certain Market Information."
LIMITED MARKET FOR THE COMPANY'S SECURITIES; POSSIBLE VOLATILITY OF SECURITIES
PRICES. There is currently a trading market for the Common Stock of the Company,
however there is currently no trading market for the Warrants. The Common Stock
of the Company trades on the Nasdaq NMS under the symbol "GGIT" and on the
Toronto Stock Exchange under the symbol "GGI", both exchanges which are limited
markets and subject to certain restrictions and limitations. There can be no
assurance that a substantial trading market will be sustained for the Common
Stock upon completion of this offering, or that purchasers will be able to
resell their securities or otherwise liquidate their investment without
considerable delay, if at all. Recent history relating to the market prices of
newly public or recently listed companies indicates that, from time to time,
there may be significant volatility in the market price of the Company's
securities because of factors unrelated, as well as related, to the Company's
operating performance. See "Price Range of Common Stock" and "Certain Market
Information."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq NMS under the symbol "GGIT"
and on the Toronto Stock Exchange under the symbol "GGI." The Company's common
stock commenced trading on the OTC Bulletin Board on May 5, 1995, on the Nasdaq
NMS on March 8, 1996, and on the Toronto Stock Exchange on February 20, 1989.
The following table sets forth the high and low bid quotations for the Common
Stock for the periods indicated. These quotations reflect prices between
dealers, do not include retail mark-ups, mark-downs or commission and may not
necessarily represent actual transactions.
Quarter Toronto Exchange OTC Bulletin Board Nasdaq
Ended High Low High Low High Low
- ----- ---- --- ---- --- ---- ---
6/30/93 Cdn$1.85 Cdn$.90 - - - -
9/30/93 1.75 1.00 - - - -
12/31/93 1.25 1.00 - - - -
3/31/94 1.35 1.05 - - - -
6/30/94 Cdn$1.70 Cdn$1.05 - - - -
9/30/94 1.20 .90 - - - -
12/31/94 1.05 .80 - - - -
3/31/95 1.95 .80 - - - -
6/30/95 Cdn$2.25 Cdn$1.74 $1.88 $1.33 - -
9/30/95 4.60 2.00 3.44 1.45 - -
12/31/95 7.10 $4.00 5.38 3.00 - -
3/31/96(1) 8.75 6.10 6.13 4.63 $6.25 $4.50
6/30/96 Cdn$9.00 Cdn$6.59 - - $6.94 $4.75
7/1/96-
8/7/96(2) Cdn$7.75 Cdn$4.00 - - $5.68 $2.688
(1) The Company's shares began trading on the Nasdaq National Market System
effective March 8, 1996.
As of August 7, 1996, there were 272 holders of record of the Common Stock
of the Company. The closing bid price on the Nasdaq National Market System at
August 7, 1996 was $3.22.
The Company currently intends to retain all earnings for working capital
to support growth, to reduce outstanding indebtedness and for general corporate
purposes. The Company, therefore, does not anticipate paying any dividends in
the foreseeable future. The Company did not pay dividends during fiscal 1996 or
1995.
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<PAGE>
DIVIDEND POLICY
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, sales of securities of the Company into the marketplace, general
conditions in the designer stationery and specialty paper industry, paper
prices, the worldwide economy, an outbreak of hostilities, a shortfall in
revenue or earnings from or changes in analysts' expectations, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in the Company's relationships with its customers,
suppliers and employees, could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years, the stock market
in general, and the market for shares of small capitalization stocks in
particular, including the Company's, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Many companies, including the Company, have recently
experienced historical highs in the market price of their common stock. There
can be no assurance that the market price of the Company's Common Stock will not
continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to the Company's performance.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at March
31, 1996 and as adjusted to give effect to the exercise of Warrants.
At March 31, 1996
-------------------------------
Actual (1) As Adjusted(2) As Adjusted(3)
----------- -------------- --------------
Stockholders' equity:
Common Stock, no par value
per share; 10,000,000 shares
authorized; 8,004,584 shares
issued and outstanding;
9,272,877 shares, issued and
outstanding; and
10,794,826 shares to be
outstanding, assuming
exercise of Warrants offered
hereby $9,620,068 $16,120,068 $25,838,350
Retained earnings $ 369,784 $369,784 $369,784
Notes due from officers $1,264,711 $1,264,711 $1,264,711
Total stockholders' equity. $9,989,852 $16,489,852 $26,208,134
Notes payable and
total stockholders'
equity $11,254,563 $17,754,563 $27,472,845
(1) See Notes to Consolidated Financial Statements included elsewhere herein
for a description of terms of the Company's promissory notes, long term
obligations and capital lease obligations.
(2) Includes the shares sold pursuant to the May 1996 Offering. Actual
capitalization figures are adjusted to reflect the issuance of 1,268,293
shares of Common Stock at $5,125 per Share, resulting in gross proceeds to
the Company of $6,500,000. See "Sales by Selling Security Holders."
(3) Same as (2), adjusted further to reflect the exercise of 1,268,293
Warrants (offered by the Selling Security Holders) into Common Stock at
$6.50 per Share, resulting in gross proceeds of approximately $8,243,905.
Also includes the issuance of 126,828 additional Shares at $5.125 to the
Company's placement agent, resulting in additional gross proceeds of
$649,994 and the exercise of 126,828 warrants at $6.50 per Share,
resulting in gross proceeds of $824,382.
16
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
for the accounts of the Selling Security Holders. There is included in the
Registration Statement, of which this Prospectus is a part, 1,395,121 shares of
Common Stock underlying warrants issued in connection with the Company's private
placement completed in May 1996. If all of the warrants issued in connection
with the Company's private placement, completed in May 1996, were exercised in
their entirety at an exercise price of $6.50 per Share, the Company would
receive proceeds of approximately 9,068,286.50. Inasmuch as the Holders of all
of the aforementioned Warrants have no obligation to exercise such Warrants, the
Company is not in a position to evaluate when and if such derivative securities
will ever be exercised and the amount of proceeds that may be realized
therefrom. Accordingly, the Company is not able to allocate at this time the
proceeds that may be received from the exercise of such derivative securities,
and any proceeds realized will be utilized for reduction of short-term debt. To
the extent the proceeds of such exercise are not used immediately, they will be
invested in certificates of deposit, savings deposits, other interest bearing
instruments or will be left in the checking accounts of the Company.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The financial data included in the following table has been selected by
the Company and has been derived from the consolidated financial statements for
the periods indicated. The following financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein.
SUMMARY FINANCIAL INFORMATION
(Not covered by Accountant's Report)
The following table sets forth selected financial information concerning the
Company and is qualified by reference to the audited consolidated financial
statements and notes thereto and unaudited quarterly financial statements
prepared by the Registrant incorporated herein by reference in this Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Year Ended March 31
1996 1995
---- ----
Operating revenues $22,613,635 $10,186,136
Net income
attributable to
Common Stock 1,232,024 747,742
Net income per
average common share
outstanding .19 .16
Weighted average
shares outstanding 6,606,499 4,549,101
- ----------------
BALANCE SHEET DATA:
At March 31
1996 1995
---- ----
Working capital $5,831,031 $1,836,436
Total Assets 24,738,041 10,614,673
Long Term debt 3,690,360 3,519,948
Stockholders' equity 9,989,852 2,803,341
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<PAGE>
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.
GENERAL
Geographics, Inc. was incorporated in 1974 and has primarily been a
manufacturer of stick-on letters, nub-on letters, stencils and other signage
products. The Company has significantly increased the scope of its operations
with the development of "Geopaper" in 1992. Geopaper is a designer stationery or
image paper with art or photo images printed on the paper. The Company began
retooling and expanding facilities to facilitate the manufacture, warehouse and
distribution of Geopaper products.
Geopaper sales represented 65% of total sales in 1996 and 21% of sales in
1995. Besides increasing as a percentage of sales, Geopaper sales were also
responsible for significant increases in total Company sales. During 1996,
Company sales increased 122% to $22,613,635 from $10,186,136 in 1995.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
FISCAL YEAR
1996 1995
---- ----
STATEMENTS OF INCOME DATA:
Net sales 100.0% 100.0%
Cost of sales 62.8 57.7
------ -----
Gross margin 37.2 42.3
Selling, general and
administrative expenses 25.4 28.2
Amortization of goodwill .7 6.3
----- -----
Income from operations 11.1 7.8
Other income .6 .0
Interest expense (3.5) (4.5)
------ ------
Other income (expense) (2.9) (4.5)
Income before provision
for income taxes 8.2 3.3
Income tax provision (benefit) 2.8 (4.0)
----- ------
Net income 5.4 7.3
===== =====
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<PAGE>
FISCAL YEARS 1996 AND 1995
Net Sales. Net sales increased 122% to $22,613,635 in fiscal 1996 from
$10,186,136 in fiscal 1995. This increase was primarily attributable to the
acceptance of the Geopaper program. The Geopaper program experienced a sales
increase of 605% in fiscal 1996 to $14,800,000 compared to $2,100,000 for fiscal
1995. Geopaper sales increases were specifically due to shipments of Geopaper
products to all Office Depot Inc. and OfficeMax stores in North America, as well
as shipments of Geopaper products to 248 Wal-Mart stores in March 1996.
Signage and lettering sales for fiscal 1996 decreased 4% to $7,800,000
from $8,100,000 in fiscal 1995. The majority of the decline in signage and
lettering sales was due to the Company discontinuing the sale of science fair
presentation boards. In prior years, the Company has purchased presentation
boards and bundled them with Geographics stick-on lettering products. In fiscal
1996, the Company continued to supply the lettering products, while the
Company's customers began purchasing the presentation boards directly from the
manufacturer. After adjusting sales for presentation boards, fiscal 1996
lettering and signage sales were slightly ahead of fiscal 1995 sales.
The sales mix of Geopaper products increased to 65% of sales in fiscal
1996 from 21% of sales in fiscal 1995, while lettering and signage sales
decreased to 35% of sales from 79% of sales for the same periods. It is the
opinion of management that sales of signage and lettering products will remain
flat or possibly decline in the future as the computerization of homes and
offices will allow the efficient production of lettering and signage products by
current end-users. Conversely, the increasing number of computers will increase
the number of potential end users of Geopaper products that are specifically
designed for use with computer technology.
Gross Margin. Cost of sales includes product manufacturing costs,
occupancy and delivery costs. Gross profit as a percentage of sales decreased to
37.2% in fiscal 1996, from 42.3% in fiscal 1995. The decrease in the gross
margin is the result of primarily two factors; (1 ) The change in sales mix to
products with lower gross margins. (Geopaper represented 65% Of sales while
lettering and signage represented 35% of sales in 1996, compared to 21% and 79%
of sales in 1995 respectively), and (2) Manufacturing and labor inefficiencies
resulting from rapid growth (the Company experienced 122% sales growth in fiscal
1996).
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<PAGE>
Other factors affecting the gross margin include:
(a) Raw Material cost increases/decreases. During fiscal 1996, the cost of
the Company's raw materials for Geopaper (commodity large sheet plain paper) was
extremely volatile in price. The raw material price changes during the year
resulted in higher overall raw paper costs and higher production costs. The
effect of the paper price increases on finished goods is somewhat limited as
packaging and labor costs constitute the largest portions of finished Geopaper
products.
(b) Selling price increases/decreases. During fiscal year 1996, the
Company was able to pass the higher costs of raw paper on to its customers in
the form of increased selling prices. Management cannot provide assurance that
increases can be passed on in the future, nor can management provide assurances
that decreases in raw materials will result in decreased selling prices.
(c) Expansion strategies. Expansion into Europe and other markets will
result in opportunities and risks that will affect gross margins. Each market
has differing competition, pricing levels and raw material costs. The Company
intends to produce most of its products at its Blaine, WA. facility and may be
at an advantage or disadvantage in various markets as a result. The Company
strategy of exporting product to foreign markets demonstrates its belief that it
is more cost efficient to ship product than to manage separate manufacturing
facilities in multiple countries.
(d) Selling strategies. The Company's approach to competition, pricing
strategies, product marketing, changes in packaging, and changes in product
design may all have effects on the selling price and cost to produce the
Company's products, all of which affect the gross margin. Management cannot
provide assurances that decisions made by management related to the above items
will result in favorable changes in gross margin.
(e) Facilities and equipment. During 1996, the Company noted logistical
inefficiencies related to the layout of the Blaine Facility. Management
anticipates the March 1996 completion of the Blaine facilities expansion should
reduce or eliminate a number of logistical cost variances. The addition of more
efficient printing and enhanced packaging equipment during fiscal 1996 and 1997
should also result in positive margin improvements as superior production lines
are completed.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses declined as a percentage of sales to 25.4% of sales in fiscal 1996 from
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<PAGE>
28.2% of sales in fiscal 1996. The decline is primarily due to the spreading of
SG&A expenses over significantly higher sales volumes resulting from the success
of the Geopaper programs.
Amortization of goodwill. Goodwill amortization declined to 0.7% of sales
from 6.3% of sales for fiscal years 1996 and 1995 respectively. The decline was
due in part to sales volumes, however, the decrease was largely due to the
completion of the amortization of the goodwill related to the 1993 purchase of
the lettering division of E-Z Industries. Fiscal 1996 included three months of
amortization compared to twelve months of amortization during fiscal 1995.
Income from operations. Income from operations increased to 11.1% of sales
during fiscal 1996, an increase from 7.8% of sales in fiscal year 1995. The
improvement in income from operations was due to the reductions in SG&A and
goodwill amortization expenses as a percentage of sales, which more than offset
the decreased gross margin percentage.
Other income. Other income was 0.6% of sales in fiscal 1996, compared to
0.0% of sales during fiscal 1995. This category includes items such as
management fees, foreign exchange gains, gains on disposition of fixed assets,
and other miscellaneous items. Management does not anticipate a reoccurrence of
this income in fiscal 1997.
Interest expense. Interest expense increased significantly to $787,848
during fiscal year 1996, compared to $457,499 for fiscal 1995. However, as a
percentage of sales, interest expense declined in fiscal 1996 to 3.5% of sales
compared to 4.5% for fiscal 1995. The acquisition of equipment used in the
manufacture of Geopaper, in addition to higher bank debt related to facilities
expansion and working capital requirements resulted in higher interest costs
during fiscal 1996. The higher interest costs spread over a significantly higher
sales volume in 1996 resulted in a decline in interest costs as a percentage of
sales.
Income before provision for income taxes. Income before provision for
income taxes improved to 8.2% of sales in fiscal 1996 compared to 3.3% of sales
in fiscal 1995. The improvement was due to the higher profitability in income
from operations noted above and the lower interest costs as a percentage of
sales previously discussed. In general, income before provision for income taxes
improved due to economies of scale resulting from increased sales volumes.
Income tax provision (benefit). The income tax provision in fiscal year
1996 was 2.8% of sales, compared to a benefit of 4.0% of sales in fiscal 1995. A
tax benefit was recognized in fiscal 1995, as management determined that future
22
<PAGE>
operating and taxable income will more likely than not be sufficient to fully
recognize all deferred tax assets existing at March 31, 1995. As a result, the
carrying value of the net deferred tax asset was increased and recognized as a
current (1995) period income tax benefit. This benefit was nonrecurring in
nature and had no effect on fiscal 1996 results.
Net income. Net Income of $1,232,024 in fiscal 1996, or 5.4% of sales
compares to net income of $747,742 in fiscal 1995, or 7.3% of sales. Net income
as a percentage of sales declined primarily due to the non-reoccurring tax
benefit discussed previously in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations in general, and its Geopaper manufacturing
operations in particular, are typically capital intensive. The Company has
experienced, from time to time, significant negative cash flows from operating
activities which have been offset by equity and debt financings. As the Company
expands its production and distribution activities, it expects to experience
negative cash flows from operating activities from time to time. In such
circumstances, the Company will be required to fund at least a portion of
production and distribution costs, pending receipt of anticipated future
revenues, from working capital or from additional debt or equity financings from
outside sources. There is no assurance that the Company will be able to obtain
such financing or that such financing, if available, will be on terms
satisfactory to the Company.
On July 14, 1995, the Company's Bank replaced the existing $5,000,000
revolving line of credit with an interest rate of prime plus .5%, with a
$6,000,000 revolving credit agreement with an interest rate of prime plus .5%.
On September 15, 1995, officers and directors converted debentures in an
aggregate face amount of $200,000 into 219,178 common shares.
On September 26, 1995, the Company issued $996,000 of convertible
debentures payable to officers and directors. The debentures were convertible at
the holders option into common shares of the Company at Cdn. $4.45 per share, to
a maximum 274,233 common shares. On December 22, 1995, these debentures were
converted into 273,233 common shares, and are no longer outstanding.
On October 23, 1995, the Company's Bank replaced the existing $6,000,000
revolving line of credit with an interest rate of prime plus .5%, with a
$7,000,000 revolving credit agreement with an interest rate of prime plus .25%.
23
<PAGE>
Between June 1995 and November 1995, the remaining holders of the 8%
convertible subordinated debentures converted the remaining $990,000 of
outstanding debentures into 894,960 shares of common stock.
On December 7, 1995, the Company's Bank modified the interest rate on two
existing term real estate loans. The floating interest rate on two loans
totaling $862,607 was fixed at a rate 8.825% per annum. Two real estate loan
commitments totaling $605,000 with interest rates at prime plus 1.0% were also
converted to a fixed rate of 8.825% per annum.
On January 23, 1996, the Company completed a private placement of 500,000
common shares to officers and directors at a price of Cdn. $5.75. Total cash
received, net of issuance costs, totaled $1,906,100.
On February 13, 1996, the Company's Bank replaced the existing $7,000,000
revolving line of credit with an interest rate of prime plus .25%, with a
$12,000,000 revolving credit agreement with interest at the prime rate.
In addition to bank borrowing, debt conversions and equity placements, the
Company received $841,154 upon the exercise of stock options and warrants
exercised during fiscal year, resulting in the issuance of 768,000 shares of
common stock.
At March 31, 1996 certain officers and directors had advanced the Company
$1,264,711 in the form of uncollateralized notes payable. The notes are payable
on demand and are classified as current liabilities. Interest on these notes are
payable monthly at the rate of prime plus 1%.
Subsequent to year end, the Company received $6,500,000 before expenses as
the result of a private placement of 1,268,293 units at a price of $5.125 per
unit. Each unit is composed of one share of stock and one warrant to purchase a
share of stock at $6.50 per share. The proceeds were used to pay down the
revolving credit line balances.
Net cash flows from operating activities. The Company experienced negative
operating cash flows during fiscal year 1996 and 1995 ($4,875,345 for fiscal
1996 and $379,162 for fiscal 1995). Contributing to the negative cash flow from
operations was the increase in trade receivable and related party trade
receivables balances. Total trade receivables for fiscal 1996 increased 113% to
$5,873,578 compared to $2,751,299 for fiscal 1995. The increase in receivables
of 113% at year end fiscal 1996 over fiscal 1995 year end balances is consistent
with the 122% increase in sales the Company experienced during 1996.
24
<PAGE>
Inventory increased to $9,139,273 at year end fiscal 1996 compared to
$2,901,155 for fiscal year end 1995, and increase of 215%. The 215% increase in
inventory is due in part to the following factors:
(a) Building of inventory in anticipation of higher sales levels in
fiscal 1997 in keeping with management's philosophy that the
building of inventory is preferable and less expensive than losing
customers due to product shortages during growth periods.
(b) The Company built Geopaper inventory for distribution in the
European market, which requires a paper size which is slightly
narrower and longer than the North American standard. The result
necessitated a duplication of inventory stock for two paper sizes.
In addition, Geographics (Europe) Limited was building inventory
levels at March 31, 1996 in preparation of initial European orders
beginning in April 1996.
(c) The Company has a continuing Geopaper design development program,
consequently new product designs are printed and stored in inventory
pending initial releases to customers.
Despite the Company's rapid growth, management anticipates improved accounts
receivable and inventory management due to recent managerial additions focusing
on these critical working capital areas. Improved accounts receivable collection
procedures and increased staffing are expected to minimize future increases in
accounts receivable. New information systems, new warehouse facilities, improved
inventory organization and the addition of key purchasing and inventory staff
should improve efficiencies in inventory management and allow for additional
sales growth without corresponding inventory increases.
Net cash flows from financing activities. For the fiscal year ended March
31, 1996, the Company received a net $8,555,704 from various financing sources,
compared to $1,697,768 for the prior fiscal year. For the year ended March 31,
1996, the Company increased current line of credit borrowings by $3,139,463,
compared to $2,183,476 for the year ended March 31, 1995. Proceeds from
long-term debt borrowings for fiscal year 1996, were $1,003,029, compared to
$765,125 in fiscal 1995. Repayments of long-term debt in fiscal 1996 were
$467,986 compared to $232,685 in fiscal 1995. The Company received $2,452,573
from officers and directors in the form of notes during fiscal 1996, while
$22,746 was received from officers and directors in fiscal year 1995. Repayments
of notes payable to officers and directors were $398,629 in fiscal 1996 compared
to $134,888 in fiscal 1995. In addition the Company received proceeds from
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<PAGE>
private placements, option exercises and warrant exercises in the amount of
$2,827,254 in fiscal 1996, compared to $287,043 in fiscal year 1995. The
proceeds received from the above debt and equity financings were primarily
utilized to finance working capital requirements, building expansion and
equipment acquisitions related to the success of the Geopaper program.
Net cash flows from investing activities. The Company experienced a net
negative cash flow from investing activities for fiscal 1996, of $3,645,679,
compared to a negative cash flow from investing activities of $1,303,258 for
fiscal 1995. The Company made significant investments to increase its Geopaper
production capacity by acquiring printing presses, paper cutting equipment,
packaging equipment, computers. trucks and warehouse racking. The Company
anticipates that it will continue to invest in Geopaper production equipment in
fiscal 1997. On January 23, 1996, the Company placed an order for a printing
press. The cost is approximately $1,200,000, which is expected to be delivered
during the second quarter of fiscal 1997. The Company has commitment from a
financial institution to provide capital lease financing for this equipment.
INFLATION
Inflation has not had a significant impact on the Company's operations.
However, any significant change in the price for paper or labor and
environmental compliance costs could adversely impact the Company.
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 distribution channel, and competitive
pricing. Consequently, the Company's product revenues may vary significantly by
quarter and the Company's operating results may experience significant
fluctuations.
26
<PAGE>
THE COMPANY
GENERAL
Geographics, Inc. was incorporated as a Wyoming corporation on September
20, 1974. The Registrant and its subsidiaries are hereinafter collectively
referred to as the Company, unless otherwise noted. The Company is engaged in
the development, manufacture, marketing, and distribution of designer
stationery, value added papers (printed business cards, brochures, letterhead,
memo pads and paper cubes), lettering, signage, stencil and graphic art products
throughout the United States, Canada, Australia, Europe, Israel and Mexico.
The Company's fiscal year end is March 31. The Company's executive offices
are located at 1555 Odell Road, Blaine, Washington 98230, and its telephone
number is (360) 332-6711.
The Company operates its business through two subsidiaries and a
partnership:
o Geographics Marketing Canada Inc. was incorporated as a British
Columbia, Canada corporation on July 31, 1995. Its offices are
located at 17735 1st Ave., Suite 1, Surrey, B.C., Canada V4P 2K1,
and its telephone number is 800-426-5923. Geographics Marketing
Canada Inc. was established to import the Company's products into
Canada and market them to wholesale and retail distribution
channels. Geographics Marketing Canada Inc. succeeds Martin
Distribution as the exclusive importer of Geographics products into
Canada effective April 1, 1996. For further discussion of Martin
Distribution see, "Certain Relationships and Related Transactions."
o Geographics (Europe) Limited was incorporated in England on December
12, 1995. Geographics (Europe) Limited offices are located at 4
Iceni Court, Letchworth, Herts SG6 1TN, England, and its telephone
number is 01462 487100. Geographics (Europe) Limited was established
to import, warehouse the Company's products, and market and
distribute its products throughout Europe.
o International Geographics of Ontario ("IGO") was established
in September 1989, with the Company owning 70% of the partnership
and a marketing agent for the Company owning the remaining 30%. The
purpose of IGO was to purchase the Company's products from Martin
Distribution Inc. and market and distribute the Company's products
in Canada. IGO was dissolved during fiscal 1996. The Company is in
27
<PAGE>
the process of winding up the affairs of the partnership. The
functions of IGO have been assumed by Geographics Marketing Canada
Inc. IGO's principal offices are located at 921 Gana Court,
Mississauga, Ontario, Canada L5S 1N9, and its telephone number is
800-426-5923.
BACKGROUND
At the time of its incorporation in 1974, the Company was a wholly owned
subsidiary of International Geographics Ltd. ("IGL"), a British Columbia
corporation traded on the Vancouver Stock Exchange. On February 20, 1989, IGL
listed its stock on the Toronto Stock Exchange and voluntarily delisted its
common stock from the Vancouver Stock Exchange.
The Company's primary focus during this period was the manufacture and
marketing of rub on and stick on lettering, signage and graphic art products.
These products were manufactured in various locations until 1980 when the
Company consolidated its manufacturing facilities and moved to Blaine,
Washington.
During 1991, a reorganization of the Geographics group of companies was
conducted whereby Geographics, Inc. undertook and completed a takeover bid to
acquire all of the issued and outstanding shares of IGL. As a result,
Geographics, Inc. acquired its parent and became a U.S. based company, with both
of its administrative offices and manufacturing facilities located at one
location, within a single entity.
During fiscal year 1991, the Company began the development of designer
stationary and value added paper products. In fiscal year 1992, the Company
introduced to the marketplace the first versions of Geopaper, a value added
paper. The Company continued to develop new Geopaper designs and new Geopaper
customers, and by fiscal year 1994 sales of Geopaper had increased to 3% of
total Company sales.
In fiscal year 1994, the Company purchased certain assets from E.Z.
Industries Inc. (an unrelated Maryland company), for $1,500,000. The purchased
assets included equipment used in the manufacturing of vinyl letter sets,
stencil kits, lettering guides, dry transfers, signs and similar products.
however, primary purpose of the acquisition was to broaden the Company's
customer base.
The Company successfully placed Geopaper in Office Depot Inc., a major
office supply superstore in fiscal year 1995. Sales of Geopaper during fiscal
year 1995 increased to 21% of total Company sales. During first quarter of
fiscal year 1996, the Company received purchase orders to place Geopaper chain
wide in Office Depot and OfficeMax, two of the three largest office supply
superstores in North America. In January 1996, the Company announced that
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<PAGE>
Wal-Mart had agreed to place Geopaper in 248 Wal-Mart stores to be shipped in
March 1996.
During fiscal year 1996, the Company introduced new variations of
Geopaper, including Geonotes and Geocubes, memo pad and paper cube products made
using Geopaper designs. As a result of the increasing popularity of Geopaper in
the retail stores and the expansion of the Geopaper product line, sales of
Geopaper products had increased to 65% of total Company sales. Fiscal year 1996
was the year the Company made the transition from a lettering and signage
manufacturing company to a manufacturer of stationary and value added papers as
its primary business.
PRODUCTS
The products manufactured by the Company are separated into two major
product groups; (1) specialty papers, and (2) lettering and signage.
The specialty papers group is composed primarily of designer stationery
and other value added papers (paper on which the Company has applied photographs
and art images during a printing process and then cut to size). The papers are
designed for use in photocopiers and computer printers to be used as stationery,
letterhead, business cards, brochures, memo pads and paper cubes. These papers
are marketed under the Trademark "Geopaper". Geopaper products are also designed
to be used with personal computer printers or to compliment other Company
products that are used with personal computers. Geopaper sales increased to 65%
of sales in fiscal year 1996, up from 21% of sales in fiscal 1995 and 3% of
sales in fiscal year 1994. Net sales for this group increased to about
$14,800,000 in fiscal 1996, up from about $2,100,000 in fiscal 1995 and $180,000
in fiscal 1994. See "Sales By Product Category." The Geopaper product line is
expected to continue to grow as a percentage of sales as more customers accept
the product line and as the use of personal computers continues to grow world
wide, but there can be no assurances that such growth shall occur as expected by
the Company.
The lettering and signage group manufacturers and distributes nub-on and
stick-on lettering, stencils, electronic moving message signs, American
Disabilities Act signs in Braille, and other signage products. This product
group represented 35% of sales in fiscal 1996, down from 79% of sales in the
prior year, net sales for this group decreased to about $7,900,000 from about
$8,100,000. The Company expects this product group to continue to decrease as a
percentage of sales as Geopaper product growth is expected to be significantly
faster than the sales growth of this category. Sales of lettering and signage
products as an industry will continue to decline over time as the use of
personal computers increases. The Company anticipates that it can offset this
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<PAGE>
expected decline by increasing its market share of this industry through its
recent addition of 400 to 500 Wal-Mart stores as customers in fiscal 1996. The
growth of existing customers featuring Geopaper and lettering products, such as
Office Depot, OfficeMax and Business Depot (Staples, Inc.'s Canadian division),
together adding over 200 new stores a year, should also contribute to an
increase in market share and add additional lettering and signage sales each
year. There can be no assurances, however, that such increase in market share
shall occur.
SALES BY PRODUCT CATEGORY
The percentage of the Company's total sales attributable to each class of
product offered by the Company for the last three years is set forth below.
As a Percentage of Sales
------------------------
Fiscal Year
Class of Product 1996 1995
---------------- ---- ----
Designer stationeries
and specialty papers 65% 21%
Lettering, signage, stencil
and graphic art products 35% 79%
Stated in Sales Dollars (rounded)
---------------------------------
Fiscal Year
Class of Product 1996 1995
---------------- ---- ----
Designer stationeries
and specialty papers $14,800,000 $2,100,000
Lettering, signage, stencil and
graphic art products 7,800,000 8,100,000
Business Concentrations
Historically, Geographics, Inc. has sold a substantial portion of its
products to a limited number of customers. Concentration of sales to the five
largest customers is detailed below:
Customer 1996 1995
-------- ---- ----
Office Depot 40% 31%
OfficeMax, Inc. 24% 16%
Martin Distribution, Inc.* 13% 12%
United Stationers, Inc. 3% 6%
Wal-Mart Stores, Inc. 3% 3%
--- ---
83% 66%
- -----------
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<PAGE>
* Martin Distribution, the Company's distributor for Canada, is a related
party to the Company as the result of a common director. Martin
Distribution was replaced by Geographics (Marketing) Canada, Inc.,
effective April 1, 1996, as distributor of Geographics, Inc. products and
will cease to be a customer of the Company. Management estimates that this
change will have little or no impact on the future sales of the Company.
The Company expects that sales to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. Although the composition of the group comprising the
Company's largest customers may vary from period to period, the basis of a
significant customer or any reduction in orders by any significant customer,
including reductions due to market, economic or competitive conditions in the
designer stationery or specialty papers industry, may have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's ability to increase its sales in the future will depend in part
upon its ability to obtain orders from customers as well as the financial
condition and success of its customers and the general economy, of which there
can be no assurance.
GROWTH STRATEGY
Management is of the opinion that the North American market will continue
to provide the Company with significant opportunities for growth. An overview of
North American market growth opportunities are as follows:
o Designer stationeries and value added papers are still in their
infancy. Thousands of stores have yet to begin carrying these
papers. The majority of mass merchandise chains, computer retailers
and department stores do not carry designer stationery or value
added paper. The office product superstore chains and office product
catalogs are the primary concentrations of companies carrying these
products.
o The Company continues to diversity away from lettering and signage
products. New product introductions in 1997 will include educational
and motivational products that will be sold into existing markets
and provide opportunities to introduce Geographics products into new
markets.
o Existing Geopaper product lines are continually reviewed to identify
lines to be replaced with new and improved lines. In addition to
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<PAGE>
replacement and improvement of existing lines, new Geopaper lines
are continually in development and in test markets.
o The Company may from time to time acquire art or paper products that
compliment the Geopaper line.
The Company believes that foreign markets may provide additional growth
opportunities. During July 1995, the Company established Geographic Marketing
Canada, Inc. as a British Columbia corporation, in July 1995, to facilitate
marketing and distribution of Company products in Canada. Geographics (Europe)
Limited was incorporated in December 1995 as U.K. corporation, to initiate
marketing and distribution of Company products in Europe. The Company also
distributes its products through an exclusive distributor in Australia, with
whom the Company entered into a letter of intent on July 3, 1996 to acquire its
assets and assume its liabilities on terms that are currently being negotiated.
The Company anticipates further expansion internationally, including Asia, which
is a prominent target destination for Company products.
International sales accounted for approximately 14% and 11% of total net
sales in 1996 and 1995, respectively. International sales were concentrated in
Canada and Australia and to a lessor degree, Mexico, Israel and Norway. The
Company anticipates that international sales will increase as a percentage of
total sales resulting from the Company's expansion plans in Europe and Asia. As
a result, a significant portion of the Company's sales will be subject to
certain risks, inducing unexpected changes in regulatory requirements, exchange
rates, tariffs and other barriers, political and economic instability,
difficulties in receivable collections, natural disasters, difficulties in
staffing and managing foreign subsidiary and branch operations, and potentially
adverse tax consequences. The Company is also subject to the risk associated
with the imposition of legislation and regulations relating to the import or
export of stationeries, specialty papers and office supply products. The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
will be implemented by the United States, Canada, Australia or any other country
upon the importation or exportation of the Company's products in the future.
There can be no assurance that any of these factors or adoption of restrictive
policies will not have a material adverse effect on the Company's business.
Financial condition and results of operations.
PURCHASING
The Company purchases goods from approximately 700 vendors. One vendor,
Unisource, accounted for a significant portion of the Company's total
merchandise purchase during the year ended March 31, 1996. The Company purchases
commodity paper and other related products from this broker/vendor that could be
supplied by other sources. There can be no assurances that the relationship
between the Company and this vendor will continue and the loss of the purchasing
power the Company has established with this company would likely have a material
adverse effect on the Company. The Company does not consider itself dependent on
any single source for materials to manufacture its products.
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<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company is investing significant resources to install integrated
software systems that provides daily information on sales, gross margins and
inventory levels by warehouse and by stockkeeping unit. These systems will allow
the Company to compare current performance against historical performance and
the current year's budget. The systems have been designed to integrate all major
aspects of the Company business, including sales, electronic data interchange
(EDI), warehousing, manufacturing, distribution, purchasing, inventory control,
merchandise planning and replenishment, as well as various financial systems.
The Company is working with outside consultants in the design, installation and
ongoing refinement of this system. The current systems used by the Company are
primarily financial in nature, such as invoicing, accounting, general ledger and
shipping. Manufacturing and inventory management systems are not presently
integrated. The new system will be installed by module beginning in the summer
of 1996 and is scheduled to be completed in the winter of fiscal 1997.
The Company currently utilizes EDI to transact business with its largest
customers. Presently 70% to 80% of customer orders are received by EDI. EDI is
utilized as it is a highly efficient method of transmitting large numbers of
orders in a paperless medium. The Company believes that the systems it has
developed and are presently developing, have the ability to continue to improve
customer service, operational efficiency, and management's ability to monitor
critical performance factors. The systems have been designed to support the
growth and expansion of the Company for the foreseeable future.
COMPETITION
The Company operates in a highly competitive environment. Competition can
be separated into two areas in which the Company conducts business; designer
stationery and lettering and signage. The Company's designer stationery
operations' competes in most of its markets with Z-International, Inc., A.C.I.
Action Communication, Inc. REDIFORM (a division Moore Corp. Ltd), First Base and
DECAdry. The Company designer stationery products compete with competitor
products for space in the office products superstores, office product stores,
mass market stores, contract stationers, wholesalers, office product catalogs
and paper direct mail catalogs.
The Company's traditional lettering and signage operations compete with
several companies that produce similar products (i.e., vinyl lettering, stencil,
nub-on lettering), these competitors are: Visu-com, Charpak and Duroart.
Competition with Company products compete with competitor products for space in
33
<PAGE>
the office products superstores, office product stores, mass market stores,
contract stationers, wholesalers, and office product catalogs.
Certain of these competitors are larger, better capitalized, more
established and have greater access to resources necessary to produce a
competitive advantage. The Company believes that its product designs, product
quality, merchandising programs, distribution channels, customer service and
competitive pricing distinguishes the Company from its competitors.
The development and manufacture of new designer stationeries and specialty
papers are highly capital intensive. In order to remain competitive, the Company
must continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities, investments in systems, procedures
and controls, expansions of operations and research and development, among many
items. The Company expects that anticipated cash flows from operations, proceeds
received from the May 1, 1996 private placement, capital leases, and funds
available under a line of credit will be sufficient to meet the Company's cash
requirements for the next twelve months. To the extent that such financial
resources are insufficient to the fund the Company's activities, additional
financing might be required. There can be no assurance that additional financing
will be available on reasonable terms.
TRADEMARKS AND COPYRIGHTS
The Company has five (5) federally registered trademarks; (1) GEOPAPER,
(2) GEOTYPE, (3) GEOTAPE, (4) GEOSTENCIL, and (5) SHIELD 'N' SEE. The Company
has eight (8) applications pending with the U.S. Patent and Trademark Office for
federal trademark registration for Geographics product lines. Additionally, the
Company has filed six (6) trademark applications pending in Canada and Australia
for Geographic product lines in those countries, which applications are
currently pending.
The Company has two (2) registered U.S. copyrights for the following
products, "GEOCRUMPLED" and "GEOCLOUDS."
Certain of the Company's proprietary manufacturing processes are protected
by trade secrets. While the Company has made every effort to protect all of its
intellectual property, to the extent such protections are inadequate, the
Company could lose a part or all of these rights which, in time, could have a
material adverse effect on the Company.
FUTURE ACQUISITIONS
The Company may, in the future, pursue acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
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<PAGE>
may result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
Company profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
limited direct prior experience, and the potential loss of key employees of the
acquired company. In the event that such acquisitions do occur, there can be no
assurance as to the effect thereof on the Company's business or operating
results.
EMPLOYEES
As of August 2, 1996, the Company had 271 employees of whom 267 were
employed at its corporate headquarters in Blaine, Washington and 4 of whom were
employed at the Company's facilities in the United Kingdom. The manufacturing
warehousing and product distribution aspects of the business employs 217
employees, 37 employees work in administration and 17 employees work in various
managerial positions. None of the Company's employees are subject to a
collective bargaining agreement. Management believes that its relationship with
its employees is good.
FACILITIES
The corporate office facility in Blaine, Washington has approximately
96,500 square feet of office, warehouse and manufacturing space. This facility
was increased from 34,000 square ft. to 49,000 square ft. in December 1994. The
facility was increased to its current size during fiscal year 1996, completing
construction in late March 1996. Construction was financed by progress payments
advanced from term bank loans described below. No construction in progress loan
balances were outstanding at March 31, 1996.
The Blaine facility is built on ten and one half acres of Company owned
land, purchased for $114,563 in 1980. The buildings and real estate are
collateral for four bank real estate loans totaling $2,341,057. These loans have
interest rates ranging from 8.825% to 10% and maturities ranging from June 2004
to October 2010. The current portion of long-term bank debt associated with real
estate as of March 31, 1996 is $175,643. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OTHER WHATCOM COUNTY FACILITIES
The Company leased a 19,050 square ft. facility in Bellingham, Washington,
in October 1995. This facility is used in manufacturing, staging and shipping
35
<PAGE>
functions. The lease payments are $7,620 per month, triple net, the lease
expires in October 1998, and the Company has an option to renew for another
three year term. In February 1996, the Company also leased a 10,000 square feet
facility near Ferndale, Washington, on a six month lease of $3,950 per month
triple net. This facility was used to meet material staging and warehouse
requirements while the new Blaine facilities were being completed and organized.
EUROPEAN FACILITIES
Geographics (Europe) Limited leases 6,700 square feet of warehouse space
near London, England. The lease requires quarterly lease payments of
approximately $5,202, triple net, expiring on February 14, 2006.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary
course of business. The Company is not involved in any legal proceedings that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
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MANAGEMENT
The names and ages of the Company's directors and executive officers are as
follows:
Director
and/or
Officer
Name Age Position Since
- ---- --- -------- -----
Ronald S. Deans 63 Chairman of the Board 1973
President and Chief
Executive Officer
Mark G. Deans 31 Director, Executive 1994
Vice President -
Marketing
R. Scott Deans 34 Director, Executive 1995
Vice President -
Operations
Fidel Garcia Carrancedo 63 Director 1989
Moises Cosio 65 Director 1995
Alan D. Tuck Jr. 53 Director 1995
Robert S. Parker 50 Director 1996
Luis Alberto Morato 36 Director 1995
Terry A. Fife 38 Vice President, 1994
Chief Financial Officer
and Secretary
- ------------------
RONALD S. DEANS has served as the Chief Executive Officer, Chairman and
President of the Company since he founded the Company in 1973. Mr. Deans has
over thirty years experience in the graphics art and office products retailing
industry. Prior to founding the Company, Mr. Deans served as sales manager of
Letraset Canada Ltd. Mr. Deans is responsible for the strategic planning and
business development of the Company.
MARK G. DEANS joined the Company in May 1985, was promoted to its Vice
President-marketing in April 1990 and to Executive Vice President-Marketing in
September 1995. Mr. Deans has served as a director of the Company since November
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1994. He is responsible for the development of new products, sales programs, and
marketing programs including relationships with the Company's major customers.
R. SCOTT DEANS joined the Company in February 1985 in the marketing and
operations department. Mr. Deans was promoted to Vice President-Operations in
January 1990 and to Executive Vice President-Operations in September 1995. Mr.
Deans has served as a director of the Company since October 1995. He is
responsible for all manufacturing operations of the Company.
FIDEL GARCIA CARRANCEDO has been a director of the Company since August 1989.
Mr. Carrancedo has served as Director General of Alimentos, S.A. de. C.V., a
food products manufacturer and distributor in Mexico since 1972.
MOISES COSIO has served on the Company's board of directors since January 1995.
Mr. Cosio is an international financier residing in Mexico. Mr. Cosio also
serves on the board of directors of Telefonos de Mexico, a publicly traded
company. He is an international financier residing in Mexico and has investment
interests in Grupo Carso, InverMexico, Mexican subsidiaries of Kimberly-Clark
and John Deere. Mr. Cosio also owns luxury hotels in Ixtapa, Acapulco and Mexico
City.
ALAN D. TUCK, JR. has been a director of the Company since August 1995. Mr. Tuck
is President of Greenway Pump, Inc., a privately held company performing
research and development of hydraulic pumps since March 1992. Mr. Tuck is also
an inventor and holds several U.S. patents. From July 1989 to March 1992, Mr.
Tuck operated Fluid Systems Engineering, a privately held company performing
research and development of hydraulic pumps. Mr. Tuck is a graduate of the
United States Air Force Academy and a Former U.S. Air Force Officer. Mr. Tuck
received his Juris Doctor from the University of California of Law in Davis,
California.
ROBERT S. PARKER has served on the Company's board of directors since April
1996. Mr. Parker has been the President of Sanford Corporation since December
1990. Sanford Corporation is a manufacturer of writing instruments and office
supplies and is a subsidiary of Newell Co., a public company.
LUIS ALBERTO MORATO has been a director of the Company since October 1995. From
March 1993 to the present, Mr. Morato has been an independent civil engineering
consultant. From June 1982 to March 1993, Mr. Morato was a budget manager with
Bytsa De. C.V.
TERRY A FIFE joined the Company as its Vice President-Finance, Chief Financial
Officer and Secretary in October 1994. From May 1991 to October 1994, Mr. Fife
served as Manager of Finance & Administration at Alf Christianson Seed Co. Prior
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to jointing Alf Christianson, Mr. Fife served as Vice President - Finance &
Administration at Dealer Information Systems Corporation. He also has worked for
the Seattle office of the Certified Public Accounting firm of KPMG Peat Marwick.
Mr. Fife is responsible for all accounting and finance functions of the Company.
Mr. Ronald S. Deans, the Company's Chairman, President and CEO, is the
father of Mark G. Deans, the Company's Executive Vice President-Marketing and a
director of the Company and R. Scott Deans, the Company's Executive Vice
President-Operations and a director of the Company. Fidel Garcia Carrancedo, a
director of the Company, is the father-in-law of Luis Alberto Morato, also a
director of the Company.
The Company's officers are elected annually by the Company Board of
Directors. The Company pays each non-employee director a fee of $500 per month,
plus $750 for each Board of Directors meeting attended. Directors are entitled
to reimbursement for reasonable travel and other out-of-pocket expenses incurred
in connection with attendance of Board of Directors meetings.
Directors of the Company who are also employees of the Company do not
receive additional compensation for their services as directors.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended March 31, 1996, there were two (2) Meetings
of the Company Board of Directors. Each Board member attended 75% or more of the
aggregate of the Meetings of the Board of Directors and the Meetings of all
Committees of the Board of Directors on which he served.
The Audit Committee was established in April 1991. The members of the
Audit Committee are Alan D. Tuck, Jr., Chairman, Ronald S. Deans and Fidel
Garcia Carrancedo. Mr. Deans is the President, CEO and Chairman of the Company.
The Compensation Committee makes recommendations with respect to compensation of
senior officers and granting of stock options and stock awards. The Compensation
Committee met one time during fiscal year 1996 and all members attended the
meeting.
The Company does not have a nomination committee.
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EXECUTIVE COMPENSATION
CASH COMPENSATION
Total cash compensation paid to all executive officers as a group for
services provided to the Company in all capacities during the year ended March
31, 1996 aggregated to $696,781. Set forth below is a summary compensation
table. As indicated below, no officer of the Company or any of its subsidiaries,
except for Messrs. Ronald S. Deans, Mark G. Deans and R. Scott Deans received
total salary and bonus which exceeded $100,000 during the periods reflected.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Other All Other
Name and Annual LTIP
Principal Compen Restricted Stock Options/ Compen-
Position Period Salary Bonus sation* Award(s) SARs(#) Payouts sation
- -------- ------ ------ ----- ------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald S. Deans, 1996 $234,000 $87,629 -- -- 30,000 -- --
Chairman, Pres- 1995 $181,666 -- -- -- -- -- --
dent and CEO 1994 $180,000 -- -- -- 20,000 -- --
Mark G. Deans, 1996 $111,694 $28,184 -- -- 32,000 -- --
Director, Exec- 1995 $ 79,243 -- -- -- 30,000 -- --
tive Vice-Presi- 1994 $ 75,000 -- -- -- 14,000 -- --
dent Marketing
R. Scott Deans, 1996 $111,694 $28,184 -- -- 32,000 -- --
Director, Exec- 1995 $ 79,243 -- -- -- 30,000 -- --
tive Vice-Presi- 1994 $ 75,000 -- -- -- 14,000 -- --
dent Marketing
Terry Fife* 1996 $ 86,914 $ 8,482 -- -- -- -- --
Vice President- 1995 $ 31,911 -- -- -- 54,000 -- --
Finance CFO 1994 $ -- -- -- -- -- -- --
& Secretary
- --------------
</TABLE>
* Mr. Fife was hired in October 1994.
The Company has no written employment agreements with any of its officers or
directors as of the date of this Proxy, although the Company intends to
establish written agreements with its officers and directors in the future.
40
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Number of Percent of
Securities Total Options/
Underlying SARs Granted Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted (#) In Fiscal Year ($/sh) (1) Date
- ---- ----------- -------------- ---------- ----
Ronald S. Dean 6.0% 30,000 Cdn $2.30 9/18/00
Mark G. Deans 6.5% 12,000 Cdn $2.00 4/25/00
20,000 Cdn $4.15 10/10/00
R. Scott Deans 6.5% 12,000 Cdn $2.00 4/25/00
20,000 Cdn $4.15 10/10/00
- --------------------
(1) The exchange rate on August 7, 1996 was US$.7291 = Cdn $1.00.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Number of Unexercised
Option/SARs In-the-Money
Option/SARs Options/SARs
Shares at FY-End (#) at FY-End
Acquired on Value Exercisable Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
Ronald S. Deans 90,000 $373,543 0/30,000 $0/92,347
Mark G. Deans 86,000 $353,253 0/20,000 $0/34,671
R. Scott Deans 86,000 $353,253 0/20,000 $0/34,671
Terry A. Fife 54,000 $207,127 0/ $0/
As of March 31, 1996, the Company had reserved 220,000 shares of Common Stock
for issuance to key employees, officers and directors. Options to purchase the
Company's Common Stock are granted at a price equal to the market price of the
stock at the date of grant, and are exercisable upon issuance and regulatory
approval. All options expire no more than five years after the date of grant.
Option prices per share are expressed in Canadian dollars. The rate of exchange
as of August 7, 1996 was US $.7291 = Cdn. $1.00.
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
On July 8, 1996, the Board of Directors adopted, subject to the approval
by the shareholders, a stock option plan called the "Geographics, Inc. 1996
Stock Option Plan." At the Company's 1996 Annual Meeting of Shareholders to be
held on August 28, 1996, Shareholders will be asked at the meeting to vote on a
proposal to adopt the Plan. The following summary describes features of the
Plan.
41
<PAGE>
The Board of Directors have determined that the Plan will work to increase
the employees', consultants' and non-employee directors' proprietary interest in
the Company and to align more closely their interests with the interests of the
Company's shareholders. The Plan will also maintain the Company's ability to
attract and retain the services of experienced and highly qualified employees
and non-employee directors. The Board of Directors believes that the Plan is in
the Company's best interests and therefore recommends adoption of the Plan on
essentially the terms and conditions as are set forth below.
Under the Plan, the Company has reserved an aggregate of 1,000,000 shares
of Common Stock for issuance pursuant to options granted under the Plan ("Plan
Options"). The Board of Directors or Compensation Committee of the Board of
Directors (the "Committee") of the Company administers the Plan including,
without limitation, the selection of the persons who will be granted Plan
Options under the Plan, the type of Plan Options to be granted, the number of
shares subject to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 10% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee. The per share purchase price of shares
subject to Plan Options granted under the Plan may be adjusted in the event of
certain changes in the Company's capitalization, but any such adjustment shall
not change the total purchase price payable upon the exercise in full of Plan
Options granted under the Plan.
42
<PAGE>
Officers, directors, key employees and consultants of the Company and its
subsidiaries are eligible to receive Non-Qualified Options under the Plan. Only
employees of the Company (or by any subsidiary thereof) are eligible to receive
Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is permanently and
totally disabled within the meaning of Section 22(c)(3) of the Internal Revenue
Code of 1986, the Plan Option granted to him lapses to the extent unexercised on
the earlier of the expiration date of the option or one year following the date
of such disability.
The Board of Directors or Committee may amend, suspend or terminate the
Plan at any time, except that no amendment shall be made which (i) increases the
total number of shares subject to the Plan or changes the minimum purchase price
therefor (except in either case in the event of adjustments due to changes in
the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on March 31, 2006. Any such termination of the Plan shall
not affect the validity of any Plan Options previously granted thereunder.
The following discussion is based on federal income tax laws and
regulations in effect on March 31, 1996. It does not purport to be a complete
description of the federal income tax consequences of the Plan, nor does it
describe the consequences of state, local or foreign tax laws which may be
applicable. Accordingly, any person receiving a grant under the Plan should
consult with his own tax adviser.
An employee granted an Incentive Stock Option does not recognize taxable
income either at the date of grant or at the date of its timely exercise.
However, the excess of the fair market value of Common Stock received upon
exercise of the Incentive Stock Option over the Option exercise price is an item
43
<PAGE>
of adjustment under Section 56(b)(3) of the Code and may be subject to the
alternative minimum tax imposed by Section 55 of the Code. Upon disposition of
stock acquired on exercise of an Incentive Stock Option, long-term capital gain
or loss is recognized in an amount equal to the difference between the sales
price and the Incentive Stock Option exercise price, provided that the option
holder has not disposed of the stock within two years from the date of grant and
within one year from the date of exercise. If the Incentive Stock Option holder
disposes of the acquired stock (including the transfer of acquired stock in
payment of the exercise price of an Incentive Stock Option) without complying
with both of these holding period requirements ("Disqualifying Disposition"),
the option holder will recognize ordinary income at the time of such
Disqualifying Disposition to the extent of the difference between the exercise
price and the lesser of the fair market value of the stock on the date the
Incentive Stock Option is exercised (the value six months after the date of
exercise may govern in the case of an employee whose sale of stock at a profit
could subject him to suit under Section 16(b) of the Securities Exchange Act of
1934) or the amount realized on such Disqualifying Disposition. Any remaining
gain or loss is treated as a short-term or long-term capital gain or loss,
depending on how long the shares are held. In the event of a Disqualifying
Disposition, the Incentive Stock Option tax preference described above may not
apply (although, where the Disqualifying Disposition occurs subsequent to the
year the Incentive Stock Option is exercised, it may be necessary for the
employee to amend his return to eliminate the tax preference item previously
reported). The Company and its subsidiary are not entitled to a tax deduction
upon either exercise of an Incentive Stock Option or disposition of stock
acquired pursuant to such an exercise, except to the extent that the Option
holder recognized ordinary income in a Disqualifying Disposition.
In respect to the holder of Non-Qualified Options, the option holder does
not recognize taxable income on the date of the grant of the Non-Qualified
Option, but recognizes ordinary income generally at the date of exercise in the
amount of the difference between the option exercise price and the fair market
value of the Common Stock on the date of exercise. However, if the holder of
Non-Qualified Options is subject to the restrictions on resale of Common Stock
under Section 16 of the Securities Exchange Act of 1934, such person generally
recognizes ordinary income at the end of the six-month period following the date
of exercise in the amount of the difference between the option exercise price
and the fair market value of the Common Stock at the end of the six-month
period. Nevertheless, such holder may elect within 30 days after the date of
exercise to recognize ordinary income as of the date of exercise. The amount of
ordinary income recognized by the option holder is deductible by the Company in
the year that income is recognized.
If the Plan is approved by the shareholders, the Company will have granted
no Plan Options.
44
<PAGE>
CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Debt and Equity Instruments Issued to Officers and Directors
During fiscal year 1996, the Company concluded several transactions
involving officers and directors of the Company. These transactions included the
issuance of convertible debentures, the conversion of debentures into common
shares and private placement of common shares.
On September 15, 1995, Ronald S. Deans, the Company's Chairman of the
Board, President and Chief Executive Officer and Fidel Carrancedo, a director of
the Company each converted debentures in the amount of US$100,000 into 109.589
common shares (for an aggregate face amount of US$200,000 into 219,178 common
shares). The debentures were convertible at each holder's option into common
$hares of the Company at Cdn.$1.25 per share, to a maximum of 219,178 common
shares. There is no remaining balance of these debentures outstanding as of
March 31, 1996.
On September 26, 1995, the Company issued US$996,000 of convertible
debentures payable to certain officers and directors of the Company including
Ronald S. Deans, the Company's Chairman of the Board, President and Chief
Executive Officer (whose principal amount of debenture equaled $527,881.86,
convertible into 145,344 common shares), Fidel Carrancedo, a director of the
Company (whose principal amount of debenture equaled $328,680.40, convertible
into 90,497 common shares, Mark G. Deans, a director and Executive Vice
President-Marketing of the Company (whose principal amount of debenture equaled
$69,718.87, convertible into 19,196), and R. Scott Deans, a director and
Executive Vice President-Operations (whose principal amount of debenture equaled
$69,718.87, convertible into 19,196). The debentures were convertible at the
holders option into common shares of the Company at Cdn$4.45 per share, to a
maximum 274,233 common shares. On December 22, 1995, these debentures were
converted into 273,233 common shares, and are no longer outstanding.
On January 23, 1996, the Company completed a private placement of 500,000
common shares certain officers and directors of the Company including Ronald S.
Deans (136,000 shares, of which 43,000 shares were purchased by Mr. Dean's wife,
Ann), Fidel Carrancedo (200,000 shares), Mark G. Deans (65,000 shares), and R.
Scott Deans (79,000 shares). Each share was purchased at a price of Cdn.$5.75.
Total cash proceeds received by the Company were US$2,117,092 and the net cash
proceeds to the Company were US$1,906,100.
At March 31, 1996, Ronald S. Deans ($1,212,706) and Fidel Carrancedo
($52,005) advanced an aggregate of $1,264,711 in the form of uncollateralized
notes payable. The notes are payable on demand and are classified as current
45
<PAGE>
liabilities of the Company. Interest on these notes are payable monthly at a
rate of prime plus 1%. The total interest costs associated with these notes and
debentures was approximately $60,000 during the year ended March 31, 1996.
Martin Distribution
Martin Distribution Inc. ("Martin") has acted as the national distributor
of the Company's products in Canada since September 1990. Martin is owned by the
estate of Martin Carrancedo, a former director of the Company. Martin imports
the Company's products into Canada, facilitates customs clearing and distributes
the Company's products to customers in Canada. All sales of the Company's
products within Canada are sold through Martin. Sales to Martin amounted to
$2,854,935 and $1,056,750 during the years ended March 31, 1996 and 1995
respectively. Trade receivables due from Martin amounted to $899,422 and
$338,875 at March 31, 1996 and 1996, respectively.
Martin sold product valued at $118,659 and $261,765 during the years ended
March 31, 1996 and 1995, respectively to International Geographics of Ontario
("IGO"). IGO is a partnership which is 70% owned by the Company and 30% owned by
a marketing agent of the Company. IGO was dissolved during fiscal 1996 and its
functions will be assumed by Geographics Marketing Canada Inc., a wholly owned
subsidiary of the Company.
Mark G. Deans, a director and executive officer of the Company serves as a
director of Martin. Fidel Garcia Carrancedo, a current director of the Company,
is the brother of the late Martin Carrancedo. There is no relationship, however,
between Fidel Garcia Carrancedo and Martin. Effective April 1, 1996, the Company
will replace Martin as its Canadian national distributor with Geographics
Marketing Canada Inc., a wholly owned subsidiary of the Company. The Company
does not expect the substitution of Geographics Marketing Canada Inc. in place
of Martin to have any material effect on the sales or profits of the Company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's articles of incorporation contains the broadest form of
indemnification for its officers and directors and former officers and directors
permitted under Wyoming law except that such indemnification does not apply to
(a) acts or omissions of the director or officer finally adjudged to be
intentional misconduct or a knowing violation of law; (b) conduct of the
director or officer finally adjudged to be gross negligence; or (c) any
transaction with respect to which it was finally adjudged that such director and
officer personally received a benefit in money, property, or services to which
the director was not legally entitled. The articles of incorporation further
46
<PAGE>
provide that the Company shall advance expenses for such persons pursuant to the
terms set forth in the Company's bylaws, or in a separate directors resolution
or contract. Additionally, Section 17-16-856 of the Wyoming Business Corporation
Act provides that unless the articles of incorporation provide otherwise, a
current or former officer of a corporation who is not a director is entitled to
mandatory indemnification and is entitled to apply for court ordered
indemnification pursuant to Wyoming corporate law. Additionally, the corporation
may indemnify and advance expenses to (i) a current or former officer, employee
or agent of a corporation who is not a director to the same extent as to a
director, and (ii) a current or former officer, employee or agent who is not a
director to the extent consistent with public policy, that may be provided by
its articles of incorporation, bylaws, general or specific action of its board
of directors or contract.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as express in the act and is therefore unenforceable.
LIMITATION OF DIRECTOR LIABILITY
The Wyoming Business Corporation Act and the Company's articles of
incorporation limit the liability of directors of the Company for damages for
conduct as a director except for (a) acts or omissions involving intentional
misconduct by the director or knowing violation of law by the director; (b)
conduct for unlawful payments of dividends or unlawful stock purchases or
redemptions as provided in Section 17-16-833 of the Wyoming Business Corporation
Act; (c) any transaction from which the director will receive a benefit in
money, property, or services to which the director is not legally entitled; or
(d) conduct deemed to be gross negligence. The limitation of liability applies
only to monetary damages and, presumably, would not affect the availability of
equitable remedies such as injunction or rescission.
The Company's articles of incorporation do provide that if the Wyoming
Business Corporation Act is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Company shall be eliminated or limited to the fullest
extent permitted by the Wyoming Business Corporation Act as so amended. Any
repeal or modification of this provision by the shareholders of the Company
shall not adversely affect any right protection of a director of the Company
with respect to any acts or omissions of such director occurring prior to such
repeal or modification.
47
<PAGE>
Section 17-16-834 of the Wyoming Business Corporation Act further provides
that the articles of incorporation may contain a provision eliminating or
limiting the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director
subject to the following: (i) the provision shall not eliminate or limiting the
liability of a director (A) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (B) for acts or omissions not in good faith
or which involved intentional misconduct a knowing violation of law, (C) for
unlawful distributions, or (D) for any transaction from which the director
derived an improper personal benefit; and (ii) the provision shall not eliminate
or limit he liability of a director for any act or omission occurring prior to
May 22, 1987, if applicable. The Company currently has not adopted this
provision of the Wyoming Business Corporation Act.
PRINCIPAL STOCKHOLDERS
The following table sets forth the Common Stock ownership information,
based on 9,382,877 shares of Common Stock outstanding as of July 31, 1996,
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person who is known by the Company to own beneficially more
than 5% of its Common Stock, (ii) each director and nominee for director, (iii)
each Named Executive Officer (as defined herein), and (iv) all directors and
executive officers as a group:
Amount and
Nature of Percentage
Name and Address Beneficial of outstanding
of Beneficial Owner(1) Ownership (2) Shares Owned(2)
- ---------------------- ------------- ---------------
Ronald S. Deans(3) 716,907 7.6%
Mark G. Deans(4) 442,279 4.7%
R. Scott Deans(5) 444,518 4.7%
Fidel Garcia Carrancedo(6) 1,426,968 15.2%
Moises Cosio(7) 169,600 1.8%
Alan D. Tuck, Jr.(8) 150,512 1.6%
Robert Parker(9) 30,000 *
Luis Alberto Morato(10) 20,000 *
Terry A. Fife(11) 47,789 *
All directors and
executive officers as
a group (nine persons) 3,448,573 36.1%
Platinum Partners, L.P.
Mr. Calvin Hori, Hori
Capital Management, Inc.(12) 660,000 7.0%
- --------------------
* Less than 1%.
48
<PAGE>
(1) Unless otherwise indicated, the address of each of the listed beneficial
owners identified is 1555 Odell Road, Blaine, Washington 98231. Unless
otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all the shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Registration
Statement upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that warrants or
options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days from the date of this
Proxy Statement have been exercised.
(3) Mr. Ronald Deans is Chairman of the Board, President, and Chief Executive
Officer of the Company. Includes 43,000 shares held in the name of his
wife, Ann Deans, and 28,775 shares held by the Geographics, Inc. 401(K)
Plan for which Mr. Deans has voting control. The beneficially owned shares
for Mr. Deans also includes 30,000 shares of Common Stock issuable upon
exercise of certain stock options by Mr. Deans. His options are
exercisable at Cdn$2.30 and expire on August 18, 2000. The shares
beneficially owned by Mr. Deans also includes 9,756 Shares and 9,756
Warrants purchased by Mr. Deans in the May 1996 Offering.
(4) Mr. Mark Deans is a Director and Executive Vice President-Marketing of the
Company. Includes 20,000 shares of Common Stock issuable upon exercise of
certain stock options by Mr. Deans. His options are exercisable at $4.15
Cdn. and expire October 10, 2000.
(5) Mr. Scott Deans is a Director and Executive Vice President-Operations of
the Company. Includes 20,000 shares of Common Stock issuable upon exercise
of certain stock options by Mr. Deans. His options are exercisable at
$4.15 Cdn. and expire October 10, 2000.
(6) Mr. Carrancedo is a Director of the Company. Includes 30,000 shares of
Common Stock issuable upon exercise of certain stock options by Mr.
Carrancedo. His options are exercisable at $2.30 Cdn. and expire August
18, 2000.
(7) Mr. Cosio is a Director of the Company.
(8) Mr. Tuck is a Director of the Company. Includes 30,000 shares of Common
Stock issuable upon exercise of certain stock options by Mr. Tuck. His
options are exercisable at $2.30 Cdn. and expire August 18, 2000. The
49
<PAGE>
shares beneficially owned by Mr. Deans also includes 9,756 Shares and
9,756 Warrants purchased by Mr. Deans in the May 1996 Offering.
(9) Mr. Parker is a Director of the Company.
(10) Mr. Morato is a Director of the Company. Includes 20,000 shares of Common
Stock issuable upon exercise of certain stock options by Mr. Morato. His
options are exercisable at $4.15 Cdn. and expire October 10, 2000.
(11) Mr. Fife is Vice President-Finance, Chief Financial Officer and Secretary
of the Company. Includes 2,089 shares owned by the Geographics, Inc.
401(k) Plan of which Mr. Fife has voting control.
(12) The address for each of these persons is One Liberty Square, Fourth Floor,
Boston, MA 02109. The information is based solely upon a Schedule 13D
dated June 27, 1996. Of the 660,000 shares shown as beneficially owned by
Platinum Partners, Mr. Calvin Hori, and Hori Capital Management, Inc., Mr.
Hori has sole voting power and sole dispositive power of such shares.
SALES BY SELLING SECURITY HOLDERS
The following table sets forth the name of each Selling Security Holder,
the amount of shares of Common Stock held directly or indirectly by each holder
on July 31, 1996, the amount of shares of Common Stock to be offered by each
such holder, the amount of Common Stock to be owned by each such holder
following sale of such shares of Common Stock and the percentage of shares of
Common Stock to be owned by each such holder following completion of such
offering. On July 31, 1996, there were 9,382,877 shares of Common Stock of the
Company outstanding.
<TABLE>
<CAPTION>
Percentage of
Number Number Warrants to Shares/Warrants
of Shares of be Owned to be Owned
Name of Selling Shares to be Warrants After After
Security Holder Owned Offered Owned Offering Offering
<S> <C> <C> <C> <C> <C>
Lagunitas Partners, L.P. 585,366 585,366 292,683 0/0 *
Tallac Corporation 390,244 390,244 195,122 0/0 *
Longwood Partners, L.P. 195,122 195,122 97,561 0/0 *
Kane & Co. 156,098 156,098 78,049 0/0 *
Gruber & McBaine International 126,830 126,830 63,415 0/0 *
One & Company 117,074 117,074 58,537 0/0 *
Grandview Partners, L.P. 117,074 117,074 58,537 0/0 *
Hare & Co. 117,074 117,074 58,537 0/0 *
David Honigman 117,074 117,074 58,537 0/0 *
Culverwell & Co., Inc.(2) 117,074 117,074 58,537 0/0 *
Proactive Partners, L.P. 97,562 97,562 48,781 0/0 *
Jon Gruber & Linda Gruber 55,536 55,536 29,268 0/0 *
Gales & Company 55,536 55,536 29,268 0/0 *
James Culverwell(2) 39,510 39,510 19,755 0/0 *
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Van Kasper & Co., Inc.(2) 39,024 39,024 19,512 0/0 *
Fordyce & Company 39,024 39,024 19,512 0/0 *
Savings & Investment Trust 39,024 39,024 19,512 0/0 *
Fiducie Desjardins A/C
900595-0-59 (Ville de
Montreal) 39,024 39,024 19,512 0/0 *
Charles Nichols, II and
Patricia M. Nichols, JTWROS 39,024 39,024 19,512 0/0 *
J. Patterson McBaine 29,268 29,268 14,634 0/0 *
Winslow, Evans & Crocker(2) 23,414 23,414 11,707 0/0 *
Edward G. Culverwell(2) 20,000 20,000 10,000 0/0 *
Denis Culverwell(2) 20,000 20,000 10,000 0/0 *
Saturn & Company 19,512 19,512 9,756 0/0 *
Lyda Hunt - Herbert Trusts -
Bruce W. Hunt 19,512 19,512 9,756 0/0 *
Lyda Hunt - Herbert Trusts -
David S. Hunt 19,512 19,512 9,756 0/0 *
Lyda Hunt - Herbert Trusts -
Lyda Bunker Hunt 19,512 19,512 9,756 0/0 *
Lyda Hunt - Herbert Trusts -
Barbara Ann Hunt 19,512 19,512 9,756 0/0 *
Lyda Hunt - Herbert Trusts -
D.H. Hunt 19,512 19,512 9,756 0/0 *
William Herbert Hunt Trust
Estate 19,512 19,512 9,756 0/0 *
Ronald S. Deans(3) 716,907 19,512 9,756 697,396/0 7.4%
Alan Tuck, Jr.(3) 150,512 19,512 9,756 131,000/0 1.4%
Fechtor-Detwiler & Co., Inc.(2) 11,708 11,708 5,854 0/0 *
Fiducie Desjardins A/C
900726-1-42 (Ville de
Jonquiere) 9.756 9,756 4,878 0/0 *
Fiducie Desjardins A/C
900237-3-42 (Ville de
Jonquiere) 9.756 9,756 4,878 0/0 *
Jonathan Piper 9,756 9,756 4,878 0/0 *
David Clark Rev Trust Walter
Burrage TTEE 9,756 9,756 4,878 0/0 *
TOTAL 3,657,661 2,790,242 1,395,121 828,395
- ------------------------
</TABLE>
* Denotes less than 1% ownership.
(1) Includes the shares of Common Stock underlying the Warrants held by each
of the Selling Security Holders.
(2) The shares of Common Stock and Warrants to be offered by these Selling
Shareholders were issued to them as result of each of them acting in the
capacity of placement agents in connection with the Company's private unit
offering completed in May 1996 described below.
(3) See "Management."
In May, 1996, the Company completed a $6,500,000 private placement unit
offering (the May 1996 Offering) to accredited investors only at $100,000 a unit
(each unit consisting of 19,512 shares of Common Stock and warrants to purchase
19,512 shares of Common Stock on or prior to June 1, 1999 at an exercise price
51
<PAGE>
of $6.50), resulting in the issuance of 1,268,280 shares of its Common Stock and
warrants to purchase 1,268,280 shares of Common Stock at $6.50 per share. All of
the shares of Common Stock included in the private offering and underlying the
aforementioned Warrants are included in the shares of Common Stock listed above
to be sold by the Selling Security Holders. An additional 1,268,280 units were
issued to See previous discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and ["Management - Certain
Relationships and Related Transactions."]
The Company has undertaken to maintain the Registration Statement current
for a period of not less than nine months from the effective date of the
Registration Statement of which this Prospectus is a part in order that sales of
shares of Common Stock may be made by the Selling Security Holders. The Company
has agreed to pay for all costs and expenses incident to the issuance, offer,
sale and delivery of the Common Stock, including, but not limited to, all
expenses and fees of preparing, filing and printing the Registration Statement
and Prospectus and related exhibits, amendments and supplements thereto and
mailing of such items. The Company will not pay selling commissions and expenses
associated with any such sales by the Selling Security Holders. The Company has
agreed to indemnify the Selling Security Holders against civil liabilities
including liabilities under the Securities Act of 1933. The Selling Security
Holders have advised the Company that sales of shares of their Common Stock may
be made from time to time by or for the accounts of the Selling Security Holders
in one or more transactions in the over-the-counter market, in negotiated
transactions or otherwise, at prices related to the prevailing market prices or
at negotiated prices.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 10,000,000 shares of
Common Stock, no par value per share, of which 9,382,877 shares were outstanding
as of July 31, 1996.
COMMON STOCK
Subject to the dividend rights of the holders of Preferred Stock, holders
of shares of Common Stock are entitled to share, on a ratable basis, such
dividends as may be declared by the Board of Directors out of funds, legally
available therefor. Upon liquidation, dissolution or winding up of the Company,
after payment to creditors and holders of Preferred Stock that may be
outstanding, the assets of the Company will be divided pro rata on a per share
basis among the holders of the Common Stock.
Each share of Common Stock entitles the holders thereof to one vote.
Holders of Common Stock do not have cumulative voting rights, which means that
52
<PAGE>
the holders of more than 50% of the shares voting for the election of Directors
can elect all of the Directors if they choose to do so, and, in such event, the
holders of the remaining shares will not be able to elect any Directors. The
By-Laws of the Company require that only a majority of the issued and
outstanding shares of Common Stock of the Company need be represented to
constitute a quorum and to transact business at a stockholders' meeting. The
Common Stock has no preemptive, subscription or conversion rights and is not
redeemable by the Company.
COMMON STOCK PURCHASE WARRANTS
In connection with the completion of the Company's $6,500,000 private
placement offering in May 1996, the Company issued an aggregate of 1,268,293
Common Stock Purchase Warrants to purchase 1,268,293 shares of Common Stock.
Additionally, the Company also issued an aggregate of 126,828 Units to the
Company's placement agents which include an aggregate of 126,828 warrants to
purchase 126,828 shares of Common Stock. These warrants are exercisable at $6.50
per share on or prior to June 30, 1999. Commencing December 1, 1996, the Company
may redeem the Warrants at a price of $.05 per underlying share provided the
closing price of the Company's Common stock is in excess of $10.00 per shares
for 10 consecutive trading day period immediately prior to the notice provided
by the Company. The shares of Common Stock underlying these warrants are
included in the Registration Statement of which this Prospectus is a part.
Warrant Holders do not have any voting or any other rights as stockholders
of the Company. The Company's outstanding warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination ar reclassification of the Common Stock. The Warrants may be
exercised upon surrender of the Warrant Certificate on or prior to the
expiration date (or earlier redemption date, as applicable) of such Warrant at
the offices of the Company's transfer agent, with the form of "Election to
Purchase" completed and executed as indicated, accompanied by payment of the
full exercise price (by certified or bank check, payable to the order of the
Company), for the number of shares with respect to which the Warrant is being
exercised. Shares of Common Stock issued upon exercise of Warrants and paid for
in accordance with the terms of the Warrants.
OPTIONS
Currently, there are 211,000 shares underlying options to purchase up to
211,000 shares of Common Stock at prices ranging from Cdn$1.00 to Cdn$4.15 from
August 10, 1996 to October 10, 2000. The exchange rate at August 7, 1996 was
$.7291 equals Cdn$1.00.
53
<PAGE>
Option Holders do not have any voting or any other rights as stockholders
of the Company. The Company's outstanding options provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination ar reclassification of the Common Stock. The options may be
exercised upon surrender of an option certificate on or prior to the expiration
date of such option at the offices of the Company's transfer agent, with the
form of "Election to Purchase" completed and executed as indicated, accompanied
by payment of the full exercise price (by certified or bank check, payable to
the order of the Company), for the number of shares with respect to which the
option is being exercised. Shares of Common Stock issued upon exercise of
options and paid for in accordance with the terms of the options.
OVER-THE-COUNTER MARKET
COMMON STOCK
Nasdaq National Market System (NMS)
The Company's Common Stock is traded on the Nasdaq NMS under the symbol "GGIT."
If for any reason the Common Stock does not continue to meet the requirements
for inclusion on the Nasdaq System, then in such case the Company's Common stock
would be expected to be traded in the over-the-counter markets through the "pink
sheets" or the NASD's OTC Bulletin Board. In that effect, the Company's Common
Stock would be covered by a Commission rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers in this
offering to sell their shares in the secondary market. The ability of the
Company to secure a symbol on the Nasdaq System does not imply that a meaningful
trading market in its Common Stock will ever develop.
WARRANTS
OTC Bulletin Board
Currently, there is no public market for Warrants being offered hereby. The
Company intends to apply for inclusion of its Common Stock on the Nasdaq System
54
<PAGE>
at such time as the price of the Company's Common Stock satisfies Nasdaq minimum
bid requirements. If for any reason the Warrants are not accepted for inclusion
on the Nasdaq System, then in such case the Warrants would be traded in the
over-the-counter markets through the "pink sheets" or the NASD's OTC Bulletin
Board. In the event the Warrants were not included in the Nasdaq System, the
Company's Warrants would be covered by a Commission rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers in this
offering to sell their shares in the secondary market. The ability of the
Company to secure a symbol on the Nasdaq System does not imply that a meaningful
trading market in its Common Stock will ever develop.
TRANSFER AGENT
The Transfer Agent for the shares of Common Stock is Montreal Trust Corporate
Services Division, Montreal Trust Centre, 410 Burrard Street, Vancouver B.C.
Canada V6C 3B9.
CERTAIN MARKET INFORMATION
As of August 7, 1996, 9,382,877 shares of the Company's Common Stock are
outstanding of which 1,446,123 shares will be "restricted securities," as such
term is defined under the Securities Act of 1933, exclusive of the Common Stock
to be sold pursuant to the Registration Statement of which this Prospectus is a
part.
In general, Rule 144 (as presently in effect), promulgated under the Act,
permits a stockholder of the Company who has beneficially owned restricted
shares of Common Stock for at least two years to sell without registration,
within any three-month period, such number of shares not exceeding the greater
of 1% of the then outstanding shares of Common Stock or, if the Common Stock is
quoted on Nasdaq, the average weekly trading volume over a defined period of
time, assuming compliance by the Company with certain reporting requirements of
Rule 144. Furthermore, if the restricted shares of Common Stock are held for at
least three years by a person not affiliated with the Company (in general, a
person who is not an executive officer, director or principal stockholder of the
Company during the three-month period prior to resale), such restricted shares
can be sold without any volume limitation. Any sales of shares by stockholders
pursuant to Rule 144 may have a depressive effect on the price of the Company's
Common Stock.
55
<PAGE>
LEGAL MATTERS
Legal matters in connection with the securities being offered hereby will be
passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., 200 East
Las Olas Boulevard, Suite 1900, Fort
Lauderdale, Florida 33301.
EXPERTS
The financial statements of the Company, as of March 31, 1996 and 1995, for the
years then ended included in this Prospectus have been so included in reliance
on the report of Moss Adams LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein, given on the authority of said firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, Washington, D.C., a
Registration Statement on Form SB-2 under the Securities Act of 1933 with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto. For further information about the Company and the securities offered
hereby, reference is made to the Registration Statement and to the exhibits
filed as a part thereof. The statements contained in this Prospectus as to the
contents of any contract or other document identified as exhibits in this
Prospectus are not necessarily complete, and in each instance, reference is made
to a copy of such contract or document filed as an exhibit to the Registration
Statement. The Registration Statement, including exhibits, may be inspected
without charge at the principal reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained upon payment of fees prescribed by the
Commission from the Public Reference Section of the Commission at its principal
office in Washington, D.C. set forth above. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission. The
address of the Web site is (http://www.sec.gov).
56
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated balance sheets of Geographics,
Inc. as of March 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Geographics, Inc.
as of March 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/MOSS ADAMS LLP
Bellingham, Washington
May 31, 1996
F-1
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash 50,028 $ 15,348
Accounts Receivable
Trade receivables, net of allowance for doubtful accounts
of $146,926 in 1996 and $115,000 in 1995 4,974,156 2,412,324
Related party receivables 899,422 338,975
Other receivables 62,572 59,215
Inventory 9,139,273 2,901,155
Deferred income taxes 970,000 69,000
Prepaid expenses and equipment deposits 793,409 331,803
------------ ------------
Total current assets 16,888,860 6,127,820
PROPERTY, PLANT AND EQUIPMENT, net 7,286,694 3,792,192
DEFERRED INCOME TAXES 192,000 460,000
INVESTMENTS IN PARTNERSHIPS (34,484) (91,270)
OTHER ASSETS 404,971 166,163
GOODWILL, net -- 159,768
------------ ------------
TOTAL ASSETS $ 24,738,041 $ 10,614,673
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 5,322,939 $ 2,183,476
Accounts payable 2,634,598 1,318,601
Accrued liabilities 1,033,905 409,149
Income tax payable 145,278 8,633
Notes payable to officers and directors 1,264,711 --
Current portion of long-term debt 656,398 371,525
------------ ------------
Total current liabilities 11,057,829 4,291,384
LONG-TERM DEBT 3,690,360 3,319,948
DEBENTURES AND NOTES PAYABLE TO OFFICERS AND DIRECTORS -- 200,000
------------ ------------
Total liabilities 14,748,189 7,811,332
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - 10,000,000 authorized, 8,004,584 and 5,176,213
issued and outstanding in 1996 and 1995, respectively 9,620,068 3,665,581
Retained earnings (accumulated deficit) 369,784 (862,240)
------------ ------------
Total stockholders' equity 9,989,852 2,803,341
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,738,041 $ 10,614,673
============ ============
See accompanying notes to these consolidated financial statements.
</TABLE>
F-2
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF INCOME
Years Ended March 31, 1996 and 1995
1996 1995
------------ ------------
SALES
Retail sales $ 19,758,700 $ 9,129,886
Related party sales 2,854,935 1,056,250
------------ ------------
Total sales 22,613,635 10,186,136
COST OF SALES 14,194,505 5,881,649
------------ ------------
Gross margin 8,419,130 4,304,487
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,734,901 2,873,476
AMORTIZATION OF GOODWILL 159,768 639,067
------------ ------------
Income from operations 2,524,461 791,944
------------ ------------
OTHER INCOME (EXPENSE)
Other income 130,090 1,930
Interest expense (787,848) (457,499)
------------ ------------
Total other income (expense) (657,758) (455,569)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,866,703 336,375
INCOME TAX PROVISION (BENEFIT) 634,679 (411,367)
------------ ------------
NET INCOME $ 1,232,024 $ 747,742
============ ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary $ .19 $ .16
======= =======
Assuming full dilution $ .18 $ .14
======= =======
SHARES USED IN COMPUTING EARNINGS PER
COMMON AND COMMON EQUIVALENT SHARE
Primary 6,606,499 4,549,101
============ ============
Assuming full dilution 7,204,220 5,816,260
============ ============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Retained
------------------------ Earnings
Shares Amount (Deficit) Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1994 4,515,729 $ 3,081,496 $(1,609,982) $ 1,471,514
Notes payable and debentures converted
to common stock 334,762 297,042 -- 297,042
Common stock issued for cash
on exercise of warrants 325,722 287,043 -- 287,043
Net income -- -- 747,742 747,742
----------- ----------- ----------- -----------
BALANCE, March 31, 1995 5,176,213 3,665,581 (862,240) 2,803,341
Proceeds from issuance of common stock 520,000 1,986,100 -- 1,986,100
Notes payable, debentures and other liabilities
converted to common stock 1,540,371 2,169,233 -- 2,169,233
Common stock issued for cash on exercise
of stock options and warrants, including
income tax benefit 768,000 1,799,154 -- 1,799,154
Net income -- -- 1,232,024 1,232,024
----------- ----------- ----------- -----------
BALANCE, March 31, 1996 8,004,584 $ 9,620,068 $ 369,784 $ 9,989,852
=========== =========== =========== ===========
See accompanying notes to these consolidated financial statements.
</TABLE>
F-4
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended March 31, 1996 and 1995
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,232,024 $ 747,742
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,124,999 1,295,262
Deferred income taxes 125,000 (529,000)
Loss on sale of property and equipment 594 13,468
Changes in noncash operating assets and liabilities
Trade receivables (2,561,832) (1,471,823)
Related party receivables (560,447) (338,975)
Other receivables (3,357) (19,504)
Inventory (6,238,118) (1,059,674)
Prepaid expenses and deposits (461,606) (210,110)
Accounts payable 1,315,997 1,074,647
Accrued liabilities 814,756 (48,828)
Income tax payable 336,645 167,633
----------- -----------
Net cash flows from operating activities (4,875,345) (379,162)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on note payable to bank 3,139,463 990,427
Proceeds from long-term debt borrowings 1,003,029 765,125
Repayment of long-term debt (467,986) (232,685)
Proceeds from notes payable to officers and directors 2,452,573 22,746
Repayments of notes payable to officers and directors (398,629) (134,888)
Proceeds from issuance of common stock 2,827,254 287,043
----------- -----------
Net cash flows from financing activities 8,555,704 1,697,768
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (3,296,165) (1,463,768)
Proceeds from sale of equipment 16,741 30,000
Net advances from (repayments to) partnerships (56,786) 250,422
Increase in other assets (309,469) (119,912)
----------- -----------
Net cash flows from investing activities (3,645,679) (1,303,258)
----------- -----------
NET CHANGE IN CASH 34,680 15,348
CASH, beginning of year 15,348 --
----------- -----------
CASH, end of year $ 50,028 $ 15,348
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock on conversion of notes payable,
debentures and other liabilities $ 2,169,233 $ 297,042
=========== ===========
Financing obtained directly from sellers in acquisition of equipment $ 1,110,242 $ 346,644
=========== ===========
Income tax benefit related to exercise of stock options and warrants $ 958,000 $ --
=========== ===========
See accompanying notes to these consolidated financial statements.
</TABLE>
F-5
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its offices and
main manufacturing facilities located in Blaine, Washington. The Company also
has warehouse/distribution facilities near London, England, and warehouse/
manufacturing facilities in Bellingham, Washington. The Company is a
manufacturer of designer stationeries, value-added papers, lettering, signage
and graphic art products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Geographics (Europe)
Limited and Geographics Marketing Canada. Significant intercompany transactions
have been eliminated in consolidation.
(b) Accounts Receivable - The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for doubtful
accounts to be fully collectible. Accounts receivable are not collateralized.
(c) Inventory - Inventory is valued at the lower of cost on a first-in-,
first-out (FIFO) basis or market.
(d) Property and Equipment - Property and equipment is stated at historical
cost. Depreciation is provided based on useful lives of five to twenty years,
using primarily the straight-line method. Betterments, renewals and repairs that
extend the life of assets are capitalized. Repairs and maintenance items are
expensed when incurred. Depreciation expense was $894,570 and $622,737 during
the years ended March 31, 1996 and 1995, respectively.
(e) Goodwill - Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible assets of businesses acquired.
Goodwill was amortized on a straight-line basis over a period of two years.
(f) Federal Income Taxes - The Company accounts for income taxes using the
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable amounts
attributed to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. This method also allows
recognition of income tax benefits for loss carryforwards, credit carryforwards
and certain temporary differences for which tax benefits have not previously
been recorded. The tax benefits recognized as assets must be reduced by a
valuation allowance where it is more likely than not the benefits may not be
realized.
(g) Foreign Currency - Transactions denominated in foreign currencies are
translated into U.S. dollars using the exchange rate in effect at the time of
the transaction. Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars using exchange rates in effect at the balance sheet
date. Translation adjustments are included in operating results of the Company
during the year in which the adjustment arises.
(h) Investment in Partnership - The Company accounts for its 70 percent
respective partnership interest in International Geographics of Ontario (the
"Partnership") using the equity method. The effect of consolidating the accounts
of the Partnership would be immaterial to these consolidated financial
statements. Advances between the Company and the Partnership for working capital
purposes are accounted for as changes to investments in Partnership. The
Partnership distributes the Company's products in Canada.
International Geographics of Ontario was dissolved during the current year. The
Company is in the process of winding up the affairs of the partnership at March
31, 1996.
(i) Earnings per Common and Common Equivalent Shares - Primary earnings per
common share equals net earnings divided by the weighted average number of
common shares outstanding, after giving effect to dilutive stock options and
warrants. Fully diluted earnings per common share equals net earnings plus
after-tax interest incurred on convertible debentures divided by the weighted
average number of common shares outstanding after giving effect to dilutive
F-6
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
stock options, warrants and shares assumed to be issued on conversion of the
convertible debentures. Fully diluted earnings per common share includes $44,712
and $66,792 in after-tax interest on convertible debentures during the years
ended March 31, 1996 and 1995, respectively.
(j) Capital Stock - The Company follows the practice of recording amounts
received upon the exercise of stock options and warrants by crediting common
stock. No charges are reflected in the consolidated statement of income as
result of the grant or exercise of stock options or warrants. The Company
realizes an income tax benefit from the exercise of certain stock options and
warrants, which results in an increase in common stock and an increase in
deferred tax assets, or reduction in income tax payable, depending on the timing
of the income tax deduction available to the Company.
(k) Reclassifications - Certain prior year amounts have been reclassified to
conform to current year presentation. Such reclassifications had no effect on
previously reported earnings or accumulated deficit.
(l) Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(m) Advertising Costs - Advertising costs are charged to expense in the period
in which they occur. The Company participates with its customers in cooperative
advertising programs, in which the Company reimburses the customers for a
portion of their advertising costs. Advertising expense amounted to $867,198 and
$271,160 in 1996 and 1995, respectively.
(n) Fair Value of Financial Instruments - Statement of Financial Accounting
Standard ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of the fair value of financial instruments, both assets and
liabilities, recognized and not recognized, in the consolidated balance sheet of
the Company for which it is practicable to estimate fair value. The estimated
fair values of financial instruments which are presented herein have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
The following methods and assumptions were used to estimated fair value:
0 The carrying amounts of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to their short-term nature.
0 Discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short- and long-term debt.
There were no significant differences as of March 31, 1996 and 1995 in the
carrying value and fair value of financial instruments.
(o) New Accounting Pronouncements - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, establishes financial accounting and reporting standards for
stock-based employee compensation plans, including stock option plans, stock
purchase plans, restricted stock, and stock appreciation rights. SFAS No. 123
defines and encourages the use of the fair value method of accounting for
employee stock-based compensation. Continuing use of the intrinsic value based
method of accounting prescribed in ACCOUNTING PRINCIPLES BOARD OPINION NO. 25
("APB 25") for measurement of employee stock-based compensation is allowed with
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. Transactions in which equity instruments
F-7
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
are issued in exchange for goods or services from nonemployees must be accounted
for based on the fair value of the consideration received or of the equity
instrument issued, whichever is more reliably measurable. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has determined that it will continue to use the
method of accounting prescribed in APB 25 for measurement of employee
stock-based compensation, and will begin providing the required pro forma
disclosures in its financial statements for the year ending March 31, 1997, as
allowed by SFAS No. 123.
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell. SFAS No. 121 is effective for fiscal years that begin after December
15, 1995. Management estimates that SFAS No. 121 will not have a significant
impact on the Company's financial position or results of operations.
NOTE 3 - INVENTORY
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Raw materials $ 1,325,837 $ 971,281
Work in progress 3,304,407 873,799
Finished goods 4,509,029 1,056,075
------------- --------------
$ 9,139,273 $ 2,901,155
============= ==============
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost Depreciation 1996 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Land $ 114,563 $ - $ 114,563 $ 114,563
Buildings 3,446,169 675,678 2,770,491 1,107,831
Machinery and equipment 4,499,744 2,057,745 2,441,999 1,769,768
Machinery and equipment under capital lease 1,998,853 357,376 1,641,477 741,217
Automobiles 304,071 89,840 214,231 58,813
Leasehold improvements 29,166 1,374 27,792 -
Construction in progress 76,141 - 76,141 -
-------------- ------------- ------------- --------------
$ 10,468,707 $ 3,182,013 $ 7,286,694 $ 3,792,192
============== ============= ============= ==============
NOTE 5 - FINANCING ARRANGEMENTS
1996 1995
----------- -------------
Installment notes payable to banks, fixed interest rates ranging from
8.825% to 10% (in 1995 rates ranged from fixed 10% to prime plus
1.25%), payable in monthly installments through October 2010, secured
by real estate. $ 2,341,057 $ 1,490,753
Capital lease obligations collateralized by certain equipment and fixtures. 1,609,424 736,136
------------ --------------
Balance carried forward $ 3,950,481 $ 2,226,889
------------ --------------
</TABLE>
F-8
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 5 - FINANCING ARRANGEMENTS (Continued)
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Balance brought forward $ 3,950,481 $ 2,226,889
Installment notes payable to banks, interest rates ranging from fixed
9.75% to variable rates from prime plus 1% to prime plus 1.5%, payable
in monthly installments through October 2000, collateralized by certain
equipment. 396,277 474,584
Convertible subordinated debentures, bearing interest at a fixed rate
of 8% per annum, convertible into common shares of the Company. - 990,000
------------- --------------
4,346,758 3,691,473
Less current portion 656,398 371,525
------------- --------------
$ 3,690,360 $ 3,319,948
============= ==============
</TABLE>
The prime rate was 8.25% and 9% at March 31, 1996 and 1995, respectively.
The Company has a revolving credit agreement with a bank for up to $12,000,000,
with interest on outstanding advances payable monthly at the bank's prime rate,
with any unpaid advances due in full on July 25, 1996. Total outstanding
advances under revolving credit agreements were $5,322,939 and $2,183,476 at
March 31, 1996 and 1995, respectively.
The revolving credit agreement, installment notes and capital lease obligations
are collateralized by substantially all of the assets of the Company. In
addition, the revolving credit agreement and certain other financing
arrangements require the Company to comply with several debt covenants, the most
restrictive of which includes the maintenance of liquidity and coverage ratios.
The convertible subordinated debentures ("debentures") were convertible at the
holder's option into common shares of the Company at a conversion rate of 904
common shares per $1,000 principal amount of debenture. At March 31, 1996, all
debentures have been converted.
At March 31, 1996, principal payments on long-term debt and capital lease
obligations are expected to be as follows:
1997 $ 656,398
1998 613,783
1999 620,704
2000 632,582
2001 457,210
Thereafter 1,366,081
-------------
$ 4,346,758
=============
Future minimum lease payments under capital leases together with the present
value of minimum lease payments as of March 31, 1996 are as follows:
1997 $ 467,662
1998 419,708
1999 409,974
2000 409,404
2001 249,693
-------------
Total minimum lease payments 1,956,441
Less amount representing imputed interest 347,017
-------------
Present value of minimum lease payments $ 1,609,424
=============
F-9
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 6 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1996 1995
--------- ---------
Current provision $ 509,679 $ 117,633
Deferred provision 125,000 (529,000)
--------- ---------
Total income tax provision (benefit) $ 634,679 $(411,367)
========= =========
The total tax provision differs from the amount computed using the statutory
federal income tax rate as follows:
1996 1995
--------- ---------
Tax expense at statutory rate $ 635,000 $ 114,000
Other differences, net (321) (64,367)
Change in valuation allowance for deferred tax assets -- (461,000)
--------- ---------
Total income tax provision (benefit) $ 634,679 $(411,367)
========= =========
The significant components of deferred income tax expense (benefit) for the
years ended March 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Utilization of tax credit carryforward $ 105,000 $ --
Depreciation of plant and equipment 88,000 43,000
Decrease in charitable contributions carryforward 31,000 2,000
Inventory differences (10,000) 43,000
Other differences, net (20,000) 13,000
Amortization of goodwill and intangibles (31,000) (175,000)
Change in allowance for doubtful accounts (38,000) 4,000
Increase in tax credit carryforward -- (137,000)
Utilization net operating loss carryforwards -- 139,000
Change in valuation allowance for deferred tax assets -- (461,000)
--------- ---------
Total deferred income tax expense (benefit) $ 125,000 $(529,000)
========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
DEFERRED TAX ASSETS
Income tax benefit related to exercise of stock
options and warrants $ 758,000 $ --
Goodwill and intangible assets, principally due
to amortization differences 380,000 349,000
Alternative minimum tax credit carryforwards 104,000 209,000
Inventory, principally due to additional cost
inventoried for tax purposes and financial
statement allowances 59,000 49,000
Accounts receivable, due to allowance for doubtful
accounts 50,000 12,000
Employee benefits, principally due to accruals for
financial reporting purposes 21,000 9,000
Other differences, net 4,000 3,000
Charitable contributions carryforward -- 31,000
--------- ---------
Net deferred tax assets 1,376,000 662,000
DEFERRED TAX LIABILITIES
Plant and equipment, principally due to
depreciation differences 214,000 133,000
--------- ---------
Net deferred tax assets $1,162,000 $ 529,000
========= =========
<PAGE>
F-10
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 6 - FEDERAL INCOME TAXES (Continued)
At March 31, 1996 and 1995, the Company's net deferred tax assets are presented
as follows:
Current deferred tax assets $ 970,000 $ 69,000
Long-term deferred tax assets 192,000 460,000
---------- ----------
$1,162,000 $ 529,000
========== ===========
The valuation allowance for deferred tax assets as of April 1, 1994 was
$461,000. The net change in the total valuation allowance for the twelve months
ended March 31, 1995 was a decrease of $461,000. Of this amount, $139,000
resulted from the utilization of net operating losses during the year ended
March 31, 1995. An additional $60,000 resulted from realization of tax benefits
of temporary differences which reversed during the year ended March 31, 1995.
The remaining $262,000 decrease resulted from the Company's reevaluation of the
realizability of future income tax benefits expected to be generated through the
utilization of its existing deferred tax assets. Based on the Company's current
operating income and expectations for the future, management determined that
future operating and taxable income will more likely than not be sufficient to
fully recognize all deferred tax assets existing at March 31, 1996 and 1995. As
a result, the carrying value of the net deferred tax asset was increased by
$262,000 at March 31, 1995. This increase was recognized as an income tax
benefit during the year ended March 31, 1995.
At March 31, 1996, the Company has alternative minimum tax credit carryforwards
of approximately $104,000 which are available to reduce future regular federal
income taxes over an indefinite period.
NOTE 7 - RELATED PARTY TRANSACTIONS
On September 15, 1995, officers and directors converted debentures in an
aggregate face amount of $200,000 into 219,178 common shares. The debentures
were convertible at the holder's option into common shares of the Company at
Cdn. $1.25 per share, to a maximum of 219,178 common shares. There is no
remaining balance of these debentures outstanding at March 31, 1996.
The Company issued $996,000 of convertible debentures payable to officers and
directors on September 26, 1995. The debentures were convertible at the holder's
option into common shares of the Company at Cdn. $4.45 per share, to a maximum
274,233 common shares. On December 22, 1995, these debentures were converted
into 274,233 common shares, and are no longer outstanding.
At March 31, 1996, certain officers and directors had advanced the Company
$1,264,711 in the form of uncollateralized notes payable. The notes are payable
on demand and are classified as current liabilities.
Interest on these notes are payable monthly at the rate of prime plus 1%.
Total interest costs associated with these notes and debentures was
approximately $60,000 during each of the years ended March 31, 1996 and 1995.
On January 23, 1996, the Company completed a private placement of 500,000 common
shares to officers and directors at a price of Cdn. $5.75. Total cash received,
net of issuance costs, totaled $1,906,100.
Sales to Martin Distribution, Inc. ("Martin"), a company related through common
directorship, amounted to $2,854,935 and $1,056,750 during the years ended March
31, 1996 and 1995, respectively. Trade receivables due from Martin amounted to
$899,422 and $338,975 at March 31, 1996 and 1995, respectively.
The Partnership recorded purchases from Martin in the aggregate amount of
$118,659 and $261,765 during the years ended March 31, 1996 and 1995,
respectively.
F-11
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 8 - EMPLOYEE BENEFIT PLANS
As of March 31, 1996, the Company had reserved 220,000 shares of common stock
for issuance to key employees, officers and directors. Options to purchase the
Company's common stock are granted at a price equal to the market price of the
stock at the date of grant, and are exercisable upon issuance and regulatory
approval. All options expire no more than five years after the date of grant.
Option prices per share are expressed in Canadian dollars.
Option
Number of Price
Shares per Share
---------- ------------
Outstanding at March 31, 1994 451,000 $1.10 - 1.26
Granted 129,000 $1.00 - 1.19
Canceled (128,000) $1.10 - 1.19
Exercised -
----------
Outstanding at March 31, 1995 452,000 $1.00 - 1.26
Granted 246,000 $2,00 - 4.15
Exercised (478,000) $1.00 - 2.00
----------
Outstanding at March 31, 1996 220,000 $1.00 - 4.15
==========
In addition, warrants to purchase 24,000 and 154,000 shares of common stock at
prices ranging from Cdn. $1.05 (U.S. $.75) to Cdn. $6.63 (U.S. $4.77) were
outstanding as of March 31, 1996 and 1995, respectively. These warrants were
granted to key employees of the Company, are exercisable upon issuance and
expire on April 15, 1998 and January 23, 1999. The exercise price of the
warrants was equal to the market price of the stock at the date the warrants
were issued.
On April 1, 1995, the Board of Directors approved a retirement savings plan,
which permits eligible employees to make contributions to the plan on a pretax
salary reduction basis in accordance with the provisions of Section 401(k) of
the Internal Revenue Code. The Company makes a matching stock contribution of
10% of the employee's pretax contribution. Eligible employees may contribute up
to 18% of their pretax compensation. Total expense related to this plan was
$20,619 during the year ended March 31, 1996.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
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 between August 1996 and
February 2006. In addition to the base lease term, the Company has various
renewal option periods. In addition, certain equipment used in the Company's
operations is leased under operating leases. A schedule of noncancelable
operating lease commitments are as follows:
1997 $ 154,217
1998 126,589
1999 88,489
2000 35,149
2001 26,434
Thereafter 97,108
-------------
$ 527,986
=============
F-12
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
On January 23, 1996, the Company placed an order for a printing press. The cost
of the press is approximately $1,200,000, which is expected to be delivered
during the second quarter of fiscal year 1997. The Company has a commitment from
a financial institution to provide capital lease financing for this equipment.
There are various 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 will not have a material effect on the
Company's financial position, results of operations or liquidity.
NOTE 10 - SUBSEQUENT EVENTS
On May 1, 1996, the Company completed a private placement of 1,268,293 units at
a price of U.S. $5.125 per unit. Total proceeds from this transaction
approximated $6,500,000. Each unit included one common share of the Company and
a warrant to purchase one additional common share of the Company at U.S. $6.50.
The warrants were exercisable upon issuance and regulatory approval, and expire
June 1, 1999.
NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts receivable,
which amounted to $5,873,578 and $2,751,299 at March 31, 1996 and 1995,
respectively. The Company's trade customers are concentrated in the retail
office products industry and mass market retail stores. Sales to three major
customers approximated 77% and 59% of total sales for the years ended March 31,
1996 and 1995, respectively. Amounts due from three customers approximated 75%
and 71% of the total accounts receivable at March 31, 1996 and 1995,
respectively.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. Although the composition of the group comprising the
Company's largest customers may vary from period to period, the loss of a
significant customer or any reduction in orders by any significant customers,
including reductions due to market, economic or competitive conditions in the
designer stationary or specialty papers industry, may have a material adverse
effect on the Company's business, financial condition and results of operations.
The following table represents approximate sales and trade accounts receivable
related to the Geographic regions in which the Company operates.
1996
---------------------------------------------------
Total United States Canada Other
----- ------------- ------ -----
Sales 100% 86% 13% 1%
======== ========= ========= =========
Accounts receivable 100% 83% 15% 2%
======== ========= ========= =========
1995
---------------------------------------------------
Total United States Canada Other
----- ------------- ------ -----
Sales 100% 89% 10% 1%
======== ========= ========= ========
Accounts receivable 100% 85% 12% 3%
======== ========= ========= ========
F-13
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
The Company purchases goods from approximately 700 vendors. One vendor accounted
for a significant portion of the Company's total merchandise purchases during
the years ended March 31, 1996 and 1995. The Company purchases commodity paper
and other related products from this broker/vendor that could be supplied by
other sources. There can be no assurances that the relationship between the
Company and this vendor will continue and the loss of the purchasing power the
Company has established with this company would likely have a material adverse
effect on the Company. The Company does not consider itself dependent on any
single source for materials to manufacture its products.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1996 1995
------------- --------------
Cash paid during the year for interest $ 812,416 $ 465,377
============= ==============
Net cash paid (received) during the year
for income taxes $ 173,034 $ (50,000)
============= ==============
F-14
<PAGE>
No person has been authorized to give any
information or to make any representations
other than those contained in this Prospectus
in connection with this offering, and any
information or representations not contained
herein must not be relied upon as having been
authorized by the Company or any other person.
This Prospectus does not constitute an offer to Geographics, Inc.
sell or a solicitation of an offer to buy any
securities other than the securities to which 2,790,242 SHARES OF
it relates, or any offer to or solicitation of COMMON STOCK AND
any person in any jurisdiction in which such 1,395,121 COMMON STOCK
offer or solicitation would be unlawful. PURCHASE WARRANTS
Neither the delivery of this Prospectus nor any
offer or sale made hereunder shall, under any
circumstances, create an implication that
information herein is correct at any time
subsequent to the date hereof.
PROSPECTUS
TABLE OF CONTENTS
Page
Prospectus Summary......... 4 AUGUST 13, 1996
Risk Factors............... 8
Price Range of
Common Stock............. 14
Dividend Policy............ 15
Capitalization............. 16
Use of Proceeds............ 17
Selected Consolidated
Financial Data........... 18
Management's Discussion and
Analysis of Financial Con-
ditions and Results of
Operations............... 19
The Company................ 27
Management................. 37
Principal Stockholders..... 48
Sales by Selling Security
Holders.................. 50
Description of Securities.. 52
Certain Market
Information.............. 55
Legal Matters.............. 56
Experts.................... 56
Additional Information..... 56
Financial Statements....... F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Executive Officers
Indemnification of Officers and Directors
The Company's articles of incorporation contains the broadest form of
indemnification for its officers and directors and former officers and directors
permitted under Wyoming law except that such indemnification does not apply to
(a) acts or omissions of the director or officer finally adjudged to be
intentional misconduct or a knowing violation of law; (b) conduct of the
director or officer finally adjudged to be gross negligence; or (c) any
transaction with respect to which it was finally adjudged that such director and
officer personally received a benefit in money, property, or services to which
the director was not legally entitled. The articles of incorporation further
provide that the Company shall advance expenses for such persons pursuant to the
terms set forth in the Company's bylaws, or in a separate directors resolution
or contract. Additionally, Section 17-16-856 of the Wyoming Business Corporation
Act provides that unless the articles of incorporation provide otherwise, a
current or former officer of a corporation who is not a director is entitled to
mandatory indemnification and is entitled to apply for court ordered
indemnification pursuant to Wyoming corporate law. Additionally, the corporation
may indemnify and advance expenses to (i) a current or former officer, employee
or agent of a corporation who is not a director to the same extent as to a
director, and (ii) a current or former officer, employee or agent who is not a
director to the extent consistent with public policy, that may be provided by
its articles of incorporation, bylaws, general or specific action of its board
of directors or contract.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that,in the
opinion of the Commission, such indemnification is against public policy as
express in the act and is therefore unenforceable.
The Wyoming Business Corporation Act and the Company's articles of incorporation
limit the liability of directors of the Company for damages for conduct as a
director except for (a) acts or omissions involving intentional misconduct by
the director or knowing violation of law by the director; (b) conduct for
unlawful payments of dividends or unlawful stock purchases or redemptions as
provided in Section 17-16-833 of the Wyoming Business Corporation Act; (c) any
transaction from which the director will receive a benefit in money, property,
or services to which the director is not legally entitled; or (d) conduct deemed
II-1
<PAGE>
to be gross negligence. The limitation of liability applies only to monetary
damages and, presumably, would not affect the availability of equitable remedies
such as injunction or rescission.
The Company's articles of incorporation do provide that if the Wyoming Business
Corporation Act is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Company shall be eliminated or limited to the fullest extent permitted by
the Wyoming Business Corporation Act as so amended. Any repeal or modification
of this provision by the shareholders of the Company shall not adversely affect
any right protection of a director of the Company with respect to any acts or
omissions of such director occurring prior to such repeal or modification.
Section 17-16-834 of the Wyoming Business Corporation Act further provides that
the articles of incorporation may contain a provision eliminating or limiting
the personal liability of a director to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director subject to the
following: (i) the provision shall not eliminate or limiting the liability of a
director (A) for any breach of the director's duty of loyalty to the corporation
or its shareholders, (B) for acts or omissions not in good faith or which
involved intentional misconduct a knowing violation of law, (C) for unlawful
distributions, or (D) for any transaction from which the director derived an
improper personal benefit; and (ii) the provision shall not eliminate or limit
he liability of a director for any act or omission occurring prior to May 22,
1987, if applicable. The Company currently has not adopted this provision of the
Wyoming Business Corporation Act.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and resale of the securities offered hereby. The
Company is responsible for the payment of all expenses in connection with the
Offering.
Registration fee under
the Securities Act of 1933.............................. $3,098.64
Blue Sky filing fees and expenses......................... 2,000.00*
Printing and engraving expenses........................... 10,000.00*
Legal fees and expenses................................... 15,000.00*
Accounting fees and expenses.............................. 15,000.00*
Miscellaneous............................................. 2,000.00*
----------
TOTAL.............................................. $47,098.64*
===========
- -------------------
* Estimated
II-2
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
During fiscal 1991, the Company issued a $360,000 convertible debenture to
directors and officers of the Company. The debenture, bearing interest at prime
plus 2%, was convertible into units at Cdn$1.25 per unit. The units were
comprise the one common share and one warrant to purchase additional common
shares of stock in the Company at Cdn$1.25 per common share. These debentures
were converted on March 31, 1995, as discussed below. All of the investors
involved in the private placement of convertible debentures were directors and
officers of the Company who were then residents of either Canada or Mexico, were
accredited investors and received such securities following review of the
transaction by the Toronto Stock Exchange. Accordingly, the registration
provisions of Section 5 of the Securities Act of 1933, as amended (the "Act")
were not applicable to the transaction.
In June 1992, the Company completed a private placement whereby notes
payable to certain officers and directors in the amount of $501,894 were
exchanged for 1,000,000 shares of the Company's common stock. All of the
investors involved in the private placement of Common Stock were directors and
officers of the Company who were then residents of either Canada or Mexico, were
accredited investors and received such securities following review of the
transaction by the Toronto Stock Exchange. Accordingly, the registration
provisions of Section 5 of the Act were not applicable to the transaction.
On June 29, 1993, the Company completed a private placement of $1,000,000
of 8% convertible debentures maturing December 1, 1998, to nine Canadian
residents, none of which were officers, directors or otherwise related to the
Company at the time. All of the investors involved in the private placement of
common stock were then residents of either Canada or Mexico, were accredited
investors and received such securities following review of the transaction by
the Toronto Stock Exchange. Accordingly, the registration provisions of Section
5 of the Act were not applicable to the transaction. However, Richard Thompson,
an original participant in the placement later became a director of the Company
in August 1995, purchased debentures from original holders on June 27, 1995. The
principal amount of the debentures are convertible at the option of the holders
at the rate of 904 common shares per principal of $1,000. Commencing December 1,
1995 and continuing through December 1, 1998, the debentures are convertible to
common shares at a conversion rate of 632 common shares per $1,000 principal
amount of debenture.
The outstanding balances of the convertible debentures was -0- and
$990,000 at March 31, 1996 and March 31, 1995, respectively. Holders of the
debentures converted $10,000 principal amount for 9,040 shares and $990,000
principal amount for 894,960 during the fiscal year ended March 31, 1995 and
fiscal year ended March 31, 1996.
II-3
<PAGE>
On April 18, 1994, the Company completed a private placement of $200,000
of convertible debentures which paid interest at a rate of prime plus 2% and was
convertible into common shares of the Company at Cdn$1.25 per share, not to
exceed a total of 219,178 shares of Common Stock of the Company. The debentures
were purchased by two directors of the Company, one a resident of Mexico and the
other a Canadian citizen. All of the investors involved in the private placement
of common stock were then residents of either Canada or Mexico, were accredited
investors and received such securities following review of the transaction by
the Toronto Stock Exchange. Accordingly, the registration provisions of Section
5 of the Act were not applicable to the transaction. These debentures were
converted into common stock on September 15, 1995.
On March 23, 1995, officers and directors holding $350,000 of convertible
debentures (issued in 1991), converted $287,043 of principal amount into 326,722
shares of common stock of the Company. On March 30, 1995, warrants associated
with this debenture conversion were exercised. The Company issued 326,722 shares
resulting from the warrant exercise, the remaining balance of the debenture
payable and cash from the warrant holders funded the warrant exercise.
During fiscal 1996, the Company issued no shares of Common Stock upon
exercise of stock options and during fiscal 1996, issued 478,000 shares of
Common Stock upon exercise of stock options raising $733,129[?].
In May 1996, the Company issued 65 Units in consideration of $6,500,000 to
accredited investors in a private placement undertaken pursuant to Regulation D
of the Securities Act of 1933, as amended (the "Act") and a Confidential Private
Term Sheet dated April 15, 1996 (the "April Offering"). Each unit (the "Unit")
consisted of 19,512 shares of Common Stock (for an aggregate of 1,268,293 shares
of Common Stock) and warrants to purchase 19,512 Shares (for an aggregate of
1,268,293 Shares) on or prior to June 30, 1999 at $6.50 per share (for an
aggregate of $8,243,904.50). Each of the investors executed subscription
agreements verifying their personal financial resources, their qualifications as
accredited investors and knowledge of investments. In addition, each of the
investors was provided with information and had access to relevant additional
information concerning the Company. Accordingly, the issuance of the
aforementioned securities was exempt from the registration requirements of the
Act pursuant to the exemptions set forth in Section 4(6) of the Act and Rule 505
under Regulation D and Section 4(2) of the Act.
In connection with the April Offering, the Company also issued 126,828
Units (the "Placement Agent Units") to the following entities, as placement
II-4
<PAGE>
agents for the April Offering (a) Van Kasper & Co., Inc. (1 unit); (b)
Fechtor-Detwiler & Co., Inc. (.3 units); (c) Winslow, Evans & Crocker (.6
units); and (d) Culverwell & Co., Inc. (4.6 units). The terms of the placement
agent units correspond with the terms and conditions of the Units described
above. The Placement Agent Units represent an aggregate of 253,626 shares of
Common Stock and Warrants to purchase an aggregate of 126,828 shares of Common
Stock at $6.50 per share (for an aggregate of $824,382).
Item 27. Exhibits. (are all previous exhibits included?)
Exhibit No. Description of Exhibits
(3)(i) Restated Articles of Incorporation dated October 31, 1990
(incorporated by reference to the Company's Amendment No. 3 to
Form 10, filed November 11, 1995 (the "Form 10"))(2).
(3)(ii) Restated Bylaws of the Company (incorporated by reference to
the Company's Form 10)(2)
(4) Instruments defining the rights of security holders, including
indentures.
(4)(i) Form of Common Stock Certificate(2).
(4)(ii) Form of resolution authorizing the issuance of convertible
debentures of the Company in the aggregate amount of
$1,000,000 dated June 29, 1993 (incorporated by reference to
the Company's Form 10)(2).
(4)(iii) Subscription Agreements for $1,000,000 Convertible Debentures
dated June 23, 1993 (incorporated by reference to Company's
Form 10)(2).
(4)(iv) Form of Common Stock Purchase Warrant issued pursuant to the
April 15, 1996 Private Offering(l).
(4)(v) Form of 1996 Stock Option Plan(l).
(5) Opinion of Atlas, Pearlman, Trop & Borkson, P.A. as to the
validity of the securities being registered(l)
(10) Material contracts
(10)(i) Sale of Lettering Division of E-Z Industries, Inc. to the
Company dated July 2, 1993 (incorporated by reference to the
Company's Form 10)(2).
(10) (ii) Potential Acquisition
II-5
<PAGE>
22 Subsidiaries(1)
(23)(i) Consent of Moss Adams LLP(1).
(23)(ii) Consent of Atlas, Pearlman, Trop & Borkson, P.A. (included as
part of Exhibit (5)(1)).
27 Financial Data Schedule - (Electronic filing only)
- ----------------
1. Filed herewith.
2. Previously filed.
Item 28. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, that each
such post-effective amendment as a new registration
II-6
<PAGE>
statement of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that tie shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB- 2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Blaine,
State of Washington, on August 12, 1996.
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
Ronald S. Deans, Chairman,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
Chairman of the
Board of Directors
/s/ Ronald S. Deans and President August 12, 1996
Ronald S. Deans
Vice President-
Finance, Secretary,
and Chief Financial
/s/ Terry A. Fife Officer August 12, 1996
Terry A Fife
II-8
CTS - W-1~
WARRANT TO PURCHASE
COMMON STOCK
OF
GEOGRAPHICS, INC.
This is to certify that 2~ (the "Holder") is entitled, subject to the
terms and conditions hereinafter set forth, to purchase 3~ shares of Common
Stock, no par value per share (the "Common Shares"), of GEOGRAPHICS, INC., a
Wyoming corporation (the "Company"), from the Company at the price per share and
on the terms set forth herein and to receive a certificate for the Common Shares
so purchased on presentation and surrender to the Company with the subscription
form attached, duly executed and accompanied by payment of the purchase price of
each share purchased either in cash or by certified or bank cashier's check or
other check payable to the order of the Company.
Exercise
- --------
The purchase rights represented by this Warrant are exercisable at a price
per Common Share of $6.50 at any time on or prior to June 1, 1999 subject to
adjustment as hereinafter provided.
The purchase rights represented by this Warrant are exercisable at the
option of the registered owner hereof in whole or in part, from time to time,
within the period specified; provided, however, that such purchase rights shall
not be exercisable with respect to a fraction of a Common Share. In case of the
purchase of less than all the Common Shares purchasable under this Warrant, the
Company shall cancel this Warrant on surrender hereof and shall execute and
deliver a new Warrant of like tenor and date for the balance of the shares
purchasable hereunder.
The Company agrees at all times to take appropriate action to reserve or
hold available a sufficient number of Common Shares to cover the number of
shares issuable on exercise of this and all other Warrants of like tenor then
outstanding. The Company agrees to obtain any authorization required from its
shareholders in order to amend its Articles of Incorporation to increase the
authorized capitalization to permit the exercise of this Warrant and other
Warrants of like tenor.
Redemption of Warrant
- ---------------------
Commencing December 1, 1996, the Company shall have the right on 20 days'
prior written notice to redeem, at a price of $0.05 per underlying Common Share,
all of the Warrants included in the Company's private offering of Units of its
<PAGE>
securities of which this Warrant is a part, provided the closing price of the
Company's Common Stock has exceeded $12.00 per share for 10 consecutive trading
days concluding within any 20 consecutive trading day period immediately prior
to date the Company has provided notice of such redemption, and provided further
that the Company has in effect a current registration statement covering the
resale of the Common Shares and this Warrant under the Securities Act of 1933 in
order to permit the sale of the Common Shares and this Warrant.
No Voting Rights
- ----------------
This Warrant shall not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Company, or to any other rights whatever
except the rights herein expressed, and no dividends shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the Common
Shares purchasable hereunder until or unless, and except to the extent that,
this Warrant shall be exercised.
Adjustments
- -----------
The number of shares of Common Stock purchasable upon exercise of this
Warrant and the Purchase Price shall be subject to adjustments from time to time
as follows:
If the Company shall at any time prior to the expiration of this Warrant
subdivide its Common Stock, by forward or reverse stock split or otherwise,
combine its Common Stock or issue additional shares of its Common Stock as a
dividend with respect to any shares of its Common Stock, the number of Common
Shares issuable upon exercise of this Warrant shall forthwith be proportionately
increased or decreased. Appropriate adjustments shall also be made to the
purchase price, but the aggregate purchase price payable for the total number of
Common Shares purchasable under this Warrant (as adjusted) shall remain the
same. Any adjustment under this paragraph shall become effective at the close of
business on the date the subdivision or combination becomes effective or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
In the event of any reclassification, capital reorganization or other
change in the Common Stock of the Company or in the event of any sale of all or
substantially all of the Company's assets or any merger, consolidation or
restructuring to which the Company is a party in which the Company's
stockholders before the transaction or series of transactions hold less than 50%
of the voting power of the surviving entity immediately after the transaction or
series of transactions (other than as a result of a subdivision, combination or
stock dividend provided for above or any transaction described in the Company's
Confidential Private Term Sheet relating to the private offering of Units of its
2
<PAGE>
securities of which this Warrant is a part), lawful provision shall be made, and
duly executed documents evidencing the same shall be made and shall be delivered
to the Holder in substitution for the Holder's rights under this Warrant, so
that the Holder shall have the right at any time and from time to time prior to
the expiration of this Warrant to purchase at a total price equal to that
payable upon exercise of this Warrant immediately prior to such event, the kind
and amount of shares of stock or other securities or property receivable in
connection with such reclassification, reorganization or change by a Holder of
same number of shares of Common Stock as were purchasable by the Holder
immediately prior to such reclassification, reorganization or change. In any
such case, appropriate provisions shall be made with respect to the rights and
interest of the Holder so that the provisions hereof shall hereafter be
applicable with respect to any shares of stock or other securities or property
deliverable upon exercise hereof, and appropriate adjustment shall be made to
the purchase price per Common Share payable hereunder, provided the aggregate
purchase price shall remain the same.
Upon any adjustments of the number of Common Shares issuable upon exercise
of this Warrant or the purchase price pursuant to this paragraph, the Company
within thirty (30) days thereafter shall cause to be prepared a certificate of
the Chief Financial or Accounting Officer of the Company setting forth the
number of Common Shares issuable upon exercise of this Warrant and the purchase
price after such adjustments, and setting forth in reasonable detail the method
of calculation used and cause a copy of such certificate to be mailed to the
Holder of the Warrant.
In the event of dissolution or liquidation of the Company in which the
Company is not a surviving corporation, this Warrant shall terminate, but the
registered owner of this Warrant shall have the right, immediately prior to such
dissolution, liquidation, merger or combination, to exercise this Warrant in
whole or in part to the extent that it shall not have been exercised.
The foregoing adjustments and the manner of application of the foregoing
provisions may provide for the elimination of fractional share interests.
Registration Rights
- -------------------
The Company has previously advised the Holder in the aforementioned
Confidential Private Term Sheet that it intends to prepare and file under the
Securities Act of 1933 (the "Act") a Registration Statement not later than sixty
(60) days following completion of the offering of the Units of which this
Warrant is part and has agreed to register the resale of the Common Shares
underlying the Holder's Warrants (the "Covered Shares") and this Warrant in such
Registration Statement. The Company shall bear all of the costs of such
registration that are normally borne by issuers.
3
<PAGE>
In connection with such Registration Statement filed pursuant to the
preceding paragraph, the Company shall prepare and promptly file with the
Securities and Exchange Commission (the "Commission") all amendments,
post-effective amendments and supplements to any such Registration Statement as
may be necessary under the Act and the regulations of the Commission to permit
the sale of the Covered Shares and the Warrant to the public, except that the
Company shall not be required to maintain a current Registration for any period
in excess of the term of this Warrant. The registration rights provided to the
Holder shall be limited to the filing of one Registration Statement only and
upon fulfillment of the terms hereof, the Company shall have no obligation to
register for resale under the Act the Holder's Common Shares or this Warrant in
any subsequent Registration Statements prepared by the Company.
The rights and obligations of the Holder pursuant to this paragraph may be
exercised only by the Holder, transferees and assigns thereof.
Indemnification
- ---------------
When pursuant hereto a Registration Statement registering the resale of
the Common Shares or this Warrant is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each Holder of the
Common Shares and the Warrant covered by such Registration Statement, amendment
or supplement and each person, if any, who controls (within the meaning of the
Act) the Holder, and each underwriter (within the meaning of the Act) of such
securities and each person, if any, who controls )within the meaning of the Act)
any such underwriter, against any losses, claims, damages or liabilities, joint
or several, to which the Holder, any such controlling person or any such
underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities, or actions in respect thereof, arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such Registration Statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arising out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Holder or such controlling person or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said Registration Statement, said preliminary prospectus, said
final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Holder or any other Holder
for use in the preparation thereof.
4
<PAGE>
The Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed said registration statement and
such amendments and supplements thereto, and each person, if any, who controls
the Company (within the meaning of the Act) against any losses, claims, damages
or liabilities, joint or several, to which the Company or any such director,
officer or controlling person may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities, or actions in respect
thereof, arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in said Registration Statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said Registration Statement, said preliminary prospectus, said final prospectus
or said amendment or supplement in reliance upon and in conformity with written
information furnished by such Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
Promptly after receipt by an indemnified party under this paragraph of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof, but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this paragraph.
In case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party
(however, in the event of disagreement as to the selection of counsel, the
indemnified party shall have the right to select such counsel), and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this paragraph for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Any settlement of such
action shall require the indemnifying party's consent, which shall not be
unreasonably withheld.
5
<PAGE>
Miscellaneous
- -------------
The Company shall not be required to issue or deliver any certificate for
Common Shares purchased on exercise of this Warrant or any portion thereof prior
to fulfillment of all the following conditions:
(a) The completion of any registration or other qualification of
such shares under any federal or state law or under the rulings or regulations
of the Securities and Exchange Commission or any other government regulatory
body which is necessary;
(b) The obtaining of any approval or other clearance from any
federal or state government agency which is necessary;
(c) The obtaining from the registered owner of the Warrant a
representation in writing that the owner is acquiring such Common Shares for the
owner's own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, if the Warrants and the
related shares have not been registered under the Act; and
(d) The placing on the certificate of an appropriate legend and the
issuance of stop transfer instructions in connection therewith if this Warrant
and the related, Common Shares have not been registered under the Act to the
following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS
OF ANY STATE AND HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION PERTAINING TO SUCH SECURITIES AND PURSUANT TO A
REPRESENTATION BY THE SECURITY HOLDER NAMED HEREON THAT SAID
SECURITIES HAVE BEEN ACQUIRED FOR PURPOSES OF INVESTMENT AND MAY
NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF REGISTRATION. FURTHERMORE, NO OFFER, SALE,
TRANSFER, PLEDGE OR HYPOTHECATION IS TO TAKE PLACE WITHOUT THE
PRIOR WRITTEN APPROVAL OF COUNSEL OR THE ISSUER BEING AFFIXED TO
THIS CERTIFICATE. THE TRANSFER AGENT HAS BEEN ORDERED TO EXECUTE
TRANSFERS OF THIS CERTIFICATE ONLY IN ACCORDANCE WITH THE ABOVE
INSTRUCTIONS."
The Company may make any changes or corrections in this Warrant (i) that
it shall deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error herein contained; or (ii)
that it may deem necessary or desirable and which shall not adversely affect the
interests of the Holder; provided, however, that this Warrant shall not
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of the Holders representing not less than 50% of the Warrants
then outstanding; and provided, further, that no change in the number or nature
6
<PAGE>
of the securities purchasable upon the exercise of any Warrant, or any increase
in the purchase price therefor, or any shortening of the Warrant exercise period
shall be made without the consent in writing of the Holders representing such
Warrant, other than such changes as are specifically prescribed by this Warrant
as originally executed.
The terms and provisions of this Warrant shall inure to the benefit of,
and be binding upon, the Company and its successors and assigns.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
the signature of its duly authorized officer.
GEOGRAPHICS, INC.
By:______________________________
President
Dated: ______________________
7
<PAGE>
SUBSCRIPTION FORM
(To be executed by the registered holder to exercise
the rights to purchase Common Shares evidenced by the
within Warrant.)
Geographics, Inc.
1555 Odell Road
Blaine, WA 98230
The undersigned hereby irrevocably subscribes for __________ Common Shares
pursuant to and in accordance with the terms and conditions of this Warrant, and
herewith makes payment of $__________ therefor, and requests that a certificate
for such Common Shares be issued in the name of the undersigned and be delivered
to the undersigned at the address stated below, and if such number of shares
shall not be all of the shares purchasable hereunder, that a new Warrant of like
tenor for the balance of the remaining Common Shares purchasable hereunder shall
be delivered to the undersigned at the address stated below.
Dated: Signed:_________________________
Address:________________________
________________________________
________________________________
8
GEOGRAPHICS, INC.
FORM OF 1996 STOCK OPTION PLAN
1. GRANT OF OPTIONS; GENERALLY. In accordance with the provisions
hereinafter set forth in this stock option plan, the name of which is the
GEOGRAPHICS, INC. 1996 STOCK OPTION PLAN (the "Plan"), the Board of Directors
(the "Board") or, the Compensation Committee (the "Stock Option Committee") of
Geographics, Inc. (the "Corporation") is hereby authorized to issue from time to
time on the Corporation's behalf to any one or more Eligible Persons, as
hereinafter defined, options to acquire shares of the Corporation's no par value
common stock (the "Stock").
2. TYPE OF OPTIONS. The Board or the Stock Option Committee is authorized
to issue options which meet the requirements of Section ss.422 of the Internal
Revenue Code of 1986, as amended (the "Code"), which options are hereinafter
referred to collectively as ISOs, or singularly as an ISO. The Board or the
Stock Option Committee is also, in its discretion, authorized to issue options
which are not ISOs, which options are hereinafter referred to collectively as
NSOs, or singularly as an NSO. The Board or the Stock Option Committee is also
authorized to issue "Reload Options" in accordance with Paragraph 8 herein,
which options are hereinafter referred to collectively as Reload Options, or
singularly as a Reload Option. Except where the context indicates to the
contrary, the term "Option" or "Options" means ISOs, NSOs and Reload Options.
3. AMOUNT OF STOCK. The aggregate number of shares of Stock which may be
purchased pursuant to the exercise of Options shall be 1,000,000 shares. Of this
amount, the Board or the Stock Option Committee shall have the power and
authority to designate whether any Options so issued shall be ISOs or NSOs,
subject to the restrictions on ISOs contained elsewhere herein. If an Option
ceases to be exercisable, in whole or in part, the shares of Stock underlying
such Option shall continue to be available under this Plan. Further, if shares
of Stock are delivered to the Corporation as payment for shares of Stock
purchased by the exercise of an Option granted under this Plan, such shares of
Stock shall also be available under this Plan. If there is any change in the
number of shares of Stock on account of the declaration of stock dividends,
recapitalization resulting in stock split-ups, or combinations or exchanges of
shares of Stock, or otherwise, the number of shares of Stock available for
purchase upon the exercise of Options, the shares of Stock subject to any Option
and the exercise price of any outstanding Option shall be appropriately adjusted
by the Board or the Stock Option Committee. The Board or the Stock Option
Committee shall give notice of any adjustments to each Eligible Person granted
<PAGE>
an Option under this Plan, and such adjustments shall be effective and binding
on all Eligible Persons. If because of one or more recapitalizations,
reorganizations or other corporate events, the holders of outstanding Stock
receive something other than shares of Stock then, upon exercise of an Option,
the Eligible Person will receive what the holder would have owned if the holder
had exercised the Option immediately before the first such corporate event and
not disposed of anything the holder received as a result of the corporate event.
4. ELIGIBLE PERSONS.
(a) With respect to ISOs, an Eligible Person means any individual
who has been employed by the Corporation or by any subsidiary of the
Corporation, for a continuous period of at least sixty (60) days.
(b) With respect to NSOs, an Eligible Person means (i) any
individual who has been employed by the Corporation or by any subsidiary of the
Corporation, for a continuous period of at least sixty (60) days, (ii) any
director of the Corporation or by any subsidiary of the Corporation or (iii) any
consultant of the Corporation or by any subsidiary of the Corporation.
5. GRANT OF OPTIONS. The Board or the Stock Option Committee has the
right to issue the Options established by this Plan to Eligible Persons. The
Board or the Stock Option Committee shall follow the procedures prescribed for
it elsewhere in this Plan. A grant of Options shall be set forth in a writing
signed on behalf of the Corporation or by a majority of the members of the Stock
Option Committee. The writing shall identify whether the Option being granted is
an ISO or an NSO and shall set forth the terms which govern the Option. The
terms shall be determined by the Board or the Stock Option Committee, and may
include, among other terms, the number of shares of Stock that may be acquired
pursuant to the exercise of the Options, when the Options may be exercised, the
period for which the Option is granted and including the expiration date, the
effect on the Options if the Eligible Person terminates employment and whether
the Eligible Person may deliver shares of Stock to pay for the shares of Stock
to be purchased by the exercise of the Option. However, no term shall be set
forth in the writing which is inconsistent with any of the terms of this Plan.
The terms of an Option granted to an Eligible Person may differ from the terms
of an Option granted to another Eligible Person, and may differ from the terms
of an earlier Option granted to the same Eligible Person.
6. OPTION PRICE. The option price per share shall be determined by the
Board or the Stock Option Committee at the time any Option is granted, and shall
be not less than (i) in the case of an ISO, the fair market value, (ii) in the
case of an ISO granted to a ten percent or greater stockholder, 110 percent of
the fair market value, or (iii) in the case of an NSO, not less than 75% of the
<PAGE>
fair market value (but in no event less than the par value) of one share of
Stock on the date the Option is granted, as determined by the Board or the Stock
Option Committee. Fair market value as used herein shall be:
(a) If shares of Stock shall be traded on an exchange or
over-the-counter market, the mean between the high and low sales prices of Stock
on such exchange or over-the-counter market on which such shares shall be traded
on that date, or if such exchange or over-the-counter market is closed or if no
shares shall have traded on such date, on the last preceding date on which such
shares shall have traded.
(b) If shares of Stock shall not be traded on an exchange or
over-the-counter market, the value as determined by a recognized appraiser as
selected by the Board or the Stock Option Committee.
7. PURCHASE OF SHARES. An Option shall be exercised by the tender to the
Corporation of the full purchase price of the Stock with respect to which the
Option is exercised and written notice of the exercise. The purchase price of
the Stock shall be in United States dollars, payable in cash or by check, or in
property or Corporation stock, if so permitted by the Board or the Stock Option
Committee in accordance with the discretion granted in Paragraph 5 hereof,
having a value equal to such purchase price. The Corporation shall not be
required to issue or deliver any certificates for shares of Stock purchased upon
the exercise of an Option prior to (i) if requested by the Corporation, the
filing with the Corporation by the Eligible Person of a representation in
writing that it is the Eligible Person's then present intention to acquire the
Stock being purchased for investment and not for resale, and/or (ii) the
completion of any registration or other qualification of such shares under any
government regulatory body, which the Corporation shall determine to be
necessary or advisable.
8. GRANT OF RELOAD OPTIONS. In granting an Option under this Plan, the
Board or the Stock Option Committee may include a Reload Option provision
therein, subject to the provisions set forth in Paragraphs 20 and 21 herein. A
Reload Option provision provides that if the Eligible Person pays the exercise
price of shares of Stock to be purchased by the exercise of an ISO, NSO or
another Reload Option (the "Original Option") by delivering to the Corporation
shares of Stock already owned by the Eligible Person (the "Tendered Shares"),
the Eligible Person shall receive a Reload Option which shall be a new Option to
purchase shares of Stock equal in number to the tendered shares. The terms of
any Reload Option shall be determined by the Board or the Stock Option Committee
consistent with the provisions of this Plan.
9. STOCK OPTION COMMITTEE. The Stock Option Committee may be appointed
from time to time by the Corporation's Board of Directors. The Board may from
<PAGE>
time to time remove members from or add members to the Stock Option Committee.
The Stock Option Committee shall be constituted so as to permit the Plan to
comply in all respects with the provisions set forth in Paragraph 20 herein. The
members of the Stock Option Committee may elect one of its members as its
chairman. The Stock Option Committee shall hold its meetings at such times and
places as its chairman shall determine. A majority of the Stock Option
Committee's members present in person shall constitute a quorum for the
transaction of business. All determinations of the Stock Option Committee will
be made by the majority vote of the members constituting the quorum. The members
may participate in a meeting of the Stock Option Committee by conference
telephone or similar communications equipment by means of which all members
participating in the meeting can hear each other. Participation in a meeting in
that manner will constitute presence in person at the meeting. Any decision or
determination reduced to writing and signed by all members of the Stock Option
Committee will be effective as if it had been made by a majority vote of all
members of the Stock Option Committee at a meeting which is duly called and
held.
10. ADMINISTRATION OF PLAN. In addition to granting Options and to
exercising the authority granted to it elsewhere in this Plan, the Board or the
Stock Option Committee is granted the full right and authority to interpret and
construe the provisions of this Plan, promulgate, amend and rescind rules and
procedures relating to the implementation of the Plan and to make all other
determinations necessary or advisable for the administration of the Plan,
consistent, however, with the intent of the Corporation that Options granted or
awarded pursuant to the Plan comply with the provisions of Paragraph 20 and 21
herein. All determinations made by the Board or the Stock Option Committee shall
be final, binding and conclusive on all persons including the Eligible Person,
the Corporation and its stockholders, employees, officers and directors and
consultants. No member of the Board or the Stock Option Committee will be liable
for any act or omission in connection with the administration of this Plan
unless it is attributable to that member's willful misconduct.
11. PROVISIONS APPLICABLE TO ISOS. The following provisions shall apply to
all ISOs granted by the Board or the Stock Option Committee and are incorporated
by reference into any writing granting an ISO:
(a) An ISO may only be granted within ten (10) years from January 2,
1996, the date that this Plan was originally adopted by the Corporation's Board
of Directors.
(b) An ISO may not be exercised after the expiration of ten (10)
years from the date the ISO is granted.
(c) The option price may not be less than the fair market value of
the Stock at the time the ISO is granted.
<PAGE>
(d) An ISO is not transferrable by the Eligible Person to whom it is
granted except by will, or the laws of descent and distribution, and is
exercisable during his or her lifetime only by the Eligible Person.
(e) If the Eligible Person receiving the ISO owns at the time of the
grant stock possessing more than ten (10%) percent of the total combined voting
power of all classes of stock of the employer corporation or of its parent or
subsidiary corporation (as those terms are defined in the Code), then the option
price shall be at least 110% of the fair market value of the Stock, and the ISO
shall not be exercisable after the expiration of five (5) years from the date
the ISO is granted.
(f) The aggregate fair market value (determined at the time the ISO
is granted) of the Stock with respect to which the ISO is first exercisable by
the Eligible Person during any calendar year (under this Plan and any other
incentive stock option plan of the Corporation) shall not exceed $100,000.
(g) Even if the shares of Stock which are issued upon exercise of an
ISO are sold within one year following the exercise of such ISO so that the sale
constitutes a disqualifying disposition for ISO treatment under the Code, no
provision of this Plan shall be construed as prohibiting such a sale.
(h) This Plan was adopted by the Corporation on ________________,
1995 by virtue of its approval by the Corporation's Board of Directors. Approval
by the stockholders of the Corporation is to occur prior to _________________,
1996.
12. DETERMINATION OF FAIR MARKET VALUE. In granting ISOs under this Plan,
the Board or the Stock Option Committee shall make a good faith determination as
to the fair market value of the Stock at the time of granting the ISO.
13. RESTRICTIONS ON ISSUANCE OF STOCK. The Corporation shall not be
obligated to sell or issue any shares of Stock pursuant to the exercise of an
Option unless the Stock with respect to which the Option is being exercised is
at that time effectively registered or exempt from registration under the
Securities Act of 1933, as amended, and any other applicable laws, rules and
regulations. The Corporation may condition the exercise of an Option granted in
accordance herewith upon receipt from the Eligible Person, or any other
purchaser thereof, of a written representation that at the time of such exercise
it is his or her then present intention to acquire the shares of Stock for
investment and not with a view to, or for sale in connection with, any
distribution thereof; except that, in the case of a legal representative of an
<PAGE>
Eligible Person, "distribution" shall be defined to exclude distribution by will
or under the laws of descent and distribution. Prior to issuing any shares of
Stock pursuant to the exercise of an Option, the Corporation shall take such
steps as it deems necessary to satisfy any withholding tax obligations imposed
upon it by any level of government.
14. EXERCISE IN THE EVENT OF DEATH OF TERMINATION OR EMPLOYMENT.
(a) If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary or (ii) within three months after termination of his
employment with the Corporation or a Subsidiary because of his disability, or
retirement or otherwise, his Options may be exercised, to the extent that the
optionee shall have been entitled to do so on the date of his death or such
termination of employment, by the person or persons to whom the optionee's right
under the Option pass by will or applicable law, or if no such person has such
right, by his executors or administrators, at any time, or from time to time. In
the event of termination of employment because of his death while an employee or
because of disability, his Options may be exercised not later than the
expiration date specified in Paragraph 5 or one year after the optionee's death,
whichever date is earlier, or in the event of termination of employment because
of retirement or otherwise, not later than the expiration date specified in
Paragraph 5 hereof or one year after the optionee's death, whichever date is
earlier.
(b) If an optionee's employment by the Corporation or a Subsidiary
shall terminate because of his disability and such optionee has not died within
the following three months, he may exercise his Options, to the extent that he
shall have been entitled to do so at the date of the termination of his
employment, at any time, or from time to time, but not later than the expiration
date specified in Paragraph 5 hereof or one year after termination of
employment, whichever date is earlier.
(c) If an optionee's employment shall terminate by reason of his
retirement in accordance with the terms of the Corporation's tax-qualified
retirement plans or with the consent of the Board or the Stock Option Committee
or involuntarily other than by termination for cause, and such optionee has not
died within the following three months, he may exercise his Option to the extent
he shall have been entitled to do so at the date of the termination of his
employment, at any time and from to time, but not later than the expiration date
specified in Paragraph 5 hereof or thirty (30) days after termination of
employment, whichever date is earlier. For purposes of this Paragraph 14,
termination for cause shall mean termination of employment by reason of the
optionee's commission of a felony, fraud or willful misconduct which has
resulted, or is likely to result, in substantial and material damage to the
Corporation or a Subsidiary, all as the Board or the Stock Option Committee in
its sole discretion may determine.
<PAGE>
(d) If an optionee's employment shall terminate for any reason other
than death, disability, retirement or otherwise, all right to exercise his
Option shall terminate at the date of such termination of employment.
15. CORPORATE EVENTS. In the event of the proposed dissolution or
liquidation of the Corporation, a proposed sale of all or substantially all of
the assets of the Corporation, a merger or tender for the Corporation's shares
of Common Stock the Board of Directors may declare that each Option granted
under this Plan shall terminate as of a date to be fixed by the Board of
Directors; provided that not less than thirty (30) days written notice of the
date so fixed shall be given to each Eligible Person holding an Option, and each
such Eligible Person shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his Option as to all or any part of the
shares of Stock covered thereby, including shares of Stock as to which such
Option would not otherwise be exercisable. Nothing set forth herein shall extend
the term set for purchasing the shares of Stock set forth in the Option.
16. NO GUARANTEE OF EMPLOYMENT. Nothing in this Plan or in any writing
granting an Option will confer upon any Eligible Person the right to continue in
the employ of the Eligible Person's employer, or will interfere with or restrict
in any way the right of the Eligible Person's employer to discharge such
Eligible Person at any time for any reason whatsoever, with or without cause.
17. NONTRANSFERABILITY. No Option granted under the Plan shall be trans-
ferable other than by will or by the laws of descent and distribution. During
the lifetime of the optionee, an Option shall be exercisable only by him.
18. NO RIGHTS AS STOCKHOLDER. No optionee shall have any rights as a
stockholder with respect to any shares subject to his Option prior to the date
of issuance to him of a certificate or certificates for such shares.
19. AMENDMENT AND DISCONTINUANCE OF PLAN. The Corporation's Board of
Directors may amend, suspend or discontinue this Plan at any time. However, no
such action may prejudice the rights of any Eligible Person who has prior
thereto been granted Options under this Plan. Further, no amendment to this Plan
which has the effect of (a) increasing the aggregate number of shares of Stock
subject to this Plan (except for adjustments pursuant to Paragraph 3 herein), or
(b) changing the definition of Eligible Person under this Plan, may be effective
unless and until approval of the stockholders of the Corporation is obtained in
the same manner as approval of this Plan is required. The Corporation's Board of
Directors is authorized to seek the approval of the Corporation's stockholders
for any other changes it proposes to make to this Plan which require such
<PAGE>
approval, however, the Board of Directors may modify the Plan, as necessary, to
effectuate the intent of the Plan as a result of any changes in the tax,
accounting or securities laws treatment of Eligible Persons and the Plan,
subject to the provisions set forth in this Paragraph 19, and Paragraphs 20 and
21.
20. COMPLIANCE WITH RULE 16B-3. This Plan is intended to comply in all
respects with Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with respect to participants who are subject to Section 16 of
the Exchange Act, and any provision(s) herein that is/are contrary to Rule 16b-3
shall be deemed null and void to the extent appropriate by either the Stock
Option Committee or the Corporation's Board of Directors.
21. COMPLIANCE WITH CODE. The aspects of this Plan on ISOs is intended to
comply in every respect with Section 422 of the Code and the regulations
promulgated thereunder. In the event any future statute or regulation shall
modify the existing statute, the aspects of this Plan on ISOs shall be deemed to
incorporate by reference such modification. Any stock option agreement relating
to any Option granted pursuant to this Plan outstanding and unexercised at the
time any modifying statute or regulation becomes effective shall also be deemed
to incorporate by reference such modification and no notice of such modification
need be given to optionee.
If any provision of the aspects of this Plan on ISOs is determined
to disqualify the shares purchasable pursuant to the Options granted under this
Plan from the special tax treatment provided by Code Section 422, such provision
shall be deemed null and void and to incorporate by reference the modification
required to qualify the shares for said tax treatment.
22. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Corporation to sell
and deliver Stock under such options, shall be subject to all applicable federal
and state laws, rules, and regulations and to such approvals by any government
or regulatory agency as may be required. The Corporation shall not be required
to issue or deliver any certificates for shares of Stock prior to (a) the
listing of such shares on any stock exchange or over-the-counter market on which
the Stock may then be listed and (b) the completion of any registration or
qualification of such shares under any federal or state law, or any ruling or
regulation of any government body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable. Moreover, no Option may be
exercised if its exercise or the receipt of Stock pursuant thereto would be
contrary to applicable laws.
23. DISPOSITION OF SHARES. In the event any share of Stock acquired by
an exercise of an Option granted under the Plan shall be transferable other than
<PAGE>
by will or by the laws of descent and distribution within two years of the date
such Option was granted or within one year after the transfer of such Stock
pursuant to such exercise, the optionee shall give prompt written notice thereof
to the Corporation or the Stock Option Committee.
24. NAME. The Plan shall be known as the "Geographics, Inc.
1996 Stock Option Plan."
25. NOTICES. Any notice hereunder shall be in writing and sent by
certified mail, return receipt requested or by facsimile transmission (with
electronic or written confirmation of receipt) and when addressed to the
Corporation shall be sent to it at its office, 1555 Odell Road, Blaine,
Washington 98230 and when addressed to the Committee shall be sent to it at 1555
Odell Road, Blaine, Washington 98230, subject to the right of either party to
designate at any time hereafter in writing some other address, facsimile number
or person to whose attention such notice shall be sent.
26. HEADINGS. The headings preceding the text of Sections
and subparagraphs hereof are inserted solely for convenience of
reference, and shall not constitute a part of this Plan nor shall
they affect its meaning, construction or effect.
27. EFFECTIVE DATE. This Plan, the Geographics, Inc. 1996
Stock Option Plan, was adopted by the Board of Directors of the
Corporation on ________________, 1995. The effective date of the
Plan shall be the same date.
Dated as of ______________.
GEOGRAPHICS, INC.
By:___________________________
Its: President
August 12, 1996
Geographics, Inc.
1555 Odell Road
Blaine, Washington, 98230
Re: Registration Statement on Form SB-2; Geographics, Inc. (the "Company"),
Gentlemen:
This opinion is submitted pursuant to the applicable rules of the
Securities and Exchange Commission with respect to the registration by the
Company of 2,790,242 shares of Common Stock, par value $.001 per share (the
"Common Stock") and 1,395,121 Common Stock Purchase Warrants (the "Warrants") to
be sold by the Selling Security Holders designated in the Registration
Statement.
In connection therewith, we have examined and relied upon original,
certified, conformed, photostat or other copies of (i) the Amended and Restated
Articles of Incorporation and Bylaws of the Company; (ii) resolutions of the
Board of Directors of the Company authorizing the offering and the issuance of
the Common Stock and Warrants, and related matters; (iii) the Registration
Statement and the exhibits thereto; and (iv) such other matters of law as we
have deemed necessary for the expression of the opinion herein contained. In all
such examinations, we have assumed the genuineness of all signatures on original
documents, and the conformity to originals or certified documents of all copies
submitted to us as conformed, photostat or other copies. In passing upon certain
corporate records and documents of the Company, we have necessarily assumed the
correctness and completeness of the statements made or included therein by the
Company, and we express no opinion thereon. As to the various questions of fact
material to this opinion, we have relied, to the extent we deemed reasonably
appropriate, upon representations or certificates of officers or directors of
the Company and upon documents, records and instruments furnished to us by the
Company, without independently checking or verifying the accuracy of such
documents, records and instruments.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock and the Warrants have been duly and validly authorized.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to use our name under the caption "Legal Matters" in
the prospectus comprising part of the Registration Statement. In giving such
consent, we do not thereby admit that we are included in with the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations promulgated thereunder.
Sincerely,
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
Geographics
1555 Odell Road
Post Office Box 1750
Blaine, Washington 98231
July 3, 1996
Mr. Graham Hanrahan
Graham's Graphics Pty. Ltd.
Re: Potential Acquisition of Assets
Dear Mr. Hanrahan:
This will confirm our mutual interest in negotiating an agreement for the
purchase of substantially all assets and the assumption of substantially all
liabilities of Graham's Graphics Pty. Ltd., an Australian corporation
("Graham's"), by Geographics, Inc., a Wyoming corporation, or another
corporation or other legal entity in which Geographics, Inc. has an interest
(collectively, "Geographics"). This letter is for the sole purpose of confirming
our mutual interest and detailing the preliminary understandings we have
reached. It is not a binding contract, and does not obligate either of us to
complete any transaction.
We have reached preliminary understandings, on the following matters:
1. PURCHASE OF ASSETS AND ASSUMPTION OF LIABILITIES. Geographics will purchase,
and Graham's will sell, substantially all of the assets owned by Graham's and
used in its wholesale paper and office products distribution business (the
"Assets"), and Geographics will simultaneously assume substantially all of the
known and identified liabilities of Graham's (the "Liabilities") (collectively,
the purchase of the Assets and assumption of the Liabilities is referred to
hereinafter as the "Transaction"). The Assets include, but are not limited to,
Graham's inventory, accounts receivable, furniture, fixtures, equipment, good
will, going concern value, other intangible assets, and interests in real
property used in Graham's business. However, we may agree, following completion
of the Preliminary Due Diligence (as defined below), to exclude certain assets
and/or liabilities of Graham's from the Transaction in order to conform the
Transaction of Geographics' plans for market development in Australia. The
Liabilities included in the Transaction will be only the specific liabilities
identified in the final purchase of documentation. Graham's will remain liable,
and will indemnify Geographics, for any unknown and/or undisclosed liabilities.
2. EFFECTIVE DATE. The Transaction will close on a date to be mutually agreed by
the parties. However, provided the Transaction does close, it will be effective
retroactively to July 1, 1996 (the "Effective Date").
<PAGE>
Mr. Graham Hanrahan
August 9, 1996
Page 2
3. PURCHASE PRICE. The purchase price for the Assets (the "Price") shall be
equal to the difference between the total value of the Assets and the total
amount of the Liabilities on the Effective Date. The parties will mutually agree
upon the value of the Assets after Geographics has completed the Preliminary Due
Diligence (as defined below), subject to the following preliminary
understandings:
a. INVENTORY. Inventory will be valued at its net book value as of th
Effective Date, subject to such adjustments as the parties may agree.
b. ACCOUNTS RECEIVABLE. Accounts receivable will be valued at their face
amount as of the Effective Date, reduced by a reasonable allowance for
overaged and/or uncollectible accounts.
c. FURNITURE, FIXTURES, AND EQUIPMENT. Furniture, fixtures, and equipment
will be valued at their net book value as of the Effective Date.
d. INTANGIBLE ASSETS. No value shall be assigned to goodwill and going
concern value. Other intangible assets carried on Graham's books will be
valued at their net book value as of the Effective Date, but in no event
shall the value exceed fair market value.
a. REAL PROPERTY. Leasehold and/or fees simple real property may be valued
at net book value, appraised value, or other reasonable measure of value
(which may include the assignment of zero value to leasehold property, if
appropriate), depending on its nature and scope.
4. PAYMENT. The Price shall be paid in the following manner:
a. CASH. At closing, $0, Australian funds, in cash or other immediately
available form.
b. STOCK. At closing, shares of Geographics stock having a total value
equal to the difference between the total Price and the amount of cash
payable pursuant to the preceding subsection. Geographics shares shall
be valued for purposes of this subsection at their closing price on the
Nasdaq Marketing System on the Effective Date, converted to Australian
funds at the exchange rate on the Effective Date, as published in the
WALL STREET JOURNAL.
<PAGE>
Mr. Graham Hanrahan
August 9, 1996
Page 3
C. STOCK OPTIONS. Subject to the terms of this subsection, options to
acquire shares of Geographics stock at their closing price on the
Nasdaq Marketing System on the Effective Date. Geographics will make a
good-faith effort to obtain approval from its shareholders and from all
necessary regulatory authorities to issue such stock options to
Graham's on or before November 30, 1996. If Geographics is unable to
obtain all necessary approvals to issue the stock options, the parties
will negotiate and agree upon alternative compensation of comparable
value.
5. PAYMENT OF HANRAHAN NOTE. The Liabilities include a Promissory Note from
Graham's to Graham Hanrahan, which will have an outstanding balance of
approximately $115,000, Australian funds, on the Effective Date. Geographics
will pay the Hanrahan Note in full at closing by delivering to Graham Hanrahan
shares of Geographics stock having a total value equal to the outstanding
balance of the Hanrahan Note on the Effective Date. Geographics stock shall be
valued in the same manner as set forth above.
6. EMPLOYMENT AND NON-COMPETITION. Pursuant to the terms of an Employment and
Non-Competition Agreement to be mutually agreed upon, Graham Hanrahan will
become an employee of Geographics, and will agree not to conduct business in
competition with Geographics for a reasonable period of time after he leaves
Geographics' employment.
7. PRELIMINARY DUE DILIGENCE. As soon as reasonably possible, Graham's will
provide Geographics with all information necessary or appropriate to facilitate
the identification, review, and valuation of the Assets and Liabilities and the
review and documentation of the Transaction. Geographics will proceed diligently
to review and evaluate the information provided, and to obtain from Graham's any
additional information Geographics deems appropriate (the "Preliminary Due
Diligence").
8. OPERATION OF BUSINESS. Graham's will continue to operate its business until
closing of the Transaction. Prior to the closing date, Geographics shall have no
rights with respect to the Assets, or duties with respect to the Liabilities,
except as the parties may otherwise expressly agree in the final documentation
of the Transaction, as described below.
9. NEGOTIATION AND EXECUTION OF FINAL AGREEMENT. Upon completion of the
Preliminary Due Diligence, Geographics and Graham's will negotiate and execute
<PAGE>
Mr. Graham Hanrahan
August 9, 1996
Page 4
a final, written purchase and sale agreement and other necessary or appropriate
documentation for the Transaction (including the employment and non-competition
agreement referred to above), which will contain terms customary in transactions
of this sort, including appropriate representations and warranties from
Graham's. The final, executed purchase and sale agreement and other
documentation shall be the sole source of the parties' obligations with respect
to the Transaction, and neither party shall be obligated to complete the
Transaction except in accordance with such agreement and documentation.
10. TAX MATTERS. Except to the extent the parties may agree otherwise, each
party will be responsible for its own taxes imposed as a result of the
Transaction. The parties will cooperate to structure the Transaction to minimize
the total taxes imposed, to the extent they can do so without materially
altering the benefit of the bargain or compromising other business objectives.
11. GOVERNING LAW. To the extent possible, the Transaction will be governed, and
the final purchase agreement and other documentation interpreted and enforced,
in accordance with the laws of the State of Washington. Each party will engage
counsel in Australia to assist with the Transaction and to address issues of
Australian law.
If this letter is consistent with your understanding of our discussions and
preliminary understandings, please execute it in the space below.
Very truly yours,
GEOGRAPHICS, INC.
By: RONALD DEANS
---------------------
Ron Deans, President
Accepted and agreed:
GRAHAM'S GRAPHICS PTY. LTD.
By: GRAHAM HANRAHAN
--------------------------
Graham Hanrahan, President
Subsidiaries
------------
Geographics Marketing Canada Inc. a Canadian corporation.
17735 1st Ave., Suite 1,
Surrey, B.C.,
Canada V4P 2K1,
Geographics (Europe) Limited, an English Company.
4 Iceni Court,
Letchworth, Herts
England, SG6 1TN,
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our Firm under the captions "Experts" and to the
use of our report dated May 31, 1996, with respect to the financial statements
of Geographics, Inc. in the Registration Statement (Form SB-2 No. 333-_____) and
related Prospectus of Geographics, Inc. for the registration of the securities
offered by the Selling Security Holders, as defined therein.
Bellingham, Washington
August 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GEOGRAPHICS, INC. FOR THE YEAR ENDED MARCH 31, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 50,028
<SECURITIES> 0
<RECEIVABLES> 6,083,076
<ALLOWANCES> (146,926)
<INVENTORY> 9,139,273
<CURRENT-ASSETS> 16,888,860
<PP&E> 10,468,707
<DEPRECIATION> (3,182,013)
<TOTAL-ASSETS> 27,738,041
<CURRENT-LIABILITIES> 11,057,829
<BONDS> 0
0
0
<COMMON> 9,620,068
<OTHER-SE> 369,784
<TOTAL-LIABILITY-AND-EQUITY> 24,738,041
<SALES> 22,613,635
<TOTAL-REVENUES> 22,613,635
<CGS> 14,194,505
<TOTAL-COSTS> 5,894,669
<OTHER-EXPENSES> (130,090)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787,848
<INCOME-PRETAX> 1,866,703
<INCOME-TAX> 634,679
<INCOME-CONTINUING> 1,232,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,232,024
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>