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 $4.25 per Share), and the
balance of the shares of Common Stock were issued or will be issued upon
exercise of the Warrants at $4.25 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 December 13, 1996, Common Stock on the Nasdaq NMS was $4.56 and
on the Toronto Stock Exchange was Cdn$6.00. There can be no assurances that a
substantial trading market for its Common Stock will develop or be sustained in
the future. At September 30, 1996, the tangible book value of the Company's
Common Stock was approximately $1.81 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 DECEMBER 24, 1996
<PAGE>
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 offer or
solicitation in such jurisdiction. Neither the delivery
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<PAGE>
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.
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<PAGE>
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of the Prospectus has been
delivered, on the written or oral request of any such person, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference in this Prospectus, other than exhibits to such documents. Written
requests for such copies should be directed to Corporate Secretary, Geographics,
Inc., 1555 Odell Road, Blaine, Washington 98231, Telephone (360) 332-6711.
4
<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 December 13, 1996,
the Canadian exchange rate was equal to $.735 per U.S. dollar.
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.
5
<PAGE>
<TABLE>
<CAPTION>
The Company's administrative office is located at 1555 Odell Road,
Blaine, Washington 98231 (telephone no. 360/332-6711; telecopier
no. 360/332-6352). The Company's fiscal year end is March 31.
THE OFFERING AND OUTSTANDING SECURITIES
<S> <C>
Common Stock Outstanding
at December 13, 1996................................. 9,416,877 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)
Proceeds to be received upon
Exercise of Warrants
Offered by Selling Security
Holders................................................ $5,929,264.25
Risk Factors.............................................. Investment in these securities
involves a high degree of risk.
See "Risk Factors."
Nasdaq NMS and Toronto Exchange
Symbols, respectively(6)
Common Stock.............................................. GGIT, GGI
Warrants.................................................. GGIW, GGW
- --------------------
<FN>
(1) As of December 13, 1996, the Company had 9,416,877 shares of
Common Stock outstanding, including 1,268,293 shares of Common
Stock issued upon completion of the "May 1996 Offering". Does
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<PAGE>
not include (i) 126,828 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) 174,500 shares underlying options to purchase up to 174,500
shares of Common Stock at prices ranging from Cdn$1.00 to Cdn$4.15 from
July 30, 1998, 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.
(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
$4.25 per Share (for an aggregate of $5,929,264.25).
(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 $4.25 per
Share.
(4) Includes 1,395,121 shares issuable upon the exercise of the
Warrants on or prior to June 1, 1999 at $4.25 per Share (for
an aggregate of $5,929,264.25), which are a part of this
offering. Does not include (i) 174,500 shares underlying
options to purchase up to 174,500 shares of Common Stock at
prices ranging from Cdn$1.00 to Cdn$4.15 from July 30, 1998 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
December 13, 1996 was $.735 equals Cdn$1.00.
(5) The Company intends to apply for inclusion of its Warrants on Nasdaq at
such time as it meets Nasdaq requirements.
</FN>
</TABLE>
Inclusion on Nasdaq does not imply that an established trading market will
develop or be sustained for the Common Stock or the Warrants.
7
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
SUMMARY OF SELECTED FINANCIAL INFORMATION
The following table sets forth certain summary financial information. The
summary statement of operations data for the years ended March 31, 1996, 1995
and 1994 are derived from the Consolidated Financial Statements of the Company,
which have been audited by Moss Adams LLP, independent certified public
accountants. The summary statement of operations data for the six months ended
September 30, 1996 and 1995 and the summary balance sheet data as of September
30, 1996 and 1995 have been derived from the unaudited consolidated statements
of the Company. The Consolidated Financial Statements for the periods indicated
above,and the report thereon, appear elsewhere in this Prospectus. The data in
such tables should be read together with "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto,
appearing elsewhere herein.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
SIX MONTHS
ENDED SEPTEMBER 30 YEAR ENDED MARCH 31
--------------------- ----------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $13,029,743 $10,093,834 $22,613,635 $10,186,136 $6,900,875
Net income(loss)
attributable to
Common Stock(loss) 519,283 582,741 1,232,024 747,742 (1,241,518)
Net income per
average common share
outstanding .06 .09 .19 .16 (.28)
Weighted average
shares outstanding 9,199,419 7,132,239 6,606,499 4,549,101 4,424,535
- ----------------
BALANCE SHEET DATA:
September 30 March 31 March 31 March 31
1996 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Working capital $11,616,338 $5,831,031 $1,836,436 $869,651
Total assets 31,902,158 24,738,041 10,614,673 6,788.067
Long Term debt 4,665,842 3,690,360 3,519,948 3,083,818
Stockholders' equity 17,052,631 9,989,852 2,803,341 1.471.514
</TABLE>
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<PAGE>
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, including Office Depot, Inc. Office Max,
Inc., and Martin Distribution, accounted for approximately 77% and 59% of the
Company's sales. See "The Company--Business Concentration." For the six months
ended September 30, 1996, the Company's three largest customers, including
Office Deport, Inc., Office Max, Inc. and Business Depot accounted for
approximately 60% 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.
Office Depot, Inc., the Company's largest customer has announced intentions to
merge with Staples, Inc. While the Company currently sells to Staples of Canada
(Business Depot) through its distributor, Geographics Marketing Canada, Inc.,
Staples is not a customer of the Company's domestic operations. Management
cannot, at this time, estimate what impact the merger will have upon the future
sales of the Company and in particular, its relationship with Office Depot, Inc.
Moreover, because Office Depot, Inc. can terminate its arrangements with the
Company at-will,the Company may have no prior notice of such intentions, which
could have a material adverse affect on the Company's productions, revenues and
cash flows. See "Business--Customer Concentration."
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,
9
<PAGE>
and delays in production 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 September 30, 1996, the
Company maintained an inventory of lettering and signage and specialty papers of
$13,275,929. While the Company believes that the maintenance of an extensive
inventory provides the Company with substantial flexibility in responding to
incoming orders, enhances the Company's reputation as a major supplier in the
industry and
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<PAGE>
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 December 13, 1996, members of the
Deans family own slightly in excess of 17% 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.
11
<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
post-effective amendments to its registration statement in order to maintain a
current prospectus
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<PAGE>
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 174,500
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 September 30, 1996, the net tangible book value of the Company's Common Stock
was approximately $1.81 per share.
POSSIBLE RESALES OF SECURITIES BY CURRENT STOCKHOLDERS AND DEPRESSIVE EFFECT ON
MARKET. As of December 13, 1996, there were 9,416,877 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
"Securities Act"), inclusive of shares being registered pursuant to this
Registration Statement of which this Prospectus is
13
<PAGE>
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 WARRANTS; 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."
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCKS; POSSIBLE FAILURE
TO QUALIFY FOR NASDAQ SMALLCAP MARKET LISTING. The Commission has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5 per share, subject to
certain exceptions. The shares of Common Stock, offered hereby may be deemed to
be "penny stocks" and thus will become subject to rules that impose additional
sales practice requirements on broker/dealers who sell such securities to
persons other than established customers and accredited investors, unless the
Common Stock is listed on the NASDAQ National Market or the NASDAQ SmallCap
Market. There can be no assurance that the Company will continue to be able to
satisfy the listing criteria of the NASDAQ National Market, or if, necessary,
the NASDAQ SmallCap Market or that its Shares will continue to trade for $5 or
more per security after the Offering. Consequently, the "penny stock" rules may
restrict the ability of broker/dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in a secondary market. Additionally, if the Company becomes unable to
meet the listing criteria (either initially or on
14
<PAGE>
a continued basis) of the NASDAQ National Market or SmallCap Market or becomes
delisted therefrom, trading, if any, in the Common Stock would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
then available, "Electronic Bulletin Board" administered by the National
Association of Securities Dealers, Inc. (the "NASD"). In such an event, the
market price of the Common Stock may be adversely impacted. As a result, an
investor may find it difficult to dispose of, or to obtain accurate quotations
as to the market value of the Common Stock.
15
<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 $1.13 - -
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
9/30/96 7.30 4.25 5.69 3.00
10/1/96-
12/13/96 6.00 3.75 4.56 2.88
- ---------
As of December 13, 1996, there were 273 holders of record of the Common Stock of
the Company. The closing bid price on the Nasdaq National Market System at
December 13, 1996 was $4.56.
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 the three years
ended March 31, 1996.
16
<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.
17
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the exercise of Warrants.
AT SEPTEMBER 30, 1996
-----------------------------------------
ACTUAL AS ADJUSTED(*)
------ --------------
Stockholders' equity:
Common Stock, no par value
per share; 10,000,000 shares
authorized; 9,412,877 shares
issued and outstanding; and
10,934,826 shares to be
outstanding, assuming
exercise of Warrants offered
hereby $16,159,408 $22,738,666
Retained earnings $889,067 $889,067
Notes due from
officers $1,000,000 $1,000,000
Total stockholders'
equity. $17,052,631 $23,627,733
Notes payable and
total stockholders'
equity $18,052,631 $24,627,733
_____________
(*) Adjusted to reflect the exercise of 1,395,121 Warrants (offered by the
Selling Security Holders) into Common Stock at $4.25 per Share,
resulting in gross proceeds of approximately $5,929,264.25. 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.
18
<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 $4.25 per Share, the Company would
receive proceeds of approximately $5,929,264.25. 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.
19
<PAGE>
<TABLE>
<CAPTION>
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.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
SIX MONTHS ENDED SEPTEMBER 30
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Operating revenues $13,029,743 $10,093,834
Net income (loss)
attributable to
Common Stock 519,283 582,741
Net income per (loss)
average common share
outstanding .06 .09
Weighted average
shares outstanding 9,199,419 7,132,239
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993(1) 1992(2)(3)
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $22,613,635 $10,186,136 $6,900,875 $5,373,595 $3,880,228
Net income (loss)
attributable to
Common Stock 1,232,024 747,742 (1,241,518) 269,089 (180,944)
Net income (loss) per
average common share
outstanding .19 .16 (.28) .06 (.06)
Weighted average
shares outstanding 6,606,499 4,549,101 4,424,535 4,231,729 3,231,729
BALANCE SHEET DATA:
September 30, 1996
------------------
Working capital $11,616,338
Total assets 31,902,158
Long Term debt 4,665,842
Stockholders'
equity 17,052,631
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993(1) 1992(2)(3)
---- ---- ---- ------- ----------
<S> <C> <C> <C> <C> <C>
Working capital $5,831,031 $1,836,436 $869,651 $1,998,656 $770,698
Total assets 24,738,041 10,614,673 6,788,067 5,358,937 5,336,137
Long-term debt 3,690,360 3,519,948 3,083,818 2,070,572 1,510,770
Stockholders'
equity 9,989,852 2,803,341 1,471,514 2,518,695 1,747,712
</TABLE>
20
<PAGE>
(1) As restated - The financial statements for FY 1993 have been restated
to reflect the expenses of product display racks and a reduction in the
carrying value of inventory and investments in partnerships.
(2) As adjusted - Although the financial statements for fiscal
1992 have not been restated or reissued to reflect the effects
of expensing product display rack costs or for the reduction
in the carrying value of investments in partnerships, the
selected financial data presented herein for 1992 has been
adjusted to retroactively reflect the impact of these changes
which were effective in fiscal year 1994.
(3) As restated - The financial statements for fiscal 1992 have been
previously restated to reflect a reorganization, to apply changes in
methods of accounting and to correct certain errors.
21
<PAGE>
<TABLE>
<CAPTION>
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, 21% of total
sales in 1995 and 3% of total sales in 1994. 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. During 1995, Company sales increased 48% to
$10,186,136 from $6,900,875 in 1994.
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:
SIX MONTHS FISCAL YEAR
ENDED SEPTEMBER 30 ENDED MARCH 31
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.9 61.2 61.2 57.7 63.2
---- ---- ----- ----- ----
Gross margin 40.1 38.8 38.8 42.3 36.8
Selling, general and
administrative expenses 30.8 25.8 25.4 28.2 45.1
Amortization of goodwill .0 1.6 .7 6.3 6.9
----- ----- ----- ----- -----
Income(loss) from operations 9.3 11.4 11.1 7.8 (15.2)
Other income .0 .9 .6 .0 2.9
Interest expense (3.0) (3.6) (3.5) (4.5) (5.2)
----- ------ ------ ------ ------
Other income (expense) (3.0) (2.7) (2.9) (4.5) (2.3)
Income(loss) before provision
for income taxes 6.3 8.7 8.2 3.3 (17.5)
Income tax provision (benefit) 2.3 3.0 2.8 (4.0) .5
----- ------ ----- ----- ------
Net income(loss) 4.0 5.7 5.4 7.3 (18.0)
===== ====== ===== ===== ======
</TABLE>
22
<PAGE>
Six Months Ended September 30, 1996 and September 30, 1995
Net Sales. Sales increased 29% to $13,029,743 for the six months ended September
30, 1996 compared to $10,093,834 for the six months ended September 30, 1995.
Sales for the six months ended September 30, 1995 included initial Geopaper
inventory shipments of $2,250,000 to approximately 900 office product
superstores, while the current six month period did not have a material number
of initial product shipments. After adjusting sales for initial product
shipments in the prior year, sales increased by 66% as compared to the same
period a year ago.
Geopaper products were responsible for 69% of sales for six month period ended
September 30, 1996, compared to 64% for the same period a year earlier. Sales
of Geopaper increased 40% to $9,021,249 from $6,455,172 for the period ended
September 30, 1996 and 1995, respectively.
Sales of Company products other than Geopaper (stick on letters, rub on letters,
stencil and LED signs) increased by 10% for the six months ended September 30,
1996 compared to the six months ended September 30, 1995. The non-Geopaper
products have decreased as a percentage of total sales to 31% from 36% for the
six month periods ended September 30, 1996 and 1995, respectively. These
products will continue to decrease in importance to the Company as consumers
continue to utilize personal computers to perform many of the tasks that these
non-Geopaper products were designed for. However, the increased usage of
personal computers is expected to generate new customers for Geopaper products
that are specifically designed for use with personal computing technology.
International sales of Geographics products increased 68% to $2,722,621 from
$1,621,522 for the six months ended September 30, 1996 and 1995, respectively.
International sales of Geographics products represented 21% of total
Geographics, Inc. sales for the six months ended September 30, 1996, compared to
16% of total sales for the same period a year earlier. The increase in
international sales was due to sales expansion in Canada and Australia, as well
as initial shipments by the Company's European subsidiary, Geographics (Europe)
Limited ("GeoEurope").
Gross Margin. Gross margin as a percentage of sales was 40.1% for the six months
ended September 30, 1996, compared to 38.8% for the same period a year earlier.
The company's gross margin rate increased primarily due to lower freight rates
resulting from increased product shipments during the past year.
Margins are also affected by changes in the mix of products sold, raw material
costs, automation, labor costs, freight costs, production levels (overhead
absorption) and the rate of product turnover. Margins are also affected by price
increases and decreases passed on to customers. While management endeavors to
improve margins, no assurance can be given that margins will continue to
improve.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, which consist of payroll, advertising, and commissions,
as well as administrative, accounting and legal costs increased as a percentage
of sales in the six months ended September 30, 1996 to 30.8% as compared to
25.8% during the same period in the prior year. SG&A costs increased as a
percentage of sales primarily due to increased overhead resulting form the
establishing of GeoEurope, Geographics Australia Pty. Ltd., and the installation
and training costs related to a new computer system at the Blaine, Washington
facility.
Goodwill Amortization. Goodwill resulting from the 1993 acquisition of the EZ
letter division of E.Z. Industries was fully amortized as of June 30, 1995.
Interest Expense. Interest expense for the six months ended September 30, 1996
was $394,112, compared to $358,337 for the same period in the prior year. This
increase in interest expense was primarily due to borrowings under the Company's
revolving credit facility during the current year to fund increases in
inventories and equipment deposits, as well as additional interest costs
resulting from borrowings related to equipment purcashes and expansions to the
Blaine manufacturing facility.
Net income. The Company reported a net income of $519,283 during the six months
ended September 30, 1996, or 4.0% of sales, as compared to a reported net income
of $582,741 during the six months ended September 30, 1995, or 5.7% of sales.
Net income decline primarily due to the increase in selling, general and
administrative expenses and interest costs discussed previously.
23
<PAGE>
FISCAL YEARS ENDED MARCH 31, 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 OfficeMax and Office Depot Inc. stores in North America, as well
as shipments of Geopaper products to 248 Wal-Mart stores in March 1996. (Office
Depot, Inc., the Company's largest customer, has announced intentions to merge
with Staples, Inc. The Company currently sells to Staples of Canada (Business
Depot) through Geographics Marketing Canada, Inc., however Staples is not a
customer of the Company's domestic operations. Management cannot at this time
estimate what impact the merger will have upon the future sales of the Company).
24
<PAGE>
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 was the result of primarily two factors. The first factor was based upon
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. Gross margins for
Geopaper were approximately 31% while gross margins for lettering and signage
were approximately 49% for 1996. The second factor resulting from manufacturing
and labor inefficiencies resulted from rapid growth, based upon the fact that
the Company experienced 122% sales growth in fiscal 1996. This rapid growth
forced the Company to substantially increase its workforce and utilize off-site
warehouses in order to meet the increase in sales demands. A more controlled
growth pattern would have allowed the Company to more effectively manage the
installation, use and training on new equipment in the production process, as
well as phase in the expanded warehouse space without needing to utilize
off-site facilities.
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
25
<PAGE>
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 expanded Facility
allows the Company to eliminate many of the off-site storage warehouses that
were required to manage the increased levels of inventory during 1996. The
Company will be able to reduce handling costs and improve logistics during
fiscal year 1997 as inventory becomes centralized at the Company's Blaine
Facility. 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 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 28.2% of
sales in fiscal 1995. 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.
26
<PAGE>
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
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
27
<PAGE>
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.
FISCAL YEARS ENDED MARCH 31, 1995 AND 1994
Net Sales. Net sales increased 48% to $10,186,136 in fiscal 1995 from
$6,900,875 in fiscal 1994. This increase was primarily attributable to the
acceptance of the Geopaper program. The Geopaper program experienced a sales
increase of 1,109% in fiscal 1995 to $2,100,000 from $190,000 for fiscal 1994.
This sales growth results directly from the growth of the office supply
superstore industry, a major focus of the Company's marketing efforts. Fast
growing companies such as Office Depot, OfficeMax and Business Depot, which are
among the fastest growing companies in this industry, all carry the Company's
products. The sales mix of Geopaper products increased to 21% of sales in fiscal
1995 from 3% of sales in fiscal 1994, while lettering and signage sales
decreased to 79% of sales from 97% of sales for the same periods.
Gross Margin. Cost of sales includes product manufacturing costs,
occupancy and delivery costs. Gross profit as a percentage of sales increased to
42.3% in fiscal 1995 from 36.8% in fiscal 1994. The increase in the gross margin
is the result of primarily two factors: (1) the Company wrote down many slow
moving or obsolete products during fiscal 1994 as the Company prepared for the
launch of its Geopaper product line; and, (2) manufacturing and labor
efficiencies gained from new production and packaging equipment employed during
fiscal 1995. This increase in margins was accomplished despite the market
pressures experienced when selling to discount office supply superstores which
demand the best possible prices. Geopaper has proven to be a successful product
for these stores, thus allowing the Company to maintain improved profit margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses 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 28.2% of sales in fiscal 1995 from 45.1% of
sales in fiscal 1994. 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, in addition to the effect of several cost cutting
measures implemented by the Company during fiscal 1995. The decrease was also
attributable to various one time costs of acquiring and integrating the EZ
Letter Division into the Company's continuing operations during fiscal 1994.
28
<PAGE>
Amortization of goodwill. Goodwill amortization declined to 6.3% of
sales from 6.9% of sales for fiscal years 1995 and 1994, respectively. The
decline was due to increased sales volumes. Fiscal 1995 included twelve months
of amortization compared to nine months of amortization during fiscal 1994.
Other income. Other income was 0.0% of sales in fiscal 1995, compared
to 2.9% of sales during fiscal 1994. 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 the future.
Interest expense. Interest expense increased to $457,499 during fiscal
year 1995, compared to $356,060 for fiscal 1994. However, as a percentage of
sales, interest expense declined in fiscal 1995 to 4.5% of sales compared to
5.2% for fiscal 1994. 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
1995. The higher interest costs spread over a significantly higher sales volume
in 1995 resulted in a decline in interest costs as a percentage of sales.
Income tax provision (benefit). The income tax benefit in fiscal year
1995 was 4.0% of sales, compared to a provision of 0.5% of sales in fiscal 1994.
The tax benefit was recognized in fiscal 1995 as management determined that
future operating and taxable income would 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
an income tax benefit during fiscal 1995. This benefit was non-reoccurring in
nature and had no effect on fiscal 1996 results.
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.
29
<PAGE>
The revolving credit agreement, installment notes and capital lease
obligations are collateralized by substantially all of the assets of the
Company. Additionally, 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 covenants include liquidity ratios which require the
Company to maintain established levels for current and net worth ratios, and
coverage limits are established for cash flow requirements and capital
expenditures. As of September 30, 1996, the Company is in compliance with the
debt covenants.
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Net cash flows from operating activities. The Company's principal cash
flow requirements have been to fund working capital needs, including building
inventory in the United States and the United Kingdom, as well as funding
equipment deposits and prepaid expenses, while reducing accounts payable and
income taxes payable.
The Company's sales are substantially on net sixty day terms, and trade
receivables are used as collateral to provide the Company with a source of
capital prior to their collection. Working capital requirements are reduced by
vendor credit terms, which allow the Company to finance a portion of its
inventory.
During the first six months of fiscal year 1997, the Company improved
its collection of receivables. Net accounts receivable were $5,293,250 as of
September 30, 1996, a decrease of 9.9% from the $5,873,578 receivable balance at
March 31, 1996. Inventory increased during six months to $13,275,929 an increase
of 45.3% from the $9,139,273 inventory balance at March 31, 1996. Increases in
inventory can be attributable to management's anticipation of seasonal Geopaper
orders, inventory requirements related to GeoEurope's initial shipments and the
introduction of a new education product line. The investment in inventories,
equipment deposits and prepaid expenses were primarily responsible for negative
cash flows from operating activities of $3,308,155 for the six months ended
September 30, 1996, compared to negative cash flows from operating activities of
$2,013,736 for the same period a year earlier.
Despite the Company's rapid growth, management anticipates improved
accounts receivable and inventory management due to Management's increased
focus 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.
At September 30, 1996, the Company had inventory impairment reserves of
$275,000. The Company established this reserve in recognition of certain
impairment risks that may arise from changes in customer preferences and
increased competition. The Company has, in past fiscal years, experienced losses
that have had a material impact on the results of operations. In order to
prevent future material losses, the Company has made improvements to its
inventory tracking systems and continuously monitors the adequacy of its
reserves. The Company believes that the Geopaper program is still in its infancy
stage, and that there are multitudes of distribution channels that remain for
the Company to pursue both on a national, as well as an international, level.
The Company believes that any potential excess inventories that remain from
initial product build-up could be sold through other channels with little or no
impairment. Based on these factors, the Company feels, but there can be no
assurances, that impairment reserves are more than adequate at September 30,
1996.
30
<PAGE>
Net cash flows from financing activities. The Company's cash flow is
also affected by financing activities, including borrowings and repayments on
revolving credit facilities, short and long term notes payable to the Company's
bank, proceeds from the issuance of debentures to officers and directors,
proceeds from the exercise of stock, as well as repayment of capital leases. The
majority of capital expenditures were financed by long term bank loans and
capital leases. A private placement of 1,268,293 units at $5.125 was also
completed during the first quarter which resulted in gross proceeds of
$6,500,000. These proceeds were used to pay down the Company's revolving credit
line balances. Financing activity resulted in net cash flows of $5,236,085 and
$3,422,928 for the six months ended September 30, 1996 and 1995, respectively.
Management is continually reviewing its financing options. Although the
Company has the ability to finance its planned growth and expansion from
operating cash flow, capital lease financing and borrowings under the Company's
existing credit facilities, the Company also considers alternative
financing options, such as the issuance of common stock or convertible debt, in
the event market conditions make such alternatives financially attractive. The
Company's future financing requirements will be affected by the number of new
customers, the strength of reorders by existing customers, the growth of
existing customers, as well as the success of new products introduced by the
Company. Additional financing might also be necessary in the event the Company
pursues further expansion or business acquisition opportunities.
Net cash flows from investing activities. During the six months ended
September 30, 1996, the Company acquired additional printing presses, packaging
equipment and other machinery related to the manufacture of Geopaper products.
These capital expenditures were necessary to support the continued expansion of
the Geopaper product line and the increase in Geopaper sales. Cash used in
investing activities (primarily capital expenditures) was $1,789,010 and
$1,385,401 during the first six months of fiscal years 1997 and 1996,
respectively.
During the quarter ended September 30, 1996, the Company agreed to
purchase substantially all of the assets of Grahams Graphics Pty. Ltd., its
exclusive distributor in Australia. The total purchase price is expected to
approximate US$390,000 to be paid as follows: (i) the issuance of 50,000 shares
of common stock (valued at an aggregate of US$200,000); (ii) the issuance of
options to purchase an additional 50,000 shares of common stock for US$4.00 per
share; (iii) the assumption of approximately US$150,000 in unsecured trade
liabilities; and, (iv) a one time cash payment of US$40,000. Upon the completion
of the purchase transaction, the assets acquired and liabilities assumed will be
contributed to the Company's wholly-owned Australian subsidiary, Geographics
Australia Pty. Ltd. The effective date of this transaction will be July 1, 1996.
31
<PAGE>
During the six months ended September 30, 1996, the Company's cash
balance increased by $138,920 to $188,948. The cash balance is not significant
and balances held by the Company are intentionally maintained at low levels as
part of the Company's strategy to minimize balances outstanding on revolving
credit facilities.
FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
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%.
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.
32
<PAGE>
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%.
During fiscal year 1996, the Company wound up and dissolved
International Geographics of Ontario ("IGO") which 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. The dissolution of IGO has had a positive impact
upon the Company as marketing and distribution to IGO's former customers is now
handled directly by the Company's wholly owned subsidiary, Geographics Marketing
Canada. The financial impact resulting from this dissolution was insignificant.
See "The Company -General."
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.
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
33
<PAGE>
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.
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 $990,427 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
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.
FISCAL YEARS ENDED MARCH 31, 1995 AND 1994
Net cash flows from operating activities. The Company experienced
negative operating cash flows during fiscal year 1995 and 1994 ($379,162 for
fiscal 1995 and $275,137 for fiscal 1994). Contributing to the negative cash
flow from operations was the increase in trade receivable and related party
trade receivable
34
<PAGE>
balances. Total trade receivables for fiscal 1995 increased 192% to $2,751,299
compared to $940,501 for fiscal 1994. The increase in receivables of 192% at
year end fiscal 1995 over fiscal 1994 year end balances is consistent with the
rapid sales growth the Company enjoyed during fiscal 1995. Also contributing to
the increase in receivables was a large sales increase in fourth quarter sales
to office supply superstores which require relatively longer credit terms.
The Company also expended significant amounts of working capital to
increase their inventories which increased to $2,901,155 at March 31, 1995 from
$1,841,481, an increase of 58%. The 58% increase in inventory was due in part to
the following factors: (1) Building of inventory in anticipation of higher sales
levels in fiscal 1996 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, and (2) the Company has a continuing
Geopaper design development program, consequently new product designs are
printed and stored in inventory pending initial releases to customers.
Net cash flows from financing activities. For the fiscal year ended
March 31, 1995, the Company received a net $1,697,768 from various financing
sources, compared to $2,339,358 for the prior fiscal year. For the year ended
March 31, 1995, the Company increased current line of credit borrowings by
$990,427, compared to $968,835 for the year ended March 31, 1994. Proceeds from
long-term debt borrowings for fiscal year 1995 were $765,125, compared to
$1,351,924 in fiscal 1994. Repayment of long-term debt in fiscal 1995 was
$232,685 compared to $214,904 in fiscal 1994. The Company received $22,746 from
officers and directors in the form of notes during fiscal 1995, while $49,184
was received from officers and directors in fiscal 1994. Repayments of notes
payable to officers and directors were $134,888 in fiscal 1995 compared to
$10,018 in fiscal 1994. In addition, the Company received proceeds from private
placements, option exercises and warrant exercises in the amount of $287,043 in
fiscal 1995, compared to $194,337 in fiscal 1994. The proceeds received from the
above debt and equity financing were primarily utilized to finance working
capital requirements, building expansions and equipment acquisitions related to
the success of the Geopaper program.
Net cash flows from investing activities. The Company experienced a
negative cash flow from investing activities for fiscal 1995, of $1,303,258,
compared to a negative cash flow from investing activities of $2,096,849 for
fiscal 1994. 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. In addition, the
Company expended $1,500,000 on the purchase of the EZ Letter Division of EZ
Industries during fiscal 1994. The Company
35
<PAGE>
also borrowed $250,422 and $34,376 from related partnerships during the fiscal
years ended March 31, 1995 and 1994, respectively.
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.
36
<PAGE>
THE COMPANY
GENERAL
Geographics, Inc. was incorporated as a Wyoming corporation on
September 20, 1974. The Company 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 and domestic operations are located at 1555 Odell Road, Blaine,
Washington 98231, and its telephone number is (360) 332-6711.
The Company conducts its export operations through three subsidiaries
and a partnership:
/bullet/ 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."
/bullet/ 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.
/bullet/ Geographics Australia Pty. Ltd. ("GAPL") was incorporated
in Brisbane, Australia on June 28, 1996. GAPL's
principal offices are located at 3/32 Lillian Fowler
Place, Marrickville NSW 2204, Australia and its telephone
number is 61-2-9519-4488. GAPL was organized to import,
warehouse, market and distribute the Company's products
throughout Australia. As part of the Company's expansion
into Australia, the Company hired Graham Hanrahan, the
37
<PAGE>
soon to be former owner of Grahams Graphics Pty. Ltd, as
the Managing Director of GAPL, as well as four former
employees of Graham Hanrahan. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations - General."
/bullet/ 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 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations
- General."
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.
38
<PAGE>
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
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 $190,000
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
39
<PAGE>
<TABLE>
<CAPTION>
as expected by the Company. See "Management's Discussion and Analysis and Plan
of Operations" and "Business Concentration."
The lettering and signage group manufacturers and distributes rub-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% and 97% of sales
during fiscal 1995 and 1994, respectively in the prior year. 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 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 1994
---------------- ---- ---- ----
<S> <C> <C> <C>
Designer stationeries
and specialty papers 65% 21% 3%
Lettering, signage, stencil
and graphic art products 35% 79% 97%
STATED IN SALES DOLLARS (ROUNDED)
---------------------------------
AS A PERCENTAGE OF SALES
------------------------
FISCAL YEAR
CLASS OF PRODUCT 1996 1995 1994
---------------- ---- ---- ----
<S> <C> <C> <C>
Designer stationeries
and specialty papers $14,800,000 $2,100,000 $200,000
Lettering, signage, stencil
and graphic art products $7,800,000 $8,100,000 $6,700,000
</TABLE>
40
<PAGE>
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 1994
-------- ---- ---- ----
Office Depot(1) 40% 31% 29%
OfficeMax, Inc. 24% 16% 16%
Martin Distribution, Inc.(2) 13% 12% 8%
United Stationers, Inc. 3% 6% 6%
Wal-Mart Stores, Inc. 3% 3% -0-
--- --- ---
83% 66% 59%
- -----------
(1) Office Depot, Inc., the Company's largest customer, has
announced intentions to merge with Staples, Inc. The Company
currently sells to Staples of Canada (Business Depot) through
Geographics Marketing Canada, Inc., however Staples is not a
customer of the Company's domestic operations. Management
cannot at this time estimate what impact the merger will have
upon the future sales of the Company. Additionally, Office Depot can
decide, at any time, to terminate its relationship with the Company,
which could have a material adverse effect on the Company, its
revenues and its cash flow. See "Risk Factors--Customer
Concentration."
(2) 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.
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<PAGE>
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:
/bullet/ 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.
/bullet/ The Company continues to diversify 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.
/bullet/ Existing Geopaper product lines are continually reviewed to
identify lines to be replaced with new and improved lines. In
addition to replacement and improvement of existing lines, new
Geopaper lines are continually in development and in test
markets.
/bullet/ The Company may from time to time acquire art or paper
products that complement 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 distributer in Australia, which
the Company has agreed to acquire as of July 1, 1996. The Company anticipates
further expansion internationally, including Asia, which is a prominent target
destination for Company products.
SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and
export sales (all foreign sales are export sales).
42
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales to Domestic
and Foreign
Customers (1):
United States $19,477,370 $8,755,853 $6,299,444
Canada 2,854,935 1,271,898 530,462
Australia 281,330 158,385 70,969
------------ ----------- ----------
Total $22,613,635 $10,186,136 $6,900,875
=========== =========== ==========
Operating profit
or (loss):
United States $2,081,817 $680,806 $(939,290)
Canada 377,328 98,831 (95,434)
Australia 65,316 12,307 (12,768)
---------- -------- ------------
Total $2,524,461 $791,944 $(1,047,492)
========== ========= ============
Identifiable assets:
United States $24,263,181 $10,705,943 $6,628,915
Europe 410,060 0 0
Canada(2) 64,800 (91,270) 159,152
Australia 0 0 0
---------- ----------- ----------
Total $24,738,041 $10,614,673 $6,788,067
=========== ============ ==========
</TABLE>
(1) All export sales to Canada are to Martin Distribution, a
related party.
(2) In fiscal 1995, Geographics borrowings from its Canadian owned
partnerships exceeded investments and other assets held in the
partnerships, resulting in a net liability in Canada.
International sales accounted for approximately 14%, 11% and 9% of
total net sales in 1996, 1995, and 1994, 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
43
<PAGE>
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 56% 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.
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.
44
<PAGE>
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 products
compete with competitor products for space in the office products superstores,
office product stores, mass market stores, contract stationers, wholesalers,
office product catalog and paper direct mail catalogs. The Company's designer
stationery operations competes in most of its markets with Paper Direct, Inc.,
Taylor, Inc., Z-International, Inc., and REDIFORM, Inc. The Company's estimated
competitive position (based upon information provided by the Company's marketing
and sales personnel) in the designer stationery industry is as follows:
COMPANY COMPETITIVE POSITION IN THE MARKET
------- ----------------------------------
Paper Direct, Inc. 40%
Taylor, Inc. 18%
GEOGRAPHICS, INC. 10%
Z-International, Inc. 10%
REDIFORM, Inc. 5%
Other 17%
---
TOTAL 100%
The Company's traditional lettering and signage operations compete with
several companies that produce similar products (i.e., vinyl lettering, stencil,
rub-on lettering), these competitors are: Visu-com, Charpak and Duroart.
Competition with Company products compete with competitor products for space in
the office products superstores, office product stores, mass market stores,
contract stationers, wholesalers, and office product catalogs. The Company's
estimated competitive position (based upon information provided by the Company's
sales and marketing personnel) in the lettering and signage industry is as
follows:
COMPANY COMPETITIVE POSITION IN THE MARKET
------- ----------------------------------
GEOGRAPHICS, INC. 55%
Visu-Com, Inc. 23%
Chartpak, Inc. 11%
Duro Art Ind., Inc. 11%
---
TOTAL 100%
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,
45
<PAGE>
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.
SEASONALITY
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, which includes the Christmas Season. As a
result, the Company has experienced and is expected to continue to experience,
such seasonal fluctuations in its operating results based upon past purchasing
patterns.
FUTURE ACQUISITIONS
The Company may, in the future, pursue acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
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
46
<PAGE>
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 November 8, 1996, the Company had 245 employees of whom 235 were
employed at its corporate headquarters in Blaine, Washington, 5 of whom were
employed at the Company's facilities in the United Kingdom, and 5 of whom were
employed in Australia. The manufacturing warehousing and product distribution
aspects of the business employs 193 employees, 36 employees work in
administration and 16 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 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.
47
<PAGE>
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.
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, Chief
Executive Officer, Chief
Financial Officer and
Secretary
Mark G. Deans 31 Director, Executive 1994
Vice President -
Marketing
R. Scott Deans 34 Director, Executive 1995
Vice President -
Operations
Moises Cosio 65 Director 1995
Alan D. Tuck Jr. 53 Director 1995
Robert S. Parker 50 Director 1996
Luis Alberto Morato 36 Director 1995
- --------------
RONALD S. DEANS has served as the Chief Executive Officer, Chairman and
President of the Company since he founded the Company in 1973 and its interim
Chief Financial Officer and Secretary since
48
<PAGE>
September 4, 1996. The Company expects to name a new Chief
Financial Officer and Secretary in the near future. 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
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 departments. 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.
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 School 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
49
<PAGE>
an independent civil engineering consultant. From June 1982 to
March 1993, Mr. Morato was a budget manager with Bytsa De. C.V.
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. Mr. Luis Alberto Morato, a director of
the Company, is the son-in-law of Mr. Fidel Garcia Carrancedo, a
former director of the Company and currently a principal
stockholder 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 and Ronald S. Deans. Mr. Deans
is the President, CEO, CFO, Chairman and a Director of the Company. The Audit
Committees's function is to make recommendations concerning the effectiveness of
the Company's internal auditing methods and procedures, to determine through
discussions with independent auditors whether any limitations or restrictions
have been placed upon them in connection with either the scope of the audit or
its implementation, to review the financial statements and related notes with
the independent auditors to ensure the statements and notes fully disclose all
material facts of the Company, and to recommend approval or non-approval of such
financial statements and related notes. The Audit Committee met one time during
fiscal year 1996 and all members attended the meeting.
The Compensation Committee was established in April, 1991. The members
of the Compensation Committee are Robert S. Parker, Chairman, Ronald S. Deans
and Alan D. Tuck Jr. 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.
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
50
<PAGE>
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.
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.
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<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.
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 $601,385. 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
The Company has no written employment agreements with any of its officers or
directors as of the date of this Prospectus, although the Company intends to
establish written agreements with its officers and directors in the future.
52
<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
- ---- ------- --- -- ------ ---- ------ --- ----
<S> <C> <C> <C> <C>
Ronald S. Dean 30,000 6.0% Cdn $2.30 9/18/00
Mark G. Deans 12,000 6.5% Cdn $2.00 4/25/00
20,000 Cdn $4.15 10/10/00
R. Scott Deans 12,000 6.5% Cdn $2.00 4/25/00
20,000 Cdn $4.15 10/10/00
- --------------------
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
- ---- -------- --- -------- ------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
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 December 13, 1996 was US $.735 = 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
which was held on August 28, 1996, Shareholders adopted the Plan. The following
summary describes features of the Plan.
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
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<PAGE>
closely their interests with the interests of the Company's shareholders. The
Plan also maintains the Company's ability to attract and retain the services of
experienced and highly qualified employees and non-employee directors.
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 is 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.
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
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<PAGE>
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 September 30, 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 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
55
<PAGE>
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEBT AND EQUITY INSTRUMENTS ISSUED TO OFFICERS AND DIRECTORS
During the three years ended September 30, 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 placements of common shares.
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<PAGE>
On June 29, 1993, the Company completed a private placement of
$1,000,000 of 8% convertible debentures to nine Canadian residents, none of whom
were officers, directors or otherwise related to the Company at that time.
Richard Thompson, a director of the Company from September 1993 to October 1995
(whose principal amount of debenture equaled $100,000 convertible into 90,400
shares of Common Stock) was an original participant in the private placement.
The principal amount of the debentures were convertible at the option of the
holders at a rate of 904 shares of Common Stock per principal amounts of $1,000.
Holders of the debentures converted an aggregate $990,000 principal amounts for
894,960 shares of Common Stock and $10,000 principal amounts for 9,040 shares of
Common Stock during the years ended March 31, 1996 and 1995 respectively. The
outstanding balances of the convertible debentures were 0, $990,000 and
$1,000,000 at March 31, 1996, 1995 and 1994, respectively.
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 were convertible into Common Stock 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 Ronald S. Deans, the Company's Chairman of the
Board, President, Chief Executive Officer and Chief Financial Officer (whose
principal amount of debenture equaled $100,000, convertible into 109,589 shares
of Common Stock) and Fidel Garcia Carrancedo, a former director and current
principal stockholder of the Company (whose principal amount of debenture
equaled $100,000, convertible into 109,589 shares of Common Stock). On September
15, 1995, Ronald S. Deans and Fidel Garcia Carrancedo each converted debentures
in the amount of $100,000 into 109,589 shares of Common Stock (for an aggregate
of $200,000 into 219,178 shares of Common Stock). The outstanding balances of
the convertible debentures were $0 and $200,000 at March 31, 1996 and 1995,
respectively.
On March 23, 1995, Ronald S. Deans (whose principal amount of debenture
equaled $100,000, convertible into 93,063 shares of Common Stock), Fidel Garcia
Carrancedo (whose principal amount of debenture equaled $200,000, convertible
into 186,127 shares of Common Stock), Mark G. Deans, a director and Executive
Vice President-Marketing of the Company (whose principal amount of debenture
equaled $25,000, convertible into 23,266 shares of Common Stock), and R. Scott
Deans, a director and Executive Vice President-Operations of the Company (whose
principal amount of debenture equaled $25,000, convertible into 23,266 shares of
Common Stock) converted $287,042 of the principal amount into 325,722 shares of
Common Stock of the Company. The remaining balance of these convertible
debentures ($62,958) were repaid in connection with the March 30, 1995 warrant
exercise discussed below. These debentures were issued during 1991 and were
convertible at the holders option into common shares of the Company at Cdn$1.25
per share to a maximum of 325,722 shares of Common Stock. These
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<PAGE>
debentures also had attached warrants to purchase an additional 325,722 shares
of Common Stock at Cdn$1.25 per Share. The outstanding balances of the
convertible debentures were $0, $0 and $350,000 at March 31, 1996, 1995, and
1994, respectively.
On March 30, 1995, Ronald S. Deans (93,063 shares of Common Stock),
Fidel Garcia Carrancedo (186,127 shares of Common Stock), Mark G. Deans (23,266
shares of Common Stock), and R. Scott Deans (23,266 shares of Common Stock)
exercised 325,722 warrants to purchase 325,722 shares of Common Stock at
Cdn$1.25 per Share, for which the Company received gross proceeds of US$287,043.
The remaining balance of the convertible debentures noted above and cash from
the warrantholders funded the entire amount received by the Company in
consideration for the Common Stock issuance.
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 (whose principal amount of debenture equaled $527,882,
convertible into 145,344 shares of Common Stock), Fidel Garcia Carrancedo (whose
principal amount of debenture equaled $328,680 convertible into 90,497 shares of
Common Stock, Mark G. Deans (whose principal amount of debenture equaled
$69,719, convertible into 19,196 shares of Common Stock), and R. Scott
Deans(whose principal amount of debenture equaled $69,719, convertible into
19,196 shares of Common Stock). The debentures were convertible at the holders
option into shares of Common Stock 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 shares of Common Stock, and are no longer outstanding.
On January 23, 1996, the Company completed a private placement of
500,000 common shares with 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 Garcia 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 September 30, 1996, Ronald S. Deans advanced an aggregate of
$1,000,000 in the form of uncollateralized notes payable. The notes are payable
on demand and are classified as current liabilities of the Company. Interest on
these notes are payable monthly at a rate of prime plus 1%. The total interest
costs associated with the notes and debentures with related parties 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
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1990. Martin is owned by the estate of Martin Carrancedo, a former director of
the Company. Martin imported the Company's products into Canada, facilitated
customs clearing and distributed the Company's products to customers in Canada.
Prior to March 31, 1996, all sales of the Company's products within Canada were
sold through Martin. Sales to Martin amounted to $2,854,935, $1,056,750, and
$530,462 during the years ended March 31, 1996, 1995 and 1994, respectively.
Trade receivables due from Martin amounted to $899,422 and $338,875 at March 31,
1996 and 1995, respectively.
Martin sold product valued at $118,659, $261,765 and $496,762 during
the years ended March 31, 1996, 1995 and 1994, 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.
The Company recorded management fee income from Martin and IGO of
$155,651 and $46,477, respectively during the year ended March 31, 1994.
Mark G. Deans, a director and executive officer of the Company, serves
as a director of Martin. Fidel Garcia Carrancedo, a former director and current
principal stockholder 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth the Common Stock ownership information,
based on 9,416,877 shares of Common Stock outstanding as of December 13, 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:
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<PAGE>
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%
Moises Cosio(6) 169,600 1.8%
Alan D. Tuck, Jr.(7) 150,512 1.6%
Robert Parker(8) 30,000 *
Luis Alberto Morato(9) 20,000 *
All directors and
executive officers as
a group (seven persons) 1,973,816 20.0%
Fidel Garcia Carrancedo(10) 1,426,968 15.2%
Platinum Partners, L.P.
Mr. Calvin Hori, Hori
Capital Management, Inc.(11) 660,000 7.0%
WisdomTree Associates, L.P. (12) 670,000 7.1%
- --------------------
* Less than 1%.
(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 Prospectus have been exercised.
(3) Mr. Ronald Deans is Chairman of the Board, President, Chief
Executive Officer and Chief Financial 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.
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<PAGE>
(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. Cosio is a Director of the Company.
(7) 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 shares beneficially
owned by Mr. Tuck also includes 9,756 Shares and 9,756
Warrants purchased by Mr. Tuck in the May 1996 Offering.
(8) Mr. Parker is a Director of the Company.
(9) 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.
(10) Mr. Carrancedo is a former Director of the Company who
resigned from that position on September 20, 1996 for personal
reasons. His address is 555 Reforma, Mexico City, Mexico.
(11) 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.
(12) The address is 1633 Broadway, 38th Floor, New York, New York 10019.
The information is based solely upon a Schedule 13D dated November 18,
1996, as amended on December 13, 1996. The Schedule 13D, as amended,
was made by WisdomTree Associates, L.P. ("WTA"), WisdomTree Offshore
Ltd., and WisdomTree Capital Management, Inc. ("WTInc"). As the general
partner of WTA, WTInc. may be deemed to have direct beneficial
ownership of the Common Stock owned of record by WTA.
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<TABLE>
<CAPTION>
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 December 13, 1996 (which assumes the exercise of the Warrants being
registered hereby), 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 December 13, 1996, there were 9,416,877 shares of Common Stock of
the Company outstanding.
Shares/ 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(1) 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 *
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.(4) 150,512 19,512 9,756 131,000/0 1.4%
Fechtor-Detwiler & Co., Inc.(2) 11,708 11,708 5,854 0/0 *
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<PAGE>
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) Mr. Ronald S. Deans is the Chairman of the Board, President, Chief
Executive Officer, Chief Financial Officer and Secretary and a Director
of the Company. See "Management."
(4) Mr. Tuck is a Director of the Company. 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
of $4.25), resulting in the issuance of 1,268,293 shares of its Common Stock and
warrants to purchase 1,268,293 shares of Common Stock at $4.25 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. On October 24, 1996, the Company
adjusted the exercise price of the Warrants to $4.25 per Shares for purposes of
encouraging the exercise of the Warrants and to balance the decline in the price
of the Common Stock since May 19, 1996. See previous discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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,
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<PAGE>
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 100,000,000 shares
of Common Stock, no par value per share, of which 9,416,877 shares were
outstanding as of December 13, 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
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
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<PAGE>
$4.25 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.
Additionally, there are outstanding 24,000 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.
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 or 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 outstanding 174,500 shares underlying options to
purchase up to 174,500 shares of Common Stock at prices ranging from Cdn$1.00 to
Cdn$4.15 from July 30, 1998, to October 10, 2000.
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.
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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. 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.
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 December 13, 1996, 9,416,877 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.
66
<PAGE>
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.
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 consolidated financial statements of the Company, as of March 31, 1996 and
1995, and for the years ended March 31, 1996, 1995 and 1994 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. As noted in the independent auditor's report prepared by Moss Adams
LLP, the consolidated financial statements of the Company for the year ended
March 31, 1994 were audited by KPMG. The 1994 information included in this
prospectus has been so included in reliance on the report of KPMG, independent
accountants, as set forth in their report 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).
67
<PAGE>
GEOGRAPHICS, INC.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT OF MOSS ADAMS LLP...........................F-1
INDEPENDENT AUDITOR'S REPORT OF KPMG.....................................F-2
CONSOLIDATED FINANCIAL STATEMENTS (AUDITED)
Balance Sheet......................................................F-3
Statement of Income................................................F-4
Statement of Stockholders' Equity..................................F-5
Statement of Cash Flows............................................F-6
Notes to Financial Statements....................................F-7-F-15
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statement of Income................................................F-16
Balance Sheet......................................................F-17
Statement of Stockholders' Equity..................................F-17
Statement of Cash Flows............................................F-18
Notes to Financial Statements...................................F-19-F-20
<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.
The consolidated financial statements for the year ended March 31, 1994 were
audited by other auditors whose report dated August 12, 1994 expressed an
unqualified opinion on those statements.
MOSS ADAMS LLP
Bellingham, Washington
May 31, 1996
F-1
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated statements of operations, stockholders' equity
and cash flow of Geographics, Inc. for the year ended March 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and cash flows for
the year ended March 31, 1994 in accordance with generally accepted accounting
principles in the United States.
KPMG
Chartered Accountants
Vancouver, Canada
August 12, 1994
F-2
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND 1995
ASSETS
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
============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
SALES
Retail sales $ 19,758,700 $ 9,129,886 $ 6,370,413
Related party sales 2,854,935 1,056,250 530,462
------------- ------------- --------------
Total sales 22,613,635 10,186,136 6,900,875
COST OF SALES 14,194,505 5,881,649 4,359,505
------------- ------------- --------------
Gross margin 8,419,130 4,304,487 2,541,370
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,734,901 2,873,476 3,109,562
AMORTIZATION OF GOODWILL 159,768 639,067 479,300
------------- ------------- --------------
Income (loss) from operations 2,524,461 791,944 (1,047,492)
------------- ------------- --------------
OTHER INCOME (EXPENSE)
Other income 130,090 1,930 196,834
Interest expense (787,848) (457,499) (356,060)
------------- ------------- --------------
Total other income (expense) (657,758) (455,569) (159,226)
------------- ------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,866,703 336,375 (1,206,718)
INCOME TAX PROVISION (BENEFIT) 634,679 (411,367) 34,800
------------- ------------- --------------
NET INCOME (LOSS) $ 1,232,024 $ 747,742 $ (1,241,518)
============= ============= ==============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary $ .19 $ .16 $ (.28)
Assuming full dilution $ .18 $ .14 $ (.28)
======== ======== =======
SHARES USED IN COMPUTING EARNINGS PER
COMMON AND COMMON EQUIVALENT SHARE
Primary 6,606,499 4,549,101 4,424,535
Assuming full dilution 7,204,220 5,816,260 4,424,535
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
--------------------
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ --------- -----
<S> <C> <C> <C> <C>
BALANCE, March 31, 1993 4,231,729 $ 2,887,159 $ (368,464) $ 2,518,695
Common shares issued for cash
on exercise of options 284,000 194,337 - 194,337
Net loss - - (1,241,518) (1,241,518)
--------- ---------- -------------- --------------
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
========= ============== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,232,024 $ 747,742 $ (1,241,518)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization 1,124,999 1,295,262 936,266
Deferred income taxes 125,000 (529,000) 34,800
Loss on sale of property and equipment 594 13,468 12,687
Equity income from investment in partnerships - - (30,639)
CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES
Trade receivables (2,561,832) (1,471,823) (287,411)
Related party receivables (560,447) (338,975) 68,758
Other receivables (3,357) (19,504) (12,386)
Inventory (6,238,118) (1,059,674) 22,705
Prepaid expenses and deposits (461,606) (210,110) (51,737)
Accounts payable 1,315,997 1,074,647 82,553
Accrued liabilities 814,756 (48,828) 336,637
Income tax payable 336,645 167,633 (145,852)
------------- ------------- --------------
Net cash flows from operating activities (4,875,345) (379,162) (275,137)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on note payable to bank 3,139,463 990,427 968,835
Proceeds from long-term debt borrowings 1,003,029 765,125 1,351,924
Repayment of long-term debt (467,986) (232,685) (214,904)
Proceeds from notes payable to officers and directors 2,452,573 22,746 49,184
Repayments of notes payable to officers and directors (398,629) (134,888) (10,018)
Proceeds from issuance of common stock 2,827,254 287,043 194,337
------------- ------------- --------------
Net cash flows from financing activities 8,555,704 1,697,768 2,339,358
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (3,296,165) (1,463,768) (744,701)
Proceeds from sale of equipment 16,741 30,000 98,563
Net advances from (repayments to) partnerships (56,786) 250,422 34,376
Increase in other assets (309,469) (119,912) 14,913
Acquisition of business - - (1,500,000)
------------- ------------- --------------
Net cash flows from investing activities (3,645,679) (1,303,258) (2,096,849)
-------------- ------------- --------------
NET CHANGE IN CASH 34,680 15,348 (32,628)
CASH, beginning of year 15,348 - 32,628
------------- ------------- --------------
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 $ 351,923
============ ========== ==========
Income tax benefit related to exercise
of stock options and warrants $ 958,000 $ - $ -
============ ========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
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, $622,737 and $456,956
during the years ended March 31, 1996, 1995 and 1994, 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 Translation - The financial statements of the Company's
non-U.S. Subsidiaries whose "functional" currencies are other than U.S. Dollars
are translated at current rates of exchange. Income and expense items are
translated at the average exchange rate for the year. The resulting translation
adjustments are recorded directly into a separate component of stockholders'
equity, if significant. Certain other translation adjustments and transaction
gains and losses are reported in net income in the period they are realized.
(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
F-7
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
dilutive 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. The stock options, warrants
and convertible debentures are not included in the earnings per share
calculations for 1994 because they are antidilutive.
(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,
$271,160 and $271,172 in 1996, 1995 and 1994, 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:
/bullet/ The carrying amounts of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to their short-term nature.
/bullet/ 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
are
F-8
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
1996 1995
------------- ------------
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
============= ============
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
============ ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
NOTE 5 - FINANCING ARRANGEMENTS
1996 1995
------------- --------------
<S> <C> <C>
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-9
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
NOTE 5 - FINANCING ARRANGEMENTS (Continued)
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-10
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 6 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Current provision $ 509,679 $ 117,633 $ -
Deferred provision 125,000 (529,000) 34,800
------------- ------------- ------------
Total income tax provision (benefit) $ 634,679 $ (411,367) $ 34,800
============= ============= ============
</TABLE>
The total tax provision differs from the amount computed using the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $ 635,000 $ 114,000 $ (422,000)
Other differences, net (321) (64,367) (4,200)
Change in valuation allowance for deferred tax assets - (461,000) 461,000
----------- ----------- ------------
Total income tax provision (benefit) $ 634,679 $ (411,367) $ 34,800
=========== =========== ============
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Utilization of tax credit carryforward $ 105,000 $ - $ -
Depreciation of plant and equipment 88,000 43,000 30,000
Change in charitable contributions carryforward 31,000 2,000 (33,000)
Inventory differences (10,000) 43,000 (92,000)
Other differences, net (20,000) 13,000 (7,200)
Amortization of goodwill and intangibles (31,000) (175,000) (113,000)
Change in allowance for doubtful accounts (38,000) 4,000 -
Increase in tax credit carryforward - (137,000) (72,000)
Effect of net operating loss carryforwards - 139,000 (139,000)
Change in valuation allowance for deferred tax assets - (461,000) 461,000
---------- ---------- ----------
Total deferred income tax expense (benefit) $ 125,000 $ (529,000) $ 34,800
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
1996 1995
------------- ---------
DEFERRED TAX ASSETS
<S> <C> <C>
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
----------- ----------
<PAGE>
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
=========== ==========
</TABLE>
F-11
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 6 - FEDERAL INCOME TAXES (Continued)
At March 31, 1996 and 1995, the Company's net deferred tax assets are presented
as follows:
1996 1995
----------- ----------
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, $1,056,750 and $530,462 during the years
ended March 31, 1996, 1995 and 1994, 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, $261,765 and $496,762 during the years ended March 31, 1996, 1995 and
1994, respectively.
F-12
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 7 - RELATED PARTY TRANSACTIONS (Continued)
The Company recorded management fee income from Martin and the Partnership of
$155,651 and $46,477, respectively, during the year ended March 31, 1994.
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, 1993 420,000 $0.75 - 1.19
Granted 315,000 $0.90 - 1.26
Exercised (284,000) $0.75 - 1.19
--------
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
--------
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,
F-13
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
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
==========
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 four major
customers approximated 80%, 65% and 59% of total sales for the years ended March
31, 1996, 1995 and 1994, 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.
F-14
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
March 31, 1996, 1995 and 1994
NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
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%
======== ========= ========= ========
1994
TOTAL UNITED STATES CANADA OTHER
------- ------------- -------- --------
Sales 100% 91% 8% 1%
======== ========= ========= ========
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 1994
--------- --------- ---------
Cash paid during the year for interest $ 812,416 $ 465,377 $ 338,558
========= ========= =========
Net cash paid (received) during the year $ 173,034 $ (50,000) $ 151,996
for income taxes ========= ========= =========
F-15
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
SIX MONTHS ENDED
----------------------------------------------
SEPT. 30 SEPT. 30
1996 1995
---------------- ---------------
<S> <C> <C>
Sales $ 13,029,743 $ 10,093,834
Cost of Sales 7,809,954 6,178,249
---------------- ---------------
Gross Margin 5,219,789 3,915,585
S.G. & A Expense 4,009,344 2,603,692
Goodwill Amortization 0 159,768
---------------- ---------------
Operating Income 1,210,445 1,152,125
Other Income (Expenses)
Interest Expense (394,112) (358,337)
Other (13,841) 89,154
---------------- ---------------
Income Before Provision
for Income Taxes 802,492 882,942
Income Tax Provision 283,209 300,201
---------------- ---------------
Net Income $ 519,283 $ 582,741
================ ===============
Earnings Per Common and
Common Equivalent Share
Primary $0.06 $0.10
Assuming full dilution $0.06 $0.09
Share used in computing earnings per common and common equivalent shares:
Primary 9,198,337 5,869,219
Assuming full dilution 9,199,419 7,132,239
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
F-16
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPT. 30, 1996 MARCH 31, 1996
------------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets
Cash $ 188,948 $ 50,028
Accounts receivable, net 5,293,250 4,974,156
Related party receivables 0 899,422
Other receivables 180,608 62,572
Inventories 13,275,929 9,139,273
Deposits 1,394,255 597,693
Prepaid expenses 483,794 99,204
Deferred income tax 837,339 970,000
Other 145,900 96,512
------------------ -----------------
Total current assets 21,800,023 16,888,860
Property, plant & equipment, net 9,393,035 7,286,694
Deferred income tax 192,000 192,000
Investment in partnerships 119,596 (34,484)
Other assets 397,504 404,971
------------------ -----------------
Total Assets $ 31,902,158 $ 24,738,041
================== =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Note payable to bank $ 4,398,617 $ 5,322,939
Accounts payable 2,010,041 2,634,598
Accrued liabilities 1,946,773 1,033,905
Income tax payable 45,952 145,278
Note payable to officer & director 1,000,000 1,264,711
Current portion of long-term debt 782,302 656,398
------------------ -----------------
Total current liabilities 10,183,685 11,057,829
Long-term debt 4,665,842 3,690,360
------------------ -----------------
Total liabilities 14,849,527 14,748,189
------------------ -----------------
Stockholders' Equity
Common stock, without par value; 100,000,000 shares
authorized; 9,412,877 and 8,004,584 issued and
outstanding on Sept. 30, 1996 and March 31, 1996,
respectively 16,159,408 9,620,068
Foreign currency translation adjustment 4,156 0
Retained earnings 889,067 369,784
------------------ -----------------
Total Stockholders' Equity 17,052,631 9,989,852
------------------ -----------------
Total Liabilities and Stockholders' Equity $ 31,902,158 $ 24,738,041
================== =================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
F-17
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
----------------------------------
SEPT. 30, 1996 SEPT. 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 519,283 $ 582,742
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization 759,980 612,839
Common stock issued in lieu of other liabilities 0 130,000
Deferred income tax 132,661 0
(Gain) loss on sale of property and equipment 8,985 (119)
Equity loss from investments in partnerships 0 (3,655)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (138,848) (452,290)
Related party receivables 899,422 0
Other receivables (118,036) (73,677)
Inventory (3,939,208) (3,288,691)
Deposits (796,562) (181,047)
Prepaid expenses (384,590) (278,575)
Other current assets (49,388) (6,162)
Accounts payable (624,557) 509,218
Accrued liabilities 522,029 370,830
Income tax payable (99,326) 64,851
----------- -----------
Net cash flows from operating activities (3,308,155) (2,013,736)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on note payable to bank (924,322) 1,347,001
Proceeds from short-term borrowings 0 800,000
Proceeds from long-term debt borrowings 225,000 583,324
Repayment of long-term debt (343,378) (259,549)
Proceeds (repayment) of notes to officers & directors (264,711) 900,000
Proceeds from issuance of common stock 6,539,340 52,152
Foreign currency translation 4,156 0
----------- -----------
Net cash flows from financing activities 5,236,085 3,422,928
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (1,607,921) (1,204,941)
Proceeds from sale of equipment 6,887 16,741
Net (increase) decrease in advances to partnerships (154,080) (182,634)
Change in other assets (33,896) (14,567)
----------- -----------
Net cash flows from investing activities (1,789,010) (1,385,401)
----------- -----------
NET CHANGE IN CASH 138,920 23,791
CASH, beginning of year 50,028 15,348
----------- -----------
CASH, end of quarter $ 188,948 $ 39,139
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained directly from sellers in acquisition
of equipment $ 1,219,764 $ 242,293
=========== ===========
Assets acquired directly in acquisition of business $ 390,839 $ 0
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
F-18
<PAGE>
GEOGRAPHICS, INC.
Notes to Consolidated Financial Statements
1. The accompanying interim unaudited consolidated financial statements of
Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position and the
results of operations and cash flows for the interim periods presented. The
results of operations for these interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's consolidated
financial statements and notes thereto for the fiscal year ended March 31,
1996.
The consolidated financial statements include the accounts of Geographics,
Inc. and its wholly-owned subsidiaries; Geographics Marketing Canada Inc.,
Geographics (Europe) Limited, Geographics Australia, Pty. Limited, and
Geographics Foreign Sales Corporation. All intercompany balances and
transactions have been eliminated.
Certain of the Company's locations calculated cost of sales using an
estimated gross profit method for interim periods. Cost of sales at these
locations are adjusted based on physical inventories which are performed no
less than once a year.
2. The Company has a $12,000,000 revolving credit agreement with a bank.
Interest on outstanding advances is payable monthly at the bank's prime
rate. Outstanding balances as of September 30, 1996 and March 31, 1995 were
$4,398,617 and $5,322,939, respectively.
The prime rate was 8.25% and 8.25% at September 30, 1996 and March 31,
1996, respectively.
3. On May 1, 1996, the Company completed a private placement of 1,268,293
units at a price of $5.125 per unit. Total proceeds from this transaction
approximated $6,500,000. Each unit included one common share of the Company
and one warrant to purchase one additional common share of the Company at
$4.25. The warrants are exercisable upon issuance and regulatory approval,
and expire June 1, 1999.
4. 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 third quarter of fiscal year 1997. On June 27, 1996,
the Company placed an order for a packaging machine. The cost of the
packaging machine is approximately $750,000 and is expected to be delivered
during the third quarter of fiscal year 1997. The Company has commitments
from financial institutions to provide capital lease financing for these
equipment orders.
F-19
<PAGE>
5. An officer and director has received notes from the Company in exchange
for $1,000,000. The notes are payable on demand and are classified as
current liabilities. Interest on these notes is payable monthly at the rate
of prime plus 1%.
6. On July 3, 1996, the Company agreed to purchase substantially all of the
assets of Grahams Graphics Pty. Ltd., its exclusive distributor in
Australia. The total purchase price is expected to approximate $390,000 to
be paid as follows: (i) the issuance of 50,000 share of common stock
(valued at an aggregate of $200,000); (ii) the issuance of options to
purchase an additional 50,000 share of common stock for $4.00 per share;
(iii) the assumption of approximately $150,000 in unsecured trade
liabilities; and, (iv) a one time cash payment of $40,000. Upon the
completion of the purchase transaction, the assets assumed will be
contributed to the Company's wholly-owned Australian subsidiary,
Geographics Australia Pty. Ltd. The effective date of the transaction is
July 1, 1996.
The Company formed Geographics Australia PTY Limited to complete the
acquisition and become the Company's distributor of Geographics products in
Australia, replacing Grahams Graphics PTY Limited as the sole Australian
distributor.
7. 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.
F-20
<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 sell or a solicitation of an
offer to buy any securities other than the securities to which it relates, or
any offer to or solicitation of any person in any jurisdiction in which such
offer or solicitation would be unlawful. 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.
TABLE OF CONTENTS
Page
Prospectus Summary......... 5
Risk Factors............... 9
Price Range of
Common Stock............. 16
Dividend Policy............ 17
Capitalization............. 18
Use of Proceeds............ 19
Selected Consolidated
Financial Data........... 20
Management's Discussion and
Analysis of Financial
Conditions and Results
of Operations............ 22
The Company................ 37
Management................. 48
Principal Stockholders..... 59
Sales by Selling Security
Holders.................. 62
Description of Securities.. 64
Certain Market
Information.............. 66
Legal Matters.............. 67
Experts.................... 67
Additional Information..... 67
Financial Statements....... F-1
Geographics, Inc.
2,790,242 SHARES OF
COMMON STOCK AND
1,395,121 COMMON STOCK
PURCHASE WARRANTS
PROSPECTUS
December 24, 1996
