UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to______________
Commission File Number: 0-26756
GEOGRAPHICS, INC.
(Exact name of registrant as specified in its charter)
Wyoming 87-0305614
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1555 Odell Road, P.O. Box 1750, Blaine, WA 98231
- - - ------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (360) 332-6711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Shares, no par value NASDAQ NATIONAL MARKET SYSTEM
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. ___X____ Yes ________ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the bet
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Common stock, no par value per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on June 14, 1996. Based on the
closing bid price of the Common Stock on the NASDAQ National Market System as
reported on June 14, 1996 $ 6.375, the aggregate market value of the 6,128,636
shares of the Common Stock held by persons other than officers, directors and
persons known to the Registrant to be the beneficial owner (as that term is
defined under the rules of the Securities and Exchange Commission) of more than
five percent of the Common Stock on that date was approximately $39,070,055. By
the foregoing statements, the Registrant does not intend to imply that any of
these officers, directors or beneficial owners are affiliates of the Registrant
or that the aggregate market value, as computed pursuant to rules of the
Securities and Exchange Commission, is in any way indicative of the amount which
could be obtained for such shares of Common Stock.
The number of Common Shares, no par value, of the Registrant outstanding as of
June 14, 1996 was 9,376,877.
Transitional Small Business Disclosure Format (Check one): Yes_____ No __X__
<PAGE>
PART 1
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. was incorporated as a Wyoming corporation on
September 20, 1974. The Registrant and its subsidiaries are hereinafter
collectively referred to as the Company, unless otherwise noted. The Company is
engaged in the development, manufacture, marketing, and distribution of designer
stationery, value added papers (printed business cards, brochures, letterhead,
memo pads and paper cubes), lettering, signage, stencil and graphic art products
throughout the United States, Canada, Australia, Europe, Israel and Mexico.
The Company's fiscal year end is March 31. The Company's executive
offices are located at 1555 Odell Road, Blaine, Washington 98230, and its
telephone number is (360) 332-6711.
The Company operates its business through two subsidiaries and a
partnership:
\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. V4P 2K1, Canada, 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\ 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 remaing 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, ON, Canada
L5S 1N9, and its telephone number is 800-426-5923.
BACKGROUND
At the time of its incorporation in 1974, the Company was a wholly
owned subsidiary of International Geographics Ltd. ("IGL"), a British Columbia
corporation traded on the Vancouver Stock Exchange. On February 20, 1989 IGL
listed its stock on the Toronto Stock Exchange and voluntarily delisted its
common stock from the Vancouver Stock Exchange.
<PAGE>
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
its administrative offices and manufacturing facilities located at one
location, within a single entity.
During fiscal year 1991, the Company began the development of designer
stationary and value added paper products. In fiscal year 1992 the Company
introduced to the marketplace the first versions of Geopaper, a value added
paper. The Company continued to develop new Geopaper designs and new Geopaper
customers, and by fiscal year 1994 sales of Geopaper had increased to 3% of
total Company sales.
In fiscal year 1994, the Company purchased certain assets from E.Z.
Industries Inc. (an unrelated Maryland company), for $1,500,000. The purchased
assets included equipment used in the manufacturing of vinyl letter sets,
stencil kits, lettering guides, dry transfers, signs and similar products,
however, primary purpose of the acquisition was to broaden the Company's
customer base.
The Company successfully placed Geopaper in Office Depot Inc., a major
office supply superstore in fiscal year 1995. Sales of Geopaper during fiscal
year 1995 increased to 21% of total Company sales. During first quarter of
fiscal year 1996, the Company received purchase orders to place Geopaper chain
wide in Office Depot and OfficeMax, two of the three largest office supply
superstores in North America. In January 1996, the Company announced that
Wal-Mart had agreed to place Geopaper in 248 Wal-Mart stores to be shipped in
March 1996.
During fiscal year 1996, the Company introduced new variations of
Geopaper, including Geonotes and Geocubes, memo pad and paper cube products made
using Geopaper designs. As a result of the increasing popularity of Geopaper in
the retail stores and the expansion of the Geopaper product line, sales of
Geopaper products had increased to 65% of total Company sales. Fiscal year 1996
was the year the Company made the transition from a lettering and signage
manufacturing company to a manufacturer of stationary and value added papers as
its primary business.
PRODUCTS
The products manufactured by the Company are separated into two major
product groups; (1) specialty papers, and (2) lettering and signage.
The specialty papers group is composed primarily of designer stationery
and other value added papers (paper on which the Company has applied photographs
and art images during a printing process and then cut to size). The papers are
designed for use in photocopiers and computer printers to be used as stationery,
letterhead, business cards, brochures, memo pads and paper cubes. These papers
are marketed under the Trademark "Geopaper". Geopaper products are also designed
to be used with personal computer printers or to compliment other Company
products that are used with personal computers. Geopaper sales increased to 65%
of sales in fiscal year 1996, up from 21% of sales in fiscal 1995 and 3% of
sales in fiscal year 1994. Net sales for this group increased to about
$14,800,000 in fiscal 1996, up from about $2,100,000 in fiscal 1995 and $180,000
in fiscal 1994. See "Sales By Product Category." The Geopaper product line is
expected to continue to grow as a percentage of sales as more customers accept
the product line and as the use of personal computers continues to grow world
wide, but there can be no assurances that such growth shall occur as expected by
the Company.
The lettering and signage group manufactures 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% of sales in the
prior year, net sales for
<PAGE>
this group decreased to about $7,900,000 from about $8,100,000. The Company
expects this product group to continue to decrease as a percentage of sales as
Geopaper product growth is expected to be significantly faster than the sales
growth of this category. Sales of lettering and signage products as an industry
will continue to decline over time as the use of personal computers increases.
The Company anticipates that it can offset this expected decline by increasing
its market share of this industry through its recent addition of 400 to 500
Wal-Mart stores as customers in fiscal 1996. The growth of existing customers
featuring Geopaper and lettering products, such as Office Depot, OfficeMax and
Business Depot (Staples, Inc.'s Canadian division), together adding over 200 new
stores a year, should also contribute to an increase in market share and add
additional lettering and signage sales each year. There can be no assurances,
however, that such increase in market share shall occur.
SALES BY PRODUCT CATEGORY
The percentage of the Company's total sales attributable to each class
of product offered by the Company for the last three years is set forth below.
AS A PERCENTAGE OF SALES
FISCAL YEAR
CLASS OF PRODUCT 1996 1995
---------------- ---- ----
Designer stationeries and specialty papers 65% 21%
Lettering, signage, stencil and graphic art products 35% 79%
STATED IN SALES DOLLARS (ROUNDED)
FISCAL YEAR
CLASS OF PRODUCT 1996 1995
---------------- ---- ----
Designer stationeries and specialty papers $14,800,000 $2,100,000
Lettering, signage, stencil and graphic art products 7,800,000 8,100,000
BUSINESS CONCENTRATIONS
Historically , Geographics, Inc. has sold a substantial portion of its
products to a limited number of customers. Concentration of sales to the five
largest customers is detailed below:
CUSTOMER 1996 1995
-------- ---- ----
Office Depot Inc. 40% 31%
OfficeMax, Inc. 24% 16%
Martin Distribution, Inc.* 13% 12%
United Stationers Inc. 3% 6%
Wal-Mart Stores, Inc. 3% 1%
--- ---
83% 66%
* 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
loss of a significant customer or any
<PAGE>
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the designer stationery or
specialty papers industry, may have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's ability
to increase its sales in the future will depend in part upon its ability to
obtain orders from customers as well as the financial condition and success of
its customers and the general economy, of which there can be no assurance.
GROWTH STRATEGY
Management is of the opinion that North America will continue to
provide the Company with significant opportunities for growth. An overview of
North American growth opportunities are 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 compliment the Geopaper line.
The Company believes that foreign markets may provide additional growth
opportunities. During July 1995, the Company established Geographics 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 a U.K. corporation, to initiate
marketing and distribution of Company products in Europe. The Company also
distributes its products through an exclusive distributor in Australia. The
Company anticipates further expansion internationally, including Asia, which is
a prominent target destination for Company products.
International sales accounted for approximately 14% and 11% of total
net sales in 1996 and 1995, respectively. International sales were concentrated
in Canada and Australia and to a lessor degree Mexico, Israel and Norway. The
Company anticipates that international sales will increase as a percentage of
total sales resulting from the Company's expansion plans in Europe and Asia. As
a result, a significant portion of the Company's sales will be subject to
certain risks, including unexpected changes in regulatory requirements, exchange
rates, tariffs and other barriers, political and economic instability,
difficulties in receivable collections, natural disasters, difficulties in
staffing and managing foreign subsidiary and branch operations and potentially
adverse tax consequences. The Company is also subject to the risk associated
with the imposition of legislation and regulations relating to the import or
export of stationeries, specialty papers and office supply products. The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
will be implemented by the United States, Canada, Australia or any other country
upon the importation or exportation of the Company's products in the future.
There can be no assurance that any of these factors or adoption of restrictive
policies will not have a material adverse effect on the Company's business,
financial condition and results of operations.
<PAGE>
PURCHASING
The Company purchases goods from approximately 700 vendors. One vendor,
Unisource, accounted for a significant portion of the Company's total
merchandise purchases 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's business including sales, electronic data interchange
(EDI), warehousing, manufacturing, distribution, purchasing, inventory control,
merchandise planning and replenishment, as well as various financial systems.
The Company is working with outside consultants in the design, installation and
ongoing refinement of this system. The current systems used by the Company are
primarily financial in nature, such as invoicing, accounting, general ledger and
shipping. Manufacturing and Inventory management systems are not presently
integrated. The new system will be installed by module beginning in the summer
of 1996 and is scheduled to be completed in the winter of fiscal 1997.
The Company currently utilizes EDI to transact business with its
largest customers. Presently 70% to 80% of customer orders are received by EDI.
EDI is utilized as it is a highly efficient method of transmitting large numbers
of orders in a paperless medium. The Company believes that the systems it has
developed, and are presently developing, have the ability to continue to improve
customer service, operational efficiency, and management's ability to monitor
critical performance factors. The systems have been designed to support the
growth and expansion of the Company for the foreseeable future.
COMPETITION
The Company operates in a highly competitive environment. Competition
can be separated into two areas in which the Company conducts business; designer
stationery and lettering and signage. The Company's designer stationery
operations' competes in most of its markets with Z-International, Inc. , A.C.I.
Action Communication, Inc., REDIFORM (a division Moore Corp Ltd), First Base and
DECAdry. The Company designer stationery products compete with competitor
products for space in the office products superstores, office product stores,
mass market stores, contract stationers, wholesalers, office product catalogs
and paper direct mail catalogs.
The Company's traditional lettering and signage operations compete with
several companies that produce similar products (i.e. vinyl lettering, stencil,
rub-on lettering), these competitors are: Visu-com, Chartpak 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.
Certain of these competitors are larger, better capitalized, more
established and have greater access to resources necessary to produce a
competitive advantage. The Company believes that its product designs, product
quality, merchandising programs, distribution channels, customer service and
competitive pricing distinguishes the Company from its competitors.
The development and manufacture of new designer stationeries and
specialty papers are highly capital intensive. In order to remain competitive,
the Company must continue to make significant expenditures for capital
equipment, sales, service, training and support capabilities, investments in
systems, procedures
<PAGE>
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 5 (five) federally registered trademarks; (1) GEOPAPER,
(2) GEOTYPE, (3) GEOTAPE, (4) GEOSTENCIL, and (5) SHIELD 'N' SEE. The Company
has 8 (eight) applications pending with the U.S. Patent and Trademark Office for
federal trademark registration for Geographics product lines. Additionally the
Company has filed 6 (six) trademark applications pending in Canada and Australia
for Geographic product lines in those countries, which applications are
currently pending.
The Company has 2 (two) 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 turn, could have
a material adverse effect on the Company.
FUTURE ACQUISITIONS
The Company may, in the future, pursue acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
may result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
Company profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
limited direct prior experience, and the potential loss of key employees of the
acquired company. In the event that such acquisitions do occur, there can be no
assurance as to the effect thereof on the Company's business or operating
results.
EMPLOYEES
As of March 31, 1996, the Company had 353 employees of whom 348 were
employed at its Corporate headquarters in Blaine, Washington and 5 of whom were
employed at the Company's facilities in the United Kingdom. The manufacturing,
warehousing and product distribution aspects of the business employs 306
employees, 31 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.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company considers its properties to be suitable and adequate for
their intended uses. These properties consist of the following:
EXECUTIVE OFFICES
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 sq. ft to 49,000 sq. ft in December
1994. The facility was increased to its current size during fiscal year 1996,
completing construction
<PAGE>
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 sq. 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 sq.
ft. facility near Ferndale, Washington on a six month lease of $3,950 per month,
triple net. This facility was used to meet material staging and warehouse
requirements while the new Blaine facilities were being completed and organized.
EUROPEAN FACILITIES
Geographics (Europe) Limited leases 6,700 square feet of
warehouse space near London, England. The lease requires quarterly lease
payments of approximately $5,202, triple net, expiring on February 14, 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary
course of business. The Company is not involved in any legal proceedings that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended March 31, 1996.
PART 2
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National Market
under the symbol "GGIT" on March 8, 1996. From May 5, 1995 to March 7, 1996 the
Company's Common Stock traded on the OTC Bulletin Board. The Company's Common
Stock also trades on the Toronto Stock Exchange under the symbol "GGI".
The following table sets forth for the periods indicated the high and
low sale prices per share of the Common Stock on the Nasdaq National
MarketSystem/OTC Bulletin Board and Toronto Stock Exchange, as reported by
Nasdaq and the Toronto Stock Exchange.
<PAGE>
NASDAQ NMS/OTC BULLETIN BOARD TORONTO STOCK EXCHANGE
SYMBOL -GGIT SYMBOL - GGI
US$ CDN. $
1995 HIGH LOW HIGH LOW
First Quarter - - $1.70 $1.05
Second Quarter - - $1.20 $0.90
Third Quarter - - $1.05 $0.80
Fourth Quarter - - $1.95 $0.83
1996 HIGH LOW HIGH LOW
First Quarter $1.88 $1.13 $2.15 $1.74
Second Quarter $3.44 $1.45 $4.60 $2.00
Third Quarter $5.38 $3.00 $7.10 $4.00
Fourth Quarter* $6.25 $4.50 $8.75 $6.10
1997 HIGH LOW HIGH LOW
First Quarter** $6.94 $4.75 $9.39 $6.88
* The Company's shares began trading on the Nasdaq National
MarketSystem effective March 8, 1996.
** First Quarter 1997 activity from April 1, 1996 to June 14, 1996.
As of June 14, 1996, there were 274 holders of record of the Common
Stock of Geographics, Inc. The closing bid price on the Nasdaq National Markets
System at June 14, 1996 was $6.375.
The Company currently intends to retain all earnings for working
capital to support growth, to reduce outstanding indebtedness and for general
corporate purposes. The Company, therefore, does not anticipate paying any
dividends in the foreseeable future. The Company did not pay dividends during
fiscal 1996 or 1995.
VOLATILITY OF STOCK PRICE
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
or 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.
<PAGE>
ITEM 6. 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
Geograpahics, Inc. was incorporated in 1974 and has primarily been a
manufacturer of stick-on letters, rub-on letters, stencils and other signage
products. The Company has significantly increased the scope of its operations
with the development of "Geopaper" in 1992. Geopaper is a designer stationery or
image paper with art or photo images printed on the paper. The Company began
retooling and expanding facilities to facilitate the manufacture, warehouse and
distribution of Geopaper products.
Geopaper sales represented 65% of total sales in 1996 and 21% of sales
in 1995. Besides increasing as a percentage of sales, Geopaper sales were also
responsible for significant increases in total Company sales. During 1996,
Company sales increased 122% to $22,613,635 from $10,186,136 in 1995.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
FISCAL YEAR
1996 1995
STATEMENTS OF INCOME DATA:
Net sales 100.0% 100.0%
Cost of sales 62.8 57.7
----- -----
Gross margin 37.2 42.3
Selling, general and administrative expenses 25.4 28.2
Amortization of goodwill .7 6.3
----- -----
Income from operations 11.1 7.8
Other income .6 .0
Interest expense (3.5) (4.5)
----- -----
Other income (expense) (2.9) (4.5)
Income before provision for income taxes 8.2 3.3
Income tax provision (benefit) 2.8 (4.0)
----- -----
Net income 5.4 7.3
===== =====
FISCAL YEARS 1996 AND 1995
Net Sales. Net sales increased 122% to $22,613,635 in fiscal 1996 from
$10,186,136 in fiscal 1995. This increase was primarily attributable to the
acceptance of the Geopaper program. The Geopaper program experienced a sales
increase of 605% in fiscal 1996 to $14,800,000 compared to $2,100,000 for fiscal
1995. Geopaper sales increases were specifically due to shipments of Geopaper
products to all Office Depot Inc. and OfficeMax stores in North America, as well
as shipments of Geopaper products to 248 Wal-Mart stores in March 1996.
<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 had purchased presentation
boards and bundled them with Geographics stick-on lettering products. In fiscal
1996, the Company continued to supply the lettering products, while the
Company's customers began purchasing the presentation boards directly from the
manufacturer. After adjusting sales for presentation boards, fiscal 1996
lettering and signage sales were slightly ahead of fiscal 1995 sales.
The sales mix of Geopaper products increased to 65% of sales in fiscal
1996 from 21% of sales in fiscal 1995, while lettering and signage sales
decreased to 35% of sales from 79% of sales for the same periods. It is the
opinion of management that sales of signage and lettering products will remain
flat or possibly decline in the future as the computerization of homes and
offices will allow the efficient production of lettering and signage products by
current end-users. Conversely, the increasing number of computers will increase
the number of potential end users of Geopaper products that are specifically
designed for use with computer technology.
Gross Margin. Cost of sales includes product manufacturing costs,
occupancy and delivery costs. Gross profit as a percentage of sales decreased to
37.2% in fiscal 1996, from 42.3% in fiscal 1995. The decrease in the gross
margin is the result of primarily two factors; (1) The change in sales mix to
products with lower gross margins. (Geopaper represented 65% of sales while
lettering and signage represented 35% of sales in 1996, compared to 21% and 79%
of sales in 1995 respectively), and (2) Manufacturing and labor inefficiencies
resulting from rapid growth (the Company experienced 122% sales growth in fiscal
1996).
Other factors affecting the gross margin include:
(a) Raw Material cost increases/decreases. During fiscal 1996,
the cost of the Company's raw materials for Geopaper (commodity large sheet
plain paper) was extremely volatile in price. The raw material price changes
during the year resulted in higher overall raw paper costs and higher production
costs. The effect of the paper price increases on finished goods is somewhat
limited as packaging and labor costs constitute the largest portions of the
cost 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 it's
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 facilitiy.
Management anticipates the March 1996 completion of the Blaine facilities
expansion should reduce or eliminate a number of logistical cost variances. The
addition of more efficient printing and enhanced packaging equipment during
fiscal 1996 and 1997 should also result in positive margin improvements as
superior production lines are completed.
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses declined as a percentage of sales to 25.4% of sales in fiscal 1996 from
28.2% of sales in fiscal 1996. The decline is primarily due to the spreading of
SG&A expenses over significantly higher sales volumes resulting from the success
of the Geopaper programs.
Amortization of goodwill. Goodwill amortization declined to 0.7% of
sales from 6.3% of sales for fiscal years 1996 and 1995 respectively. The
decline was due in part to sales volumes, however, the decrease was largely due
to the completion of the amortization of the goodwill related to the 1993
purchase of the lettering division of E-Z Industries. Fiscal 1996 included three
months of amortization compared to twelve months of amortization during
fiscal1995.
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 benefit was non-reoccurring 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.
<PAGE>
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 loans or from additional debt or equity
financings from outside sources. There is no assurance that the Company will be
able to obtain such financing or that such financing, if available, will be on
terms satisfactory to the Company.
On July 14, 1995, the Company's Bank replaced the existing $5,000,000
revolving line of credit with an interest rate of prime plus .5%, with a
$6,000,000 revolving credit agreement with an interest rate of prime plus .5%.
On September 15, 1995, officers and directors converted debentures in
an aggregate face amount of $200,000 into 219,178 common shares.
On September 26, 1995, the Company issued $996,000 of convertible
debentures payable to officers and directors. The debentures were convertible at
the holders option into common shares of the Company at Cdn. $4.45 per share, to
a maximum 274,233 common shares. On December 22, 1995, these debentures were
converted into 273,233 common shares, and are no longer outstanding.
On October 23, 1995, the Company's Bank replaced the existing
$6,000,000 revolving line of credit with an interest rate of prime plus .5%,
with a $7,000,000 revolving credit agreement with an interest rate of prime plus
.25%.
Between June 1995 and November 1995, the remaining holders of the 8%
convertible subordinated debentures converted the remaining $990,000 of
outstanding debentures into 894,960 shares of common stock.
On December 7, 1995, the Company's Bank modified the interest rate on
two existing term real estate loans. The floating interest rate on two loans
totaling $862,607 was fixed at a rate 8.825% per annum. Two real estate loan
commitments totaling $605,000 with interest rates at prime plus 1.0% were also
converted to a fixed rate of 8.825% per annum.
On January 23, 1996, the Company completed a private placement of
500,000 common shares to officers and directors at a price of Cdn. $5.75. Total
cash received, net of issuance costs, totaled $1,906,100.
On February 13, 1996, the Company's Bank replaced the existing
$7,000,000 revolving line of credit with an interest rate of prime plus .25%,
with a $12,000,000 revolving credit agreement with interest at the prime rate.
In addition to bank borrowing, debt conversions and equity placements,
the Company received $841,154 upon the exercise of stock options and warrants
exercised during fiscal year, resulting in the issuance of 768,000 shares of
common stock.
At March 31, 1996 certain officers and directors had advanced the
Company $1,264,711 in the form of uncollateralized notes payable. The notes are
payable on demand and are classified as current liabilities. Interest on these
notes are payable monthly at the rate of prime plus 1%.
Subsequent to year end, the Company received $6,500,000 before expenses
as the result of a private placement of 1,268,293 units at a price of $5.125 per
unit. Each unit is composed of one share of
<PAGE>
stock and one warrant to purchase a share of stock at $6.50 per share. The
proceeds were used to pay down the revolving credit line balances.
Net cash flows from operating activities. The Company experienced
negative operating cash flows during fiscal year 1996 and 1995 ($4,875,345 for
fiscal 1996 and $379,162 for fiscal 1995). Contributing to the negative cash
flow from operations was the increase in trade receivable and related party
trade receivables balances. Total trade receivables for fiscal 1996 increased
113% to $5,873,578 compared to $2,751,299 for fiscal 1995. The increase in
receivables of 113% at year end fiscal 1996 over fiscal 1995 year end balances
is consistent with the 122% increase in sales the Company experienced during
1996.
Inventory increased to $9,139,273 at year end fiscal 1996 compared to
$2,901,155 for fiscal year end 1995, an increase of 215%. The 215% increase in
inventory is due in part to the following factors:
(a) Building of inventory in anticipation of higher sales levels in
fiscal 1997 in keeping with management's philosophy that the
building of inventory is preferable and less expensive than
losing customers due to product shortages during growth periods.
(b) The Company built Geopaper inventory for distribution in the
European market, which requires a paper size which is slightly
narrower and longer than the North American standard. The result
necessitated a duplication of inventory stock for two paper
sizes. In addition, Geographics (Europe) Limited was building
inventory levels at March 31, 1996 in preparation of initial
European orders beginning in April 1996.
(c) The Company has a continuing Geopaper design development program,
consequently new product designs are printed and stored in
inventory pending initial releases to customers.
Despite the Company's rapid growth, management anticipates improved accounts
receivable and inventory management due to recent managerial additions focusing
on these critical working capital areas. Improved accounts receivable collection
procedures and increased staffing are expected to minimize future increases in
accounts receivable. New information systems, new warehouse facilities, improved
inventory organization and the addition of key purchasing and inventory staff
should improve efficiencies in inventory management and allow for additional
sales growth without corresponding inventory increases.
Net cash flows from financing activities. For the fiscal year ended
March 31, 1996, the Company received a net $8,555,704 from various financing
sources, compared to $1,697,768 for the prior fiscal year. For the year ended
March 31, 1996, the Company increased current line of credit borrowings by
$3,139,463, compared to $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, facilities 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
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included
under Item 13(a) (1) and (2) of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE UNDER SECTION 16 (A) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions with the Company of
the executive officers and directors of the Company. Directors will be elected
at the Company's annual meeting of stockholders and serve for one year or until
their successors are elected and qualify. Officers are elected by the Board and
their terms of office are, except to the extent governed by employment contract,
at the discretion of the Board.
NAME AGE POSITION
Ronald S. Deans 63 Chairman of the Board of Directors,
President and Chief Executive
Officer
Mark G. Deans 31 Director, Executive Vice
President-Marketing
R. Scott Deans 34 Director, Executive Vice
President-Operations
Fidel Garcia Carrancedo 63 Director
Moises Cosio 65 Director
Alan D. Tuck Jr. 53 Director
Robert S. Parker 50 Director
Luis Alberto Morato 36 Director
Terry A. Fife 38 Vice President-Finance, Chief
Financial Officer and Secretary
RONALD S. DEANS, Chairman/Chief Executive Officer/President, is a
founder of the Company. He has served as an officer and director of the Company
from its inception in 1973. Mr. Deans has over thirty years experience in the
graphics arts and office products retailing industry. Prior to founding the
Company , he had served as Sales Manager for Letraset Canada Ltd. Mr. Deans is
responsible for strategic planning and business development.
MARK G. DEANS, Director/Executive Vice President - Marketing, joined
the Company in May 1985 working in the marketing department. Mr. Deans was
promoted to Vice President-Marketing in April 1990, and was promoted to
Executive Vice President-Marketing in September 1995. Ronald S. Deans is the
father of Mark G, Deans. Mr. Deans is responsible for the development of new
products, sales and marketing programs including relationships with major
customers.
R. SCOTT DEANS, Director/Executive Vice President - Operations, joined
the Company in February 1985 working in the marketing and operations
departments. Mr. Deans was promoted to Vice President-Operations in January
1990, and promoted to Executive Vice President-Operations in September 1995.
Ronald S. Deans is the father of R. Scott Deans. Mr. Deans is responsible for
all manufacturing operations of the Company.
<PAGE>
FIDEL GARCIA CARRANCEDO, Director - Mr.Carrancedo has served as
Director General of Alimentos, S.A. de C.V., a food products manufacturer and
distributor in Mexico since August 1972. Mr. Carrancedo has served on the board
of directors since August of 1989.
MOISES COSIO, Director - Mr. Cosio is an international financier
residing in Mexico. Mr. Cosio has been appointed to various boards including
Telefonos de Mexico and has investment interests in Grupo Carso, InverMexico,
Mexican subsidiaries of Kimberly-Clark and John Deere. He also owns luxury
hotels in Ixtapa, Acapulco and Mexico City. He has served on the Company's board
since January 1995.
ALAN D. TUCK JR., Director - Mr. Tuck is President of Greenway Pump
Inc. and has served in that capacity since March 1992. Mr. Tuck is also an
inventor and holder of several U.S. patents. Prior to March 1992 Mr. Tuck worked
in several capacities including a law firm and a pump and engineering firm. Mr.
Tuck is a graduate of the United States Air Force Academy and former U.S. Air
Force Officer and a receiptant of a Juris Doctor Degree from the University of
California School of Law. Mr. Tuck has served on the board of directors of the
Company since August 1995.
ROBERT S. PARKER, Director- Mr. Parker was appointed to the Board of
Directors in April 1996. Mr. Parker has served as President of Sanford
Corporation, a manufacturer of writing instruments and office supplies since
December 1990. Sanford Corporation is a subsidiary of Newell Co.
LUIS ALBERTO MORATO, Director- Mr. Morato is a resident of Mexico,
and a civil engineering consultant with a degree in civil engineering from the
Universidad Ibero Americana. Prior to becoming a consultant, Mr. Morato was a
budget manager with Bytsa De C.V. from June 1982 until March 1993. Mr. Morato is
the son-in-law of Geographics director, Fidel Garcia Carrancedo. Mr. Morato has
been a director of the Company since October 1995.
TERRY A. FIFE, Vice President - Finance/Chief Financial
Officer/Secretary, joined the Company in October 1994. From May 1991 to October
1994, Mr. Fife served as Manager of Finance & Administration at Alf Christianson
Seed Co. Prior to joining Alf Christianson, Mr. Fife served as Vice President -
Finance & Administration at Dealer Information Systems Corporation. He also has
worked for the Seattle office of the Certified Public Accounting firm of KPMG
Peat Marwick. Mr. Fife is responsible for all accounting and finance functions
of the Company.
ITEM 10. EXECUTIVE COMPENSATION
CASH COMPENSATION
Total cash compensation paid to all executive officers as a
group for services provided to the Company in all capacities during the year
ended March 31, 1996 aggregated to $696,781. Set forth below is a summary
compensation table in the tabular format specified in the applicable rules of
the Securities and Exchange Commission. As indicated, no officer of the Company
or any of its subsidiaries, except for Mr. Ronald S, Deans, Mr. Mark G, Deans
and Mr. R. Scott Deans, received total salary and bonus which exceeded $100,000
during the periods reflected.
The Company compensates outside directors at the rate of $500
per month plus $750 for each Board of Directors meeting attended. Directors
employed by the Company receive no pay in their capacity as Directors. Directors
are entitled to reimbursement for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance of Board of Directors meetings.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND RESTRICTED OTHER
PRINCIPAL OTHER ANNUAL STOCK OPTIONS/ LTIP ALL
POSITION PERIOD SALARY BONUS COMPENSATION AWARD(S) SARS(#) PAYOUTS COMPENSATION
- - - ----------- ------ ------ ----- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald S. Deans 1996 $234,000 $87,629 0 0 30,000 0 $321,629
Chairman, 1995 181,666 0 0 0 0 0 181,666
President & CEO 1994 180,000 0 0 0 20,000 0 180,000
Mark G. Deans 1996 $111,694 $28,184 0 0 32,000 0 139,878
Director 1995 79,243 0 0 0 30,000 0 79,243
Executive Vice 1994 75,000 0 0 0 14,000 0 75,000
President-Marketing
R. Scott Deans 1996 $111,694 $28,184 0 0 32,000 0 139,878
Director 1995 79,243 0 0 0 30,000 0 79,243
Executive Vice 1994 75,000 0 0 0 14,000 0 75,000
President-Operations
Terry A. Fife 1996 $ 86,914 $ 8,482 0 0 0 0 95,396
Secretary 1995 31,911* 0 0 0 54,000 0 31,911
Vice President- 1994 - - - - - - -
Finance & CFO
</TABLE>
* Mr. Fife was hired in October 1994.
EMPLOYMENT AGREEMENTS
The Company has no written employment agreements with any of its
officers or directors as of March 31, 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
TOTAL
OPTIONS/SARS
PERCENT OF NUMBER GRANTED TO EXERCISE OR EXPIRATION
OF SECURITIES UNDERLYING EMPLOYEES BASE PRICE DATE
NAME OPTIONS/SARS GRANTED (#) IN FISCAL YEAR ($/SH)
- - - ---- ------------------------ -------------- -------------- -------------------------------
<S> <C> <C> <C> <C>
Ronald S. Deans 6.0% 30,000 Cdn $2.30 August 18, 2000
Mark G. Deans 6.5% 32,000 Cdn $2.00-4.15 April 25, 2000-October 10, 2000
R. Scott Deans 6.5% 32,000 Cdn $2.00-4.15 April 25, 2000-October 10, 2000
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTION/
FY-END (#) SARS AT FY-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON 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
Terry A. Fife 54,000 $207,127 0 0
</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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth Common Stock ownership as of June 14,
1996 with respect to (i) each person known to the Company to be the beneficial
owner of five (5%) or more of the Company's outstanding Common Stock, (ii) each
director of the Company and (iii) all executive officers and directors of the
Company as a group. This information as to beneficial ownership was furnished to
the Company by or on behalf of the persons named. Unless otherwise indicated,
the business address of each person listed is 1555 Odell Road, Blaine,
Washington 98231. Information with respect to the percent of class is based on
9,376,877 shares of the Company's Common Stock issued and outstanding as of June
14, 1996.
SHARES PERCENT
NAME BENEFICIALLY OWNED(1) OF CLASS
---- --------------------- --------
Ronald S. Deans (2) 697,395 7.4%
Mark G. Deans (3) 442,279 4.7%
R. Scott Deans (4) 444,518 4.7%
Fidel Garcia Carrancedo (5) 1,426,968 15.2%
Moises Cosio (6) 169,600 1.8%
Alan D. Tuck Jr. (7) 140,756 1.5%
Robert Parker (8) 30,000 .3%
Luis Alberto Morato (9) 20,000 .2%
Terry A. Fife (10) 57,589 .6%
All Officers and Directors
as a Group (9 persons) 3,429,105 36.0%
(1) Except as otherwise indicated in the footnotes below, each stockholder has
sole power to vote and dispose of all the shares of Common Stock listed
opposite his name.
(2) Mr. Ronald Deans is Chairman of the Board, President, Chief Executive
Officer. Includes 43,000 shares in the name of his wife Ann Deans and
28,775 shares held by the Geographics, Inc. 401(k) Plan 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 $2.30 Cdn. and expire
August 18, 2000.
(3) 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.
(4) Mr. Scott 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. Carrancedo is a Director of the Company. Includes 30,000 shares of
Common Stock issuable upon exercise of certain stock options by Mr.
Carrancedo. His options are exercisable at $2.30 Cdn. and expire August 18,
2000.
(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.
<PAGE>
(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. Fife is a Vice President - Finance, Chief Financial Officer and
Secretary of the Company. Includes 2,089 shares owned by the Geographics,
Inc. 401(k) Plan which Mr. Fife has voting control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEBT AND EQUITY INSTRUMENTS ISSUED TO OFFICERS/DIRECTORS
During the fiscal year the Company concluded several
transactions involving officers and directors of the Company. These transactions
included the issuance of convertible debentures, the conversion of debentures
into common shares and private placement of common shares. These transactions
are as follow:
(degree) 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.
(degree) 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.
(degree) 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 of US$2,117,092, proceeds
net of issuance costs, totaled US$1,906,100.
(degree) 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%.
(degree) Total interest costs associated with these notes and
debentures was approximately $60,000 during the years ended
March 31, 1996 and 1995.
MARTIN DISTRIBUTION
Martin Distribution Inc. ("Martin") has acted as national
distributor of the Company's products in Canada since September 1990. Martin
imports the Company's products into Canada, facilitates customs clearing and
distributes the Company's products to customers in Canada. All sales of the
Company's products within Canada are sold through Martin. Sales to Martin
amounted to $2,854,935 and $1,056,750 during the years ended March 31, 1996 and
1995, respectively. Trade receivables due from Martin amounted to $899,422 and
$338,875 at March 31, 1996 and 1995, respectively.
Martin sold product valued at $118,659 and $261,765 during the
years ended March 31, 1996 and 1995, respectively to International Geographics
of Ontario ("IGO"). IGO is a partnership which is 70%
<PAGE>
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.
Martin is owned by the estate of Martin Carrancedo, a former
director of the Company. Mark G. Deans, a director and officer of the Company,
serves as a director of Martin Distribution Inc. Fidel Garcia Carrancedo, a
current director, is the brother of the late Martin Carrancedo. There is no
relationship, however, between Fidel Garcia Carrancedo and Martin Distribution
Inc. Effective April 1, 1996 the Company will replace Martin as it's 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. for Martin to have any material affect on
sales or profits.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The financial statements listed on the index to financial statements
incorporated in this Form 10-KSB.
(b) Reports on Form 8-K
No reports were filed by the Company on Form 8-K during the fiscal year
ended March 31, 1996.
(c) Exhibits
The following Exhibits are incorporated by reference or included in
this report:
NUMBER DESCRIPTION OF DOCUMENT
- - - ------ -----------------------
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
3.3 Geographics Marketing Canada Inc. - Articles of Incorporation.
(2)
3.4 Geographics (Europe) Limited - Articles of Association (2)
4.1 Directors Resolution and Private Placement Subscription
Agreements for $1,000,000 Convertible Debentures dated June
23, 1993. (1)
10.1 Agreements whereby the Company acquired the assets of the
letter division of E.Z. Industries Inc., dated July 2, 1993.
(1)
10.2 Lease - 4030 Iron Gate (2)
10.3 Lease - Unit 4 Iceni Court (2)
10.4 Loan Documents (2)
21.1 List of the Company's subsidiaries (2)
27.1 Financial Data Schedule (2)
(1) Incorporated by reference to the Exhibits to the Registration Statement on
Form 10 as amended, as filed with the Securities and Exchange Commission
effective date November 11, 1995.
(2) Filed herewith Annual Report on Form 10-KSB for the year ended March 31,
1996, as filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on this 28th day of June 1996.
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
Ronald S. Deans, Chairman
of the Board, President and
Chief Executive Officer
In accordance with the Exchange, this Report has been signed below by
the following person on behalf of the Registrant, and in the capacities and on
the date indicated.
SIGNATURE
- - - ---------
Chairman of the Board,
/s/ Ronald S. Deans President and Chief
- - - ------------------------------ Executive Officer June 28, 1996
Ronald S. Deans
Director, Executive
/s/ Mark G. Deans Vice President-Marketing June 28,1996
- - - ------------------------------
Mark G. Deans
/s/ R. Scott Deans Director, Executive
- - - ------------------------------ Vice President-Marketing June 28,1996
R. Scott Deans
/s/ Fidel Garcia Carrancedo
- - - ------------------------------ Director June 28, 1996
Fidel Garcia Carrancedo
/s/ Alan D. Tuck Jr. Director June 28, 1996
- - - ------------------------------
Alan D. Tuck Jr.
/s/ Robert S. Parker
- - - ------------------------------- Director June 28, 1996
Robert S. Parker
Vice President-Finance
/s/ Terry A. Fife Chief Financial Officer
- - - ------------------------------- and Secretary June 28, 1996
Terry A. Fife
<PAGE>
GEOGRAPHICS, INC.
TABLE OF CONTENTS
March 31, 1996 and 1995
PAGE
----
INDEPENDENT AUDITOR'S REPORT.......................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet................................................... 2
Statement of Income............................................. 3
Statement of Stockholders' Equity............................... 4
Statement of Cash Flows......................................... 5
Notes ot Financial Statements................................... 6-14
<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.
Bellingham, Washington
May 31, 1996
1
<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.
2
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF INCOME
Years Ended March 31, 1996 and 1995
1996 1995
------------- --------------
<S> <C> <C>
SALES
Retail sales $ 19,758,700 $ 9,129,886
Related party sales 2,854,935 1,056,250
------------- --------------
Total sales 22,613,635 10,186,136
COST OF SALES 14,194,505 5,881,649
------------- --------------
Gross margin 8,419,130 4,304,487
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,734,901 2,873,476
AMORTIZATION OF GOODWILL 159,768 639,067
------------- --------------
Income from operations 2,524,461 791,944
------------- --------------
OTHER INCOME (EXPENSE)
Other income 130,090 1,930
Interest expense (787,848) (457,499)
------------- --------------
Total other income (expense) (657,758) (455,569)
------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,866,703 336,375
INCOME TAX PROVISION (BENEFIT) 634,679 (411,367)
------------- --------------
NET INCOME $ 1,232,024 $ 747,742
============= ==============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary $ .19 $ .16
======== =======
Assuming full dilution $ .18 $ .14
======== =======
SHARES USED IN COMPUTING EARNINGS PER
COMMON AND COMMON EQUIVALENT SHARE
Primary 6,606,499 4,549,101
============= ==============
Assuming full dilution 7,204,220 5,816,260
============= ==============
</TABLE>
3
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996 and 1995
COMMON STOCK RETAINED
----------------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1994 4,515,729 $ 3,081,496 $ (1,609,982) $ 1,471,514
Notes payable and debentures converted
to common stock 334,762 297,042 - 297,042
Common shares 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>
4
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended March 31, 1996 and 1995
Increase (Decrease) in Cash
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,232,024 $ 747,742
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization 1,124,999 1,295,262
Deferred income taxes 125,000 (529,000)
Loss on sale of property and equipment 594 13,468
CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES
Trade receivables (2,561,832) (1,471,823)
Related party receivables (560,447) (338,975)
Other receivables (3,357) (19,504)
Inventory (6,238,118) (1,059,674)
Prepaid expenses and deposits (461,606) (210,110)
Accounts payable 1,315,997 1,074,647
Accrued liabilities 814,756 (48,828)
Income tax payable 336,645 167,633
------------- --------------
Net cash flows from operating activities (4,875,345) (379,162)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on note payable to bank 3,139,463 990,427
Proceeds from long-term debt borrowings 1,003,029 765,125
Repayment of long-term debt (467,986) (232,685)
Proceeds from notes payable to officers and directors 2,452,573 22,746
Repayments of notes payable to officers and directors (398,629) (134,888)
Proceeds from issuance of common stock 2,827,254 287,043
------------- --------------
Net cash flows from financing activities 8,555,704 1,697,768
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (3,296,165) (1,463,768)
Proceeds from sale of equipment 16,741 30,000
Net advances from (repayments to) partnerships (56,786) 250,422
Increase in other assets (309,469) (119,912)
------------- --------------
Net cash flows from investing activities (3,645,679) (1,303,258)
-------------- --------------
NET CHANGE IN CASH 34,680 15,348
CASH, beginning of year 15,348 -
------------- --------------
CASH, end of year $ 50,028 $ 15,348
============= ==============
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock on conversion of notes payable,
debentures and other liabilities $ 2,169,233 $ 297,042
============= ==============
Financing obtained directly from sellers in acquisition of equipment $ 1,110,242 $ 346,644
============= ==============
Income tax benefit related to exercise of stock options and warrants $ 958,000 $ -
============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 1 - DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its offices and
main manufacturing facilities located in Blaine, Washington. The Company also
has warehouse/distribution facilities near London, England, and warehouse/
manufacturing facilities in Bellingham, Washington. The Company is a
manufacturer of designer stationeries, value-added papers, lettering, signage
and graphic art products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Geographics (Europe)
Limited and Geographics Marketing Canada. Significant intercompany transactions
have been eliminated in consolidation.
(b) Accounts Receivable - The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for doubtful
accounts to be fully collectible. Accounts receivable are not collateralized.
(c) Inventory - Inventory is valued at the lower of cost on a first-in-,
first-out (FIFO) basis or market.
(d) Property and Equipment - Property and equipment is stated at historical
cost. Depreciation is provided based on useful lives of five to twenty years,
using primarily the straight-line method. Betterments, renewals and repairs that
extend the life of assets are capitalized. Repairs and maintenance items are
expensed when incurred. Depreciation expense was $894,570 and $622,737 during
the years ended March 31, 1996 and 1995, respectively.
(e) Goodwill - Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible assets of businesses acquired.
Goodwill was amortized on a straight-line basis over a period of two years.
(f) Federal Income Taxes - The Company accounts for income taxes using the
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable amounts
attributed to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. This method also allows
recognition of income tax benefits for loss carryforwards, credit carryforwards
and certain temporary differences for which tax benefits have not previously
been recorded. The tax benefits recognized as assets must be reduced by a
valuation allowance where it is more likely than not the benefits may not be
realized.
(g) Foreign Currency - Transactions denominated in foreign currencies are
translated into U.S. dollars using the exchange rate in effect at the time of
the transaction. Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars using exchange rates in effect at the balance sheet
date. Translation adjustments are included in operating results of the Company
during the year in which the adjustment arises.
(h) Investment in Partnership - The Company accounts for its 70 percent
respective partnership interest in International Geographics of Ontario (the
"Partnership") using the equity method. The effect of consolidating the accounts
of the Partnership would be immaterial to these consolidated financial
statements. Advances between the Company and the Partnership for working capital
purposes are accounted for as changes to investments in Partnership. The
Partnership distributes the Company's products in Canada.
International Geographics of Ontario was dissolved during the current year. The
Company is in the process of winding up the affairs of the partnership at March
31, 1996.
(i) Earnings per Common and Common Equivalent Shares - Primary earnings per
common share equals net earnings divided by the weighted average number of
common shares outstanding, after giving effect to dilutive stock options and
warrants. Fully diluted earnings per common share equals net earnings plus
after-tax interest incurred on
6
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
convertible debentures divided by the weighted average number of common shares
outstanding after giving effect to 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.
(j) Capital Stock - The Company follows the practice of recording amounts
received upon the exercise of stock options and warrants by crediting common
stock. No charges are reflected in the consolidated statement of income as
result of the grant or exercise of stock options or warrants. The Company
realizes an income tax benefit from the exercise of certain stock options and
warrants, which results in an increase in common stock and an increase in
deferred tax assets, or reduction in income tax payable, depending on the timing
of the income tax deduction available to the Company.
(k) Reclassifications - Certain prior year amounts have been reclassified to
conform to current year presentation. Such reclassifications had no effect on
previously reported earnings or accumulated deficit.
(l) Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(m) Advertising Costs - Advertising costs are charged to expense in the period
in which they occur. The Company participates with its customers in cooperative
advertising programs, in which the Company reimburses the customers for a
portion of their advertising costs. Advertising expense amounted to $867,198 and
$271,160 in 1996 and 1995, respectively.
(n) Fair Value of Financial Instruments - Statement of Financial Accounting
Standard ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of the fair value of financial instruments, both assets and
liabilities, recognized and not recognized, in the consolidated balance sheet of
the Company for which it is practicable to estimate fair value. The estimated
fair values of financial instruments which are presented herein have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
The following methods and assumptions were used to estimated fair value:
/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 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
7
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
============= ==============
<TABLE>
<CAPTION>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
NET BOOK VALUE
ACCUMULATED -----------------------------
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
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
------------- --------------
Balance carried forward $ 4,346,758 $ 2,701,473
------------- --------------
</TABLE>
8
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 5 - FINANCING ARRANGEMENTS (Continued)
1996 1995
------------- ------------
Balance brought forward $ 4,346,758 $ 2,701,473
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
============= ==============
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
=============
9
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 6 - FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1996 1995
------------- --------------
Current provision $ 509,679 $ 117,633
Deferred provision 125,000 (529,000)
------------- --------------
Total income tax provision (benefit) $ 634,679 $ (411,367)
============= ==============
The total tax provision differs from the amount computed using the statutory
federal income tax rate as follows:
1996 1995
------------- --------------
Tax expense at statutory rate $ 635,000 $ 114,000
Other differences, net (321) (64,367)
Change in valuation allowance
for deferred tax assets - (461,000)
------------- --------------
Total income tax provision (benefit) $ 634,679 $ (411,367)
============= ==============
The significant components of deferred income tax (benefit)
expense for the years ended March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Utilization of tax credit carryforward $ 105,000 $ -
Depreciation of plant and equipment 88,000 43,000
Decrease in charitable contributions carryforward 31,000 2,000
Inventory differences (10,000) 43,000
Other differences, net (20,000) 13,000
Amortization of goodwill and intangibles (31,000) (175,000)
Change in allowance for doubtful accounts (38,000) 4,000
Increase in tax credit carryforward - (137,000)
Utilization net operating loss carryforwards - 139,000
Change in valuation allowance for deferred tax assets - (461,000)
------------- --------------
Total deferred income tax expense (benefit) $ 125,000 $ (529,000)
============= ==============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
DEFERRED TAX ASSETS
Income tax benefit related to exercise of stock options and warrants $ 758,000 $ -
Goodwill and intangible assets, principally due to amortization differences 380,000 349,000
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
Alternative minimum tax credit carryforwards 104,000 209,000
Employee benefits, principally due to accruals for financial reporting purposes 21,000 9,000
Other differences, net 4,000 3,000
Charitable contributions carryforward - 31,000
------------- --------------
Net deferred tax assets 1,376,000 662,000
DEFERRED TAX LIABILITIES
Plant and equipment, principally due to depreciation differences 214,000 133,000
------------- --------------
Net deferred tax assets $ 1,162,000 $ 529,000
============= ==============
</TABLE>
10
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 6 - FEDERAL INCOME TAXES (Continued)
At March 31, 1996 and 1995, the Company's net deferred tax assets are presented
as follows:
Current deferred tax assets $ 970,000 $ 69,000
Long-term deferred tax assets 192,000 460,000
------------- --------------
$ 1,162,000 $ 529,000
============= ==============
The valuation allowance for deferred tax assets as of April 1, 1994 was
$461,000. The net change in the total valuation allowance for the twelve months
ended March 31, 1995 was a decrease of $461,000. Of this amount, $139,000
resulted from the utilization of net operating losses during the year ended
March 31, 1995. An additional $60,000 resulted from realization of tax benefits
of temporary differences which reversed during the year ended March 31, 1995.
The remaining $262,000 decrease resulted from the Company's reevaluation of the
realizability of future income tax benefits expected to be generated through the
utilization of its existing deferred tax assets. Based on the Company's current
operating income and expectations for the future, management determined that
future operating and taxable income will more likely than not be sufficient to
fully recognize all deferred tax assets existing at March 31, 1996 and 1995. As
a result, the carrying value of the net deferred tax asset was increased by
$262,000 at March 31, 1995. This increase was recognized as an income tax
benefit during the year ended March 31, 1995.
At March 31, 1996, the Company has alternative minimum tax credit carryforwards
of approximately $104,000 which are available to reduce future regular federal
income taxes over an indefinite period.
NOTE 7 - RELATED PARTY TRANSACTIONS
On September 15, 1995, officers and directors converted debentures in an
aggregate face amount of $200,000 into 219,178 common shares. The debentures
were convertible at the holder's option into common shares of the Company at
Cdn. $1.25 per share, to a maximum of 219,178 common shares. There is no
remaining balance of these debentures outstanding at March 31, 1996.
The Company issued $996,000 of convertible debentures payable to officers and
directors on September 26, 1995. The debentures were convertible at the holder's
option into common shares of the Company at Cdn. $4.45 per share, to a maximum
274,233 common shares. On December 22, 1995, these debentures were converted
into 274,233 common shares, and are no longer outstanding.
At March 31, 1996, certain officers and directors had advanced the Company
$1,264,711 in the form of uncollateralized notes payable. The notes are payable
on demand and are classified as current liabilities. Interest on these notes are
payable monthly at the rate of prime plus 1%.
Total interest costs associated with these notes and debentures was
approximately $60,000 during each of the years ended March 31, 1996 and 1995.
On January 23, 1996, the Company completed a private placement of 500,000 common
shares to officers and directors at a price of Cdn. $5.75. Total cash received,
net of issuance costs, totaled $1,906,100.
Sales to Martin Distribution, Inc. ("Martin"), a company related through common
directorship, amounted to $2,854,935 and $1,056,750 during the years ended March
31, 1996 and 1995, respectively. Trade receivables due from Martin amounted to
$899,422 and $338,975 at March 31, 1996 and 1995, respectively.
The Partnership recorded purchases from Martin in the aggregate amount of
$118,659 and $261,765 during the years ended March 31, 1996 and 1995,
respectively.
11
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 8 - EMPLOYEE BENEFIT PLANS
As of March 31, 1996, the Company had reserved 220,000 shares of common stock
for issuance to key employees, officers and directors. Options to purchase the
Company's common stock are granted at a price equal to the market price of the
stock at the date of grant, and are exercisable upon issuance and regulatory
approval. All options expire no more than five years after the date of grant.
Option prices per share are expressed in Canadian dollars.
OPTION
NUMBER OF PRICE
SHARES PER SHARE
------------- ------------
Outstanding at March 31, 1994 451,000 $1.10 - 1.26
Granted 129,000 $1.00 - 1.19
Canceled (128,000) $1.10 - 1.19
Exercised -
-------------
Outstanding at March 31, 1995 452,000 $1.00 - 1.26
Granted 246,000 $2.00 - 4.15
Exercised (478,000) $1.00 - 2.00
-------------
Outstanding at March 31, 1996 220,000 $1.00 - 4.15
=============
In addition, warrants to purchase 24,000 and 154,000 shares of common stock at
prices ranging from Cdn. $1.05 (U.S. $.75) to Cdn. $6.63 (U.S. $4.77) were
outstanding as of March 31, 1996 and 1995, respectively. These warrants were
granted to key employees of the Company, are exercisable upon issuance and
expire on April 15, 1998 and January 23, 1999. The exercise price of the
warrants was equal to the market price of the stock at the date the warrants
were issued.
On April 1, 1995, the Board of Directors approved a retirement savings plan,
which permits eligible employees to make contributions to the plan on a pretax
salary reduction basis in accordance with the provisions of Section 401(k) of
the Internal Revenue Code. The Company makes a matching stock contribution of
10% of the employee's pretax contribution. Eligible employees may contribute up
to 18% of their pretax compensation. Total expense related to this plan was
$20,619 during the year ended March 31, 1996.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company conducts certain operations in leased facilities, under leases that
are classified as operating leases for financial statement purposes. The leases
provide for the Company to pay real estate taxes, common area maintenance, and
certain other expenses. Lease terms, excluding renewal option periods
exercisable by the Company at escalated rents, expire between August 1996 and
February 2006. In addition to the base lease term, the Company has various
renewal option periods. In addition, certain equipment used in the Company's
operations is leased under operating leases. A schedule of noncancelable
operating lease commitments are as follows:
1997 $ 154,217
1998 126,589
1999 88,489
2000 35,149
2001 26,434
Thereafter 97,108
-------------
$ 527,986
=============
12
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
On January 23, 1996, the Company placed an order for a printing press. The cost
of the press is approximately $1,200,000, which is expected to be delivered
during the second quarter of fiscal year 1997. The Company has a commitment from
a financial institution to provide capital lease financing for this equipment.
There are various claims, lawsuits, and pending actions against the Company
incident to the operations of its business. It is the opinion of management that
the ultimate resolution of these matters will not have a material effect on the
Company's financial position, results of operations or liquidity.
NOTE 10 - SUBSEQUENT EVENTS
On May 1, 1996, the Company completed a private placement of 1,268,293 units at
a price of U.S. $5.125 per unit. Total proceeds from this transaction
approximated $6,500,000. Each unit included one common share of the Company and
a warrant to purchase one additional common share of the Company at U.S. $6.50.
The warrants were exercisable upon issuance and regulatory approval, and expire
June 1, 1999.
NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts receivable,
which amounted to $5,873,578 and $2,751,299 at March 31, 1996 and 1995,
respectively. The Company's trade customers are concentrated in the retail
office products industry and mass market retail stores. Sales to three major
customers approximated 77% and 59% of total sales for the years ended March 31,
1996 and 1995, respectively. Amounts due from three customers approximated 75%
and 71% of the total accounts receivable at March 31, 1996 and 1995,
respectively.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. Although the composition of the group comprising the
Company's largest customers may vary from period to period, the loss of a
significant customer or any reduction in orders by any significant customers,
including reductions due to market, economic or competitive conditions in the
designer stationary or specialty papers industry, may have a material adverse
effect on the Company's business, financial condition and results of operations.
The following table represents approximate sales and trade accounts receivable
related to the Geographic regions in which the Company operates.
1996
---------------------------------------------------------
TOTAL UNITED STATES CANADA OTHER
-------- ------------- --------- -----------
Sales 100 86% 13% 1%
======== ========= ========= ==========
Accounts receivable 100 83% 15% 2%
======== ========= ========= ==========
1995
---------------------------------------------------------
TOTAL UNITED STATES CANADA OTHER
-------- ------------- --------- -----------
Sales 100 89% 10% 1%
======== ========= ========= ==========
Accounts receivable 100 85% 12% 3%
======== ========= ========= ==========
13
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued)
The Company purchases goods from approximately 700 vendors. One vendor accounted
for a significant portion of the Company's total merchandise purchases during
the years ended March 31, 1996 and 1995. The Company purchases commodity paper
and other related products from this broker/vendor that could be supplied by
other sources. There can be no assurances that the relationship between the
Company and this vendor will continue and the loss of the purchasing power the
Company has established with this company would likely have a material adverse
effect on the Company. The Company does not consider itself dependent on any
single source for materials to manufacture its products.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1996 1995
------------- --------------
Cash paid during the year for interest $ 812,416 $ 465,377
============= ==============
Net cash paid (received) during the
year for income taxes $ 173,034 $ (50,000)
============= ==============
14
Exhibit 21.1
SUBSIDIARIES OF GEOGRAPHICS, INC.
1. Geographics Marketing Canada Inc.
2. Geographics (Europe) Limited
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
(A) FROM 10-KSB FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 50,028
<SECURITIES> 0
<RECEIVABLES> 6,083,076
<ALLOWANCES> (146,926)
<INVENTORY> 9,139,273
<CURRENT-ASSETS> 16,888,860
<PP&E> 10,468,707
<DEPRECIATION> (3,182,013)
<TOTAL-ASSETS> 24,738,041
<CURRENT-LIABILITIES> 11,057,829
<BONDS> 0
0
0
<COMMON> 9,620,068
<OTHER-SE> 369,784
<TOTAL-LIABILITY-AND-EQUITY> 24,738,041
<SALES> 22,613,635
<TOTAL-REVENUES> 22,613,635
<CGS> 14,194,505
<TOTAL-COSTS> 5,894,669
<OTHER-EXPENSES> (130,090)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787,848
<INCOME-PRETAX> 1,866,703
<INCOME-TAX> 634,679
<INCOME-CONTINUING> 1,232,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,232,024
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
