-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I+VE/BhrP+4zxIH0w8y+AgJpRW0OKGp3F5QgGHSD72dp8VJqvNfTH5AzN/ISh0gG BDGJQXgVaWgEW074XS54ow== 0000912057-96-027436.txt : 19961126 0000912057-96-027436.hdr.sgml : 19961126 ACCESSION NUMBER: 0000912057-96-027436 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19961125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOGRAPHICS INC CENTRAL INDEX KEY: 0001000621 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 870305614 STATE OF INCORPORATION: WY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-26756 FILM NUMBER: 96671413 BUSINESS ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 BUSINESS PHONE: 3603326711 MAIL ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 10-K405/A 1 FORM 10K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 AMENDMENT NO. 1 TO FORM 10-KSB ON FORM 10-K (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 (IRS Employer Identification No.) incorporation or organization) 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 November 15, 1996. Based on the closing bid price of the Common Stock on the NASDAQ National Market System as reported on November 15, 1996 of $2.94, the aggregate market value of the 5,524,380 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 $15,882,593. 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 November 15, 1996 was 9,416,877. Transitional Small Business Disclosure Format (Check one): Yes_____ No __X__ DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Document Part of Annual Report -------- --------------------- Portions of the General Form for Registration of Part IV - Item 14 Securities Pursuant to Section 12(b) and 12(g) of the '34 Act. PART I 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 and domestic operations are located at 1555 Odell Road, Blaine, Washington 98231, and its telephone number is (360) 332-6711. The Company conducts its export operations through three subsidiaries and a partnership: - - 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." - - 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, market and distribute the Company's products throughout Europe. - - Geographics Australia Pty. Ltd. ("GAPL") was incorporated in Brisbane, Australia on June 28, 1996. GAPL's principal offices are located at 3/32 Lillian Fowler Place, Marrickville NSW 2204, Australia and its telephone number is 61-2-9519-4488. GAPL was organized to import, warehouse, market and distribute the Company's products throughout Australia. - - International Geographics of Ontario ("IGO")was established in September 1989, with the Company owning 70% of the partnership and a marketing agent for the Company owning the remaining 30%. The purpose of IGO was to purchase the Company's products from Martin Distribution Inc. and market and distribute the Company's products in Canada. IGO was dissolved during fiscal 1996. The Company is in the process of winding up the affairs of the partnership. The functions of IGO have been assumed by Geographics Marketing Canada Inc. IGO's principal offices are located at 921 Gana Court, Mississauga, 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 de-listed its common stock from the Vancouver Stock Exchange. The Company's primary focus during this period was the manufacture and marketing of rub on and stick on lettering, signage and graphic art products. These products were manufactured in various locations until 1980 when the Company consolidated its manufacturing facilities and moved to Blaine, Washington. During 1991, a reorganization of the Geographics group of companies was conducted whereby Geographics, Inc. undertook and completed a takeover bid to acquire all of the issued and outstanding shares of IGL. As a result, Geographics, Inc. acquired its parent and became a U.S. based company, with both of its administrative offices and manufacturing facilities located at one location, within a single entity. During fiscal year 1991, the Company began the development of designer stationary and value added paper products. In fiscal year 1992 the Company introduced to the marketplace the first versions of Geopaper, a value added paper. The Company continued to develop new Geopaper designs and new Geopaper customers, and by fiscal year 1994 sales of Geopaper had increased to 3% of total Company sales. In fiscal year 1994, the Company purchased certain assets from E.Z. Industries Inc. (an unrelated Maryland company), for $1,500,000. The purchased assets included equipment used in the manufacturing of vinyl letter sets, stencil kits, lettering guides, dry transfers, signs and similar products, however, primary purpose of the acquisition was to broaden the Company's customer base. The Company successfully placed Geopaper in Office Depot Inc., a major office supply superstore in fiscal year 1995. Sales of Geopaper during fiscal year 1995 increased to 21% of total Company sales. During first quarter of fiscal year 1996, the Company received purchase orders to place Geopaper chain wide in Office Depot and OfficeMax, two of the three largest office supply superstores in North America. In January 1996, the Company announced that Wal-Mart had agreed to place Geopaper in 248 Wal-Mart stores to be shipped in March 1996. During fiscal year 1996, the Company introduced new variations of Geopaper, including Geonotes and Geocubes, memo pad and paper cube products made using Geopaper designs. As a result of the increasing popularity of Geopaper in the retail stores and the expansion of the Geopaper product line, sales of Geopaper products had increased to 65% of total Company sales. Fiscal year 1996 was the year the Company made the transition from a lettering and signage manufacturing company to a manufacturer of stationary and value added papers as its primary business. PRODUCTS The products manufactured by the Company are separated into two major product groups; (1) specialty papers, and (2) lettering and signage. The specialty papers group is composed primarily of designer stationery and other value added papers (paper on which the Company has applied photographs and art images during a printing process and then cut to size). The papers are designed for use in photocopiers and computer printers to be used as stationery, letterhead, business cards, brochures, memo pads and paper cubes. These papers are marketed under the Trademark "Geopaper". Geopaper products are also designed to be used with personal computer printers or to compliment other Company products that are used with personal computers. Geopaper sales increased to 65% of sales in fiscal year 1996, up from 21% of sales in fiscal 1995 and 3% of sales in fiscal year 1994. Net sales for this group increased to about $14,800,000 in fiscal 1996, up from about $2,100,000 in fiscal 1995 and $190,000 in fiscal 1994. See "Sales By Product Category." The Geopaper product line is expected to continue to grow as a percentage of sales as more customers accept the product line and as the use of personal computers continues to grow world wide, but there can be no assurances that such growth shall occur as expected by the Company. See "Management's Discussion and Analysis and Plan of Operations" and "Business Concentration". The lettering and signage group manufacturers and distributes rub-on and stick-on lettering, stencils, electronic moving message signs, American Disabilities Act signs in Braille, and other signage products. This product group represented 35% of sales in fiscal 1996, down from 79% and 97% of sales during fiscal 1995 and 1994, respectively. The Company expects this product group to continue to decrease as a percentage of sales as Geopaper product growth is expected to be significantly faster than the sales growth of this category. Sales of lettering and signage products as an industry will continue to decline over time as the use of personal computers increases. The Company anticipates that it can offset this expected decline by increasing its market share of this industry through its recent addition of 400 to 500 Wal-Mart stores as customers in fiscal 1996. The growth of existing customers featuring Geopaper and lettering products, such as Office Depot, OfficeMax and Business Depot (Staples, Inc.'s Canadian division), together adding over 200 new stores a year, should also contribute to an increase in market share and add additional lettering and signage sales each year. There can be no assurances, however, that such increase in market share shall occur. SALES BY PRODUCT CATEGORY The percentage of the Company's total sales attributable to each class of product offered by the Company for the last three years is set forth below. AS A PERCENTAGE OF SALES ------------------------ FISCAL YEAR CLASS OF PRODUCT 1996 1995 1994 ---------------- ---- ---- ---- Designer stationeries and specialty papers 65% 21% 3% Lettering, signage, stencil and graphic art products 35% 79% 97% STATED IN SALES DOLLARS (ROUNDED) ---------------------------------
FISCAL YEAR CLASS OF PRODUCT 1996 1995 1994 ---------------- ---- ---- ---- Designer stationeries and specialty papers $14,800,000 $2,100,000 $200,000 Lettering, signage, stencil and graphic art products $7,800,000 $8,100,000 $6,700,000
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: FISCAL YEAR CUSTOMER 1996 1995 1994 -------- ---- ---- ---- Office Depot Inc.(1) 40% 31% 29% OfficeMax, Inc. 24% 16% 16% Martin Distribution, Inc.(2) 13% 12% 8% United Stationers Inc. 3% 6% 6% Wal-Mart Stores, Inc. 3% 1% 0% ---- ---- ---- 83% 66% 59% ---- ---- ---- ---- ---- ---- (1) Office Depot, Inc., the Company's largest customer, has announced intentions to merge with Staples, Inc. The Company currently sells to Staples of Canada (Business Depot) through its Canadian subsidiary, Geographics Marketing Canada, Inc., however Staples is not a customer of the Company's domestic operations. Management cannot estimate what impact, if any, this merger may have on the future sales and operating results of the Company. (2) Martin Distribution, the Company's distributor for Canada, is a related party to the Company as the result of a common director. Martin Distribution was replaced by Geographics (Marketing) Canada Inc., effective April 1, 1996, as distributor of Geographics, Inc. products and will cease to be a customer of the Company. Management estimates that this change will have little or no impact on the future sales of the Company. The Company expects that sales to relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future and believes that its financial results depend in significant part upon the success of these few customers. Although the composition of the group comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the designer stationery or specialty papers industry, may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to increase its sales in the future will depend in part upon its ability to obtain orders from customers as well as the financial condition and success of its customers and the general economy, of which there can be no assurance. GROWTH STRATEGY Management is of the opinion that the North American market will continue to provide the Company with significant opportunities for growth. An overview of North American growth opportunities are follows: - - 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. - - 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. - - Existing Geopaper product lines are continually reviewed for performance and may be replaced with new and improved lines. In addition to replacement and improvement of existing lines, new Geopaper products are continually in development and in test markets. - - 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, which the Company has agreed to acquire as of July 1, 1996. The Company anticipates further expansion internationally, including Asia, which is a prominent target destination for Company products. SALES/ASSETS BY GEOGRAPHIC LOCATION Financial information relating to foreign and domestic operations and export sales (all foreign sales are export sales) is as follows: FISCAL YEAR 1996 1995 1994 ---- ---- ---- Sales to Domestic and Foreign Customers United States $19,477,370 $ 8,755,853 $ 6,299,444 Canada (1) 2,854,935 1,271,898 530,462 Australia 281,330 158,385 70,969 ----------- ----------- ------------ Total $22,613,635 $10,186,136 $ 6,900,875 ----------- ----------- ------------ ----------- ----------- ------------ Operating profit or (loss): United States $ 2,081,817 $ 680,806 $ (939,290) Canada (1) 377,328 98,831 (95,434) Australia 65,316 12,307 (12,768) ----------- ----------- ------------ Total $ 2,524,461 $ 791,944 $(1,047,492) ----------- ----------- ------------ ----------- ----------- ------------ Identifiable assets: United States $24,263,181 $10,705,943 $ 6,628,915 Europe 410,060 0 0 Canada (2) 64,800 (91,270) 159,152 Australia 0 0 0 ----------- ----------- ------------ Total $24,738,041 $10,614,673 $ 6,788,067 ----------- ----------- ------------ ----------- ----------- ------------ (1) All export sales to Canada were to Martin Distribution, a related party. (2) In fiscal 1995, Geographics borrowings from its Canadian owned partnerships exceeded investments and other assets held in the partnerships, resulting in a net liability in Canada. International sales accounted for approximately 14%, 11% and 9% of total net sales in 1996, 1995 and 1994, respectively. International sales were concentrated in Canada and Australia and to a lessor degree Mexico, Israel and Norway. The Company anticipates that international sales will increase as a percentage of total sales resulting from the Company's expansion plans in Europe and Asia. As a result, a significant portion of the Company's sales will be subject to certain risks, 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. PURCHASING The Company purchases goods from approximately 700 vendors. One vendor, Unisource, accounted for 56% 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 Paper Direct, Inc., Taylor, Inc., Z-International, Inc., and REDIFORM, Inc. (a division Moore Corp Ltd). 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 estimated competitive position (based upon information provided by the Company's marketing and sales personnel) in the designer stationery industry is as follows: COMPANY COMPETITIVE POSITION IN THE MARKET - ------- ---------------------------------- Paper Direct, Inc. 40% Taylor, Inc 18% Geographics, Inc. 10% Z-International, Inc. 10% REDIFORM, Inc. 5% Others 17% ---- Total 100% ---- The Company's traditional lettering and signage operations compete with several companies that produce similar products (i.e. vinyl lettering, stencil, rub-on lettering), these competitors are: Visu-com, Chartpak and Duro-Art Ind. Competition with Company products compete with competitor products for space in the office products superstores, office product stores, mass market stores, contract stationers, wholesalers, and office product catalogs. The Company's estimated competitive position (based upon information provided by the Company's sales and marketing personnel) in the lettering and signage industry is as follows: COMPANY COMPETITIVE POSITION IN THE MARKET - ------- ---------------------------------- Geographics, Inc. 55% Visu-Com, Inc. 23% Chartpak, Inc. 11% Duro Art Ind., Inc. 11% ---- Total 100% ---- Certain of these competitors are larger, better capitalized, more established and have greater access to resources necessary to produce a competitive advantage. The Company believes that its product designs, product quality, merchandising programs, distribution channels, customer service and competitive pricing distinguishes the Company from its competitors. The development and manufacture of new designer stationeries and specialty papers are highly capital intensive. In order to remain competitive, the Company must continue to make significant expenditures for capital equipment, sales, service, training and support capabilities, investments in systems, procedures and controls, expansions of operations and research and development, among many items. The Company expects that anticipated cash flows from operations, proceeds received from the May 1, 1996 private placement, capital leases, and funds available under a line of credit will be sufficient to meet the Company's capital 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 seven (7) federally registered trademarks; (1) GEOPAPER, (2) GEOTYPE, (3) GEOTAPE, (4) GEOSTENCIL, (5) SHIELD `N' SEE, (6) GEOFOIL, and (7) GEOSIGN. The Company has 6 (six) 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 two (2) registered U.S. copyrights for the following products, "GeoCrumpled" and "GEOCLOUDS". Certain of the Company's proprietary manufacturing processes are protected by trade secrets. While the Company has made every effort to protect all of its intellectual property, to the extent such protections are inadequate, the Company could lose a part or all of these rights which, in 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 November 8, 1996, the Company had 244 employees of whom 234 were employed at its Corporate headquarters in Blaine, Washington, 5 of whom were employed at the Company's facilities in the United Kingdom, and 5 of whom were employed at the Company's facilities in Australia. The manufacturing, warehousing and product distribution aspects of the business employs 192 employees, 36 employees work in administration and 16 employees work in various managerial positions. None of the Company's employees are subject to a collective bargaining agreement. Management believes that its relationship with its employees is good. INFLATION Inflation has not had a significant impact on the Company's operations. However, any significant change in the price for paper or labor and environmental compliance costs could adversely impact the Company. QUARTERLY FLUCTUATIONS The Company's operating results may fluctuate significantly from period to period as a result of a variety of factors, including product returns, purchasing patterns of consumers, the length of the Company's sales cycle to key customers and distributors, the timing of the introduction of new products and product enhancements by the Company and its competitors, technological factors, variations in sales by product and distribution channel, and competitive pricing. Consequently, the Company's product revenues may vary significantly by quarter and the Company's operating results may experience significant fluctuations. SEASONALITY A significant portion of the Company's customer orders are placed between August and October of each year in anticipation for shipment during the Company's third fiscal quarter, which includes the Christmas season. As a result, the Company has experienced, and is expected to continue to experience, such seasonal fluctuations in its operating results based upon past purchasing patterns. 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 AND DOMESTIC FACILITIES The Corporate office and manufacturing 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 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 $5,202, triple net, expiring on February 14, 2006. AUSTRALIAN FACILITIES Upon the completion of the Graham's Graphics acquisition, the Company will assume the lease of 5,000 square feet of warehouse space near Brisbane, Australia. ITEM 3. LEGAL PROCEEDINGS The Company is involved in legal proceedings arising in the ordinary course of business. The Company is not involved in any legal proceedings that it believes will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended March 31, 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock began trading on the NASDAQ National Market under the symbol "GGIT" on March 8, 1996. From May 5, 1995 to March 7, 1996 the Company's Common Stock traded on the OTC Bulletin Board. The Company's Common Stock also trades on the Toronto Stock Exchange under the symbol "GGI". The following table sets forth for the periods indicated the high and low sale prices per share of the Common Stock on the NASDAQ National Market System/OTC Bulletin Board and Toronto Stock Exchange, as reported by NASDAQ and the Toronto Stock Exchange. NASDAQ NMS/OTC BULLETIN BOARD TORONTO STOCK EXCHANGE SYMBOL -GGIT SYMBOL - GGI US$ CDN. $ 1994 HIGH LOW HIGH LOW First Quarter - - $1.85 $0.90 Second Quarter - - $1.75 $1.00 Third Quarter - - $1.25 $1.00 Fourth Quarter - - $1.35 $1.05 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 $0.80 1996 HIGH LOW HIGH LOW First Quarter $1.88 $1.13 $2.25 $1.74 Second Quarter $3.44 $1.45 $4.60 $2.00 Third Quarter $5.38 $3.00 $7.10 $4.00 Fourth Quarter(1) $6.25 $4.50 $8.75 $6.10 1997 HIGH LOW HIGH LOW First Quarter $6.94 $4.75 $9.39 $6.88 Second Quarter $5.69 $3.00 $7.30 $4.25 Third Quarter(2) $3.40 $2.88 $4.75 $3.75 (1) The Company's shares began trading on the NASDAQ National Market System effective March 8, 1996. (2) Third Quarter 1997 activity from October 1, 1996 to November 15, 1996. As of November 15, 1996, there were 275 holders of record of the Common Stock of Geographics, Inc. The closing bid price on the NASDAQ National Markets System at November 15, 1996 was $2.94. The Company currently intends to retain all earnings for working capital to support growth, to reduce outstanding indebtedness and for general corporate purposes. The Company, therefore, does not anticipate paying any dividends in the foreseeable future. The Company did not pay dividends during the three years ended March 31, 1996. 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. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The financial data included in the following table has been selected by the Company and has been derived from the consolidated financial statements for the period indicated. The following financial data should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. CONSOLIDATED STATEMENT OF OPERATIONS DATA: FISCAL YEAR ENDED MARCH 31,
(1) (2)(3) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Operating revenues $22,613,635 $10,186,136 $6,900,875 $5,373,595 $3,880,228 Net income (loss) attributable to Common Stock 1,232,024 747,742 (1,241,518) 269,089 (180,944) Net income (loss) per average common share outstanding .19 .16 (.28) .06 (.06) Weighted average shares outstanding 6,606,499 4,549,101 4,424,535 4,231,729 3,231,729 BALANCE SHEET DATA: FISCAL YEAR ENDED MARCH 31, (1) (2)(3) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Working capital $5,831,031 $1,836,436 $869,651 $1,998,656 $770,698 Total assets 24,738,041 10,614,673 6,788,067 5,358,937 5,336,137 Long term debt 3,690,360 3,519,948 3,083,818 2,070,572 1,510,770 Stockholders' equity 9,989,852 2,803,341 1,471,514 2,518,695 1,747,712
(1) As restated - The financial statements for the fiscal year ended March 31, 1993 have been restated to reflect adjustments to the carrying value of product display racks, inventory and investments in partnerships. (2) As adjusted - Although the financial statements for the fiscal year ended March 31, 1992 have not been restated or reissued to reflect adjustments to the carrying value of product display racks, inventory and investments in partnerships, the selected financial data presented herein for 1992 has been adjusted to retroactively reflect the impact of these changes which were effective in fiscal year 1994. (3) As restated - The financial statements for the fiscal year ended March 31, 1992 were previously restated to reflect a reorganization, to apply changes in methods of accounting and to correct certain errors. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of the Company and the Notes thereto appearing elsewhere on this Report. GENERAL Geographics, Inc. was incorporated in 1974 and has primarily been a manufacturer of stick-on letters, 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, 21% of total sales in 1995 and 3% of total sales in 1994. Besides increasing as a percentage of sales, Geopaper sales were also responsible for significant increases in total Company sales. During 1996, Company sales increased 122% to $22,613,635 from $10,186,136 in 1995. During 1995, Company sales increased 48% to $10,186,136 from $6,900,875 in 1994. RESULTS OF OPERATIONS The following table sets forth the percentages which the items in the Company's consolidated statements of income bear to net sales for the periods indicated: FISCAL YEAR 1996 1995 1994 STATEMENTS OF OPERATIONS DATA: Net sales 100.0% 100.0% 100.0% Cost of sales 62.8 57.7 63.2 ----- ----- ----- Gross margin 37.2 42.3 36.8 Selling, general and administrative expenses 25.4 28.2 45.1 Amortization of goodwill .7 6.3 6.9 ----- ----- ----- Income from operations 11.1 7.8 (15.2) ----- ----- ----- Other income .6 .0 2.9 Interest expense (3.5) (4.5) (5.2) ----- ----- ----- Other income (expense) (2.9) (4.5) (2.3) ----- ----- ----- Income before provision for income taxes 8.2 3.3 (17.5) Income tax provision (benefit) 2.8 (4.0) .5 ----- ----- ----- Net income 5.4% 7.3% (18.0)% ----- ----- ----- ----- ----- ----- FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 Net Sales. Net sales increased 122% to $22,613,635 in fiscal 1996 from $10,186,136 in fiscal 1995. This increase was primarily attributable to the acceptance of the Geopaper program. The Geopaper program experienced a sales increase of 605% in fiscal 1996 to $14,800,000 compared to $2,100,000 for fiscal 1995. Geopaper sales increases were specifically due to shipments of Geopaper products to all Office Depot Inc. and OfficeMax stores in North America, as well as shipments of Geopaper products to 248 Wal-Mart stores in March 1996. Office Depot, Inc., the Company's largest customer, has announced intentions to merge with Staples, Inc. The Company currently sells to Staples of Canada (Business Depot) through its Canadian subsidiary, Geographics Marketing Canada, Inc., however Staples is not a customer of the Company's domestic operations. Management cannot estimate what impact, if any, this merger may have on the future sales and operating results of the Company. Signage and lettering sales for fiscal 1996 decreased 4% to $7,800,000 from $8,100,000 in fiscal 1995. The majority of the decline in signage and lettering sales was due to the Company discontinuing the sale of science fair presentation boards. In prior years, the Company has purchased presentation boards and bundled them with Geographics stick-on lettering products. In fiscal 1996, the Company continued to supply the lettering products, while the Company's customers began purchasing the presentation boards directly from the manufacturer. After adjusting sales for presentation boards, fiscal 1996 lettering and signage sales were slightly ahead of fiscal 1995 sales. The sales mix of Geopaper products increased to 65% of sales in fiscal 1996 from 21% of sales in fiscal 1995, while lettering and signage sales decreased to 35% of sales from 79% of sales for the same periods. It is the opinion of management that sales of signage and lettering products will remain flat or possibly decline in the future as the computerization of homes and offices will allow the efficient production of lettering and signage products by current end-users. Conversely, the increasing number of computers will increase the number of potential end users of Geopaper products that are specifically designed for use with computer technology. Gross Margin. Cost of sales includes product manufacturing costs, occupancy and delivery costs. Gross profit as a percentage of sales decreased to 37.2% in fiscal 1996, from 42.3% in fiscal 1995. The decrease in the gross margin is the result of primarily two factors. The first factor results from a change in sales mix to products with lower gross margins. Geopaper represented 65% of sales while lettering and signage represented 35% of sales in 1996, compared to 21% and 79% of sales in 1995, respectively. Gross margins for Geopaper were approximately 31% while gross margins for lettering and signage were approximately 49% during fiscal 1996. The second factor results from manufacturing and labor inefficiencies created by the Company's 122% growth rate. This rapid growth forced the Company to substantially increase its facilities, equipment and work force, as well as utilize leased warehouse space in order to meet the increased sales demands. A more controlled growth pattern would have allowed the Company to more effectively manage the installation and usage of new equipment introduced to the production process, as well as phase in the expanded warehouse space without utilizing off-site facilities. Other factors affecting the gross margin include: (a) Raw Material cost increases/decreases. During fiscal 1996, the cost of the Company's raw materials for Geopaper (commodity large sheet plain paper) was extremely volatile in price. The raw material price changes during the year resulted in higher overall raw paper costs and higher production costs. The effect of the paper price increases on finished goods is somewhat limited as packaging and labor costs constitute the largest portions of finished Geopaper products. (b) Selling price increases/decreases. During fiscal year 1996 the Company was able to pass the higher costs of raw paper on to its customers in the form of increased selling prices. Management cannot provide assurance that increases can be passed on in the future, nor can management provide assurances that decreases in raw materials will result in decreased selling prices. (c) Expansion strategies. Expansion into Europe and other markets will result in opportunities and risks that will affect gross margins. Each market has differing competition, pricing levels and raw material costs. The Company intends to produce most of its products at its Blaine, Washington 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 Facility. Management anticipates the March 1996 completion of the Blaine facilities expansion should reduce or eliminate a number of logistical cost variances. The expanded Facility allows the Company to eliminate many of the off-site storage warehouses that were required to manage the increased levels of inventory during 1996. The Company will be able to reduce handling and storage costs, while improving logistics, during fiscal 1997 as inventory becomes centralized at the Company's Blaine Facility. The addition of more efficient printing and enhanced packaging equipment during fiscal 1996 and 1997 should also result in positive margin improvements as superior production lines are completed. Selling, general and administrative expenses. Selling, general and administrative expenses (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 fiscal 1995. Income from operations. Income from operations increased to 11.1% of sales during fiscal 1996, an increase from 7.8% of sales in fiscal year 1995. The improvement in income from operations was due to the reductions in SG&A and goodwill amortization expenses as a percentage of sales, which more than offset the decreased gross margin percentage. Other income. Other income was 0.6% of sales in fiscal 1996, compared to 0.0% of sales during fiscal 1995. This category includes items such as management fees, foreign exchange gains, gains on disposition of fixed assets, and other miscellaneous items. Management does not anticipate a reoccurrence of this income in fiscal 1997. Interest expense. Interest expense increased significantly to $787,848 during fiscal year 1996, compared to $457,499 for fiscal 1995. However, as a percentage of sales, interest expense declined in fiscal 1996 to 3.5% of sales compared to 4.5% for fiscal 1995. The acquisition of equipment used in the manufacture of Geopaper, in addition to higher bank debt related to facilities expansion and working capital requirements resulted in higher interest costs during fiscal 1996. The higher interest costs spread over a significantly higher sales volume in 1996 resulted in a decline in interest costs as a percentage of sales. Income before provision for income taxes. Income before provision for income taxes improved to 8.2% of sales in fiscal 1996 compared to 3.3% of sales in fiscal 1995. The improvement was due to the higher profitability in income from operations noted above and the lower interest costs as a percentage of sales previously discussed. In general, income before provision for income taxes improved due to economies of scale resulting from increased sales volumes. Income tax provision (benefit). The income tax provision in fiscal year 1996 was 2.8% of sales, compared to a benefit of 4.0% of sales in fiscal 1995. A tax benefit was recognized in fiscal 1995 as management determined that future operating and taxable income will more likely than not be sufficient to fully recognize all deferred tax assets existing at March 31, 1995. As a result, the carrying value of the net deferred tax asset was increased and recognized as a current (1995) period income tax benefit. This 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. FISCAL YEARS ENDED MARCH 31, 1995 AND 1994 Net Sales. Net sales increased 48% to $10,186,136 in fiscal 1995 from $6,900,875 in fiscal 1994. This increase was primarily attributable to the acceptance of the Geopaper program. The Geopaper program experienced a sales increase of 1,109% in fiscal 1995 to $2,100,000 from $190,000 for fiscal 1994. This sales growth results directly from the growth of the office supply superstore industry, a major focus of the Company's marketing efforts. Fast growing companies such as Office Depot, Office Max and Business Depot, which are among the fastest growing Companies in this industry, all carry the Company's products. The sales mix of Geopaper products increased to 21% of sales in fiscal 1995 from 3% of sales in fiscal 1994, while lettering and signage sales decreased to 79% of sales from 97% of sales for the same periods. Gross Margin. Cost of sales includes product manufacturing costs, occupancy and delivery costs. Gross profit as a percentage of sales increased to 42.3% in fiscal 1995 from 36.8% in fiscal 1994. The increase in the gross margin is the result of primarily two factors; (1) The Company wrote down many slow-moving or obsolete products during fiscal 1994 as the Company prepared for the launch of it's Geopaper product line and, (2) Manufacturing and labor efficiencies gained from new production and packaging equipment employed during fiscal 1995. This increase in margins was accomplished despite the market pressures experienced when selling to discount office supply superstores which demand the best possible prices. Geopaper has proven to be a successful product for these stores, thus allowing the Company to maintain improved profit margins. Selling, general and administrative expenses. Selling, general and administrative expenses (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 28.2% of sales in fiscal 1995 from 45.1% of sales in fiscal 1994. The decline is primarily due to the spreading of SG&A expenses over significantly higher sales volumes resulting from the success of the Geopaper programs, in addition to the effect of several cost-cutting measures implemented by the Company during fiscal 1995. The decrease was also attributable to various one-time costs of acquiring and integrating the EZ Letter Division into the Companies continuing operations during fiscal 1994. Amortization of goodwill. Goodwill amortization declined to 6.3% of sales from 6.9% of sales for fiscal years 1995 and 1994, respectively. The decline was primarily due to increased sales volumes. Fiscal 1995 included twelve months of amortization compared to nine months of amortization during fiscal 1994. Other income. Other income was 0.0% of sales in fiscal 1995, compared to 2.9% of sales during fiscal 1994. This category includes items such as management fees, foreign exchange gains, gains on disposition of fixed assets, and other miscellaneous items. Management does not anticipate a reoccurrence of this income in the future. Interest expense. Interest expense increased significantly to $457,499 during fiscal year 1995, compared to $356,060 for fiscal 1994. However, as a percentage of sales, interest expense declined in fiscal 1995 to 4.5% of sales compared to 5.2% for fiscal 1994. The acquisition of equipment used in the manufacture of Geopaper, in addition to higher bank debt related to facilities expansion and working capital requirements resulted in higher interest costs during fiscal 1995. The higher interest costs spread over a significantly higher sales volume in 1995 resulted in a decline in interest costs as a percentage of sales. Income tax provision (benefit). The income tax benefit in fiscal year 1995 was 4.0% of sales, compared to a provision of 0.5% of sales in fiscal 1994. The tax benefit was recognized in fiscal 1995 as management determined that future operating and taxable income would more likely than not be sufficient to fully recognize all deferred tax assets existing at March 31, 1995. As a result, the carrying value of the net deferred tax asset was increased and recognized as an income tax benefit during fiscal 1995. This benefit was non-reoccurring in nature and had no effect on fiscal 1996 results. LIQUIDITY AND CAPITAL RESOURCES The Company's operations in general, and its Geopaper manufacturing operations in particular, are typically capital intensive. The Company has experienced from time to time significant negative cash flows from operating activities which have been offset by equity and debt financings. As the Company expands its production and distribution activities, it expects to experience negative cash flows from operating activities from time to time. In such circumstances, the Company will be required to fund at least a portion of production and distribution costs, pending receipt of anticipated future revenues, from working capital or from additional debt or equity financings from outside sources. Although the Company has the ability to finance its planned growth and expansion from operating cash flow, capital lease financing, and borrowings under the Company's existing credit facilities, the Company also considers alternative financing options, such as the issuance of common stock or convertible debt, in the event market conditions make such alternatives financially attractive. The Company's future financing requirements will be affected by the number of new customers, the strength of reorders by existing customers, the growth of existing customers, as well as the success of new products introduced by the Company. Additional financing might also be necessary in the event the Company pursues further expansion or business acquisition opportunities. There is no assurance the Company will be able to obtain such financing or that such financing, if available, will be on terms satisfactory to the Company. The revolving credit agreement, installment notes and capital lease obligations are collateralized by substantially all of the assets of the Company. Additionally, the revolving credit agreement and certain other financing arrangements require the Company to comply with several debt covenants, the most restrictive of which include the maintenance of liquidity and coverage ratios. The covenants include liquidity ratios which require the Company to maintain established levels of current and net worth ratios, and limits are established for cash flow coverage and capital expenditures. As of March 31, 1996, the Company is in compliance with the debt covenants. FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 On July 14, 1995, the Company's Bank replaced the existing $5,000,000 revolving line of credit with an interest rate of prime plus .5%, with a $6,000,000 revolving credit agreement with an interest rate of prime plus .5%. On September 15, 1995, officers and directors converted debentures in an aggregate face amount of $200,000 into 219,178 common shares. On September 26, 1995, the Company issued $996,000 of convertible debentures payable to officers and directors. The debentures were convertible at the holders option into common shares of the Company at Cdn. $4.45 per share, to a maximum 274,233 common shares. On December 22, 1995, these debentures were converted into 273,233 common shares, and are no longer outstanding. On October 23, 1995, the Company's Bank replaced the existing $6,000,000 revolving line of credit with an interest rate of prime plus .5%, with a $7,000,000 revolving credit agreement with an interest rate of prime plus .25%. Between June 1995 and November 1995, the remaining holders of the 8% convertible subordinated debentures converted the remaining $990,000 of outstanding debentures into 894,960 shares of common stock. On December 7, 1995, the Company's Bank modified the interest rate on two existing term real estate loans. The floating interest rate on two loans totaling $862,607 was fixed at a rate 8.825% per annum. Two real estate loan commitments totaling $605,000 with interest rates at prime plus 1.0% were also converted to a fixed rate of 8.825% per annum. On January 23, 1996, the Company completed a private placement of 500,000 common shares to officers and directors at a price of Cdn. $5.75. Total cash received, net of issuance costs, totaled $1,906,100. On February 13, 1996, the Company's Bank replaced the existing $7,000,000 revolving line of credit with an interest rate of prime plus .25%, with a $12,000,000 revolving credit agreement with interest at the prime rate. 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 the fiscal year, resulting in the issuance of 768,000 shares of common stock. At March 31, 1996 certain officers and directors had advanced the Company $1,264,711 in the form of uncollateralized notes payable. The notes are payable on demand and are classified as current liabilities. Interest on these notes are payable monthly at the rate of prime plus 1%. During fiscal year 1996, the Company wound up and dissolved International Geographics of Ontario ("IGO"). The purpose of IGO was to distribute the Company's products in Canada. The dissolution of IGO has had a positive impact upon the Company as marketing and distribution to IGO's former customers is handled directly by its' subsidiary Geographics Marketing Canada, Inc. The financial impact resulting from this dissolution was insignificant. Subsequent to year end, the Company received $6,500,000 before expenses as the result of a private placement of 1,268,293 units at a price of $5.125 per unit. Each unit is composed of one share of stock and one warrant to purchase a share of stock at $6.50 per share. The proceeds were used to pay down the revolving credit line balances. Subsequent to year end, the Company agreed to purchase substantially all of the assets of Grahams Graphics Pty. Ltd., its exclusive distributor in Australia. The total purchase price is expected to approximate US$390,000 to be paid as follows: (i) the issuance of 50,000 shares of common stock (valued at an aggregate of US$200,000); (ii) the issuance of options to purchase an additional 50,000 shares of common stock for US$4.00 per share; (iii) the assumption of approximately US$150,000 in unsecured trade liabilities; and (iv) a one time cash payment of US$40,000. Upon the completion of the purchase transaction, the assets acquired and liabilities assumed will be contributed to the Company's wholly-owned Australian subsidiary, Geographics Australia Pty. Ltd. The effective date of this transaction will be July 1, 1996. NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company's principal cash flow requirements have been to fund working capital needs, including building inventory in the United States and the United Kingdom, as well as funding equipment deposits and prepaid expenses. The Company's sales are substantially on net sixty day terms, and trade receivables are used as collateral to provide the Company with a source of capital prior to their collection. Working capital requirements are reduced by the existence of vendor credit terms, which allow the Company to finance a portion of its inventory. 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, building expansion and equipment acquisitions related to the success of the Geopaper program. NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net negative cash flow from investing activities for fiscal 1996, of $3,645,679, compared to a negative cash flow from investing activities of $1,303,258 for fiscal 1995. The Company made significant investments to increase its Geopaper production capacity by acquiring printing presses, paper cutting equipment, packaging equipment, computers, trucks and warehouse racking. The Company anticipates that it will continue to invest in Geopaper production equipment in fiscal 1997. On January 23, 1996, the Company placed an order for a printing press. The cost is approximately $1,200,000, which is expected to be delivered during the second quarter of fiscal 1997. The Company has commitment from a financial institution to provide capital lease financing for this equipment. FISCAL YEARS ENDED MARCH 31, 1995 AND 1994 NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced negative operating cash flows during fiscal year 1995 and 1994 ($379,162 for fiscal 1995 and $275,137 for fiscal 1994). Contributing to the negative cash flow from operations was the increase in trade receivables and related party trade receivables balances. Total trade receivables for fiscal 1995 increased 192% to $2,751,299 compared to $940,501 for fiscal 1994. The increase in receivables of 192% at year end fiscal 1995 over fiscal 1994 year end balances is consistent with the rapid sales growth the Company enjoyed during fiscal 1995. Also contributing to the increase in receivables was a large sales increase in fourth quarter sales to office supply superstores which require relatively longer credit terms. The Company also expended significant amounts of working capital to increase their inventories which increased to $2,901,155 at March 31, 1995 from $1,841,481, an increase of 58%. The 58% increase in inventory was due in part to the following factors: (1) Building of inventory in anticipation of higher sales levels in fiscal 1996 in keeping with management's philosophy that the building of inventory is preferable and less expensive than losing customers due to product shortages during growth periods, and (2) The Company has a continuing Geopaper design development program, consequently new product designs are printed and stored in inventory pending initial releases to customers. NET CASH FLOWS FROM FINANCING ACTIVITIES. For the fiscal year ended March 31, 1995, the Company received a net $1,697,768 from various financing sources, compared to $2,339,358 for the prior fiscal year. For the year ended March 31, 1995, the Company increased current line of credit borrowings by $990,427, compared to $968,835 for the year ended March 31, 1994. Proceeds from long-term debt borrowings for fiscal 1995, were $765,125, compared to $1,351,924 in fiscal 1994. Repayments of long-term debt in fiscal 1995 were $232,685 compared to $214,904 in fiscal 1994. The Company received $22,746 from officers and directors in the form of notes during fiscal 1995, while $49,184 was received from officers and directors in fiscal year 1994. Repayments of notes payable to officers and directors were $134,888 in fiscal 1995 compared to $10,018 in fiscal 1994. In addition the Company received proceeds from private placements, option exercises and warrant exercises in the amount of $287,043 in fiscal 1995, compared to $194,337 in fiscal year 1994. The proceeds received from the above debt and equity financing were primarily utilized to finance working capital requirements, building expansion and equipment acquisitions related to the success of the Geopaper program. NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net negative cash flow from investing activities for fiscal 1995, of $1,303,258, compared to a negative cash flow from investing activities of $2,096,849 for fiscal 1994. The Company made significant investments to increase its Geopaper production capacity by acquiring printing presses, paper cutting equipment, packaging equipment, computers, trucks and warehouse racking. In addition, the Company expended $1,500,000 on the purchase of the EZ Letter Division of EZ Industries during fiscal 1994. The Company also borrowed $250,422 and $34,376 from related partnerships during the fiscal years ended March 31, 1995 and 1994, respectively. ITEM 8. FINANCIAL STATEMENTS The financial statements and supplementary data are included under Item 14 (a) 1. and (a) 2. of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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, Chief Executive Officer, Chief Financial Officer and Secretary Mark G. Deans 31 Director, Executive Vice President-Marketing R. Scott Deans 34 Director, Executive Vice President-Operations Moises Cosio 65 Director Alan D. Tuck Jr. 53 Director Robert S. Parker 50 Director Luis Alberto Morato 36 Director RONALD S. DEANS has served as the Chairman, Chief Executive Officer and President of the Company since he founded the Company in 1973. He has also served as the Company's interim Chief Financial Officer and Secretary since September 4, 1996. The Company expects to name a new Chief Financial Officer and Secretary in the near future. Mr. Deans has over thirty years experience in the graphics 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 of the Company. MARK G. DEANS 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. Mr. Deans has served as a director of the Company since November 1994. 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 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. Mr. Deans has served as a director of the Company since September 1995. Ronald S. Deans is the father of R. Scott Deans. Mr. Deans is responsible for all manufacturing operations of the Company. MOISES COSIO has served on the Company's board of directors since January 1995. Mr. Cosio is an international financier residing in Mexico. Mr. Cosio has been appointed to various boards including Telefonos de Mexico, a publicly traded company, and has investment interests in Grupo Carso, InverMexico, Mexican subsidiaries of Kimberly-Clark and John Deere. Mr. Cosio also owns luxury hotels in Ixtapa, Acapulco and Mexico City. ALAN D. TUCK JR. has served on the board of directors of the Company since August 1995. Mr. Tuck is President of Greenway Pump Inc., a privately held company performing research an development of hydraulic pumps since March 1992. Mr. Tuck is also an inventor and holder of several U.S. patents. From July 1989 to March 1992, Mr. Tuck operated Fluid Systems Engineering, a privately held company performing research and development of hydraulic pumps. Mr. Tuck is a graduate of the United States Air Force Academy and former U.S. Air Force Officer and a recipient of a Juris Doctor Degree from the University of California School of Law in Davis, California. ROBERT S. PARKER has served on the Board of Directors since April 1996. Mr. Parker has been the President of Sanford Corporation, a manufacturer of writing instruments and office supplies, since December 1990. Sanford Corporation is a subsidiary of Newell Co., a publicly traded company. LUIS ALBERTO MORATO has been a director of the Company since October 1995. From March 1993 to the present, Mr. Morato has been an independent civil engineering consultant. From June 1982 to March 1993, Mr. Morato was a budget manager with Bytsa De C.V. Mr. Morato is the son-in-law of Mr. Fidel Garcia Carrancedo, a former director of the Company and current principal stockholder of the Company. The Company pays each non-employee director a fee of $500 per month, plus $750 for each Board of Directors meeting attended. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance of Board of Directors meetings. Directors of the Company who are also employees of the Company do not receive fees for their services as directors. BOARD COMMITTEES AND MEETINGS During the fiscal year ended March 31, 1996, there were two (2) Meetings of the Company Board of Directors. Each Board member attended 75% or more of the aggregate of the Meetings of the Board of Directors and the Meetings of all Committees of the Board of Directors on which they served. The Audit Committee was established in April 1991. The Audit Committee's function is to make recommendations concerning the effectiveness of the Company's internal auditing methods and procedures, to determine through discussions with independent auditors whether any limitations or restrictions have been placed upon them in connection with either the scope of the audit or its implementation, to review the financial statements and related notes with the auditors to ensure the statements and notes fully disclose all material facts of the Company, and to recommend approval or non-approval of such financial statements and related notes. The members of the Audit Committee are currently Alan D. Tuck, Jr., Chairman and Ronald S. Deans. Fidel Garcia Carrancedo was previously a member of the Audit Committee through September 20, 1996, at which time he resigned from the Board of Directors. The Board intends to replace this position on the Audit Committee as soon as practical. The Audit Committee met one time during fiscal 1996 and all members attended the meeting. The Compensation Committee was established in April 1991. The Compenstion Committee's function is to monitor and make recommendations with respect to compensation of senior officers, as well as the granting of stock options and stock awards. The members of the Compensation Committee are Robert S. Parker, Chairman, Ronald S. Deans and Alan D. Tuck, Jr. The Compensation Committee met one time during fiscal 1996 and all members attended the meeting. The Company does not have a nomination committee. ITEM 11. 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. SUMMARY COMPENSATION TABLE
Name and Restricted Other Principal Other Annual Stock Options/ LTIP All Position Period Salary Bonus Compensation Award(s) SARs(#) Payouts Compensation - -------- ------ ------ ----- ------------ -------- ------- ------- ------------ 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 0 0 0 0 0 0 0 Finance & CFO
* Mr. Fife was hired in October 1994, and resigned September 4, 1996. EMPLOYMENT AGREEMENTS The Company has no written employment agreements with any of its officers or directors as of March 31, 1996, although the Company intends to establish written agreements with its officers and directors in the future. OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
Percent of Number Total Options/SARs Exercise or of Securities Underlying Granted to Employees Base Price Expiration Name Options/SARs Granted (#) in Fiscal Year ($/Sh) Date - ---------------------------------------------------------------------------------------------------------------- Ronald S. Deans 6.0% 30,000 Cdn $2.30 August 18, 2000 Mark G. Deans 6.5% 12,000 Cdn $2.00 April 25, 2000 20,000 Cdn. $4.15 October 10, 2000 R. Scott Deans 6.5% 12,000 Cdn $2.00 April 25, 2000 20,000 Cdn. $4.15 October 10, 2000
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Value of Number of Unexercised Unexercised In-the-Money Option/SARs at Options/SARs at Shares FY-End (#) FY-End Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized Unexercisable Unexercisable - -------------------------------------------------------------------------------------- Ronald S. Deans 90,000 $373,543 0/30,000 $0/92,347 Mark G. Deans 86,000 $353,253 0/20,000 $0/34,671 R. Scott Deans 86,000 $353,253 0/20,000 $0/34,671 Terry A. Fife 54,000 $207,127 0 0
As of March 31, 1996, the Company had reserved 220,000 shares of common stock for issuance to key employees, officers and directors. Options to purchase the Company's common stock are granted at a price equal to the market price of the stock at the date of grant, and are exercisable upon issuance and regulatory approval. All options expire no more than five years after the date of grant. Option prices per share are expressed in Canadian dollars. The rate of exchange as of November 15, 1996 was US $.752 = Cdn $1.00. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS Mr. Ronald S. Deans, a member of the Company's Compensation and Audit Committee, is the Company's President, Chief Executive Officer, Chief Financial Officer, Chairman, Director and Principal Shareholder of the Company. During the fiscal year ended March 31, 1996, Mr. Deans received $321,629 in salary, bonus and stock compensation. BOARD OF DIRECTORS COMPENSATION REPORT ON EXECUTIVE COMPENSATION The Company's Compensation Committee (the "Committee") is comprised of Robert S. Parker, Chairman, Alan D. Tuck, Jr. and Ronald S. Deans. Mr. Parker and Mr. Tuck are outside directors, while Mr. Deans is an inside director. The committee has the overall responsibility to review and approve the Company's executive compensation programs. To assist the Company in recruiting, motivating and retaining high caliber executives, the Company has approved a compensation policy that pays key executives for superior results. The current compensation program for executive officers consists of three major elements: (1) base salary, (2) performance based discretionary cash bonus and (3) periodic stock option grants. BASE SALARY. It is the policy of the Company to review executive officer base salaries each year in relation to comparable positions of responsibility in similar sized companies. This does not assure an increase in salary. In establishing base salary levels, the Committee considers the competitiveness of the entire compensation package. STOCK OPTION GRANTS. The Company believes that the ability to use the Stock Option Plan to attract and retain key personnel has been essential to the growth of the Company. Stock option grants are designed to concurrently reward the stockholders and recipients since the executive officers realize increases in value from the stock options will occur only if the stock price, and thus stockholder value, also increases. Additionally, this element of compensation encourages and creates ownership and retention of the Company's stock by key employees and further aligns the long-range interests of these employees with those of the stockholders by allowing key employees to build a meaningful ownership stake in the Company. CHIEF EXECUTIVE OFFICER COMPENSATION. It is the policy of the Compensation Committee to review the base salary of the Chief Executive Officer each year in relation to comparable positions of responsibility in companies of similar size. This does not assure an increase in salary. Mr. Deans base salary was $234,000 during the fiscal year ended March 31, 1996, an increase of $52,334 over Mr. Deans base salary during the fiscal year ended March 31, 1995. This increase was approved by the Compensation Committee and was based upon the significant increase in the growth and profitability of the Company during the fiscal years ended March 31, 1996 and 1995. Mr. Deans also received a bonus of $87,629 during the fiscal year ended March 31, 1996, an increase of $87,629 over the fiscal year ended March 31, 1995. This bonus was approved by the Compensation Committee and was based upon a fixed calculation tied to the relative growth of the Company's sales and profitability. The output of this calculation is then adjusted by the Compensation Committee for Mr. Deans contributions to the relative growth and profitability of the Company in relation to those benchmarks created by the Compensation Committee to evaluate the performance of Mr. Deans as Chief Executive Officer. COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). Section 162(M) of the Internal Revenue Code, as amended, generally disallows a tax deduction to public companies for compensation for over $1 million paid to the Chief Executive Officer and the Company's four other most highly-paid executive officers. Performance based compensation is not subject to the deduction limit if certain requirements are met. The Company intends to structure the performance-based position of the compensation to its executive officers, when and if awarded in the future, in a manner that complies with the statute. PERFORMANCE GRAPH The Securities and Exchange Commission requires that the Company include a line-graph presentation comparing cumulative, five-year stockholder returns on an indexed basis with a performance indicator of the overall stock market and either a published industry index or company-determined peer group. The Company has elected to exclude this information from this filing as the Company became listed on NASDAQ shortly before year end. Consequently, pertinent market information related to stockholder returns for the previous five years is not available. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth Common Stock ownership as of November 8, 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. Information with respect to the percent of class is based on 9,416,877 shares of the Company's Common Stock issued and outstanding as of November 8, 1996. Shares Percent Name and Address (1) Beneficially Owned(2) of Class --------------------- -------- Ronald S. Deans (3) 716,907 7.6% Mark G. Deans (4) 442,279 4.7% R. Scott Deans (5) 444,518 4.7% Moises Cosio (6) 169,600 1.8% Alan D. Tuck Jr. (7) 150,512 1.6% Robert Parker (8) 30,000 .3% Luis Alberto Morato (9) 20,000 .2% All Officers and Directors as a Group (7 persons) 1,973,816 20.0% Fidel Garcia Carrancedo (10) 1,426,968 15.2% Platinum Partners, L.P., Mr. Calvin Hori, Hori Capital Management (11) 660,000 7.0% (1) Unless otherwise indicated, the address of each of the listed beneficial owners identified is 1555 Odell Road, Blaine, Washington 98231. Unless otherwise noted below, the Company believes that all persons named in the table have sole voting and investment with respect to all of the shares of Common Stock beneficially owned by them. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this filing upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that warrants or options that are held by such person (but not those held by any other person) and that are exercisable within 60 days of this filing have been exercised. (3) Mr. Ronald Deans is Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer of the Company. Includes 43,000 shares in the name of his wife, Ann Deans, and 28,775 shares held by the Geographics, Inc. 401(k) Plan for which Mr. Deans has voting control. The beneficially owned shares for Mr. Deans also includes 30,000 shares of Common Stock issuable upon exercise of certain stock options by Mr. Deans. His options are exercisable at $2.30 Cdn. and expire August 18, 2000. The shares beneficially owned by Mr. Deans also includes 9,756 shares and 9,756 warrants purchased by Mr. Deans in the May 1996 Offering. (4) Mr. Mark Deans is a Director and Executive Vice President - Marketing of the Company. Includes 20,000 shares of Common Stock issuable upon exercise of certain stock options by Mr. Deans. His options are exercisable at $4.15 Cdn. and expire October 10, 2000. (5) Mr. Scott Deans is a Director and Executive Vice President - 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. (6) Mr. Cosio is a Director of the Company. (7) Mr. Tuck is a Director of the Company. Includes 30,000 shares of Common Stock issuable upon exercise of certain stock options by Mr. Tuck. His options are exercisable at $2.30 Cdn. and expire August 18, 2000. The shares beneficially owned by Mr. Tuck also includes 9,756 shares and 9,756 warrants purchased by Mr. Tuck in the May 1996 Offering. (8) Mr. Parker is a Director of the Company. (9) Mr. Morato is a Director of the Company. Includes 20,000 shares of Common Stock issuable upon exercise of certain stock options by Mr. Morato. His options are exercisable at $4.15 Cdn. and expire October 10, 2000. (10) Mr. Carrancedo is a former Director of the Company who resigned from that position on September 20, 1996 for personal reasons. His address is 555 Reforma, Mexico City, Mexico. (11) The address for each of these persons is One Liberty Square, Fourth Floor, Boston, MA 02109. The information is based solely upon a Schedule 13D dated June 27, 1996. Of the 660,000 shares shown as beneficially owned by Platinum Partners, Mr. Calvin Hori, and Hori Capital Management, Inc., Mr. Hori has sole voting power and sole dispositive power of such shares. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 5% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. These insiders are required by the Securities and Exchange Commission's regulations to furnish the Company with copies of all Section 16(a) forms they file, including Forms 3, 4, and 5. To the Company's knowledge, based solely upon review of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended March 31, 1996, all such Section 16(a) filing requirements appear to be satisfied. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS DEBT AND EQUITY INSTRUMENTS ISSUED TO OFFICERS AND DIRECTORS During the three years ended March 31, 1996, the Company concluded several transactions involving officers and directors of the Company. These transactions included the issuance of convertible debentures, the conversion of debentures into common shares and private placements of common shares. These transactions are as follows: On June 29, 1993, the Company completed a private placement of $1,000,000 of 8% convertible debentures to nine Canadian residents, none of which were officers, directors or otherwise related to the Company at the time. Richard Thompson, a former Director of the Company from September 1993 to October 1995 (whose principal amount of debenture equaled $100,000 convertible into 90,400 shares of Common Stock) was an original participant in the private placement. The principal amount of the debentures were convertible at the option of the holders at the rate of 904 common shares per principal amounts of $1,000. Holders of the debentures converted an aggregate $990,000 principal amounts for 894,960 shares of Common Stock and $10,000 principal amounts for 9,040 shares of Common Stock during the years ended March 31, 1996 and 1995, respectively. The outstanding balances of the convertible debentures were $0, $990,000 and $1,000,000 at March 31, 1996, 1995 and 1994, respectively. On April 18, 1994, the Company completed a private placement of $200,000 of convertible debentures which paid interest at a rate of prime plus 2% and were convertible into Common Stock of the Company at Cdn$1.25 per share, not to exceed a total of 219,178 shares of Common Stock of the Company. The debentures were purchased by Ronald S. Deans, the Company's Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer (whose principal amount of debenture equaled $100,000, convertible into 109,589 shares of Common Stock), and Fidel Garcia Carrancedo, a former Director and current principal stockholder of the Company (whose principal amount of debenture equaled $100,000, convertible into 109,589 shares of Common Stock). On September 15, 1995, Ronald S. Deans and Fidel Garcia Carrancedo each converted debentures in the amount of $100,000 into 109,589 shares of Common Stock (for an aggregate amount of $200,000 into 219,178 shares of Common Stock). The outstanding balances of the convertible debentures were $0 and $200,000 at March 31, 1996 and 1995, respectively. On March 23, 1995, Ronald S. Deans (whose principal amount of debenture equaled $100,000, convertible into 93,063 shares of Common Stock), Fidel Garcia Carrancedo (whose principal amount of debenture equaled $200,000, convertible into 186,127 shares of Common Stock), Mark G. Deans, a Director and Executive Vice President-Marketing of the Company (whose principal amount of debenture equaled $25,000, convertible into 23,266 shares of Common Stock), and R. Scott Deans, a Director and Executive Vice President-Operations of the Company (whose principal amount of debenture equaled $25,000, convertible into 23,266 shares of Common Stock) converted $287,042 of the principal amount into 325,722 shares of Common Stock of the Company. The remaining balance of these convertible debentures ($62,958) were repaid in connection with the March 30, 1995 warrant exercise discussed below. These debentures were issued during 1991 and were convertible at the holders option into common shares of the Company at Cdn$1.25 per share to a maximum of 325,722 shares of Common Stock. These debentures also had attached warrants to purchase an additional 325,722 shares of Common Stock at Cdn$1.25 per share. The outstanding balances of the convertible debentures were $0, $0 and $350,000 at March 31, 1996, 1995, and 1994, respectively. On March 30, 1995, Ronald S. Deans (93,063 shares of Common Stock), Fidel Garcia Carrancedo (186,127 shares of Common Stock), Mark G. Deans (23,266 shares of Common Stock), and R. Scott Deans (23,266 shares of Common Stock) exercised 325,722 warrants to purchase 325,722 shares of Common Stock at Cdn$1.25 per share., for which the Company received gross proceeds of US$287,043. The remaining balance of the convertible debentures noted above and cash from the warrant-holders funded the entire amount received by the Company in consideration for the Common Stock issuance. On September 26, 1995, the Company issued $996,000 of convertible debentures payable to certain officers and directors of the Company, including Ronald S. Deans (whose principal amount of debenture equaled $527,882, convertible into 145,344 shares of Common Stock), Fidel Garcia Carrancedo (whose principal amount of debenture equaled $328,680 convertible into 90,497 shares of Common Stock), Mark G. Deans (whose principal amount of debenture equaled $69,719, convertible into 19,196 shares of Common Stock), and R. Scott Deans (whose principal amount of debenture equaled $69,719, convertible into 19,196 shares of Common Stock). The debentures were convertible at the holders option into shares of Common Stock of the Company at Cdn. $4.45 per share, to a maximum 274,233 shares of Common Stock. On December 22, 1995, these debentures were converted into 274,233 shares of Common Stock, and are no longer outstanding. On January 23, 1996, the Company completed a private placement of 500,000 shares of Common Stock with certain officers and directors of the Company including Ronald S. Deans (136,000 shares of Common Stock), Fidel Garcia Carrancedo (200,000 shares of Common Stock), Mark G. Deans (65,000 shares of Common Stock), and R. Scott Deans (79,000 shares of Common Stock). Each share was purchased at a price of Cdn. $5.75. Total cash proceeds received by the Company were US$2,117,092 and the net cash proceeds to the Company were US$1,906,100. At March 31, 1996, Ronald S. Deans ($1,212,707) and Fidel Garcia Carrancedo ($52,004) had advanced the Company an aggregate of $1,264,711 in the form of uncollateralized notes payable. The notes are payable on demand and are classified as current liabilities of the Company. Interest on these notes are payable monthly at the rate of prime plus 1%. Total interest costs associated with the notes and debentures with related parties was approximately $60,000 during the years ended March 31, 1996 and 1995. MARTIN DISTRIBUTION Martin Distribution Inc. ("Martin") acted as a national distributor of the Company's products in Canada from September 1990 through March 31, 1996. Martin is owned by the estate of Martin Carrancedo, a former director of the Company. Martin imported the Company's products into Canada, facilitated customs clearing and distributed the Company's products to customers in Canada. Prior to March 31, 1996, all sales of the Company's products within Canada were sold through Martin. Sales to Martin amounted to $2,854,935, $1,056,750 and $530,462 during the years ended March 31, 1996, 1995 and 1994, respectively. Trade receivables due from Martin amounted to $899,422 and $338,875 at March 31, 1996 and 1995, respectively. Martin sold product valued at $118,659, $261,765 and $496,762 during the years ended March 31, 1996, 1995 and 1994, respectively to International Geographics of Ontario ("IGO"). IGO is a partnership which is 70% owned by the Company and 30% owned by a marketing agent of the Company. IGO was dissolved during fiscal 1996, its functions will be assumed by Geographics Marketing Canada Inc. The Company recorded management fee income from Martin and IGO of $155,651 and $46,477, respectively during the year ended March 31, 1994. Mark G. Deans, a director and officer of the Company, serves as a director of Martin Distribution Inc. Fidel Garcia Carrancedo, a former director and principal stockholder of the Company, 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and (a) 2. Financial Statements and Schedules The financial statements listed on the index to financial statements incorporated in this Form 10-K. (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. (d) Financial Statement Schedules Excluded From the Annual Report to Shareholders Not applicable. (a) 3. and (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) Incorporated by reference to the Exhibits to the Annual Report on Form 10-KSB for the year ended March 31, 1996, as previously filed with the Securities and Exchange Commission. 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 22nd day of November 1996. GEOGRAPHICS, INC. By: /s/ Ronald S. Deans --------------------------- Ronald S. Deans, Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Secretary 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, President, Chief Executive Officer, Chief Financial /s/ Ronald S. Deans Officer and Secretary November 22, 1996 - ------------------------- Ronald S. Deans Director, Executive /s/ Mark G. Deans Vice President-Marketing November 22, 1996 - ------------------------- Mark G. Deans Director, Executive /s/ R. Scott Deans Vice President-Operations November 22, 1996 - ------------------------- R. Scott Deans /s/ Alan D. Tuck Jr. Director November 22, 1996 - ------------------------- Alan D. Tuck Jr. /s/ Robert S. Parker Director November 22, 1996 - ------------------------- Robert S. Parker GEOGRAPHICS, INC. TABLE OF CONTENTS March 31, 1996, 1995 and 1994 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 to Financial Statements. . . . . . . . . . . . . . . . . . . . .6-14 INDEPENDENT AUDITOR'S REPORT To the Stockholders Geographics, Inc. We have audited the accompanying consolidated balance sheets of Geographics, Inc. as of March 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Geographics, Inc. as of March 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The consolidated financial statements for the year ended March 31, 1994 were audited by other auditors whose report dated August 12, 1994 expressed an unqualified opinion on those statements. /s/ Moss Adams LLP Bellingham, Washington May 31, 1996 1 GEOGRAPHICS, INC. CONSOLIDATED BALANCE SHEET March 31, 1996 and 1995
ASSETS 1996 1995 ----------- ----------- CURRENT ASSETS Cash $ 50,028 $ 15,348 Accounts Receivable Trade receivables, net of allowance for doubtful accounts of $146,926 in 1996 and $115,000 in 1995 4,974,156 2,412,324 Related party receivables 899,422 338,975 Other receivables 62,572 59,215 Inventory 9,139,273 2,901,155 Deferred income taxes 970,000 69,000 Prepaid expenses and equipment deposits 793,409 331,803 ----------- ----------- Total current assets 16,888,860 6,127,820 PROPERTY, PLANT AND EQUIPMENT, net 7,286,694 3,792,192 DEFERRED INCOME TAXES 192,000 460,000 INVESTMENTS IN PARTNERSHIPS (34,484) (91,270) OTHER ASSETS 404,971 166,163 GOODWILL, net - 159,768 ----------- ----------- TOTAL ASSETS $24,738,041 $10,614,673 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable to bank $5,322,939 $2,183,476 Accounts payable 2,634,598 1,318,601 Accrued liabilities 1,033,905 409,149 Income tax payable 145,278 8,633 Notes payable to officers and directors 1,264,711 - Current portion of long-term debt 656,398 371,525 ----------- ----------- Total current liabilities 11,057,829 4,291,384 LONG-TERM DEBT 3,690,360 3,319,948 DEBENTURES AND NOTES PAYABLE TO OFFICERS AND DIRECTORS - 200,000 ----------- ----------- Total liabilities 14,748,189 7,811,332 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock - 10,000,000 authorized, 8,004,584 and 5,176,213 issued and outstanding in 1996 and 1995, respectively 9,620,068 3,665,581 Retained earnings (accumulated deficit) 369,784 (862,240) ----------- ----------- Total stockholders' equity 9,989,852 2,803,341 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,738,041 $10,614,673 ----------- -----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 2 GEOGRAPHICS, INC. CONSOLIDATED STATEMENT OF INCOME Years Ended March 31, 1996, 1995 and 1994
1996 1995 1994 ------------- ------------- ------------- SALES Retail sales $19,758,700 $9,129,886 $6,370,413 Related party sales 2,854,935 1,056,250 530,462 ------------- ------------- ------------- Total sales 22,613,635 10,186,136 6,900,875 COST OF SALES 14,194,505 5,881,649 4,359,505 ------------- ------------- ------------- Gross margin 8,419,130 4,304,487 2,541,370 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,734,901 2,873,476 3,109,562 AMORTIZATION OF GOODWILL 159,768 639,067 479,300 ------------- ------------- ------------- Income (loss) from operations 2,524,461 791,944 (1,047,492) ------------- ------------- ------------- OTHER INCOME (EXPENSE) Other income 130,090 1,930 196,834 Interest expense (787,848) (457,499) (356,060) ------------- ------------- ------------- Total other income (expense) (657,758) (455,569) (159,226) ------------- ------------- ------------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,866,703 336,375 (1,206,718) INCOME TAX PROVISION (BENEFIT) 634,679 (411,367) 34,800 ------------- ------------- ------------- NET INCOME (LOSS) $1,232,024 $747,742 $(1,241,518) ------------- ------------- ------------- EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Primary $.19 $.16 $(.28) ---- ---- ----- Assuming full dilution $.18 $.14 $(.28) ---- ---- ----- SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Primary 6,606,499 4,549,101 4,424,535 ------------- ------------- ------------- Assuming full dilution 7,204,220 5,816,260 4,424,535 ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 GEOGRAPHICS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years Ended March 31, 1996, 1995 and 1994
Common Stock Retained ------------------------- Earnings Shares Amount (Deficit) Total ---------- ----------- ------------- ------------ BALANCE, March 31, 1993 4,231,729 $ 2,887,159 $ (368,464) $ 2,518,695 Common shares issued for cash on exercise of options 284,000 194,337 - 194,337 Net loss - - (1,241,518) (1,241,518) ---------- ---------- ----------- ----------- BALANCE, March 31, 1994 4,515,729 3,081,496 (1,609,982) 1,471,514 Notes payable and debentures converted to common stock 334,762 297,042 - 297,042 Common stock issued for cash on exercise of warrants 325,722 287,043 - 287,043 Net income - - 747,742 747,742 ---------- ---------- ----------- ----------- BALANCE, March 31, 1995 5,176,213 3,665,581 (862,240) 2,803,341 Proceeds from issuance of common stock 520,000 1,986,100 - 1,986,100 Notes payable, debentures and other liabilities converted to common stock 1,540,371 2,169,233 - 2,169,233 Common stock issued for cash on exercise of stock options and warrants, including income tax benefit 768,000 1,799,154 - 1,799,154 Net income - - 1,232,024 1,232,024 ---------- ---------- ----------- ----------- BALANCE, March 31, 1996 8,004,584 $9,620,068 $369,784 $9,989,852 ---------- ---------- ----------- -----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 4 GEOGRAPHICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended March 31, 1996, 1995 and 1994 Increase (Decrease) in Cash
1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 1,232,024 $ 747,742 $(1,241,518) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES Depreciation and amortization 1,124,999 1,295,262 936,266 Deferred income taxes 125,000 (529,000) 34,800 Loss on sale of property and equipment 594 13,468 12,687 Equity income from investment in partnerships - - (30,639) CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES Trade receivables (2,561,832) (1,471,823) (287,411) Related party receivables (560,447) (338,975) 68,758 Other receivables (3,357) (19,504) (12,386) Inventory (6,238,118) (1,059,674) 22,705 Prepaid expenses and deposits (461,606) (210,110) (51,737) Accounts payable 1,315,997 1,074,647 82,553 Accrued liabilities 814,756 (48,828) 336,637 Income tax payable 336,645 167,633 (145,852) ---------- ---------- ---------- Net cash flows from operating activities (4,875,345) (379,162) (275,137) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on note payable to bank 3,139,463 990,427 968,835 Proceeds from long-term debt borrowings 1,003,029 765,125 1,351,924 Repayment of long-term debt (467,986) (232,685) (214,904) Proceeds from notes payable to officers and directors 2,452,573 22,746 49,184 Repayments of notes payable to officers and directors (398,629) (134,888) (10,018) Proceeds from issuance of common stock 2,827,254 287,043 194,337 ---------- ---------- ---------- Net cash flows from financing activities 8,555,704 1,697,768 2,339,358 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and equipment (3,296,165) (1,463,768) (744,701) Proceeds from sale of equipment 16,741 30,000 98,563 Net advances from (repayments to) partnerships (56,786) 250,422 34,376 Increase in other assets (309,469) (119,912) 14,913 Acquisition of business - - (1,500,000) ---------- ---------- ---------- Net cash flows from investing activities (3,645,679) (1,303,258) (2,096,849) ---------- ---------- ---------- NET CHANGE IN CASH 34,680 15,348 (32,628) CASH, beginning of year 15,348 - 32,628 ---------- ---------- ---------- CASH, end of year $50,028 $ 15,348 $ - ---------- ---------- ---------- NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock on conversion of notes payable, debentures and other liabilities $ 2,169,233 $ 297,042 $ - ---------- ---------- ---------- Financing obtained directly from sellers in acquisition of equipment $ 1,110,242 $ 346,644 $351,923 ---------- ---------- ---------- Income tax benefit related to exercise of stock options and warrants $ 958,000 $ - $ - ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 5 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 1 - DESCRIPTION OF OPERATIONS Geographics, Inc. (the "Company") is a Wyoming corporation with its offices and main manufacturing facilities located in Blaine, Washington. The Company also has warehouse/distribution facilities near London, England, and warehouse/ manufacturing facilities in Bellingham, Washington. The Company is a manufacturer of designer stationeries, value-added papers, lettering, signage and graphic art products. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Geographics (Europe) Limited and Geographics Marketing Canada. Significant intercompany transactions have been eliminated in consolidation. (b) Accounts Receivable - The Company typically offers credit terms to its customers, which generally require payment within sixty days. Management considers all accounts receivable in excess of the allowance for doubtful accounts to be fully collectible. Accounts receivable are not collateralized. (c) Inventory - Inventory is valued at the lower of cost on a first-in, first- out (FIFO) basis or market. (d) Property and Equipment - Property and equipment is stated at historical cost. Depreciation is provided based on useful lives of five to twenty years, using primarily the straight-line method. Betterments, renewals and repairs that extend the life of assets are capitalized. Repairs and maintenance items are expensed when incurred. Depreciation expense was $894,570, $622,737 and $456,956 during the years ended March 31, 1996, 1995 and 1994, respectively. (e) Goodwill - Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible assets of businesses acquired. Goodwill was amortized on a straight-line basis over a period of two years. (f) Federal Income Taxes - The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities represent the estimated tax effects of future deductible or taxable amounts attributed to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. This method also allows recognition of income tax benefits for loss carryforwards, credit carryforwards and certain temporary differences for which tax benefits have not previously been recorded. The tax benefits recognized as assets must be reduced by a valuation allowance where it is more likely than not the benefits may not be realized. (g) Foreign Currency Translation - The financial statements of the Company's non-U.S. subsidiaries whose "functional" currencies are other than U.S. dollars are translated at current rates of exchange. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded directly into a separate component of stockholders' equity, if significant. Certain other translation adjustments and transaction gains and losses are reported in net income in the period they are realized. (h) Investment in Partnership - The Company accounts for its 70 percent respective partnership interest in International Geographics of Ontario (the "Partnership") using the equity method. The effect of consolidating the accounts of the Partnership would be immaterial to these consolidated financial statements. Advances between the Company and the Partnership for working capital purposes are accounted for as changes to investments in Partnership. The Partnership distributes the Company's products in Canada. International Geographics of Ontario was dissolved during the current year. The Company is in the process of winding up the affairs of the partnership at March 31, 1996. 6 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 (i) Earnings per Common and Common Equivalent Shares - Primary earnings per common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options and warrants. Fully diluted earnings per common share equals net earnings plus after-tax interest incurred on convertible debentures divided by the weighted average number of common shares outstanding after giving effect to 7 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) dilutive stock options, warrants and shares assumed to be issued on conversion of the convertible debentures. Fully diluted earnings per common share includes $44,712 and $66,792 in after-tax interest on convertible debentures during the years ended March 31, 1996 and 1995, respectively. The stock options, warrants and convertible debentures are not included in the earnings per share calculations for 1994 because they are antidilutive. (j) Capital Stock - The Company follows the practice of recording amounts received upon the exercise of stock options and warrants by crediting common stock. No charges are reflected in the consolidated statement of income as result of the grant or exercise of stock options or warrants. The Company realizes an income tax benefit from the exercise of certain stock options and warrants, which results in an increase in common stock and an increase in deferred tax assets, or reduction in income tax payable, depending on the timing of the income tax deduction available to the Company. (k) Reclassifications - Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on previously reported earnings or accumulated deficit. (l) Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (m) Advertising Costs - Advertising costs are charged to expense in the period in which they occur. The Company participates with its customers in cooperative advertising programs, in which the Company reimburses the customers for a portion of their advertising costs. Advertising expense amounted to $867,198, $271,160 and $271,172 in 1996, 1995 and 1994, respectively. (n) Fair Value of Financial Instruments - Statement of Financial Accounting Standard ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of financial instruments, both assets and liabilities, recognized and not recognized, in the consolidated balance sheet of the Company for which it is practicable to estimate fair value. The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange. The following methods and assumptions were used to estimated fair value: - - The carrying amounts of cash, receivables, accounts payable and accrued liabilities approximate fair value due to their short-term nature. - - 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 8 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) issued in exchange for goods or services from nonemployees must be accounted for based on the fair value of the consideration received or of the equity instrument issued, whichever is more reliably measurable. SFAS No. 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company has determined that it will continue to use the method of accounting prescribed in APB 25 for measurement of employee stock- based compensation, and will begin providing the required pro forma disclosures in its financial statements for the year ending March 31, 1997, as allowed by SFAS No. 123. SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG- LIVED ASSETS TO BE DISPOSED OF, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Long-lived assets and certain identifiable intangibles to be held and used by a company are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for such long-lived assets and identifiable intangibles should be based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are required to be reported generally at the lower of the carrying amount or fair value less cost to sell. SFAS No. 121 is effective for fiscal years that begin after December 15, 1995. Management estimates that SFAS No. 121 will not have a significant impact on the Company's financial position or results of operations. NOTE 3 - INVENTORY 1996 1995 ------------ ------------ Raw materials $ 1,325,837 $ 971,281 Work in progress 3,304,407 873,799 Finished goods 4,509,029 1,056,075 ------------ ------------ $ 9,139,273 $ 2,901,155 ------------ ------------ ------------ ------------ NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Net Book Value Accumulated --------------------------------- Cost Depreciation 1996 1995 ------------- ----------- ------------ ------------ Land $ 114,563 $ - $ 114,563 $ 114,563 Buildings 3,446,169 675,678 2,770,491 1,107,831 Machinery and equipment 4,499,744 2,057,745 2,441,999 1,769,768 Machinery and equipment under capital lease 1,998,853 357,376 1,641,477 741,217 Automobiles 304,071 89,840 214,231 58,813 Leasehold improvements 29,166 1,374 27,792 - Construction in progress 76,141 - 76,141 - ------------- ------------ ------------ ------------ $ 10,468,707 $ 3,182,013 $ 7,286,694 $ 3,792,192 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
NOTE 5 - FINANCING ARRANGEMENTS
1996 1995 ------------- ------------ Installment notes payable to banks, fixed interest rates ranging from 8.825% to 10% (in 1995 rates ranged from fixed 10% to prime plus 1.25%), payable in monthly installments through October 2010, secured by real estate. $ 2,341,057 $ 1,490,753 Capital lease obligations collateralized by certain equipment and fixtures. 1,609,424 736,136 ------------- ------------ Balance carried forward $ 3,950,481 $ 2,226,889 ------------- ------------ ------------- ------------
9 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 5 - FINANCING ARRANGEMENTS (Continued) 1996 1995 ------------- ------------ Balance brought forward $ 3,950,481 $ 2,226,889 Installment notes payable to banks, interest rates ranging from fixed 9.75% to variable rates from prime plus 1% to prime plus 1.5%, payable in monthly installments through October 2000, collateralized by certain equipment. 396,277 474,584 Convertible subordinated debentures, bearing interest at a fixed rate of 8% per annum, convertible into common shares of the Company. - 990,000 ----------- ----------- 4,346,758 3,691,473 Less current portion 656,398 371,525 ----------- ----------- $ 3,690,360 $ 3,319,948 ----------- ----------- ----------- ----------- 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 ------------ ------------ 10 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 6 - FEDERAL INCOME TAXES The provision (benefit) for income taxes consists of the following:
1996 1995 1994 ----------- ------------ ------------ Current provision $ 509,679 $ 117,633 $ - Deferred provision 125,000 (529,000) 34,800 ----------- ------------ ------------ Total income tax provision (benefit) $ 634,679 $ (411,367) $ 34,800 ----------- ------------ ------------ ----------- ------------ ------------
The total tax provision differs from the amount computed using the statutory federal income tax rate as follows:
1996 1995 1994 ----------- ------------ ------------ Tax expense (benefit) at statutory rate $ 635,000 $ 114,000 $ (422,000) Other differences, net (321) (64,367) (4,200) Change in valuation allowance for deferred tax assets - (461,000) 461,000 ----------- ------------ ------------ Total income tax provision (benefit) $ 634,679 $ (411,367) $ 34,800 ----------- ------------ ------------ ----------- ------------ ------------
The significant components of deferred income tax expense (benefit) are as follows:
1996 1995 1994 ----------- ------------ ------------ Utilization of tax credit carryforward $ 105,000 $ - $ - Depreciation of plant and equipment 88,000 43,000 30,000 Change in charitable contributions carryforward 31,000 2,000 (33,000) Inventory differences (10,000) 43,000 (92,000) Other differences, net (20,000) 13,000 (7,200) Amortization of goodwill and intangibles (31,000) (175,000) (113,000) Change in allowance for doubtful accounts (38,000) 4,000 - Increase in tax credit carryforward - (137,000) (72,000) Effect of net operating loss carryforwards - 139,000 (139,000) Change in valuation allowance for deferred tax assets - (461,000) 461,000 ----------- ------------ ------------ Total deferred income tax expense (benefit) $ 125,000 $ (529,000) $ 34,800 ----------- ------------ ------------ ----------- ------------ ------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
1996 1995 ----------- ----------- DEFERRED TAX ASSETS Income tax benefit related to exercise of stock options and warrants $ 758,000 $ - Goodwill and intangible assets, principally due to amortization differences 380,000 349,000 Alternative minimum tax credit carryforwards 104,000 209,000 Inventory, principally due to additional cost inventoried for tax purposes and financial statement allowances 59,000 49,000 Accounts receivable, due to allowance for doubtful accounts 50,000 12,000 Employee benefits, principally due to accruals for financial reporting purposes 21,000 9,000 Other differences, net 4,000 3,000 Charitable contributions carryforward - 31,000 Net deferred tax assets 1,376,000 662,000 DEFERRED TAX LIABILITIES Plant and equipment, principally due to depreciation differences 214,000 133,000 ----------- ----------- Net deferred tax assets $ 1,162,000 $ 529,000 ----------- ----------- ----------- -----------
11 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 6 - FEDERAL INCOME TAXES (Continued) At March 31, 1996 and 1995, the Company's net deferred tax assets are presented as follows: 1996 1995 ----------- --------- Current deferred tax assets $ 970,000 $ 69,000 Long-term deferred tax assets 192,000 460,000 ----------- ---------- $ 1,162,000 $ 529,000 ----------- ---------- ----------- ---------- The valuation allowance for deferred tax assets as of April 1, 1994 was $461,000. The net change in the total valuation allowance for the twelve months ended March 31, 1995 was a decrease of $461,000. Of this amount, $139,000 resulted from the utilization of net operating losses during the year ended March 31, 1995. An additional $60,000 resulted from realization of tax benefits of temporary differences which reversed during the year ended March 31, 1995. The remaining $262,000 decrease resulted from the Company's reevaluation of the realizability of future income tax benefits expected to be generated through the utilization of its existing deferred tax assets. Based on the Company's current operating income and expectations for the future, management determined that future operating and taxable income will more likely than not be sufficient to fully recognize all deferred tax assets existing at March 31, 1996 and 1995. As a result, the carrying value of the net deferred tax asset was increased by $262,000 at March 31, 1995. This increase was recognized as an income tax benefit during the year ended March 31, 1995. At March 31, 1996, the Company has alternative minimum tax credit carryforwards of approximately $104,000 which are available to reduce future regular federal income taxes over an indefinite period. NOTE 7 - RELATED PARTY TRANSACTIONS On September 15, 1995, officers and directors converted debentures in an aggregate face amount of $200,000 into 219,178 common shares. The debentures were convertible at the holder's option into common shares of the Company at Cdn. $1.25 per share, to a maximum of 219,178 common shares. There is no remaining balance of these debentures outstanding at March 31, 1996. The Company issued $996,000 of convertible debentures payable to officers and directors on September 26, 1995. The debentures were convertible at the holder's option into common shares of the Company at Cdn. $4.45 per share, to a maximum 274,233 common shares. On December 22, 1995, these debentures were converted into 274,233 common shares, and are no longer outstanding. At March 31, 1996, certain officers and directors had advanced the Company $1,264,711 in the form of uncollateralized notes payable. The notes are payable on demand and are classified as current liabilities. Interest on these notes are payable monthly at the rate of prime plus 1%. Total interest costs associated with these notes and debentures was approximately $60,000 during each of the years ended March 31, 1996 and 1995. On January 23, 1996, the Company completed a private placement of 500,000 common shares to officers and directors at a price of Cdn. $5.75. Total cash received, net of issuance costs, totaled $1,906,100. Sales to Martin Distribution, Inc. ("Martin"), a company related through common directorship, amounted to $2,854,935, $1,056,750 and $530,462 during the years ended March 31, 1996, 1995 and 1994, respectively. Trade receivables due from Martin amounted to $899,422 and $338,975 at March 31, 1996 and 1995, respectively. The Partnership recorded purchases from Martin in the aggregate amount of $118,659, $261,765 and $496,762 during the years ended March 31, 1996, 1995 and 1994, respectively. 12 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 7 - RELATED PARTY TRANSACTIONS (Continued) The Company recorded management fee income from Martin and the Partnership of $155,651 and $46,477, respectively, during the year ended March 31, 1994. NOTE 8 - EMPLOYEE BENEFIT PLANS As of March 31, 1996, the Company had reserved 220,000 shares of common stock for issuance to key employees, officers and directors. Options to purchase the Company's common stock are granted at a price equal to the market price of the stock at the date of grant, and are exercisable upon issuance and regulatory approval. All options expire no more than five years after the date of grant. Option prices per share are expressed in Canadian dollars. Option Number of Price Shares per Share --------- ------------ Outstanding at March 31, 1993 420,000 $0.75 - 1.19 Granted 315,000 $0.90 - 1.26 Exercised (284,000) $0.75 - 1.19 --------- Outstanding at March 31, 1994 451,000 $1.10 - 1.26 Granted 129,000 $1.00 - 1.19 Canceled (128,000) $1.10 - 1.19 --------- Outstanding at March 31, 1995 452,000 $1.00 - 1.26 Granted 246,000 $2,00 - 4.15 Exercised (478,000) $1.00 - 2.00 --------- Outstanding at March 31, 1996 220,000 $1.00 - 4.15 --------- --------- In addition, warrants to purchase 24,000 and 154,000 shares of common stock at prices ranging from Cdn. $1.05 (U.S. $.75) to Cdn. $6.63 (U.S. $4.77) were outstanding as of March 31, 1996 and 1995, respectively. These warrants were granted to key employees of the Company, are exercisable upon issuance and expire on April 15, 1998 and January 23, 1999. The exercise price of the warrants was equal to the market price of the stock at the date the warrants were issued. On April 1, 1995, the Board of Directors approved a retirement savings plan, which permits eligible employees to make contributions to the plan on a pretax salary reduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The Company makes a matching stock contribution of 10% of the employee's pretax contribution. Eligible employees may contribute up to 18% of their pretax compensation. Total expense related to this plan was $20,619 during the year ended March 31, 1996. NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company conducts certain operations in leased facilities, under leases that are classified as operating leases for financial statement purposes. The leases provide for the Company to pay real estate taxes, common area maintenance, 13 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued) and certain other expenses. Lease terms, excluding renewal option periods exercisable by the Company at escalated rents, expire between August 1996 and February 2006. In addition to the base lease term, the Company has various renewal option periods. In addition, certain equipment used in the Company's operations is leased under operating leases. A schedule of noncancelable operating lease commitments are as follows: 1997 $ 154,217 1998 126,589 1999 88,489 2000 35,149 2001 26,434 Thereafter 97,108 ---------- $ 527,986 ---------- ---------- On January 23, 1996, the Company placed an order for a printing press. The cost of the press is approximately $1,200,000, which is expected to be delivered during the second quarter of fiscal year 1997. The Company has a commitment from a financial institution to provide capital lease financing for this equipment. There are various claims, lawsuits, and pending actions against the Company incident to the operations of its business. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's financial position, results of operations or liquidity. NOTE 10 - SUBSEQUENT EVENTS On May 1, 1996, the Company completed a private placement of 1,268,293 units at a price of U.S. $5.125 per unit. Total proceeds from this transaction approximated $6,500,000. Each unit included one common share of the Company and a warrant to purchase one additional common share of the Company at U.S. $6.50. The warrants were exercisable upon issuance and regulatory approval, and expire June 1, 1999. NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS Assets for which the Company has credit risk include trade accounts receivable, which amounted to $5,873,578 and $2,751,299 at March 31, 1996 and 1995, respectively. The Company's trade customers are concentrated in the retail office products industry and mass market retail stores. Sales to four major customers approximated 80%, 65% and 59% of total sales for the years ended March 31, 1996, 1995 and 1994, respectively. Amounts due from three customers approximated 75% and 71% of the total accounts receivable at March 31, 1996 and 1995, respectively. The Company expects that sales to relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future and believes that its financial results depend in significant part upon the success of these few customers. Although the composition of the group comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by any significant customers, including reductions due to market, economic or competitive conditions in the designer stationary or specialty papers industry, may have a material adverse effect on the Company's business, financial condition and results of operations. The following table represents approximate sales and trade accounts receivable related to the Geographic regions in which the Company operates. 14 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 11 - INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS (Continued) 1996 ----------------------------------------------------- Total United States Canada Other --------- ------------- --------- --------- Sales 100% 86% 13% 1% --------- --------- --------- --------- Accounts receivable 100% 83% 15% 2% --------- --------- --------- --------- 1995 ----------------------------------------------------- Total United States Canada Other --------- ------------- --------- --------- Sales 100% 89% 10% 1% --------- --------- --------- --------- Accounts receivable 100% 85% 12% 3% --------- --------- --------- --------- 1994 ----------------------------------------------------- Total United States Canada Other --------- ------------- --------- --------- Sales 100% 91% 8% 1% --------- --------- --------- --------- The Company purchases goods from approximately 700 vendors. One vendor accounted for a significant portion of the Company's total merchandise purchases during the years ended March 31, 1996 and 1995. The Company purchases commodity paper and other related products from this broker/vendor that could be supplied by other sources. There can be no assurances that the relationship between the Company and this vendor will continue and the loss of the purchasing power the Company has established with this company would likely have a material adverse effect on the Company. The Company does not consider itself dependent on any single source for materials to manufacture its products. NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1996 1995 1994 ---------- ----------- ---------- Cash paid during the year for interest $ 812,416 $ 465,377 $ 338,558 ---------- ----------- ---------- ---------- ----------- ---------- Net cash paid (received) during the year for income taxes $ 173,034 $ (50,000) $ 151,996 ---------- ----------- ---------- ---------- ----------- ----------
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