<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended: September 30, 1997
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
incorporation or organization) Identification No.)
1555 Odell Road, P.O. Box 1755, Blaine, WA 98231
------------------------------------------------------------
(Address of principal executive office and zip code)
(360) 332-6711
------------------------------------------------------------
(Registrant's telephone number including area code)
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.
Yes X No
----- -----
The registrant had 9,717,877 shares of common stock outstanding as of November
14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
PAGE 1 OF 11 PAGES
Exhibit Index at page 10
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to
this Report and by this reference incorporated herein the consolidated
balance sheets as of September 30, 1997 (unaudited) and March 31, 1997
(audited), the unaudited statements of operations for the six months ended
September 30, 1997 and September 30, 1996, and the unaudited consolidated
statements of cash flows for the six months ended September 30, 1997 and
September 30, 1996, together with the notes thereto.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere on this Report.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited
to, those concerning trends relating to the Company's profitability and gross
profit margins; the ability of the Company to increase the size and
capabilities of its accounting department, and to improve its internal
controls; the ability of the Company to refinance its existing revolving
credit facility, to identify potential buyers for all or part of its business
or to raise additional debt or equity financing sufficient to meet its
working capital requirements; and the ability of the Company to continue
operations as a going concern. Relevant risks and uncertainties include, but
are not limited to, slower than anticipated growth of the pre-print market,
loss of certain key customers, or insufficient market acceptance of the
Company's specialty papers products; actions, including price reductions, by
the Company's competitors; increases in the costs of raw materials used to
produce the Company's products; loss of favorable trade credit, supply terms,
reliable and immediately available raw material supply and other favorable
terms with certain key vendors; greater than expected costs incurred in
connection with the implementation of a management information system;
failure to realize expected improved efficiencies from the Company's
automated production equipment; increases in the costs of production;
unfavorable determinations of pending lawsuits or disputes; loss of key
personnel; and inability to secure additional working capital when and as
needed. Additional risks and uncertainties include those described under
"Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the
year ended March 31, 1997 and those described from time to time in the
Company's other filings with the Securities and Exchange Commission, press
releases and other communications.
Page 2
<PAGE>
OVERVIEW
Geographics was incorporated as a Wyoming corporation on September
20, 1974. From its inception until fiscal 1991, the Company was engaged
exclusively in the manufacture and wholesale marketing of various rub-on and
stick-on lettering, stencils, graphics arts products and other signage
products. In 1991, the Company began the development of "pre-print" or
"specialty" paper products consisting of paper on which photographs or other
art images are printed and which is then cut to size. In 1992, the Company
introduced its first specialty paper product under the Geopaper brand name.
The Company now has several specialty paper products using Geopaper designs,
including stationery, business cards, brochures, memo pads, posterboards and
paper cubes, which, in North America, are sold primarily to office supply
superstores and mass market retailers, and which are also distributed
internationally through the Company's subsidiaries in Canada, Europe and
Australia. The specialty papers group now constitutes the Company's
principal business, with approximately 81% and 71% of the Company's total
sales in the six months ended September 30, 1997 and the year ended March 31,
1997, respectively, attributable to sales of Geopaper products. Primarily as
a result of sales generated by the specialty papers group, the Company has
experienced substantial growth, with total sales increasing from $6,900,875
for fiscal 1994 to $23,840,506 for fiscal 1997, an increase of 245%.
Primarily to develop its specialty papers group, the Company has
made substantial investments to expand its facilities, purchase and install
automated production equipment and an integrated management information
system and enhance administrative and other infrastructure systems. The
Company commenced installation of new production equipment and information
systems in the third quarter of fiscal 1997. The Company experienced delays,
set-backs and unanticipated additional expenses in the installation of the
production equipment and the management information system. Moreover, the
management information system failed to perform as promised by vendors. As a
result, the Company has not yet fully realized the originally anticipated
economic benefits and efficiencies from these capital expenditures. These
unanticipated expenses and operational inefficiencies, together with price
reductions for the Company's products and cost increases for certain raw
materials, have had a negative impact on the Company's gross margins and
contributed to a substantial net loss for fiscal 1997 and the first two
quarters of fiscal 1998. In addition, since May 1997, the Company has been in
default of several financial covenants under its revolving credit facility,
the Company's primary source of working capital, and borrowings under the
facility have exceeded permitted borrowing base limitations. The existence
of these defaults constitutes a default under the Company's mortgage loans
and certain equipment lease facilities. The report of the Company's auditors
dated August 26, 1997 relating to the Company's Consolidated Financial
Statements for the fiscal year ended March 31, 1997 states that the Company's
fiscal 1997 losses and non-compliance with covenants under its revolving
credit facility raise substantial doubt about the Company's ability to
continue as a going concern. See "-Liquidity and Capital Resources."
Page 3
<PAGE>
RECENT DEVELOPMENTS
On October 2, 1997, production employees at the Company's
headquarters in Whatcom County, Washington voted 126 to 61 against union
representation by the Graphics Communications Union, Local 767M. The results
of the election were subsequently certified by the National Labor Relations
Board.
In October, 1997 the Company took steps to reduce operating costs,
including layoffs of approximately 45 employees, decreases in senior
executive compensation, a company-wide wage freeze, and a management
restucturing that included the permanent elimination of two vice-president
level positions. The company projects that these steps will result in cost
savings in excess of $1,300,000 over the next 12 months.
The company announced on November 4, 1997 that its Board of Directors
appointed Mr. Richard Lundquist to the Board and to its Audit Committee. Mr.
Lundquist fills a vacancy that was created by the resignation of Mr. Luis
Morato.
On November 6, 1997, the Board of Directors named Bruce Clawson as the
Company's Chief Financial Officer. Mr. Clawson has previously served as the
Company's Vice President of Finance since April 1997.
OVERSTATEMENT OF GROSS PROFITS AND INVENTORY. In connection with
Company's audit for the fiscal year ended March 31, 1997, management
determined that, during fiscal 1997, the use of certain accounting procedures
and estimates based on historical results caused an overstatement of gross
margin and inventories on an interim basis. Although the Company believes
that the overstatements occurred over the course of fiscal 1997, it has
determined that, given the complexity of the issues involved, it is not
possible to allocate accurately the necessary adjustment to any interim
quarterly period in fiscal 1997. As a result, the adjustment to gross margin
and inventories was made at the end of fiscal 1997, and previously reported
quarterly information for fiscal 1997 has not been restated. The cumulative
effect in fiscal 1997 of the overstatement, when combined with reserves for
obsolete inventory, was a reduction of both gross margin and inventory of
approximately $5,600,000. The effect that an interim allocation of such
adjustments might have had on the results for the first two quarters of
fiscal 1997, if any, are not reflected in the period-to-period comparisons
for gross margin included in this Report. Accordingly the comparisons of
gross margin and inventory for each of the first three quarters of fiscal
1997 with the corresponding quarters of fiscal 1998 and fiscal 1996 may not
be entirely meaningful.
Page 4
<PAGE>
WEAKNESSES IN INTERNAL CONTROLS. In connection with the Company's
audit for the fiscal year ended March 31, 1997, management determined that
several weaknesses in the Company's internal controls occurred during fiscal
1997. Management continues to take steps to improve its internal controls,
including increasing the size and capabilities of its accounting department
and improving its management information systems. However, there can be no
assurance that the Company will not encounter other internal control
weaknesses. The failure of the Company's accounting and finance systems to
provide accurate information necessary to monitor the Company's financial
position, results of operations and liquidity could have a material adverse
effect on the Company's business, financial condition and results of
operations.
SEASONALITY. A significant portion of the Company's customer orders
are placed between August and October of each year for shipment during the
Company's second and third fiscal quarters, which includes the Christmas
season, with the largest levels of sales historically occurring in the second
half of the calendar year. As a result, the Company has experienced, and is
expected to continue to experience, seasonal fluctuations in its operating
results.
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 distributions channel, and competitive pricing. Consequently,
the Company's revenues may vary significantly by quarter and the Company's
operating results may experience significant fluctuations.
BACKLOG. The Company's backlog of orders as of November 13, 1997
was $763,205. Historically, the Company has generally filled its backlog of
orders within 2 weeks. The Company includes in backlog the value of all
purchase orders received from customers for product not yet shipped and
invoiced. Because the Company only recently implemented internal controls
necessary to determine backlog, the Company is unable to determine backlog at
March 31, 1997 or at the end of any other prior period. The Company's
backlog is subject to fluctuations as a result of seasonality in the
Company's business and other factors. Moreover, the Company's backlog may not
necessarily lead to sales in any future period. The Company's failure or
inability to ship product with respect to a purchase order could result in
cancellation of such purchase order and a reduction of backlog, and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COLLECTIONS OF ACCOUNTS RECEIVABLE. Difficulties encountered by the
Company in fiscal 1997 in connection with the installation and implementation
of a new electronic data interchange ("EDI") software package resulted in
significant delays in the required electronic delivery of invoices to certain
key customers. These delays resulted in significant corresponding delays in
the collection of accounts receivable during the third and fourth quarters of
fiscal 1997 which contributed to a substantial increase in the Company's
trade receivable balance and negative operating cash flow at the end of
fiscal 1997. The Company believes it has resolved the EDI invoicing
limitations, but any further invoicing or collection difficulties could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Page 5
<PAGE>
MAINTENANCE OF LARGE INVENTORY. As of September 30, 1997, the
Company maintained an inventory of lettering, signage and specialty papers of
$9,487,798. While the Company believes that the maintenance of an extensive
inventory provides it substantial flexibility in responding to incoming
orders, enhances its reputation as a major supplier in the industry and
offers certain economies of scale in its purchasing program, the maintenance
of an extensive inventory requires a substantial outlay of funds which may
not be recovered for extended periods of time. In addition, the Company has
generally observed that raw materials prices change more rapidly than the
pricing for the Company's products. Consequently, the Company may be
required to absorb price increases on raw materials before it is able to pass
through such increases to its customer base. Also, to the extent that
purchasing preferences of the Company's customers change over time, the
Company's inventory may become less marketable, which may require the Company
to dispose of such inventory on an unprofitable basis. The Company has made
an effort to address these problems by increasing its reserves for obsolete
inventory since March 31, 1996 from $100,000 to $1,390,000 as of September
30, 1997. However, if the Company were not able to recover a substantial
portion of its investment in inventory, this would have a material adverse
effect on the Company's business, financial condition and results of
operations.
RESULTS OF OPERATIONS
SALES. Sales increased 22% to $8,363,293 in the quarter ended
September 30, 1997 from $6,858,676 in the quarter ended September 30, 1996.
Sales increased 23% to $15,971,552 in the six month period ended September
30, 1997 from $13,029,743 in the same period a year earlier. The increase
is primarily due to increased sales of the Company's products to major mass
market retailers, and the continued market acceptance of the Company's Geopaper
products, including Geoposterboards.
Geopaper products were responsible for 82% and 81% of sales in the
quarter and six month period ended September 30, 1997, respectively, compared
to 69% in the corresponding three and six month periods of the prior year.
Sales of Geopaper have increased 43% to $12,896,305 in the six months ended
September 30, 1997 from $9,021,249 in the corresponding six month period of
the prior year.
Sales of the Company's lettering and signage products decreased
approximately $568,308 and $933,247 in the quarter and six month period
ended September 30, 1997 compared to approximately $2,057,603 and
$4,008,494 in the quarter and six month period ended September 30, 1996. The
Company expects this product group to continue to decrease as a percentage of
sales and that sales of lettering and signage products as an industry may
continue to decline over time as the use of personal computers increases.
Sales of the Company's lettering and signage products have decreased as a
percentage of total sales to 19% from 31% for the six months ended September
30, 1997 and September 30, 1996, respectively.
Page 6
<PAGE>
International sales of Geographics products were $2,053,139 and
$3,737,258 for the quarter and six month period ended September 30, 1997,
respectively, and $1,523,100 and $2,722,621 for the quarter and six month
period ended September 30, 1996, respectively. International sales of
Geographics products represented 25% and 23% of the Company's total sales for
the quarter and six month period ended September 30, 1997, respectively,
compared to 22% and 21% , respectively, of total sales for the same periods
in the prior year.
GROSS MARGIN. Gross profit margin as a percentage of sales was
16.1% for the quarter ended September 30, 1997, compared to 40.5% for the
same period in the prior year. For the six month period ended September 30,
1997, gross profit margin as a percentage of sales was 11.9%, compared to
40.1% for the same period in the prior year. The decreases were primarily due
to price reductions for the Company's specialty paper products implemented in
August 1996 and April 1997 and a continuing shift in mix of sales to lower
margin Geopaper products. In connection with the Company's audit for the
fiscal year ended March 31, 1997, management determined that, during fiscal
1997, the use of certain accounting procedures and estimates based on
historical results caused an overstatement of gross margin and inventories on
an interim basis. Although the Company believes that the overstatements
occurred over the course of fiscal 1997, it has determined that, given the
complexity of the issues involved, it is not possible to allocate accurately
the necessary adjustment to any interim quarterly period during fiscal 1997.
As a result, the adjustment to gross margin and inventories was made at the
end of the fiscal year ended March 31, 1997, and previously reported
quarterly information for fiscal 1997 has not been restated. Accordingly,
gross profit margin for both the quarter and six month period ended September
30, 1996 does not reflect the effect, if any, that an interim allocation of
this adjustment might have had on the results for such periods. The
cumulative effect in fiscal 1997 of the overstatement, when combined with
reserves for obsolete inventory, was a reduction of both gross margin and
inventory of approximately $5,600,000. See "-Overview-Overstatement of Gross
Margin and Inventories."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
selling, general and administrative (S,G&A) expenses, which consist of
payroll, advertising, commissions, administrative, accounting, legal and
other costs, increased as a percentage of sales during the quarter ended
September 30, 1997 to 34.5%, as compared to 28.8% during the same period in
the prior year. S,G&A expenses increased as a percentage of sales to 35.9%
for the six month period ended September 30, 1997 as compared to 31% for the
same period in the prior year. The increases are primarily the result of
increased costs associated with advertising allowances, volume rebates and
other promotional payments made to key customers.
INTEREST EXPENSE. The Company's interest expense for the quarter
ended September 30, 1997 increased 106% to $419,873 compared to $203,341 for
the same period in the prior year. The Company's interest expense for the six
month period ended September 30, 1997 increased 115% to $848,197, compared to
$394,112 for the same period in the prior year. The increase in interest
expense was primarily the result of substantially increased borrowings under
the Company's revolving credit facility during fiscal 1998. Borrowings
increased due primarily to operating losses incurred by the Company in fiscal
1997 and 1998. Borrowings also increased in part due to delays in the
collection of accounts receivable, which resulted from problems encountered
by the Company in the electronic delivery of invoices to major customers
during fiscal 1997 and the first quarter of fiscal 1998. See
"-Overview-Collections of Accounts Receivable." Interest expenses also
increased as a result of additional borrowings in the form of capital leases
and mortgage loans related to equipment purchases and expansions to the
Company's Blaine manufacturing facility made during fiscal 1997 and the
first six months of fiscal 1998.
Page 7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a result of the rapid growth of the Company's specialty papers
group, capital expenditures relating to the purchase and installation of
automated production equipment and a management information system, operating
losses and other factors, the Company has required, and continues to require,
substantial external working capital. Moreover, subsequent to the end of
fiscal 1997, the Company has experienced working capital short-falls which
have required the Company to delay payments to certain vendors, delay planned
purchases, institute internal cost reduction measures and take other steps to
conserve operating capital. During fiscal 1997, operating losses totaled
$6,261,298, and the Company experienced negative operating cash flows of
$6,601,926. During the quarter ended September 30, 1997, operating losses
totaled $1,543,203. However, the Company experienced positive operating cash
flows of $1,215,290 during the quarter ended September 30, 1997, primarily as
a result of substantial reductions in trade accounts receivable balances
during the quarter. This reduction in trade accounts receivable was due to
improvements in the Company's electronic data interchange ("EDI") billing
systems and procedures which resulted in improved collections. This
improvement in billing and collections resulted in positive operating cash
flows of $107,672 in the six months ended September 30, 1997, in spite of
operating losses during the same period of $3,831,615.
At the date of this Report, the Company's only available source of
working capital consisted of borrowings available under its revolving credit
facility. The revolving credit facility permits borrowings of up to $12.0
million subject to a borrowing base limitation of 80% of the value of the
Company's eligible accounts receivable and 55% of the value of its inventory,
net of certain reserves. Borrowings under the facility bear interest at the
prime rate and are secured by substantially all of the Company's assets.
Under the terms of the facility, the Company is required to comply with a
number of financial covenants relating to, among other things, the
maintenance of minimum net worth, debt-to-equity ratios and cash flow
coverage ratios.
Since May 1997, the Company has failed to comply with the net worth,
debt-to-equity ratios and cash flow coverage ratios under the revolving
credit facility, and borrowings under the facility exceeded the permitted
borrowing base limitations. The Company's lender has also provided the
Company with several mortgage loans and equipment loans, and the
defaults under the revolving credit facility constitute a default under
these other loans. The report of the Company's auditors dated August 26,
1997 relating to the Company's Consolidated Financial Statements for the
fiscal year ended March 31, 1997 states that the Company's fiscal 1997 losses
and non-compliance with covenants under its revolving credit facility raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's Consolidated Financial Statements for the fiscal year ended
March 31, 1997 (as well as the Unaudited Consolidated Financial Statements
for the fiscal quarter ended September 30, 1997 included in this Report) were
prepared assuming that the Company will continue as a going concern and do
not include any adjustments that might result from the outcome of this
uncertainty.
Page 8
<PAGE>
The Company entered into a short-term forbearance agreement with its
lender, effective November 14, 1997, pursuant to which the lender agreed to
extend the expiration date of the revolving credit facility to November ,
1997, to increase the $12.0 million commitment by a $300,000 stand-by letter
of credit, to permit borrowings of up to $3,000,000 million in excess of the
applicable borrowing base limitation (not to exceed the $12.0 million
revolving credit facility commitment) and to forbear from asserting its
rights with respect to the Company's non-compliance with the financial
covenants as well as the defaults under the Company's mortgage loans and
equipment loans. The Company plans to request a further extension of the
forebearance agreement upon expiration of the current extension. There can be
no assurance that the lender will continue to permit borrowings under the
revolving credit facility, that the lender will agree to further extend the
facility's expiration date or that the Company would be able to refinance or
replace the facility on acceptable terms when and as needed.
The Company currently projects continuing losses and potentially
negative cash flows from operations for the remainder of fiscal 1998. The
exact amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms obtained from the Company's vendors and the
timing of capital expenditures. However, even if the Company's lender were to
continue to waive all existing defaults under the Company's revolving credit
facility, the Company expects that available borrowings under the facility
may not be sufficient to satisfy its working capital requirements beyond
December 31, 1997. Furthermore, although the Company's lender has permitted
borrowings under the revolving credit facility in spite of existing defaults,
there can be no assurance that it will continue to do so. Accordingly, the
Company is delaying payments to vendors, instituting internal cost reduction
measures and taking other steps to conserve operating capital. As a result,
the Company's vendors may place the Company on credit hold or take other
actions against the Company, including the termination of their relationship
with the Company or the initiation of collection proceedings.
In October, 1997 the Company took steps to reduce operating costs,
including layoffs of approximately 45 employees, decreases in senior
executive compensation, a company-wide wage freeze, and a management
restructuring that included the permanent elimination of two vice-president
level positions. The Company projects that these steps will result in cost
savings in excess of $1,300,000 over the next 12 months.
The Company has been actively pursuing possible sources of
additional capital and has engaged an investment banker to assist in the
evaluation and pursuit of financing transactions, which could include the
issuance of debt or equity securities or the sale of all or part of the
Company's assets. During the week of November 3, 1997 the Company received
several offers, subject to a number of conditions, for the purchase of
portions of its assets related its lettering and signage business. However,
as of the date of this report, the Company had not yet entered into any
binding agreements with regards to any such offer. Though such offers are
under active consideration by management, the transactions contemplated
thereby are subject to satisfaction of a number of conditions precedent, and
there can be no assurance that any such transaction will be consummated.
Further, there can be no assurance that the Company will be able to obtain
additional sources of working capital when and as needed or that the terms of
any such funding will be acceptable to the Company. Any equity financing may
involve substantial dilution to the interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under,
and to extend the expiration date of, the revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy its working
capital requirements could force the Company to curtail or further
restructure operations, seek extended payment terms from its vendors or seek
protection under the federal bankruptcy laws.
Page 9
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
Exhibit Number
(Referenced to
Item 601 of
Registration S-K) Description of Document
______________ _______________________
10.16 Financial Advisory Agreement, dated August 6, 1997,
between Geographics, Inc. and Cruttenden Roth,
Incorporated
10.17 Subscription Agreement, dated October 9, 1997, between
Geographics, Inc. and First Prudential Investment Fund,
Inc.
11.1 Statement re computation of net income (loss) per share
27.1 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed by the Company during the fiscal
quarter ended September 30, 1997.
Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized on
this 14th day of November, 1997.
GEOGRAPHICS, INC.
By: /s/ RONALD S. DEANS
-------------------------------------
Ronald S. Deans
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
By: /s/ BRUCE A. CLAWSON
-------------------------------------
VICE PRESIDENT OF FINANCE
AND CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Page 11
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of September 30, 1997 and March 31, 1997................................ F-2
Consolidated Statements of Operations for the three months and six
months ended September 30, 1997 and September 30, 1996................................................. F-3
Consolidated Statements of Cash Flows for the three months and
six months ended September 30, 1997 and September 30, 1996............................................. F-4
Notes to Consolidated Financial Statements............................................................. F-5
</TABLE>
F-1
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997 AND MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
September 30, 1997 March 31, 1997
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash 126,556 $ 408,757
Accounts receivable
Trade receivables, net 5,171,155 6,654,500
Other receivables 820,339 993,243
Inventory, net of allowance for obsolete inventory
of $1,390,000 at September 30, 1997 and $1,290,000 at March 31, 1997 9,487,798 9,457,874
Prepaid expenses, deposits, and other current assets 764,404 893,483
-------------- --------------
Total current assets 16,370,252 18,407,857
PROPERTY, PLANT AND EQUIPMENT, net 13,350,760 10,832,231
OTHER ASSETS 486,521 1,005,613
-------------- --------------
TOTAL ASSETS $ 30,207,533 $ 30,245,701
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 626,753 $ 467,445
Note payable to bank 10,755,195 8,649,390
Accounts payable 4,161,548 2,421,768
Accrued liabilities 2,576,578 2,145,030
Notes payable to officers and directors -- 850,000
Current portion of long-term debt 3,510,962 3,472,674
-------------- --------------
Total current liabilities 21,631,036 18,006,307
LONG-TERM DEBT 5,365,124 4,322,371
-------------- --------------
Total liabilities 26,996,160 22,328,678
-------------- --------------
STOCKHOLDERS' EQUITY
No par common stock - 100,000,000 authorized, 9,467,877 and
9,467,877 issued and outstanding at September 30, 1997 and March 31,
1997, respectively 15,573,434 15,574,018
Foreign currency translation adjustment (68,404) (76,478)
Retained earnings (accumulated deficit) (12,293,657) (7,580,517)
-------------- --------------
Total stockholders' equity 3,211,373 7,917,023
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 30,207,533 $ 30,245,701
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
- --------------------------------------------------------------------------------------------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 8,363,293 $6,858,576 $15,971,552 $13,029,743
Cost of Sales 7,018,882 4,083,653 14,067,086 7,809,954
----------- ---------- ----------- -----------
Gross Margin 1,344,411 2,775,023 1,904,466 5,219,789
Selling, General and Administrative 2,887,614 1,975,339 $ 5,736,081 4,009,344
Expenses ----------- ---------- ----------- -----------
Income (Loss) from
Operations (1,543,203) 799,684 (3,831,615) 1,210,445
Other Income (Expenses)
Interest Expense (419,873) (203,341) (848,197) (394,112)
Other (14,288) (10,065) (33,328) (13,841)
----------- ---------- ----------- -----------
(434,161) (213,406) (881,525) (407,953)
Income (Loss) Before Provision for (1,977,364) 586,278 (4,713,140) 802,492
Income Taxes
Income Tax Provision -- 213,172 - 283,209
----------- ---------- ----------- -----------
Net Income (Loss) $(1,977,364) $ 373,106 (4,713,140) 519,283
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Earnings Per Common and Common
Equivalent Share
Primary ($0.21) $0.04 ($.50) $.06
Assuming full dilution ($0.21) $0.04 ($.50) $.06
Shares Used in Computing Earnings Per
Common and Common Equivalent Share
Primary 9,467,877 9,427,811 9,467,877 9,198,337
Assuming full dilution 9,467,877 9,427,803 9,467,877 9,199,419
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
INCREASE (DECREASE) IN CASH (Unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,713,140) $ 512,283
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization 892,340 759,980
Deferred income taxes - 132,661
(Gain) loss on sales of property and equipment 1,740 8,985
CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES
Trade receivables 1,483,345 (138,848)
Related party receivables - 899,422
Other receivables 172,904 (118,036)
Inventory (29,924) (3,939,208)
Prepaid expenses, deposits and other current assets 129,079 (1,230,540)
Accounts payable 1,739,780 (624,557)
Accrued liabilities 431,548 522,029
Income tax payable - (99,326)
---------------------------------------
Net cash flows from operating activities 107,672 (3,308,155)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts 159,308 -
Net borrowings on note payable to bank 2,105,805 (924,322)
Proceeds from long-term debt borrowings - 225,000
Repayment of long-term debt (596,877) (343,378)
Repayments of notes payable to officers and directors (850,000) (264,711)
Proceeds from issuance of common stock (584) 6,539,340
Foreign currency translation 8,075 4,156
---------------------------------------
Net cash flows from financing activities 825,727 5,236,085
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (1,215,600) (1,607,921)
Proceeds from sales of equipment - 6,887
Net advances from (repayments to) partnerships - (154,080)
Change in other assets - (33,896)
---------------------------------------
Net cash flows from investing activities (1,215,600) (1,789,010)
---------------------------------------
NET CHANGE IN CASH (282,201) 138,920
CASH, beginning of year 408,757 50,028
CASH, end of quarter $ 126,556 $ 188,948
-------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $1,677,918 $ 1,219,764
-------------------------------------
Assets acquired directly in acquisition of business - $390,839
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
GEOGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements of
Geographics, Inc. (the "Company" or "Geographics") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of
operations and cash flows for the interim periods presented. The results of
operations for these interim periods are not necessarily indicative of the
results to be expected for the full year. These financial statements should
be read in conjunction with the audited consolidated financial statements and
footnotes included in the Company's consolidated financial statements and
notes thereto for the fiscal year ended March 31, 1997.
The consolidated financial statements include the accounts of Geographics
and its wholly-owned subsidiaries: Geographics Marketing Canada Inc.,
Geographics (Europe) Limited and Geographics Australia, Pty. Limited. All
intercompany balances and transactions have been eliminated.
Certain of the Company's subsidiaries calculated cost of sales using an
estimated gross profit method for interim periods. Cost of sales at these
subsidiaries are adjusted based on physical inventories which are performed
no less than once a year.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company conducts certain operations in leased facilities,
under leases that are classified as operating leases for financial statement
purposes. The leases provide for the Company to pay real estate taxes, common
area maintenance, and certain other expenses. Lease terms, excluding renewal
option periods exercisable by the Company at escalated rents, expire between
March, 1998 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 also leased under operating leases. A
schedule of noncancelable operating lease commitments are as follows:
1998.................................. $365,103
1999.................................. 152,253
2000.................................. 67,403
2001.................................. 46,164
_______
$630,923
=======
F-5
<PAGE>
LITIGATION - In July 1997, three related class action suits were filed in
the United States District Court for the Western District of Washington
against the Company, its President, Chief Executive Officer and Chairman of
its Board of Directors, and the Company's former Vice President of Finance
and Chief Financial Officer (the "Defendants"). The suits allege that the
Defendants inflated the price of the Company's stock by intentionally or
recklessly making misrepresentations or omissions which deceived the public
about the Company's financial condition and prospects, thus misleading
shareholders who purchased shares between August 6, 1996 and June 12, 1997.
The complaints seek damages in unstated amounts.
Management intends to vigorously defend these complaints. However, the
ultimate outcome of these actions cannot be predicted with certainty. The
Company owns insurance policies applicable to certain losses including costs
of defense. These insurance policies have an aggregate self-insurance
retention of $150,000. If the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any claim, there is no assurance
that any or all of such liability, compromise or settlement would be covered
by the Company's insurance. If the amount of insurance is insufficient, or if
the policies are determined to be inapplicable, the Company could be required
to make additional payment beyond the self-insurance retention in the form of
cash, indebtedness or equity securities. A payment of this nature could have
a negative material impact on the Company's capital resources, and issuance of
additional equity securities could have a negative material impact on the
Company's existing shareholders. The defense of this or any pending or future
litigation, investigations or disputes could result in substantial legal and
professional costs to the Company.
There are various additional 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 and any
future unidentified claims will not have a material effect on the Company's
business, financial condition or results of operations.
CONTINGENCY FOR YEAR 2000 ISSUES - The Company has not yet made an
assessment of the impact of the year 2000 on their computer software,
hardware and other systems, including those of vendors, customers and other
third parties. The potential expense to ensure that all of the computer and
other systems are year 2000 compliant cannot be determined until such an
assessment is made.
EMPLOYMENT CONTRACTS - During the quarter ended September 30, 1997, the
Company entered into employment contracts with certain employees for a period
of up to three years. The contracts provide for severance payments in the
event these employees terminate employment for certain specified reasons
during the contract period.
NOTE 3 - GOING CONCERN
As a result of the $7,950,301 loss incurred by the Company for the year
ended March 31, 1997, a decline in gross profit margins, the Company's failure
to comply with covenants under its line of credit and other factors, the report
of the Company's auditors, dated August 26, 1997, relating to the Company's
Consolidated Financial Statements for the year ended March 31, 1997 states that
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements have been prepared assuming the
Company will continue as
F-6
<PAGE>
a going concern and do not include any adjustments that might result from the
outcome this uncertainty.
The Company currently projects continuing losses and potentially negative
cash flows from operations for the remainder of fiscal 1998. The exact amount
and timing of the Company's capital requirements will be determined by
numerous factors, including the level of, and gross margin on, future sales,
the outcome of outstanding contingencies and disputes such as pending
lawsuits, payment terms obtained from the Company's vendors and the timing of
capital expenditures. However, even if the Company's lender were to waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility may not be sufficient to
satisfy its working capital requirements beyond December 31, 1997.
Furthermore, although the Company's lender has permitted borrowings under the
revolving credit facility in spite of existing defaults, there can be no
assurance that it will continue to do so. Accordingly, the Company is
delaying payments to vendors, instituting internal cost reduction measures
and taking other steps to conserve operating capital. As a result, the
Company's vendors may place the Company on credit hold or take other actions
against the Company, including the termination of their relationship with the
Company or the initiation of collection proceedings.
In October, 1997 the Company took steps to reduce operating costs,
including layoffs of approximately 45 employees, decreases in senior
executive compensation, a company-wide wage freeze, and a management
restructuring that included the permanent elimination of two vice-president
level positions. The Company projects that these steps will result in cost
savings in excess of $1,300,000 over the next 12 months.
The Company has been actively pursuing possible sources of additional
capital and has engaged an investment banker to assist in the evaluation and
pursuit of financing transactions, which could include the issuance of debt
or equity securities or the sale of all or part of the Company's assets.
During the week of November 3, 1997 the Company received several offers,
subject to a number of conditions, for the purchase of its lettering and
signage business. However, as of the date of this report the Company had not
yet entered into any binding agreements with regards to any such offer.
Though such offers are under active consideration by management, the
transactions contemplated thereby are subject to satisfaction of a number of
conditions precedent and there can be no assurance that any such transaction
will be consummated. Further, there can be no assurance that the Company will
be able to obtain additional sources of working capital when and as needed or
that the terms of any such funding will be acceptable to the Company. Any
equity financing may involve substantial dilution to the interests of the
Company's shareholders.
The failure to obtain an increase in borrowing availability under, and to
extend the expiration date of, the revolving credit facility, or to otherwise
obtain sufficient funds when and as needed to satisfy its working capital
requirements could force the Company to curtail or further restructure
operations, seek extended payment terms from its vendors or seek protection
under the federal bankruptcy laws.
F-7
<PAGE>
[LETTERHEAD]
August 6, 1997
PRIVILEGED AND CONFIDENTIAL
Geographics, Inc.
1555 Odell Road
Blaine, Washington 98231
Attention: Mr. Ronald S. Deans
Chairman of the Board, President and
Chief Executive Officer
Gentlemen:
This letter agreement (the "Agreement") will confirm the
understanding between Geographics, Inc. (the "Company") and
Cruttenden Roth Incorporated ("CRI" or the "Advisor") pursuant to
which the Company has retained CRI to render financial advisory
services to the Company, on the terms and subject to the conditions
set forth herein, in connection with: 1) an assessment of its
strategic financing options and at the Company's option; 2) the sale
of all of, or a controlling interest in, any or all of the Company's
operations by way of a merger, sale of assets or stock, or other
significant transaction involving all or substantially all of, or a
controlling interest in, the business, assets or stock of the Company
or any of its operations or subsidiaries or any financing that provides
additional funds to the Company (a "Transaction").
1. RETENTION. The Company hereby retains the Advisor on an
exclusive basis and the Advisor agrees to act as financial advisor
to the Company in connection with a Transaction or potential
Transaction. This Agreement shall expire on February 28, 1998 (the
"Expiration Date"), unless extended by mutual agreement of the
Company and the Advisor. Subject to the terms and conditions of this
Agreement, the nature and scope of the Advisor's efforts shall be
such as CRI deems appropriate. In connection with its advisory work,
the Advisor will evaluate the Company's strategic financing options
and will perform promptly, if appropriate, the following:
(a) an analysis of the Company, its business and its future
operating prospects;
<PAGE>
(b) an analysis of the objectives of the Company and its
shareholders' objectives, analyzing the priorities and
tradeoffs associated with such objectives;
(c) an analysis of values to be received in connection with a
possible Transaction;
(d) delivery of a written summary of strategic financing
options;
(e) assistance with the preparation of a confidential
memorandum describing the Company and distribution of such a
memorandum to potential participants in a Transaction;
provided that all potential participants to be contacted by
CRI shall have been approved by the Company in advance in
writing (the "Prospective Purchasers");
(f) the identification, the introduction to, and on-going
discussions and negotiations with parties to a Transaction
described in (d) above;
(g) assistance with other matters related to closing a
Transaction; and
(h) other studies, analyses and advisory services as deemed
appropriate.
The Company agrees to retain its own legal counsel and
accountants for any necessary legal and tax advice.
2. COMPENSATION. As compensation for services rendered and
to be rendered hereunder by the Advisor, the Company agrees, subject
to the provisions of paragraph 6 below, to pay the Advisor (or cause
the Advisor to be paid) non-refundable cash fees as follows:
(a) The Advisor shall be entitled to receive a monthly
retainer fee payable in arrears in the amount of $20,000 per
month. The first such payment shall be paid upon the
acceptance of this letter.
(b) Upon the closing of any financing (including cash
investment or loan) with parties with whom the Company has
already initiated discussions, the Company shall pay to
CRI a cash fee of $100,000. The Company shall promptly
supply CRI a list of such entities in writing. Any monthly
retainer fees paid prior to such closing shall be credited
against such
<PAGE>
$100,000. Such fee shall be $100,000 irrespective of the
number of participants in such financing.
(c) Upon execution of a letter of intent or definitive purchase
agreement with respect to any Transaction except that
described in paragraph (b) above, which is executed by an
officer or director of the Company authorized to execute
such a letter or agreement on behalf of the Company, the
Company will pay CRI $100,000 for the initial Transaction
and $50,000 for any Transaction following the payment of any
Success Fee by the Company to CRI. Any monthly retainers
fees paid by the Company to CRI that have not already
been credited against fees due under paragraph (b) above
shall be credited against such $100,000 up to the full
amount due under this paragraph (c). No such fee shall be
payable for parties from whom the Company has received a
letter of intent as of the date or the execution of this
letter. Such letters are appended to this letter as
Exhibit II.
(d) In the event that a Transaction is closed (except as
specified in Section 6 hereof), the Company will pay or
cause to be paid in cash to CRI, as provided herein, a
Success Fee (the "Success Fee") of $200,000 for each
Transaction for which payment has been made under paragraph
(c) and $300,000 for Transactions for which no payment has
been made under paragraph (c). Up to three monthly retainer
fees that have not already been credited against other fees
payable under this Agreement shall be credited against the
Success Fee.
(e) In addition to the compensation to be paid to the Advisor
as provided above, the Company shall pay to, or on behalf of
the Advisor, promptly as billed, all reasonable
out-of-pocket expenses (including all reasonable fees and
expenses of Advisor's counsel, and messenger, overnight
courier, fax, telephone, copying, printing and travel
related expenses) incurred by the Advisor in connection with
the services to be rendered hereunder, not to exceed $20,000
without the approval of the Company.
3. INDEMNITY. As partial consideration for the services to
be rendered by CRI, the Company agrees to indemnify CRI and the other
Indemnified Persons as set forth in Exhibit I hereto, which is
incorporated herein and made a part hereof.
<PAGE>
4. COVENANTS OF THE COMPANY. The Company agrees as follows:
(a) This Agreement is duly authorized and validly executed and
delivered by the Company, and constitutes a legal, valid and
binding agreement of the Company.
(b) In connection with Advisor's activities hereunder, the
Company agrees to furnish the Advisor with all information
concerning the Company and its business, prospects,
operations, and financial results and condition that the
Advisor reasonably deems appropriate. Such information will
include a memorandum, any amendments or supplements (hereto,
various corporate reports and any other materials used in
connection with consummating the Transaction (collectively,
the "Offering Materials"). All of the Offering Materials,
and any other documents supplied to CRI or Prospective
Purchasers shall have been prepared, reviewed and approved
by the Company and shall be, to the Company's best
knowledge, accurate and complete in all material respects.
Subject to such review and approval of the Offering
Materials by the Company, CRI is hereby authorized and
directed as the company's exclusive agent to transmit to
Prospective Purchasers a copy or copies of the Offering
Materials and any other documents delivered to CRI or
Prospective Purchasers by or on behalf of the company in
connection with the performance of CRI's services hereunder
or the consummation of a Transaction. The Company shall
promptly advise CRI of any material development affecting
the Company or the Offering Materials. In addition, the
Company agrees to provide the Advisor with access to the
company's accountants, counsel, consultants and other
appropriate agents and representatives. The Company
acknowledges that the Advisor may rely upon the completeness
and accuracy of information and data furnished to it by the
Company's officers, directors, employees, agents and
representatives without an independent verification of such
information and data or an appraisal of the Company's
assets.
(c) In order to coordinate the efforts to effect a Transaction
satisfactory to the Company and its shareholders, the
Company and its shareholders, officers, directors, and
employees will not initiate any discussions with respect to
a potential Transaction except with the Advisor. Also, the
Company hereby confirms and acknowledges that the only
discussions with, or inquiries from, Prospective Purchasers
with respect to a potential transaction, that have occurred
prior to the date of this Agreement are from the parties
<PAGE>
listed on Exhibit II, which is attached hereto. The Company
hereby agrees to permit the Advisor to assist the Company in
any negotiations with the Prospective Purchasers listed on
Exhibit II. In the event that the Company and its
shareholders, officers, directors, and employees receive any
other inquiry or are otherwise aware of the interest of any
other third party concerning the availability of the company
for acquisition, they will promptly inform the Advisor of
the Prospective Purchaser and its interest and permit the
Advisor to assist the Company in any negotiations with such
Prospective Purchaser.
5. CONFIDENTIALITY. Except to the extent authorized by the
Company or required by any Federal or state law, rule or regulation or
any decision or order of any court or regulatory authority, the Advisor
agrees that it will refrain from disclosing to any person, other than to
any agents, attorneys, accountants, employees, officers, and directors of
the Advisor who need to know the information in connection with the
Advisor's engagement hereunder, any confidential information which has
not become public about the Company that the Advisor receives from the
Company or its agents, attorneys or accountants in connection with the
services rendered hereunder. Any advice rendered by CRI hereunder shall
not be disclosed publicly in any manner without CRI's written approval
and will be treated by the Company and CRI as confidential. In addition,
CRI's advice is not intended for, and should not be relied upon by, other
third parties. The Company also agrees that any reference to the Advisor
or any affiliate of the Advisor in any release or communication to any
party outside the Company is subject to the Advisor's prior approval,
which approval shall be unreasonably withheld or delayed. If the
Advisor resigns or is terminated prior to any release or communication,
no reference shall be made therein to the Advisor without the Advisor's
prior written permission.
6. TERMINATION. This Agreement may be terminated by either
the Company or CRI at any time prior to the Expiration Date upon written
notice to the other party. In either event, the Company shall continue
to be liable to CRI for any unpaid compensation earned or otherwise to be
paid to CRI pursuant to this Agreement and provided that the expense
reimbursement provisions contained in paragraph 2 herein, and the
indemnity, contribution and expense reimbursement provisions contained in
paragraph 3 and Exhibit I shall remain operative and in full force and
effect regardless of termination, expiration, or consummation of a
Transaction.
Also, if this Agreement expires or is terminated prior to consummation of
a Transaction and within 18 months after expiration or termination the
Company consummates a Transaction with a Prospective Purchaser for any
group that includes such Prospective
<PAGE>
Purchaser or affiliate of such Prospective Purchaser, then the Company
hereby agrees to pay CRI compensation in accordance with paragraph 2 of this
Agreement. For purposes of computing the fee payable pursuant to the
preceding sentence, CRI agrees to provide the Company with a written list
within 30 business days of expiration or termination of all Prospective
Purchasers with whom the Advisor had discussions, on behalf of the Company,
about a potential Transaction.
7. NOTICES. Notice given pursuant to any of the provisions
of this Agreement shall be in writing and shall be mailed or delivered to
the Company at 1555 Odell Road, Blaine, Washington 98231, Attention:
Ronald S. Deans; and to CRI at 520 Pike Street, Suite 1010, Seattle,
Washington 98101, Attention: Corporate Finance Department.
8. ADVERTISEMENTS. The Company agrees that the Advisor
shall have the right to place advertisements in financial and other
newspapers and journals at its own expense describing its services to the
Company hereunder; provided that the Advisor shall have submitted a copy
of any such proposed advertisement to the Company for its prior approval,
which approval shall not be unreasonably withheld or delayed.
9. CONSTRUCTION. The Agreement incorporates the entire
understanding of the parties and supersedes all previous agreements and
shall be governed by, and construed in accordance with, the laws of the
State of Washington as applied to contracts made and performed in such
State, without regard to principles of conflicts of laws.
10. SEVERABILITY. Any determination that any provision of
this Agreement may be, or is, unenforceable shall not affect the
enforceability of the remainder of this Agreement.
11. HEADINGS. The section headings in this Agreement have
been inserted as a matter of convenience for reference and are not an
effective part of this Agreement.
12. COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed
an original, but all of which shall constitute one and the same
instrument.
13. THIRD PARTY BENEFICIARIES. This Agreement has been and
is made solely for the benefit of the Company, the Advisor and the other
Indemnified Persons referred to in paragraph 3 hereof and their
respective successors and assigns, and no other person shall acquire or
have any rights under or by virtue of this Agreement.
<PAGE>
14. SUCCESSION. This Agreement shall be binding upon and
insure to the benefit of the Company, CRI, the Indemnified Persons and
their respective successors, assigns, heirs and personal representatives.
If the foregoing terms correctly set forth our Agreement,
please confirm this by signing and returning to the Advisor the duplicate
copy of this letter. Thereupon this letter, as signed in counterpart,
shall constitute our Agreement on the subject matter herein.
CRUTTENDEN ROTH INCORPORATED
By: /s/ James M. Stearns
------------------------------
Confirmed and Agreed to:
Geographics, Inc.
By: /s/ Ronald S. Deans
------------------------------
Title: Chairman & C.E.O.
---------------------------
Date: 8/11/97
----------------------------
<PAGE>
EXHIBIT I
CRI will be acting on behalf of Geographics, Inc. (the "Company") in
connection with the services or matters that are the subject of the Agreement
to which this Exhibit I is attached. Accordingly, the Company agrees to
indemnify and hold harmless CRI and CRI's affiliates, the respective
directors, officers, agents and employees of CRI and CRI's affiliates, and
each other person, if any, controlling CRI or any of CRI's affiliates
(collectively the "Indemnified Persons"), from and against any losses, claims,
damages, liabilities or expenses (or actions, including shareholder actions,
in respect thereof) related to or arising out of such engagement or CRI's
role in connection therewith, and will reimburse the Indemnified Persons for
all expenses (including out-of-pocket expenses, CRI's customary hourly
charges for time expended in defending or preparing to defend any action or
legal proceeding and CRI's counsel fees and expenses) as they are incurred by
the Indemnified Persons in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with pending
or threatened litigation in which CRI or any Indemnified Person is a party.
The Company will not, however, be responsible for any losses, claims,
damages, liabilities or expenses which are finally judicially determined to
have resulted primarily from CRI's willful misconduct or gross negligence.
The Company also agrees that none of the Indemnified Persons shall have any
liability to the Company for or in connection with the services or matters
pertaining to the Agreement except for any such liability for losses, claims,
damages, liabilities or expenses incurred by the Company that results
primarily from CRI's willful misconduct or gross negligence. If the forgoing
indemnity is unavailable or insufficient to hold the Indemnified Persons
harmless, then the Company shall contribute to the amount paid or payable by
the Indemnified Persons, in respect of the Indemnified Persons, for losses,
claims, damages, liabilities or expenses in such proportion as appropriately
reflects the relative benefits received by, and fault of, the Company, on the
one hand and the Indemnified Persons, on the other, in connection with the
matters as to which such losses, claims, damages, liabilities or expenses
relate and other equitable consideration; provided, however, the Company
agrees that the aggregate contribution of all Indemnified Persons shall in
all cases be not more than the amount of fees actually received by CRI for
its services. It is hereby further agreed that the relative benefits to
the Company on the one hand and the Indemnified Persons on the other with
respect to any Transaction contemplated by the Agreement shall be deemed to
be in the same proportion as (i) the total value of the Transaction bears to
(ii) the fees actually paid to the CRI with respect to such Transaction. The
foregoing Agreement shall be in addition to any rights that CRI or any
Indemnified Person may have at common law or otherwise. The Company hereby
consents to personal jurisdiction and service and venue in any court in which
any claim which is subject to this Agreement is brought against CRI or any
other Indemnified Person. If any action, proceeding or investigation is
commenced as to which an Indemnified Person demands indemnification, the
Indemnified Person shall have the right to retain counsel of its own choice
to represent it, the Company shall pay the reasonable fees and expenses of
such counsel, and such counsel shall to the extent consistent with its
professional responsibilities cooperate with the Company and any counsel
designated by the Company; provided that the Company shall not be responsible
for the fees and expenses of more than one counsel.
<PAGE>
SUBSCRIPTION AGREEMENT
THIS AGREEMENT made as of the ____ day of October, 1997.
BETWEEN:
FIRST PRUDENTIAL INVESTMENT FUND INC.
("Subscriber")
- AND -
GEOGRAPHICS, INC.
(the "Company")
- AND -
RONALD S. DEANS
(the "Principal")
WHEREAS:
1. The Company retained Subscriber to perform certain services for the
Company ("the Services"), which services have now been fully performed to
the complete satisfaction of the Company;
2. In consideration of the performance of the Services, the Company is
indebted to Subscriber in the amount $125,000.00 of lawful money of Canada
(the "Services Fee"), which sum is now due and payable to Subscriber;
3. Subscriber wishes to subscribe to the Company for 250,000 common shares
in the capital stock of the Company ("the Shares") at a price (the
"Subscription Price") equal to the Services Fee;
4. Subscriber wishes to apply the Services Fee to payment of the Subscription
Price; and
5. The directors of the Company have by resolution determined that the
Subscription Price is the fair equivalent of the money that the Company
would have received if the Shares had been issued for money on this date.
<PAGE>
- 2 -
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of
Subscriber subscribing for and purchasing the Shares and of the mutual
covenants and agreements herein contained and for other good and valuable
consideration (the receipt and sufficiency of which is hereby acknowledged),
the parties hereto agree with each other as follows:
1. SUBSCRIPTION:
Subscriber hereby subscribes to the Company for the Shares for an
aggregate purchase price equal to the Subscription Price, subject to the
terms and conditions of this agreement, which subscription the Company
hereby accepts.
2. COMPLETION
(a) PAYMENT: Subscriber hereby authorizes and directs the Company to
apply the Services Fee to the Subscription Price, which authorization
and direction the Company hereby accepts in full payment and
satisfaction of the Subscription Price.
(b) DELIVERY OF SHARE CERTIFICATE(S): The Company hereby acknowledges
payment for the Shares and agrees to deliver to Subscriber the share
certificate(s) in respect of the Shares in the name of Subscriber
immediately upon the signing of this agreement. The Company further
agrees to deliver the Shares by way of share certificate numbers 03672
to 03721, each representing 5,000 common shares.
3. REPRESENTATIONS AND WARRANTIES:
The Company and the Principal (in his personal capacity) hereby jointly
and severally represent and warrant to Subscriber that as at the date
hereof:
(a) RECITALS: The above recitals to this agreement are true;
(b) BANKRUPTCY: The Company has not proposed a compromise or arrangement
to its creditors generally, had any petition for a receiving order in
bankruptcy filed against it, taken any proceeding with respect to a
compromise or arrangement, taken any proceeding to have itself declared
bankrupt or wound-up, taken any proceeding to have a receiver appointed
over any part of its assets, had any encumbrancer take possession of
any of its property, or had any execution or distress become
enforceable or become levied upon any of its property;
<PAGE>
- 3 -
(c) SUBSISTING CORPORATION: The Company is a corporation duly incorporated
and organized, validly subsisting and in good standing under the laws
of the State of Wyoming; and is duly authorized and licensed to own its
properties, and to carry on its business;
(d) DUE AUTHORIZATION: The Company has all necessary corporate power
and authority to enter into this agreement and to issue the
certificate(s) representing the Shares and to carry out its obligations
hereunder; and the execution and delivery of this agreement and the
consummation of the transaction contemplated hereunder has been duly
authorized by all necessary corporate action on the part of the
Company;
(e) ENFORCEABILITY OF OBLIGATIONS: This agreement and each of the Documents
will constitute a valid and binding obligation on the Company
enforceable against it in accordance with its terms, subject, however,
to the limitations with respect to enforcement imposed by law in
connection with bankruptcy, insolvency, re-organization or other
laws affecting creditors' rights generally;
(f) NO CONFLICTING AGREEMENTS: The Company is not a party to, bound or
affected by or subject to any indenture, mortgage, lease, agreement,
instrument, charter or by-law provision, statute, regulation, judgment,
decree or law which would be violated, contravened, breached by, or
under which any obligation would be accelerated or default or
termination would occur as a result of the consummation of any of the
transactions provided for herein;
(g) NO FINDER: No broker or finder acted directly for the Company or
one or more of its Principals or its shareholders or a shareholder of a
shareholder in connection with this agreement or the transaction
contemplated thereby, and no broker or finder is entitled to any
brokerage or finder's fee or other commission or fee in respect
thereof;
(h) REGISTERED OWNER: First Prudential is, or immediately upon execution
of this agreement will be, registered on the records of the Company
as the owner of the Shares;
(i) FULLY PAID: Upon issuance of the Shares to First Prudential, the
Shares will be fully paid and non-assessable shares;
(j) NO CONTROL BLOCK: The Shares do not constitute a control block;
<PAGE>
- 4 -
(k) NO RESTRICTIONS ON TRADING: The Shares are free-trading shares and
may be sold by First Prudential on the open market at any time; and,
without limiting the generality of the foregoing, there are no
undertakings, agreements or other restrictions entered into with any
governmental or securities body which restrict the public trading of
the Shares by Subscriber or anyone else and, to the best of the
knowledge and belief of the undersigned, the public trading of the
Shares in Canada or the United States is not prohibited by any federal,
provincial or State legislation or regulations of general application;
(l) SHARES LEGALLY OBTAINED: The Shares have been obtained legally in
strict compliance with the rules and regulations of all appropriate
governmental and regulatory bodies having jurisdiction.
(m) NO ADVERSE CLAIMS: There are no adverse claims by any third party
in respect of the Shares.
4. NO ACTION TO PREVENT TRANSFER:
The Company and the Principal jointly and severally agree that they will
not assert any adverse claim in respect of the Shares or otherwise attempt
to impede the sale, assignment, transfer or other disposition of the Shares.
5. NON-MERGER OF REPRESENTATIONS AND WARRANTIES:
All of the foregoing representations and warranties are or shall be true
and correct at the date of this agreement and at the date of the issue of
the Shares to Subscriber pursuant to this agreement. Such representations
and warranties shall not merge on the closing of the transactions
contemplated hereby, shall survive the completion of the sale of the Shares
to Subscriber.
6. ENTIRE AGREEMENT:
Except as expressly set forth herein, this agreement constitutes the
entire agreement between the parties relating to the subject matter and
supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties.
<PAGE>
- 5 -
7. SUCCESSORS AND ASSIGNS:
The provisions of this agreement shall, except as otherwise provide
herein, enure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns
and each and every person so bound shall make, execute and deliver all
documents necessary to carry out this agreement.
8. SEPARATE COUNTERPARTS:
This agreement may be executed in one or more counterparts each of which
when so executed shall be deemed to be an original and such counterparts
together shall constitute but one and the same instrument.
9. EXTENDED MEANINGS AND HEADINGS:
In this agreement words importing the singular number only shall include
the plural and vice-versa and words importing the masculine gender shall
include feminine gender and words importing persons shall include firms and
corporations and vice-versa. The headings of the paragraphs hereof are
inserted for convenience of reference only and shall not affect the
interpretation or construction of this agreement.
10. ASSIGNMENT:
This agreement may be assigned by the Subscriber to any successor(s) in
title to the Shares.
11. GOVERNING LAW:
This agreement shall be governed by and construed in accordance with the
laws of the Province of Ontario and the laws of Canada applicable therein
and such laws shall govern even where one or more of the parties hereto may
at some time in the future become a resident of a different province or
country.
<PAGE>
- 6 -
IN WITNESS WHEREOF the parties hereto have executed this agreement.
SIGNED, SEALED & DELIVERED)
in the presence of )
) FIRST PRUDENTIAL INVESTMENT FUND INC.
)
)
) Per: /s/ Donald Appel
) --------------------------
) Donald Appel, President
)
) GEOGRAPHICS, INC.
/s/ Bruce A.R. Benson )
)
) Per: /s/ Ronald S. Deans
) ----------------------------------
) Ronald S. Deans, Chairman
)
)
)
) /s/ Ronald S. Deans
----------------------------------
Ronald S. Deans
<PAGE>
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER
SHARE
Quarter Ended September 30,
---------------------------
1997 1996
---- ----
Net income (loss) $(1,977,364) $373,106
Primary weighted average
common shares outstanding 9,467,877 9,427,811
Primary earnings per share ($.21) $.04
Fully diluted weighted average
common shares outstanding 9,467,877 9,427,811
Fully diluted earnings per share ($.21) $.04
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 126,556
<SECURITIES> 0
<RECEIVABLES> 5,927,922
<ALLOWANCES> (756,767)
<INVENTORY> 9,487,798
<CURRENT-ASSETS> 16,370,252
<PP&E> 18,640,103
<DEPRECIATION> (5,289,343)
<TOTAL-ASSETS> 30,207,533
<CURRENT-LIABILITIES> 21,631,036
<BONDS> 5,365,124
0
0
<COMMON> 15,573,434
<OTHER-SE> (12,362,061)
<TOTAL-LIABILITY-AND-EQUITY> 30,207,533
<SALES> 8,363,293
<TOTAL-REVENUES> 8,363,293
<CGS> 7,018,882
<TOTAL-COSTS> 2,887,614
<OTHER-EXPENSES> 14,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419,873
<INCOME-PRETAX> (1,977,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,977,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,977,364)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
