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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended: December 31, 1997
Commission File Number: 0-26756
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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
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(Address of principal executive office and zip code)
(360) 332-6711
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(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
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The registrant had 9,827,252 shares of common stock outstanding as of
April 22, 1998.
Documents Incorporated by Reference
None
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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 December 31, 1997 (unaudited) and March 31, 1997
(audited), the unaudited statements of operations for the nine months ended
December 31, 1997 and December 31, 1996, and the unaudited consolidated
statements of cash flows for the nine months ended December 31, 1997 and
December 31, 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 in 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 capabilities of
its accounting department and to improve its internal controls; the continued
availability of borrowings under the Company's revolving credit facility; the
Company's ability to refinance the revolving credit facility, to consummate
the currently proposed sale of its lettering and signage business and to
obtain additional debt or equity financing or other sources of external
working capital sufficient to meet its working capital requirements; and the
ability of the Company to continue 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. All forward looking
statements contained in this Report reflect the Company's expectations at the
time of this Report only, and the Company disclaims any responsibility to
revise or update any such forward-looking statement except as may be required
law.
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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 paper products business now constitutes the
Company's principal business, with approximately 80% and 71% of the Company's
total sales in the nine months ended December 31, 1997 and the year ended
March 31, 1997, respectively, attributable to sales of Geopaper products.
Substantially as a result of sales generated by the specialty paper products
business, the Company has experienced rapid growth, with total sales
increasing from $6,900,875 for fiscal 1994 to $23,840,506 for fiscal 1997, an
increase of 245%. However, gross profit as a percentage of revenue
associated with sales of specialty paper products in recent periods has been
substantially lower than gross profit from sales of lettering and signage
products. See "-Results of Operations."
Primarily to develop its specialty paper products business and to
improve its margins, 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. During the fifteen month period ended June 30, 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
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contributed to a substantial net loss for fiscal 1997 and a substantial
further loss for the nine month period ended December 31, 1997. Total losses
during the twenty-one months ended December 31, 1997 exceeded $14.2 million.
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 cross-default under the Company's mortgage loans and
certain of the Company's 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."
On December 23, 1997, the Company entered into an agreement (herein
referred to as the "Asset Purchase Agreement") for the sale of its lettering
and signage product line business (herein referred to as the "Asset Sale") to
U.S. Stamp of Cookeville, Tennessee (also referred to as "The Identity
Group"). The sale was subject to satisfaction of a number of conditions. The
Asset Purchase Agreement provided for a purchase price of $7.5 million in
cash if the sale was consummated on or before March 23, 1998 and $7.4 million
in cash if the sale was consummated after March 23, 1998 but on or before May
6, 1998, the date that the Asset Purchase Agreement expires. The purchase
price was subject to a downward or upward adjustment at closing to the extent
that the value of the eligible inventory of the lettering and signage
products business was more or less than $974,572 and subject to a holdback of
$400,000 as an offset against obsolete inventory and certain measured
liabilities of the lettering and signage product line business. Due to severe
working capital limitations, recent resignations of key administrative
personnel including the Company's chief financial officer, and other factors,
the Company has been delayed in pursuing the regulatory process necessary to
conclude the Asset Sale. Accordingly, at the date of filing of this report,
the Asset Sale had not been completed. If the Company is not able to satisfy
all conditions to closing by the May 6 deadline, the buyer will be free to
terminate the transaction.
The Company has commenced negotiations with U.S. Stamp for the purpose
of obtaining an extension or restructuring the transaction to provide for
alternate means of completing the Asset Sale. On April 13, 1998, the Company
entered into a letter agreement with U.S. Stamp that set forth certain
revisions to the Asset Purchase Agreement. Pursuant to such revisions, the
purchase price would be reduced to $7.0 million (subject to holdbacks). Also,
it is now expected that the Company's lender, which holds a securitiy
interest in all of the assets which are the subject of the Asset Sale, will
foreclose on such assets, sell them to the Identity Group and apply some
portion of the net proceeds to reduce borrowings under the Company's
revolving credit facility. There can be no assurance that the Asset Sale will
be completed on the terms described above or at all. See "--Liquidity and
Capital Resources."
The Company currently projects continuing losses and negative cash flows
from operations for the remainder of fiscal 1998 and at least the first
and second quarters of fiscal 1999. As a result of mounting losses and
negative cashflow, the Company is experiencing a severe working capital
shortfall which has required the Company to delay payments to vendors,
substantially reduce sales and marketing efforts, defer planned purchases
and take other steps to conserve operating capital. These steps have had a
negative impact on sales. At March 31, 1998, payments to vendors aggregating
approximately $2,825,000 were past due. As a result, a number of the
Company's vendors continue to ship only on a C.O.D. basis, have placed the
Company on credit hold, and may take other action against the Company,
including the termination of their relationship with the Company or the
initiation of collection proceedings.
At March 31, 1998 borrowings under the Company's revolving credit
facility aggregated approximately $11,304,335, which exceeded permitted
borrowings under this facility's borrowing base formula by approximately
$2,692,621. Although the Company's lender has permitted borrowings in excess
of the borrowing base limitations, the lender may cease doing so at any time.
It is necessary for the Company to obtain additional working capital as soon
as possible in order to finance continuing operating losses. The lender will
require that the proceeds from the Asset Sale, if and when it occurs, be used
to pay down borrowings under the line of credit, however, the Company is
currently in negotiations with its lenders to modify the current facility's
borrowing base formula to allow for additional borrowings to satisfy the
Company's short-term working capital requirements. There can be no assurance
that the lender will agree to such a modification. Accordingly, whether or
not the Asset Sale occurs, the Company must obtain additional sources of
working capital to finance continuing losses. The Company had been seeking
sources of additional operating capital and/or buyers for its assets for
several months. However, as of the date of this report, the Company has
received no firm commitments with respect to any such transaction other than
the proposed Asset Sale, and there can no assurance that any such transaction
will be identified or consummated once identified. The failure to obtain
sufficient funds when needed to satisfy its working capital requirements will
force the Company to further curtail or restructure operations, sell assets,
seek extended payment terms from its vendors or seek protection under the
federal bankruptcy laws. See "--Liquidity and Capital Resources."
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 year ended March
31, 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 such fiscal year. 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 three 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 the fiscal
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year ended March 31, 1997 with the corresponding quarters of the fiscal year
ended March 31, 1998 may not be entirely meaningful.
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 such fiscal
year. Management has attempted to improve its internal controls, including
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 March 31, 1998 was
$927,208. 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 period prior to March 31, 1997. 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
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and results of operations.
COLLECTIONS OF ACCOUNTS RECEIVABLE. Difficulties encountered by the
Company during the fiscal year ended March 31, 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.
MAINTENANCE OF LARGE INVENTORY. As of December 31, 1997, the Company
maintained an inventory of lettering, signage and specialty papers of
$8,127,571. 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 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. The Company undertook a concentrated effort to reduce its inventory
during the quarter ended December 31, 1997 and, as a result, has reduced this
reserve by $521,000 to $869,000 as of December 31, 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. Also, additional
write-downs in inventory values may be necessary in the future.
RESULTS OF OPERATIONS
SALES. Sales increased 33% to $8,110,028 in the quarter ended December
31, 1997 from $6,089,998 in the quarter ended December 31, 1996. Sales
increased 26% to $24,081,577 in the nine month period ended December 31, 1997
from $19,119,741 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
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responsible for 77% and 80% of sales in the three and nine month periods
ended December 31, 1997, respectively, compared to 71% in both the
corresponding three and nine month periods of the prior year. Sales of
Geopaper have increased 42% to $19,323,791 in the nine months ended December
31, 1997 from $13,520,877 in the corresponding period of the prior year.
The Company was notified in March 1998 that one of its customers, Office
Max, would be sharply reducing its paper products orders with the Company.
Although the Company's sales to this customer during the quarter ended
December 31, 1997 were $964,000, this amount was unusually high due to the
placement of initial stocking orders for seventy new Office Max stores. The
Company believes that the decrease in revenue due to this reduction in orders
will be mitigated by the extremely low margins realized by the Company on
sales to Office Max due to excessive freight costs associated with sales to
this customer.
Sales of the Company's lettering and signage products decreased to
$1,735,189 and $4,757,784 for the three month and nine month periods ended
December 31, 1997, respectively, compared to approximately $1,544,592 and
$5,544,724, respectively, in the three and nine month periods ended December
31, 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 20% from 29% for the nine months
ended December 31, 1997 and December 31, 1996, respectively.
International sales of Geographics products were $2,182,775 and
$5,920,028 for the three and nine month periods ended December 31, 1997,
respectively, and $1,758,868 and $4,481,489 for the three and nine month
periods ended December 31, 1996, respectively. This growth is primarily due
to increased business development through the Company's subsidiaries,
including new account development, existing customer business expansion and
new product sales. International sales of Geographics products represented
23% and 21% of the Company's total sales for the three and nine month periods
ended December 31, 1997, respectively, compared to 28% and 24%, respectively,
of total sales for the same periods in the prior year.
GROSS MARGIN. Gross profit margin as a percentage of sales was 29.5% for
the quarter ended December 31, 1997, compared to 37.3% reported for the same
period in the prior year. For the nine month period ended December 31, 1997,
gross profit margin as a percentage of sales was 17.9%, compared to 39.2%
reported 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. Though the Company announced price
increases on Geopaper products on August 1, 1997 and January 1, 1998, delays
in the implementation of these announced price increases have diminished the
impact that such price increases were expected to have on the Company's gross
profit margins. In connection with the Company's audit for the fiscal year
ended March 31, 1997, management determined that, during such fiscal year,
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 the fiscal year ended March 31, 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
such fiscal year. 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 such fiscal year has not been restated.
Accordingly, gross profit margin for both the quarter and nine month period
ended December 31, 1996 does not reflect the
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effect, if any, that an interim allocation of this adjustment might have had
on the results for such periods. The cumulative effect in the fiscal year ended
March 31, 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, depreciation of sales displays and other fixed assets,
commissions, administrative, accounting, legal and other costs, decreased as
a percentage of sales during the quarter ended December 31, 1997 to 35.8%, as
compared to 42.4% during the same period in the prior year. S,G&A expenses
increased as a percentage of sales to 35.8% for the nine month period ended
December 31, 1997 as compared to 34.5% for the same period in the prior year.
The year to date increase is primarily the result of increased costs
associated with advertising allowances, volume rebates and associated
promotional payments made to key customers, as well as higher than planned
fees and expenses for legal, accounting, investment bankers and similar
professionals. The Company's management believes that S,G&A expenses may be
reduced as its current financial problems are addressed.
INTEREST EXPENSE. The Company's interest expense for the quarter ended
December 31, 1997 increased 30% to $418,388 compared to $321,284 for the same
period in the prior year. The Company's interest expense for the nine month
period ended December 31, 1997 increased 77% to $1,266,585, compared to
$715,396 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 the twelve month period ended
December 31, 1997 (fourth quarter of fiscal 1997 and the first, second and
third quarters of fiscal 1998). Borrowings increased due primarily to
operating losses incurred by the Company in fiscal 1997 and 1998. Borrowings
during the quarters ended March 31 and June 30, 1997 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.
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 year ended March 31, 1997, the Company has experienced and is
continuing to experience severe working capital short-falls which have
required the Company to delay payments to certain vendors,
substantially reduce sales and marketing efforts, delay planned
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purchases, institute internal cost reduction measures and take other steps to
conserve operating capital. These steps have had a negative impact on sales.
At March 31, 1998, payments to vendors aggregating approximately $2,825,000
were past due. During fiscal year ended March 31, 1997, operating losses
totaled $6,261,298, and the Company experienced negative operating cash flows
of $6,601,926. During the nine months ended December 31, 1997, operating
losses totaled $5,565,744. However, the Company experienced positive
operating cash flows of $45,248 during the nine months ended December 31,
1997, primarily as a result of substantial reductions in trade accounts
receivable and inventory balances, along with a substantial increase in trade
accounts payable balances. The 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.
At the date of this Report, the Company's only available source of
working capital consisted of borrowings 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. At March 31, 1998, borrowings under the Company's
revolving credit facility aggregated approximately $11,304,335, which
exceeded permitted borrowings under this facility's borrowing base formula by
approximately $2,692,621. 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 cross-defaults 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 December 31, 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.
The Company entered into a forbearance agreement with its lender,
effective August 31, 1997 (the "Forbearance Agreement"), pursuant to which
the lender agreed to extend the expiration date of the revolving credit
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facility to October 31, 1997, to increase the $12.0 million commitment by a
$300,000 stand-by letter of credit, to permit borrowings of up to $2.25
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. However, in September 1997, the Company was
required to request borrowings substantially in excess of the amended
borrowing limits in order to meet payroll and other expenses. Although the
Company's lender permitted the requested borrowings, it did not formally
waive this additional default. Beginning in September 1997, and without
changes altering any of the other provisions of the Forbearance Agreement,
the Company's lender permitted borrowings of up to $3.0 million in excess of
the applicable borrowing base limitation (the "Modified Forbearance Limits").
The Company's lender subsequently extended the Forbearance Agreement with the
Modified Forbearance Limits, to December 1, 1997 and then again to December
31, 1997.
As of the date of this Report, the Forbearance Agreement has neither
been extended nor replaced with a new forbearance agreement since its
expiration on December 31, 1997. Although the lender has continued to permit
borrowings under the revolving credit facility in accordance with the terms
of the Forbearance Agreement, it is under no obligation to do so. In the
absence of a new forbearance agreement with the lender, the lender may at any
time refuse to permit further borrowings under the facility, terminate the
facility, accelerate the indebtedness due under the facility, or take any
combination of these actions. In addition, the lender may take immediate
action to foreclose on its collateral, including the initiating of
involuntary bankruptcy proceedings, in order to protect its interest in the
Company's assets.
On December 23, 1997, the Company entered into the Asset Purchase
Agreement for the sale of its lettering and signage product line business to
The Identity Group. The sale is subject to satisfaction of a number of
conditions. The Asset Purchase Agreement provided for a purchase price of
$7.5 million in cash if the sale was consummated on or before March 23, 1998
and $7.4 million in cash if the sale was consummated after March 23, 1998 but
on or before May 6, 1998, the date that the Asset Purchase Agreement expires.
The purchase price was subject to a downward or upward adjustment at closing
to the extent that the value of the eligible inventory of the lettering and
signage products business is more or less than an amount equal to $974,572
and subject to a holdback of $400,000 as an offset against obsolete inventory
and certain unassumed liabilities of the lettering and signage product line
business.
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Due to severe working capital limitations, recent resignations of key
administrative personnel, including the Company's chief financial officer,
and other factors, the Company has been delayed in pursuing the regulatory
process necessary to conclude the Asset Sale. Accordingly, at the date of
filing of this report, the Asset Sale had not been completed. If the Company
is not able to satisfy all conditions to closing by the May 6 deadline, the
buyer will be free to terminate the transaction.
The Company commenced negotiations with U.S. Stamp for the purpose of
obtaining an extension or restructuring the transaction to provide for
alternate means of completing the Asset Sale. On April 13, 1998, the Company
entered into a letter agreement with U.S. Stamp that set forth certain
revisions to the Asset Purchase Agreement. Pursuant to such revisions, the
purchase price would be reduced to $7.0 million (subject to holdbacks). Also,
it is now expected that the Company's lender, which holds a security interest
in all of the assets which are the subject of the Asset Sale, will foreclose
on such assets, sell them to the Identity Group and apply some portion of the
net proceeds to reduce borrowings under the Company's revolving credit
facility. There can be no assurance that the Asset Sale will be completed on
the terms described above or at all.
The Company currently projects continuing losses and negative cash flows
from operations for the remainder of fiscal 1998 and at least the first and
second quarters of fiscal 1999. The Company is currently in negotiations with
its lender to modify the current revolving credit facility's borrowing base
formula to allow for additional borrowings to satisfy the Company's short
term working capital requirements. There can be no assurance that the lender
will agree to such a modification. Also, even if the Company's lender
continues to permit borrowings under the credit facility, as of the date of
this Report the Company believes that it is necessary to obtain additional
working capital as soon as possible in order to finance continuing operating
losses. The Company's lender will require that a substantial portion of the
proceeds from the Asset Sale, if and when it occurs, be used to pay down
borrowings under the line of credit. At March 31, 1998, payments to vendors
aggregating approximately $2,825,000 were past due. As a result, many of the
Company's vendors continue to ship only on a C.O.D. basis and may take other
action against the Company, including termination of their relationship with
the Company or the initiation of collection proceedings. Accordingly, whether
or not the Asset Sale occurs, the Company must obtain additional sources of
working capital to finance continuing losses.
The Company is actively seeking possible sources of additional capital
or buyers for its assets. However, as of the date of this Report, the
Company has received no firm commitments with respect to any such transaction
other than the proposed Asset Sale and there can be no assurance that any
such transaction will be identified, or consummated once identified. If the
Company's lender ceases to permit borrowings under the credit facility or if
the Company is unable to obtain additional external working capital when
<PAGE>
needed in order to satisfy its working capital requirements, the Company will
be required to further curtail or restructure operations, sell assets,
continue to seek extended payment terms from its vendors or seek protection
under the federal bankruptcy laws.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1997..........................................................F-2
Consolidated Statements of Operations for the three months and nine
months ended December 31, 1997 and 1996.....................................F-3
Consolidated Statements of Cash Flows for the three months and
nine months ended December 31, 1997 and 1996................................F-4
Notes to Consolidated Financial Statements..................................F-5
</TABLE>
F-1
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1997 1997
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 454,006 $ 408,757
Accounts receivable
Trade receivables, net 4,813,097 6,654,500
Other receivables 540,267 993,243
Inventory, net of allowance for obsolete inventory
of $869,000 at December 31, 1997 and $1,290,000
at March 31, 1997 8,127,571 9,457,874
Prepaid expenses, deposits, and other current assets 870,184 893,483
------------- -----------
Total current assets 14,359,560 18,407,857
PROPERTY, PLANT AND EQUIPMENT, net 13,306,887 10,832,231
OTHER ASSETS 464,416 1,005,613
------------- -----------
TOTAL ASSETS $28,576,428 $30,245,701
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 315,613 $ 467,445
Note payable to bank 10,759,320 8,649,390
Accounts payable 4,036,635 2,421,768
Accrued liabilities 2,701,394 2,145,030
Notes payable to officers and directors 0 850,000
Current portion of long-term debt 3,446,602 3,472,674
------------- -----------
Total current liabilities 21,322,564 18,006,307
LONG-TERM DEBT 5,107,662 4,322,371
------------- -----------
Total liabilities 26,430,226 22,328,678
------------- -----------
STOCKHOLDERS' EQUITY
No par common stock - 100,000,000 authorized,
9,827,252 and 9,467,877 issued and outstanding at
December 31, 1997 and March 31, 1997, respectively 15,573,434 15,574,018
Foreign currency translation adjustment (217,974) (76,478)
Retained earnings (accumulated deficit) (13,146,258) (7,580,517)
------------- -----------
Total stockholders' equity $ 2,209,202 7,917,023
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,576,428 $30,245,701
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to these consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
(Unaudited)
Three Months Ended Nine Months Ended
- -------------------------------------------------------------------------------------
Dec. 31 Dec. 31 Dec. 31 Dec. 31
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 8,110,028 $6,089,998 $24,081,577 $19,119,741
Cost of Sales $ 5,715,028 3,817,103 $19,782,107 11,627,057
------------- ------------- ------------- -------------
Gross Margin 2,395,000 2,272,895 4,299,469 7,492,684
Selling, General and 2,899,592 2,582,567 8,635,685 6,591,911
Administrative Expenses
------------- ------------- ------------- -------------
Income (Loss) from
Operations (504,593) (309,672) (4,336,216) 900,773
Other Income (Expenses)
Interest Expense (418,388) (321,284) (1,266,585) (715,396)
Other 70,384 27,102 37,056 13,261
------------- ------------- ------------- -------------
Income (Loss) Before (852,596) (603,854) (5,565,744) 198,638
Provision for Income
Taxes
Income Tax Provision -- (214,601) -- 68,608
------------- ------------- ------------- -------------
Net Income (Loss) $ (852,596) $(389,253) $(5,565,744) $130,030
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings Per Common
and Common Equivalent
Share
Primary $(.16) $(.04) $(.59) $.01
Assuming full dilution $(.16) $(.04) $(.59) $.01
Shares Used in
Computing Earnings Per
Common and Common
Equivalent Share
Primary 9,742,334 9,416,953 9,296,617
Assuming full dilution 9,742,334 9,416,953 9,396,176
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
INCREASE (DECREASE) IN CASH (Unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (5,565,741) $ 130,030
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization 1,358,208 1,016,576
Deferred income taxes -- (102,192)
(Gain) loss on sales of property and equipment 1,740 8,985
CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES
Trade receivables 1,841,403 172,948
Related party receivables -- 899,422
Other receivables 452,976 (78,167)
Inventory 1,330,303 (4,324,024)
Deposits 231,899
Other Current Assets (123,511)
Prepaid expenses, deposits and other current assets (84,989) (850,627)
(4,546)
Accounts payable 1,614,867 (690,574)
Accrued liabilities 556,284 561,319
Income tax payable -- (93,207)
---------------------------
Net cash flows from operating activities 1,608,873 (3,349,511)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdrafts (151,832) 494,936
Net borrowings on note payable to bank 2,109,930 (740,689)
Proceeds from long-term debt borrowings -- 2,231,013
Repayment of long-term debt (918,699) (556,750)
Repayments of notes payable to officers and directors -- (264,711)
Repayments of debentures and notes payable to officers and directors (850,000)
Proceeds from issuance of common stock (584) 6,526,549
Foreign currency translation (141,496) 16,728
---------------------------
Net cash flows from financing activities 47,319 7,707,076
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (1,610,944) (3,931,513)
Proceeds from sales of equipment 1,787
Net advances from (repayments to) partnerships -- (153,397)
Change in other assets (0) (94,643)
---------------------------
Net cash flows from investing activities (1,610,944) (4,177,766)
---------------------------
NET CHANGE IN CASH 45,248 179,799
CASH, beginning of year 408,757 50,028
---------------------------
CASH, end of quarter 454,006 229,827
---------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment 1,677,918 1,442,192
---------------------------
Assets acquired 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.
F-5
<PAGE>
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. The following is a
schedule of noncancelable operating lease commitments:
<TABLE>
<S> <C>
1998........................................ $ 365,103
1999........................................ 152,253
2000........................................ 67,403
2001........................................ 46,164
-------
$ 630,164
-------
-------
</TABLE>
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 separate lawsuits were
consolidated into a single class action lawsuit (the "Litigation"). On April
27, 1998, Defendants entered into an agreement to settle the Litigation. Under
the terms of such agreement, Defendants' insurance carrier will pay the
plaintiffs $1.5 million, in addition to certain costs of class notice and
settlement administration in an amount not to exceed $100,000 (the
"Settlement"). In settling this matter, Defendants specifically deny
liability for any alleged wrongdoing. On behalf of themselves and all members
of the class, the plaintiffs will dismiss and release all claims against the
Company and its officers and directors. The Settlement is conditioned upon
receipt of authorization and consent from Defendants' primary D&O liability
insurance carrier, said condition to be exercised or waived by Defendants by
April 30, 1998. The Settlement must be approved by the court as fair and
reasonable and in the best interests of class members before it will become
final and effective. Members of the class who opt out of the settlement, if
any, will not be bound by the release. The terms and conditions of a
contribution from the Company is the subject of continuing negotiations
between the Company and the insurance carrier. At this time, the Company
believes that if the settlement in its current form is approved by the court
and becomes final and effective, it will not have a material adverse effect
on the financial operations and condition of the Company. However, there can
be no assurance that such approval will be given. Furthermore, if the
Settlement is not approved by the court for any reason and is voided, the
Company believes that the Litigation would continue and the Company would
continue to vigorously defend the allegations in the consolidated complaint.
The defense of this or any pending or future litigation, investigation or
disputes could result in substantial legal and professional costs to the
Company.
F-6
<PAGE>
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 uses three software
packages at its North American production, warehousing and administrative
facilities. The three software packages include a Unix operating system, an
integrated operations and accounting application package, and electronic data
interchange software. Of particular importance, the Company's principal
business and accounting software package was constructed using two digits
rather than four to define the applicable year. As a result, it has
time-sensitive software that may recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed a preliminary internal assessment of the
impact of the year 2000 on the three principal computer software packages
described above. As a result, the Company believes that with existing minor
upgrades of its existing software packages, the year 2000 issue will not pose
significant operational problems. However, it has not yet completed an
assessment of its hardware and other systems, including those of vendors,
customers and other third parties. The Company anticipates completing all of
its assessment no later than March 1999. However, the potential expense to
ensure that all of the computer and other systems, including those of
vendors, customers and third parties, are year 2000 compliant cannot be
determined until a more complete assessment is performed. The potential
expense to ensure that all of the computer and other systems are year 2000
complaint cannot be determined until such an assessment is made.
EMPLOYMENT CONTRACTS -- In August 1997, the Company entered into
employment contracts with certain employees for a period of up to three
years. None of these contracts remain in force as of the date of this Report.
F-7
<PAGE>
NOTE 3 - GOING CONCERN
As a result of the $7,950,301 loss incurred by the Company for the
fiscal year ended March 31, 1997, a decline in gross profit margins, the
Company's failure to comply with covenants under its revolving credit
facility 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
a going concern and do not include any adjustments that might result from the
outcome of this uncertainty.
During the nine months ended December 31, 1997, operating losses totaled
$5,565,744. The Company currently projects continuing losses and negative
cash flows from operations for the remainder of fiscal 1998 and at least the
first and second quarters of fiscal 1999. The Company is currently in
negotiations with its lender to modify the current revolving credit
facility's borrowing base formula to allow for additional borrowings to
satisfy the Company's short term working capital requirements. There can be
no assurance that the lender will agree to such a modification. Also, even if
the Company's lender continues to permit borrowings under the credit
facility, as of the date of this Report the Company believes that it is
necessary to obtain additional working capital as soon as possible in order
to finance continuing operating losses. The Company's lender will require
that a substantial portion of the proceeds from the Asset Sale, if and when
it occurs, be used to pay down borrowings under the line of credit. At March
31, 1998, payments to vendors aggregating approximately $2,825,000 were past
due. As a result, many of the Company's vendors continue to ship only on a
C.O.D. basis and may take other action against the Company, including
termination of their relationship with the Company or the initiation of
collection proceedings. Accordingly, whether or not the Asset Sale occurs,
the Company must obtain additional sources of working capital to finance
continuing losses.
The Company is actively seeking possible sources of additional capital
or buyers for its assets. However, as of the date of this Report, the Company
has received no firm commitments with respect to any such transaction other
than the proposed Asset Sale and there can be no assurance that any such
transaction will be identified, or consummated once identified. The failure
to 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-8
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1997, Mr. Deans caused the Company to issue 250,000 shares of
Common Stock (the "Consulting Shares") to First Prudential Investment Fund,
Inc., a Toronto-based financial services firm ("First Prudential"). The
Company's management involved in this transaction believed that the issuance
of the Consulting Shares did not need to be registered under the Securities
Act based on the following: (i) the transaction was privately negotiated with
First Prudential, (ii) no general solicitation was made in connection with
the transaction, (iii) First Prudential had access to publicly available
information concerning the Company, and (iv) the apparent sophistication of
First Prudential. However, the Consulting Shares were issued without
restrictions on transferability and without a representation from First
Prudential that it was acquiring the Consulting Shares with investment
intent. Accordingly, it appears that the issuance of the Consulting Shares
does not qualify for the exemption from registration under the Securities Act
pursuant to Section 4(2) thereof and it is not clear whether any other
exemption is available.
In November 1997, the Company entered into a settlement agreement with a
former consultant and certain other parties, pursuant to which Mr. Deans
caused the Company to issue 109,375 shares of Common Stock (the "Settlement
Shares") in settlement of a $70,000 claim. The Company's management involved
in the negotiation of the settlement believed that the issuance of the
Settlement Shares did not need to be registered under the Securities Act of
1933 (the "Securities Act") based on the following: (i) the transaction was
privately negotiated with the former consultant, (ii) no general solicitation
was made in connection with the transaction, (iii) the former consultant had
access to publicly available information concerning the Company, and (iv) the
apparent sophistication of the former consultant. However, the Settlement
Shares were issued without restrictions on transferability and without a
representation from the former consultant that he was acquiring the
Settlement Shares with investment intent. Accordingly, it appears that the
issuance of the Settlement Shares does not qualify for the exemption from
registration under the Securities Act pursuant to Section 4(2) thereof and it
is not clear whether any other exemption is available.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Since May 1997, the Company has failed to comply with the net worth,
debt-to-equity ratios and cash flow coverage ratios under its $12.0 million
revolving credit facility, and borrowings under the revolving credit facility
exceeded the permitted borrowing base limitations. The Company entered into a
forbearance agreement pursuant to which its lender continued to permit
borrowings under the revolving credit facility, subject to certain terms and
conditions. This forbearance agreement, as subsequently modified and
extended, expired on December 31, 1997 and, as of the date of this Report,
had not been extended or replaced. Accordingly, since December 31, 1997, the
Company has been in default under the revolving credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" contained in Part I, Item 2 of
this Report, which by this reference is incorporated into this Item 3.
Item 5. OTHER INFORMATION
On December 23, 1997, the Company's securities were delisted from the
Nasdaq SmallCap Market. On November 19, 1997, the Company's securities had been
transitioned from the Nasdaq National Market to the SmallCap Market subject to
the Company completing a reverse stock split by January 19, 1998. Nasdaq's
decision to delist the Company was based on the Company's determination that
both the reverse stock split and the sale of the lettering and signage product
line would require shareholder approval and that the Company would be unable to
submit both matters to shareholders at a single meeting prior to the January 19,
1998 Nasdaq deadline. The Company's securities have continued to trade on
Nasdaq's OTC Electronic Bulletin Board and its common stock has continued to
remain listed on the Toronto Stock Exchange. However, the delisting has had a
material adverse effect on the liquidity of the market for the Company's
securities and could have a material adverse effect on the Company's ability
to obtain equity financing.
The Company announced on December 24, 1997 that its Board of Directors
appointed Mr. Ray Maxon to the Board and to its Audit Committee. Mr.
Maxon filled a vacancy that was created by the resignation of Mr. Richard
Lundquist. In addition, on January 16, 1998, Mr. Mark G. Deans, Executive Vice
President of Sales and Marketing, and Mr. R. Scott Deans, Executive Vice
President of Operations, resigned from the Board of Directors. While they no
longer serve on the Company's Board of Directors, they remain officers of the
Company and there is no change in their day-to-day responsibilities.
CHANGES IN EXECUTIVE OFFICERS
Effective March 6, 1998, Bruce A. Clawson resigned as the Company's Vice
President-Finance and Chief Financial Officer to accept another position. The
Company is attempting to identify a suitable replacement for Mr. Clawson.
Pending the hiring of a new chief financial officer, Ronald S. Deans, the
Company's President and Chief Executive Officer ("Mr. Deans"), is serving as
the Company's Chief Financial Officer. Also, the Board of Directors, with the
concurrence of Mr. Deans, has determined that the Company will attempt to
hire a new President, chief executive and chief financial officer to replace
Mr. Deans as soon as possible. It is expected that Mr. Deans will continue as
a consultant to the Company for some period of time after his replacement has
been retained. In the interim, the Company has engaged a management
consultant to assist Mr. Deans in the day-to-day management of the Company.
Although the Company intends to seek replacements for Messrs. Deans and
Clawson, there can be no assurance that it will be able to do so in the near
term, if at all.
EXAMINATION OF MANAGEMENT
The board of directors of the Company currently consists of Mr. Deans,
David P. McCleery and Raymond P. Maxon. Messrs. McCleery and Maxon, neither
of whom are employees of the Company, were appointed to the board in
September and December 1997, respectively, following the resignations of
other directors. In January 1998, the board of directors, with Mr. Deans'
concurrence, appointed a special committee consisting of Messrs. McCleery and
Maxon to conduct an examination of the performance and conduct of the
Company's management (the "Special Committee"). The Special Committee engaged
independent counsel to assist with this examination. The focus of the
examination has been on the adequacy of documentation related to a number of
expenses incurred by Mr. Deans and other members of management which were
paid or reimbursed by the Company, whether such expenses were business or
personal in nature, the tax reporting and accounting for certain stock option
exercises by Mr. Deans and his sons in January 1996, the basis for compliance
with the registration requirements of applicable securities laws in
connection with three separate issuances of common stock by the Company in
1996 and 1997 and certain other securities-related matters.
In March 1998, based on the findings of the Special Committee to that
point in time, the Special Committee requested that Mr. Deans undertake
certain corrective measures and implement certain policies and procedures.
Certain of the findings and recommendations of the Special Committee are
summarized below.
EXPENSES. Based on a review by the accountants hired by independent
counsel for the Special Committee of Company records of expenses reimbursed
or paid by the Company in 1997, it appears that a substantial portion of the
approximately $125,000 of expenses reimbursed or paid by the Company in 1997
for Mr. Deans lacked adequate documentation for tax purposes and/or appeared
to be primarily personal in nature. Based on a limited review of Mr. Deans'
expense accounts for 1996 by independent counsel, it appears that most of the
approximately $150,000 in reimbursed expenses for Mr. Deans in that year also
lacked adequate documentation for tax purposes or appeared to be personal
expenses. Pending further review of Company records and possible explanation
by Mr. Deans, the Special Committee requested that Mr. Deans reimburse the
Company $100,000 with respect to 1997 and 1996 and agree to provide further
reimbursement to the Company if and to the extent that expenses paid or
reimbursed by the Company for him in excess of that amount are later
determined not to be deductible for tax purposes. Mr. Deans reviewed certain
of his expense records and agreed that certain expenses may not have been
properly substantiated and, pending his further review of the remainder of
his expense records, he has offered to reimburse the Company $32,000 with
respect to 1997 and 1996 by reducing a note payable by the Company to a
company affiliated with Mr. Deans. As of the date of this report, the Special
Committee and Mr. Deans have not reached agreement on either the amount to be
paid by Mr. Deans or Mr. Deans' proposed method of payment. In addition, to
the extent that it is determined that additional expenses were not properly
substantiated, Mr. Deans has agreed to reimburse the Company for such
additional amounts. The accountants engaged by independent counsel also found
that the documentation related to a substantial portion of reimbursed
expenses of several other corporate officers is inadequate, and the Special
Committee has directed that those employees also reimburse the Company for
those expenses that are personal or lack adequate documentation. The Special
Committee is requiring management to implement policies that will insure
proper expense reporting in the future.
To the extent it is determined that expenses paid or reimbursed by the
Company for the benefit of Mr. Deans or any other officer were personal in
nature or not adequately documented, such expenses may not be deductible for
tax purposes and the Company may owe additional tax, together possibly with
interest and penalties, for prior periods in which it otherwise did not incur
a loss for tax purposes. In addition, the net income reported by the Company
for periods in which the expenses were deducted may have been overstated to
the extent of the tax savings realized from the deduction of expenses which
are later determined to be nondeductible, if any. Also, unless these expenses
are repaid, the amount of income for such individuals reported in prior SEC
reports may have been understated to the extent such expenses were personal
in nature. Due to the volume of transactions and the complexity of the
questions involved, it is not possible at this time to quantify such amounts.
STOCK OPTION EXERCISES. In January 1996, Mr. Deans, his sons, Scott and
Mark Deans, and other Company personnel exercised certain non-qualified stock
options to purchase shares of the Company's common stock. The difference
between the exercise prices of the options exercised by the Deans and the
market value of the shares of the Company's common stock issued upon exercise
of such options yielded a gain of $1,089,049 in the aggregate as of the date
of exercise. Although this gain likely should have been reported for tax
purposes as income by the Deans in 1996 and recorded as an expense by the
Company in that year, it was not. With respect to these option exercises, the
Special Committee has (i) directed Mr. Deans to cause the Company to issue
amended 1996 Form W-2s to himself, Mark and Scott Deans to include previously
unreported income associated with such exercises and to instruct the
Company's tax preparer to seek a deduction for the Company in that amount,
and (ii) asked Mr. Deans, Mark Deans and Scott Deans each to include such
amounts on amended tax returns for the tax year 1996. Mr. Deans has agreed to
instruct the Controller to issue an amended Form W-2 to himself and his sons,
and to instruct the Company's accountants to seek the appropriate deduction.
He also agreed to include the appropriate income on his tax return and
request Mark and Scott Deans to do the same. The deemed gain associated with
these options exercises should have been, but was not, reported in the
Company's annual report on Form 10-K for the fiscal year ended March 31, 1996.
SECURITIES COMPLIANCE. The Special Committee examined certain issues
with respect to past and present practices related to dissemination of
company related information. The Special Committee determined that management
had not previously promulgated written policies on securities compliance. In
addition to the actions identified in the previous paragraphs, to ensure
knowledge of and compliance with the securities laws, the Board of Directors
is requiring management to implement, with Board approval, an appropriate
education and written compliance policy.
ISSUANCES OF COMMON STOCK. In July 1996, October 1997 and November 1997,
Mr. Deans caused the Company to issue shares of common stock in three
separate transactions. It now appears that the Company may not have complied
with the registration requirements of federal and state securities laws in
connection with such transactions. The Company initially made certain
disclosures regarding the 1996 transaction in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997. The two transactions
which occurred in 1997 are described under the caption "Changes in Securities
and Use of Proceeds" in Item 2 of Part II of this Report. If it is determined
that these issuances of stock did not comply with an exemption from the
registration requirements of applicable securities laws, the Company may be
subject to penalties or liability for damages. It is not possible to
determine at this time whether the issuance of such stock will subject the
Company to liability.
COMPENSATION/PERQUISITES. The Special Committee and Mr. Deans have
agreed that effective April 1, 1998 the salaries paid to Mr. Deans and his
sons will be decreased from an annual rate of $220,000 to $150,000 in the
case of Mr. Deans and from $120,000 to $100,000 in the case of his sons. In
addition, the Special Committee has asked Mr. Deans to pay any expenses
incurred by the Company in investigating and correcting deficiencies related
to expense reporting and stock option exercises. Finally, the Special
Committee has requested that Ron, Scott and Mark Deans resign from or
purchase all (with one exception) personal club memberships paid for by the
Company.
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
Regulation S-K) Description of Document
______________ _______________________________________________
10.18 Asset Purchase Agreement between Geographics, Inc. and
Identity Group, Inc. dated December 23, 1997.
11.1 Statement re computation of net income (loss) per share
27.1 Financial Data Schedule
<PAGE>
(b) No Current Reports on Form 8-K were filed by the Company during the fiscal
quarter ended December 31, 1997.
<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 29th day of
April, 1998.
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
---------------------------------
Ronald S. Deans
President and Chief Financial
Officer
<PAGE>
ASSET PURCHASE AGREEMENT
BETWEEN
GEOGRAPHICS, INC.
AND
IDENTITY GROUP, INC.
DATED DECEMBER 23, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<C> <C> <S> <C>
1. SALE AND PURCHASE OF ASSETS............................................................................ 1
1.1. Transfer of Assets.......................................................................... 1
1.2. No Assumption of Liabilities by Buyer; Responsibility for Customer Returns.................. 1
1.3. Excluded Assets............................................................................. 2
1.4. Employees................................................................................... 2
1.5. Inventory................................................................................... 2
1.6. Transition Period........................................................................... 3
2. PURCHASE PRICE; PAYMENT TERMS.......................................................................... 3
2.1. Purchase Price.............................................................................. 3
2.2. Payment of Purchase Price................................................................... 3
2.3. Allocation of Purchase Price................................................................ 3
3. CLOSING................................................................................................ 3
3.1. Time and Place of Closing; Escrow........................................................... 3
3.2. Items to be Delivered at the Closing........................................................ 3
3.3. Closing Costs............................................................................... 4
3.4. Further Assurances.......................................................................... 4
4. CONDITIONS TO CLOSING.................................................................................. 4
4.1. Conditions Precedent to Obligations of Buyer................................................ 4
5. REPRESENTATIONS AND WARRANTIES OF SELLER............................................................... 5
5.1. Organization, Standing and Authority of Seller.............................................. 5
5.2. Authorization of Agreement.................................................................. 5
5.3. No Conflict; Consents....................................................................... 5
5.4. Financial Statements........................................................................ 6
5.5. Absence of Certain Liabilities and Changes.................................................. 6
5.6. Title to Assets............................................................................. 6
5.7. Condition of Assets......................................................................... 6
5.8. Intellectual Property Rights................................................................ 6
5.9. Taxes....................................................................................... 6
5.10. Contracts................................................................................... 6
5.11. Employee Matters............................................................................ 7
5.12. Litigation; Compliance with Laws............................................................ 7
5.13. Insurance................................................................................... 7
5.14. Foreign Sales............................................................................... 7
5.15. Disclosure.................................................................................. 7
6. REPRESENTATIONS AND WARRANTIES OF BUYER................................................................ 7
6.1. Buyer's Organization........................................................................ 7
6.2. Authorization of Agreement.................................................................. 8
6.3. No Conflict, Consents....................................................................... 8
6.4. Litigation.................................................................................. 8
7. FURTHER COVENANTS OF THE PARTIES....................................................................... 8
7.1. Access to Information....................................................................... 8
7.2. Cooperation................................................................................. 8
7.3. Conduct of the Business Pending the Closing................................................. 8
7.4. Use of Packaging Material................................................................... 8
</TABLE>
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<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<C> <C> <S> <C>
7.5. Advice of Claims............................................................................ 9
7.6. Notice by Buyer............................................................................. 9
7.7. Publicity................................................................................... 9
7.8. Bulk Sales Compliance....................................................................... 9
7.9. Preservation of Records..................................................................... 9
7.10. Termination Fee............................................................................. 9
7.11. Brokers..................................................................................... 9
7.12. No Solicitation............................................................................. 9
7.13. Post-Closing Cooperation.................................................................... 10
7.14. Customer Orders............................................................................. 10
7.15. Post-Closing Payments....................................................................... 10
8. INDEMNIFICATION AND RELATED MATTER..................................................................... 10
8.1. Indemnification............................................................................. 10
8.2. Survival of Representations and Warranties Determination of Damages......................... 11
8.3. Claims Procedure............................................................................ 11
9. CONFIDENTIALITY........................................................................................ 11
10. TERMINATION............................................................................................ 12
10.1. Termination Events.......................................................................... 12
10.2. Effect of Termination....................................................................... 12
11. MISCELLANEOUS.......................................................................................... 12
11.1. Notices..................................................................................... 12
11.2. Full Understanding.......................................................................... 13
11.3. Entire Agreement............................................................................ 13
11.4. Modification................................................................................ 13
11.5. No Waiver................................................................................... 13
11.6. Captions and Construction................................................................... 13
11.7. Survival.................................................................................... 13
11.8. Governing Law............................................................................... 13
11.9. Expenses.................................................................................... 13
11.10. Execution in Counterparts................................................................... 13
11.11. Invalid Provisions.......................................................................... 14
11.12. Time of the Essence......................................................................... 14
11.13. Binding Effect, Assignment, No Third Party Rights........................................... 14
11.14. Arbitration................................................................................. 14
11.15. Non-Competition............................................................................. 14
</TABLE>
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<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT is entered into as of December 23, 1997 by and
between Geographics, Inc., a Wyoming corporation ("Seller"), and Identity Group,
Inc., a Tennessee corporation ("Buyer").
RECITALS
A. Seller, through its signage products business segment, is engaged in the
business of developing, manufacturing, marketing, supporting and distributing
various rub-on and stick-on lettering, stencils, graphic arts products,
non-electric and electric signs and other signage products (the "Business").
B. Buyer desires to purchase, and Seller desires to sell, substantially all
of the assets of Seller employed or held exclusively in connection with the
Business.
NOW THEREFORE, the parties agree as follows:
AGREEMENT
1. SALE AND PURCHASE OF ASSETS.
1.1. TRANSFER OF ASSETS. Subject to the terms and conditions of this
Agreement, at the closing referred to in Section 3 (the "Closing"), Seller shall
sell, assign, grant and transfer to Buyer, and Buyer shall purchase and accept
from Seller, free and clear of any liens, charges or encumbrances, all of
Seller's right, title and interest in and to the following assets (the
"Assets"), not including the Excluded Assets (as defined below):
(i) all of the furnishings, furniture, office supplies, tools, machinery
and equipment owned by Seller and used primarily in the operation of the
Business including without limitation the assets listed on SCHEDULE 1.1(i)
hereto (all of the foregoing being collectively referred to as the
"Equipment");
(ii) all quantities of inventory, including raw materials,
works-in-process, finished goods, stores and supplies, owned by Seller and
used primarily in the operation of the Business (the "Inventory");
(iii) all research, development, trade secrets, know-how, inventions, and
designs, and other technical information whether owned by Seller or licensed
from third parties by Seller, used primarily in the Business and all
records, reports and data relating thereto;
(iv) all trademarks, trade names and service marks, and registrations
and applications for such trademarks, trade names, service marks owned by
Seller and primarily used in the Business listed in SCHEDULE 1.1(iii)
(collectively, the "Intellectual Property");
(v) all contracts, purchase orders, arrangements and commitments of any
kind which relate to the Business or Assets, including, without limitation,
those contracts listed on SCHEDULE 5.10 (the "Contracts");
(vi) all customer and vendor lists relating to the Business and all
files and documents (including credit information) relating to customers and
vendors of the Business;
(vii) all other assets used by Seller primarily in the conduct of the
Business; and
(viii) all other business and financial records, files, books and
documents relating to the Assets or the Business, including without
limitation, all product and marketing plans, procedural and technical
manuals, user's guides, servicing routines, parts lists, advertisements,
brochures and promotional materials.
The purchase and sale of the foregoing Assets on the terms and conditions
set forth in this Agreement is referred to herein as the "Acquisition."
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1.2. NO ASSUMPTION OF LIABILITIES BY BUYER; RESPONSIBILITY FOR CUSTOMER
RETURNS (a) Buyer is not assuming and does not agree to pay, perform or
discharge, any liabilities of Seller, other than ongoing obligations under any
executory contracts expressly assumed by Buyer. All liabilities shall be
retained by, and remain the sole responsibility of Seller, other than ongoing
obligations under any executory contracts expressly assumed by Buyer.
(b) Seller shall be responsible for all costs, liabilities and expenses
associated with any customer returns of goods shipped prior to the Transition
Date and shall promptly reimburse Buyer for any such costs, liabilities and
expenses incurred by Buyer.
1.3. EXCLUDED ASSETS. The parties to this Agreement expressly understand
and agree that Seller is not hereunder selling, assigning, transferring or
conveying to Buyer any assets, rights or properties of Seller not referred to in
Section 1.1 or as otherwise provided under this Agreement. Without limiting the
foregoing, the following assets, rights and properties (the "Excluded Assets")
shall be specifically excluded from the transactions contemplated by this
Agreement:
(a) cash;
(b) receivables, pension or other funded employee benefit plan assets,
or amounts owed to Seller by or claims by Seller against third parties,
including any right or claim to refund of any deposits, prepayments or tax
abatements for which Seller may have a claim with respect to the Assets or
Business conducted prior to the Transition Date; and
(c) any assets, rights or properties used primarily in connection with
Seller's paper products business segment.
1.4. EMPLOYEES. Buyer shall not be obligated to hire any employees of
Seller or the Business. Seller will be solely responsible for terminating
employees who work in the Business. All employee-related costs and expenses will
be retained by Seller, including without limitation all severance or separation
costs.
1.5. INVENTORY. The Purchase Price (as hereafter defined) will be adjusted
dollar-for-dollar as set forth herein, if, on the Closing Date, the value of the
Inventory that is good, usable and salable in the ordinary course of business,
as determined in accordance with generally accepted accounting principles (the
"Inventory Value"), on a cost basis is more or less than $974,572. In order to
assess Seller's Inventory Value, Buyer may, at its option, conduct a physical
count of the Inventory immediately prior to the Closing Date. The Inventory
Value will not be reduced prior to the Closing to account for Obsolete Inventory
unless Buyer and Seller mutually agree otherwise. The purchase price for the
Assets will be reduced or increased on the Closing Date by the amount of any
mutually agreed variation in Inventory Value based upon the physical count. Not
later than 45 days after the Closing (the "Determination Period"), Seller shall
deliver to Buyer the Seller's calculation of Obsolete Inventory (defined below)
value to the extent not previously taken into account in calculating Inventory
Value. For purposes of determining the Obsolete Inventory value, items which are
determined to not be good, useable or salable in the ordinary course of
business, the value of any amounts of finished goods inventory (based on unit
cost at September 30, 1997, as determined by Seller) which exceed the actual
sales of the Business for the 12 month period immediately preceding the Closing
(the "Obsolete FG Inventory") will be excluded. Any work in process inventory
which is mutually determined to be not salable in the ordinary course of
business (the "Obsolete WIP Inventory", and, collectively with the Obsolete FG
Inventory, the "Obsolete Inventory") will also be excluded. In the event that
Buyer disagrees with Seller's determination of the Obsolete Inventory value and
Buyer and Seller cannot agree as to the Obsolete Inventory value within 30
business days after the end of the Determination Period, then Buyer and Seller
shall select a firm of independent accountants reasonably acceptable to Buyer
and Seller and such firm shall be responsible for determining the Obsolete
Inventory value for purposes of this Section 1.5. The undisputed amount of any
downward adjustment for Obsolete Inventory shall be immediately paid to Buyer
out of the Escrow Fund (as hereafter defined). The
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<PAGE>
balance of the Obsolete Inventory value, if any, as finally determined will be
promptly paid to Buyer out of the Escrow Fund or, if the Escrow Fund has been
fully disbursed, promptly paid by Seller to Buyer.
1.6. TRANSITION PERIOD. Title to all the Assets and risk of loss shall
pass to Buyer as of the Closing Date. However, in order to facilitate the
transfer of the Assets and Business, Seller shall permit Buyer to maintain the
Assets in Seller's plant after Closing for such period to be determined by Buyer
in its discretion but in any event not longer than 90 days after the Closing
Date (the "Transition Period"). During the Transition Period, manufacturing of
products for the Business shall continue to be performed in Seller's plant by
Seller's employees under the direction of Buyer. Buyer shall reimburse Seller
for (i) actual, direct labor costs, including, but not limited to direct
supervisory costs, the cost of one customer service representative, payroll
taxes and benefits incurred by Seller in manufacturing and shipping products for
Buyer and (ii) actual shipping expenses. Buyer shall pay to Seller the sum of
$1.00 as rent for the Transition Period in consideration for the use of a
portion of Seller's plant to manufacture, store and ship products for the
Business, which rent amount shall be the sole payment to Seller for all costs
(including without limitation utilities), other than direct labor costs and
actual shipping expenses associated with Buyer's use of Seller's manufacturing
plant during the Transition Period. During the Transition Period, Buyer shall be
named as an additional insured under Seller's casualty and liability insurance
policies.
2. PURCHASE PRICE; PAYMENT TERMS.
2.1. PURCHASE PRICE. Provided that the Closing occurs on or before March
23, 1998, the aggregate purchase price for the Assets shall be $7,500,000;
subject to adjustment in accordance with Section 1.5 above. Notwithstanding the
forgoing, the purchase price shall be reduced by $100,000 if the Closing occurs
after March 23, 1998 but before May 6, 1998. The purchase price as determined
pursuant to this Section 2.1 and subject to adjustment in accordance with
Section 1.5 is referred to herein as the "Purchase Price".
2.2. PAYMENT OF PURCHASE PRICE. At the Closing Buyer shall pay to Seller
the Purchase Price (less the amount of the Escrow Fund) by wire transfer of
immediately available funds to an account designated by Seller.
2.3. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Assets in accordance with SCHEDULE 2.3. The parties shall report
consistently with such allocations on all income tax returns and other
statements (including, without limitation, filing of Form 8594) and in the
course of any tax audit, tax review or tax litigation relating thereto.
3. CLOSING.
3.1. TIME AND PLACE OF CLOSING; ESCROW.
(a) The Closing of the sale and purchase of the Assets provided for in
Section 1 shall take place on such date and at such place as may be mutually
agreed by the parties but in no event later than three business days after all
of the conditions specified in Section 4 have been fulfilled. The date of the
Closing is herein referred to as the "Closing Date".
(b) On the date which is ten (10) days after the mailing of proxy materials
to all of Seller's shareholders in connection with the transactions contemplated
under the Agreement, $400,000 of the Purchase Price shall be placed in escrow
(the "Escrow Fund") in accordance with the terms and provisions of an escrow
agreement between Buyer, Seller and Lawyers Title Insurance Corporation, as
escrow agent (the "Escrow Agent") in the form attached hereto as EXHIBIT 3.1(b)
(the "Escrow Agreement"). The terms and conditions relating to disbursement of
the Escrow Fund will be as set forth in the Escrow Agreement.
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<PAGE>
3.2. ITEMS TO BE DELIVERED AT THE CLOSING.
(a) ITEMS TO BE DELIVERED BY SELLER. At the Closing, Seller shall deliver
or cause to be delivered to Buyer:
(i) an executed Bill of Sale in the form of EXHIBIT 3.2(a)(i)(A)
attached hereto, an Assignment and Assumption Agreement in the form of
EXHIBIT 3.2(a)(i)(B) attached hereto, an Assignment of Intellectual Property
Rights in the form of EXHIBIT 3.2(a)(i)(C) attached hereto, and such other
assignments and other instruments or documents as may be requested by Buyer
as necessary to effect the transfer of all of Seller's right, title and
interest in and to the Assets to Buyer;
(ii) a copy of resolutions of the board of directors and shareholders of
Seller authorizing the execution, delivery and performance of this Agreement
by Seller, and an executed certificate of its secretary or assistant
secretary that such resolutions were duly adopted and are in full force and
effect as of the Closing Date;
(iii) an executed certificate of Seller, dated as of the Closing Date,
certifying that (A) all conditions and covenants which Seller was required
to have complied with prior to the Closing have been fulfilled and (B) all
of the representations and warranties of Seller contained in Section 5 are
true and accurate;
(iv) all third party consents and releases of liens necessary for the
consummation of the transactions contemplated hereby;
(v) an opinion of counsel to Seller as to those items identified on
EXHIBIT 3.2(a)(v) attached hereto; and
(vi) the Escrow Agreement and such other documents as Buyer shall
reasonably request.
(b) ITEMS TO BE DELIVERED BY BUYER. At the Closing, Buyer shall deliver or
cause to be delivered to Seller:
(i) evidence of the wire transfer referred to in Section 2.3;
(ii) a copy of resolutions of the board of directors of Buyer
authorizing the execution, delivery and performance of this Agreement by
Buyer, and an executed certificate of its secretary or assistant secretary
that such resolutions were duly adopted and are in full force and effect as
of the Closing Date;
(iii) an executed certificate of Buyer, dated as of the Closing Date,
certifying that (A) all conditions and covenants which Buyer was required to
have complied with prior to the Closing have been fulfilled and (B) all of
the representations and warranties of Buyer contained in Section 6 are true
and accurate;
(iv) an opinion of counsel to Buyer in substantially the form of EXHIBIT
3.2(b)(iv) attached hereto; and
(v) the Escrow Agreement and such other documents as Seller shall
reasonably request.
3.3. CLOSING COSTS. All sales, use or similar taxes, of any nature
whatsoever, applicable to, or resulting from, the sale and purchase of the
Assets shall be paid by Seller.
3.4. FURTHER ASSURANCES. On and after the Closing Date, each party shall
execute all certificates, instruments and documents and take all actions
reasonably requested by the other party to effectuate the purposes of this
Agreement and to consummate and evidence the consummation of the transactions
contemplated hereby.
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<PAGE>
4. CONDITIONS TO CLOSING.
4.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligations of
Buyer to consummate the purchase of the Assets under this Agreement is subject
to the fulfillment, prior to or at the Closing, of each of the following
conditions (any or all of which may be waived solely by Buyer):
(a) all representations and warranties of Seller shall be true and
correct as of the Closing Date with the same effect as though made again at
and as of the Closing Date;
(b) Seller shall have performed and complied with all obligations and
covenants required by this Agreement to be performed or complied with by
Seller prior to or at the Closing;
(c) Buyer shall have received, in form and substance satisfactory to
Buyer and its counsel, each and every other closing document required to be
delivered to it under this Agreement, including without limitation, copies
of all third party consents and releases of liens required for consummation
of the transactions contemplated hereby;
(d) there shall not have been commenced any action or proceeding in
state or federal court or by or before any administrative body challenging
or seeking to prevent the consummation of this Agreement, and there shall
not be in effect any injunction or restraining order issued by a court of
competent jurisdiction in an action or proceeding against the consummation
of the sale and purchase of the Assets pursuant to this Agreement;
(e) the transactions contemplated by this Agreement shall have been
approved by any federal, state, local and foreign governmental or regulatory
authority or self-regulatory body the approval of which is required to
permit consummation thereof;
(f) Buyer shall have received a certificate dated the Closing Date from
the Secretary of Seller as to bylaws and incumbency;
(g) Buyer shall have received (i) a copy, certified by the Secretary of
State of Wyoming, of the articles of incorporation of Seller and (ii) a good
standing certificate for Seller from the Secretary of State of Wyoming; and
(h) there shall not have occurred any material adverse change in the
Business or Assets since September 30, 1997.
5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and
warrants to Buyer as follows:
5.1. ORGANIZATION, STANDING AND AUTHORITY OF SELLER. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Wyoming and where the Business is now being conducted, except
where the failure to do so would not have a material adverse effect on Seller,
and has full corporate power and authority to enter into and perform this
Agreement.
5.2. AUTHORIZATION OF AGREEMENT. On the Closing Date, the execution,
delivery and performance of this Agreement by Seller shall have been duly
authorized by all necessary corporate and shareholder action of Seller. This
Agreement constitutes the valid and binding obligation of Seller enforceable
against it in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights in general and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
5.3. NO CONFLICT; CONSENTS. The execution, delivery and performance of
this Agreement by Seller will not (i) conflict with its articles of
incorporation or by-laws; (ii) conflict with, or result in the breach or
termination of, or constitute a default under, any lease, agreement, commitment
or other instrument, or any order, judgment or decree, to which Seller is a
party or by which any of its properties is bound, except for any conflicts,
breaches, terminations or defaults that would not in the aggregate have a
material
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<PAGE>
adverse effect on Seller's ability to consummate the sale of the Assets or on
the Business; (iii) violate any law or regulation applicable to Seller the
enforcement of which would have a material adverse effect on Seller's ability to
consummate the sale of the Assets pursuant to this Agreement or on the Business;
or (iv) result in the creation of any lien, charge or encumbrance upon any of
the Assets other than liens, charges or encumbrances that do not in the
aggregate materially detract from the value of, or materially interfere with,
the Business. No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority is required on the part
of Seller in connection with the execution, delivery and performance of this
Agreement.
5.4. FINANCIAL STATEMENTS. The unaudited statements of assets,
liabilities, revenue, direct labor costs and direct material purchases for the 6
month period ended on September 30, 1997 of the Business, a copy of which is
included in Schedule 5.4 (the "Financial Statement"), accurately represents the
financial position and the results of operations of the Business as at such date
and for the period then ended. Seller makes no representation as to, and
expressly disclaims, any forecast of future results, whether verbal or written.
5.5. ABSENCE OF CERTAIN LIABILITIES AND CHANGES. Since the date of the
Financial Statement, there has not been any material adverse change in the
Assets or in the financial condition, business or results of operations of
Seller. Without limiting the foregoing, since the date of the Financial
Statement, there has not occurred any:
(a) sale, mortgage, encumbrance, lease, license or other disposition of
any of the Assets, except for sales of inventory in the ordinary course of
business;
(b) damage, destruction or loss affecting the Assets; or
(c) any incurrence of indebtedness or other liabilities other than trade
payables in the ordinary course of business.
5.6. TITLE TO ASSETS. Seller has good title to the Assets, free and clear
of any and all liens, claims and encumbrances other than (i) minor imperfections
of title, if any, that are not substantial in character, amount or extent and do
not materially detract from the value of the property subject thereto, or
materially interfere with the manner in which it is currently being used by the
Business, or materially impair the operations of the Business and (ii) taxes and
general and special assessments not in default and payable without penalty or
interest.
5.7. CONDITION OF ASSETS. The Assets constitute all of the property, plant
and equipment necessary for the manufacture of the products sold in the Business
as currently conducted. The Inventory is of a quantity and quality usable in the
ordinary course of business. The Equipment is useful in the conduct of the
Business and is in good condition and working order, except for (i) normal wear
and tear and (ii) obsolete items or items below standard quality as to which
appropriate provision has been made on the books of the Business in accordance
with generally accepted accounting principles.
5.8. INTELLECTUAL PROPERTY RIGHTS. SCHEDULE 5.8 lists all trademarks,
service marks, service names, trade names, design rights, patents, copyrights,
trade secrets, inventions, processes, formulae, and other intellectual property
rights (collectively, the "Intellectual Property") which are owned, used or
licensed by Seller and used in the Business. To Seller's knowledge, except as
set forth in SCHEDULE 5.8, none of the Intellectual Property conflicts with or
infringes in any material respect any United States, Canadian or Australian
proprietary right of any third party, and no one has asserted a claim against
Seller alleging any such conflict or infringement.
5.9. TAXES. Seller has timely filed with the appropriate governmental
agencies all tax returns and reports required to have been filed by Seller on or
before the Closing Date. Seller has paid or adequately reserved for all taxes,
interest and other governmental charges which have become due pursuant to such
returns and all other taxes, interest and governmental charges which have become
due and payable on or
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before the Closing Date. To the best of Seller's knowledge, there are no audit
examination, deficiency, refund litigation or matter in controversy with respect
to which an adjustment to any tax item has been asserted in writing, except as
set forth in SCHEDULE 5.9.
5.10. CONTRACTS. SCHEDULE 5.10 contains a list of all Contracts, including
without limitation contracts, understandings, licenses or leases (written and
oral) that are material to the Assets or the Business, including (a) all
commitments and agreements for the purchase of any materials or supplies that
involve an expenditure by Seller of more than $25,000 for any one contract; (b)
all leases and other rental agreements under which Seller is either lessor or
lessee that involve annual payments or receipts of $25,000 or more; and (c) all
other orders, leases, commitments, agreements, instruments (including but not
limited to mortgages, indentures and other agreements and instruments relating
to indebtedness for borrowed money) to which Seller is a party or by which it or
the Assets are bound that require a payment by Seller of more than $25,000.
Seller has provided Buyer with copies of all material written Contracts. To the
best of Seller's knowledge, all Contracts are valid and binding and in full
force and effect, except as noted in SCHEDULE 5.10. Neither Seller nor, to
Seller's knowledge, any other party to such Contracts is in default, nor to the
knowledge of Seller is there any basis for any claim of default.
5.11. EMPLOYEE MATTERS. Seller is not a party to or bound by any
employment agreement or any collective bargaining or other labor agreement, or
any pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, retainer, consultant, bonus, group insurance or other
incentive or welfare contract, plan or arrangement relating to the Business
except as set forth on SCHEDULE 5.11 (the "Plans"). Except as set forth on
SCHEDULE 5.11, Seller has (and upon consummation of the transactions
contemplated by this Agreement will have) no liability with respect to the
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), any other similar federal or state statute, or under the
Plans to the Pension Benefit Guarantee Corporation. None of the Plans is a
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA. Except as set
forth on SCHEDULE 5.11, to the best knowledge of Seller, Seller has complied
with respect to the Plans in all material respects with the reporting and
disclosure requirements of ERISA.
5.12. LITIGATION; COMPLIANCE WITH LAWS. There are no judicial or
administrative actions, proceedings or investigations pending or, to the best of
Seller's knowledge, threatened against Seller, the Assets or the Business or
that would enjoin, restrain, condition or prohibit consummation of this
Agreement or any of the transactions contemplated herein, or which, if adversely
determined, would have a material adverse effect upon the Business. (i) Seller
is not in violation of any applicable law, regulation, ordinance, or any other
applicable requirement of any governmental body or court, including, without
limitation, antitrust, environmental and securities laws, which violation would
have a material adverse effect upon the Business (ii) no notice has been
received by Seller alleging any such violation and (iii) Seller is not aware of
any allegation of any such violation.
5.13. INSURANCE. Seller maintains and will maintain through the Closing
Date levels of coverage under policies of insurance now in effect and which
Seller believes to be adequate with respect to the Business and the Assets.
SCHEDULE 5.13 sets forth all such policies of insurance which are in effect with
respect thereto.
5.14. FOREIGN SALES. To Seller's knowledge, part 1 of SCHEDULE 5.14 lists
all sales by Seller's foreign subsidiaries and affiliates for each of 1996 and
1997 (through October 31), categorized to provide monthly dollar equivalent and
unit sales by product and customer for each such year. Part 2 of SCHEDULE 5.14
sets forth current selling prices for each product by customer and current
rebates, advertising and/or other similar allowances, if any, for each customer.
5.15. DISCLOSURE. (a) No representation or warranty made by Seller in this
Agreement or any document delivered pursuant hereto or in connection herewith
omits to state a material fact necessary to make the statements contained herein
or therein not misleading.
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<PAGE>
(b) There is no fact known to Seller (other than general economic or
industry conditions) that may materially adversely affect the Assets or the
Business that has not been disclosed in this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants
to Seller as follows:
6.1. BUYER'S ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the law of the State of Tennessee and has
the full corporate power and authority to enter into and to perform this
Agreement.
6.2. AUTHORIZATION OF AGREEMENT. The execution, delivery and performance
of this Agreement by Buyer have been duly authorized by all necessary corporate
action of Buyer and this Agreement constitutes the valid and binding obligation
of Buyer enforceable against it in accordance with its terms, except as may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights in general and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
6.3. NO CONFLICT, CONSENTS. The execution, delivery and performance of
this Agreement by Buyer will not (i) conflict with its charter or by-laws; (ii)
conflict with, or result in the breach or termination of, or constitute a
default under, any lease, agreement, commitment or other instrument, or any
order, judgment or decree, to which Buyer is a party or by which any of its
properties is bound, except for any conflicts, breaches, terminations or
defaults that would not in the aggregate have a material adverse effect on
Buyer's ability to consummate the purchase of the Assets; or (iii) violate any
law or regulation applicable to Buyer the enforcement of which would have a
material adverse effect on Buyer's ability to consummate the purchase of the
Assets pursuant to this Agreement. No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority is required
on the part of Buyer in connection with the execution, delivery and performance
of this Agreement.
6.4. LITIGATION. There are no judicial or administrative actions,
proceedings or investigations pending or, to the best of Buyer's knowledge,
threatened against or with respect to Buyer that question the validity of this
Agreement or any action taken or to be taken by Buyer in connection with this
Agreement or that, if adversely determined, would have a material adverse effect
upon Buyer's ability to perform its obligations under this Agreement.
7. FURTHER COVENANTS OF THE PARTIES.
7.1. ACCESS TO INFORMATION. From the date of this Agreement to and
including the Closing Date, Seller shall (a) give to Buyer and its counsel,
accountants and other representatives reasonable access during normal business
hours to examine and make copies of all books, agreements, records, files and
documents relating exclusively to the Business and the Assets and (b) cause its
employees, officers, attorneys and accountants to furnish such additional
information with respect to the Business and the Assets as Buyer may reasonably
request.
7.2. COOPERATION. From the date of this Agreement to and including the
Closing Date, each party shall cooperate with the other party and such other
party's counsel and accountants in connection with any steps required to be
taken as part of its obligations under this Agreement. Each party shall use its
best efforts to cause all conditions to the parties' obligations to effect the
Closing under this Agreement to be satisfied and to obtain all consents and
approvals necessary for the due and punctual performance of this Agreement and
for the satisfaction of the conditions hereof.
7.3. CONDUCT OF THE BUSINESS PENDING THE CLOSING. From the date of this
Agreement to and including the Closing Date, except as otherwise permitted in
SCHEDULE 7.3, Seller shall operate the Business in the ordinary course and so as
to maintain the value of the Business and the Assets. Without limiting the
generality of the foregoing, from the date of this Agreement to and including
the Closing Date Seller shall not (a) transfer, sell or dispose of the Assets to
or on account of any person, (b) make any changes (whether by sale, destruction,
pledge, lease or otherwise) in or with respect to the Assets or (c) establish or
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adopt any employee benefit plan, or pay any bonus or similar payment to, or
increase the compensation of any employee of the Business in each case except in
the ordinary course of business.
7.4. USE OF PACKAGING MATERIAL. Buyer shall have the right to use in the
ordinary conduct of the Business after the Closing all existing packaging and
printed materials included in the Assets. Buyer also shall have the right to
reorder similar packaging and printed materials to meet its needs during the
ninety days after the Closing. Seller hereby grants to Buyer a limited,
non-exclusive right to use any of Seller's trademarks and tradenames which
appear on any such presently existing or reordered packaging and materials in
the ordinary course of business for one year after the Closing.
7.5. ADVICE OF CLAIMS. From the date of this Agreement to and including
the Closing Date, Seller shall promptly advise Buyer of the commencement or
notice of any material litigation or proceeding affecting the Business or the
Assets of which Seller has knowledge.
7.6. NOTICE BY BUYER. From the date of this Agreement to and including the
Closing Date, Buyer shall promptly advise Seller of any material adverse change
in, or any event (other than one generally known to the public) that is
reasonably foreseeable may have a material adverse effect on, Buyer or that
would impair Buyer's ability to perform its obligations under this Agreement.
7.7. PUBLICITY. Neither party shall issue any press release or public
announcement of any kind concerning this Agreement or the transactions
contemplated hereby without the prior written consent of the other.
7.8. BULK SALES COMPLIANCE. Buyer hereby waives compliance by Seller with
the provisions of the Bulk Sales Law of any state.
7.9. PRESERVATION OF RECORDS. Buyer agrees that it shall preserve and keep
the records of the Business acquired by it pursuant to this Agreement for a
period consistent with its customary practice of record retention, or for any
longer period as may be required by any government agency or ongoing litigation,
and shall make such records available to Seller as may be reasonably required by
Seller in connection with, among other things, any insurance claims by, legal
proceedings against or governmental investigations of Seller or in connection
with any tax examination of or preparation of a tax return by Seller. In
particular, Buyer will permit Seller to have full access at any reasonable time
and on reasonable notice for one year after the Closing Date, to all tax returns
and supporting papers therefore acquired from Seller relating to the Business.
7.10. TERMINATION FEE. In the event that this Agreement is terminated by
Seller pursuant to Section 10.1(e) below, and, on or before December 31, 1998,
the Seller has entered into a definitive agreement with respect to such Superior
Offer (as defined in Section 7.12 below), Seller shall immediately pay to Buyer
a termination fee of $500,000 as compensation for Buyer's efforts in connection
with the Acquisition.
7.11. BROKERS. Each of the parties shall be solely responsible for its
respective costs and expenses of any broker or finder retained by it in
connection with the transactions contemplated by this Agreement.
7.12. NO SOLICITATION. Seller will not (i) initiate, solicit, or
encourage, directly or indirectly, any inquiries or the making of any proposals
that constitutes or is reasonably likely to lead to, any Acquisition Proposal
(as hereinafter defined), (ii) engage in negotiations or discussions with any
third party relating to an Acquisition Proposal, or (iii) enter into any
agreement with respect to any Acquisition Proposal. Notwithstanding anything to
the contrary contained herein, Seller and its Board of Directors may participate
in discussions or negotiations with, or furnish information to, any third party
making an unsolicited Acquisition Proposal (a "Potential Acquiror") if the
Seller's Board of Directors is advised by its financial advisor that such
Potential Acquiror is reasonably financially capable of consummating the
Acquisition Proposal, and the Board determines in good faith (A) after receiving
advice from its financial advisor that such Acquisition Proposal is a Superior
Proposal (as defined below), and (B) based upon the
A-11
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advice of outside legal counsel, that the failure to participate in such
discussions or negotiations or to approve an Acquisition Proposal would violate
the Board's fiduciary duties under applicable law. For purposes of this
Agreement, "Acquisition Proposal" shall mean any bona fide proposal, whether in
writing or otherwise, made by a third party to acquire all or a material portion
of the Business, pursuant to a merger, consolidation or other business
combination, sale of shares of capital stock, sale of assets, tender offer,
exchange offer or any similar transaction, including any single or multiple step
transaction or series of related transactions. The term "Superior Proposal"
means any "Acquisition Proposal" which the Board of Directors determines in good
faith to be more favorable to the Seller and its stockholders than the purchase
and sale pursuant to the terms of this Agreement (based on the advice of the
Seller's financial advisor that the value of the consideration provided for in
such proposal is superior to the value of the consideration provided for
herein), which, in the good faith reasonable judgment of the Board of Directors,
after receiving advice from its financial advisor, is reasonably capable of
being financed by such third party.
7.13. POST-CLOSING COOPERATION. After the Closing, without further
consideration: Seller shall take all such further actions and execute,
acknowledge and deliver all such further consents and other documents as Buyer
may reasonably request to facilitate or effect the transactions contemplated by
this Agreement, including without limitation and such further acts, deeds,
transfers, conveyances, assignments, powers of attorney or assurances as may be
required to transfer, assign, convey and grant to Buyer all of the Assets in
accordance with the terms hereof.
7.14. POST-CLOSING CUSTOMER ORDERS. (a) Seller shall transmit to Buyer,
promptly upon receipt, any customer orders for products relating to the Business
received by Seller after the Closing Date.
(b) With respect to any customer orders which are received by Seller
electronically or otherwise prior to conversion of customer ordering procedures
to reflect sale of the Business to Buyer, Seller will promptly transmit such
orders to Buyer for completion. During the Transition Period, if requested by
Buyer, the products will be shipped and invoiced to the customer by Seller.
Buyer shall invoice Seller daily (or at such other intervals not more frequently
than daily) as Buyer may elect and each invoice shall be payable in full not
later than 30 days after the invoice date.
7.15. POST-CLOSING PAYMENTS. After the Closing, Seller shall promptly
remit to Buyer any payments received for products relating to the Business
shipped after the Closing.
8. INDEMNIFICATION AND RELATED MATTERS.
8.1. INDEMNIFICATION.
(a) Seller agrees to indemnify, defend and hold Buyer harmless from and
against any and all liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees, incurred by Buyer resulting from any of the
following: (i) a breach of any of the representations and warranties of Seller
contained in this Agreement or in any written statement, agreement or
certificate delivered to Buyer in connection with this Agreement or the
transactions contemplated hereby, (ii) any breach of any covenants or agreements
made by Seller in this Agreement, (iii) any liabilities and obligations of
Seller, except for obligations under executory contracts expressly assumed by
Buyer, (iv) the conduct of the Business, or any occurrence in connection with
the Assets, prior to the Closing, including any injury or damage to person or
property resulting or arising from products manufactured or sold by Seller, (v)
failure by Seller to comply with any applicable bulk sales law, or (vi) any
costs or expenses related to employees of Seller or the Business, including
without limitation any severance or separation costs; (all of the foregoing
being collectively referred to as "Seller's Indemnified Liabilities") provided,
however, that Seller shall not have any liability under this Section 8.1(a)
until Seller's Indemnified Liabilities exceed in the aggregate $25,000, and then
only for the amount by which such Liabilities exceed $25,000; provided, however,
that the aggregate amount of Seller's Indemnified Liabilities under this Section
8.1(a) shall in no event exceed the
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Purchase Price. Any amounts payable by Seller pursuant to this Section 8.1(a)
shall be net of insurance proceeds, if any, received by Buyer in respect of
Seller's Indemnified Liabilities.
(b) Buyer agrees to indemnify, defend and hold Seller harmless from and
against any and all liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees, incurred by Seller resulting from any of the
following: (i) a breach of any of the representations and warranties of Buyer
contained in this Agreement or in any written statement, agreement or
certificate delivered to Seller in connection with this Agreement or the
transactions contemplated hereby, (ii) any breach of any covenants or agreements
made by Buyer in this Agreement, (iii) any gross negligence or willful
misconduct by Buyer in managing the Business during the Transition Period, or
(iv) the conduct of Buyer's business, or any occurrence in connection with the
Assets (other than injury or damage to person or property resulting or arising
from products manufactured or sold by Seller), after the Closing (all of the
foregoing being collectively referred to as "Buyer's Indemnified Liabilities");
provided, however that Buyer shall not have any liability under this Section
8.1(b) until Buyer's Indemnified Liabilities exceed in the aggregate $25,000,
and then only for the amount by which such Liabilities exceed $25,000; provided,
however that the aggregate amount of Buyer's Indemnified Liabilities under this
Section 8.1(b) shall in no event exceed the Purchase Price. Any amount payable
by Seller pursuant to this Section 8.1(b) shall be net of insurance proceeds, if
any, received by Seller in respect of Buyer's Indemnified Liabilities.
8.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Seller or Buyer contained in this Agreement or any written
statement, certificate, instrument, schedule or other document delivered
pursuant hereto shall survive the Closing until the expiration of three years
from the Closing Date and any claim based upon said representations and
warranties shall thereupon be of no further force and effect, except to the
extent the claiming party shall have asserted in writing a specific claim prior
to the expiration of such rights, in which event the other party shall remain
liable with respect to such claim. Buyer acknowledges and agrees that it has
been furnished with or given adequate access to such information about the
Equipment as it shall have requested and that it has made its own investigation
into, and based thereon it has formed an independent judgment concerning, the
Equipment. It is therefore expressly understood and agreed that, except as
otherwise specifically set forth Section 5, 6 and 5.7, Buyer accepts the
condition of the Equipment "AS IS, WHERE IS" and Seller makes no
representations, warranties or guarantees as to the condition, size, extent,
quantity, type or value of the Equipment.
8.3. CLAIMS PROCEDURE. If a party (the "Indemnified Party") is threatened
in writing with any claim, or any claim is presented in writing to or any action
or proceeding formally commenced against such party, which may give rise to the
right of indemnification hereunder (a "Claim"), the Indemnified Party shall
promptly give written notice thereof (specifying in reasonable detail the basis
for the Claim and, to the extent known, the amount thereof) to the other party
(the "Indemnifying Party"). The Indemnifying Party shall have the right, at its
sole cost and expense, to participate, and, to the extent the Indemnifying Party
so desires, assume the defense of such Claim with counsel mutually satisfactory
to the parties upon prompt notice to the Indemnified Party of its intent to
defend such Claim. If the Indemnified Party requests in writing that such Claim
not be contested, then it shall not be contested but shall not be covered by the
indemnities provided herein. The Indemnifying Party may settle a Claim which it
has duly elected to contest without the consent of the Indemnified Party unless
such settlement will have a material adverse effect upon the Indemnified Party,
in which case such Claim shall be settled only with the consent of the
Indemnified Party. In the event that the Indemnified Party unreasonably declines
to consent to such settlement, then the Indemnified Party shall have no right to
indemnification beyond the amount of the proposed settlement. The Indemnified
Party shall cooperate with the Indemnifying Party in the defense of any Claim,
including, without limitation, by making records available to the Indemnifying
Party and its legal counsel and permitting interview, depositions and testimony
at trial of the Indemnified Party's employees. The Indemnifying Party shall keep
the Indemnified Party fully informed regarding the progress and status of any
Claim. In the event the Indemnified Party fails to follow the claim procedure
specified in this Section 8.3 with respect to a Claim by any third party against
the Indemnified Party, such failure shall
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not relieve the Indemnifying Party from liability hereunder except and solely to
the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure.
9. CONFIDENTIALITY.
The obligations of the parties set forth in that certain Confidentiality
Agreement dated July 11, 1997 between the parties shall survive the execution
and performance of this Agreement.
10. TERMINATION.
10.1. TERMINATION EVENTS. This Agreement may, by notice given prior to or
at the Closing, be terminated:
(a) by either Buyer or Seller if a material breach of any provision of
this Agreement has been committed by the other party and such breach has not
been waived;
(b) (i) by Buyer if any of the conditions in Section 4.1 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Buyer to comply
with its obligations under this Agreement) and Buyer has not waived such
condition on or before the Closing Date;
(c) by mutual consent of Buyer and Seller; or
(d) by Buyer if the Closing has not occurred (other than through the
failure of any party seeking to terminate this Agreement to comply fully
with its obligations under this Agreement) on or before May 6, 1998, or such
later date as the parties may agree upon;
(e) subject to Section 7.10 above, by Seller, if prior to the Closing,
(A) a third party shall have made an Acquisition Proposal that the Board of
Directors of the Company determines in good faith, after consultation with
its financial advisor, is a Superior Proposal, and (B) the Board of
Directors of the Seller shall have withdrawn its approval or recommendation
to its shareholders of this Agreement.
10.2. EFFECT OF TERMINATION. Each party's right of termination under
Section 10.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 10.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Section 7.10 and Section 8 will survive; PROVIDED that
if this Agreement is terminated by a party because of the breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
11. MISCELLANEOUS.
11.1. NOTICES. All notices, demands and other communications called for or
required by this Agreement shall be in writing and shall be addressed to the
parties at their respective addresses stated below or to such other address as a
party may subsequently designate by ten (10) days' advance written notice to the
other parties. Communications hereunder shall be deemed to have been received
(i) upon delivery in person, (ii) five (5) days after mailing by U.S. certified
mail, return receipt requested and postage prepaid, (iii) the second business
day after depositing it with a commercial overnight carrier which provides
written verification of delivery or (iv) the day of transmission by
telefacsimile if sent before 2:00 p.m. recipient's time provided that a copy of
such notice is sent on the same day by U.S. certified mail,
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<PAGE>
return receipt requested and postage prepaid, with an indication that the
original was sent by facsimile and the date of its transmittal:
<TABLE>
<S> <C>
To: Geographics, Inc.
Attention: Bruce Clawson
1555 Odell Road, P.O. Box
1750
Blaine, WA 98231
Phone: (360) 332-6711
Facsimile: (360) 332-6352
To: Identity Group, Inc.
Attention: Donald J. Polak
1480 Gould Drive
Cookeville, TN 38506
Phone: (931) 432-4000
Facsimile: (931) 432-6477
</TABLE>
11.2. FULL UNDERSTANDING. In executing this Agreement, each member of each
party fully, completely and unconditionally acknowledges and agrees that it (a)
has had an equal opportunity to participate in drafting of this Agreement, (b)
has consulted with and had the advice and counsel of a duly licensed and
competent attorney and that it has executed this Agreement after independent
investigation, voluntarily and without fraud, duress or undue influence, (c)
expressly consents that this Agreement be given full force and effect according
to each and every of its express terms and provisions and (d) agrees that no
ambiguity shall be construed against any party based upon a claim that such
party drafted the applicable language.
11.3. ENTIRE AGREEMENT. This Agreement and all schedules and exhibits
hereto contain all of the terms and conditions agreed upon by the parties
relating to the subject matter hereof and supersede and cancel all prior
agreements, negotiations, correspondence, undertakings, communications and
understandings of the parties, whether written or oral, respecting that subject
matter other than the Confidentiality Agreement referred to in Section 9 hereof.
11.4. MODIFICATION. No waiver or modification of this Agreement or any
provision contained herein shall be valid unless in writing and duly executed by
all parties hereto.
11.5. NO WAIVER. Failure or delay on the part of any party in exercising
any rights, power or privileges under this Agreement shall not be deemed a
waiver of any exercise of any right, power or privilege.
11.6. CAPTIONS AND CONSTRUCTION. Captions in this Agreement are for the
convenience of the reader and are not to be considered in the interpretation of
the terms of this Agreement.
11.7. SURVIVAL. Neither the investigation by a party or the acceptance of
delivery of property hereunder shall constitute a waiver of any covenant,
representation, warranty, agreement, obligation or undertaking of a party
hereunder, and the same shall survive and continue after the date hereof.
11.8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Tennessee, without regard to its
conflict of laws principles.
11.9. EXPENSES. Each of the parties shall pay its respective expenses,
costs and fees (including, without limitation, attorneys' and accountants' fees)
incurred in connection with the negotiation, preparation, execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby.
11.10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when
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<PAGE>
one or more counterparts have been signed by each of the parties and either
original or facsimile counterparts have been delivered to the other party.
11.11. INVALID PROVISIONS. If any one or more provisions of this
Agreement, or the applicability of any such provision to a specific situation,
shall be held invalid or unenforceable, such provision shall be modified to the
minimum extent necessary to make it or its application valid and enforceable,
and the validity and enforceability of all other provisions of this Agreement
and all other applications of any such provisions shall not be affected thereby.
11.12. TIME OF THE ESSENCE. Time is of the essence in the performance of
each of the terms hereof with respect to the obligations and rights of each
party hereto.
11.13. BINDING EFFECT, ASSIGNMENT, NO THIRD PARTY RIGHTS. None of the
parties shall assign or delegate or in any way transfer any rights, interests or
obligations hereunder without the prior written consent of the other party;
provided, however, that no such consent shall be required for Buyer to assign
part or all of its rights and duties hereunder to subsidiary of Buyer but no
such assignment by Buyer of its rights hereunder shall relieve Buyer of any of
its obligations under this Agreement to Seller. Subject to the foregoing
restrictions, this Agreement shall be binding upon and inure to the benefit of
each of Buyer, Seller and their respective successors and assigns. Nothing
expressed or referred to in this Agreement will be construed to give any person
or entity other than Seller and Buyer any legal or equitable right, remedy, or
claim under or with respect to this Agreement.
11.14. ARBITRATION. Any dispute, controversy or claim arising out of,
relating to, or in connection with this Agreement shall be finally settled by
binding arbitration before a single arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in effect at
the time of the arbitration. The arbitration shall be conducted in Chicago,
Illinois.
The arbitrator shall permit such discovery as he or she determines is
appropriate in the circumstances, taking into account the needs of the parties
and the desirability of making discovery expeditions and cost effective. The
arbitrator's award shall be in writing, shall set forth the findings and
conclusions upon which the arbitrator based the award, and shall be final and
binding on the parties. The arbitrator will have the authority to grant any
equitable and legal remedies that would be available in any judicial proceeding
instituted to resolve a dispute, controversy or claim hereunder. Each party will
bear its own costs and expenses in connection with any arbitration and 50% of
the compensation to be paid to the arbitrator. Judgment upon the arbitrator's
award may be entered in any federal or state court having jurisdiction thereof
or having jurisdiction over the parties or their assets.
Nothing contained in this Section 11.14 shall be construed to limit or
preclude a party from bringing any action in any court of competent jurisdiction
for injustice or other provisional relief to compel another party to comply with
its obligations under this Agreement during the pendency of the arbitration
proceedings.
11.15. NON-COMPETITION. Seller covenants and agrees that for a period of
five (5) years following the Closing, Seller shall not, directly or indirectly,
in the United States of America, Australia, Canada or in any other country of
the world in which the Seller has done business at any time during the last
three (3) years prior to the Closing, engage, whether as principal or as agent,
alone or in association with any other Person in a Competing Business. For
purposes of this Agreement, the term "Competing Business" shall mean any person,
corporation or other entity which sells or attempts to sell any products or
services which are the same or substantially similar to the products sold by
Seller at any time and from time to time during the last three (3) years prior
to the Closing in connection with the Business. Buyer acknowledges and agrees
that products or services currently offered for sale by Seller's paper products
business segment, and products and services that are substantially similar to
those currently offered for sale by the Seller's paper products business
segment, (including, without limitation, the products currently known as
geoposterboard, geopostersign and retailsign) are not competing products. Buyer
further agrees that it will not
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<PAGE>
use the trademarks and tradenames purchased hereunder on paper products which
are substantially similar to paper products sold by Seller.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first set forth above.
GEOGRAPHICS, INC.
By:
---------------------
Name:
Title:
IDENTITY GROUP, INC.
By:
---------------------
Name:
Title:
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<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1998
<CASH> 454,006
<SECURITIES> 0
<RECEIVABLES> 5,444,224
<ALLOWANCES> (631,627)
<INVENTORY> 8,127,571
<CURRENT-ASSETS> 14,805,125
<PP&E> 19,035,447
<DEPRECIATION> (5,728,560)
<TOTAL-ASSETS> 28,576,428
<CURRENT-LIABILITIES> 21,259,564
<BONDS> 5,107,662
0
0
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<TOTAL-REVENUES> 8,110,028
<CGS> 5,715,028
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<OTHER-EXPENSES> 70,384
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<INTEREST-EXPENSE> 418,388
<INCOME-PRETAX> (852,596)
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<INCOME-CONTINUING> (852,596)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (852,596)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
