-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fo3bIrRAEPZl7/oUcu1ZsDc/LeH5uVxf+dgcktFUz32HK4CSxvxMw8VsiiwhA0kT hKXg+xqLaLeRncrYAtTZFw== 0001047469-97-005052.txt : 19971117 0001047469-97-005052.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-005052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOGRAPHICS INC CENTRAL INDEX KEY: 0001000621 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 870305614 STATE OF INCORPORATION: WY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26756 FILM NUMBER: 97721968 BUSINESS ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 BUSINESS PHONE: 3603326711 MAIL ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 10-Q 1 INDEX TO FIN. STATEMENTS, FIN. STATEMENTS, NOTES UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _________________________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Quarter Ended: September 30, 1997 Commission File Number: 0-26756 _________________________________ GEOGRAPHICS, INC. (Exact name of registrant as specified in its charter) WYOMING 87-0305614 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1555 Odell Road, P.O. Box 1755, Blaine, WA 98231 ------------------------------------------------------------ (Address of principal executive office and zip code) (360) 332-6711 ------------------------------------------------------------ (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The registrant had 9,717,877 shares of common stock outstanding as of November 14, 1997. DOCUMENTS INCORPORATED BY REFERENCE None PAGE 1 OF 11 PAGES Exhibit Index at page 10 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Geographics, Inc. (the "Company" or "Geographics") has attached to this Report and by this reference incorporated herein the consolidated balance sheets as of September 30, 1997 (unaudited) and March 31, 1997 (audited), the unaudited statements of operations for the six months ended September 30, 1997 and September 30, 1996, and the unaudited consolidated statements of cash flows for the six months ended September 30, 1997 and September 30, 1996, together with the notes thereto. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing elsewhere on this Report. FORWARD-LOOKING STATEMENTS Statements herein concerning expectations for the future constitute forward-looking statements which are subject to a number of known and unknown risks, uncertainties and other factors which might cause actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements herein include, but are not limited to, those concerning trends relating to the Company's profitability and gross profit margins; the ability of the Company to increase the size and capabilities of its accounting department, and to improve its internal controls; the ability of the Company to refinance its existing revolving credit facility, to identify potential buyers for all or part of its business or to raise additional debt or equity financing sufficient to meet its working capital requirements; and the ability of the Company to continue operations as a going concern. Relevant risks and uncertainties include, but are not limited to, slower than anticipated growth of the pre-print market, loss of certain key customers, or insufficient market acceptance of the Company's specialty papers products; actions, including price reductions, by the Company's competitors; increases in the costs of raw materials used to produce the Company's products; loss of favorable trade credit, supply terms, reliable and immediately available raw material supply and other favorable terms with certain key vendors; greater than expected costs incurred in connection with the implementation of a management information system; failure to realize expected improved efficiencies from the Company's automated production equipment; increases in the costs of production; unfavorable determinations of pending lawsuits or disputes; loss of key personnel; and inability to secure additional working capital when and as needed. Additional risks and uncertainties include those described under "Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the year ended March 31, 1997 and those described from time to time in the Company's other filings with the Securities and Exchange Commission, press releases and other communications. Page 2 OVERVIEW Geographics was incorporated as a Wyoming corporation on September 20, 1974. From its inception until fiscal 1991, the Company was engaged exclusively in the manufacture and wholesale marketing of various rub-on and stick-on lettering, stencils, graphics arts products and other signage products. In 1991, the Company began the development of "pre-print" or "specialty" paper products consisting of paper on which photographs or other art images are printed and which is then cut to size. In 1992, the Company introduced its first specialty paper product under the Geopaper brand name. The Company now has several specialty paper products using Geopaper designs, including stationery, business cards, brochures, memo pads, posterboards and paper cubes, which, in North America, are sold primarily to office supply superstores and mass market retailers, and which are also distributed internationally through the Company's subsidiaries in Canada, Europe and Australia. The specialty papers group now constitutes the Company's principal business, with approximately 81% and 71% of the Company's total sales in the six months ended September 30, 1997 and the year ended March 31, 1997, respectively, attributable to sales of Geopaper products. Primarily as a result of sales generated by the specialty papers group, the Company has experienced substantial growth, with total sales increasing from $6,900,875 for fiscal 1994 to $23,840,506 for fiscal 1997, an increase of 245%. Primarily to develop its specialty papers group, the Company has made substantial investments to expand its facilities, purchase and install automated production equipment and an integrated management information system and enhance administrative and other infrastructure systems. The Company commenced installation of new production equipment and information systems in the third quarter of fiscal 1997. The Company experienced delays, set-backs and unanticipated additional expenses in the installation of the production equipment and the management information system. Moreover, the management information system failed to perform as promised by vendors. As a result, the Company has not yet fully realized the originally anticipated economic benefits and efficiencies from these capital expenditures. These unanticipated expenses and operational inefficiencies, together with price reductions for the Company's products and cost increases for certain raw materials, have had a negative impact on the Company's gross margins and contributed to a substantial net loss for fiscal 1997 and the first two quarters of fiscal 1998. In addition, since May 1997, the Company has been in default of several financial covenants under its revolving credit facility, the Company's primary source of working capital, and borrowings under the facility have exceeded permitted borrowing base limitations. The existence of these defaults constitutes a default under the Company's mortgage loans and certain equipment lease facilities. The report of the Company's auditors dated August 26, 1997 relating to the Company's Consolidated Financial Statements for the fiscal year ended March 31, 1997 states that the Company's fiscal 1997 losses and non-compliance with covenants under its revolving credit facility raise substantial doubt about the Company's ability to continue as a going concern. See "-Liquidity and Capital Resources." Page 3 RECENT DEVELOPMENTS On October 2, 1997, production employees at the Company's headquarters in Whatcom County, Washington voted 126 to 61 against union representation by the Graphics Communications Union, Local 767M. The results of the election were subsequently certified by the National Labor Relations Board. In October, 1997 the Company took steps to reduce operating costs, including layoffs of approximately 45 employees, decreases in senior executive compensation, a company-wide wage freeze, and a management restucturing that included the permanent elimination of two vice-president level positions. The company projects that these steps will result in cost savings in excess of $1,300,000 over the next 12 months. The company announced on November 4, 1997 that its Board of Directors appointed Mr. Richard Lundquist to the Board and to its Audit Committee. Mr. Lundquist fills a vacancy that was created by the resignation of Mr. Luis Morato. On November 6, 1997, the Board of Directors named Bruce Clawson as the Company's Chief Financial Officer. Mr. Clawson has previously served as the Company's Vice President of Finance since April 1997. OVERSTATEMENT OF GROSS PROFITS AND INVENTORY. In connection with Company's audit for the fiscal year ended March 31, 1997, management determined that, during fiscal 1997, the use of certain accounting procedures and estimates based on historical results caused an overstatement of gross margin and inventories on an interim basis. Although the Company believes that the overstatements occurred over the course of fiscal 1997, it has determined that, given the complexity of the issues involved, it is not possible to allocate accurately the necessary adjustment to any interim quarterly period in fiscal 1997. As a result, the adjustment to gross margin and inventories was made at the end of fiscal 1997, and previously reported quarterly information for fiscal 1997 has not been restated. The cumulative effect in fiscal 1997 of the overstatement, when combined with reserves for obsolete inventory, was a reduction of both gross margin and inventory of approximately $5,600,000. The effect that an interim allocation of such adjustments might have had on the results for the first two quarters of fiscal 1997, if any, are not reflected in the period-to-period comparisons for gross margin included in this Report. Accordingly the comparisons of gross margin and inventory for each of the first three quarters of fiscal 1997 with the corresponding quarters of fiscal 1998 and fiscal 1996 may not be entirely meaningful. Page 4 WEAKNESSES IN INTERNAL CONTROLS. In connection with the Company's audit for the fiscal year ended March 31, 1997, management determined that several weaknesses in the Company's internal controls occurred during fiscal 1997. Management continues to take steps to improve its internal controls, including increasing the size and capabilities of its accounting department and improving its management information systems. However, there can be no assurance that the Company will not encounter other internal control weaknesses. The failure of the Company's accounting and finance systems to provide accurate information necessary to monitor the Company's financial position, results of operations and liquidity could have a material adverse effect on the Company's business, financial condition and results of operations. SEASONALITY. A significant portion of the Company's customer orders are placed between August and October of each year for shipment during the Company's second and third fiscal quarters, which includes the Christmas season, with the largest levels of sales historically occurring in the second half of the calendar year. As a result, the Company has experienced, and is expected to continue to experience, seasonal fluctuations in its operating results. QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate significantly from period to period as a result of a variety of factors, including product returns, purchasing patterns of consumers, the length of the Company's sales cycle to key customers and distributors, the timing of the introduction of new products and product enhancements by the Company and its competitors, technological factors, variations in sales by product and distributions channel, and competitive pricing. Consequently, the Company's revenues may vary significantly by quarter and the Company's operating results may experience significant fluctuations. BACKLOG. The Company's backlog of orders as of November 13, 1997 was $763,205. Historically, the Company has generally filled its backlog of orders within 2 weeks. The Company includes in backlog the value of all purchase orders received from customers for product not yet shipped and invoiced. Because the Company only recently implemented internal controls necessary to determine backlog, the Company is unable to determine backlog at March 31, 1997 or at the end of any other prior period. The Company's backlog is subject to fluctuations as a result of seasonality in the Company's business and other factors. Moreover, the Company's backlog may not necessarily lead to sales in any future period. The Company's failure or inability to ship product with respect to a purchase order could result in cancellation of such purchase order and a reduction of backlog, and could have a material adverse effect on the Company's business, financial condition and results of operations. COLLECTIONS OF ACCOUNTS RECEIVABLE. Difficulties encountered by the Company in fiscal 1997 in connection with the installation and implementation of a new electronic data interchange ("EDI") software package resulted in significant delays in the required electronic delivery of invoices to certain key customers. These delays resulted in significant corresponding delays in the collection of accounts receivable during the third and fourth quarters of fiscal 1997 which contributed to a substantial increase in the Company's trade receivable balance and negative operating cash flow at the end of fiscal 1997. The Company believes it has resolved the EDI invoicing limitations, but any further invoicing or collection difficulties could have a material adverse effect on the Company's business, financial condition or results of operations. Page 5 MAINTENANCE OF LARGE INVENTORY. As of September 30, 1997, the Company maintained an inventory of lettering, signage and specialty papers of $9,487,798. While the Company believes that the maintenance of an extensive inventory provides it substantial flexibility in responding to incoming orders, enhances its reputation as a major supplier in the industry and offers certain economies of scale in its purchasing program, the maintenance of an extensive inventory requires a substantial outlay of funds which may not be recovered for extended periods of time. In addition, the Company has generally observed that raw materials prices change more rapidly than the pricing for the Company's products. Consequently, the Company may be required to absorb price increases on raw materials before it is able to pass through such increases to its customer base. Also, to the extent that purchasing preferences of the Company's customers change over time, the Company's inventory may become less marketable, which may require the Company to dispose of such inventory on an unprofitable basis. The Company has made an effort to address these problems by increasing its reserves for obsolete inventory since March 31, 1996 from $100,000 to $1,390,000 as of September 30, 1997. However, if the Company were not able to recover a substantial portion of its investment in inventory, this would have a material adverse effect on the Company's business, financial condition and results of operations. RESULTS OF OPERATIONS SALES. Sales increased 22% to $8,363,293 in the quarter ended September 30, 1997 from $6,858,676 in the quarter ended September 30, 1996. Sales increased 23% to $15,971,552 in the six month period ended September 30, 1997 from $13,029,743 in the same period a year earlier. The increase is primarily due to increased sales of the Company's products to major mass market retailers, and the continued market acceptance of the Company's Geopaper products, including Geoposterboards. Geopaper products were responsible for 82% and 81% of sales in the quarter and six month period ended September 30, 1997, respectively, compared to 69% in the corresponding three and six month periods of the prior year. Sales of Geopaper have increased 43% to $12,896,305 in the six months ended September 30, 1997 from $9,021,249 in the corresponding six month period of the prior year. Sales of the Company's lettering and signage products decreased approximately $568,308 and $933,247 in the quarter and six month period ended September 30, 1997 compared to approximately $2,057,603 and $4,008,494 in the quarter and six month period ended September 30, 1996. The Company expects this product group to continue to decrease as a percentage of sales and that sales of lettering and signage products as an industry may continue to decline over time as the use of personal computers increases. Sales of the Company's lettering and signage products have decreased as a percentage of total sales to 19% from 31% for the six months ended September 30, 1997 and September 30, 1996, respectively. Page 6 International sales of Geographics products were $2,053,139 and $3,737,258 for the quarter and six month period ended September 30, 1997, respectively, and $1,523,100 and $2,722,621 for the quarter and six month period ended September 30, 1996, respectively. International sales of Geographics products represented 25% and 23% of the Company's total sales for the quarter and six month period ended September 30, 1997, respectively, compared to 22% and 21% , respectively, of total sales for the same periods in the prior year. GROSS MARGIN. Gross profit margin as a percentage of sales was 16.1% for the quarter ended September 30, 1997, compared to 40.5% for the same period in the prior year. For the six month period ended September 30, 1997, gross profit margin as a percentage of sales was 11.9%, compared to 40.1% for the same period in the prior year. The decreases were primarily due to price reductions for the Company's specialty paper products implemented in August 1996 and April 1997 and a continuing shift in mix of sales to lower margin Geopaper products. In connection with the Company's audit for the fiscal year ended March 31, 1997, management determined that, during fiscal 1997, the use of certain accounting procedures and estimates based on historical results caused an overstatement of gross margin and inventories on an interim basis. Although the Company believes that the overstatements occurred over the course of fiscal 1997, it has determined that, given the complexity of the issues involved, it is not possible to allocate accurately the necessary adjustment to any interim quarterly period during fiscal 1997. As a result, the adjustment to gross margin and inventories was made at the end of the fiscal year ended March 31, 1997, and previously reported quarterly information for fiscal 1997 has not been restated. Accordingly, gross profit margin for both the quarter and six month period ended September 30, 1996 does not reflect the effect, if any, that an interim allocation of this adjustment might have had on the results for such periods. The cumulative effect in fiscal 1997 of the overstatement, when combined with reserves for obsolete inventory, was a reduction of both gross margin and inventory of approximately $5,600,000. See "-Overview-Overstatement of Gross Margin and Inventories." SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general and administrative (S,G&A) expenses, which consist of payroll, advertising, commissions, administrative, accounting, legal and other costs, increased as a percentage of sales during the quarter ended September 30, 1997 to 34.5%, as compared to 28.8% during the same period in the prior year. S,G&A expenses increased as a percentage of sales to 35.9% for the six month period ended September 30, 1997 as compared to 31% for the same period in the prior year. The increases are primarily the result of increased costs associated with advertising allowances, volume rebates and other promotional payments made to key customers. INTEREST EXPENSE. The Company's interest expense for the quarter ended September 30, 1997 increased 106% to $419,873 compared to $203,341 for the same period in the prior year. The Company's interest expense for the six month period ended September 30, 1997 increased 115% to $848,197, compared to $394,112 for the same period in the prior year. The increase in interest expense was primarily the result of substantially increased borrowings under the Company's revolving credit facility during fiscal 1998. Borrowings increased due primarily to operating losses incurred by the Company in fiscal 1997 and 1998. Borrowings also increased in part due to delays in the collection of accounts receivable, which resulted from problems encountered by the Company in the electronic delivery of invoices to major customers during fiscal 1997 and the first quarter of fiscal 1998. See "-Overview-Collections of Accounts Receivable." Interest expenses also increased as a result of additional borrowings in the form of capital leases and mortgage loans related to equipment purchases and expansions to the Company's Blaine manufacturing facility made during fiscal 1997 and the first six months of fiscal 1998. Page 7 LIQUIDITY AND CAPITAL RESOURCES As a result of the rapid growth of the Company's specialty papers group, capital expenditures relating to the purchase and installation of automated production equipment and a management information system, operating losses and other factors, the Company has required, and continues to require, substantial external working capital. Moreover, subsequent to the end of fiscal 1997, the Company has experienced working capital short-falls which have required the Company to delay payments to certain vendors, delay planned purchases, institute internal cost reduction measures and take other steps to conserve operating capital. During fiscal 1997, operating losses totaled $6,261,298, and the Company experienced negative operating cash flows of $6,601,926. During the quarter ended September 30, 1997, operating losses totaled $1,543,203. However, the Company experienced positive operating cash flows of $1,215,290 during the quarter ended September 30, 1997, primarily as a result of substantial reductions in trade accounts receivable balances during the quarter. This reduction in trade accounts receivable was due to improvements in the Company's electronic data interchange ("EDI") billing systems and procedures which resulted in improved collections. This improvement in billing and collections resulted in positive operating cash flows of $107,672 in the six months ended September 30, 1997, in spite of operating losses during the same period of $3,831,615. At the date of this Report, the Company's only available source of working capital consisted of borrowings available under its revolving credit facility. The revolving credit facility permits borrowings of up to $12.0 million subject to a borrowing base limitation of 80% of the value of the Company's eligible accounts receivable and 55% of the value of its inventory, net of certain reserves. Borrowings under the facility bear interest at the prime rate and are secured by substantially all of the Company's assets. Under the terms of the facility, the Company is required to comply with a number of financial covenants relating to, among other things, the maintenance of minimum net worth, debt-to-equity ratios and cash flow coverage ratios. Since May 1997, the Company has failed to comply with the net worth, debt-to-equity ratios and cash flow coverage ratios under the revolving credit facility, and borrowings under the facility exceeded the permitted borrowing base limitations. The Company's lender has also provided the Company with several mortgage loans and equipment loans, and the defaults under the revolving credit facility constitute a default under these other loans. The report of the Company's auditors dated August 26, 1997 relating to the Company's Consolidated Financial Statements for the fiscal year ended March 31, 1997 states that the Company's fiscal 1997 losses and non-compliance with covenants under its revolving credit facility raise substantial doubt about the Company's ability to continue as a going concern. The Company's Consolidated Financial Statements for the fiscal year ended March 31, 1997 (as well as the Unaudited Consolidated Financial Statements for the fiscal quarter ended September 30, 1997 included in this Report) were prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Page 8 The Company entered into a short-term forbearance agreement with its lender, effective November 14, 1997, pursuant to which the lender agreed to extend the expiration date of the revolving credit facility to November , 1997, to increase the $12.0 million commitment by a $300,000 stand-by letter of credit, to permit borrowings of up to $3,000,000 million in excess of the applicable borrowing base limitation (not to exceed the $12.0 million revolving credit facility commitment) and to forbear from asserting its rights with respect to the Company's non-compliance with the financial covenants as well as the defaults under the Company's mortgage loans and equipment loans. The Company plans to request a further extension of the forebearance agreement upon expiration of the current extension. There can be no assurance that the lender will continue to permit borrowings under the revolving credit facility, that the lender will agree to further extend the facility's expiration date or that the Company would be able to refinance or replace the facility on acceptable terms when and as needed. The Company currently projects continuing losses and potentially negative cash flows from operations for the remainder of fiscal 1998. The exact amount and timing of the Company's capital requirements will be determined by numerous factors, including the level of, and gross margin on, future sales, the outcome of outstanding contingencies and disputes such as pending lawsuits, payment terms obtained from the Company's vendors and the timing of capital expenditures. However, even if the Company's lender were to continue to waive all existing defaults under the Company's revolving credit facility, the Company expects that available borrowings under the facility may not be sufficient to satisfy its working capital requirements beyond December 31, 1997. Furthermore, although the Company's lender has permitted borrowings under the revolving credit facility in spite of existing defaults, there can be no assurance that it will continue to do so. Accordingly, the Company is delaying payments to vendors, instituting internal cost reduction measures and taking other steps to conserve operating capital. As a result, the Company's vendors may place the Company on credit hold or take other actions against the Company, including the termination of their relationship with the Company or the initiation of collection proceedings. In October, 1997 the Company took steps to reduce operating costs, including layoffs of approximately 45 employees, decreases in senior executive compensation, a company-wide wage freeze, and a management restructuring that included the permanent elimination of two vice-president level positions. The Company projects that these steps will result in cost savings in excess of $1,300,000 over the next 12 months. The Company has been actively pursuing possible sources of additional capital and has engaged an investment banker to assist in the evaluation and pursuit of financing transactions, which could include the issuance of debt or equity securities or the sale of all or part of the Company's assets. During the week of November 3, 1997 the Company received several offers, subject to a number of conditions, for the purchase of portions of its assets related its lettering and signage business. However, as of the date of this report, the Company had not yet entered into any binding agreements with regards to any such offer. Though such offers are under active consideration by management, the transactions contemplated thereby are subject to satisfaction of a number of conditions precedent, and there can be no assurance that any such transaction will be consummated. Further, there can be no assurance that the Company will be able to obtain additional sources of working capital when and as needed or that the terms of any such funding will be acceptable to the Company. Any equity financing may involve substantial dilution to the interests of the Company's shareholders. The failure to obtain an increase in borrowing availability under, and to extend the expiration date of, the revolving credit facility, or to otherwise obtain sufficient funds when and as needed to satisfy its working capital requirements could force the Company to curtail or further restructure operations, seek extended payment terms from its vendors or seek protection under the federal bankruptcy laws. Page 9 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as part of this Report: Exhibit Number (Referenced to Item 601 of Registration S-K) Description of Document ______________ _______________________ 10.16 Financial Advisory Agreement, dated August 6, 1997, between Geographics, Inc. and Cruttenden Roth, Incorporated 10.17 Subscription Agreement, dated October 9, 1997, between Geographics, Inc. and First Prudential Investment Fund, Inc. 11.1 Statement re computation of net income (loss) per share 27.1 Financial Data Schedule (b) No Current Reports on Form 8-K were filed by the Company during the fiscal quarter ended September 30, 1997. Page 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of November, 1997. GEOGRAPHICS, INC. By: /s/ RONALD S. DEANS ------------------------------------- Ronald S. Deans CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER By: /s/ BRUCE A. CLAWSON ------------------------------------- VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) Page 11 INDEX TO FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 1997 and March 31, 1997................................ F-2 Consolidated Statements of Operations for the three months and six months ended September 30, 1997 and September 30, 1996................................................. F-3 Consolidated Statements of Cash Flows for the three months and six months ended September 30, 1997 and September 30, 1996............................................. F-4 Notes to Consolidated Financial Statements............................................................. F-5
F-1 GEOGRAPHICS, INC. CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND MARCH 31, 1997
ASSETS September 30, 1997 March 31, 1997 (Unaudited) (Audited) CURRENT ASSETS Cash 126,556 $ 408,757 Accounts receivable Trade receivables, net 5,171,155 6,654,500 Other receivables 820,339 993,243 Inventory, net of allowance for obsolete inventory of $1,390,000 at September 30, 1997 and $1,290,000 at March 31, 1997 9,487,798 9,457,874 Prepaid expenses, deposits, and other current assets 764,404 893,483 -------------- -------------- Total current assets 16,370,252 18,407,857 PROPERTY, PLANT AND EQUIPMENT, net 13,350,760 10,832,231 OTHER ASSETS 486,521 1,005,613 -------------- -------------- TOTAL ASSETS $ 30,207,533 $ 30,245,701 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdrafts $ 626,753 $ 467,445 Note payable to bank 10,755,195 8,649,390 Accounts payable 4,161,548 2,421,768 Accrued liabilities 2,576,578 2,145,030 Notes payable to officers and directors -- 850,000 Current portion of long-term debt 3,510,962 3,472,674 -------------- -------------- Total current liabilities 21,631,036 18,006,307 LONG-TERM DEBT 5,365,124 4,322,371 -------------- -------------- Total liabilities 26,996,160 22,328,678 -------------- -------------- STOCKHOLDERS' EQUITY No par common stock - 100,000,000 authorized, 9,467,877 and 9,467,877 issued and outstanding at September 30, 1997 and March 31, 1997, respectively 15,573,434 15,574,018 Foreign currency translation adjustment (68,404) (76,478) Retained earnings (accumulated deficit) (12,293,657) (7,580,517) -------------- -------------- Total stockholders' equity 3,211,373 7,917,023 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 30,207,533 $ 30,245,701 -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-2 GEOGRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (Unaudited)
Three Months Ended Six Month Ended - -------------------------------------------------------------------------------------------------------- Sept. 30 Sept. 30 Sept. 30 Sept. 30 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------- Sales $ 8,363,293 $6,858,576 $15,971,552 $13,029,743 Cost of Sales 7,018,882 4,083,653 14,067,086 7,809,954 ----------- ---------- ----------- ----------- Gross Margin 1,344,411 2,775,023 1,904,466 5,219,789 Selling, General and Administrative 2,887,614 1,975,339 $ 5,736,081 4,009,344 Expenses ----------- ---------- ----------- ----------- Income (Loss) from Operations (1,543,203) 799,684 (3,831,615) 1,210,445 Other Income (Expenses) Interest Expense (419,873) (203,341) (848,197) (394,112) Other (14,288) (10,065) (33,328) (13,841) ----------- ---------- ----------- ----------- (434,161) (213,406) (881,525) (407,953) Income (Loss) Before Provision for (1,977,364) 586,278 (4,713,140) 802,492 Income Taxes Income Tax Provision -- 213,172 - 283,209 ----------- ---------- ----------- ----------- Net Income (Loss) $(1,977,364) $ 373,106 (4,713,140) 519,283 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Earnings Per Common and Common Equivalent Share Primary ($0.21) $0.04 ($.50) $.06 Assuming full dilution ($0.21) $0.04 ($.50) $.06 Shares Used in Computing Earnings Per Common and Common Equivalent Share Primary 9,467,877 9,427,811 9,467,877 9,198,337 Assuming full dilution 9,467,877 9,427,803 9,467,877 9,199,419
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 GEOGRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 INCREASE (DECREASE) IN CASH (Unaudited)
September 30, 1997 September 30, 1996 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (4,713,140) $ 512,283 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES Depreciation and amortization 892,340 759,980 Deferred income taxes - 132,661 (Gain) loss on sales of property and equipment 1,740 8,985 CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES Trade receivables 1,483,345 (138,848) Related party receivables - 899,422 Other receivables 172,904 (118,036) Inventory (29,924) (3,939,208) Prepaid expenses, deposits and other current assets 129,079 (1,230,540) Accounts payable 1,739,780 (624,557) Accrued liabilities 431,548 522,029 Income tax payable - (99,326) --------------------------------------- Net cash flows from operating activities 107,672 (3,308,155) --------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in bank overdrafts 159,308 - Net borrowings on note payable to bank 2,105,805 (924,322) Proceeds from long-term debt borrowings - 225,000 Repayment of long-term debt (596,877) (343,378) Repayments of notes payable to officers and directors (850,000) (264,711) Proceeds from issuance of common stock (584) 6,539,340 Foreign currency translation 8,075 4,156 --------------------------------------- Net cash flows from financing activities 825,727 5,236,085 --------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and equipment (1,215,600) (1,607,921) Proceeds from sales of equipment - 6,887 Net advances from (repayments to) partnerships - (154,080) Change in other assets - (33,896) --------------------------------------- Net cash flows from investing activities (1,215,600) (1,789,010) --------------------------------------- NET CHANGE IN CASH (282,201) 138,920 CASH, beginning of year 408,757 50,028 CASH, end of quarter $ 126,556 $ 188,948 ------------------------------------- NONCASH INVESTING AND FINANCING ACTIVITIES Financing obtained in acquisition of equipment $1,677,918 $ 1,219,764 ------------------------------------- Assets acquired directly in acquisition of business - $390,839 -------------------------------------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS F-4 GEOGRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying interim unaudited consolidated financial statements of Geographics, Inc. (the "Company" or "Geographics") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's consolidated financial statements and notes thereto for the fiscal year ended March 31, 1997. The consolidated financial statements include the accounts of Geographics and its wholly-owned subsidiaries: Geographics Marketing Canada Inc., Geographics (Europe) Limited and Geographics Australia, Pty. Limited. All intercompany balances and transactions have been eliminated. Certain of the Company's subsidiaries calculated cost of sales using an estimated gross profit method for interim periods. Cost of sales at these subsidiaries are adjusted based on physical inventories which are performed no less than once a year. NOTE 2 - COMMITMENTS AND CONTINGENCIES LEASES - The Company conducts certain operations in leased facilities, under leases that are classified as operating leases for financial statement purposes. The leases provide for the Company to pay real estate taxes, common area maintenance, and certain other expenses. Lease terms, excluding renewal option periods exercisable by the Company at escalated rents, expire between March, 1998 and February 2006. In addition to the base lease term, the Company has various renewal option periods. In addition, certain equipment used in the Company's operations is also leased under operating leases. A schedule of noncancelable operating lease commitments are as follows: 1998.................................. $365,103 1999.................................. 152,253 2000.................................. 67,403 2001.................................. 46,164 _______ $630,923 ======= F-5 LITIGATION - In July 1997, three related class action suits were filed in the United States District Court for the Western District of Washington against the Company, its President, Chief Executive Officer and Chairman of its Board of Directors, and the Company's former Vice President of Finance and Chief Financial Officer (the "Defendants"). The suits allege that the Defendants inflated the price of the Company's stock by intentionally or recklessly making misrepresentations or omissions which deceived the public about the Company's financial condition and prospects, thus misleading shareholders who purchased shares between August 6, 1996 and June 12, 1997. The complaints seek damages in unstated amounts. Management intends to vigorously defend these complaints. However, the ultimate outcome of these actions cannot be predicted with certainty. The Company owns insurance policies applicable to certain losses including costs of defense. These insurance policies have an aggregate self-insurance retention of $150,000. If the Company is determined to be liable for, or otherwise agrees to settle or compromise, any claim, there is no assurance that any or all of such liability, compromise or settlement would be covered by the Company's insurance. If the amount of insurance is insufficient, or if the policies are determined to be inapplicable, the Company could be required to make additional payment beyond the self-insurance retention in the form of cash, indebtedness or equity securities. A payment of this nature could have a negative material impact on the Company's capital resources, and issuance of additional equity securities could have a negative material impact on the Company's existing shareholders. The defense of this or any pending or future litigation, investigations or disputes could result in substantial legal and professional costs to the Company. There are various additional claims, lawsuits, and pending actions against the Company incident to the operations of its business. It is the opinion of management that the ultimate resolution of these matters and any future unidentified claims will not have a material effect on the Company's business, financial condition or results of operations. CONTINGENCY FOR YEAR 2000 ISSUES - The Company has not yet made an assessment of the impact of the year 2000 on their computer software, hardware and other systems, including those of vendors, customers and other third parties. The potential expense to ensure that all of the computer and other systems are year 2000 compliant cannot be determined until such an assessment is made. EMPLOYMENT CONTRACTS - During the quarter ended September 30, 1997, the Company entered into employment contracts with certain employees for a period of up to three years. The contracts provide for severance payments in the event these employees terminate employment for certain specified reasons during the contract period. NOTE 3 - GOING CONCERN As a result of the $7,950,301 loss incurred by the Company for the year ended March 31, 1997, a decline in gross profit margins, the Company's failure to comply with covenants under its line of credit and other factors, the report of the Company's auditors, dated August 26, 1997, relating to the Company's Consolidated Financial Statements for the year ended March 31, 1997 states that there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as F-6 a going concern and do not include any adjustments that might result from the outcome this uncertainty. The Company currently projects continuing losses and potentially negative cash flows from operations for the remainder of fiscal 1998. The exact amount and timing of the Company's capital requirements will be determined by numerous factors, including the level of, and gross margin on, future sales, the outcome of outstanding contingencies and disputes such as pending lawsuits, payment terms obtained from the Company's vendors and the timing of capital expenditures. However, even if the Company's lender were to waive all existing defaults under the Company's revolving credit facility, the Company expects that available borrowings under the facility may not be sufficient to satisfy its working capital requirements beyond December 31, 1997. Furthermore, although the Company's lender has permitted borrowings under the revolving credit facility in spite of existing defaults, there can be no assurance that it will continue to do so. Accordingly, the Company is delaying payments to vendors, instituting internal cost reduction measures and taking other steps to conserve operating capital. As a result, the Company's vendors may place the Company on credit hold or take other actions against the Company, including the termination of their relationship with the Company or the initiation of collection proceedings. In October, 1997 the Company took steps to reduce operating costs, including layoffs of approximately 45 employees, decreases in senior executive compensation, a company-wide wage freeze, and a management restructuring that included the permanent elimination of two vice-president level positions. The Company projects that these steps will result in cost savings in excess of $1,300,000 over the next 12 months. The Company has been actively pursuing possible sources of additional capital and has engaged an investment banker to assist in the evaluation and pursuit of financing transactions, which could include the issuance of debt or equity securities or the sale of all or part of the Company's assets. During the week of November 3, 1997 the Company received several offers, subject to a number of conditions, for the purchase of its lettering and signage business. However, as of the date of this report the Company had not yet entered into any binding agreements with regards to any such offer. Though such offers are under active consideration by management, the transactions contemplated thereby are subject to satisfaction of a number of conditions precedent and there can be no assurance that any such transaction will be consummated. Further, there can be no assurance that the Company will be able to obtain additional sources of working capital when and as needed or that the terms of any such funding will be acceptable to the Company. Any equity financing may involve substantial dilution to the interests of the Company's shareholders. The failure to obtain an increase in borrowing availability under, and to extend the expiration date of, the revolving credit facility, or to otherwise obtain sufficient funds when and as needed to satisfy its working capital requirements could force the Company to curtail or further restructure operations, seek extended payment terms from its vendors or seek protection under the federal bankruptcy laws. F-7 EX-10.16 2 EXHIBIT 10.16 [LETTERHEAD] August 6, 1997 PRIVILEGED AND CONFIDENTIAL Geographics, Inc. 1555 Odell Road Blaine, Washington 98231 Attention: Mr. Ronald S. Deans Chairman of the Board, President and Chief Executive Officer Gentlemen: This letter agreement (the "Agreement") will confirm the understanding between Geographics, Inc. (the "Company") and Cruttenden Roth Incorporated ("CRI" or the "Advisor") pursuant to which the Company has retained CRI to render financial advisory services to the Company, on the terms and subject to the conditions set forth herein, in connection with: 1) an assessment of its strategic financing options and at the Company's option; 2) the sale of all of, or a controlling interest in, any or all of the Company's operations by way of a merger, sale of assets or stock, or other significant transaction involving all or substantially all of, or a controlling interest in, the business, assets or stock of the Company or any of its operations or subsidiaries or any financing that provides additional funds to the Company (a "Transaction"). 1. RETENTION. The Company hereby retains the Advisor on an exclusive basis and the Advisor agrees to act as financial advisor to the Company in connection with a Transaction or potential Transaction. This Agreement shall expire on February 28, 1998 (the "Expiration Date"), unless extended by mutual agreement of the Company and the Advisor. Subject to the terms and conditions of this Agreement, the nature and scope of the Advisor's efforts shall be such as CRI deems appropriate. In connection with its advisory work, the Advisor will evaluate the Company's strategic financing options and will perform promptly, if appropriate, the following: (a) an analysis of the Company, its business and its future operating prospects; (b) an analysis of the objectives of the Company and its shareholders' objectives, analyzing the priorities and tradeoffs associated with such objectives; (c) an analysis of values to be received in connection with a possible Transaction; (d) delivery of a written summary of strategic financing options; (e) assistance with the preparation of a confidential memorandum describing the Company and distribution of such a memorandum to potential participants in a Transaction; provided that all potential participants to be contacted by CRI shall have been approved by the Company in advance in writing (the "Prospective Purchasers"); (f) the identification, the introduction to, and on-going discussions and negotiations with parties to a Transaction described in (d) above; (g) assistance with other matters related to closing a Transaction; and (h) other studies, analyses and advisory services as deemed appropriate. The Company agrees to retain its own legal counsel and accountants for any necessary legal and tax advice. 2. COMPENSATION. As compensation for services rendered and to be rendered hereunder by the Advisor, the Company agrees, subject to the provisions of paragraph 6 below, to pay the Advisor (or cause the Advisor to be paid) non-refundable cash fees as follows: (a) The Advisor shall be entitled to receive a monthly retainer fee payable in arrears in the amount of $20,000 per month. The first such payment shall be paid upon the acceptance of this letter. (b) Upon the closing of any financing (including cash investment or loan) with parties with whom the Company has already initiated discussions, the Company shall pay to CRI a cash fee of $100,000. The Company shall promptly supply CRI a list of such entities in writing. Any monthly retainer fees paid prior to such closing shall be credited against such $100,000. Such fee shall be $100,000 irrespective of the number of participants in such financing. (c) Upon execution of a letter of intent or definitive purchase agreement with respect to any Transaction except that described in paragraph (b) above, which is executed by an officer or director of the Company authorized to execute such a letter or agreement on behalf of the Company, the Company will pay CRI $100,000 for the initial Transaction and $50,000 for any Transaction following the payment of any Success Fee by the Company to CRI. Any monthly retainers fees paid by the Company to CRI that have not already been credited against fees due under paragraph (b) above shall be credited against such $100,000 up to the full amount due under this paragraph (c). No such fee shall be payable for parties from whom the Company has received a letter of intent as of the date or the execution of this letter. Such letters are appended to this letter as Exhibit II. (d) In the event that a Transaction is closed (except as specified in Section 6 hereof), the Company will pay or cause to be paid in cash to CRI, as provided herein, a Success Fee (the "Success Fee") of $200,000 for each Transaction for which payment has been made under paragraph (c) and $300,000 for Transactions for which no payment has been made under paragraph (c). Up to three monthly retainer fees that have not already been credited against other fees payable under this Agreement shall be credited against the Success Fee. (e) In addition to the compensation to be paid to the Advisor as provided above, the Company shall pay to, or on behalf of the Advisor, promptly as billed, all reasonable out-of-pocket expenses (including all reasonable fees and expenses of Advisor's counsel, and messenger, overnight courier, fax, telephone, copying, printing and travel related expenses) incurred by the Advisor in connection with the services to be rendered hereunder, not to exceed $20,000 without the approval of the Company. 3. INDEMNITY. As partial consideration for the services to be rendered by CRI, the Company agrees to indemnify CRI and the other Indemnified Persons as set forth in Exhibit I hereto, which is incorporated herein and made a part hereof. 4. COVENANTS OF THE COMPANY. The Company agrees as follows: (a) This Agreement is duly authorized and validly executed and delivered by the Company, and constitutes a legal, valid and binding agreement of the Company. (b) In connection with Advisor's activities hereunder, the Company agrees to furnish the Advisor with all information concerning the Company and its business, prospects, operations, and financial results and condition that the Advisor reasonably deems appropriate. Such information will include a memorandum, any amendments or supplements (hereto, various corporate reports and any other materials used in connection with consummating the Transaction (collectively, the "Offering Materials"). All of the Offering Materials, and any other documents supplied to CRI or Prospective Purchasers shall have been prepared, reviewed and approved by the Company and shall be, to the Company's best knowledge, accurate and complete in all material respects. Subject to such review and approval of the Offering Materials by the Company, CRI is hereby authorized and directed as the company's exclusive agent to transmit to Prospective Purchasers a copy or copies of the Offering Materials and any other documents delivered to CRI or Prospective Purchasers by or on behalf of the company in connection with the performance of CRI's services hereunder or the consummation of a Transaction. The Company shall promptly advise CRI of any material development affecting the Company or the Offering Materials. In addition, the Company agrees to provide the Advisor with access to the company's accountants, counsel, consultants and other appropriate agents and representatives. The Company acknowledges that the Advisor may rely upon the completeness and accuracy of information and data furnished to it by the Company's officers, directors, employees, agents and representatives without an independent verification of such information and data or an appraisal of the Company's assets. (c) In order to coordinate the efforts to effect a Transaction satisfactory to the Company and its shareholders, the Company and its shareholders, officers, directors, and employees will not initiate any discussions with respect to a potential Transaction except with the Advisor. Also, the Company hereby confirms and acknowledges that the only discussions with, or inquiries from, Prospective Purchasers with respect to a potential transaction, that have occurred prior to the date of this Agreement are from the parties listed on Exhibit II, which is attached hereto. The Company hereby agrees to permit the Advisor to assist the Company in any negotiations with the Prospective Purchasers listed on Exhibit II. In the event that the Company and its shareholders, officers, directors, and employees receive any other inquiry or are otherwise aware of the interest of any other third party concerning the availability of the company for acquisition, they will promptly inform the Advisor of the Prospective Purchaser and its interest and permit the Advisor to assist the Company in any negotiations with such Prospective Purchaser. 5. CONFIDENTIALITY. Except to the extent authorized by the Company or required by any Federal or state law, rule or regulation or any decision or order of any court or regulatory authority, the Advisor agrees that it will refrain from disclosing to any person, other than to any agents, attorneys, accountants, employees, officers, and directors of the Advisor who need to know the information in connection with the Advisor's engagement hereunder, any confidential information which has not become public about the Company that the Advisor receives from the Company or its agents, attorneys or accountants in connection with the services rendered hereunder. Any advice rendered by CRI hereunder shall not be disclosed publicly in any manner without CRI's written approval and will be treated by the Company and CRI as confidential. In addition, CRI's advice is not intended for, and should not be relied upon by, other third parties. The Company also agrees that any reference to the Advisor or any affiliate of the Advisor in any release or communication to any party outside the Company is subject to the Advisor's prior approval, which approval shall be unreasonably withheld or delayed. If the Advisor resigns or is terminated prior to any release or communication, no reference shall be made therein to the Advisor without the Advisor's prior written permission. 6. TERMINATION. This Agreement may be terminated by either the Company or CRI at any time prior to the Expiration Date upon written notice to the other party. In either event, the Company shall continue to be liable to CRI for any unpaid compensation earned or otherwise to be paid to CRI pursuant to this Agreement and provided that the expense reimbursement provisions contained in paragraph 2 herein, and the indemnity, contribution and expense reimbursement provisions contained in paragraph 3 and Exhibit I shall remain operative and in full force and effect regardless of termination, expiration, or consummation of a Transaction. Also, if this Agreement expires or is terminated prior to consummation of a Transaction and within 18 months after expiration or termination the Company consummates a Transaction with a Prospective Purchaser for any group that includes such Prospective Purchaser or affiliate of such Prospective Purchaser, then the Company hereby agrees to pay CRI compensation in accordance with paragraph 2 of this Agreement. For purposes of computing the fee payable pursuant to the preceding sentence, CRI agrees to provide the Company with a written list within 30 business days of expiration or termination of all Prospective Purchasers with whom the Advisor had discussions, on behalf of the Company, about a potential Transaction. 7. NOTICES. Notice given pursuant to any of the provisions of this Agreement shall be in writing and shall be mailed or delivered to the Company at 1555 Odell Road, Blaine, Washington 98231, Attention: Ronald S. Deans; and to CRI at 520 Pike Street, Suite 1010, Seattle, Washington 98101, Attention: Corporate Finance Department. 8. ADVERTISEMENTS. The Company agrees that the Advisor shall have the right to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder; provided that the Advisor shall have submitted a copy of any such proposed advertisement to the Company for its prior approval, which approval shall not be unreasonably withheld or delayed. 9. CONSTRUCTION. The Agreement incorporates the entire understanding of the parties and supersedes all previous agreements and shall be governed by, and construed in accordance with, the laws of the State of Washington as applied to contracts made and performed in such State, without regard to principles of conflicts of laws. 10. SEVERABILITY. Any determination that any provision of this Agreement may be, or is, unenforceable shall not affect the enforceability of the remainder of this Agreement. 11. HEADINGS. The section headings in this Agreement have been inserted as a matter of convenience for reference and are not an effective part of this Agreement. 12. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 13. THIRD PARTY BENEFICIARIES. This Agreement has been and is made solely for the benefit of the Company, the Advisor and the other Indemnified Persons referred to in paragraph 3 hereof and their respective successors and assigns, and no other person shall acquire or have any rights under or by virtue of this Agreement. 14. SUCCESSION. This Agreement shall be binding upon and insure to the benefit of the Company, CRI, the Indemnified Persons and their respective successors, assigns, heirs and personal representatives. If the foregoing terms correctly set forth our Agreement, please confirm this by signing and returning to the Advisor the duplicate copy of this letter. Thereupon this letter, as signed in counterpart, shall constitute our Agreement on the subject matter herein. CRUTTENDEN ROTH INCORPORATED By: /s/ James M. Stearns ------------------------------ Confirmed and Agreed to: Geographics, Inc. By: /s/ Ronald S. Deans ------------------------------ Title: Chairman & C.E.O. --------------------------- Date: 8/11/97 ---------------------------- EXHIBIT I CRI will be acting on behalf of Geographics, Inc. (the "Company") in connection with the services or matters that are the subject of the Agreement to which this Exhibit I is attached. Accordingly, the Company agrees to indemnify and hold harmless CRI and CRI's affiliates, the respective directors, officers, agents and employees of CRI and CRI's affiliates, and each other person, if any, controlling CRI or any of CRI's affiliates (collectively the "Indemnified Persons"), from and against any losses, claims, damages, liabilities or expenses (or actions, including shareholder actions, in respect thereof) related to or arising out of such engagement or CRI's role in connection therewith, and will reimburse the Indemnified Persons for all expenses (including out-of-pocket expenses, CRI's customary hourly charges for time expended in defending or preparing to defend any action or legal proceeding and CRI's counsel fees and expenses) as they are incurred by the Indemnified Persons in connection with investigating, preparing or defending any such action or claim, whether or not in connection with pending or threatened litigation in which CRI or any Indemnified Person is a party. The Company will not, however, be responsible for any losses, claims, damages, liabilities or expenses which are finally judicially determined to have resulted primarily from CRI's willful misconduct or gross negligence. The Company also agrees that none of the Indemnified Persons shall have any liability to the Company for or in connection with the services or matters pertaining to the Agreement except for any such liability for losses, claims, damages, liabilities or expenses incurred by the Company that results primarily from CRI's willful misconduct or gross negligence. If the forgoing indemnity is unavailable or insufficient to hold the Indemnified Persons harmless, then the Company shall contribute to the amount paid or payable by the Indemnified Persons, in respect of the Indemnified Persons, for losses, claims, damages, liabilities or expenses in such proportion as appropriately reflects the relative benefits received by, and fault of, the Company, on the one hand and the Indemnified Persons, on the other, in connection with the matters as to which such losses, claims, damages, liabilities or expenses relate and other equitable consideration; provided, however, the Company agrees that the aggregate contribution of all Indemnified Persons shall in all cases be not more than the amount of fees actually received by CRI for its services. It is hereby further agreed that the relative benefits to the Company on the one hand and the Indemnified Persons on the other with respect to any Transaction contemplated by the Agreement shall be deemed to be in the same proportion as (i) the total value of the Transaction bears to (ii) the fees actually paid to the CRI with respect to such Transaction. The foregoing Agreement shall be in addition to any rights that CRI or any Indemnified Person may have at common law or otherwise. The Company hereby consents to personal jurisdiction and service and venue in any court in which any claim which is subject to this Agreement is brought against CRI or any other Indemnified Person. If any action, proceeding or investigation is commenced as to which an Indemnified Person demands indemnification, the Indemnified Person shall have the right to retain counsel of its own choice to represent it, the Company shall pay the reasonable fees and expenses of such counsel, and such counsel shall to the extent consistent with its professional responsibilities cooperate with the Company and any counsel designated by the Company; provided that the Company shall not be responsible for the fees and expenses of more than one counsel. EX-10.17 3 EXHIBIT 10.17 SUBSCRIPTION AGREEMENT THIS AGREEMENT made as of the ____ day of October, 1997. BETWEEN: FIRST PRUDENTIAL INVESTMENT FUND INC. ("Subscriber") - AND - GEOGRAPHICS, INC. (the "Company") - AND - RONALD S. DEANS (the "Principal") WHEREAS: 1. The Company retained Subscriber to perform certain services for the Company ("the Services"), which services have now been fully performed to the complete satisfaction of the Company; 2. In consideration of the performance of the Services, the Company is indebted to Subscriber in the amount $125,000.00 of lawful money of Canada (the "Services Fee"), which sum is now due and payable to Subscriber; 3. Subscriber wishes to subscribe to the Company for 250,000 common shares in the capital stock of the Company ("the Shares") at a price (the "Subscription Price") equal to the Services Fee; 4. Subscriber wishes to apply the Services Fee to payment of the Subscription Price; and 5. The directors of the Company have by resolution determined that the Subscription Price is the fair equivalent of the money that the Company would have received if the Shares had been issued for money on this date. - 2 - NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of Subscriber subscribing for and purchasing the Shares and of the mutual covenants and agreements herein contained and for other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged), the parties hereto agree with each other as follows: 1. SUBSCRIPTION: Subscriber hereby subscribes to the Company for the Shares for an aggregate purchase price equal to the Subscription Price, subject to the terms and conditions of this agreement, which subscription the Company hereby accepts. 2. COMPLETION (a) PAYMENT: Subscriber hereby authorizes and directs the Company to apply the Services Fee to the Subscription Price, which authorization and direction the Company hereby accepts in full payment and satisfaction of the Subscription Price. (b) DELIVERY OF SHARE CERTIFICATE(S): The Company hereby acknowledges payment for the Shares and agrees to deliver to Subscriber the share certificate(s) in respect of the Shares in the name of Subscriber immediately upon the signing of this agreement. The Company further agrees to deliver the Shares by way of share certificate numbers 03672 to 03721, each representing 5,000 common shares. 3. REPRESENTATIONS AND WARRANTIES: The Company and the Principal (in his personal capacity) hereby jointly and severally represent and warrant to Subscriber that as at the date hereof: (a) RECITALS: The above recitals to this agreement are true; (b) BANKRUPTCY: The Company has not proposed a compromise or arrangement to its creditors generally, had any petition for a receiving order in bankruptcy filed against it, taken any proceeding with respect to a compromise or arrangement, taken any proceeding to have itself declared bankrupt or wound-up, taken any proceeding to have a receiver appointed over any part of its assets, had any encumbrancer take possession of any of its property, or had any execution or distress become enforceable or become levied upon any of its property; - 3 - (c) SUBSISTING CORPORATION: The Company is a corporation duly incorporated and organized, validly subsisting and in good standing under the laws of the State of Wyoming; and is duly authorized and licensed to own its properties, and to carry on its business; (d) DUE AUTHORIZATION: The Company has all necessary corporate power and authority to enter into this agreement and to issue the certificate(s) representing the Shares and to carry out its obligations hereunder; and the execution and delivery of this agreement and the consummation of the transaction contemplated hereunder has been duly authorized by all necessary corporate action on the part of the Company; (e) ENFORCEABILITY OF OBLIGATIONS: This agreement and each of the Documents will constitute a valid and binding obligation on the Company enforceable against it in accordance with its terms, subject, however, to the limitations with respect to enforcement imposed by law in connection with bankruptcy, insolvency, re-organization or other laws affecting creditors' rights generally; (f) NO CONFLICTING AGREEMENTS: The Company is not a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, instrument, charter or by-law provision, statute, regulation, judgment, decree or law which would be violated, contravened, breached by, or under which any obligation would be accelerated or default or termination would occur as a result of the consummation of any of the transactions provided for herein; (g) NO FINDER: No broker or finder acted directly for the Company or one or more of its Principals or its shareholders or a shareholder of a shareholder in connection with this agreement or the transaction contemplated thereby, and no broker or finder is entitled to any brokerage or finder's fee or other commission or fee in respect thereof; (h) REGISTERED OWNER: First Prudential is, or immediately upon execution of this agreement will be, registered on the records of the Company as the owner of the Shares; (i) FULLY PAID: Upon issuance of the Shares to First Prudential, the Shares will be fully paid and non-assessable shares; (j) NO CONTROL BLOCK: The Shares do not constitute a control block; - 4 - (k) NO RESTRICTIONS ON TRADING: The Shares are free-trading shares and may be sold by First Prudential on the open market at any time; and, without limiting the generality of the foregoing, there are no undertakings, agreements or other restrictions entered into with any governmental or securities body which restrict the public trading of the Shares by Subscriber or anyone else and, to the best of the knowledge and belief of the undersigned, the public trading of the Shares in Canada or the United States is not prohibited by any federal, provincial or State legislation or regulations of general application; (l) SHARES LEGALLY OBTAINED: The Shares have been obtained legally in strict compliance with the rules and regulations of all appropriate governmental and regulatory bodies having jurisdiction. (m) NO ADVERSE CLAIMS: There are no adverse claims by any third party in respect of the Shares. 4. NO ACTION TO PREVENT TRANSFER: The Company and the Principal jointly and severally agree that they will not assert any adverse claim in respect of the Shares or otherwise attempt to impede the sale, assignment, transfer or other disposition of the Shares. 5. NON-MERGER OF REPRESENTATIONS AND WARRANTIES: All of the foregoing representations and warranties are or shall be true and correct at the date of this agreement and at the date of the issue of the Shares to Subscriber pursuant to this agreement. Such representations and warranties shall not merge on the closing of the transactions contemplated hereby, shall survive the completion of the sale of the Shares to Subscriber. 6. ENTIRE AGREEMENT: Except as expressly set forth herein, this agreement constitutes the entire agreement between the parties relating to the subject matter and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties. - 5 - 7. SUCCESSORS AND ASSIGNS: The provisions of this agreement shall, except as otherwise provide herein, enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns and each and every person so bound shall make, execute and deliver all documents necessary to carry out this agreement. 8. SEPARATE COUNTERPARTS: This agreement may be executed in one or more counterparts each of which when so executed shall be deemed to be an original and such counterparts together shall constitute but one and the same instrument. 9. EXTENDED MEANINGS AND HEADINGS: In this agreement words importing the singular number only shall include the plural and vice-versa and words importing the masculine gender shall include feminine gender and words importing persons shall include firms and corporations and vice-versa. The headings of the paragraphs hereof are inserted for convenience of reference only and shall not affect the interpretation or construction of this agreement. 10. ASSIGNMENT: This agreement may be assigned by the Subscriber to any successor(s) in title to the Shares. 11. GOVERNING LAW: This agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and such laws shall govern even where one or more of the parties hereto may at some time in the future become a resident of a different province or country. - 6 - IN WITNESS WHEREOF the parties hereto have executed this agreement. SIGNED, SEALED & DELIVERED) in the presence of ) ) FIRST PRUDENTIAL INVESTMENT FUND INC. ) ) ) Per: /s/ Donald Appel ) -------------------------- ) Donald Appel, President ) ) GEOGRAPHICS, INC. /s/ Bruce A.R. Benson ) ) ) Per: /s/ Ronald S. Deans ) ---------------------------------- ) Ronald S. Deans, Chairman ) ) ) ) /s/ Ronald S. Deans ---------------------------------- Ronald S. Deans EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE Quarter Ended September 30, --------------------------- 1997 1996 ---- ---- Net income (loss) $(1,977,364) $373,106 Primary weighted average common shares outstanding 9,467,877 9,427,811 Primary earnings per share ($.21) $.04 Fully diluted weighted average common shares outstanding 9,467,877 9,427,811 Fully diluted earnings per share ($.21) $.04 EX-27.1 5 EXHIBIT 27.1
5 9-MOS MAR-31-1998 SEP-30-1997 126,556 0 5,927,922 (756,767) 9,487,798 16,370,252 18,640,103 (5,289,343) 30,207,533 21,631,036 5,365,124 0 0 15,573,434 (12,362,061) 30,207,533 8,363,293 8,363,293 7,018,882 2,887,614 14,288 0 419,873 (1,977,364) 0 (1,977,364) 0 0 0 (1,977,364) (.21) (.21)
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