<PAGE> 1
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 June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 checkmark 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 [ ] No [X]
The Registrant had 9,857,252 shares of common stock, no par value, outstanding
at June 30, 1998
DOCUMENTS INCORPORATED BY REFERENCE
FORM 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 29, 1998
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PART I FINANCIAL INFORMATION................................................................................2
ITEM 1. FINANCIAL STATEMENTS.................................................................2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...........................................................................2
LATE FILINGS; SUBSEQUENT EVENTS AND FILINGS..................................................2
FORWARD-LOOKING STATEMENTS...................................................................2
OVERVIEW.....................................................................................3
SEASONALITY..........................................................................4
QUARTERLY FLUCTUATIONS...............................................................4
RESULTS OF OPERATIONS........................................................................4
SALES................................................................................4
GROSS MARGIN.........................................................................5
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.........................................5
INTEREST EXPENSE.....................................................................5
LIQUIDITY AND CAPITAL RESOURCES..............................................................5
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................6
FOREIGN CURRENCY.............................................................................6
PART II OTHER INFORMATION....................................................................................6
Item 1. Legal Proceedings....................................................................6
Item 2. Changes in Securities and Use of Proceeds............................................7
Item 3. Defaults Upon Senior Securities......................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................................7
Item 5. Other Information....................................................................7
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K......................................................8
SIGNATURES...................................................................................................9
INDEX TO FINANCIAL STATEMENTS...............................................................................10
CONSOLIDATED BALANCE SHEET.................................................................................F-1
CONSOLIDATED STATEMENT OF OPERATIONS.......................................................................F-2
CONSOLIDATED STATEMENT OF CASH FLOWS.......................................................................F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................F-4
</TABLE>
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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 June 30, 1998 (unaudited) and March 31, 1998, the unaudited statements of
operations for the three months ended June 30, 1998 and June 30, 1997, and the
unaudited consolidated statements of cash flows for the three months ended June
30, 1998 and June 30, 1997, 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
consolidated financial statements of the Company and the notes thereto appearing
elsewhere on this Report.
LATE FILINGS; SUBSEQUENT EVENTS AND FILINGS
The Company has not, during the preceding 12 months, timely filed all
reports required to be filed by it pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, despite the fact that it has been subject to
such filing requirements for the past 90 days.
INFORMATION SET FORTH IN THIS FORM 10-Q EXCLUSIVELY COVERS THE COMPANY'S FISCAL
QUARTER ENDED JUNE 30, 1998 AND MUST ONLY BE READ IN CONJUNCTION WITH THE
COMPANY'S MOST RECENT REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Potential investors should realize that material, subsequent developments with
respect to the Company's business, operations and financial condition have
occurred from and after June 30, 1998 and that such developments are more fully
described in each of the following reports filed by the Company on or before
March 19, 1999:
1. Form 10-Q for the period ending December 31, 1998; and
2. Form 10-Q for the period ending September 30, 1998.
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
profits margins; the ability of the Company to increase the size and
capabilities of its accounting department, to implement a management information
system, including an electronic data interchange system, adequate to meet
operations requirements in the future and to improve its internal controls; the
ability of the Company to refinance its existing revolving credit facility, to
identify potential
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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, insufficient market
acceptance of the Company's specialty papers products; unanticipated actions,
including price reductions, by the Company's competitors; unanticipated
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; inability to implement an electronic data
interchange system adequate to support the Company's operations; failure to
realize expected economic efficiencies of the Company's automated production
equipment; unexpected increases in the costs of production as a result of
collective bargaining arrangements; unfavorable determinations of pending
lawsuits or disputes; 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, 1998 and those described from time to time in the Company's
other filings with the Securities and Exchange Commission, press releases and
other communications.
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 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 87% and 78% of the Company's total sales
in the quarter ended June 30, 1998 and the fiscal year ended March 31, 1998,
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 during fiscal
year 1994 to $24,097,845 for fiscal 1998, an increase of 249%.
On May 4, 1998, the Company and its primary lender, U.S. Bank of
Washington, National Association (the "Bank"), executed an Amended and Restated
Asset Purchase Agreement for the sale of the Company's lettering and signage
business (the "Transaction") to Identity Group, Inc., an unaffiliated Tennessee
corporation. The terms governing and the circumstances surrounding the
Transaction were previously disclosed by the Company in a Form 8-K filed with
the Securities and Exchange Commission on June 29, 1998. Such Form 8-K is hereby
incorporated by reference herein and made a part hereof.
Primarily to develop its specialty papers group, the Company has made
substantial investments to expand its facilities, purchase and install automated
production equipment and
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an integrated management information system and enhance administrative and other
infrastructure systems.
Since June 30, 1998, the Company has continued to seek extended payment
terms from its vendors, delayed purchases of raw materials, instituted internal
cost reduction measures and took other steps to conserve operating capital. As
a result, from and after June 30, 1998, the Company has faced the proposition
that its 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 addition, since June
30, 1998, the Company has continued to pursue possible sources of additional
capital, which could include the issuance of debt or equity securities or the
sale of all or part of the Company's assets. However, at the end of the period
ending June 30, 1998, the Company had received no firm commitments with respect
to any such transaction and there can be no assurance that any such transaction
will be identified. 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. See "--Liquidity and Capital Resources."
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
third fiscal quarter, 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.
RESULTS OF OPERATIONS
SALES. Sales decreased 20% to $6,059,978 in the quarter ended June 30,
1998 from $7,608,260 in the quarter ended June 30, 1997. Geopaper products were
responsible for 88% of sales for the quarter ended June 30, 1998, compared to
79% for the same period a year earlier. Sales of Geopaper decreased 11% to
approximately $5,308,438 from approximately $5,884,000 for the periods ended
June 30, 1998 and June 30, 1997, respectively.
Despite the fact that the Company sold its lettering and signage
business during its first quarter, sales of the Company's lettering and signage
products decreased 55% to approximately $751,539 for the quarter ended June 30,
1998 compared to approximately $1,724,109 for the quarter ended June 30, 1997.
International sales of Geographics products were $1,746,621 for the
quarter ended
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June 30, 1998, an increase of 4% over international sales of $1,684,119 for the
quarter ended June 30, 1997. International sales of Geographics products
represented 25% of the Company's total sales for the quarter ended June 30,
1998, compared to 23% of total sales for the same period in the prior year.
GROSS MARGIN.. Gross profit margin as a percentage of sales was 52% for
the quarter ended June 30, 1998, compared to 23% for the same period in the
prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
shipping, general and administrative expenses, which consist of payroll,
advertising, commissions, administrative, accounting, legal and other costs,
decreased as a percentage of sales during the quarter ended June 30, 1998 to
44%, as compared to 53% during the same period in the prior year. The decrease
as a percentage of sales was primarily the result of decreased costs associated
with advertising and other rebates and promotions to key customers.
INTEREST EXPENSE. The Company's interest expense for the quarter ended
June 30, 1998 decreased 21% to $337,480 compared to $428,324 for the same period
in the prior year. The decrease is mainly due to the $6.8 million pay-down of
the credit line from the sale of the Core Business.
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 1998, the
Company has experienced working capital short-falls which have required the
Company to delay payments to certain vendors, delay purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital. During fiscal 1998, operating losses totaled $8,011,719, and the
Company experienced positive operating cash flows of $1,145,131. During the
quarter ended June 30, 1998, operating income totaled $492,146, and the Company
experienced positive operating cash flows of $7,411,945.
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 $6.0 million
subject to a borrowing base limitation of 70% 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.
The Company's Consolidated Financial Statements for the fiscal year
ended March 31, 1998 (as well as the Unaudited Consolidated Financial Statements
for the fiscal quarter ended June 30, 1998 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.
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The Company entered into a third forbearance agreement with its lender,
effective May 1, 1998, pursuant to which the lender agreed to extend the
expiration date of the revolving credit facility to November 30, 1998.
Although the Company's lender has permitted borrowings under the
revolving credit facility, however, there can be no assurance that it will
continue to do so. Accordingly, for the foreseeable future the Company will
continue to seek extended payment terms from its vendors, delay purchases of
raw materials, institute 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 addition, the Company is pursuing
possible sources of additional capital, which could include the issuance of
debt or equity securities or the sale of all or part of the Company's assets.
However, as of the end of the quarter ended June 30, 1998, the Company had
received no firm commitments with respect to any such transaction and there can
be no assurance that any such transaction will be identified. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY
Substantially all of the revenue and operating expenses of the Company's
foreign subsidiaries are denominated in local currencies and translated into US
dollars at rates of exchange approximating those existing at the date of the
transactions. Foreign currency translation impacts primarily revenue and
operating expenses as a result of foreign exchange rate fluctuations. The
Company's foreign currency transaction risk is primarily limited to amounts
receivable from its foreign subsidiaries, which are denominated in local
currencies. To minimize foreign currency transaction risk, the Company ensures
that its foreign subsidiaries remit amounts to the US parent in a timely manner.
Foreign country short-term borrowing facilities are utilized where necessary to
ensure prompt payments. The Company does not currently utilize foreign currency
hedging contracts.
If the US dollar uniformly increases in strength by 10% in 1999 relative
to the currencies in which the Company's sales are denominated, income before
taxes would decrease by $100,000.00 for the fiscal year ending March 31, 1999.
This calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting
sales, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency prices.
INFLATION
Although the Company cannot accurately anticipate the effects of
inflation on its financial condition or operations, the Company does not
believe inflation has had or is likely to have a material effect on its
results, operations or liquidity.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In its Form 10-Q filed with the Securities and Exchange Commission on
April 29, 1998 for the period ending December 31, 1997, the Company reported
that in July 1997, three related class actions were filed against it, its
Chairman of the Board and its Chief Executive Officer. These suits alleged
various violations by the named defendants of the Securities Exchange Act of
1934, as amended. As at the end of the Company's fiscal quarter ending June 30,
1998, these suits had not been resolved.
In addition to the litigation matter described above, the Company is
subject to additional claims and actions incident to the operation 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 adverse
effect on the Company's business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As has been previously reported by the Company, the Company has, since
May 1997, failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under its existing revolving credit facility with its
lender. As at June 30, 1998, borrowings under the Company's revolving credit
facility aggregated approximately $4,275,178. 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 Company has previously reported that these defaults,
coupled with its fiscal year 1998 losses, raise substantial doubt about the
Company's ability to continue as a going concern.
In May 1998, the Company requested and received a forbearance agreement
with its lender pursuant to which the lender agreed to extend the expiration
date of the revolving credit facility to November 1, 1998 and to forbear from
asserting its rights with respect to the Company's non-compliance with the
revolving credit facility's financial covenants. Although the Company's lender
has permitted borrowings under the revolving credit facility in excess of the
borrowing base limitations set forth in the agreement, there can be no assurance
that the lender will continue to allow such borrowings to occur. Over the course
of the fiscal quarter ending June 30, 1998, the Company continued to evaluate
additional sources of working capital in order to finance its ongoing business
operations. The Company is firmly committed to continuing that process for the
remainder of the 1999 fiscal year. In addition, the Company continues to have
ongoing discussions with its lender regarding the execution of a new forbearance
agreement and/or a complete restructuring of its obligations under its existing
revolving credit facility. See "Management's Discussion of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
In its Form 10-Q filed with the Securities and Exchange Commission on
April 29, 1998, for the period ending December 31, 1998, the Company reported
the establishment of a special committee of the Company's board of directors to
investigate the performance and conduct of management. As at June 30, 1998, the
special committee had not completed its work with respect to these matters.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Report:
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.1 Third Forbearance Agreement, between U.S. Bank, N.A. and Geographics,
Inc., dated May 1, 1998.
</TABLE>
B. The following Current Reports on Form 8-K were filed by the
Company during the period covered by this Report:
1. Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 29, 1998
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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 18th day of
March, 1999.
GEOGRAPHICS, INC.
By: /s/ Richard C. Gockelman
-------------------------------------
Richard C. Gockelman
President and Chief Executive Officer
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INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998 F-1
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997 F-2
Consolidated Statements of Cash Flows for the three months ended
June 30, 1998 and 1997 F-3
Notes to Consolidated Financial Statements F-5
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GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998 AND MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1998 MARCH 31, 1998
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 190,339 $ 316,078
Accounts receivable
Trade receivables, net 3,644,433 4,164,861
Other receivables 271,516 148,050
Inventory, net of allowance for obsolete inventory of $486,547
and $586,000 at March 31, 1998 5,344,345 6,763,508
Prepaid expenses, deposits, and other current assets 947,102 731,307
------------- -------------
Total current assets 10,397,735 12,123,804
PROPERTY, PLANT AND EQUIPMENT, NET 12,480,662 12,881,118
OTHER ASSETS 372,688 340,043
------------- -------------
TOTAL ASSETS $ 23,251,085 $ 25,344,965
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 198,943 $ 301,716
Note payable to bank 4,275,177 11,300,808
Accounts payable 3,223,934 3,285,467
Accrued liabilities 2,381,453 2,680,594
Notes payable to officers and directors -- --
Current portion of long-term debt 3,350,344 3,350,344
------------- -------------
Total current liabilities 13,429,852 20,918,929
------------- -------------
LONG-TERM DEBT 4,517,712 4,853,254
------------- -------------
Total liabilities $ 17,947,564 $ 25,772,183
------------- =============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
No par common stock--100,000,000 authorized, 9,857,252 and
9,857,252 issued and outstanding at June 30, 1998 and March
31, 1998, respectively 15,759,353 15,769,018
Foreign currency translation adjustment 33,899
Retained earnings (accumulated deficit) (10,455,831) (16,230,135)
------------- -------------
Total stockholders' equity 5,303,522 (427,218)
============= =============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,251,085 $ 25,344,965
============= =============
</TABLE>
See Accompanying Notes to These Financial Statements.
F-1
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GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30
1998 1997
----------- -----------
<S> <C> <C>
SALES $ 6,059,978 $ 7,608,260
COST OF SALES 2,887,185 5,893,368
----------- -----------
Gross margin 3,172,793 1,714,892
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,680,647 4,003,301
----------- -----------
Income from operations 492,146 (2,288,409)
OTHER INCOME (EXPENSE)
Interest Expense (337,480) (428,324)
Other (14,473) (19,040)
----------- -----------
(353,053) (447,364)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 139,093 (2,735,772)
INCOME TAX PROVISION
----------- -----------
PROCEEDS FROM SALE OF CORE BUSINESS 5,657,580 --
NET INCOME $ 5,796,673 $(2,735,772)
=========== ===========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
BASIC $ .59 $ (0.29)
----------- -----------
DILUTED .59 (0.29)
----------- -----------
SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
BASIC 9,857,252 9,467,877
----------- -----------
DILUTED $ 9,857,252 $ 9,467,877
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-2
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GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,796,673 $(2,735,772)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES
Depreciation and amortization 432,261 428,205
Deferred income taxes -- --
(Gain) loss on sales of property and equipment -- 1,740
Reserve for impairment on EDP installation-in-progress
Changes in Non-cash Operating Assets and Liabilities
Trade receivables 520,428 (478,793)
Related party receivables -- --
Other receivables (123,466) 108,987
Inventory 1,419,163 755,698
Prepaid expenses, deposits and other current assets (248,440) (336,962)
Accounts payable (61,533) 1,145,755
Accrued liabilities (323,141) 3,524
Income tax payable -- --
----------- -----------
Net cash flows from operating activities 7,411,945 (1,107,618)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdrafts (102,772) 331,314
Net borrowings on note payable to bank (7,025,631) 2,598,835
Proceeds from long-term debt borrowings -- --
Repayment of long-term debt (335,542) (281,884)
Repayments of notes payable to officers and directors -- (850,000)
Net Proceeds (costs) from issuance of common stock -- --
Foreign currency translation (41,933) (41,506)
----------- -----------
Net cash flows from financing activities (7,505,878) 1,756,175
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (31,808) (674,956)
Proceeds from sales of equipment -- --
Net advances from (repayments to) partnerships -- --
Change in other assets (49,977)
----------- -----------
Net cash flows from investing activities (31,808) (724,934)
----------- -----------
NET CHANGE IN CASH (125,740) (76,376)
CASH, beginning of quarter 316,078 408,757
----------- -----------
CASH, end of quarter $ 190,339 $ 332,381
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ 0 $ 1,677,918
</TABLE>
See Accompanying Notes to These Consolidated Financial Statements
F-3
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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, 1998.
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.
Reclassifications - Certain prior year amounts have been reclassified to
conform to current Year presentations. Such reclassifications had no effect on
previously reported Earnings or financial position.
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 April 1999. The
minimum lease commitment is $64,770 in 1999.
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.
<PAGE> 16
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
financial position, results of operations or liquidity.
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.
NOTE 3--GOING CONCERN
As a result of the $8,649,618 loss incurred by the Company for the year
ended March 31, 1998, the report of the Company's auditors, dated September 22,
1998, relating to the Company's Consolidated Financial Statements for the year
ended March 31, 1998 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 this uncertainty.
The Company's lender has permitted borrowings under the Company's
revolving credit facility, there can be no assurance that it will continue to do
so. Accordingly, the Company is continuing to seek extended payment terms from
its vendors, delaying purchases of raw materials, 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 addition, the
Company is 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.
<PAGE> 1
THIRD FORBEARANCE AGREEMENT
The effective date of this Agreement is May 1, 1998. The Parties to
this Agreement are U.S. Bank National Association ("Bank"), Geographics,
Inc. ("Borrower"), and Geographics Marketing Canada and Martin
Distributing, Inc. (jointly and severally "Guarantors").
THIS AGREEMENT IS MADE WITH RESPECT TO THE FOLLOWING RECITALS. THE TRUTH,
ACCURACY AND COMPLETENESS OF EACH OF THE RECITED FACTS IS EXPRESSLY
ACKNOWLEDGED BY THE PARTIES, AND THIS ACKNOWLEDGEMENT IS INTENDED TO BE
CONTRACTUALLY BINDING UPON THE PARTIES.
A. Geographics is currently indebted to Bank under a promissory note dated
August 30, 1996, and a related business loan agreement pursuant to which
the Bank provided Geographics a Revolving Line of Credit in the maximum
amount of $12,000,000 (the "Revolving Loan"). In addition to the Revolving
Loan, Geographics is indebted to Bank for various real estate and
equipment loans (the "Term Loans"). The amounts owed on the Revolving Loan
and the Term Loans as of April 23, 1998 (not including attorney fees) are
set forth on attached Exhibit A to this Agreement. The Bank has continued
to make advances under the Revolving Loan pending execution of this Third
Forbearance Agreement. Further, interest, fees and other charges continue
to accrue on the Revolving Loan and the Term Loans. Geographics' entire
indebtedness to the Bank shall be referred to herein as the
"Indebtedness."
B. The Indebtedness is secured by security interests in substantially all of
Geographics' assets, including but not limited to accounts, inventory,
equipment, and general intangibles, and specifically including the Core
Business Assets defined below.
C. Guarantors have guaranteed all of Geographics' Indebtedness to the Bank,
which guarantees remain outstanding.
D. The Revolving Loan and the Term Loans are in default, and the Bank has
declared all of the Indebtedness, including principal and accrued but
unpaid interest, to be immediately due and payable. Geographics and the
Guarantors hereby acknowledge that the Loans are in default, that the
Indebtedness is currently due and owing, and that there are no defenses or
offsets that exist to the repayment of said Indebtedness.
E. Bank and Geographics entered into prior Forbearance Agreements, under
which the Bank agreed to forbear from the exercise of its rights and
remedies as a result of the defaults described above. The most recent such
agreement ("Second Forbearance Agreement") expired on April 15, 1998.
THIRD FORBEARANCE AGREEMENT -- Page 1
<PAGE> 2
F. Borrower and Guarantors have requested that the Bank further forbear for a
period of time from the exercise of its rights and remedies as a result of
the events of default described above. Bank is willing to forbear for a
limited time only if Geographics cooperates in the Bank's foreclosure sale
of Geographics "Core Business" assets as described below.
G. Geographics, 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
"Core Business"). In addition to the Core Business, Geographics operates a
"Specialty Paper Business," which is engaged in the development,
manufacture, marketing and distribution of designer stationery, business
cards, brochures, letterhead, memo pads and paper cubes. For over a year,
Geographics has been attempting to sell the Core Business. After
considering all offers, Geographics agreed in December 1997 to sell the
assets associated with the Core Business to Identity Group, Inc.
("Identity"). The parties reached agreement on price and terms. However,
Geographics has determined it will be unable to satisfy all of the
conditions in the offer by the closing deadline.
H. At the time the parties entered into the Second Forbearance Agreement, it
was expected that Geographics would close the sale to Identity prior to
expiration of the second forbearance period on April 15, 1998. Geographics
has been in default for almost a year. The Bank is unwilling to continue
financing Geographics' operations without a prompt paydown of the
Indebtedness. To avoid losing the sale to Identity, the Bank has demanded
Geographics' cooperation in allowing the Bank to foreclose on the Core
Business assets through private sale to Identity pursuant to RCW
62A.9-504.
I. Geographics desires to continue the Specialty Paper Business whether or
not the Core Business is sold. Geographics intends to block the
foreclosure sale to Identity (by filing Chapter 11, if necessary) unless
the Bank agrees to provide post-sale financing for a period of up to six
months on the terms set forth below. Geographics believes this will give
it a chance to refinance its obligations to the Bank, to convince the Bank
to extend further financing accommodations, or to otherwise satisfy its
obligations to the Bank.
NOW THEREFORE IT IS HEREBY AGREED:
1. Acknowledgment of Default. On and as of the date hereof: (i)
material events of default existed and continue to exist under the Revolving
Loan and the Terms Loans, including, without limitation, those events of default
identified in the Recitals to this Forbearance Agreement; (ii) timely, adequate
and proper notice of the occurrence of such Existing Defaults ("collectively,
"the Existing Defaults") has been received by the Borrower and Guarantors from
the Bank (and Borrower and Guarantor waive any requirement that any such notice
be in writing); (iii) all grace periods, if any, applicable to the cure of
defaults after receipt of such notices have expired; (iv) each of the Existing
Defaults was and is continuing without timely cure by Borrower; and (v) Bank had
not and has not waived, in any respect, any or all the Existing Defaults or its
respective rights and remedies with respect thereto.
THIRD FORBEARANCE AGREEMENT -- Page 2
<PAGE> 3
2. Acknowledgment of Bank's Right to Accelerate. On and as of the
date hereof, the Bank has accelerated and declared the Indebtedness evidenced by
the Revolving Loan and Term Loans to be immediately due and payable and has made
demand upon Borrower and Guarantor for the full payment of all such
Indebtedness. Such acceleration and demand for payment, is in all respects
adequate and proper. Borrower and Guarantor waive any and all further notice,
presentment, and notice of dishonor or demand with respect to such Indebtedness.
3. Acknowledgment of Indebtedness. On and as of the date hereof,
Borrower is indebted to the Bank in the amounts set forth in the Recitals to
this Forbearance Agreement, together with additional advances made from April
23, 1998 to date. All such amounts remain outstanding and unpaid. All such
amounts are due and payable in full, without offset, deduction or counterclaim
of any kind or character whatsoever, but are subject to increase or other
adjustment as a result of any and all interest, fees, and other charges,
including without limitation, attorneys fees and costs of collection, which are
payable to the Bank under the Revolving Loan and Term Loan documents.
4. Forbearance. On the terms and conditions as set forth in this
Forbearance Agreement, Bank shall forbear from taking any action to enforce its
rights under the Revolving Loan and Term Loans, arising from the Existing
Defaults, through November 1, 1998 ("Forbearance Period").
5. Conditions of Forbearance. The Forbearance Period shall
terminate upon the earliest occurring of any of the following:
(a) The end of the Forbearance Period;
(b) Any default by the Borrower or the Guarantors under this
Forbearance Agreement;
(c) Any default by the Borrower or the Guarantors under the
Term Loans or the Revolving Loan (as modified hereby) after the date
of this Agreement, or under the Core Business Collateral Surrender
and Foreclosure Agreement (hereafter, "Collateral Surrender
Agreement) executed by the parties contemporaneously herewith;
(d) Failure of the Bank's private foreclosure sale of the
Core Business Assets to Identity to close (and Bank to receive all
net sale proceeds) on or before May 6, 1998.
6. Forbearance on Default Interest. Bank further will forebear on
collection of all default interest now accrued and/or owing under the Revolving
Loan on the following conditions:
(a) If there is no default under this Forbearance Agreement,
such default interest shall be waived and forgiven.
THIRD FORBEARANCE AGREEMENT -- Page 3
<PAGE> 4
(b) If there is a default under this Forbearance Agreement,
or under the Collateral Surrender Agreement, such default interest
shall be immediately due and payable in full.
7. Extension of Revolving Loan. During the Forbearance Period,
the Revolving Loan shall continue under its current terms and conditions with
the following modifications:
(a) All Indebtedness thereunder shall be due and payable
without demand on the earlier of the end of the Forbearance Period
or November 1, 1998.
(b) During the months of May, June and July 1998, the
maximum amount of the Revolving Loan shall not exceed $5,500,000.
During the months of August, September and October 1998, the maximum
amount of such Loan shall not exceed $6,000,000. At all times during
the Forbearance Period, the maximum amount of the Revolving Loan
advanced against eligible inventory shall not exceed $3,500,000.
(c) The advance rate against eligible accounts receivable
shall be reduced to 70%.
(d) During the months of August and September 1998, the
Bank, in its sole discretion, will consider increasing the maximum
amount of the Revolving Loan up to $7,500,000 on the following
conditions:
(i) Such increase shall be considered only to enable
Borrower to fill identified purchase orders for seasonal
sales.
(ii) Borrower must be in compliance with its
obligations under this Agreement.
(iii) Advances will be made under the Revolving Loan
only if it is in formula. However, the Bank will consider
increasing the advance rate against identified accounts
receivable for seasonal inventory sales which are not subject
to charge-back, volume discount, rebate or other reduction.
(e) All other provisions and limitations in the "Operating
Provisions Accounts Receivable and Inventory Secured Lines" attached
as Exhibit B and incorporated herein by reference shall apply.
(f) Notwithstanding any prior course of dealing between the
parties, the Bank shall not make or permit any overadvances under
the Revolving Loan beyond the maximum amounts available under the
terms of this Third Forbearance Agreement.
8. It is expressly understood and agreed that upon the maturity
of the Indebtedness on November 1, 1998, or earlier acceleration of the
Indebtedness as provided for herein, all such Indebtedness shall be immediately
payable in full, AND BANK SHALL HAVE NO FURTHER OBLIGATIONS OR COMMITMENTS TO
BORROWER TO EXTEND,
THIRD FORBEARANCE AGREEMENT -- Page 4
<PAGE> 5
RENEW OR REFINANCE ANY OF SUCH INDEBTEDNESS, REGARDLESS OF ANY RENEWALS,
EXTENSIONS OR FLEXIBILITY WHICH BANK MAY IN GOOD FAITH AND FAIR DEALING HAVE
PREVIOUSLY ALLOWED IN CONNECTION WITH SUCH INDEBTEDNESS.
9. Acknowledgment that Agreements Continue in Full Force and
Effect. The Revolving Loan and Term Loans, and all notes, security agreements,
trust deeds and other agreements related thereto, shall, except as expressly
modified herein during the forbearance period, remain in full force and effect,
and shall not be released, impaired, diminished, or in any other way modified or
amended as a result of the execution and delivery of this forbearance agreement.
10. Grant of Cross Security. All of the security agreements, deeds
of trust, and other security instruments and collateral which secure the
Revolving Loan, Term Loans and guarantees shall continue to remain in full force
and effect and each shall secure repayment of all Indebtedness and obligations
owed by Borrower and Guarantors, respectively to the Bank, including those
obligations arising under this Forbearance Agreement.
11. Further Cooperation. Borrower and Guarantors agree to
cooperate fully and to take all further actions and to execute all further
instruments that Bank deems necessary or appropriate to carry out the purposes
of this Agreement.
12. Cross Default. Any failure by Borrower to observe and perform
any of the covenants or agreements contained herein or in any other agreement
between the Borrower and the Bank will constitute an event of default under this
Agreement and each other agreement between Borrower and the Bank. Upon the
happening of any event of default, the Bank shall have the right to demand
immediate payment of any and all Indebtedness owing to it by the Borrower and
the Guarantors and to exercise any or all of its rights under the law and
pursuant to the terms of this Agreement and all of the other agreements in
effect between the parties.
13. No Waiver. Any waiver by the Bank of a default in any of the
terms and conditions of this Agreement or in any other agreement referred to
herein shall not be deemed a waiver of any subsequent or other default or of any
of the Bank's rights as a result of breaches or defaults by the Borrower.
14. Except as modified or supplemented hereby and except as
inconsistent herewith, all unexpired prior agreements entered into between the
parties hereto remain in full force and effect pursuant to their original terms
and said agreements are hereby ratified and confirmed.
15. Each and every word and portion of this Agreement is
contractual and not merely a recital. This Agreement may not be amended or
supplemented, canceled or discharged and no provision hereof may be waived,
except by subsequent written agreement between the parties.
THIRD FORBEARANCE AGREEMENT -- Page 5
<PAGE> 6
16. Borrower acknowledges that, in general, borrowers who
experience difficulties honoring loan obligations, in an effort to inhibit or
impede lenders from exercising the rights and remedies available pursuant to
mortgages, notes, loan agreements or other instruments evidencing or affecting
loan transactions, frequently allege or argue that some loan officer or
administrator of a lender made an oral modification or made some statement which
could be interpreted as a consent, waiver, extension, modification or amendment
of one or more debt instruments or could be interpreted as an agreement to take
or forbear from taking some action and that the borrower relied to its detriment
upon such consent, waiver, oral modification or statement. For that reason, and
in order to protect the Bank from such allegations and arguments in connection
with the transactions contemplated by this Agreement, it is agreed and
acknowledged that all instruments referred to herein or executed or delivered in
connection herewith can be extended, modified or amended, and a consent or
waiver can be given and an agreement can be altered or entered into, only in
writing. None of the rights, powers, remedies or benefits of the Bank can be
released, waived, extended, modified or amended and no consent can be given or
any agreement altered or entered into except in writing signed by an agent of
the Bank. Borrower further acknowledges its understanding that no officer or
employee of the Bank has the power or authority to make an oral consent or an
oral release, extension, modification or amendment in respect to this Agreement
or of any of the documents referred to herein or executed or delivered in
connection herewith or to make any oral waiver or to alter or enter into any
oral agreement on behalf of the Bank.
17. This writing is intended by the parties as a final and
complete expression of this Agreement and of all matters relating to this
Agreement. No prior course of dealing or negotiations between the parties, and
no oral or extrinsic evidence of any nature shall be used to supplement or
modify any term of this Agreement.
18. In the event any suit or action is instituted to enforce or
interpret any of the terms of this Agreement, including any action or
participation in or in connection with a case or proceeding under any Chapter of
the Bankruptcy Code or any successor statute, the prevailing party shall be
entitled to such sum as the court may adjudge reasonable as attorney fees and
costs in such suit, action or proceeding, or upon any appeal from any judgment,
order or decree entered therein, and whether or not such fees and costs are
prescribed by statute. Whether or not any court action is involved, Borrower
agrees to pay all reasonable attorney fees and costs incurred by the Bank that
are necessary at any time in the Bank's opinion for the protection of its
interests or enforcement of its rights hereunder.
19. Each and every right, remedy and power hereby granted to the
Bank or allowed it by law or other agreement, shall be cumulative and shall not
be exclusive of any other rights, remedy and power and may be exercised
concurrently, consecutively or separately by the Bank. No failure nor neglect on
the part of the Bank to exercise and no delay in exercising any right, remedy or
power hereunder, under any other agreement, any other document, or by law, shall
in any way release or reduce Borrower's liability to the Bank hereunder, or in
any way reduce, condition or limit Borrowers obligations hereunder.
THIRD FORBEARANCE AGREEMENT -- Page 6
<PAGE> 7
20. The Bank and Borrower intend that their relationship shall be
solely that of creditor and debtor. Nothing contained herein or in any document
referred to herein or executed or delivered in connection herewith shall be
deemed or construed to create a partnership, tenancy-in-common, joint tenancy,
joint venture or co-ownership by or between the Bank and Borrower. The Bank
shall not be in any way responsible or liable for the debts, losses, obligations
or duties of Borrower with respect to its business or otherwise. All obligations
to pay real property or other taxes, assessments, insurance premiums, and all
other fees and charges arising from the ownership, operation, or occupancy of
the business and property of Borrower, and to perform all other agreements and
contracts relating thereto, shall be the sole responsibility of Borrower
consistent with the terms and provisions of this Agreement and the documents
referred to above, Borrower shall be free to determine and follow its own
policies and practices in the conduct of its respective business.
21. Borrowers, Guarantors and the Bank acknowledge and agree that
the parties may, in the sole discretion of the Bank, discuss various means for
repayment of the Indebtedness owing to the Bank, and that Borrower may enter
into discussions and negotiations with prospective third-party lenders to
Borrower, third-party creditors of Borrower, or potential investors in Borrower
or other third persons. If Borrower asks the Bank to enter into or participate
in any such discussions or negotiations, Borrower agrees that the Bank may, in
the course of such discussions, reveal information about the Borrower that would
normally be considered confidential between the Bank and the Borrower. Borrower
agrees that, if such discussions do take place, they shall in no way obligate or
commit the Bank to agree to any secured or unsecured financing, to subordinate
any lien or to release any collateral, to lend any additional funds to Borrower,
to extend any other form of credit to Borrower, to forbear from exercising any
rights, powers and remedies of the Bank, or to provide any letters of credit or
other credit support on behalf of Borrower. Borrower waives, releases and
discharges any right it may have to assert any claim or contention that the Bank
has made any oral or written offer, promise, or commitment to cooperate with any
third-party lender to Borrower or third-party creditor of Borrower, or any other
third person, to agree to any secured or unsecured financing or to otherwise
subordinate any lien or to release any collateral, to lend any additional funds
to Borrower or provide any other form of credit to Borrower, to forbear from
exercising any rights, powers and remedies of the Bank, to provide any letters
of credit or other credit support on behalf of Borrower, or to take (or refrain
from taking) any other action whatsoever with respect to Borrower, except as
provided in this Agreement.
22. The parties declare that they have been advised by counsel in
connection with the execution of this Agreement and acknowledge that they are
not relying on any representations or advice of the Bank or its lawyers, that
they are not acting under any misrepresentation or misapprehension as to this
Agreement's legal effect, and that this Agreement has not been executed under
duress.
23. It is understood that the rule of construction that a written
agreement is construed against the party preparing or drafting such agreement
shall specifically not be applicable to the interpretation of this Agreement.
THIRD FORBEARANCE AGREEMENT -- Page 7
<PAGE> 8
24. All the covenants, agreements, conditions and terms contained
in this Agreement shall be binding upon, apply, and inure to the benefit of the
successors and assigns of the respective parties hereto.
25. The laws of the State of Washington shall govern the rights,
liabilities, duties and responsibilities of the parties. At Bank's request, and
subject to the provisions on Mandatory Arbitration below, if there is a lawsuit,
Borrower and/or Guarantor shall submit themselves to the exclusive jurisdiction
of the courts of King County, State of Washington.
26. Mandatory Arbitration. Lender and Borrower agree that all
disputes, claims and controversies between them, whether individual, joint, or
class in nature, arising from this Agreement or otherwise, including without
limitation contract and tort disputes, shall be arbitrated pursuant to the Rules
of the American Arbitration Association, upon request of either party. No act to
take or dispose of any Collateral shall constitute a waiver of this arbitration
agreement or be prohibited by this arbitration agreement. This includes, without
limitation, obtaining injunctive relief or a temporary restraining order;
invoking a power of sale under any deed of trust or mortgage; obtaining a writ
of attachment or imposition of a receiver; or exercising any rights relating to
personal property, including taking or disposing of such property with or
without judicial process pursuant to Article 9 of the Uniform Commercial Code.
Any disputes, claims or controversies concerning the lawfulness or
reasonableness of any act, or exercise of any right, concerning any Collateral,
including any claim to rescind, reform, or otherwise modify any agreement
relating to the Collateral, shall also be arbitrated, provided however that no
arbitrator shall have the right or the power to enjoin or restrain any act of
any party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
27. This Agreement may be executed in counterparts, each of which
when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Any
counterpart that may be delivered by facsimile transmission shall be deemed the
equivalent of an originally signed counterpart and shall be fully admissible in
any enforcement proceeding regarding this Agreement.
28. Release. As additional consideration to the Bank for entering
into this Agreement, Borrower and Guarantors hereby release and forever
discharge to the Bank, its officers, directors, employees, agents, successors
and assigns, from any and all liability, or claims of liability, whether known
or unknown, of whatsoever nature arising out of or based in whole or in part
upon any agreement, act, or omission of the Bank, or of any person or entity
acting, or purporting to act on behalf of the Bank, occurring prior to the
effective date of this Agreement.
29. Time is of the essence under this Forbearance Agreement
THIRD FORBEARANCE AGREEMENT -- Page 8
<PAGE> 9
30. Borrower's Representations and Warranties. Borrower represents
and warrants to Bank as of the date of this Agreement :
(a) Organization. Borrower is a corporation which is duly
organized, validly existing, and in good standing under the laws of
the State of Washington. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is
duly qualified as a foreign corporation and is in good standing in
all states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
(b) Authorization. The execution, and performance of this
Agreement and all related documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of its articles
of incorporation or organization, or bylaws, or any agreement or
other instrument biding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
(c) Legal Effect. This Agreement constitutes, and any
instrument or agreement required hereunder to be given by Borrower
when delivered will constitute, legal, valid and binding obligations
of Borrower enforceable against Borrower in accordance with their
respective terms.
(d) Survival of Representations, Releases and Warranties.
Borrower understands and agrees that Bank is relying upon the above
representations, releases and warranties in entering into this
Forbearance Agreement. Borrower further agrees that the foregoing
representations, releases and warranties shall be continuing in
nature and shall remain in full force and effect until such time as
Borrower's obligations to Bank shall be paid in full.
31. No Representations or Warranties by Lender. Except as
expressly set forth herein, the Bank makes no representations, warranties,
promises, or commitments to loan money, extend credit, or forbear from enforcing
repayment in connection with any of the documents or transactions contemplated
hereunder. The Borrower and the Guarantors acknowledge that they have received
the following notice:
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
TO FORBEAR FROM ENFORCING REPAYMENT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
BORROWER AND GUARANTORS ACKNOWLEDGE RECEIPT OF A COPY OF THIS
AGREEMENT.
THIRD FORBEARANCE AGREEMENT -- Page 9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this FORBEARANCE
AGREEMENT as of the date first written above.
GEOGRAPHICS, INC. GEOGRAPHICS MARKETING CANADA
By: ______________________________ By: _________________________________
Ronald S. Deans
Chairman/CEO Its: _________________________________
U.S. NATIONAL BANK,
NATIONAL ASSOCIATION MARTIN DISTRIBUTING, INC.
By: ______________________________ By: _________________________________
Roger Lundeen
Its: _____________________________ Its: _________________________________
THIRD FORBEARANCE AGREEMENT -- Page 10
