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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
For the Fiscal Quarter Ended: December 31, 1998
Commission File Number: 0-26756
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GEOGRAPHICS, INC.
(Exact name of registrant as specified in its charter)
WYOMING 87-0305614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1755, BLAINE, WA 98231
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(Address of principal executive office and zip code)
(360) 332-6711
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
The registrant had 9,857,252 shares of common stock outstanding as of
December 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Geographics, Inc. (the "Company" or "Geographics") has attached to this
Report and by this reference incorporated herein the consolidated balance sheets
as of December 31, 1998 (unaudited) and March 31, 1998 (audited), the unaudited
statements of operations for the three months ended December 31, 1998 and
December 31, 1997, and the unaudited consolidated statements of cash flows for
the three months ended December 31, 1998 and December 31, 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 DECEMBER 31, 1998 AND MUST ONLY BE READ IN CONJUNCTION WITH THE
COMPANY'S MOST RECENT REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
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 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
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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, 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 only business for that quarter, with approximately
100% and 95% of the Company's total sales in the quarter ended December 31, 1998
and the year ended March 31, 1998, respectively, attributable to sales of
Geopaper products.
Upon arrival of the new management on July 27, 1998, it was determined
that no action had been taken to engage the company's auditors to perform the
annual audit for the fiscal year ended March 31, 1998. The new management
immediately moved to engage the company's auditors on July 27, 1998 to begin the
audit, which was completed on September 22, 1998. The audit was complicated by a
number of contingent liabilities that required considerable investigation.
The auditors recommended and the company established additional
reserves totaling $1,265,000 to more accurately reflect the market value of
inventories and receivables, fixed assets and other contingent claims.
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The audit report also reported the company was not in compliance with
covenants under its revolving credit facility, which caused them to qualify
their opinion as to the Company's ability to continue as a going concern.
On August 1, 1998, the new management provided a written request to the
former president and chief executive officer, Ronald S. Deans, who was then
still employed by the Company and asked for detailed explanations for a number
of the issues that had been previously been raised and identified in the
company's Form 10-Q for the period ending December 31, 1997, which was filed on
April 29, 1998.
The former Board of Directors had conducted an extensive investigation
on several of these matters, including improperly reimbursed expenses;
withholding taxes that had not been paid on stock options exercised in January
1996, and certain securities transactions involving the company's common stock.
In addition to the issues previously identified in the Form 10-Q of April 29,
1998 for the December 31, 1997 period, new management discovered a number of
additional potential issues that were included in the August 1, 1998
request which Mr. Deans, the former president and CEO did not answer in a
satisfactory or complete manner.
The new management's evaluation of these unexplained issues and
liabilities was handicapped by a lack of proper corporate records, including the
absence of corporate meeting minutes in order to judge the decisions and
authorization of the Board regarding each of the issues identified by the new
management.
The new management judged each of these liabilities to be potentially
quite significant, and in the opinion of the new management required prompt
resolution and proper disclosure. The former management provided insufficient
information to enable the new management to bring these matters to a proper
conclusion.
Throughout the entire period, it was impractical for the new management
or its counsel to complete its required periodic filings, as the contingent
liabilities that had been identified were not fully examined, understood or
correctly documented. The Company had not been in proper reporting compliance
and the then existing conditions of the Company's records, coupled with the poor
cooperation of prior management, made proper filings of the Form 10-K and 10-Qs
an impractical matter. A substantial portion of the Company's resources and the
attention of its new management were forced into an otherwise unnecessary effort
to clearly understand the manner in which each of these liabilities was created,
the financial impact upon the Company, the potential legal exposure and the
materiality of such information. 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
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
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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
The Company's financial health was considerably anemic upon the
election of its new management. Prior management allowed an excessive amount of
old trade payables to accumulate and which required immediate attention so as to
prevent a considerable number of outside suppliers and vendors from converting
their extended payables into a series of lawsuits. Due to the ineffectiveness of
the then existing Management Information System ("MIS"), particularly the EDI
process, some $513,255 of otherwise good receivables had been written-off since
at that time, the EDI system was incapable of allowing the Company to properly
reconcile its records. In addition, the Company's product and market planning
was investing critically short cash resources into product inventory investments
for which there was very poor or almost no positive cashflow benefit. The
Company had made a practice of capitalizing its investments in merchandise racks
provided to customers and depreciating them over a number of years. The
effective useful life of such merchandise racks, in practical terms, is probably
not much more than a one-year period and the long-term depreciation approach had
the effect of maintaining an artificial asset value. The Company had begun to
focus its attention on inventory management through a more disciplined and
structured manufacturing, planning and control process. This effort had been
complicated by virtue of the non-integrated manner of the then operating MIS
systems. As part of the effort to improve the Company's inventory management
system, the Company had begun to focus its attention on the work-in-process
segment of its inventories which had traditionally been the source of its
inventory problems.
The Company initiated a reorganization of its Operations Group in
November, 1998 with the principal intention of creating a plant management
control system, with fewer supervisors and more sharply defined areas of
accountability and responsibility. The operating and manufacturing organization
that had been in place prior to the new management functioned in a largely
uncoordinated and a nonintegrated manner in which there was no uniformity with
respect to controlling the entire manufacturing process. A substantial portion
of the operating equipment installed in connection with prior management's
capital investment program had not attained optimum production rates and
performance efficiencies. The operations organization at that time lacked any
industrial engineering function and the financial constraints upon the Company
made it difficult for the necessary investments and expenses to be provided.
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The Company's approach to its purchasing function and the management of
its vendor relationships was not well organized and was largely ineffective.
There had not been any coordinated effort to reduce cost related to purchasing
raw materials and of process yields. There was no effort to maintain proper
market price benchmarking and competitive price bidding for its principal key
raw materials. While the Company had a large number of suppliers, its principal
raw material and service providers were concentrated on a few such providers
from which there were clear opportunities to extract significant cost benefits.
Inventories had accumulated to a total of $4,509,926 in July 1998 and
by December 1998, had been reduced to $3,674,750. In December 1998, inventory
turns had improved to 4.3 times versus the 3.5 turns that had been realized in
July 1998. The Daily Sales Outstanding ("DSO") was reduced from 72.9 days in
July 1998 to 60.8 days by December 1998. The previously established accounts
payable that had accumulated prior to the election of new management, reaching
$2,933,105 in July 1998, had been reduced to $2,532,591 by December 1998.
Whereas the prior receivables write-off of $513,255 was due to the EDI-based
systems problem described above, the receivables write-off had been reduced to
$112,044 at the end of December 1998. New management established a policy
pursuant to which merchandise racks would no longer be depreciated over a
long-term period. Instead, new rack expenditures would be expensed over the
12-month period in which they were placed into the market. The previously
existing value of depreciated racks is now being reduced over a more
accelerated short-term period and thereby is reducing the value of those assets
to a more manageable level. During the July 1998 to the December, 1998 period,
the combined total of the Company's capital leases, bank debt, and long-term
debt was reduced by $548,024, from $17,414,934 to $16,866,910.
As of July 31, 1998 the Company had capitalized intangible assets of
$470,363. These assets included various items including start-up costs,
trademarks, and other elements. Management is carefully reviewing the intangible
assets to insure that it is clear as to which of these are actually used or in
fact useful in the conduct of the Company's business.
As a consequence of these actions and the severe operating losses
experienced under past management, as of July 31, 1998 the Company was under a
severe liquidity crisis. Its debt obligations were significantly in excess of
the Company's ability to service such obligations on a current basis or
according to previously agreed terms. The Company, as of July 31, 1998, had been
put on credit hold by most of its suppliers and was only able to make purchases
on a "collect-on-delivery" basis. Although the Company had negotiated a third
extension of its forbearance agreement with its major secured lender, there had
been concern that certain past due creditors were considering the potential for
filing petitions for involuntary bankruptcy.
New management immediately took steps to ease the cash crisis. Efforts
were initially focused on negotiating payment plans with suppliers so as to
insure the
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continued flow of raw materials. New management also focused efforts on
accelerating the collection of accounts receivable which included beginning to
enforce the collection of improperly taken customer credits and/or discounts.
Part of the efforts initiated by the new management to improve gross
and operating margins were directed at the elimination of certain low margin
products, low margin accounts, the elimination of small customers and more
vigorous attention to the enforcement of credit terms provided to customers.
Additionally, the Company has begun to determine the appropriate changes that
are necessary for the Company's terms and conditions that are intended to cause
a significant reduction in the Company's total freight expenses which represent
close to 10.0% of sales. Minimum order size and freight pre-paid policies are
being changed to enable the Company to maintain its competitive position while
simultaneously preserving a practical economic outcome.
The Company instituted a travel and expense reporting control procedure
in September 1998. Prior management did not have an expense control policy. This
new policy insures that there is consistent and uniform control of all travel
and expense spending and insures timely and accurate reporting with clear
internal audit controls. Operating managers must review the expense reports of
those people reporting to them and the chief executive officer of the company
personally signs and reviews every expense report.
In December 1998, the Company implemented the second phase of its
reorganization plan and realigned its sales, marketing and administrative
support groups. This reorganization followed the same principals that were
implemented in November with the Operations Group wherein the principal
objective is intended to have significant reductions in the overall payroll
cost, while improving the focus and work content by enabling people to operate
against specified and clear objections. The Company has also established an
Operating Committee consisting of the Company's key managers and this is the
principal mechanism by which the Company operates on a daily basis and
establishes its short-term goals and develops budgets and longer-term strategic
plans.
The Company has eliminated certain outside resources that had been used
for long periods of time and which generated significant expense with
questionable value and performance for the services they were providing to the
Company. All outside resources and services now being provided are reviewed by
the Company's chief executive officer and are closely monitored by the
appropriate functional manager.
Sales. Sales decreased 35% to $5,310,126 in the quarter ended December
31, 1998 from $8,110,028 in the quarter ended December 31, 1997. Sales decreased
31% to $16,693,816 in the nine-month period ended December 31, 1998 from
$24,081,577 in the same period a year earlier. The decrease is primarily due to
the sale of the Core Business and the loss of Office Max.
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Geopaper products were responsible for 100% and 95% of sales for the
three and nine-month period ended December 31, 1998 respectively, compared to
81% in the corresponding three and nine-month periods of the prior year. Sales
of Geopaper have decreased 18% to $15,942,282 in the nine months ended December
31, 1998 from $19,466,190 in the corresponding nine-month period of the prior
year.
Sales of the Company's lettering and signage products decreased 84% to
approximately $751,539 for the nine-month period ended December 31, 1998
compared to approximately $4,615,387 for the quarter ended December 31, 1997.
International sales of Geographics products were $2,012,740 and
$5,758,050 for the quarter and nine-month period ended December 31, 1998,
respectively, and $2,182,775 and $5,920,028 for the quarter and nine-month
period ended December 31, 1997, respectively. International sales of Geographics
products represented 31% and 29% of the Company's total sales for the quarter
and nine-month period ended December 31, 1998, respectively, compared to 23% and
20%, respectively, of total sales for the same periods in the prior year.
Gross Margin. Gross profit margin as a percentage of sales was 53.2%
for the quarter ended December 31, 1998, compared to 39.9% for the same period
in the prior year. For the nine-month period ended December 31, 1998, gross
profit margin as a percentage of sales was 53.4%, compared to 31.8% for the same
period in the prior year.
Selling, General and Administrative Expenses. The Company's selling,
shipping, 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 December 31, 1998 to
46.5%, as compared to 46.1% during the same period in the prior year. S,G&A
expenses decreased as a percentage of sales to 45.7% for the nine-month period
ended December 31, 1998 as compared to 49.8% for the same period in the prior
year.
Interest Expense. The Company's interest expense for the quarter ended
December 31, 1998 decreased 35% to $274,029 compared to $418,388 for the same
period in the prior year. The company's interest expense for the nine-month
period ended December 31, 1998, decreased 30% to $881,939 compared to $1,266,585
for the same period in the prior year. The decrease in interest expense was
primarily the result of the pay-down of U.S. Bank 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
1997, the Company has experienced working capital short-falls which have
required the Company to delay payments to
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certain vendors, delay planned 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 December 31, 1998,
operating income totaled $355,621. The Company experienced positive operating
cash flows of $7,982,369 during the quarter ended December 31, 1998.
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 entered into a short-term 4th forbearance agreement with
its lender, effective November 30, 1998, pursuant to which the lender agreed to
extend the expiration date of the revolving credit facility to April 1, 1999. to
permit borrowings of up to $5.5 million. The Company is seeking a longer
forbearance arrangement with its lender, although as of the date of this report,
no such longer-term agreement is in place. 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 will be able to refinance or replace the facility on acceptable
terms when and as needed.
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. 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
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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.
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 adverse 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 then
Chairman of the Board, Ronald S. Deans, and its then chief financial officer,
Terry A. Fife. These suits alleged that the defendants violated Section 10(b) of
the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In August 1998, the Company, its insurance carrier and the plaintiffs reached an
agreement to settle the lawsuits, which had previously been consolidated as one
lawsuit (the "Settlement"). On October 30, 1998, the judge presiding over this
lawsuit approved the Settlement. Under the terms of the Settlement, the
plaintiffs received a cash payment of $1.6 million without any admission of
liability or wrongdoing by the defendants. In light of the defendants' insurance
carrier's proposed substantial contribution to any final settlement amount, the
Company does not believe that the funding of the settlement will have a material
impact on its financial condition or operations
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.
Shares of the Company's Common Stock continue to be traded solely on
the NASDAQ OTC Bulletin Board. This has had a material adverse effect on the
liquidity of the market for the Company's securities and could hinder the
ability of the Company to obtain additional equity financing.
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 December 31, 1998, borrowings under the Company's revolving credit
facility aggregated approximately $4,578,838. 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.
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On November 1, the Company and its lender entered into a fourth
forbearance agreement (the "Fourth Forbearance Agreement") pursuant to which the
lender agreed to extend the expiration date of the revolving credit facility to
March 31, 1999, 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
December 31, 1998, the Company continued to evaluate additional sources of
working capital, including, without limitation, additional equity investments,
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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CHANGES IN CORPORATE GOVERNANCE AND MANAGEMENT. On October 12, 1998,
the Company terminated the employment of Ronald S. Deans, the Company's former
chairman, chief executive officer and president. In November 1998, Richard C.
Gockelman, the Company's present chief executive officer and president, began
implementing an organizational restructuring program aimed at rationalizing and
strengthening the Company's internal management structure. A component of this
program has been shifting the Company's operational model to a "Plant Manager
Control Model" in which the Company's purchasing, manufacturing and scheduling
departments have been merged into one, integrated entity. The Company believes
that this new approach will result in substantial cost-savings versus the former
managerial form.
In December 1998, Mr. Gockelman, as the Company's sole director and in
accordance with the Company's By-laws, appointed five outside individuals to
serve on the Company's Board of Directors. The new members of the Board of
Directors are as follows:
William T. Graham, Chairman. Mr. Graham was the founder, president and
chief executive officer of W.T. Rogers Company, which was merged into Newell
Corporation in 1992. Mr. Graham served as chairman of Newell Office Products
until 1992. He has founded and co-founded several office industry ventures and
participates in a number of public-service activities in his home state of
Wisconsin.
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C. Joseph Barnette, Director. Mr. Barnette is co-founder and president
of KAPCO, a privately-held adhesive products company in Kent, Ohio. Mr. Barnette
holds several patents on file in both the United States and in several foreign
countries. Mr. Barnette is a graduate of the University of Akron.
William S. Hanneman, Director. Mr. Hanneman is a founder and principal
in the firm of Zachary Scott & Company, an investment banking and financial
advisory firm located in Seattle, Washington. Mr. Hanneman previously served as
Vice President of Seafirst Bank, N.A.'s Mergers and Acquisitions Department. Mr.
Hanneman is a graduate of the University of Washington.
John F. Kuypers, Director. Mr. Kuypers is executive vice president of
sales and marketing for Pentech International, a writing instrument and related
products company based in Madison, Wisconsin. He was previously employed with
Newell Office Products and W.T. Rogers Company. Mr. Kuypers is a founding member
and director of SHOPA, a leading office products trade association. He is a
graduate of the University of Wisconsin.
David C. Lentz, Director. Mr. Lentz is chairman and principal of E-Z
Industries, Inc., an office product manufacturer located in Westminster,
Maryland. His prior experience includes employment in the banking industry and
Mr. Lentz served as the State Examiner for the State of Maryland. Mr. Lentz is a
graduate of the University of Baltimore and the University of Baltimore's law
school.
In addition to his duties as the Company's president and chief executive
officer, Mr. Gockelman will continue to serve as a director of the Company.
In the early part of 1999, the newly reconstituted Board of Directors
anticipated creating two new board committees: a finance committee and an audit
committee. In addition, the new Board of Directors has adopted as a high
priority the holding of an annual shareholders meeting, tentatively scheduled to
be held during the Company's second fiscal quarter of fiscal year 2000.
None of the new members of the Board of Directors is a party to any
transaction, series of similar transactions or any proposed transaction that
would require disclosure pursuant to Item 404 of Regulation S-K.
Because of the complexity of the reporting requirements imposed on the
Company's directors and executive officers under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"), special securities counsel to the
Company has recommended that the Company assume responsibility for preparing and
filing the periodic reports of changes in beneficial ownership required of these
persons by statute. As at December 31, 1998, however, this undertaking had not
yet been implemented. The Company has undertaken to quickly remedy this
situation and will file the periodic reports required by Section 16 of the
Exchange Act as soon as is reasonably practicable.
13
<PAGE> 14
EXAMINATION OF MANAGEMENT. The Company has previously reported that it is in an
on-going process of investigating certain activities engaged in, and
transactions effected by, the Company's former chief executive office, Ronald S.
Deans. The Company's initial findings played a substantial role in the
termination of Mr. Deans' employment in October 1998. The Company continued its
efforts with respect to resolving the matters under investigation throughout the
fiscal quarter ending December 31, 1998, and the Company fully anticipates such
efforts to continue into its next fiscal year. Several efforts have been made by
the Company, its general outside counsel and special securities counsel to
resolve all of the outstanding issues raised by the actions taken by Mr. Deans
or by the Company while under his direction and control. As has previously
been reported, however, Mr. Deans has proved to be much less cooperative that
the Company would have hoped.
In order to accelerate the resolution of the above-described matters,
the Company's Board of Directors has directed its newly formed audit committee,
subject to supervision by the Board of Directors, to vigorously pursue an end to
the Company's investigative efforts in this area. Bringing these matters to
closure may involve, but not be limited to, initiating one or more lawsuits
against Mr. Deans with respect to what the Company believes are serious
violations of Mr. Deans' fiduciary duties to the Company. In addition, the
Company's Board of Directors is seriously considering reporting its findings
to one or more federal and/or state agencies with jurisdiction over the matters
at issue. Regardless of the final decision, members of the Company's Board of
Directors and senior management remain committed to resolving fully these
issues and will timely file periodic reports with the Securities and Exchange
Commission as the above-described issues are resolved.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit Number Description of Document
------------- ------------------------
<S> <C>
10.1 Fourth Forbearance Agreement, between U.S. Bank,
N.A. and Geographics, Inc., dated November 1, 1998
11.1 Statement regarding computation of net income (loss)
per share.
</TABLE>
(b) No reports were filed by the Company on Form 8-K during the fiscal quarter
ended December 31, 1998.
14
<PAGE> 15
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 19th day of
March, 1999.
GEOGRAPHICS, INC.
By:/S/Richard C. Gockelman
--------------------
Richard C. Gockelman
President and Chief Executive Officer
15
<PAGE> 16
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998 ............................................................F-2
Consolidated Statements of Operations for the three months and nine
months ended December 31, 1998 and December 31, 1997 ......................F-3
Consolidated Statements of Cash Flows for the three months and nine
months ended December 31, 1998 and December 31, 1997 ......................F-4
Notes to Consolidated Financial Statements ................................F-5
F-1
<PAGE> 17
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND MARCH 31, 1998
(unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
(Unaudited) (Audited)
------------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 440,483 $ 316,078
Accounts receivable
Trade receivables, net 3,646,186 4,164,861
Other receivables 71,387 148,050
Inventory, net of allowance for obsolete inventory of $279,382 at
December 31, 1998 and $586,000 at March 31, 1998 5,322,270 6,763,508
Prepaid expenses, deposits, and other current assets 819,526 731,307
------------ ------------
Total current assets 10,299,852 12,123,804
PROPERTY, PLANT AND EQUIPMENT, net 11,818,733 12,881,118
OTHER ASSETS 335,992 340,043
------------ ------------
TOTAL ASSETS $ 22,454,577 $ 25,344,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts $ 386,233 $ 301,716
Note payable to bank 4,578,838 11,300,808
Accounts payable 3,003,610 3,285,467
Accrued liabilities 1,872,363 2,680,594
Notes payable to officers and directors -- --
Current portion of long-term debt 3,350,344 3,350,344
------------ ------------
Total current liabilities 13,191,388 20,918,929
LONG-TERM DEBT 3,846,199 4,853,254
------------ ------------
Total liabilities 17,037,587 25,772,183
------------ ------------
STOCKHOLDERS' EQUITY
No par common stock - 100,000,000 authorized, 9,857,252 and
9,852,252 issued and outstanding at December 31, 1998 and
March 31, 1998, respectively 15,769,018 15,769,018
Foreign currency translation adjustment (103,050) 33,899
Retained earnings (accumulated deficit) (10,248,978) (16,230,135)
------------ ------------
Total stockholders' equity 5,416,990 (427,218)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,454,577 $ 25,344,965
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-2
<PAGE> 18
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------------------
Dec. 31, 1998 Dec 31,1997 Dec. 31, 1998 Dec. 31, 1997
<S> <C> <C> <C> <C>
Sales $ 5,310,126 $ 8,110,028 $ 16,693,816 $ 24,801,577
Cost of Sales 2,484,871 4,874,132 7,778,221 16,434,970
------------ ------------ ------------ ------------
Gross Margin 2,825,255 3,235,896 8,915,595 7,646,607
Selling, General and Administrative
Expenses 2,469,634 3,740,489 7,629,780 11,982,823
------------ ------------ ------------ ------------
Income (Loss) From Operations 355,621 (504,593) 1,285,815 (4,336,216)
Other Income (Expenses)
Expense interest (274,029) (418,388) (881,939) (1,266,585)
Other 4,834 70,384 5,622,200 37,056
------------ ------------ ------------ ------------
Total Other Income (Expenses) (269,195) (348,003) 4,740,261 (1,229,529)
Income (Loss) Before 86,426 (852,596) 6,026,076 (5,565,744)
Provision for Income Taxes
Income Tax Provision -- -- -- --
Net Income (Loss) 86,426 (852,596) 6,026,076 (5,565,745)
============ ============ ============ ============
Earnings Per Common and Common
Equivalent Share
Basic $ .01 $ (.09) $ .61 $ (.57)
Diluted .01 (.09) .61 (.57)
Shares Used in Computing Earnings
Per Common and Common
Equivalent Share
Basic 9,857,252 9,742,334 9,857,252 9,742,334
Diluted 9,857,252 9,742,334 9,857,252 9,742,334
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 19
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 6,026,076 (5,565,744)
Adjustments to reconcile net income to net
cash flows from operating activities
Depreciation and amortization 1,138,905 1,358,211
Deferred income taxes -- --
(Gain) loss on sales of property and equipment -- 1,740
Changes in noncash operating assets and liabilities
Trade receivables 518,675 1,841,403
Related party receivables -- --
Other receivables 76,663 452,976
Inventory 1,441,238 1,330,303
Prepaid expenses, deposits and other current assets (84,168) 18,753
Accounts payable (281,857) 1,614,867
Accrued liabilities (853,163) 556,364
Income tax payable -- --
---------------------------
Net cash flows from operating activities 7,982,369 1,608,873
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts 84,517 (151,832)
Net borrowings on note payable to bank (6,721,970) 2,109,930
Proceeds from long-term debt borrowings -- --
Repayment of long-term debt (1,007,055) (918,699)
Repayments of notes payable to officers and directors -- (850,000)
Proceeds from issuance of common stock -- (584)
Foreign currency translation (136,949) (141,496)
---------------------------
Net cash flows from financing activities (7,781,457) 47,319
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (76,508) (1,610,944)
Proceeds from sales of equipment -- --
Net advances from (repayments to) partnerships -- --
Change in other assets -- --
---------------------------
Net cash flows from investing activities (76,508) (1,610,944)
---------------------------
NET CHANGE IN CASH 124,404 45,248
CASH, beginning of year 316,078 408,757
CASH, end of quarter 440,483 454,006
---------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment -- 1,677,918
---------------------------
Assets acquired directly in acquisition of business -- --
---------------------------
</TABLE>
See accompanying notes to these consolidated financial statements
F-4
<PAGE> 20
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 quarterly.
Reclassifications - Certain prior year amounts have been reclassified
to conform to current year presentation. 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 in April
1999. The total minimum lease commitment is $64,770 in 1999.
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.
F-5
<PAGE> 21
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 - Subsequent to year end, 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 $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 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. 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.
F-6
<PAGE> 1
EXHIBIT 10.1
FOURTH FORBEARANCE AGREEMENT
The effective date of this Agreement is November 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 November 16, 1998 (calculated without accounting for the
interest rate adjustment and Banker's Acceptance fees provided below, and
not including attorney's fees and costs) are set forth on attached Exhibit
A to this Agreement. The Bank has continued to make advances under the
Revolving Loan, and to accept payments on the Term Loans, including a
matured real estate loan (No. 9289934), pending execution of this Fourth
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.
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
("Third Forbearance Agreement") expired on November 1, 1998.
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, as set forth in greater detail hereinbelow.
G. Geographics currently 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. Prior to May 1998, Geographics was also 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"). For over a year, Geographics had 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 determined it would 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. At that time
Geographics had been in default for almost a year. To avoid losing the sale
to Identity, the Bank had demanded, and obtained Geographics' cooperation
in allowing the Bank to foreclose on the Core Business assets through
private sale to Identity pursuant to RCW 62A.9-504. That sale was
consummated by the parties on or around May 4, 1998. At that time Identity
paid to the Bank the sum of $6,620,000, which amount was used, after
payment of certain costs incurred in connection with the sale of the Core
Business assets, to pay down the Indebtedness and to reduce permanently the
maximum amount of the Revolving Loan to $6,000,000. In addition, on or
around October 23, 1998, the Bank received $449,187.47 from an escrow
established in connection with the sale of the Core Business to Identity.
I. Geographics desires to continue, and is continuing, the Specialty Paper
Business, and further desires the Bank to continue provide 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 Term 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
Page 2
<PAGE> 3
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.
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. 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 March 31, 1999 ("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; or
(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.
6. Forbearance on Default Interest. Bank further will waive
collection and forgive payment of any default interest now accrued and/or owing
under the Revolving Loan if there is no default under this Agreement.
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
March 31, 1999.
(b) Provided that Borrower is in compliance with the terms and
conditions of this Agreement (including, without limitation, the
aggregate borrowing limitations set forth in this Paragraph 7), Bank
shall, at Borrower's instructions, issue Bankers Acceptances in
accordance with Bank's standard procedures and policies. Borrower shall
Page 3
<PAGE> 4
pay to Bank a monthly fee, equal to (i) two percent (2%) per annum of
the amounts of all Bankers Acceptances that are outstanding during the
prior month for the months from November, 1998 through January, 1999,
and (ii) three percent (3%) per annum of the amounts of all Bankers
Acceptances that are outstanding during the prior month for months
after February 1, 1999.
(c) The maximum amount of the Revolving Loan, including any
and all outstanding Bankers Acceptances, shall not exceed $5,500,000.
At all times during the Forbearance Period, the maximum amount of the
Revolving Loan, including any and all outstanding Bankers Acceptances,
advanced against eligible inventory shall not exceed $2,750,000.
(d) The interest rate to be applied to the unpaid principal
balance under the Revolving Loan shall be 1.500 percentage points over
the rate of interest which Bank from time to time establishes as its
prime rate.
(e) The following person(s) are authorized to request advances
under the Revolving Loan until Bank receives from Geographics written
notice of revocation of his authority: Richard Gockelman, President and
C.E.O., only.
(f) Promptly upon execution of this Agreement by the parties,
Geographics shall pay to Bank a renewal fee of Thirteen Thousand Seven
Hundred Fifty and 00/100 Dollars ($13,750), plus an amount equal to all
legal fees and expenses incurred by Bank in connection with the
preparation and negotiation of this Agreement. In the event Geographics
fails to pay to Bank all unpaid principal and interest under the
Revolving Loan on or before February 1, 1999, Geographics shall pay
immediately to Bank an additional fee of Thirteen Thousand Seven
Hundred Fifty and 00/100 Dollars ($13,750).
(g) Geographics will timely provide to Bank monthly interim
financial statements, each of which will include cash flow summaries
and comparisons to the projections attached hereto as Exhibit B.
(h) All other provisions and limitations in the "Operating
Provisions Accounts Receivable and Inventory Secured Lines" attached
hereto as Exhibit C and incorporated herein shall apply.
(i) 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 Fourth Forbearance Agreement.
8. It is expressly understood and agreed that upon the maturity of
the Indebtedness on March 31, 1999, 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, 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.
Page 4
<PAGE> 5
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, including, without limitation, corporate resolutions of Borrower
authorizing the transactions contemplated by this Agreement, similar in
substance to those resolutions attached hereto as Exhibit D.
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. Status of Prior Agreements. 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. Amendments in Writing. 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.
16. No Oral Waivers or Modifications. 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
Page 5
<PAGE> 6
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. Complete Agreement. 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. Attorney Fees. 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. Remedies Cumulative. 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.
20. No Partnership. 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
Page 6
<PAGE> 7
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. Discussions with Others. 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
Fourth-party lenders to Borrower, Fourth-party creditors of Borrower, or
potential investors in Borrower or other Fourth 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 Fourth-party
lender to Borrower or Fourth-party creditor of Borrower, or any other Fourth
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. Advice of Counsel, etc. 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. Construction. 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.
24. Successors. 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. Governing Law; Jurisdiction. 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.
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<PAGE> 8
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. Counterparts. 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 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. Time is of the essence under this Forbearance Agreement.
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.
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<PAGE> 9
(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.
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<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this FOURTH
FORBEARANCE AGREEMENT as of the date first written above.
GEOGRAPHICS, INC. GEOGRAPHICS MARKETING CANADA
By: _______________________________ By: _______________________________
Richard Gockelman
President/CEO Its: ______________________________
U.S. NATIONAL BANK,
NATIONAL ASSOCIATION MARTIN DISTRIBUTING, INC.
By: _______________________________ By: _______________________________
Roger Lundeen
Its: ______________________________ Its: ______________________________
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<PAGE> 11
EXHIBIT A
Geographics, Inc.
AFS Customer Number: 3208662005
As of 11/16/98
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
CURRENT BALANCE ACCRUED
PRINCIPAL INTEREST
- ------------------------------------------------------------------------------
<S> <C> <C>
"Term Loans"
- ------------------------------------------------------------------------------
#604 $426,337.71 $1,546.20
- ------------------------------------------------------------------------------
#612 247,094.70 896.15
- ------------------------------------------------------------------------------
#620 317,777.84 1,152.49
- ------------------------------------------------------------------------------
#638 189,473.67 687.17
- ------------------------------------------------------------------------------
#646 11,648.91 2.87
- ------------------------------------------------------------------------------
#653 45,501.63 63.58
- ------------------------------------------------------------------------------
#661* 888,234.77 3,329.05
- ------------------------------------------------------------------------------
"Revolving Loan" 146,789.81 406.17
#75 Calculated at maturity of
Bankers Acceptances 4,000,000.00 Bankers Acceptances
- ------------------------------------------------------------------------------
</TABLE>
*"Large Term Loan" previous obligation number: 9289934
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<PAGE> 1
EXHIBIT 11.1
EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF NET INCOME
(LOSS) PER SHARE
<TABLE>
<CAPTION>
Quarter Ended December 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss) $ 86,426 (852,596)
Primary weighted average common
share outstanding 9,857,252 9,742,334
Primary earnings per share .01 (.09)
Fully diluted weighted average
common shares outstanding 9,857,252 9,742,334
Fully diluted earnings per share .01 (.09)
</TABLE>
F-7
