-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Solw5ep6OMqkq3vnmPhDdMKVyDkxYOrg0jCenwJl44ukOnQYU8LebmPaLo/bc5Mb 3qOdrSJCtq5iLeBOdmM2Cg== 0000891020-99-000499.txt : 19990323 0000891020-99-000499.hdr.sgml : 19990323 ACCESSION NUMBER: 0000891020-99-000499 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOGRAPHICS INC CENTRAL INDEX KEY: 0001000621 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 870305614 STATE OF INCORPORATION: WY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26756 FILM NUMBER: 99569885 BUSINESS ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 BUSINESS PHONE: 3603326711 MAIL ADDRESS: STREET 1: 1555 ODELL RD CITY: BLAINE STATE: WA ZIP: 98230 10-Q 1 EDGAR FORM 10-Q FOR GEOGRAPHICS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------------------- 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 --------------------------------- GEOGRAPHICS, INC. (Exact name of registrant as specified in its charter) WYOMING 87-0305614 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1555 ODELL ROAD, P.O. BOX 1755, BLAINE, WA 98231 - -------------------------------------------------------------------------------- (Address of principal executive office and zip code) (360) 332-6711 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] The registrant had 9,857,252 shares of common stock outstanding as of December 31, 1998 DOCUMENTS INCORPORATED BY REFERENCE None 2 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 2 3 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. 3 4 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 4 5 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. 5 6 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 6 7 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. 7 8 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 8 9 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 9 10 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. 10 11 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. 11 12 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. 12 13 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 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:
Exhibit Number Description of Document ------------- ------------------------ 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.
(b) No reports were filed by the Company on Form 8-K during the fiscal quarter ended December 31, 1998. 14 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 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 17 GEOGRAPHICS, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND MARCH 31, 1998 (unaudited) ASSETS
December 31, 1998 March 31, 1998 (Unaudited) (Audited) ------------------ -------------- 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 ============ ============
See accompanying notes to these consolidated financial statements. F-2 18 GEOGRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Unaudited)
Three Months Ended Nine Months Ended --------------------------------------------------------------------- Dec. 31, 1998 Dec 31,1997 Dec. 31, 1998 Dec. 31, 1997 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
See accompanying notes to these consolidated financial statements. F-3 19 GEOGRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 INCREASE (DECREASE) IN CASH (UNAUDITED)
December 31, December 31, 1998 1997 ----------------------------- 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 -- -- ---------------------------
See accompanying notes to these consolidated financial statements F-4 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 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 EX-10.1 2 FOURTH FORBEARANCE AGREEMENT 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 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 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 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 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 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 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. Page 7 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. Page 8 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. Page 9 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: ______________________________ Page 10 11 EXHIBIT A Geographics, Inc. AFS Customer Number: 3208662005 As of 11/16/98
- ------------------------------------------------------------------------------ CURRENT BALANCE ACCRUED PRINCIPAL INTEREST - ------------------------------------------------------------------------------ "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 - ------------------------------------------------------------------------------
*"Large Term Loan" previous obligation number: 9289934 Page 11 EX-11.1 3 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
Quarter Ended December 31, ----------------------------- 1998 1997 ---------- ---------- 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)
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