March 22, 1999
GEOGRAPHICS INC (GGIT)
Annual Report (SEC form 10-K)
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.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the Company's consolidated statements of income bear to net sales for the periods indicated:
1998 1997 1996
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.3 96.9 64.3
Gross margin 12.7 3.1 35.7
Selling, general and
administrative expenses 45.9 47.7 26.0
Amortization of goodwill -- -- 0.9
Income from operations (33.2) (44.6) 8.6
Other income -- .1 .8
Interest expense (5.9) (4.7) (3.4)
Total other income (expense) (6.7) (8.7) (2.5)
Income before provision for
income taxes (39.9) (53.3) 6.1
Income tax provision
(benefit) -- (.3) 2.1
Income From Discontinued
Operations 4.0 6.3 3.6
Net income (35.9) (46.6) 7.7
1998 COMPARED TO 1997
NET SALES. Net sales increased 41.3% to $24,097,845 in fiscal year 1998 from $17,051,142 in fiscal year 1997. This increase was primarily attributable to the
continued growth of the Geopaper product line, which offset certain factors in the third and fourth quarters that negatively impacted fiscal year 1998 sales. Revenue growth
with respect to the Geopaper product line slowed compared to the two prior years. Geopaper sales increases in 1998 were due primarily to sales for new store openings
by Office Depot, and initial shipments of Geopaper products to new customers, including Wal-Mart, Target and Kmart. In addition, Geopaper sales increased due to the
introduction of the Geoposterboard product line in over 900 Wal-Mart stores, 500 Office Depot stores in the United States and Canada, and 80 Staples/Business Depot
stores in Canada.
The shift in the Company's sales mix toward Geopaper and related products continued in fiscal year 1998. In 1998, the percentage of total Company sales represented by
Geopaper increased to 78%, compared to 71% of total sales in fiscal year 1997, while signage and lettering sales declined to 22% of total sales. In fiscal year 1997, the
sales mix of signage and lettering was 29% of sales. Sales for signage and lettering products are not presented with net sales in the Statement of Operations, but are
included in discontinued operations, which is discussed later in this section.
GROSS MARGIN. Cost of sales includes product manufacturing costs, occupancy and distribution costs. Gross profit as a percentage of sales increased to 12.7% in
fiscal year 1998, from 3.1% in fiscal year 1997. The higher gross margin is primarily attributable to an increase in selling prices for the Company's paper products coupled
with modest cost decreases and a continuing shift in mix of sales to higher margin products
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("SG&A") are those expenses that are incurred to support
the Company's selling, marketing and manufacturing efforts. SG&A expenses increased to $11,074,425 (45.9% of sales) in fiscal year 1998 from $8,127,710 (47.7% of
sales) in fiscal year 1997. The SG&A expense for fiscal year 1998 was attributable to an increase in advertising rebates and other rebates and promotions to customers,
and increases in salaries and wages of administrative, and sales & marketing personnel and an increase in legal expenses incurred by the Company.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from operations in fiscal year 1998 of $8,011,719 compared to an operating loss of $7,598,804
during fiscal year 1997. The operating loss was the result of higher gross margins more than offset by significantly higher sales, general and administrative expenses.
OTHER INCOME (EXPENSE). There was no other income in fiscal year 1998 compared to $24,907 in fiscal year 1997. In previous years, this category included such
items such as management fees, foreign exchange gains, gains on disposition of fixed assets, and other miscellaneous items.
INTEREST EXPENSE. Interest expense increased to $1,413,219 (5.9% of sales) during fiscal year 1998, compared to $805,079 (4.7% of sales) during fiscal year
1997. The higher interest costs were caused by increased average borrowings to support the Company's operating losses, and the acquisition of equipment used in the
manufacture of Geopaper in 1998 and 1997.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before provision for income taxes was $9,622,709 (39.9% of sales) in fiscal year 1998
compared to the loss before provision for income taxes of $9,085,783 (53.3% of sales) in fiscal year 1997. The 1998 loss before provision for
income taxes was primarily the result of the Company's operating losses and increased interest expense.
The Company did not recognize a tax benefit resulting from its loss from continuing operations in 1998 because of uncertainty concerning the use of this loss to reduce
future taxes. A portion of the loss was used to reduce taxes that would have been attributable to income from discontinued operations. The amount of taxes eliminated on
discontinued operations was estimated to be approximately $330,000. As of March 31, 1998, the total deferred tax assets estimated to be available to the Company were
$5,801,000 which had been reduced in their entirety by a valuation allowance.
DISCONTINUED OPERATIONS. On May 4, 1998, the Company sold substantially all of its signage and lettering operating assets, licenses, inventory and other rights
to a corporation for total consideration of $6,820,000.
Signage and lettering net sales for fiscal year 1998 decreased 3% to approximately $6,598,000 from $6,789,000 in fiscal year 1997. The decline in the sales of the signage
and lettering product lines was attributable to a general decline in the demand for products of this type and increased management attention on the development of the
specialty papers group. Management believes that sales of signage and lettering products will continue to decline in the future as the computerization of homes and offices
will allow the efficient production of lettering and signage products by current end-users.
NET INCOME/LOSS. Net loss of $8,649,618 in fiscal year 1998, or 35.9% of sales, compares to net income of $7,950,301 in fiscal year 1997, 46.6% of sales.
1997 COMPARED TO 1996
NET SALES. Net sales increased 6.1% to $17,051,142 in fiscal year 1997 from $16,075,363 in fiscal year 1996. This increase was primarily attributable to the
acceptance of the Geopaper product line. Geopaper experienced a sales increase of 665% in fiscal year 1996 to $16,075,363 compared to $2,100,000 for fiscal 1995.
Geopaper sales increases in fiscal year 1996 were due to shipments of Geopaper products to all Office Depot Inc. and OfficeMax stores in North America, as well as
shipments of Geopaper products to 248 Wal-Mart stores in March 1996.
Signage and lettering sales for fiscal year 1997 increased 4% to $6,789,364 from $6,538,272 in fiscal year 1996. The majority of the increase in signage and lettering sales
was due to increased sales to Office Max.
The sales mix of Geopaper products remained unchanged in fiscal year 1997 and 1996. Lettering and signage sales also remained unchanged for the same periods.
GROSS MARGIN. Gross margin as a percentage of sales decreased to 3.1% in fiscal year 1997, from 35.7% in fiscal year 1996. The decrease in the gross margin was
the result of a change in sales mix to products with lower gross margins. Geopaper represented 71% of sales while lettering and signage represented 29% of sales in 1997,
compared to 71% and 29% of sales in 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased in fiscal year 1997 to $8,127,710 (47.7% of sales) from $4,185,331
(26.0% of sales) in fiscal year 1996.
AMORTIZATION OF GOODWILL. Goodwill amortization declined to $0 from $159,768 (.98% of sales) for fiscal years 1997 and 1996 respectively. The decrease
was due to the completion of the amortization of the goodwill related to the 1993 purchase of the lettering division of E-Z Industries.
INCOME FROM OPERATIONS. Income from operations decreased to $(7,598,804) (44.6% of sales) during fiscal year 1997, a decrease from $1,386,801 (8.6% of
sales) in fiscal year 1996.
OTHER INCOME. Other income was $24,907 (0.14% of sales) in fiscal year 1997, compared to $130,684 (0.8% of sales) during fiscal year 1996.
INTEREST EXPENSE. Interest expense increased to $805,079 (4.7% of sales) during fiscal year 1997, compared to $539,394 (3.4% of sales) for fiscal year 1996. The
acquisition of equipment used in the manufacture of Geopaper, in addition to higher bank debt related to facilities expansion and working capital requirements resulted in
higher interest costs during fiscal year 1997.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for income taxes declined to $(9,085,783) (53.2% of sales) in fiscal year 1997
compared to $977,497 (6.1% of sales) in fiscal year 1996.
INCOME TAX PROVISION/BENEFIT. There is no ITP in fiscal year 1998. In fiscal year 1997, the Company recorded a current income tax benefit of $55,972, which
represents the amount of income tax recoverable from net operating loss carry-backs. The total potential income tax benefit for fiscal year 1997, and corresponding
increase in the Company's deferred tax asset as of March 31, 1997, was an estimated $3,162,000. The total potential deferred tax asset (before valuation allowance) as of
March 31, 1997 was $3,774,000. Based on the Company's current operating income and available projections for operating income, the Company determined that future
operating and taxable income may not be sufficient to fully or partially recognize the deferred tax asset of $3,774,000 at March 31, 1997. As a result, the Company
decided to provide a valuation allowance on all of its deferred tax assets at March 31, 1997. This valuation analysis was recorded in the fourth quarter and totaled
$3,774,000. The income tax provision in fiscal year 1996 was 2.1% of sales in fiscal year 1996. This provision was 34% of pre-tax net income.
NET INCOME. Net income of $(7,950,301) in fiscal year 1997 (46.6% of sales) compares to net income of $1,232,024 in fiscal year 1996 (7.7% of sales).
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As a result of the rapid growth of the Company's specialty papers group, capital expenditures relating to the purchase and installation of an automated production system
and a management information system, operating losses and other factors, the Company has required, and continues to require, substantial external working capital.
Moreover, subsequent to the end of fiscal year 1998, the Company has experienced working capital short-falls which have required the Company to delay payments to
certain vendors, institute internal cost reduction measures and take other steps to conserve operating capital. During fiscal year 1998, operating losses totaled $8,011,719,
and the Company experienced positive operating cash flows of $1,145,131.
1998 COMPARED TO 1997
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced positive operating cash flow of $1,145,131 in fiscal year 1998 and a negative
operating cash flow of ($6,601,926) in fiscal year 1997. The Company's principal cash flow requirements in fiscal year 1998 were to fund operating losses, which totaled
$8,011,719, and to fund increased working capital needs. Operating losses in 1997 of ($7,598,809) also created substantial cash requirements which were further strained
by growing needs for working capital used in operating assets and liabilities. The Company was able to decrease its current assets which reduced the need for cash. Of
particular note were decreases in trade accounts receivable of $2,500,000 and inventories of $2,700,000. Also aiding cash flows in a meaningful way in 1998 were the
lengthening of payment periods with vendors and suppliers. During 1998, accounts payable and accrued expenses increased by $1,400,000. The combined effect of
reducing current assets and increasing current liabilities enabled the Company to achieve positive cash flows from operations in 1998. These events are in contrast with
1997, where trade accounts receivable increased by $1,500,000 and inventories increased by $121,000, both of which used cash in 1997. In 1997, accounts payable,
accrued liabilities and income taxes payable, together increased by $562,000 over 1996 which reduced the need for operating cash.
NET CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal year 1998, the Company used a net ($44,469) from various financing sources, compared to
$11,273,041 during fiscal year 1997. In fiscal year 1998, the Company increased borrowings under its revolving credit facility by $2,651,418 compared to an increase of
$3,326,451 in fiscal year 1997. Proceeds from long-term debt in fiscal year 1998 were $0.00 compared to $2,333,526 in fiscal year 1997. Repayments of long-term debt
in fiscal year 1998 totaled $1,790,535 compared to $875,134 in fiscal year 1997. The Company received no loans from officers or directors in fiscal year 1998.
Repayments of notes payable to officers and directors totaled $850,000 in fiscal year 1998 compared to $362,706 in fiscal year 1997. In 1998, the Company received no
proceeds from private placements, option exercises and warrant exercises, compared to $6,459,945 in fiscal year 1997.
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net negative cash flow from investing activities for fiscal year 1998 of
$1,193,341, compared to a negative cash flow from investing activities of $4,312,394 for fiscal year 1997. The Company made significant investments in fiscal year 1997
to increase the production capacity of its specialty papers group by acquiring automated production equipment.
1997 COMPARED TO 1996
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced negative operating cash flows during fiscal year 1997 and 1996 ($6,601,926) for
fiscal year 1997 and $(4,931,017) for fiscal year 1996). Contributing to the negative cash flow from operations was the increase in trade receivable and related party trade
receivables balances. Trade receivables increased to $6,654,500 at the end of fiscal year 1997 compared to $4,974,156 at the end of fiscal year 1996. This increase was
in part due to difficulties experienced in the installation and implementation of a new electronic data interchange software package which resulted in significant delays in the
required electronic delivery of invoices to certain key customers. These delays resulted in significant corresponding delays in the collection of accounts receivable during the
third and fourth quarters of fiscal year 1997. See "Item 1. BusinessRisk FactorsElectronic Data Interchange" and "Item 1. BusinessRisk FactorsCollection of Accounts
Receivable." Total trade receivables for fiscal year 1997 increased 34% to $6,654,500 compared to $4,979,156 for fiscal 1996.
Inventory increased to $9,457,874 at year end fiscal year 1997 compared to $9,139,273 for fiscal year end 1996, an increase of 3%. The increase in inventory is due in
part to the building of North American inventories in anticipation of higher sales levels in fiscal year 1997.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In fiscal year 1997, the Company received a net $11,273,049 from various financing sources, compared to
$8,555,704 for the prior fiscal year. In fiscal year 1997, the Company increased borrowings under its revolving credit facility by $3,326,451, compared to $3,139,463 for
the prior year. Proceeds from long-term debt borrowings during fiscal year 1997 were $2,333,526, compared to $1,003,029 in fiscal year 1996. Repayments of
long-term debt in fiscal year 1997 were $875,134 compared to $467,986 in fiscal year 1996. The Company received $0 from officers and directors in the form of notes
during fiscal year 1997, while $2,452,573 was received from officers and directors in fiscal year 1996. Repayments of notes payable to officers and directors were
$362,706 in fiscal year 1997 compared to $398,629 in fiscal year 1996. In addition the Company received proceeds from private placements, option exercises and
warrant exercises in the amount of $6,459,945 in fiscal year 1997, compared to $2,827,254 in fiscal year 1996. The proceeds received from the above debt and equity
financings were primarily utilized to finance working capital requirements, building expansion and equipment acquisitions related to the increased sales of the Geopaper
program.
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net negative cash flow from investing activities for fiscal year 1997 of
$4,312,394, compared to a negative cash flow from investing activities of $3,590,007 for fiscal year 1996. The Company decreased its expenditures on plant and
equipment to $1.9 million in 1998 from $4.2 million in 1997. Other assets decreased to $340,047 in 1998 from $1,005,613 in 1997. During fiscal year 1997 and 1996,
the Company made significant investments to increase its Geopaper production capacity by acquiring printing presses, paper cutting equipment, and packaging equipment.
ITEM 8. FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc. are incorporated into this Item 8 by reference to another section of this Report as follows:
(a) Report of Moss Adams LLP regarding Financial Statements F-2
(b) Consolidated Balance Sheets as of March 31, 1998 and 1997 F-3
(c) Consolidated Statements of Income for the years ended March 31,
1998, 1997 and 1996 F-4
(d) Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1998, 1997 and 1996 F-5
(e) Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996 F-6
(f) Notes to Consolidated Financial Statements F-7
(g) Report of Moss Adams LLP regarding Schedule II - Valuation and
Qualifying Accounts S-1
(h) Schedule II - Valuation and Qualifying Accounts S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable. |
