<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number: 0-2349
GRAPHIC CONTROLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-0834173
- ----------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
189 VAN RENSSELAER STREET, P.O. BOX 1271, BUFFALO, NY 14240
- ----------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (716) 853-7500
--------------
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 the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
At the date of this filing, there were 100 shares, par value $1.00 per share of
common stock outstanding, all of which was owned by Graphic Holdings, Inc.
<PAGE>
GRAPHIC CONTROLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
March 31, 1996 and December 31, 1995.................................................. 1
Condensed consolidated statements of income
-- three months ended March 31, 1996 and 1995......................................... 2
Condensed consolidated statements of cash flow
-- three months ended March 31, 1996 and 1995......................................... 3
Notes to condensed consolidated financial statements
-- March 31, 1996..................................................................... 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 6-7
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K............................................... 8
Signature............................................................................... 9
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1995 1996
------------ -----------
(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 1,481 $ (726)
Accounts receivable, net............................. 25,430 31,393
Inventories.......................................... 22,009 29,347
Other................................................ 858 1,978
-------- --------
Total current assets............................... 49,778 61,992
Property, plant and equipment:
Land................................................. 1,097 1,097
Buildings and improvements........................... 7,766 9,998
Machinery and equipment.............................. 12,976 24,225
-------- --------
21,839 35,320
Less accumulated depreciation........................ 585 2,154
-------- --------
21,254 33,166
Deferred income taxes................................. 581 580
Goodwill, net......................................... 164,719 231,172
Financing costs, net.................................. 9,203 12,016
Purchase escrow....................................... -- 5,657
Patents............................................... -- 5,243
Other assets.......................................... 5,377 6,753
-------- --------
$250,912 $356,579
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable..................................... $ 10,186 $ 13,378
Employees' compensation.............................. 5,561 6,480
Accrued expenses..................................... 6,797 7,954
Income taxes payable................................. 357 1,204
Deferred income taxes................................ 679 679
Current portion of long-term debt.................... 2,131 3,933
-------- --------
Total current liabilities.......................... 25,711 33,628
Long-term debt........................................ 158,000 222,616
Other non-current liabilities......................... 15,702 16,615
Shareholder's equity:
Common stock ($1 par)
Authorized - 5,000,000 shares; issued & outstanding
100 shares.......................................... -- --
Additional paid-in capital........................... 50,866 82,366
Retained earnings.................................... 804 1,470
Equity adjustment from foreign currency translation.. (171) (116)
-------- --------
Total shareholder's equity......................... 51,499 83,720
-------- --------
$250,912 $356,579
======== ========
</TABLE>
(1) The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-ACQUISITION
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
--------------- --------------
<S> <C> <C>
Net sales..................................... $43,555 $50,605
Cost of sales................................. 23,230 27,687
Selling, general and administration expenses.. 12,439 16,546
------- -------
35,669 44,233
------- -------
Operating income.............................. 7,886 6,372
Interest income............................... 24 14
Interest expense.............................. (1,121) (4,545)
------- -------
Income before income taxes.................... 6,789 1,841
Income tax expense............................ 2,658 1,175
------- -------
Net income.................................... $ 4,131 $ 666
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-ACQUISITION
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
--------------- --------------
<S> <C> <C>
Operating activities:
Net income.................................... $ 4,131 $ 666
Depreciation and amortization................. 1,685 3,010
Changes in assets and liabilities............. (1,657) (3,781)
------- ---------
4,159 (105)
------- ---------
Investing activities:
Additions to property, plant and equipment.... (357) (1,020)
Purchase of Devon Industries, Inc. - Note C. -- (99,000)
------- ---------
(357) (100,020)
------- ---------
Financing activities:
Repayment of senior debt...................... (4,986) (1,082)
Proceeds from senior bank facilities.......... -- 67,500
Proceeds from additional paid in capital...... -- 31,500
------- ---------
(4,986) 97,918
------- ---------
Decrease in cash and cash equivalents.......... $(1,184) $ (2,207)
======= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Graphic Controls Corporation and Subsidiaries (the "Company") 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, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
DECEMBER 31 MARCH 31
1995 1996
----------- --------
Raw materials................ $ 6,924 $11,128
Work in process.............. 1,239 1,627
Finished products............ 13,846 16,592
------- -------
$22,009 $29,347
======= =======
-4-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE C - PURCHASE OF DEVON INDUSTRIES, INC.
On February 28, 1996, the Company acquired all the outstanding common stock
of Devon Industries, Inc., a closely held California corporation. Devon is a
developer, manufacturer, and marketer of disposable medical and surgical
supplies. The total cost of the transaction was approximately $99 million,
including estimated expenses of $5 million, and up to $7 million in deferred
consideration contingent upon Devon's future financial performance. The Devon
transaction was financed with $67.5 million of bank debt and $31.5 million of
new equity provided by Bessemer Holdings, L.P. The pro forma unaudited results
of operations for the three months ended March 31, 1996 and March 31, 1995,
assuming consummation of the purchase and related financing as of January 1,
1995, are as follows:
THREE MONTHS ENDED MARCH 31
1995 1996
------------ --------------
Net sales............ $63,276 $61,849
Net income........... 2,148 1,362
NOTE D - CONTINGENT MATTERS
In accordance with an agreement with the Pennsylvania Department of
Environmental Resources, the Company is required to perform certain
environmental removal and remediation actions at its former coating facility
located in Pittsburgh, Pennsylvania. The estimated costs of performing these
procedures, including ongoing operation and monitoring, of $1,026,000 was
provided in 1993. The Company has completed removal and remediation according
to the agreement and is currently monitoring the impact of the actions taken.
Although the ultimate costs of performing the required work may differ from the
amount currently estimated, management does not believe that any such variances
would be material to the financial statements.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED TO FIRST QUARTER ENDED
MARCH 31, 1995
The following table sets forth certain operational data as a percentage of sales
for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
PRE-ACQUISITION
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Sales...................... 100.0% 100.0%
Gross profit............... 45.3% 46.6%
Operating expenses......... 32.6% 28.4%
Operating income........... 12.6% 18.1%
</TABLE>
NET SALES. Net sales for the first quarter 1996 increased by $7.1 million or
16.3% from $43.6 million in 1995 to $50.6 in 1996. $6.0 million of the increase
was attributable to the acquisition of Devon Industries, Inc. ("Devon") on
February 29, 1996. Sales of Graphic Controls' North American medical products
increased by 9.2% over the prior period primarily due to continued strong demand
for electrode and diagnostic imaging products. Partially offsetting this
increase was a reduction in sales of cable and leadwires and industrial chart
sales as compared to the prior period in 1995 when both products experienced
higher than normal sales. Sales of cables and leadwires in the first quarter of
1995 were positively impacted by increased marketplace demand due to a shift to
safety product that began in 1994. Also in the first quarter of 1995, sales of
industrial charts were positively impacted by a strong backlog at the beginning
of the year. This backlog was attributable to the closing of the Company's
manufacturing facility in Clayton, New York in the fourth quarter of 1995 and
the acquisition of Leeds & Northrup products in the second half of 1994.
GROSS PROFIT. Gross profit increased by $2.6 million or 12.8% from $20.3
million in the first quarter of 1995 to $22.9 million in the first quarter 1996.
The increase was primarily attributable to the acquisition of Devon. Gross
profit as a percentage of sales declined from 46.6% in 1995 to 45.3% in 1996.
The decrease was primarily due to the increased sales of lower margin medical
products and the unfavorable sales volume at Tronomed. The Company has decided
to relocate Tronomed manufacturing from San Juan Capistrano, California into the
Cherry Hill, New Jersey plant. Implementation of the plan will begin in April,
and integration is scheduled to be completed in the fourth quarter of this year.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses increased
by $4.1 million or 33.1% from $12.4 million for the prior period in 1995 to
$16.5 million in 1996. $2.5 million of the increase was due to the acquisition
of Devon. In addition, goodwill expense increased by $1.4 million over the
prior period due Bessemer Holdings, L.P.'s acquisition of the Company and Devon.
Regarding the Devon acquisition, the Company announced a plan to consolidate the
sales forces, distribution systems, marketing departments and administrative
functions of Devon and Graphic Controls which will result in savings in excess
of $4 million annually once the integration is completed.
OPERATING INCOME. Operating Income declined by $1.5 million or 19% from $7.9
million in the first quarter 1995 to $6.4 million in the first quarter 1996.
The decrease is primarily the result of the increased amortization associated
with the foregoing acquisitions.
-6-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. During the first quarter ended March 31, 1996,
the Company's cash and cash equivalents decreased by $2.2 million to $(.7)
million. The primary reason for the decrease was spending for additions to
property, plant and equipment of $1.0 million and repayment of senior debt of
$1.1 million. The Company anticipates that its cash flow from operations and
existing lines of credit will be sufficient to meet normal operating
requirements for 1996.
On February 29, 1996, the Company acquired Devon for approximately $99 million
including expenses. The transaction was financed with $67.5 million of bank
debt and $31.5 million of new equity provided by Bessemer Holdings, L.P. The
required amortization payments under the Company's revised Senior Bank Credit
Agreement are $1.8 million for the remainder of 1996, $9.4 million in 1997,
$12.1 million in 1998, $13.3 million in 1999, and $14.3 million in 2000. At
March 31, 1996, the Company was in compliance with all of the bank covenant
requirements.
-7-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-4 (File No.
33-99094)).
4.1 Indenture, dated as of September 15, 1995, between the
Company and United States Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
4.2 Exchange and Registration Rights Agreement, dated September
28, 1995, between the Company and Chemical Securities Inc.
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
4.3 Form of 12% Senior Subordinated Notes due 2005 of the Company
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
10.1 Commercial Lease between Acadia Properties, Inc. and the Company
dated November 1, 1984, as modified (incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on Form
S-4 (File No. 33-99094)).
10.2 Share Purchase Agreement dated as of December 23, 1995, among
the Company, Dan S. Sandel and the selling shareholders named
therein (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4 (File No.
33-99094)).
27 Financial Data Schedule*
*Filed herewith.
(b) Reports on Form 8-K
On March 14, 1996, the Company filed a Current Report on Form 8-K reporting
the consummation on February 29, 1996 of the acquisition of all of the
outstanding common stock of Devon. In connection with this Report, the Company
filed financial statements of Devon as of December 30, 1994 and December 31,
1993 and for the years ended December 30, 1994 and December 31, 1993 and for
the years ended December 30, 1994, December 31, 1993 and December 25, 1992, and
interim unaudited financial statements of Devon for the nine month periods
ended September 30, 1995 and September 30, 1994. In connection with this
Report, the Company also filed pro forma financial information consisting of
pro forma balance sheet data as of September 30, 1995 and pro forma statement
of operations data for the year ended December 31, 1994 and the nine month
period ended September 30, 1995, which pro forma financial information was
incorporated by reference into the Report from the Prospectus forming a part of
the Company's Registration Statement on Form S-4 (file number 33-99094).
-8-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Graphic Controls Corporation
-------------------------------------------
Date __________________ ___________________________________________
Anthony W. Borowicz, Vice President-Finance
(Principal Financial Officer and Duly Authorized
Officer)
-9-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-4 (File No.
33-99094)).
4.1 Indenture, dated as of September 15, 1995, between the Company
and United States Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
4.2 Exchange and Registration Rights Agreement, dated September 28,
1995, between the Company and Chemical Securities Inc.
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
4.3 Form of 12% Senior Subordinated Notes due 2005 of the Company
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
10.1 Commercial Lease between Acadia Properties, Inc. and the Company
dated November 1, 1984, as modified (incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on Form
S-4 (File No. 33-99094)).
10.2 Share Purchase Agreement dated as of December 23, 1995, among
the Company, Dan S. Sandel and the selling shareholders named
therein (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4 (File No. 33-
99094)).
27 Financial Data Schedule*
</TABLE>
*Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> (726)
<SECURITIES> 0
<RECEIVABLES> 32,151
<ALLOWANCES> (758)
<INVENTORY> 29,347
<CURRENT-ASSETS> 61,992
<PP&E> 35,320
<DEPRECIATION> (2,154)
<TOTAL-ASSETS> 356,579
<CURRENT-LIABILITIES> 33,628
<BONDS> 222,616
0
0
<COMMON> 0
<OTHER-SE> 83,720
<TOTAL-LIABILITY-AND-EQUITY> 356,579
<SALES> 50,605
<TOTAL-REVENUES> 50,619
<CGS> 27,687
<TOTAL-COSTS> 44,233
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 4,545
<INCOME-PRETAX> 1,841
<INCOME-TAX> 1,175
<INCOME-CONTINUING> 666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
