<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 September 30, 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
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
September 30, 1996 and December 31, 1995................................................... 1
Condensed consolidated statements of income
-- three months ended September 30, 1996 and 1995
nine months ended September 30, 1996 and 1995............................................ 2
Condensed consolidated statements of cash flow
-- nine months ended September 30, 1996 and 1995............................................ 3
Notes to condensed consolidated financial statements
-- September 30, 1996...................................................................... 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 6-7
Signature............................................................................... 8
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1996
------------ -----------
(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 1,481 $ 142
Accounts receivable, net............................. 25,430 33,493
Inventories.......................................... 22,009 29,300
Other................................................ 858 1,880
-------- --------
Total current assets............................... 49,778 64,815
Property, plant and equipment:
Land................................................. 1,097 1,097
Buildings and improvements........................... 7,766 10,376
Machinery and equipment.............................. 12,976 26,397
-------- --------
21,839 37,870
Less accumulated depreciation........................ 585 4,406
-------- --------
21,254 33,464
Deferred income taxes................................. 581 1,298
Goodwill, net......................................... 164,719 229,223
Financing costs, net.................................. 9,203 11,455
Purchase escrow....................................... -- 5,659
Patents............................................... -- 5,207
Other assets.......................................... 5,377 7,141
-------- --------
$250,912 $358,262
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable..................................... $ 10,186 $ 11,382
Employees' compensation.............................. 5,561 7,727
Accrued expenses..................................... 6,797 5,533
Income taxes payable................................. 357 1,399
Deferred income taxes................................ 679 679
Current portion of long-term debt.................... 2,131 5,035
-------- --------
Total current liabilities.......................... 25,711 31,755
Long-term debt........................................ 158,000 225,315
Other non-current liabilities......................... 15,702 18,411
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.................................... 804 631
Equity adjustment from foreign currency translation.. (171) (216)
-------- --------
Total shareholder's equity......................... 51,499 82,781
-------- --------
$250,912 $358,262
======== ========
</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>
Three Months Ended Sept 30, Nine Months Ended
Sept
30,
Pre-Acquisition Pre-Acquisition
1995 1996 1995 1996
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 40,770 $ 62,577 $ 127,895 $ 176,010
Cost of sales................................. 22,317 33,716 69,440 96,217
---------- ---------- --------- --------
Gross Profit............................... 18,453 28,861 58,455 79,793
Selling, general and administration expenses.. 12,241 18,066 37,013 51,660
Amortization expense.......................... 1,593 2,019 1,964 5,692
Other nonrecurring expense. .................. 445 3,409 486 4,875
---------- ---------- --------- --------
Total operating expenses................... 14,279 23,494 39,463 62,227
---------- ---------- --------- --------
Operating income........................... 4,174 5,367 18,992 17,566
Interest income............................... 11 9 56 32
Interest expense.............................. (1,013) (5,467) (3,125) (15,465)
----------- ---------- --------- --------
Income before income taxes................. 3,172 (91) 15,923 2,133
Income tax expense............................ 320 462 4,868 2,306
--------- ---------- --------- -------
Net income (loss).......................... $ 2,852 $ (553) $ 11,055 $ (173)
========== ==========
==========
=======
</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
NINE MONTHS ENDED NINE MONTHS
ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income.................................... $11,055 $ (173)
Depreciation and amortization................. 6,439 10,538
Changes in assets and liabilities............. 7 (8,274)
------- ---------
Net cash provided by operations............. 17,501 2,091
------- ---------
Investing activities:
Payment of acquisition fees................... (2,212) --
Net proceeds from sale of product line........ 463 --
Additions to property, plant & equipment...... (1,505) (4,637)
Purchase of Devon Industries, Inc............. -- (100,513)
------- ---------
Net cash used in investing activities....... (3,254) (105,150)
------- ---------
Financing activities:
Repayment of senior debt...................... (51,178) --
Proceeds from senior bank facilities.......... 92,000 2,720
Senior bank financing of Devon purchase....... -- 67,500
Proceeds from additional paid in capital...... -- 31,500
Proceeds from senior subordinated notes....... 75,000 --
Financing fees................................ (9,524) --
Dividends paid................................ (118,652) --
------- --------
Net cash (used) provided by financing activities (12,354) 101,720
------- --------
Increase(decrease) in cash and cash equivalents 1,893 (1,339)
Cash and cash equivalents at beginning of period 1,517 1,481
------- --------
Cash and cash equivalents at end of period..... $ 3,410 $ 142
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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- and nine-month periods ended September 30, 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 SEPTEMBER 30
1995 1996
----------- ------------
Raw materials................ $ 6,924 $10,908
Work in process.............. 1,239 1,799
Finished products............ 13,846 16,593
------- -------
$22,009 $29,300
======= =======
-4-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE C - PURCHASE OF DEVON INDUSTRIES, INC.
On February 29, 1996, the Company acquired all the outstanding common stock
of Devon Industries, Inc., a closely held California corporation ("Devon").
Devon is a developer, manufacturer, and marketer of disposable medical and
surgical supplies. The total cost of the transaction was approximately
$100 million, including estimated expenses of $6 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. and affiliates
thereof. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of operations of Devon are included in
the consolidated results of the Company from February 29, 1996, the date of
the acquisition. Goodwill associated with the acquisition is being amortized
on a straight-line basis over a 40 year period. The pro forma unaudited results
of operations for the nine months ended September 30, 1996 and September 30,
1995, assuming consummation of the purchase and related financing as of
January 1, 1995, are as follows:
NINE MONTHS ENDED SEPTEMBER 30
1995 1996
----------- -----------
Net sales............ $181,351 $187,254
Net income........... $ 1,049 $ (154)
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 cost of performing these
procedures, including ongoing operation and monitoring, of $1,026,000 was
provided for 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 cost of performing the required work
may differ from the amount currently estimated, management does not believe
that any such variance would be material to the financial statements.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995.
Sales for the three months ended September 30, 1996 were $62.6 million, and
an increase of $21.8 million or 53.4% over sales of $40.8 in the three months
ended September 30, 1995. $17.8 million of the increase was attributable to the
acquisition of Devon Industries, Inc. ("Devon") which was completed on
February 29, 1996 (the "Devon Acquisition"). Domestic medical sales excluding
Devon-brand sales increased by 14.5% in the three months ended September 30,
1996 over the same period last year. The increase, which was across all major
product lines except neurology chart products, was primarily attributable to
increased market penetration, new product sales and a normal sales level for
Tronomed subsidiary sales as compared to the same period last year. Devon-brand
sales, which are primarily sold through medical logistic companies, have been
impacted by inventory reduction programs by these distributors aimed at
improving their profitability and increasing cash flow, which has resulted in a
temporary slowdown of sales for Devon-brand products. Management believes,
however, end user demand for Devon-brand products remains consistent with
historical growth levels. Industrial product sales decreased by 1.4% in the
three months ended September 30, 1996, an improvement compared to the same
period last year. International sales increased by 27.8%, partially attributable
to incremental Devon-brand sales. In the three months ended September 30, 1996,
the Company completed the sale of its Australian subsidiary, and will now sell
Graphic Controls-branded products in Australia through two distributors.
Gross profit increased from $18.5 million in the three months ended September
30, 1995 to $28.9 million for the three months ended September 30, 1996. The
majority of the increase was due to the Devon Acquisition. Gross margin
increased to 46.1% from 45.3% last year. The increase was due to higher margin
Devon-brand sales and improved core domestic medical sales margins resulting
from increased sales volume. During September 1996, the Company relocated its
Tronomed manufacturing operation to its New Jersey facility. This move should
provide more efficient coverage of overhead expenses and lower manufacturing
costs.
Selling, General & Administrative Expenses increased by $5.9 million or 48.4%
from $12.2 million in the three months ended September 30, 1995 to $18.1 million
in the three months ended September 30, 1996. Substantially all of the increase
was due to the Devon Acquisition. As a percentage of net sales, expenses
decreased from 29.9% for the three months ended September 30, 1995 to 28.9% for
the same period this year primarily resulting from the elimination of duplicate
selling, marketing, and administrative costs resulting from the integration of
Devon.
Amortization Expense increased by $.4 million in the three months ended
September 30, 1996 to $2.0 million as compared to the same period last year.
The increase is attributable to the higher goodwill expense due to Bessemer
Holdings, L.P.'s acquisition of the Company in September 1995
(the "Company Sale") and the Devon Acquisition, which was completed in February
1996.
Nonrecurring Expense represents one-time costs associated with the
consolidation and integration of Devon, the sale of the Company's Australian
subsidiary and relocation of the Company's Tronomed subsidiary to Cherry Hill,
New Jersey. These costs in the three months ended September 30, 1996 totaled
$3.4 million. Management expects additional expenses to be incurred in the
fourth quarter of 1996 due to other initiatives.
Operating Income increased by $1.2 million from $4.2 million in the three months
ended September 30, 1995 to $5.4 million for the same period this year. The
increase in operating income reflects the Devon Acquisition and the strong
growth in the Company's core domestic medical business. Partially offsetting
this increase was certain nonrecurring expenses resulting from the initiatives
described above. The Company hopes to realize the full effects of such
initiatives on operating income in 1997.
Net Interest Expense increased from $1.0 million in the three months ended
September 30, 1995 to $5.5 million for the three months ended September 30,
1996. The increase was the result of the increased indebtedness incurred in
connection with the Company Sale and the Devon Acquisition which amounted to
$234.5 million.
-6-
<PAGE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995.
Sales for the nine months ended September 30, 1996 were $176.0 million, an
increase of $48.1 million or 37.6% over sales of $127.9 million for the same
period last year. The Devon Acquisition accounted for $41.2 million of this
increase. If the Devon Acquisition is given effect, on a pro forma basis, as
of January 1, 1995, sales for the nine months ended September 30, 1996 were
1.2% below the same period last year due primarily to inventory reductions by
the Company's largest distributors, higher sales rebate reserves and the
temporary disruption caused by the integration of the Company's sales force
with Devon. Sales of the medical products segment (excluding Devon) increased
by 10.7% for the nine months ended September 30, 1996 over the same period last
year reflecting strong demand for the Company's products. Industrial product
sales decreased by 4.1% for the nine months ended September 30, 1996 compared
to the same period last year due to the higher than normal sales in the first
half of 1995. International revenues increased by 8.2% for the three months
ended September 30, 1996 over the same period last year.
The Gross Profit Margin was 45.3% for the nine months ended September 30, 1996
compared to 45.7% in the same period last year. The decrease was attributable
to the changing sales mix between medical and industrial products and lower
margins on international product sales.
Selling, General and Administrative Expenses increased to $51.7 million
for the nine months ended September 30, 1996 compared to $37.0 million over the
same period last year. The majority of the increase for the nine months ended
September 30, 1996 is attributable to the effects of the Devon Acquisition.
Expense as a percentage of sales for the nine months ended September 30, 1996
remained comparable to the same period last year. The integration of Devon was
not completed until July 1996. Expenses relative to sales should decrease in
the second half of 1996 (as revealed by results in the third quarter of 1996)
as duplicate expenses resulting from the Devon Acquisition are eliminated.
Amortization expense for the nine months ended September 30, 1996 increased
to $5.7 million from $2.0 million in the comparable period in 1995 which
reflects the increased goodwill from the Company Sale and the Devon Acquisition.
Operating Income for the nine months ended September 30, 1996 decreased by
$1.4 million to $17.6 million due to the increased amortization and nonrecurring
expenses resulting from the Devon Acquisition and other initiatives undertaken
in 1996. Adjusting for the increased amortization and nonrecurring expenses,
operating income increased by 31.2% compared to last year.
Net Interest Expense for the nine months ended September 30, 1996 increased
from $3.1 million in the same period in 1995 to $15.5 million. The increase is
attributable to the Company Sale and the Devon Acquisition.
Liquidity and Capital Resources. Cash flows provided by operations was $2.1
million for the nine months ended September 30, 1996 as compared to
$17.5 million for the nine months ended September 30, 1995. Cash flows for 1996
were negatively impacted by the increase in interest expense, payment of
restructuring and pension liabilities and higher account receivables.
Net cash used by investing for activities was $105.2 million for the nine months
ended September 30, 1996 compared to $3.3 million for the nine months ended
September 30, 1995. Cash for the Devon Acquisition approximated $100.5 million.
Capital expenditures for the nine months ended September 30, 1996 were $4.6
million.
Cash flows from financing activities were $101.7 million for the nine months
ended September 30, 1996. The Devon Acquisition was financed with $31.5 million
in cash equity and $67.5 million in new debt. Voluntary and scheduled principal
payments for the nine months ended September 30, 1996 amounted to $6 million.
The Company's credit facility consists of a $30 million secured revolving line
of credit which carries interest rates of 2.5 - 3.0% over LIBOR. Borrowings
against the credit facility in the nine months ended September 30, 1996 were
$8.7 million. At September 30, the Company was in compliance with all covenant
requirement of the Credit Agreement.
-7-
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
<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 November 15, 1996 /s/ Anthony W. Borowicz
------------------------- ------------------------
Anthony W. Borowicz,
Vice President - Finance
(Principal Financial Officer and
Duly Authorized Officer)
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 142
<SECURITIES> 0
<RECEIVABLES> 34,153
<ALLOWANCES> (660)
<INVENTORY> 29,300
<CURRENT-ASSETS> 64,815
<PP&E> 37,870
<DEPRECIATION> (4,406)
<TOTAL-ASSETS> 358,262
<CURRENT-LIABILITIES> 31,755
<BONDS> 225,315
0
0
<COMMON> 0
<OTHER-SE> 82,781
<TOTAL-LIABILITY-AND-EQUITY> 358,262
<SALES> 176,010
<TOTAL-REVENUES> 176,042
<CGS> 96,217
<TOTAL-COSTS> 158,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 94
<INTEREST-EXPENSE> 15,465
<INCOME-PRETAX> 2,133
<INCOME-TAX> 2,306
<INCOME-CONTINUING> (173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (173)
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
</TABLE>
