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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 June 28, 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
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(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.
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GRAPHIC CONTROLS CORPORATION
FORM 10-Q
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
June 28, 1996 and December 31, 1995................................................... 1
Condensed consolidated statements of income
-- three months ended June 28, 1996 and 1995
six months ended June 28, 1996 and 1995............................................ 2
Condensed consolidated statements of cash flow
-- six months ended June 28, 1996 and 1995............................................ 3
Notes to condensed consolidated financial statements
-- June 28, 1996...................................................................... 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 6-7
Signature............................................................................... 8
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PART I. FINANCIAL INFORMATION
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 28
1995 1996
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(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 1,481 $ (181)
Accounts receivable, net............................. 25,430 33,487
Inventories.......................................... 22,009 29,212
Other................................................ 858 2,191
-------- --------
Total current assets............................... 49,778 64,709
Property, plant and equipment:
Land................................................. 1,097 1,097
Buildings and improvements........................... 7,766 10,297
Machinery and equipment.............................. 12,976 25,802
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21,839 37,196
Less accumulated depreciation........................ 585 3,975
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21,254 33,221
Deferred income taxes................................. 581 581
Goodwill, net......................................... 164,719 230,679
Financing costs, net.................................. 9,203 11,847
Purchase escrow....................................... -- 5,657
Patents............................................... -- 5,235
Other assets.......................................... 5,377 7,002
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$250,912 $358,931
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable..................................... $ 10,186 $ 17,820
Employees' compensation.............................. 5,561 6,860
Accrued expenses..................................... 6,797 5,981
Income taxes payable................................. 357 1,424
Deferred income taxes................................ 679 679
Current portion of long-term debt.................... 2,131 2,737
-------- --------
Total current liabilities.......................... 25,711 35,501
Long-term debt........................................ 158,000 222,414
Other non-current liabilities......................... 15,702 17,702
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 1,184
Equity adjustment from foreign currency translation.. (171) (236)
-------- --------
Total shareholder's equity......................... 51,499 83,314
-------- --------
$250,912 $358,931
======== ========
</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.
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
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<CAPTION>
Three Months Ended June 28, Six Months Ended June 28,
Pre-Acquisition Pre-Acquisition
1995 1996 1995 1996
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<S> <C> <C> <C> <C>
Net sales..................................... $ 43,570 $ 62,828 $ 87,125 $ 113,433
Cost of sales................................. 23,893 34,814 47,123 62,501
Selling, general and administration expenses.. 12,523 18,783 24,772 33,594
Amortization expense 185 1,956 371 3,673
Other non-recurring expense.................. 37 1,448 41 1,466
---------- ---------- --------- ---------
36,638 57,001 72,307 101,234
Operating income.............................. 6,932 5,827 14,818 12,199
Interest income............................... 21 9 45 23
Interest expense.............................. (991) (5,453) (2,112) (9,998)
---------- ---------- --------- ---------
Income before income taxes.................... 5,962 383 12,751 2,224
Income tax expense............................ 1,890 669 4,548 1,844
--------- ---------- --------- ---------
Net income (loss)............................. $ 4,072 $ (286) $ 8,203 $ 380
========== ========== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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<CAPTION>
PRE-ACQUISITION
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 28, 1996
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Operating activities:
Net income.................................... $ 8,203 $ 380
Depreciation and amortization................. 3,377 6,809
Changes in assets and liabilities............. (1,601) (3,655)
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9,979 3,534
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Investing activities:
Additions to property, plant and equipment.... (924) (2,716)
Purchase of Devon Industries, Inc. - Note C. -- (99,000)
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(924) (101,716)
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Financing activities:
Repayment of senior debt...................... (10,217) (2,480)
Proceeds from senior bank facilities.......... -- 67,500
Proceeds from additional paid in capital...... -- 31,500
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(10,217) 96,520
-------- ---------
Decrease in cash and cash equivalents.......... $(1,162) $ (1,662)
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 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 six-month periods ended June 28, 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 JUNE 28
1995 1996
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Raw materials................ $ 6,924 $11,321
Work in process.............. 1,239 1,576
Finished products............ 13,846 16,312
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$22,009 $29,212
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 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
$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. 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 six months ended June 28, 1996 and June 30, 1995,
assuming consummation of the purchase and related financing as of January 1,
1995, are as follows:
SIX MONTHS ENDED JUNE 28
1995 1996
----------- -----------
Net sales............ $124,304 $124,677
Net income........... $ 1,295 $ 1,065
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Three Months Ended June 28, 1996 Compared to Three Months Ended June 30, 1995.
Sales for the quarter ended June 28, 1996 were $62,828,000, an increase of
$19,258,000 or 44.2% compared to sales of $43,570,000 in the quarter ended
June 30, 1995. The increase is primarily the result of incremental sales
volume associated with the Devon acquisition which was completed on
February 29, 1996 (the "Devon Acquisition").
Cost of Sales increased by $10,921,000 or 45.7% from $23,893,000 in the second
quarter 1995 to $34,814,000 in the second quarter 1996. The increase is
primarily attributable to the incremental sales volume associated with the
Devon Acquisition. Gross profit as a percentage of sales declined from 45.2%
in the second quarter 1995 to 44.6% in the second quarter 1996. The decrease
is attributable to the change in sales mix between medical and industrial
products. Medical products generally have lower margins than industrial
products. Medical gross margins, however, improved from the same quarter
last year due to the acquisition of higher margin Devon products.
Selling, General & Administrative Expenses increased by $6,260,000 or 50.0%
from $12,523,000 in the second quarter 1995 to $18,783,000 in the second
quarter 1996. The increase is primarily attributable to the Devon Acquisition.
As a percentage of sales, expenses increased to 29.9% from 28.7% in the
comparable period of 1995. This ratio is expected to improve in the second
half of the year as a result of the elimination of duplicate selling and
administrative costs from the Devon organization which did not become effective
until June 3, 1996.
Amortization expense increased from $185,000 in the second quarter 1995 to
$1,956,000 in the second quarter 1996. The increase is attributable to the
higher goodwill expense due to Bessemer Holdings, L.P.'s acquisition of the
Company (the "Company Sale") and the Company's subsequent acquisition of Devon.
Non-reoccurring Expense represents one-time costs associated with the
consolidation and integration of Devon and other management reorganizations.
These costs in the second quarter of 1996 totaled $1,635,000. Management
expects these expenses will increase due to other [profit enhancing]
initiatives scheduled for the second half of the year.
Operating Income declined by $1,105,000 from $6,932,000 in the second quarter
1995 to $5,827,000 in the second quarter 1996. The decrease is the result of
the increased amortization and one-time costs associated with the Company Sale
and the Devon Acquisition.
Net Interest Expense increased from $970,000 in the second quarter 1995 to
$5,444,000 in the second quarter of 1996. The increase was the result of the
increased indebtedness in connection with the Company Sale and the Devon
Acquisition.
Six Months Ended June 28, 1996 Compared to Six Months Ended June 30, 1995.
Sales for the six months ended June 28, 1996 increased by $26,308,000 or 30.2%
from $87,125,000 in the first half 1995 to $113,433,000 in the first half 1996.
The increase is primarily attributable to the incremental sales volume from the
Devon Acquisition. However, sales of the base medical North American products
(excluding Devon) achieved record levels in the first half of the year. Sales
of industrial products declined by 5.3% compared to an exceptionally strong
first half of 1995 in which 52.5% of the total 1995 industrial products sales
were recorded. International sales were comparable to the prior year period.
Gross Margins declined from 45.9% for the six month ended June 30, 1995 to
44.9% for the six months ended June 28, 1996. The changing sales mix between
medical and industrial products was the primary cause for the decrease. Gross
margins on medical sales for the first half of 1996 remained the same compared
to the prior year period. Industrial gross margins improved compared to the
first half, whereas International margins decreased slightly.
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Selling, General and Administrative Expenses increased by $8,822,000 from
$24,772,000 in the first half of 1995 to $33,594,000 in the first half of 1996.
The increase was attributable to the Devon Acquisition. Costs for the base
North American operation (excluding Devon) declined compared to last year,
reflecting the Company initiatives to reduce administrative expenses.
Amortization expense increased from $371,000 in the first half of 1995 to
$3,673,000 in the comparable period in 1996 which reflects the increased
goodwill from the Company Sale and the Devon Acquisition.
Operating Income decreased by $2,619,000 to $12,199,000 due to the increased
amortization and non-reoccurring expenses pertaining to the Company Sale and
the Devon Acquisition. Furthermore, approximately 52% of the 1995 operating
income was recorded in the first half due to higher than normal sales of
industrial and cable and leadwire sales. These sales normalized in the last
half of 1995.
Net Interest Expense increased from $2,067,000 in the first half of 1995 to
$9,975,000 in the first half of 1996. Aggregate indebtedness at June 30, 1995
was $225,151,000 which is down $9,000,000 from original borrowings associated
with the Company Sale and the Devon Acquisition.
Liquidity and Capital Resources. During the six-month period ended June 28,
1996, the Company's cash and cash equivalents decreased by $1,662,000 to
$(181,000). The primary reason for the decrease was spending for additions to
property, plant and equipment of $2,716,000 and repayment of senior debt of
$2,480,000. 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 pursuant to the Devon
Acquisition 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. and affiliates thereof. The required
amortization payments under the Company's amended Senior Bank Credit
Agreement (the "Credit Agreement") are $437,000 for the remainder of 1996,
$9,400,000 in 1997, $12,100,000 in 1998, $13,300,000 in 1999, and $14,300,000
in 2000. At June 28, 1996, the Company was in compliance with all of the
covenant requirements of the Credit Agreement.
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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
-------------------------------------------
Registrant
August 14, 1996 Anthony W. Borowicz
------------------ -------------------------------------------
Date Anthony W. Borowicz, Vice President-Finance
(Principal Financial Officer and Duly
Authorized Officer)
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