<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, 1997
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.
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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 statements of income
-- three months ended March 31, 1997 and 1996.......................................... 1
Condensed consolidated balance sheets
March 31, 1997 and December 31, 1996................................................... 2
Condensed consolidated statements of cash flow
-- three months ended March 31, 1997 and 1996.......................................... 3
Notes to condensed consolidated financial statements
-- March 31, 1997...................................................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 5-6
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K................................................. 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 MARCH 31
1996 1997
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(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 563 $ 657
Accounts receivable, net............................. 37,208 37,987
Inventories.......................................... 32,697 36,916
Income tax recoverable............................... 1,755 --
Other................................................ 1,138 1,711
-------- --------
Total current assets............................... 73,361 77,271
Property, plant and equipment:
Land................................................. 1,097 1,096
Buildings and improvements........................... 11,160 11,209
Machinery and equipment.............................. 29,589 31,203
-------- --------
41,846 43,508
Less accumulated depreciation........................ 6,750 8,641
-------- --------
35,096 34,867
Goodwill, net......................................... 229,639 229,073
Financing costs, net.................................. 11,150 10,517
Acquisition escrow accounts........................... 9,002 9,002
Other assets.......................................... 6,715 7,109
-------- --------
$365,017 $367,839
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Cash overdraft....................................... $ 2,954 $ --
Accounts payable..................................... 14,261 13,297
Employees' compensation.............................. 7,154 5,395
Accrued expenses..................................... 5,009 3,906
Income taxes payable................................. -- 356
Deferred income taxes................................ 1,970 1,970
Current portion of long-term debt.................... 8,015 10,465
-------- --------
Total current liabilities.......................... 39,363 35,389
Long-term debt........................................ 219,728 226,022
Deferred income taxes................................. 1,199 1,197
Other non-current liabilities......................... 22,962 22,949
Shareholder's equity:
Common stock ($1 par)
Authorized - 5,000,000 shares; issued & outstanding
100 shares.......................................... -- --
Additional paid-in capital........................... 82,366 82,366
Retained earnings (accumulated deficit).............. (288) 696
Equity adjustment from foreign currency translation.. (313) (780)
-------- --------
Total shareholder's equity......................... 81,765 82,282
-------- --------
$365,017 $367,839
======== ========
</TABLE>
(1) The balance sheet at December 31, 1996 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-
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1997
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<S> <C> <C>
Net sales..................................... $ 50,605 $ 63,466
Cost of sales.................................. 27,687 33,897
---------- ----------
Gross Profit............................... 22,918 29,569
Selling, general and administration expenses.. 14,811 18,223
Amortization expense.......................... 1,717 2,149
Other nonrecurring expense. .................. 18 1,279
---------- ----------
Total operating expenses................... 16,546 21,651
---------- ----------
Operating income........................... 6,372 7,918
Interest income............................... 14 --
Interest expense.............................. (4,545) (5,634)
----------- ----------
Income before income taxes................. 1,841 2,284
Income tax expense............................ 1,175 1,300
--------- ----------
Net income................................. $ 666 $ 984
========== ==========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
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<S> <C> <C>
Operating activities:
Net income.................................... $ 666 $ 984
Depreciation and amortization................. 3,010 4,134
Changes in assets and liabilities............. (3,781) (9,154)
-------- ---------
Net cash used by operations................. (105) (4,036)
-------- ---------
Investing activities:
Additions to property, plant & equipment...... (1,020) (1,660)
Purchase of Devon Industries, Inc............. (96,251) --
-------- ---------
Net cash used in investing activities....... (97,271) (1,660)
-------- ---------
Financing activities:
Repayment of senior debt...................... (1,082) (375)
Decrease in cash overdraft.................... -- (2,954)
Financing fees................................ (2,749) --
Proceeds from senior bank facilities.......... -- 9,119
Senior bank financing of Devon purchase....... 67,500 --
Proceeds from additional paid in capital...... 31,500 --
------- ---------
Net cash provided by financing activities... 97,918 5,790
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Increase(decrease) in cash and cash equivalents (2,207) 94
Cash and cash equivalents at beginning of period 1,481 563
------- ---------
Cash and cash equivalents at end of period..... $ (726) $ 657
======= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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, 1997 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1996 1997
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<S> <C> <C>
Raw materials................ $12,822 $11,885
Work in process.............. 2,094 2,299
Finished products............ 17,781 22,732
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$32,697 $36,916
======= =======
</TABLE>
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 is
a developer, manufacturer, and marketer of disposable medical and surgical
supplies. The total cost of the transaction was $96 million, including
estimated expenses of $5 million, plus 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,
1997, assuming consummation of the purchase and related financing as of
January 1, 1996, are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1997
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<S> <C> <C>
Net sales .................................. $61,849 $63,466
Net income.................................. 1,362 984
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996.
Net Sales increased by 25.5% from $50.6 million in the first quarter ended March
31, 1996 to $63.5 million for the three months ended March 31, 1997. The
increase is primarily the result of incremental sales volume associated with
the acquisition of Devon Industries Inc. ("Devon") which was completed on
February 29, 1996 (the "Devon Acquisition). Domestic medical sales excluding
Devon-brand increased by 7.2% in the three months ended March 31, 1997 over
the same period last year. In the first quarter, the Company began shipping
certain products under the new Premier Alliance contract which contributed to
the increased sales. Sales under this contract should increase going forward
as the hospitals are converted to Graphic Controls products. Offsetting the
increased end user demand is the continued oscillation in the Company's sales
to the largest medical distributors. In the first quarter of 1997, the
Company's largest distributors decreased their inventory of the Company's
products resulting in a reduction in sales of approximately $1.4 million. The
impact is primarily affecting sales of Devon-brand products which almost
entirely are sold through these distributors. Industrial product sales
decreased by 2.4% in the three months ended March 31, 1997, which is in line
with the historical rate of decline on this mature product segment.
International sales increased by 16.9% compared to the same period last year.
Sales of Devon-brand products and increased market penetration of the
Company's electrodes and chart products account for the majority of the
increase.
Gross profit increased from $22.9 million for the first quarter ended March
31, 1996 to $29.6 for the first quarter ended March 31, 1997, an increase of
$6.7 million or 29.3%. The majority of the increase was due to the Devon
Acquisition. Gross margin increased from 45.2% in the first quarter 1996 to
46.6% in 1997. The increase is partially attributable to increased productivity
in some of our manufacturing plants resulting from continued business
improvement actions.
Selling, General & Administrative Expenses increased by $3.4 million or 22.9%
from $14.8 million in the three months ended March 31, 1996 to $18.2 million
in 1997. Substantially all of the increase was due to the Devon Acquisition.
As a percentage of net sales, expenses have decreased from 29.2% to 28.6% of
net sales for the quarter ending March 31, 1997. The decrease is partially
attributable to the consolidation of Devon Industries into Graphic Controls,
the rationalization of our international business and the improved distribution
capabilities.
Amortization Expense increased by $.4 million in the three months ended
March 31, 1997 to $2.1 million as compared to the same period last year.
The increase is attributable to the higher goodwill expense due to the Devon
Acquisition.
Nonrecurring Expense of $1.3 million for the three months ended March 1997
represents costs primarily associated with the contract with Thomas Group
Incorporated and the startup costs of cable and leadwire operation in the
New Jersey facility. The Thomas Group has been contracted to assist in the
profit enhancing activities of the Company. Their focus will be on reducing
order fulfillment and new product development cycle time, reducing working
capital requirements and other corporate productivity measures aimed at
increasing revenue growth and improving margins. To improve long term
efficiency, the cable and leadwire production has been consolidated into the
Cherry Hill facility. Phase I, the physical move of the equipment from the
California plant to the New Jersey plant, was completed in September 1996.
Phase II of the consolidation, the startup of production, is currently
ongoing. To date, learning curve related costs of $.7 million have been
incurred. Actions are being taken to improve the product and support costs
for the cable and leadwire production.
Operating Income increased by $1.5 million from $6.4 million in the three months
ended March 31, 1996 to $7.9 million for the same period this year. The
increase in operating income reflects the Devon Acquisition and the growth
across the company's three lines of business -- medical, industrial and
international.
Net Interest Expense increased from $4.5 million in the three months ended
March 31, 1996 to $5.6 million for same period this year. The increase was
the result of the increased indebtedness incurred in connection with the
Devon Acquisition and the temporary one-time increase in inventory and
receivables of approximately $13.0 million.
-5-
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Liquidity and Capital Resources. Cash flows used by operations for the first
quarter 1997 was $4.0 million as compared to $.1 million used by operations
for the three months ended March 1996. Operating cash flows for 1997 were
negatively impacted by an increase in inventories primarily attributable to
the ramp up for the projected increase in sales for the Premier contract,
the anticipated slowdown in distributor purchases which caused inventory to
increase, a temporary increase in accounts receivable primarily related to
the startup of a new collection system and a reduction in current liabilities,
primarily lower accrued expenses.
Net cash used by investing for activities was $1.6 million reflecting purchases
of machinery and equipment to primarily support the growth in medical
products.
Cash flows from financing activities were $5.8 million for the first quarter
1997. The increase was provided by borrowings under the Company's revolving
bank line of credit to support the increase in working capital requirements.
On March 31, the Company had aggregate borrowings under its credit facility
of $161.5 million and $15.4 million available under its bank line of credit.
As a result of the integration of Devon and the identification of several new
areas of potential cost savings, the Company spent $7.7 million on a one-time
basis in 1996 and expects to incur additional nonrecurring costs in 1997
relating to the anticipated profit enhancing actions by the Company and the
Thomas Group. In connection with such increased expenditures, the Company
received approval on May 9, 1997 to amend its current agreement governing its
bank debt.
Forward-Looking Statements. Statements, either written or oral, which express
the Company's expectation for the future with respect to financial performance
or operating strategies can be identified as forward-looking statements.
Caution must be taken to consider these statements in light of the following
factors: current and contemplated cost-containment measures will be
successfully implemented; key distributors will make purchases at the same
level as their sales; demand for the Company's products will follow recent
growth trends; key customers will comply with the terms of their contract;
competitors will not introduce new products which will substantially reduce
Graphic Controls' market share in its most significant product lines; and the
Company will continue to manufacture high quality products at competitive costs
and maintain or increase product pricing. In the event any of the above factors
do not occur as management anticipates, actual results could differ materially
from the expectations expressed in the forward-looking statements.
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<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 May 15, 1997 /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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 657
<SECURITIES> 0
<RECEIVABLES> 38,812
<ALLOWANCES> (825)
<INVENTORY> 36,916
<CURRENT-ASSETS> 77,271
<PP&E> 43,508
<DEPRECIATION> (8,641)
<TOTAL-ASSETS> 367,839
<CURRENT-LIABILITIES> 35,389
<BONDS> 226,022
0
0
<COMMON> 0
<OTHER-SE> 82,282
<TOTAL-LIABILITY-AND-EQUITY> 367,839
<SALES> 63,466
<TOTAL-REVENUES> 63,466
<CGS> 33,897
<TOTAL-COSTS> 55,548
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 5,634
<INCOME-PRETAX> 2,284
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 984
<EPS-PRIMARY> 9.84
<EPS-DILUTED> 9.84
</TABLE>
