<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, 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.
<PAGE>
GRAPHIC CONTROLS CORPORATION
FORM 10-Q
INDEX
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<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
September 30, 1997 and December 31, 1996............................................... 1
Condensed consolidated statements of income
-- three months ended September 30, 1997 and 1996
nine months ended September 30, 1997 and 1996...................................... 2
Condensed consolidated statements of cash flow
--nine months ended September 30, 1997 and 1996...................................... 3
Notes to condensed consolidated financial statements
-- September 30, 1996................................................................ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 5-7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 8
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 SEPTEMBER 30
1996 1997
------------ -----------
(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 563 $ 509
Accounts receivable, net............................. 37,208 39,116
Inventories.......................................... 32,697 39,193
Income tax recoverable............................... 1,755 774
Other................................................ 1,138 1,839
-------- --------
Total current assets............................... 73,361 81,431
Property, plant and equipment:
Land................................................. 1,097 1,096
Buildings and improvements........................... 11,160 11,377
Machinery and equipment.............................. 29,589 33,849
-------- --------
41,846 46,322
Less accumulated depreciation........................ 6,750 12,413
-------- --------
35,096 33,909
Goodwill, net......................................... 229,693 226,122
Financing costs, net.................................. 11,150 9,449
Acquisition escrow accounts........................... 9,002 8,963
Other assets.......................................... 6,715 7,597
-------- --------
$365,017 $367,471
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Cash overdraft....................................... $ 2,954 $ 1,081
Accounts payable..................................... 14,261 14,027
Employees' compensation.............................. 7,154 6,318
Accrued expenses..................................... 5,009 3,349
Income taxes payable................................. -- --
Deferred income taxes................................ 1,970 1,970
Current portion of long-term debt.................... 8,015 11,952
-------- --------
Total current liabilities.......................... 39,363 38,697
Long-term debt........................................ 219,728 223,225
Deferred income taxes................................. 1,199 1,197
Other non-current liabilities......................... 22,962 22,829
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) 4
Equity adjustment from foreign currency translation.. (313) (847)
-------- --------
Total shareholder's equity......................... 81,765 81,523
-------- --------
$365,017 $367,471
======== ========
<FN>
(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.
</TABLE>
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<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1996 1997 1996 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 62,577 $ 65,883 $ 176,010 $ 192,216
Cost of sales................................. 33,716 36,617 96,217 105,999
---------- ---------- ---------- ---------
Gross profit................................ 28,861 29,266 79,793 86,217
Selling, general and administration expenses.. 18,066 18,876 51,660 56,057
Amortization expense 2,019 2,156 5,692 6,459
Other non-recurring expense.................. 3,409 1,404 4,875 4,352
---------- ---------- ---------- ---------
Total operating expense..................... 23,494 22,436 62,227 66,868
---------- ---------- ---------- ---------
Operating income............................. 5,367 6,830 17,566 19,349
Interest income............................... 9 7 32 10
Interest expense.............................. (5,467) (5,877) (15,465) (17,350)
---------- ---------- --------- ---------
Income (loss) before income taxes............. (91) 960 2,133 2,009
Income tax expense (benefit).................. 462 654 2,306 1,717
--------- ---------- --------- ---------
Net income (loss)............................. $ (553) $ 306 $ (173) $ 292
========== ========== ========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
-2-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income (loss)............................... $ (173) $ 292
Depreciation and amortization................... 10,538 12,326
Changes in assets and liabilities............... (8,572) (13,758)
-------- ---------
Net cash provided (used) by operations........ 1,793 (1,140)
-------- ---------
Investing activities:
Additions to property, plant and equipment...... (4,637) (4,475)
Purchase of Devon Industries, Inc............... (96,251) --
-------- ----------
Net cash used in investing activities......... (100,888) (4,475)
-------- ----------
Financing activities:
Repayment of senior debt........................ (6,063) (4,750)
Decrease in cash overdraft...................... -- (1,873)
Financing fees.................................. (3,964) --
Proceeds from senior bank facilities............ 8,783 12,184
Senior bank financing of Devon purchase......... 67,500 --
Proceeds from additional paid in capital........ 31,500 --
-------- ---------
Net cash provided by financing activities..... 97,756 5,561
-------- ---------
Increase (decrease) in cash and cash equivalents. (1,339) (54)
Cash and cash equivalents at beginning of period. 1,481 563
-------- ---------
Cash and cash equivalents at end of period....... $ 142 $ 509
======== =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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- and nine-month periods ended September 30, 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):
DECEMBER 31 SEPTEMBER 30
1996 1997
----------- --------
Raw materials................ $12,822 $13,621
Work in process.............. 2,094 1,781
Finished products............ 17,781 23,791
------- -------
$32,697 $39,193
======= =======
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
$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 nine months ended September 28, 1996
and September 30, 1997, assuming consummation of the purchase and related
financing as of January 1, 1996, are as follows:
NINE MONTHS ENDED SEPTEMBER 30
1996 1997
----------- -----------
Net sales............ $187,254 $192,216
Net income........... $ (237) $ 292
NOTE D - EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. The Company has not yet determined the
impact Statement No. 130 will have on its financial statements.
In June 1997, The Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which is
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the impact Statement No. 131 will have on its financial
statements.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996.
Net Sales for the three months ended September 30, 1997 were $65.9 million
compared to $62.6 million for the corresponding three months ended
September 30, 1996. Medical sales reached a record high of $49.8 million for the
three months ended September 30, 1997, an increase of 10.7% from the
corresponding 1996 fiscal period. The record sales results were partially
attributable to strong new national contract sales and increased purchases by
major national medical distributors, temporarily reversing a previously
discussed inventory reduction trend. Industrial sales experienced a decrease
of 4.7% from the corresponding 1996 fiscal period. This decrease represents a
continued unit volume decline in the mature chart and marking systems product
lines. International sales were $2.9 million for the the three months ended
September 30, 1997 as compared to sales of $3.7 million in the three months
ended September 1996. Adjusting for the absence of sales related to the
divested business, International revenues would have remained approximately
the same as last year.
Gross Profit for the third quarter of 1997 was $29.3 million, compared to $28.9
million for the third quarter of 1996. The Company's gross margin percentage
was 44.4% in the third quarter of 1997 as compared to 46.1% in the third
quarter of 1996. The decrease in margin reflects the lower sales on the higher
margin industrial products, unfavorable manufacturing variances temporarily
caused by scheduled maintenance programs and lower pricing on national
contract sales.
Selling, General & Administrative Expenses (SG&A) for the third quarter of 1996
were $18.9 million, an increase of 4.5% compared to the third quarter 1997.
The increase is primarily attributable to higher variable expenses related to
the increased sales. As a percentage of net sales, expenses were 28.7%
approximately the same as the third quarter last year.
Non-recurring and other expense for the three months ended September 30, 1997
was $1.4 million as compared to $3.4 million in the third quarter of 1996.
The 1997 expense represents start-up cost related to the closure of the
California based cable & leadwire operation and relocation to the New Jersey
facility and consulting costs paid to the Thomas Group. The Thomas Group has
been contracted to assist in the profit sharing initiatives of the Company. The
prior year expense of $3.4 million represents one-time costs associated with the
consolidation and integration of Devon Industries, the sale of the Company's
Australian subsidiary and relocation of the Tronomed manufacturing facility.
Operating income of $6.8 million increased by $1.5 million or 27.3% compared
to the same quarter last year, principally due to the lower non-recurring
and other expense. Operating margin increased from 8.6% in the third quarter of
fiscal 1996 to 10.4% in the third quarter of fiscal 1997. Earnings before
interest taxes, depreciation, amortization non-recurring and other expenses was
$12.5 million an increase of 16.2% from the second quarter of 1997.
Net Interest expense for the three months ended September 30, 1997 of $5.9
million increased by $.4 milllion compared to the same period last year. The
increase was due to higher working capital requirements associated with
increased sales and accounts receivables.
-5-
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996.
Net Sales for the nine months ended September 30, 1997 were $192.2 million,
an increase of $16.2 million or 9.2% from net sales of $176.0 million for the
corresponding nine months ended September 30, 1996. Medical sales of
$141 million for the nine months ended September 30, 1997, increased by 15.3%
from the same period last year.The increase was primarily a result of the Devon
acquisition that was relected in 1996 results only from February 18, 1996, the
date of the acquisition, and higher national contract sales. Industrial sales
were $41 million for the nine months ended September 30, 1997 compared to $43
million for the same period last year, a decrease of 4.7%. International
sales were $10.4 million for the nine months ended September 30, 1997 compared
to $10.8 million for the same period last year, a decrease of 4.4%. Adjusting
for the divested business, International sales increased by 16.7%.
Gross Profit for the first nine months of fiscal 1997 was $86.2 million, an
increase of $6.4 million from gross profit of $79.8 million for the
corresponding fiscal period. The majority of the increase was due to the
acquisition of Devon Industries. Gross profit margin percentage decreased to
44.9% in the first nine months of fiscal 1997 compared to 45.3% for the same
period last year. The decrease is primarily attributable to sales mix changes.
Selling, General and Administrative Expenses (SG&A) of $56 million increased
8.5% for the first nine months of fiscal 1997 from $51.7 million in the nine
months ended September 1996. Substantially all of the increase was due to the
Devon acquisition. As a percentage of net sales, expenses decreased from 29.4%
to 29.2% for the nine months of 1997 compared to 1996. The decrease is
partially attributable to the consolidation of Devon Industries into Graphic
Controls and the rationalization of the international business. Amortization
expenses increased by $.8 million for the nine months of 1997 compared to the
same period last year due to the higher goodwill expense resulting from the
Devon acquisition.
Nonrecurring Expense and other charges decreased by $.5 million for the nine
months ended September 30, 1997 compared with the same period last year from
$4.9 million to $4.4 million.
Operating Income increased by $1.7 million from $17.6 million in the first nine
months of 1996 to $19.3 million for the nine months of fiscal 1997 as a result
of the foregoing factors. Earnings before interest, taxes, depreciation,
amortization, and nonrecurring and other charges was $36.6 million for the nine
months ended September 30, 1997, an increase of 8.3% for the same period last
year.
Net Interest Expense was $17.3 million for the nine months of fiscal 1997
compared to $15.4 million for the same period last year. The increase resulted
from a higher debt balance primarily as a result of the Devon acquisition.
Liquidity and Capital Resources. Cash flows used by operations for the first
nine months of fiscal 1997 was $1.4 million as compared to $1.8 million provided
by operations for the nine months ended September 1996. Operating cash flows
for 1997 were negatively impacted by an increase in inventories of approximately
$6.5 million due to the ramp up for the projected increase in sales for the
Premier contract.
Net cash used by investing activities was $4.5 million reflecting purchases of
machinery and equipment to primarily support the growth in medical products.
Cash flows from financing activities were $5.5 million for the nine months ended
September 30, 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 September 30, 1997 the Company had aggregate borrowings under
its credit facility of $160.2 million and $14.5 million available under its bank
line of credit.
Resulting from 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 have incurred additional one-time expenses in 1997 of $4.4
million relating to the anticipated profit enhancing actions by the Company
and the Thomas Group.
-6-
<PAGE>
Effects of New Accounting Pronouncements. In June 1997, the Financial
Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
The Company has not yet determined the impact Statement No. 130 will have on its
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information, which is
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the impact Statement No. 131 will have on its financial
statements.
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.
-7-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Utah Medical filed on June 3, 1997, a lawsuit in the U.S. District
Court for the Central District of Utah against the Company
for alleged patent infringement with respect to the
Company's Softrans 4000 Intrauterine Pressure Catheter. The
Company has denied the allegation and intends to vigorously
defend its right to manufacture and distribute the Softrans product.
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.
-8-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 509
<SECURITIES> 0
<RECEIVABLES> 40,016
<ALLOWANCES> (900)
<INVENTORY> 39,193
<CURRENT-ASSETS> 81,431
<PP&E> 46,322
<DEPRECIATION> (12,413)
<TOTAL-ASSETS> 367,471
<CURRENT-LIABILITIES> 38,697
<BONDS> 223,225
0
0
<COMMON> 0
<OTHER-SE> 81,523
<TOTAL-LIABILITY-AND-EQUITY> 367,471
<SALES> 192,216
<TOTAL-REVENUES> 192,226
<CGS> 105,999
<TOTAL-COSTS> 172,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 121
<INTEREST-EXPENSE> 17,350
<INCOME-PRETAX> 2,009
<INCOME-TAX> 1,717
<INCOME-CONTINUING> 292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.92
</TABLE>
