<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, 1998
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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<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
September 30, 1998 and December 31, 1997............................................... 1
Condensed consolidated statements of income
-- three months ended September 30, 1998 and 1997
nine months ended September 30, 1998 and 1997...................................... 2
Condensed consolidated statements of cash flow
--nine months ended September 30, 1998 and 1997...................................... 3
Notes to condensed consolidated financial statements
-- September 30, 1998................................................................ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 5-7
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 SEPTEMBER 30
1997 1998
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(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 626 $ 548
Accounts receivable, net............................. 35,280 38,999
Inventories.......................................... 32,091 30,160
Income tax recoverable............................... 730 720
Other................................................ 1,055 743
-------- --------
Total current assets............................... 69,782 71,170
Property, plant and equipment:
Land................................................. 1,095 1,093
Buildings and improvements........................... 7,390 7,372
Machinery and equipment.............................. 34,278 30,699
-------- --------
42,763 39,164
Less accumulated depreciation........................ 13,660 17,767
-------- --------
39,103 21,397
Goodwill, net......................................... 224,221 219,780
Other assets.......................................... 22,969 20,488
-------- --------
$346,075 $332,835
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Cash overdraft....................................... $ 4,446 $ 5,537
Accounts payable..................................... 14,081 12,723
Accrued expenses..................................... 13,133 11,790
Deferred income taxes................................ 2,230 2,230
Current portion of long-term debt.................... 12,165 13,017
-------- --------
Total current liabilities.......................... 46,055 45,297
Long-term debt........................................ 201,625 195,755
Deferred income taxes................................. 240 223
Other non-current liabilities......................... 20,187 15,248
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).............. (2,910) (3,627)
Equity adjustment from foreign currency translation.. (1,488) (2,427)
-------- --------
Total shareholder's equity......................... 77,968 76,312
-------- --------
$346,075 $332,835
======== ========
<FN>
(1) The balance sheet at December 31, 1997 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,
1997 1998 1997 1998
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 65,883 $ 65,575 $ 192,216 $ 198,054
Cost of sales................................. 36,617 38,602 105,999 115,315
---------- --------- ---------- ---------
Gross profit.................................. 29,266 26,973 86,217 82,739
Selling, general and administration expenses.. 18,876 17,818 56,057 56,057
Amortization expense......................... 2,156 2,135 6,459 6,424
Other non-recurring expense.................. 1,404 1,249 4,352 3,214
---------- --------- --------- ---------
Total operating expense..................... 22,436 21,202 66,868 65,695
---------- --------- --------- ---------
Operating income.............................. 6,830 5,771 19,349 17,044
Interest expense.............................. (5,870) (5,353) (17,340) (16,233)
---------- --------- -------- --------
Income (loss) before income taxes............. 960 418 2,009 811
Income tax expense (benefit).................. 654 572 1,717 1,528
--------- --------- -------- --------
Net income (loss)............................. $ 306 $ (154) $ 292 $ (717)
========= ========= ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<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, 1997 SEPTEMBER 30, 1998
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<S> <C> <C>
Operating activities:
Net income (loss)............................... $ 292 $ (717)
Depreciation and amortization................... 12,326 12,311
Changes in assets and liabilities............... (13,758) (9,932)
-------- ---------
Net cash provided (used) by operations........ (1,140) 1,662
-------- ---------
Investing activities:
Additions to property, plant and equipment...... (4,475) (3,227)
Proceeds from sale of machinery and equipment... -- 5,414
-------- ---------
Net cash used in investing activities......... (4,475) 2,187
-------- ---------
Financing activities:
Repayment of senior debt........................ (4,750) (10,057)
Decrease in cash overdraft...................... (1,873) 1,091
Proceeds from senior bank facilities............ 12,184 5,039
-------- ---------
Net cash provided by financing activities..... 5,561 (3,927)
-------- ---------
Increase (decrease) in cash and cash equivalents. (54) (78)
Cash and cash equivalents at beginning of period. 563 626
-------- ---------
Cash and cash equivalents at end of period....... $ 509 $ 548
======== =========
<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, 1998
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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
DECEMBER 31 SEPTEMBER 30
1997 1998
----------- --------
Raw materials................ $11,644 $ 9,944
Work in process.............. 2,116 2,675
Finished products............ 18,331 17,541
------- -------
$32,091 $30,160
======= =======
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997.
Net Sales for the three months ended September 30, 1998 were $65.6 million
compared to $65.9 million for the corresponding three months ended
September 30, 1997, a decrease of .5%. Increased sales volume in the company's
Medical and International segments were offset by the decline in Industrial
product sales.
Gross Profit for the third quarter of 1998 was $27.0 million, compared to $29.3
million for the third quarter of 1997. The Company's gross margin percentage
was 41.1% in the third quarter of 1998 from 44.4% in the third quarter of 1997.
The decrease is partially attributable to the timing effect of lower medical
products selling prices on certain large national account contracts.
Selling, General & Administrative Expenses (SG&A) for the third quarter of 1998
were $17.8 million, compared to $18.9 million for the third quarter 1997. As a
percentage to sales, SG&A expense decreased to 27.2% in the third quarter of
1998 from 28.7% in the third quarter of 1997. The decrease in SG&A expense as a
percentage of net sales is partially attributable to expense reduction
activities.
Non-recurring expense for the three months ended September 30, 1998 of $1.2
million decreased by $.2 million from the comparable period last year. This
expense represents costs primarily associated with the contract with the Thomas
Group Incorporated and employee severance costs.
Operating income for the three months ended September 30, 1998 of $5.8 million
decreased by $1.0 million compared to the same quarter last year, a decrease
of 15.5%. As a percentage to sales, operating margins declined to 8.8% in the
third quarter of 1998 from 10.4% in the third quarter of 1997.
Net Interest expense for the three months ended September 30, 1998 of $5.4
million decreased by $.5 million compared to the same period last year. The
decrease was the result of decreased indebtedness of approximately $26 million
compared to September 1997.
-5-
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997.
Net Sales for the nine months ended September 30, 1998 were $198.1 million,
an increase of $5.9 million or 3.1% from net sales of $192.2 million for the
corresponding nine months ended September 30, 1997. Medical sales increased
by 5.7% Industrial sales decreased by 7.9% and International sales increased
by 9.4% for the nine months ended September 1998 compared to the corresponding
period of 1997.
Gross Profit for the first nine months of fiscal 1998 was $82.7 million, a
decrease of $3.5 million from gross profit of $86.2 million for the
corresponding fiscal period. The majority of the decrease is attributable
to the timing effects of the lower medical national account selling prices and
higher first quarter 1997 sales due to timing issues relating to clearing
backordered shipments.
Selling, General and Administrative Expenses (SG&A) were $56.1 million for the
first nine months of both fiscal 1998 and 1997. As a percentage of net sales,
expenses decreased from 29.2% to 28.3% for the first nine months of 1998
compared to 1997.
Nonrecurring Expense and other charges decreased by $1.2 million for the nine
months ended September 30, 1998 compared with the same period last year from
$4.4 million to $3.2 million.
Operating Income decreased by $2.3 million from $19.3 million in the first nine
months of 1997 to $17.0 million in the comparable 1998 period as a result of
the foregoing factors. Earnings before interest, taxes, depreciation,
amortization, and nonrecurring and other charges was $32.6 million for the nine
months ended September 30, 1998, compared to $36.0 for the same period last
year, a decrease of 9.4% for the first nine months of 1997.
Net Interest Expense was $16.2 million for the nine months of fiscal 1998
compared to $17.3 million for the same period last year. The decrease was the
result of decreased indebtedness of approximately $26 million compared to
September 1997.
Liquidity and Capital Resources. Cash flows provided by operations for the
first nine months of fiscal 1998 was $1.7 million as compared to $1.1 million
used by operations for the nine months ended September 1997. Operating cash
flow for 1998 were negatively impacted by an increase in inventories of
approximately $5.5 million due to the ramp up for the projected increase in
sales for the Premier contract and the unanticipated slowdown in distributor
purchases.
Net cash provided by investing activities was $2.2 million reflecting $3.2
million in purchases of machinery and equipment to primarily support the growth
in medical products and proceeds of $5.4 million from a sale/leaseback of
equipment.
Cash flows used in financing activities were $3.9 million for the nine months
ended September 30, 1998, primarily representing repayment of borrowings under
the Company's bank line of credit. On September 30, 1998 the Company had
aggregate borrowings under its credit facility of $133.8 million and $25.2
million available under its bank line of credit.
Management believes that the funds generated from operations, along with the
Company's current working capital position and bank credit, will be sufficient
to satisfy the Company's capital requirements for the foreseeable future.
The Effect Of The Year 2000 Compliance. The Company is in the process of
implementing a new enterprise-wide software program that will solve Year 2000
compliance issues. The Company anticipates completing this program in
mid 1999. Management believes that the repair of existing systems or the
purchase of new software will not have a material effect on the financial
results of the Company.
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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.
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<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 13, 1998 -----------------------------
_________________ Anthony W. Borowicz, Vice President -
Finance
(Principal Financial Officer and
Duly Authorized Officer)
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 548
<SECURITIES> 0
<RECEIVABLES> 39,594
<ALLOWANCES> (595)
<INVENTORY> 30,160
<CURRENT-ASSETS> 71,170
<PP&E> 39,164
<DEPRECIATION> (17,767)
<TOTAL-ASSETS> 332,835
<CURRENT-LIABILITIES> 45,297
<BONDS> 195,755
0
0
<COMMON> 0
<OTHER-SE> 76,312
<TOTAL-LIABILITY-AND-EQUITY> 332,835
<SALES> 198,054
<TOTAL-REVENUES> 198,054
<CGS> 115,315
<TOTAL-COSTS> 181,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 251
<INTEREST-EXPENSE> 16,233
<INCOME-PRETAX> 811
<INCOME-TAX> 1,528
<INCOME-CONTINUING> (717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (717)
<EPS-PRIMARY> (7.17)
<EPS-DILUTED> (7.17)
</TABLE>
