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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 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: NOT ASSIGNED
GRAPHIC CONTROLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-0834173
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(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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE NONE
-------------------------------------- --------------------------------------
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
SENIOR SUBORDINATED NOTES DUE 2005
------------------------------------------------
(TITLE OF CLASS)
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
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GRAPHIC CONTROLS CORPORATION
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business............................................................ 1
2. Properties.......................................................... 13
3. Legal Proceedings................................................... 13
4. Submission of Matters to a Vote of Security Holders................. 13
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters..................................... 14
6. Selected Financial Data............................................. 14
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 16
8. Financial Statements and Supplementary Data......................... 20
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 43
PART III
10. Directors and Executive Officers of the Registrant.................. 43
11. Executive Compensation.............................................. 46
12. Security Ownership of Certain Beneficial Owners
and Management...................................................... 53
13. Certain Relationships and Related Transactions...................... 53
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 55
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Graphic Controls Corporation (the "Company"), wholly-owned by Bessemer
Holdings, L.P. and its affiliates (collectively, "Bessemer") and management
(through their 100% ownership of Graphic Holdings, Inc. ("Holdings"), of which
the Company is a wholly-owned subsidiary), is a leading North American
manufacturer and marketer of disposable medical and surgical products and
industrial recording supplies. Medical products, which represented 22% of the
Company's 1997 net sales, include six principal product lines: (i) cardiology
and critical care, (ii) labor and delivery room,(iii) neurology,
(iv) perinatology, (v) infection control and (vi) Devon(R) brand operating room
products. Industrial products, which represented 22% of the Company's 1997 net
sales, include recording charts and marking systems used in recording physical
measurements such as temperature, humidity, rate and volume of flow, liquid
level, electric current and magnetic and seismic activity. Industrial products
also include proprietary and other items including ink jet inks, gas monitoring
devices and electronic dataloggers.
The Company offers a broad range of products to a large and diverse customer
base. The Company has grown through expanded sales of existing products,
development of new or modified products and through a series of acquisitions in
the medical industry where the Company has been able to leverage its sales and
market presence.
COMPETITIVE STRENGTHS
The Company believes the following factors have been critical to its success to
date and will be important in realizing growth in the future:
Leading Manufacturer and Marketer. The Company believes that it is the leading
North American manufacturer and marketer of many of its products, including
including medical charts, operating room needle counters and light gloves;
diagnostic electrodes, cables and leadwires and industrial recording charts
and marking systems. In 1997, net sales of these products represented over
85% of the Company's net sales.
Broad Product Offering. The Company offers a broad range of products, selling
more than 100 types of medical products and more than 50 types of industrial
products (representing more than 60,000 medical and industrial SKUs). In the
medical products industry, the breadth of the Company's product offering has
become increasingly important as customers seek to reduce the number of
suppliers with whom they conduct business. With respect to the industrial
products market, the Company's extensive library of over 34,000 different charts
enables it to more effectively service the diverse needs of its customers and
often positions the Company as the sole source of supply of many such charts.
1
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Extensive and Focused Sales Organization. The Company has an extensive and
experienced sales organization comprised of 129 medical and 43 industrial sales
personnel. Unlike many of its competitors, who are primarily original equipment
manufacturers, the Company concentrates solely on providing supplies to its
customers. This focus enables the Company's sales force to provide its customers
with a broad line of supplies that are compatible with a wide range of medical
and industrial recording equipment. The composition of the Company's medical
products sales organization, which is divided between field sales and telesales
forces, permits the Company to effectively and efficiently provide coverage and
service to large hospital chains and other Group Purchasing Organizations
(GPOs), as well as smaller hospitals, medical practice groups and clinics. The
field sales force employs value-added selling techniques, such as on-site
training seminars, and enhances the Company's ability to communicate with
doctors, nurses and other medical personnel, which provides the Company with
valuable feedback on its products. The Company's industrial products sales
force, which is divided between field sales and telesales forces, which the
Company believes is the largest sales organization dedicated to selling
industrial recording supplies, permits it to effectively service its large base
of industrial customers. The Company believes that its extensive and focused
sales organizations enable it to achieve strong market penetration for both
existing and new products.
Established Relationships with GPOs and Medical Distributors. The Company has
contracts with the majority of approximately 50 national or regional GPOs in
North America, sales to which approximately 70 percent of the Company's 1997
North American medical products net sales. The Company has also established
sales relationships with several of the largest national and regional
distributors, which effectively act as hospital logistics and purchasing agents.
The Company believes that it developed these relationships with distributors
earlier than many of its competitors and that these established relationships
with GPOs and distributors, together with its broad product offering, position
the Company to expand its sales because these large GPOs and distributors are
expected to represent an increasing proportion of medical products purchases and
to concentrate their purchases with fewer, larger suppliers.
Flexible and Cost-Effective Manufacturing. The Company believes that it
is a low-cost producer due to, among other things, volume efficiencies,
advanced manufacturing techniques and a consistent focus on process
improvements. The Company manufactures more than 90% of products sold and
utilizes a wide range of production processes throughout the plants.
Recording charts are produced on equipment customized by Company
engineers to permit specialized manufacturing applications, such as the
the production line for the continuous printing of fetal charts, and an
integrated manufacturing cell to produce finished cardiology charts in a
continuous process, all of which result in product cost advantages. The
Company has developed and built proprietary, high-speed equipment used to
manufacture medical electrodes and difibulator electrodes with minimal
labor content. Devon brand products are produced in modern facilities with high
end injection molding equipment, tools and accessories. Assembly of kits
benefits from the internal molding, thermal forming and packaging
capabilities which result in low cost and rapid response to customer
orders. The Company continuously applies its engineering expertise in an
effort to lower the costs of manufacturing other products. The Company
believes that it has the ability to respond quickly and efficiently to
specific customer requests and to fabricate a wide variety of customized
products, ranging from a simple identification for private label products
and kits to a specially packaged diagnostic electrode or cables and
leadwires used for diagnostic cardiac testing to a sophisticated
intrauterine pressure catheterization system.
Customer Service Focus. The Company's large customer service department provides
its customers with fast, knowledgeable responses to their inquiries and with
fast and accurate order turnaround through its electronic data interchange order
system. The Company's flexible manufacturing and nationwide distribution network
enable it to ship virtually all its medical product orders within 24-48 hours of
receipt.
Experienced Management Team with Significant Equity Stake. Members of the
Company's senior operating management have an average of approximately 16 years
of experience in designing, manufacturing and marketing disposable medical and
industrial recording products. In addition, the senior operating management owns
on a fully diluted basis, approximately 10% of the capital stock of Holdings
(and indirectly of the Company).
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INDUSTRY TRENDS
Medical Products. Healthcare industry trends as well as broader population
demographic trends affect the sales of the Company's products. The overriding
trend in the healthcare industry is the move to managed care and its resulting
emphasis on cost reduction. This places significant pressure on pricing as well
as product utilization. In addition, it has caused the consolidation of
suppliers, GPOs, distributors and hospital or customer consolidation. For
medical device manufacturers, the ability to provide the customer with all of
their product needs for a particular application or across a broad product line
provides leverage in achieving sole source agreements for product lines. As a
result of the foregoing, the Company has pursued a selective acquisition
strategy to fill in the gaps in product line offerings. As part of the cost
containment effort in healthcare, reducing the length of stay (LOS) in a
hospital is a primary goal. Consequently, early diagnosis or prevention of
diseases is pursued with an increase in diagnostic testing and minimally
invasive surgery. Many of the Company's products are used in diagnostic
testing so this trend may increase product usage. Healthcare is more often
being provided in a variety of alternate care centers ranging from subacute
care to freestanding surgery centers and diagnostic imaging centers as well as
doctors' offices and clinics. The number of procedures in which the Company's
products may be used continue to increase overall, and some are shifting from
the acute care or hospital setting into the alternate care channel.
Information systems are beginning to be used in hospitals in an effort to
reduce redundant testing and paperwork processing. However, much of the effort
is still niche focused and not well integrated so as to truly affect cost,
improve access to data and deliver more efficient patient care. A paper
record at the point of care is still mandatory for clinicians. The focus on
the safety of healthcare workers favors the use of disposable, safety products
in the operating room as well as in-room sharps containers to avoid potential
contamination and the labor and energy required to clean and sterilize
equipment or products for re-use.
The market for the Company's products is also affected by the aging population
and an increase in high-risk obstetrics. The increasing average age of the
population increases the use of cardiology and neurology services including EKG
and EEG testing and the use of related products. The rise in high-risk
obstetrics results in a higher demand for fetal monitoring services and
products.
Industrial Products. The market for industrial charts and marking systems has
been and will continue to be affected by the digitization and computerization of
industrial recording equipment which, based on the Company's experience, has
resulted in declining unit volumes for charts and markers, and accelerated
industry consolidation as competitors exit the business. The Company believes
that the negative impact of continued digitization will be partly mitigated by
(i) the large installed base of paper-based industrial recording equipment
(estimated at approximately 4.7 million recorders worldwide), (ii) the continued
development by many original equipment manufacturers of paper-based recorders
and/or digital recorders that include paper chart functions, (iii) the
significant cost of converting to digital equipment compared to the limited
savings resulting from reduced paper usage and (iv) the continued Federal,
state, and provincial regulatory requirements to maintain hard copy records of
processes and business activities. In this market environment, the Company
believes that companies with economies of scale and leadership positions in
specific product categories or applications are expected to outperform those
without such competitive advantages.
COMPANY STRATEGY
The Company's strategic objective is to profitably grow its net sales and market
presence in North America and internationally. The Company's operating strategy
includes: (i) increasing its market presence in its existing North American
disposable medical supplies and industrial recording supplies markets; (ii)
leveraging its extensive sales organization through the sale of new medical
products acquired, licensed or developed internally; (iii) continuing to
increase operating efficiencies; and (iv) expanding its international medical
product operations.
3
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Increase North American Market Presence. The Company is focused on increasing
its market presence by capitalizing on its competitive strengths, including the
breadth and quality of its product lines, the effectiveness of its sales
organization and the high level of its customer service. In order to meet the
expected growth in diagnostic and preventative medicine, the Company intends to
continue to increase its presence by targeting the specific product and service
needs of the cardiology, obstetrics (labor and delivery room), neurology and
perinatology disciplines. The Company believes it is currently well-positioned
within the disposable medical products industry to benefit from certain
industry trends including increased focus on cost containment, end-user
preferences for purchasing from medical suppliers having a broad range of
products and using disposable products, and certain demographic trends such
as an aging population and an increasing rate of high risk births.
Additionally, the Company expects to continue to increase its leading
position in the industrial recording supplies industry as a result of further
industry consolidation, the comprehensive nature of the Company's chart
library and the Company's focused sales force.
Leverage Sales Organization through New Product Introductions. The Company's
extensive and focused sales organization is one of its primary competitive
strengths, providing it with strong customer relations and significant industry
and product knowledge. This sales force also enables the Company to effectively
sell new products to its existing customer base without incurring significant
incremental sales costs. The Company intends to leverage this strength by
obtaining new disposable medical products through selective acquisitions,
licensing agreements or through internal product development.
Acquisitions of New Products. The Company intends to make selective
acquisitions of companies and/or individual products in order to augment its
existing product lines, add additional product lines or facilitate capacity
consolidation and rationalization. In February 1996, the Company acquired
Devon Industries, Inc. and began distributing their products through its
existing sales force.
Internal Development of New Products. Within the last few years, the Company
has expanded its new product development activities with the hiring of several
new research and development personnel and has emphasized the integration of
customer input into the product development process. The Company's development
activities are focused on disposable FDA Class I and II products, which are
defined as those medical products which cannot cause death if they malfunction
and thus require shorter approval times. This focus enables the Company to
bring new products to market faster and to minimize potential product liability
exposure. The Company has concentrated on cardiology, obstectrics, sharps
safety, and perinatology in which it has extensive product knowledge and strong
customer relationships. As a result of its recent efforts, the Company expects
to introduce several new products in these areas within the next year.
Improve Operating Efficiencies. The Company is continually focused on reducing
costs and improving manufacturing and other operating efficiencies in order to
increase profitability and enhance its competitive position. As a result of such
efforts, the Company believes it is a low cost producer of many of its products.
The Company intends to continue to pursue cost reductions through, among other
things, increased automation, improved production processes, increased economies
of scale from increases in volume and new product introductions and plant
consolidations.
Expand International Sales. The Company believes it has significant growth
opportunities outside North America, particularly with regard to sales of
disposable medical products. In 1997, only approximately 5% of the Company's
medical products net sales were directly made outside North America. Industry
sources, however, estimate that over 50% of all medical products are sold in
markets outside North America. The Company intends to focus initially on markets
in Western Europe, by increasing its sales and marketing efforts and by
considering strategic partnerships and joint ventures with local companies.
4
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The foregoing discussion of competitive strengths, industry trends and Company
strategy includes forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals or strategies
will be achieved. Important factors that would cause actual results to differ
materially from those in the forward looking statements or projections included
herein include, among others, the pace and direction of change in the healthcare
industry, the degree and pace of digitization and computerization of industrial
recording equipment, the development of new products, competitive developments
and the timing and extent of the Company's efforts to implement the strategies
planned by management.
MEDICAL PRODUCTS
Products
The Company offers a broad range of medical products to a large customer base.
The Company manufactures more than 100 principal types of medical products
comprised of approximately 15,000 SKUs. No single product type represented more
than 5% of the Company's 1997 net sales.
The table below sets forth certain information concerning the net sales of the
Company's medical products for each of the five years in the period ended
December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
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1993 1994 1995/(3)/ 1996 1997
---------- -------- ------------ ----------- --------
(Dollars In Million)
<S> <C> <C> <C> <C> <C>
Medical product sales $ 84.8/(2)/ $97.4 $ 105.6 $176.6/(4)/ $ 200.6
Annual growth percentage/(1)/ 23.6%/(2)/ 14.9% 8.4% 67.2% 13.6%
Percentage of total net sales 56.2% 60.0% 62.1% 74.2% 77.9%
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</TABLE>
(1) Refers to the percentage change in the Company's medical products net sales
as compared to those of the prior year.
(2) Includes the Company's acquisition of Tronomed and Upbeat in February 1993,
which together contributed net sales of $10.2 million during 1993.
(3) As a result of the Company's acquisition on September 28, 1995, the 1995
sales consist of the predecessor company's sales for the nine months ended
September 28, 1995 and the Company's sales for the three months ended
December 31, 1995.
(4) As a result of the Devon acquisition on February 29, 1996, the 1996 sales
include of Devon(R) brand sales for the 10 months ended December 31, 1996 of
$60.6 million.
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The Company's medical products, which represented 78% of its 1997 net sales, are
divided into six principal product lines: (i) cardiology and critical care,
(ii) labor and delivery room, (iii) neurology, (iv) perinatology, (v) infection
control, and (vi) Devon(R) brand operating room products. Virtually, all of the
Company's medical products are disposable, FDA Class I or II devices that are
noninvasive or minimally invasive. The Company focuses on this type of medical
products in order to enable its customers to reduce labor costs and setup times
and to take advantage of shorter FDA approval times and reduced product
liability exposure.
Cardiology and Critical Care. The Company's largest medical products line,
cardiology and critical care items, consists of recording charts used with a
large variety of electronic monitors in cardiology (EKGs) and cardiology
electrodes.
The Company believes it is the leading manufacturer and marketer of cardiology
and prenatal medical charts in North America. These recording charts provide
hard copy forms of data used by healthcare professionals in the diagnosis of
illness and the treatment of patients. Cardiac charts are used for diagnostic
EKGs (static, stress testing, ambulatory, echocardiography), pre-surgical
patient testing, intensive care unit records, routine check-ups for cardiac
(including high blood pressure) patients, in-hospital monitoring, routine
check-up and pre-birth monitoring of mothers, sports medicine and physical
fitness training, and emergency room care.
The Company's diagnostic and monitoring electrodes product line includes
disposable electrodes that self-adhere to a patient's body and are connected to
EKG or other medical machines. They are required for both electronic digital and
paper-based recording machines which are used for cardiac related testing and
monitoring. The Company believes that it is the leading North American
manufacturer and marketer of diagnostic electrodes, which are worn for 20 to 30
minutes at a time and are used for resting EKG tests and physical examinations,
and a leading North American manufacturer and marketer of monitoring electrodes,
which are worn for extended periods of time ranging from 24 hours to 72 hours
and are used to monitor heart rates. The Company has recently introduced several
new products such as the Q-Trace(R) Gold diagnostic electrode and the LT and MT
series monitoring electrodes.
Labor and Delivery. This category includes fetal monitoring charts, fetal
monitoring electrodes, intrauterine pressure catheters, and related
accessories. Fetal monitoring charts are used in antepartum clinics and
labor and delivery departments to monitor the fetal heart rate response
to uterine contractions.
Fetal monitoring products are used in labor and delivery rooms to monitor
the health and condition of mothers and fetuses and new born babies
during and after delivery. The Company's products include abdominal belts
for the mother, fetal scalp electrodes, disposable leg plates and
intrauterine pressure catheters (under the Company's LIFE-TRACE(R)
trademark). Many of these products are used in normal births and
particularly in high risk births, including those involving mothers over
35 years of age and with medical ailments, drug addictions or other
impairments.
Neurology. The Company's neurology products consist of recording charts
and other supplies used with a large variety of electronic monitors in
electroencephalography (EEG) testing and monitoring, and this category
also includes the diagnostic imaging media (DIM) product family.
Neurology charts are used in EEG departments and sleep analysis
laboratories to monitor the electrical activity of the brain to help
diagnose many neurological disorders such as epilepsy, narcolepsy,
Alzheimer's disease and Parkinson's disease.
Diagnostic imaging media includes print media used for varied
applications found in X-Ray, echo, ultrasound, nuclear medicine,
endoscopy, cath lab, pathology, micro-surgery and the operating room. It
also includes videotapes and audio tapes used in diagnostic testing.
Although most products are manufactured by the Company, certain
diagnostic imaging media are sourced through other companies.
Perinatalogy. The Company's specialized neonatal electrodes, preattached
leadwire electrodes, and similar items are used in monitoring the health
of at-risk babies in the neonatal intensive care unit (NICU) and nursery.
As medical technolgy promotes the increased survivability of these types
of patients, the demand for the Company's products is growing.
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Infection Control. The Company's infection control products include sharps
containers and disposable systems used in infection control. These items are
collection units used by medical professionals to safely dispose of used and
potentially contaminated sharp objects such as needles, syringes, scalpel
blades, suture needles, etc. The Company believes that sales of disposable
products will continue to grow in response to continuing concerns over hospital
personnel safety and controlling spread of infectious diseases that may spread
by needle sticks or medical waste.
Devon(R) Brand Operating Room Supplies. Devon-brand products are used in
virtually all types of surgical procedures. The product line includes disposable
needle and blade counting and containment systems, disposable surgical light
handles and covers, surgical markers, instrument protection products, operating
utility products, non-sterile surgical supplies, patient positioning devices,
and other products. The Company also assembles surgical kits, which include
several products used regularly in many surgical procedures.
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Customers
The Company's products are typically sold directly to end user customers or
pursuant to supply agreements in which the purchaser specifies whether such
products are to be supplied through a national or regional distributor. The
Company's healthcare business comprises hospitals, national and regional
distributors, group purchasing organizations, integrated healthcare networks,
original equipment manufacturers, medical centers, clinics, physicians offices,
alternate care facilities, nursing homes and dialysis centers.
Sales and Marketing
A primary strength of the Company is its experienced and dedicated 179
person sales organization as of December 31, 1997, for medical products,
consisting of a 129 person acute care field sales force, a 30 person alternate
care sales force which is predominately telesales and 20 regional managers. The
field sales force calls on hospitals and large hospital chains as well as
GPOs, regional integrated healthcare networks (IHNs) and distributors.
The field sales force employs value-added selling techniques, such as in-
servicing products and providing cost saving analysis for accounts on a
quarterly basis. The sales force facilitates communication with
clinicians which helps to obtain customer input for the new product
development process, and to identify customer needs for services and
programs. Sales are made to end-users in specific hospital departments
(e.g., operating room, EKG department, sleep labs, stress and Holter,
emergency room, intensive care unit, critical care unit, telemetry, labor
and delivery) as well as to materials management and infection control
personnel. The Company has numerous long-term relationships with
customers including contracts with GPOs covering over 60% of all hospital
beds in the United States .
The alternate care sales force calls on specialty dealers for coverage of
this extensive and evolving customer base. Telesales members of the alternate
care sales force call on the end-user in smaller or remotely located hospitals
as well as freestanding surgery centers, multi-specialty group practices,
physician's offices, ambulatory care centers, emergency medical services and
diagnostic imaging centers.
The industrial sales force is also augmenting the medical sales of sharps
disposal and collection systems by calling on medical waste haulers. The trend
in the industry appears to be the bundling of both waste disposal services and
the sale of the containers themselves.
The Company provides marketing support for its sales forces with a mix of
direct mail, trade show participation, advertising and other promotional
techniques.
INDUSTRIAL PRODUCTS
Products
The Company has an extensive offering of industrial products. The Company
manufactures more than 50 principal types of industrial products comprised of
approximately 3,000 stock SKUs and approximately 45,000 nonstock SKUs. No single
industrial product type represented more than 4% of the Company's 1997 net
sales.
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The table below sets forth information concerning the net sales of the Company's
industrial products for each of the five years in the period ended December 31,
1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995/(1)/ 1996 1997
------------ ------- ------------ ------- -----------
(Dollars In Million)
<S> <C> <C> <C> <C> <C>
Industrial Product sales....... $ 66.0 $ 64.9 $ 64.4 $ 61.4 $ 56.9
Annual growth percentage/(3)/.. (6.1)% (1.7)% (.8)% (4.7%) (7.4)%
Percentage of total net sales.. 43.8% 40.0% 37.9% 25.8 22.1%
</TABLE>
_______________
(1) As a result of the Company's acquisition on September 28, 1995, the 1995
sales consist of the predecessor company's sales for the nine months ended
September 28, 1995 and the Company's sales for the three months ended
December 31, 1995.
(2) Refers to the percentage change in the Company's industrial products net
sales as compared to those of the prior year.
The Company's industrial products, which represented 22% of its 1997 net sales,
are divided into two principal product lines: (i) industrial recording charts
and (ii) marking systems. These industrial products are used for recording
physical measurements such as temperature, humidity, rate and volume of flow,
liquid level, electric current/voltage and magnetic and seismic activity, for
purposes such as monitoring and control device process flow, environmental
compliance assessment and wastewater monitoring. The Company, which has been
engaged in the industrial products business for over 85 years, believes it is
the leading manufacturer and marketer of industrial recording charts and marking
systems in North America.
The Company's recording charts include a wide combination of printed charts
configured in various forms (such as circular, strip, roll and Z-folded) and
printed on ink-absorbing, pressure sensitive or thermal papers. The Company's
marking systems include the pens and inks used to record relevant information on
these recording charts. These products are sold for a large variety of
electronic monitors made by recording device companies, including devices
manufactured by Honeywell Inc., General Electric Company, The Foxboro Company,
Yokogawa Electric Corporation and Leeds & Northrup Company, and provide hard
copy forms of data used by customers in their efforts to satisfy compliance
obligations imposed by various Federal, state, and local governmental
regulations. In many cases, the Company believes it is the sole source of supply
for certain industrial charts because of its extensive collection of over
100,000 printing plates.
Customers
The Company has a large, diverse and established customer base of over 60,000
customers, including a variety of participants in the oil and gas, chemical,
pulp and paper, electric and gas utility, pharmaceutical, food, aerospace and
automotive industries. In addition to end users, the Company's customers include
manufacturers of recording equipment who wish to market their own branded
supplies and third party regional distributors who offer industrial customers
several specialty product lines, including the Company's recording supplies.
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The Company's industrial products sales are made to a highly diversified group
of customers representing a variety of industries, which helps protect the
Company's business from economic downturns in any one industry. In 1997, the
Company's top 20 customers of industrial products accounted for approximately
10% of the Company's industrial products net sales, and no single industrial
customer represented more than 3% of such net sales. Customers located in North
America accounted for approximately 94% of the Company's 1997 industrial
products net sales.
Sales and Marketing
The Company sells its industrial products directly to industrial customers as
well as through private label manufacturers and specialty distributors. The
Company employs a 43 person sales organization for its industrial products,
consisting of a 36 person field sales force and an 7 person telesales
force. The Company believes that it maintains the largest sales organization
dedicated to selling industrial recording supplies. Such sales organization,
which focuses principally on maintaining and servicing the Company's large
existing base of customers, makes sales by calling upon the purchasing and
materials managers and engineers in maintenance, manufacturing controls and
environmental departments of a variety of industrial customers, including public
utilities and oil and gas refineries. The field sales force focuses on larger
customers near major cities, while the telesales force covers smaller customers
in smaller cities and more geographically dispersed locations.
The Company also concentrates on making sales to private label manufacturers of
recording devices, who wish to market the Company's products under their own
brand. The Company's sales force works with these manufacturers in customizing
the Company's products to meet their particular requirements. Several of these
manufacturers have turned over responsibility for the distribution of their
products to the Company. Agreements with other customers allow the Company to
produce private label products for distribution by both the Company and the
customer.
The Company also sells its industrial products to selected regional third party
dealers who offer industrial customers several specialty product lines,
including the Company's recording supplies. Sales through these dealers
generally provides the Company exposure in focused niches where customer size
and buying patterns make direct sales a less efficient means of distribution.
INTERNATIONAL SALES
The Company's business outside of North America, with 1997 sales of $13.6
million or 5.3% of the Company's net sales, is conducted through two operating
groups: a Spanish subsidiary which represented approximately 40% of the
Company's 1997 international net sales and a Buffalo-based direct/export sales
effort which represented approximately 51% of the Company's 1997 international
net sales. Through these operating groups, the Company has entered into sales
distribution agreements for its products in approximately 87 countries
worldwide, including those in Latin America, Continental Europe and the Far
East. The Company's direct international business sells through national
distributors in the foreign jurisdictions by means of the Company's multi-
lingual customer service department and through direct sales presentations
conducted by a group of three professionals.
On September 30, 1996, the Company completed the sale of its Australian
medical products and industrial products businesses to two separate buyers,
while entering into sales and distribution agreements with both. The Company's
Australian subsidiary accounted for approximately 14% of the Company's 1996
international net sales and .8% of the Company's total 1996 net sales.
10
<PAGE>
MANUFACTURING AND QUALITY ASSURANCE
The Company maintains manufacturing facilities in the United States as well as
in each of the foreign countries in which it operates. See "Properties".
Principal manufacturing facilities are in Buffalo, New York (patient data
supplies), Gananoque, Ontario (electrode and fetal monitoring supplies),
Cherry Hill, New Jersey (marking systems and medical devices), Methuen,
Massachusetts (electrode and fetal monitoring supplies), Chatsworth,
California (Devon(R) brand products) and Rock Hill, South Carolina (Devon(R)
brand products).
The Company possesses diverse types of equipment for the production of
recording charts. The Company has assembled what it believes to be the largest
library of chart printing plates in the world. The Company has developed and
built automated machinery used in the manufacture of medical electrodes which it
believes provides it with a cost advantage over most of its competitors. As
fetal monitoring supplies sales increase, the Company is using its manufacturing
and engineering expertise developed with charts and electrodes to lower
manufacturing costs in this area.
Much of the Company's production equipment has been customized and manufactured
by Company engineers for specialized manufacturing applications. The Company
has developed and built proprietary, high speed equipment used to manufacture
medical electrodes with minimal labor content. The Company's manufacturing
facilities are linked to its data processing center in Buffalo, New York,
enabling production scheduling and inventory requirements to be computer
controlled.
The Company has expanded its offering of disposable medical supplies through
its acquisition of Devon Industries, Inc. in February 1996. This acquisition
has increased the Company's molding capabilities, allowing it to provide Sharps
Containers used in the disposal of needles and infectious waste materials. The
Chatsworth and Rock Hill facilities also produce kits used for surgical
procedures.
The Gananoque, Ontario and Methuen, Massachusetts facilities have increased
their capacity to produce monitoring and diagnostic electrodes to service
worldwide requirements. In addition, Gananoque continues to produce a growing
number of belts and straps used in hospital applications.
The Cherry Hill, New Jersey facility produces Industrial Markers. In
addition, Cherry Hill has introduced water-based Ink Jet products that have been
designed and developed at that facility. Cherry Hill also produces the
intrauterine transducer-tipped catheter which was a new product introduced in
1996. Production of cables and leadwires was transferred from the former San
Juan Capistrano, California facility to the Cherry Hill facility in September
1996. The San Juan Capistrano facility ceased all significant manufacturing
operations during 1996.
The Company has established extensive product quality programs to ensure
customer requirements are fully met. Quality assurance includes documentation of
device master records and new product development activities, coordination of
all engineering change order requests, inspection of in-process manufacturing
and finished goods. The Company coordinates all its quality assurance
activities, in all its manufacturing facilities through a Quality Council that
concerns itself with global quality issues not limited to manufacturing
activities. Currently, all of the Company's North American manufacturing
facilities have been awarded ISO 9001 certification, indicating that the Company
has achieved and sustained a high degree of quality and consistency with respect
to its products. ISO 9001 certification meets the stringent European Community
manufacturing standards and therefore permits the products manufactured in these
facilities to be sold in the European Common Market.
11
<PAGE>
INVENTORY CONTROL AND DISTRIBUTION
The Company stocks a variety of different products in finished goods inventory
which, coupled with its computerized inventory control system, electronic data
interchange system, and its order management system, enables it to respond
rapidly and accurately to customer orders and requests. Virtually all orders
for stocked items are shipped within 24-48 hours of receipt.
With the acquisition of Devon Industries, the Company re-evaluated its
distribution network and strategy and embarked on a plan to outsource some of
the distribution function to a third party supplier. A new third party
warehousing arrangement allows the Company to meet the space requirements
necessitated by the rapid growth the Company is experiencing at continued high
service levels to customers at reduced costs.
As the Company's medical products business has grown, the need for various new
applications and technologies such as electronic data interchange (EDI) and
barcoding have increased. Approximately 35% of the Company's North American
order volume is now through EDI and the Company barcodes all its products.
The Company is now analyzing its order entry and order fulfillment processes, as
well as its computer systems to improve cycle times from order receipt to
delivery of product while reducing inventory levels.
RAW MATERIALS
Paper is the Company's largest raw material component in dollar terms and it
represented over 20% of the Company's 1997 raw material purchases. It is
purchased in a variety of sizes, weights and specified grades from major paper
suppliers. Other raw materials such as resins, foams, wire and packaging
materials are also procured from a number of major suppliers.
The Company continues to shift its thermal paper purchases from Japanese sources
to North American-based sources. Throughout 1997 the Company experienced some
paper price decreases as well as decreases in resin costs. The Company does not
believe that operations would be seriously affected by the loss of products or
services by any one supplier.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,782 persons, of
whom approximately 64% were employed in manufacturing and distribution, 22%
were in sales and marketing and the balance of 14% were in executive and
administrative positions. The Company considers its employee relations to be
good and has never experienced a work stoppage or strike. None of the Company's
North American employees is represented by a union.
12
<PAGE>
ITEM 2. PROPERTIES
The following table presents information, as of December 31, 1997, with respect
to the principal real properties owned or leased by the Company:
<TABLE>
<CAPTION>
Approximate
Square Nature of
Location Footage Occupancy Primary Use
- - -------- ------- --------- -----------
<S> <C> <C> <C>
Buffalo, New York.................... 580,000 Owned Administrative offices, chart
manufacturing, warehousing
Rock Hill, South Carolina............ 128,496 Leased Offices, warehouse and Devon(R) brand product
manufacturing
Chatsworth, California............... 121,000 Leased Offices, warehouse and Devon(R) brand product
manufacturing
Gananoque, Ontario................... 76,000 Owned EEG chart, electrode and fetal
monitoring supplies manufacturing
Cherry Hill, New Jersey.............. 65,000 Owned Marking systems and medical
device manufacturing
Methuen, Massachusetts............... 60,000 Leased Electrode and fetal monitoring
supplies manufacturing
San Juan Capistrano, CA.............. 27,300 Leased Sales office
Madrid, Spain........................ 19,000 Leased Chart manufacturing
Houston, Texas....................... 14,400 Leased Distribution center
Lesquin, France...................... 2,700 Leased Sales and distribution
St. Laurent, Quebec.................. 1,500 Leased Service center
</TABLE>
All the Company's leased properties are held pursuant to operating leases with
expiration dates ranging from November 30, 1998 to September 30, 2004, subject
in most cases to renewal at the option of the Company.
On November 3, 1997, the Company announced plans to move from its current
Buffalo printing plant and headquarters offices to a new single floor
continuous process printing plant and to an office building in the same
vicinity. Construction of the printing facility is scheduled to begin in
mid-1998 and is scheduled to be completed during the second half of 1999.
The move to the headquarters building is scheduled for December 1998.
The Company anticipates that this construction and headquarter relocation
will be funded with internally generated cash and with state and local tax
incentives.
ITEM 3. LEGAL PROCEEDINGS
The Company's medical products are subject to regulation by several governmental
authorities, including in particular the U.S. Food and Drug Administration
(FDA). The Company's manufacturing facilities and medical products are
required to be registered with, and are subject to periodic inspection by or
approval of, the FDA. Such products are all registered with the FDA as Class I,
Class II or Class III devices and therefore must comply with Good Manufacturing
Practices and Standards of Performance promulgated by the FDA to ensure that
they are safe and effective. New medical products also are subject to these
regulations and must be approved by the FDA prior to their release. The Company
believes that it is in material compliance with all applicable FDA regulations.
The Company produces certain toxic wastes as by-products of its manufacturing
operations. The Company disposes of certain hazardous material through
contractors that transport the material to regulated sites. From time to time,
the Company has been required to perform certain environmental removal and
remedial work at certain of its facilities. The Company does not believe that
any of its facilities currently require significant environmental removal or
remedial actions. The Company is also engaged in certain routine litigation
arising in the ordinary course of its business. The Company does not believe
that an adverse determination of any pending litigation, either singly or in the
aggregate, would have a material adverse effect upon its business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is not traded on public markets.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables set forth selected historical financial data of the Company
for the five years ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1993 1994 1995/(1)/ 1996 1997
--------- ----------- ----------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales:
Medical products.................. $ 84,763/(2)/ $ 97,353 $ 105,602 $ 176,601/(3)/ $ 200,633
Industrial products............... 65,970 64,882 64,413 61,423 56,860
------------- -------- ---------- --------- ---------
150,733 162,235 170,015 238,024 257,493
------------- -------- ---------- --------- ---------
Gross profit....................... 71,827 76,649 77,886 108,134 114,261
Selling, general and
administrative expenses......... 48,470 49,651 48,630 70,270 74,699
Nonrecurring and other charges..... 3,018/(4)/ -- -- 7,721/(5)/ 5,983/(6)/
Impairment Loss.................... -- -- -- -- 4,005/(7)/
Amortization....................... 870 897 2,074 8,058 8,800
------------- -------- ---------- --------- ---------
Operating income................... 19,469 26,101 27,182 22,085 20,774
Interest expense (net)............. 4,840 4,513 7,344 21,104 23,036
------------- -------- ---------- --------- ---------
Income from continuing operations
before income taxes,
accounting change and
extraordinary charge............ 14,629 21,588 19,838 981 (2,262)
Income tax expense................. 6,273 8,437 6,890 2,073 360
------------- -------- ---------- --------- ---------
Income (loss) from continuing
operations before accounting
change and extraordinary
charge.......................... 8,356 13,151 12,948 (1,092) (2,262)
Income (loss) from discontinued
operation (net)................. (1,582) 160 (298) -- --
Extraordinary charge............... -- -- (791)/(8)/ -- --
-------- -------- -------- ---------- ----------
Net income (loss).................. $ 6,774 $ 13,311 $ 11,859 $ (1,092) $ (2,622)
======== ======== ========= ========= ==========
OTHER DATA AND RATIOS:
EBITDA/(9)/........................ 29,109 32,872 34,316 44,275 47,304
Depreciation and amortization...... 6,622 6,771 7,134 14,469 16,542
Capital expenditures............... 3,979 3,569 2,319 6,281 5,590
Dividends paid..................... -- -- 118,652 -- --
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.......... 2,008 1,517 1,481 563 626
Total assets....................... 83,751 77,788 250,912 365,017 346,075
Total long-term debt............... 67,369 51,425 160,131 227,743 213,790
Stockholders' equity (deficit)..... (17,262) (4,096) 51,499 81,765 77,968
</TABLE>
(Footnotes on following page)
14
<PAGE>
_________________
(1) As a result of the Acquisition on September 28, 1995, results of
operations represents the results of the predecessor company for the nine
months ended September 28, 1995 and the results of the Company for the
three months ended December 31, 1995.
(2) Includes the Company's acquisition of Tronomed and Upbeat in February
1993, which together contributed net sales of $10.2 million during 1993.
(3) Includes Devon(R) brand sales for the 10 months since its acquisition
on February 29, 1996 of $60.6 million.
(4) Represents a $2.0 million restructuring charge taken by the Company
for employee severance and losses arising from the disposal of property
and equipment related to consolidating the Company's Clayton, New York
operations into the Buffalo, New York facility and revising its corporate
management structure, and a $1.0 million charge taken by the Company for
its share of the environmental cleanup costs pertaining to the Company's
no-longer active Pittsburgh, Pennsylvania facility pursuant to a
settlement with the Pennsylvania Department of Environmental Resources.
(5) These consist primarily of consolidation expenses pertaining to the
Devon Acquisition, the physical move of Tronomed manufacturing from
California to New Jersey, outsourcing of distribution to a third party
provider and the sale of the Australian subsidiary.
(6) These consist primarily of consolidation expenses pertaining to the
physical move of Tronomed manufacturing from California to New Jersey,
expenses associated with the outsourcing of distribution to a third
party provider and consulting expenses associated with business
improvement initiatives.
(7) Represents the write-off of the Buffalo facility in connection with
the Company's relocation plans.
(8) Represents an extraordinary charge associated with early retirement
of debt.
(9) "EBITDA" means earnings from continuing operations before interest
expense, taxes, depreciation, amortization, nonrecurring and other
charges, extraordinary items and accounting changes. EBITDA is included
because it is commonly used by certain investors and analysts to analyze
and compare on the basis of operating performance and to determine a
company's ability to service and incur debt. EBITDA should not be
considered in isolation from or as a substitute for net income, cash
flows from operating activities or other consolidated income or
cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of profitability or liquidity.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The Company's net sales reflect the manufacturing, marketing and reselling of
medical and industrial supplies to both North American and international
customers. In 1997, 78% of the Company's net sales were derived from the sale of
medical products, with the remaining net sales derived from the sale of
industrial products. Approximately 95% of the Company's 1997 net sales were made
to North American customers, with the remaining net sales made to international
customers.
In general, the Company's gross margins reflect the following characteristics:
(i) gross margins on industrial product sales are significantly higher than
those realized on medical products sales; (ii) gross margins on North American
sales are higher than those realized on international sales; and (iii) gross
margins on products manufactured by the Company are higher than those realized
on products sold under distribution agreements.
Selling, general and administrative expenses supporting sales of medical
products are slightly higher than those supporting sales of industrial products.
As a result of the foregoing, operating margins realized on sales of industrial
products are higher than those realized on sales of medical products, and in
1997, operating income from sales of industrial products accounted for
approximately 43% of the Company's total income from continuing operations. See
Note L, "Business Segment Information", of the Company's Consolidated Financial
Statements appearing elsewhere in this Report.
Results of Operations
Change in Ownership. On September 28, 1995, the Company was acquired by
Bessemer, affiliates of Bessemer and management. The description of the results
of operations for the fiscal year ended December 31, 1995 includes the results
of the predecessor company for the nine months ended September 28, 1995 and the
results of the Company for the three months ended December 31, 1995.
The following table sets forth, on a comparative basis, certain income statement
data as a percentage of net sales for the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales:
Medical products........................... 62.1% 72.2% 77.9%
Industrial products........................ 37.9% 25.8% 22.1%
----- ----- -----
Total net sales......................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 54.2 54.6 55.6
Gross profit................................. 45.8 45.4 44.4
Selling, general and administrative expense.. 28.6 29.5 29.0
Nonrecurring and other costs................. -- 3.2 3.9
Amortization................................. 1.2 3.4 3.4
Operating income............................. 16.0 9.3 8.1
</TABLE>
16
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES.
Sales for 1997 were $257.5 million, an increase of $19.5 million, or
8.2%, compared to sales of $238.0 million in 1996. The increase was
largely attributable to the acquisition of Devon Industries which was
reflected in 1996 results only from February 28,1996, the date of the
acquisition. Partially offsetting the incremental sales from the Devon
Industries acquisition was the (i) divestiture of the Australian facility
which had $2.0 million of sales in 1996, (ii) inventory reductions by the
Company's major distributors, and (iii) lower average selling prices of
recording charts, electrodes and certain Devon-brand products largely
attributable to securing long-term contracts with certain GPOs. Domestic
Medical revenues of $190.2 increased by 13.7% from last year due to
(i)the Devon acquisition, (ii) increased sales resulting from the supply-
agreement with Premier, and (iii) continued market penetration in the
alternate care market. As a result of these factors, sales of EKG
electrodes, fetal monitoring products, sharps containers and certain
operating room products have displayed good growth rates. Domestic
Industrial product revenues of $53.7 million decreased by 5.3% from the
prior year, due to the continued decline of this market. This decline
was partially offset by the focus on introducing new non-chart industrial
products. International sales of $13.6 million declined by 3.3% from
last year due to the divestiture of the Australian subsidiary. Sales of
continuing products increased by 12.2% from last year, despite the
unfavorable impact by the effect of a stronger dollar versus the prior
year.
GROSS PROFIT.
Gross Profit for 1997 was $114.3 million, an increase of $6.2 million or
5.7%, compared to gross profit of 108.1 in 1996. The company's gross
profit percentage was 44.4% in 1997 compared to 45.4% in 1996. The
decrease in gross margin percentage was primarily attributable to
(i)increased product mix of lower margin medical products,
(ii) higher costs related to building inventories in anticipation of
sales to Premier hospitals, (iii) increased distributor rebates, and
(iv) lower average selling prices.
Selling, General and Administrative Expenses increased to $74.7 million
in 1997, an increase of $4.4 million, or 6.3%, compared to selling,
general and administrative expense of $70.3 million in 1996. The
majority of the increase was due to the inclusion of expenses of Devon
Industries for 10 months in 1996. As a percent of sales, selling,
general and administrative expense decreased to 29.0% in 1997 from 29.5%
in 1996. The reduction reflects the Company's efforts to reengineer its
business processes to reduce overall costs.
In 1997, the Company recorded $10.0 million of one-time and other
nonrecurring charges. The costs included a $4 million write-off of the
Company's current Buffalo facility in connection with the Company's
planned relocation to new administrative and manufacturing facilities.
These moves are planned to be complete by mid 1999. In addition, the
Company incurred costs of $3.6 million in connection with its
reengineering activities and $2.4 million in costs relative to the
relocation of its cable and leadwire facility from California to
New Jersey.
17
<PAGE>
Amortization Expenses of $8.8 million was primarily attributable to
goodwill expenses incurred in connection with the Company acquisitions.
Interest Expense of $23.1 million increased by $2 million from $21.1
million in 1996, resulting from increased borrowing for the first nine
months of 1997, due to increased working capital requirements. In the
fourth quarter of 1997, the Company decreased total debt outstanding by
$20 million resulting from reduced inventory and accounts receivable
balances.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased by $68.0 million or 40% from $170.0 million in
1995 to $238.0 million in 1996. The increase was primarily attributable to the
incremental sales from the acquisition of Devon Industries, Inc. ("Devon") which
was completed on February 29, 1996 (the "Devon Acquisition"). Domestic Medical
sales excluding Devon brand products increased by 8.5% for the year ended
December 31, 1996, primarily the result of increased market penetration and new
fetal monitoring product sales. Domestic Industrial product sales declined by
3.1% from the prior year which is in line with the historical trend.
International sales increased by 6.3%.
GROSS PROFIT. Gross profit increased from $77.9 million in 1995 to $108.1
million in 1996. The Company's gross profit percentage was 45.4% in 1996
compared to 45.8% in 1995. The decrease is primarily attributable to the
continued increased product mix of lower margin medical products. In 1996,
medical sales accounted for 74.2% of total sales compared to 62.1% to total
sales in 1995.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses increased
by $21.6 million or 44.5% from $48.6 million in 1995 to $70.3 million in 1996
due primarily to the Devon Acquisition. As a percentage of net sales, SG&A
increased to 29.5% in 1996 from 28.6% in 1995. The integration of Devon and
Graphic Controls was completed in June of 1996 which resulted in cost savings
from the elimination of duplicate SG&A expenses. These savings are expected to
be fully realized in 1997.
NONRECURRING AND OTHER COSTS. For 1996, the Company incurred nonrecurring and
other costs of $7.7 million. These costs consist primarily of consolidation
expenses pertaining to the Devon Acquisition, the physical move of the Tronomed
manufacturing from California to New Jersey, outsourcing of the Company's
distribution operations to a third party provider and the sale of the Company's
Australian subsidiary.
AMORTIZATION EXPENSES. Amortization expenses increased from $2.1 million in
1995 to $8.1 million in 1996. The increase is primarily attributable to the
increased goodwill expense due to the acquisition of the Company by Bessemer and
management (the "Acquisition") and the Company's subsequent acquisition of
Devon.
OPERATING INCOME. Operating income decreased from $27.2 million in 1995 to
$22.1 million in 1996. Excluding the nonrecurring costs and the amortization
charges mentioned above, income from operations increased from $29.3 million in
1995 to $37.9 million in 1996 or an increase of 29.4%.
INTEREST EXPENSE NET. Net interest expense increased to $21.1 million in 1996
from $7.3 million in 1995. The increase was the result of the increased
indebtedness in connection with the Acquisition and the Devon Acquisition.
INCOME TAX EXPENSES. Taxes on income decreased $4.8 million. This was due to
the impact of the reported net loss, which is primarily attributable to the
increased non-recurring expense, higher non-cash amortization expense
attributable to the Acquisition and Devon Acquisition, and higher interest
charges.
NET INCOME. Net income decreased by $13.0 million from $11.9 million
in 1995 to a net loss of $1.1 million in 1996. This decrease reflects the
factors discussed above.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. In connection with the Company's
acquisitions, the book value of certain tangible and intangible assets
increased in accordance with generally accepted accounting principles.
Accordingly, the Company's results of operations include a significant
level of non-cash expenses related to the depreciation of fixed assets
and the amortization of intangible assets, including goodwill.
Depreciation and amortization expenses increased by $2.1 million in 1997.
Management believes, therefore, that EBITDA represents the more
appropriate measure of the Company's ability to internally fund our
capital requirements.
Cash flow provided by operating activities was $21.4 million as compared
to $5.0 million provided from operations in 1996. Operating cash flow
for 1997 was favorably impacted by a reduction in operations working
capital of $10.3 million primarily resulting from improved management of
accounts receivable and inventory.
The Company's cash flow used in investing activities for the year 1997
was $8.1 million. The expenditures attributed to purchases of property,
plant and equipment and other long term assets in connection with the
growth in the Company's Medical segment.
During 1997, the Company repaid $14.0 million of bank debt resulting in a
term loan balance of $138.7 million and a revolver balance of $-0- at
fiscal year end. At December 31, 1997, the Company had aggregate
borrowings under its credit facility of $138.7 million and $28.7 million
available under the revolving portion of the Credit facility.
The Company believes that cash flow from operations, and sources of
credit will be adequate to satisfy its capital needs for the foreseeable
future.
IMPACT OF YEAR 2000
The Company has undertaken a project aimed at replacing its current
management information systems with new management information systems
which it believes will function properly with respect to dates in the
year 2000 and thereafter. In addition, the Company has completed an
asessment and modified certain portions of its software. The Company
presently believes that with the modifications to existing software and
conversions to new software, the year 2000 issue will not pose
significant operational problems for its computer systems. However, if
such conversations are not made, or are not completed timely, a material
impact on the operations of the Company could result.
19
<PAGE>
The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their
own year 2000 issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
The Company has determined it has no exposure to contingencies related to
the year 2000 issue for the products it has sold.
The Company utilized both internal and external resources to reprogram
and test the current software for year 2000 modifications. These
modifications were completed during 1997 at a total cost of $145,000.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its
components; however, adoption in 1998 will have not impact on the
Company's net income or shareholder's equity. Statement 130 requires the
foreign currency translation adjustment, which currently is reported in
shareholders' equity, to be included in other comprehensive income and
the disclosure of total comprehensive income. If the Company adopted
Statement 130 for the year ended December 31, 1997, the total of other
comprehensive income items, reported as a component of shareholder's
equity, and comprehensive income (which includes net income) would be
$(1,488,000) and $(3,797,000), respectively, and would be displayed
separately.
In June 1997, the Financial Accounting Standards Board issued Statement
131, Disclosure About Segments of an Enterprise and Related
Information, which is effective for years beginning after December 15,
1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
Company will adopt the new requirements retroactively during 1998.
Management does not expect that the adoption of this statement will
result in the Company reporting additional segments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth below are the audited consolidated financial statements of the
Company and its subsidiaries as of December 31, 1995, 1996, and 1997, and
for the periods in the three years ended December 31, 1997.
20
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................... 22
Consolidated Balance Sheets...................................... 23
Consolidated Statements of Operations............................ 24
Consolidated Statements of Changes in Shareholder's Equity....... 25
Consolidated Statements of Cash Flows............................ 26
Notes to Consolidated Financial Statements....................... 28
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Graphic Controls Corporation
We have audited the accompanying consolidated balance sheets of Graphic Controls
Corporation and subsidiaries (a wholly-owned subsidiary of Graphic Holdings,
Inc.) as of December 31, 1996 and 1997, and the related consolidated statements
of income, changes in shareholder's equity and cash flows for the
three-month period ended December 31, 1995 and the years ended December 31,
1996 and 1997. We have also audited the consolidated statements of operations,
changes in shareholder's equity (deficit) and cash flows of the Pre-Acquisition
Company and subsidiaries for the nine-month period ended September 28, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Graphic
Controls Corporation and subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for the
three-month period ended December 31, 1995 and the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of the operations
and cash flows of the Pre-Acquisition Company and subsidiaries for the
nine-month period ended September 28, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, the related finanical
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Buffalo, New York
February 6, 1998,
except for Noted, as to which the date is
February 20, 1998
22
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash ............................................... $ 563 $ 626
Accounts receivable, less allowances for doubtful
accounts and returns (1996-$782, 1997-$657)........ 37,208 35,280
Inventories......................................... 32,697 32,091
Income taxes recoverable............................ 1,755 730
Other............................................... 1,138 1,055
-------- --------
Total current assets............................. 73,361 69,782
Property, plant and equipment:
Land................................................ 1,097 1,095
Buildings and improvements.......................... 11,160 7,390
Machinery and equipment............................. 29,589 34,278
-------- --------
41,846 42,763
Less accumulated depreciation....................... 6,750 13,660
-------- --------
Net property, plant and equipment................ 35,096 29,103
Goodwill, net of accumulated amortization of
$6,553 (1996) and $12,768 (1997).................... 229,693 224,221
Financing costs, net of accumulated amortization of
$2,338 (1996) and $4,378 (1997)..................... 11,150 9,026
Acquisition escrow accounts.......................... 9,002 5,896
Other assets......................................... 6,715 8,047
-------- --------
$365,017 $346,075
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
<S> <C> <C>
Cash overdraft....................................... $ 2,954 $ 4,446
Accounts payable..................................... 14,261 14,081
Employees' compensation.............................. 7,154 5,740
Accrued expenses..................................... 5,009 7,393
Deferred income taxes................................ 1,970 2,230
Current portion of long-term debt.................... 8,015 12,165
-------- --------
Total current liabilities......................... 39,363 46,055
Long-term debt........................................ 219,728 201,625
Deferred income taxes................................. 1,199 240
Other non-current liabilities......................... 22,962 20,187
Shareholder's equity:
Common stock ($1 par)
Authorized - 5,000,000 shares; issued & outstanding
100 shares......................................... -- --
Additional paid-in capital........................... 82,366 82,366
Accumulated deficit ................................. (288) (2,910)
Equity adjustment from foreign currency translation.. (313) (1,488)
-------- --------
Total shareholder's equity............................ 81,765 77,968
-------- --------
$365,017 $346,075
======== ========
</TABLE>
See accompanying notes
23
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mos. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................. $127,895 $ 42,120 $238,024 $257,493
Cost of sales......................... 69,440 22,689 129,890 143,232
Selling, general and
administration expenses............. 37,011 11,619 70,270 74,699
Impairment loss....................... -- -- -- 4,005
Nonrecurring and other costs.......... -- -- 7,721 5,983
Amortization........................... 668 1,406 8,058 8,800
-------- ------- -------- --------
107,119 35,714 215,939 236,719
-------- ------- -------- --------
Operating income....................... 20,776 6,406 22,085 20,774
Interest income........................ 56 50 38 48
Interest expense....................... (3,125) (4,325) (21,142) (23,084)
-------- ------- -------- --------
Income (loss) from continuing operations
before income taxes and
extraordinary charge................. 17,707 2,131 981 (2,262)
Income tax expense..................... 5,563 1,327 2,073 360
-------- ------- -------- --------
Income (loss) from continuing
operations before
extraordinary charge................. 12,144 804 (1,092) (2,622)
Discontinued operations (Note B):
Loss from disposal, net of
income tax benefit of $190........... (298) -- -- --
Extraordinary charge from early
retirement of debt, net of income
taxes of $505......................... (791) -- -- --
-------- ------- -------- --------
Net income (loss)...................... $ 11,055 $ 804 $ (1,092) $ (2,622)
======== ======= ======== ========
</TABLE>
See accompanying notes
24
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Equity
Retained Adj From
Add'l Earnings Foreign
Common Paid-In (Accumulated Currency
Stock Capital Deficit) Translation Total
----- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995
(Pre-Acquisition)............... $ -- $19,467 $ (22,674) $ (889) $ (4,096)
Net income for nine months
ended September 28, 1995..... -- -- 11,055 -- 11,055
Income tax benefit of stock
options exercised............ -- -- 525 -- 525
Translation gains.............. -- -- -- 640 640
Dividends ($1,186,520 per
share)....................... -- (19,467) (99,185) -- (118,652)
------ ------- --------- --------- ----------
Balance at September 28, 1995
(Pre-Acquisition)............... $ -- $ -- $(110,279) $ (249) $(110,528)
====== ======= ========== ========= =========
Balance at September 28, 1995. $ -- $ -- $ -- $ -- $ --
Capital contribution.......... -- 50,866 -- -- 50,866
Net income for three months
ended December 31, 1995..... -- -- 804 -- 804
Translation losses............ -- -- -- (171) (171)
------ ------- --------- --------- ----------
Balance at December 31, 1995.... -- 50,866 804 (171) 51,499
Capital contribution.......... -- 31,500 -- -- 31,500
Net loss for 1996............. -- -- (1,092) -- (1,092)
Translation losses............ -- -- -- (142) (142)
------ ------- --------- --------- ----------
Balance at December 31, 1996.... -- 82,366 (288) (313) 81,765
Net loss for 1997............. -- -- (2,622) -- (2,622)
Translation losses............ -- -- -- (1,175) (1,175)
------ ------- --------- --------- ----------
Balance at December 31, 1997... $ -- $82,366 $ (2,910) $ (1,488) $ 77,968
====== ======= ========== ========= =========
</TABLE>
See accompanying notes
25
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mos. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 11,055 $ 804 $ (1,092) $ (2,622)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 5,143 1,991 14,469 16,542
Impairment loss ..................... -- -- -- 4,005
Write-off of unamortized
financing costs.................... 1,296 -- -- --
Deferred income taxes.............. (253) 277 3,071 (699)
Disposal of discontinued operations 298 -- -- --
Change in assets and liabilities
excluding effects from purchases
or sales of businesses:
Accounts receivable............ 1,176 (1,503) (5,368) 1,383
Inventory...................... (2,627) 1,774 (1,980) 349
Other current asset............ 582 58 370 83
Accounts payable and accrued
expenses..................... 1,800 2,911 (2,803) 1,139
Income taxes................... (1,044) (37) (2,176) 1,063
Other non-current liabilities.. 12 (261) 590 331
Other, net..................... 37 (11) (129) (164)
--------- ------- -------- --------
Total Adjustments.............. 6,420 5,199 6,044 24,032
--------- ------- -------- --------
Net cash provided by operating
activities................... 17,475 6,003 4,952 21,410
Cash flows from investing activities:
Additions to property,
plant, and equipment................. (1,505) (814) (6,281) (5,590)
Payments for businesses acquired....... -- -- (96,251) --
Payments for other assets.............. -- -- (1,496) (2,536)
Payment of acquisition fees............ (2,212) -- -- --
Net proceeds from sale of
product line......................... 463 -- -- --
--------- ------- -------- --------
Net cash used in investing
activities....................... (3,254) (814) (104,028) (8,126)
</TABLE>
See accompanying notes
26
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mos. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from senior bank facilities. $ 92,000 $ -- $ 73,541 $ --
Cash overdraft........................ -- -- 2,954 1,492
Capital contribution.................. -- -- 31,500 --
Proceeds from senior
subordinated notes.................. 75,000 -- -- --
Repayment of senior debt.............. (51,178) (7,116) (6,125) (13,953)
Financing fees........................ (9,524) -- (3,964) --
Dividends paid........................ (118,652) -- -- --
Other................................. -- -- 196 --
-------- ------- -------- --------
Net cash provided by (used in)
financing activities.............. (12,354) (7,116) 98,102 (12,461)
Effect of exchange rate changes
on cash............................... 26 (2) 56 760
-------- ------- -------- --------
Net increase (decrease) in cash......... 1,893 (1,929) (918) 63
Cash at beginning of period............. 1,517 3,410 1,481 563
-------- ------- -------- --------
Cash at end of period................... $ 3,410 $ 1,481 $ 563 $ 626
======== ======= ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 3,116 $ 330 $ 22,650 $ 20,372
Income taxes....................... 6,309 974 1,167 34
</TABLE>
See accompanying notes
27
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - Summary Of Significant Accounting Policies
- ---------------------------------------------------
Description of The Business: Graphic Controls Corporation (the "Company")
(a wholly-owned subsidiary of Graphic Holdings, Inc. ("Holdings")) is a leading
manufacturer and marketer of a number of disposable single use medical products
and industrial recording supplies. Medical products, which include Devon (R)
brand operating room products, represent a substantial majority of the Company's
of net sales and are principally used in the areas of cardiology and critical
care, neurology, labor and delivery, perinatology, and infection control.
Industrial products include recording charts and marking systems used in
recording physical measurements such as temperature, humidity, rate and volume
of flow, liquid level, electric current and magnetic and seismic activity.
Medical products are sold primarily to healthcare providers, including
hosptials, clinics, physicians' offices and other alternate care providers.
Industrial products are sold to customers primarily in the oil and gas,
chemical, pulp and paper, electric and gas utility, pharmaceutical, feed,
aerospace and automotive industries. The Company markets its products both
domestically and internationally.
Organization and Basis of Presentation: On September 28, 1995, GH Acquisition
Corporation, a newly organized subsidiary of Bessemer Holdings, L.P.
("Bessemer"), merged with and into Holdings, with Holdings being the surviving
corporation and becoming a direct subsidiary of Bessemer (The "Acquisition").
The Acquisition was accounted for using the purchase method of accounting. The
total purchase price, including fees and expenses related to the Acquisition and
its financing, was approximately $218,000,000.
In conjunction with the Acquisition, the Company borrowed $92,000,000 of senior
debt and $75,000,000 of senior subordinated notes. These proceeds were used to
pay existing debt, pay acquisition and financing fees and pay a dividend of
$118,652,000 to Holdings. Holdings used the proceeds from the dividend for the
redemption of the prior shareholders. The cash flows related to the transaction
are reflected in the statement of cash flows for the nine months ended
September 28, 1995.
In connection with the Acquisition, the Company was permitted to hold
approximately $4,300,000 of the purchase price in escrow for potential
liabilities related to matters such as taxes, environmental issues, transaction
respectively. The escrow amount is recorded in acquisition escrow accounts in
the Company's balance sheets with a corresponding liability to the selling
shareholders in other long-term liabilities. The agreement calls for escrow
funds to be released to the selling shareholders starting on the first
anniversary of the transaction and ending on the fifth anniversary of the
transaction. Escrow funds released to the selling shareholders were $ - 0 -
in 1996 and $2,257,000 in 1997. Escrow funds totaling approximately $200,000
in 1996 and $1,400,000 in 1997 were returned to the Company as reimbursement for
certain expenditures. The balance in the escrow fund was $4,154,000 and
$1,049,000 at December 31, 1996 and 1997, respectively.
28
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE A - Summary Of Significant Accounting Policies - (Continued)
- -----------------------------------------------------------------
Organization and Basis of Presentation Cont'd.
In conjunction with the Acquisition, the Company repaid the existing
indebtedness outstanding under its credit agreement and wrote off the
unamortized financing fees related to this indebtedness. This write-off has
been shown as an extraordinary charge, net of income taxes, in the consolidated
statement of operations of the Company for the nine months ended
September 28, 1995.
Principles of Consolidation: The consolidated financial statements include the
accounts of Graphic Controls Corporation and its subsidiaries. All material
intercompany accounts and transactions have been eliminated. The Company's
total investment in its foreign subsidiaries is approximately $17,600,000 at
December 31, 1996 and $20,000,000 at December 31, 1997.
Revenue Recognition: The Company recognizes revenue at the point of passage of
title, which is generally at the time of shipment to the customer. The Company
provides for probable future returns and uncollectible accounts as revenue is
recognized.
Account Receivable: The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Inventories: Inventories are stated at the lower of cost or market. The cost
of substantially all domestic inventories is determined under the last-in,
first-out (LIFO) method. The cost of the remaining inventories, principally at
foreign operations, is determined under the first-in, first-out (FIFO) method
(see Note C).
Property, Plant and Equipment: Land, buildings and improvements, and machinery
and equipment are carried on the basis of cost. Expenditures for maintenance
and repairs are charged directly against income; major renewals and betterments
are capitalized. Depreciation is provided over estimated useful lives using the
straight-line method for buildings and improvements and the double declining
balance method for machinery and equipment, except for used equipment which is
depreciated on the straight-line method. Depreciation expense was $4,475,000
for the period ended September 28, 1995, $585,000 for the period ended
December 31, 1995, $6,411,000 for 1996, and $7,742,000 for 1997.
Goodwill: Goodwill is being amortized over forty years on a straight-line
basis. The Company periodically reviews goodwill to assess recoverability.
Impairments would be recognized in operating results if a permanent reduction in
value were to occur.
Financing Costs: Financing costs are being amortized on a straight-line basis
over the term of the credit facilities.
Interest Rate Cap Agreement: The costs of interest rate cap agreements are
being amortized on a straight-line basis over the term of the agreements.
Payments to be received as a result of the cap agreements are accrued as a
reduction of interest expense.
Income Taxes: Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
29
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE A - Summary Of Significant Accounting Policies - (Continued)
- -----------------------------------------------------------------
Income Taxes Cont'd.:
- ---------------------
The provision for income taxes includes Federal, foreign, state, and local
income taxes. Investment tax credits are accounted for using the flow-through
method.
It is the Company's policy to repatriate approximately 50% of the earnings of
its foreign subsidiaries. All remaining undistributed earnings are reinvested
in these subsidiaries. Total undistributed earnings for which no federal income
taxes have been provided, including those earnings reinvested in the
subsidiaries, are approximately $16,200,000.
Translation of Foreign Currencies: The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars using the applicable local
currency as the functional currency. Accordingly, balance sheet accounts are
translated using exchange rates in effect at the balance sheet date and revenue
and expense accounts are translated using an average exchange rate during the
year. Resulting translation adjustments are made directly to a separate
component of shareholder's equity. Foreign currency transaction gains (losses)
included in the determination of net income approximated $(132,000) for the
period ended September 28, 1995, $(102,000) for the period ended
December 31, 1995, $(56,000) for 1996 and $159,000 for 1997.
Research and Development Costs and Royalty Arrangements: Product research and
development costs are charged to expense as incurred. Research and development
expense approximated $2,897,000 for the period ended September 28, 1995,
$1,199,000 for the three months ended December 31, 1995, $4,651,000 for 1996,
and $5,995,000 for 1997.
Costs related to royalty arrangements are charged to expense as incurred.
Royalty expense approximated $650,000 for the period ended September 28, 1995,
$180,000 for the three months ended December 31, 1995, $502,000 for 1996, and
$410,000 for 1997. Most of the Company's royalty agreements are in effect for
an indefinite period of time.
Retirement Plans and Post-Retirement Benefits: The Company has domestic
non-contributory defined benefit retirement plans covering substantially all
U.S. employees. Benefits under the plans are based on earnings and years of
benefit service. The Company's foreign subsidiaries provide plans for employees
consistent with local practices. Amounts charged to earnings relative to these
plans are determined in accordance with the Company's accounting practices
described in Note G. The Company's policy is to fund the U.S. plans on a
current basis in accordance with the requirements of the Employee Retirement
Income Security Act of 1974 (ERISA).
Certain employees may be eligible for post-retirement health care and life
insurance benefits upon retirement from the Company. It is the Company's policy
to accrue the cost of these benefits during the active service period of the
employee.
Impairment of Long-lived Assets: The Company reviews asset carrying amounts
whenever events or circumstances indicate that such carrying amounts may not be
recoverable. When considered impaired, the carrying amount of the asset is
reduced, by a charge to income, to its current fair value. During 1997, the
Company recorded an impairment loss of $4,005,000 in connection with its plan to
move its current Buffalo, New York operations to new facilities and dispose of
its current Buffalo facility.
30
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE A - Summary Of Significant Accounting Policies - (Continued)
- -----------------------------------------------------------------
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B - Acquisitions and Divestitures
- --------------------------------------
On February 28, 1996, the Company acquired all the outstanding common stock of
Devon Industries, Inc., a manufacturer and distributor of medical supplies
primarily for use in operating rooms (the "Devon Acquisition"). The total cost
of the transaction was approximately $99,000,000 including expenses of
approximately $5,000,000, plus up to an additional $7,000,000 in deferred
consideration contingent upon Devon's future financial performance. The Devon
Acquisition was financed with $67,500,000 of bank debt and $31,500,000 of new
equity provided by Bessemer. The Devon Acquisition agreement permitted the
Company to hold $5,657,000 of the purchase price in escrow for potential
liabilities such as taxes, pensions, litigation and other indemnified
liabilities. Escrow funds totaling $810,000 were returned to the Company in
1996 as reimbursement for certain expenditures. In connection with the Devon
Acquisition, the Company acquired assets with a fair value of $35,436,000 and
assumed liabilities of $8,854,000.
The Devon Acquisition has been accounted for using the purchase method of
accounting and the resulting goodwill of approximately $70,200,000 is being
amortized over its forty year life. The results of the acquired entity are
included in the 1996 consolidated statement of operations since the
February 28, 1996 acquisition date.
The following condensed pro forma results of operations for the year ended
December 31, 1996, the three month period ended December 31, 1995 and the nine
month period ended September 28, 1995 were prepared based on the historical
statements of operations for the respective periods, adjusted to give effect to
the Devon Acquisition, the Acquisition and the related financing, as if each had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
Nine Mos. Three Mo. Year
Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31
1995 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net sales.......................... $ 181,351 $ 58,389 $ 249,268
Income before extraordinary items.. $ 1,049 $ (542) $ (1,312)
Net income (loss).................. $ 1,049 $ (542) $ (1,312)
</TABLE>
During 1993, the Company announced its intention to divest its plotter and fax
supplies business units. The loss on disposal of these discontinued operations
was initially provided in 1993 and revised in 1994 and 1995 based on actual
results. The plotter supplies business was sold on September 9, 1994 and the
facsimile business was sold on April 28, 1995.
The plotter and fax supplies business units have been reported as discontinued
operations. Revenue for the discontinued operations was $4,483,000 for the
period ended September 28, 1995.
31
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note C - Inventories
- --------------------
Inventories at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Finished products............................. $ 17,781 $ 18,331
Work in process............................... 2,094 2,116
Raw materials................................. 12,822 11,644
-------- --------
$ 32,697 $ 32,091
======== ========
</TABLE>
Domestic inventories determined primarily on the last-in, first-out (LIFO)
method were $29,549,000 and $28,577,000 at December 31, 1996 and 1997,
respectively, and would have been lower by $3,465,000 in 1996 and $4,521,000
in 1997 had the first- in, first-out (FIFO) method been used exclusively.
NOTE D - Long-Term Debt
- -----------------------
Long-term debt outstanding at December 31, 1996 and 1997 was as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Senior bank facilities.......................... $152,416 $138,688
Senior Subordinated Notes due 2005 at 12%
per annum..................................... 75,000 75,000
Other........................................... 327 102
-------- --------
227,743 213,790
Less: current portion.......................... 8,015 12,165
-------- --------
$219,728 $201,625
======== ========
</TABLE>
Credit Agreement: The Company has entered into a Credit Agreement which
provides an aggregate term loan of up to $150,000,000 (subject to the repayment
terms of the Credit Agreement described below) and revolving credit facility of
up to $30,000,000 (subject to an availability requirement described below).
Advances under the Credit Agreement bear interest at a rate per annum equal to
1.5% over the bank's base rate (as defined) or 2.5% over the Eurodollar rate
(as defined), at the option of the Company for $102,500,000 of the facility and
2.0% over the bank's base rate or 3.0% over the Eurodollar rate for $77,500,000
of the facility. Interest is payable periodically in arrears.
In connection with the Company's obligations under the Credit Agreement, the
Company has granted mortgages on the manufacturing facilities and offices owned
by the Company and security interests in its machinery and equipment, certain
accounts receivable, inventory and certain other collateral. In addition, a
non-recourse guaranty by Holdings further secures the performance of the
Company's obligations under the Credit Agreement.
32
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE D - Long-Term Debt (Cont'd)
The following is a summary of the other principal terms of the Credit Agreement:
Terms Loans: The term loans are repayable in quarterly installments, with a
final maturity date in September 2003. Amounts repaid under the term loans
may not be reborrowed.
Revolving Credit: Under the revolving credit facility, the Company may
borrow, repay and reborrow from time to time up to the lesser of
(a)$30,000,000 or (b) the Company's total availability. The Credit
agreement defines the Company's total availability as the sum of 85% of
eligible accounts receivable plus 60% of eligible raw material inventory
plus 50% of eligible finished inventory plus 50% of the net book value of
property, plant and equipment (limited to $5,000,000) acquired pursuant to
a permitted business acquisition.
All outstanding borrowings under the revolving credit facility will mature
in September 2002. The amount the Company may borrow under the revolving
credit facility also is reduced by the full amount of any letters of credit
issued by the bank for the account of the Company. At December 31, 1997,
open letters of credit totaled $1,324,000.
Senior Subordinated Notes: On September 28, 1995, $75,000,000 of 12% Senior
Subordinated Notes were sold. These notes will mature on September 15, 2005.
There are no sinking fund requirements. Interest is payable in arrears on
March 15 and September 15. The notes are redeemable at the option of the
Company, in whole or in part, at any time on or after September 15, 2000,
initially at 106% of the principal amount, declining annually to 100% of the
principal amount on September 15, 2003, plus accrued interest to the date of
redemption. In addition, at any time prior to September 15, 1998, the Company
may redeem up to $25,000,000 of the notes with the proceeds of one or more
public equity offerings at 112% of the principal amount plus accrued interest to
the date of redemption. These notes are subordinated to all existing and future
senior indebtedness of the Company. The indenture restricts, among other
things, the payment of cash dividends on, or other distributions in respect of,
the Company's capital stock.
The aggregate maturities of long-term debt, excluding contingent payments, if
any, are as follows (in thousands):
<TABLE>
<CAPTION>
Revolving
Term Loans Credit Facility Notes Other Total
---------- --------------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1998........ $ 12,063 $ -- $ -- $ 102 $ 12,165
1999........ 13,250 -- -- -- 13,250
2000........ 14,250 -- -- -- 14,250
2001........ 15,125 -- -- -- 15,125
2002........ 29,719 -- -- -- 29,719
Thereafter.. 54,281 -- 75,000 -- 129,281
-------- -------- ------- ------ --------
$138,688 $ -- $75,000 $ 102 $213,790
======== ======== ======= ====== ========
</TABLE>
33
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE D - Long-Term Debt (Cont'd)
Restrictive Covenants: The Credit Agreement contains certain restrictive
financial covenants. At December 31, 1997, the Company was in compliance with
such requirements, except for an interest coverage requirement, for which a
waiver has been obtained. In addition to the financial covenants, the Credit
Agreement imposes certain other restrictions on the Company's business and
operations. The Company is prohibited from incurring consolidated capital
expenditures in excess of $10,000,000 per year. The Company's ability to
declare or pay dividends on any class of stock, other than in shares of such
stock, is limited. The Credit Agreement also restricts the Company from
incurring certain additional indebtedness.
Note E - Other Non-Current Liabilities
Other non-current liabilities at December 31, 1996 and 1997 consist of
(in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Retiree health and life insurance benefit obligation.. $ 6,683 $ 6,963
Accrued non-current pension costs..................... 5,345 5,521
Purchase escrows...................................... 9,002 5,896
Lease provision....................................... 1,382 1,256
Other................................................. 550 551
------- -------
$22,962 $20,187
======= =======
</TABLE>
Note F - Retirement Plans
The costs charged to earnings relative to the United States and Canadian plans
for the periods ended September 28, 1995 and December 31, 1995 and the years
ended December 31, 1996 and 1997 were determined in accordance with Statement of
Financial Accounting Standards No. 87. The provisions of this Statement have
not been applied to a foreign plan as it is not material to the financial
statements.
United States and foreign retirement plan expenses were $934,000 for the period
ended September 28, 1995, $311,000 for the period ended December 31, 1995,
$1,931,000 for 1996, and $1,220,000 for 1997. This included net periodic
pension expense for the United States and Canadian plans of $909,000 for the
period ended September 28, 1995, $303,000 for the period ended
December 31, 1995, and $1,900,000 for 1996, and $1,220,000 for 1997, which is
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mos. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service cost -
benefits earned during the period.. $ 683 $ 228 $ 1,792 $ 1,422
Interest cost on projected
benefit obligation................. 1,523 556 2,512 2,391
Actual Return on plan assets......... (3,568) (743) (3,156) (4,743)
Net amortization and deferral........ 2,361 262 752 2,150
-------- -------- -------- -------
Net periodic pension expense ........ $ 909 $ 303 $ 1,900 $ 1,220
======== ======== ======== =======
</TABLE>
34
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE F - Retirement Plans - (Continued)
Unrecognized gains (losses) and prior service costs are amortized on a
straight-line basis over a period approximating the average remaining service
period for active employees.
<TABLE>
<CAPTION>
Actuarial assumptions used:
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate................... 7.25 - 7.50% 7.50 - 7.75% 7.25 - 7.50%
Salary increases................ 3.50 - 6.00% 3.50 - 6.00% 3.50 - 6.00%
Expected return on plan assets.. 7.50 - 9.00% 7.50 - 9.00% 7.50 - 9.00%
</TABLE>
The following table sets forth the United States and Canadian plans' estimated
funded status at December 31, 1996 and 1997, based on the most recent actuarial
valuation available (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $25,650 and $28,333....................... $26,251 $28,681
======= =======
Projected benefit obligation............................ 31,777 34,427
Plan assets at fair value............................... 29,514 30,890
------- -------
Excess of projected benefit obligation over plan
assets................................................ (2,263) (3,537)
Unrecognized net gain................................... (3,023) (2,287)
------- -------
Accrued pension cost.................................... $(5,286) $(5,824)
======= =======
</TABLE>
All previously unrecognized gains, losses, and prior service costs were
recognized at the date of the Acquisition. The accrued pension cost is recorded
in the December 31, 1996 and 1997 balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Account payable and accrued employees' compensation.. $ 601 $ 1,014
Other assets......................................... (660) (711)
Other non-current liabilities........................ 5,345 5,521
------- -------
$ 5,286 $ 5,824
======= =======
</TABLE>
The plans' assets consist of listed stocks and corporate and government fixed
income securities.
Changes to the discount rate actuarial assumptions resulted in a decrease in
the vested benefit obligation, the accumulated benefit obligation and the
projected benefit obligation of approximately $1,850,000, $1,882,000 and
$2,409,000 respectively in 1997.
Company also sponsors 401(k) personal retirement savings plans covering all
eligible employees. The Company contributes an amount equal to 100% of each
participant's total contribution, not to exceed amounts specified in the
plans. The amount charged to expense for matching contributions was $236,000
for the period ended September 28, 1995, $78,000 for the period ended
December 31, 1995, $456,000 for the year ended December 31, 1996 and $649,000
for the year ended December 31, 1997.
35
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note G - Retiree Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits to eligible
retired employees. All participants generally become eligible for retiree
health care benefits after reaching age 55 with 10 years of service or after
reaching age 65 with at least 5 years of service. The plan provides benefits of
a maximum of $50.00 per month for health care and $5,000 of life insurance for
retirees with 5-10 years of service and a maximum of $100.00 per month for
health care and $10,000 of life insurance for retirees with over 10 years of
service.
The Company accrues the cost of providing postretirement benefits, including
medical and life insurance coverage, during the active service period of the
employee. The United States retiree health care and life insurance benefit
expenses were $318,000 for the period ended September 28,1995, $163,000 for
the period ended December 31, 1995,$634,000 for 1996 and $788,000 for 1997.
The Company funds these benefits on a pay-as-you-go basis.
The following table sets forth the funded status of the plans at
December 31, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Retirees......................................... $ 3,486 $ 3,519
Fully eligible active plan participants.......... 561 693
Other active plan participants................... 2,380 3,533
------- -------
Accumulated postretirement benefit obligation.... 6,427 7,745
Unrecognized prior service cost.................. -- (414)
Unrecognized net gain ........................... 490 58
------- -------
Accrued postretirement benefit obligation........ $ 6,917 $ 7,389
======= =======
</TABLE>
All previously unrecognized gains and losses were recognized at the date of the
Acquisition. The accrued postretirement benefit obligation is recorded in other
non-current liabilities and accrued expenses in the Company's balance sheets.
Net periodic postretirement benefit cost for the periods ended
September 28, 1995 and December 31, 1995 and the years ended December 31, 1996
and 1997 included the following components (in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mos. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service cost - benefits earned
during the period................... $ 81 $ 36 $ 174 $ 247
Interest cost on projected
postretirement benefit obligation... 359 127 460 518
Net amortization and deferral......... (122) -- -- 23
-------- ------- --------- -------
Net periodic post retirement expense.. $ 318 $ 163 $ 634 $ 788
======== ======= ========= =======
</TABLE>
36
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note G - Retiree Health Care and Life Insurance Benefits (Continued)
For measuring the postretirement benefit obligation, the assumed rate of
increase in the per capita cost of covered health care benefits was 11% for
1998, decreasing gradually to 6% in 2001. Additionally, the Medicare Part B
premium was assumed to increase at 5% per annum. Increasing these rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $523,000 and the annual net
periodic postretirement benefit cost by $71,000. The discount rate used in
determining the postretirement benefit obligation was 7.75% in 1996 and 7.25%
in 1997. The decrease in the discount rate in 1997 increased the accumulated
postretirement benefit obligation by $432,000.
Unrecognized gains and losses are amortized on a straight-line basis over the
average remaining service period of active participants.
Note H - Leases
Rental expense under operating leases amounted to $2,159,000 for the period
ended September 28, 1995, $704,000 for the period ended December 31, 1995,
$5,413,000 for 1996 and $7,704,000 for 1997. The future minimum lease payments
for all noncancelable operating leases are as follows (in thousands):
1998..................... $ 2,692
1999..................... 2,488
2000..................... 2,287
2001..................... 949
2002 & Thereafter........ 3,819
Note I - Fair Value Of Financial Instruments
The following table sets forth the carrying amounts and fair values of the
Company's financial instruments.
<TABLE>
<CAPTION>
December 31, 1996 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash................................... $ 563 $ 563 $ 626 $ 626
Liabilities:
Cash overdraft......................... 2,954 2,954 4,446 4,446
Long-term debt,
including current maturities:
Senior bank facilities............. 152,416 152,416 138,688 138,688
Senior Subordinated Notes.......... 75,000 79,695 75,000 83,640
Other.............................. 327 327 102 102
</TABLE>
37
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note I - Fair Value Of Financial Instruments (Continued)
The following methods and assumptions were used by the Company in estimating the
fair value of financial instruments:
Cash and cash equivalents: The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates its fair value.
Long and short-term debt under senior bank facilities: The carrying amounts
of the Company's borrowings under its senior bank facilities approximate
their fair value, as the underlying instrument is comprised of notes that
are repriced on a short-term basis.
Senior subordinated notes: The Company estimates the fair value of its
borrowings under the senior subordinated notes using quoted prices.
Note J - Income Taxes
The components of income (loss) before income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mo. Three Mo. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic ...................... $ 15,580 $ 1,345 $ (1,928) $ (7,764)
Foreign ....................... 2,127 786 2,909 5,502
--------- -------- --------- --------
$ 17,707 $ 2,131 $ 981 $ (2,262)
========= ======== ========= ========
<CAPTION>
Income tax expense (benefit) consists of the following (in thousands):
Pre-Acquisition
Nine Mo. Three Mo. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current: Federal .............. $ 4,285 $ 750 $ (1,969) $ (1,080)
State ................ 568 112 (368) (16)
Foreign .............. 963 188 1,338 2,155
Deferred: Federal .............. (177) 137 2,698 (608)
State ................ (32) 24 406 (91)
Foreign .............. (44) 116 (33) --
--------- -------- --------- --------
$ 5,563 $ 1,327 $ 2,073 $ 360
========= ======== ======== ========
</TABLE>
38
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note J - Income Taxes (Continued)
<TABLE>
<CAPTION>
Income tax expense differs from the amount computed by applying the Federal
statutory rate to income before income taxes. This difference is reconciled as
follows (in thousands):
Pre-Acquisition
Nine Mo. Three Mo. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
35% of pretax income ................ $ 6,197 $ 746 $ 343 $ (792)
State and local taxes, net of Federal
effect ............................ 348 88 25 (70)
Taxes (credits) on dividends from
foreign subsidiaries ................ (350) 48 -- --
Expenses without tax benefits, primarily
goodwill amortization ............... 21 362 1,494 1,554
Contribution of emission credits...... (382) -- -- --
Foreign subsidiary's net operation
loss................................. -- -- 158 --
Other ................................. (265) 83 53 (332)
--------- -------- -------- -------
$ 5,563 $ 1,327 $ 2,073 $ 360
========= ======== ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities at December 31, 1996
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Pension and other postretirement benefits.. $ 4,696 $ 4,872
Employee compensation...................... 1,175 1,227
Accrued expenses........................... 538 313
Other...................................... 262 262
------- -------
Total deferred tax assets.............. 6,671 6,674
Property, plant, and equipment............. (3,419) (1,638)
Inventory.................................. (3,945) (4,032)
Purchased intangibles...................... (2,476) (3,474)
------- -------
Total deferred tax liabilities......... (9,840) (9,144)
Net deferred tax liabilities........ $(3,169) $(2,470)
======= =======
</TABLE>
39
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note K - Stock Options
Prior to the Acquisition, certain of the Company's employees received options to
purchase the stock of Holdings. In connection with the Acquisition, all
outstanding options were either redeemed for cash or exchanged for new
non-qualified options ("Rollover Options") for a total of 23,015 shares of
Holdings' preferred stock, at prices ranging from $8.13 to $90.30 per share,
and 76722 shares of Holdings' common stock, at prices ranging from $.81 to $9.03
per share. Upon exercise of any, or all, Rollover Options, Holdings may, at its
options, settle such Rollover Options by issuing a total of 7,784 shares of
preferred stock and 25,952 shares of common stock, or by paying the employee the
current fair market value of such shares in cash. All Rollover Options were
100% vested at Acquisition date, are exercisable at any time through
September 28, 2005 and remain outstanding at December 31, 1997.
During 1996, the Company issued options to key employees for the purchase of
36,630 shares of preferred stock of Holdings for $100 per share and 122,098
shares of common stock of Holdings for $10 per share. All of these options
remaining outstanding at December 31, 1996, vest ratably over three years and
are exercisable through February 28, 2006.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value based method of accounting as prescribed by APB25.
Under APT25, because the exercise price of the Company's employee stock option
equals the market price of the underlying stock on the grant date, no
compensation cost is recognized. SSFAS 123 requires companies that do not adopt
the new fair value accounting rules to disclose pro forma net income (loss)
under the new method. The fair value of each option on the date of grant was
$13.93 for preferred stock options and $1.39 for common stock options, which was
estimated at the date of grant using the minimum value option pricing model with
the following weighted-average assumptions: risk free interest rate of 5%,
dividend yield of 0% and a weighted-average expected life of the option of 3
years. If the fair value based method accounting provisions of SFAS 123 had
been adopted at the beginning of 1996, the net loss would have been $(1,206,000)
and $(2,758,000) for 1996 and 1997, respectively. The effects of applying
SFAS 123 for providing pro forma disclosures are not likely to be representative
of the effects on reported net income for future years.
Note L - Business Segment Information
The Company operates primarily in two industries: medical products and
industrial products. Operations in medical products involve the manufacturing
and marketing of medical recording charts and other patient data supplies,
disposable medical and surgical supplies, disposable diagnostic and monitoring
electrodes, labor and delivery, fetal monitoring supplies and cables and
leadwires. Operations in industrial products involve the manufacture and
marketing of industrial recording supplies and marking systems for recording
instruments. Following is a summary of segment information (in thousands):
40
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note L - Business Segment Information - Continued
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mo. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
Medical products ................... $ 78,682 $ 26,920 $176,601 $200,633
Industrial products ................ 49,213 15,200 61,423 56,860
-------- -------- ------- --------
$127,895 $ 42,120 $238,024 $257,493
======== ======== ======== ========
Intersegment sales:
Medical products ................... $ -- $ -- $ -- $ --
Industrial products ................ 14,962 4,584 19,782 21,082
-------- -------- ------- --------
$ 14,962 $ 4,584 $ 19,782 $ 21,082
======== ======== ======== ========
Income from continuing operations before
general corporate expenses:
Medical products ................... $ 10,636 $ 4,042 $ 24,685 $ 24,519
Industrial products ................ 14,294 5,117 18,127 18,427
-------- -------- ------- --------
24,930 9,159 42,812 42,946
General corporate expenses:
General ......................... (3,486) (1,347) (4,948) (5,725)
Impairment loss ................. -- -- -- (4,005)
Nonrecurring and other charges... -- -- (7,721) (3,642)
Amortization .................... (668) (1,406) (8,058) (8,800)
-------- -------- ------- --------
Income from continuing operations... $ 20,776 $ 6,406 $ 22,085 $ 20,774
======== ======== ======== ========
Capital expenditures:
Medical products ................... $ 921 $ 504 $ 4,501 $ 4,314
Industrial products ................ 431 179 1,353 958
Corporate .......................... 153 131 427 318
-------- -------- ------- --------
$ 1,505 $ 814 $ 6,281 $ 5,590
======== ======== ======== ========
Depreciation:
Medical products ................... $ 2,519 $ 241 $ 4,484 $ 5,866
Industrial products ................ 1,471 298 1,375 1,163
Corporate .......................... 485 46 552 713
-------- -------- ------- --------
$ 4,475 $ 585 $ 6,411 $ 7,742
======== ======== ======== ========
Identifiable assets (at period end):
Medical products ................... $ 46,028 $ 47,056 $ 89,679 $ 90,991
Industrial products ................ 18,665 20,008 21,149 15,601
-------- -------- ------- --------
$ 64,693 $ 67,064 $110,828 $106,592
General corporate assets:
Goodwill.......................... $165,754 $164,719 $229,693 $224,221
Financing costs .................. 9,524 9,203 11,150 9,026
Acquisition escrow accounts....... 4,376 4,376 9,002 5,896
Other ............................ 10,259 5,550 4,344 340
-------- -------- ------- --------
$254,606 $250,912 $365,017 $346,075
======== ======== ======== ========
</TABLE>
41
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Note L - Business Segment Information - Continued
The Company operates principally in the United States. The following is a
summary of information by geographic area (in thousands):
<TABLE>
<CAPTION>
Pre-Acquisition
Nine Mos. Three Mo. Year Year
Ended Ended Ended Ended
Sept. 28 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
United States (including net sales
exported to foreign countries)... $ 111,189 $ 36,362 $214,944 $233,876
All other areas .................... 16,706 5,758 23,080 23,617
--------- -------- -------- --------
$ 127,895 $ 42,120 $238,024 $257,493
========= ======== ======== ========
Sales between geographic areas:
United States....................... $ 10,807 $ 3,543 $ 16,438 $ 11,755
All other areas .................... 7,782 2,936 13,247 16,759
--------- -------- -------- --------
$ 18,589 $ 6,479 $ 29,685 $ 28,334
========= ======== ======== ========
Identifiable assets at period end:
United States....................... $ 241,095 $237,209 $351,549 $331,261
All other areas .................... 13,511 13,703 13,558 14,814
--------- -------- -------- --------
$ 254,606 $250,912 $365,017 $346,075
========= ======== ======== ========
Income from continuing operations before
general corporate expenses:
United States (including net sales
exported to foreign countries).....$ 22,841 $ 8,494 $ 39,767 37,325
All other areas .................... 2,089 665 3,045 5,621
--------- -------- -------- --------
24,930 9,159 42,812 42,946
General corporate expenses:
General ......................... (3,486) (1,347) (4,948) (5,725)
Impairment loss ................. -- -- -- (4,005)
Nonrecurring and other charges... -- -- (7,721) (3,642)
Amortization .................... (668) (1,406) (8,058) (8,800)
--------- -------- -------- --------
Income from continuing operations... $ 20,776 $ 6,406 $ 22,085 $ 20,774
========= ======== ======== ========
</TABLE>
Intersegment and intergeographic sales are accounted for principally based on
cost plus a pre-determined mark-up based on sales to unaffiliated customers and
are excluded from net sales reported in the accompanying statements of
operations. Income from operations represents net sales, less operating
expenses for each industry segment/geographic area and excludes general
corporate expenses and other income and expenses of a general corporate nature.
Identifiable assets are those that are identifiable with operations in each
industrial segment/geographic area. Other general corporate assets consist
primarily of buildings and equipment.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Duane B. Hopper...................... 51 President, Chief Executive Officer and Director
Jeffrey A. Blair...................... 50 Senior Vice President and
Chief Operating Officer
Anthony W. Borowicz.................. 41 Vice President, Finance and Treasurer
Frank M. D'Amore..................... 38 Vice President and General Counsel
Kenneth D. Rolfes.................... 50 Vice President, Operations
Jan Reicis........................... 45 Vice President, Human Resources
M. Catherine Militello............... 40 Vice President, North American Medical Marketing
Edward J. Sulick..................... 48 Vice President, North American Medical Sales
Edward M. Roth III................... 54 Vice President, North American Industrial Sales and Marketing
Patricia A. Baubonis................. 51 Corporate Secretary and Manager, Legal Services
Michael B. Rothfeld.................. 50 Chairman of the Board
Ward W. Woods, Jr.................... 55 Director
Stuart S. Janney, III................ 49 Director
</TABLE>
Duane B. Hopper has been President and Chief Executive officer since May 1994.
He was President and Chief Operating Officer since December 1992, and a
Director since 1993. He was Executive Vice President from August to
December 1992. Prior to that, he was Vice President and General Manager of the
Medical Products Division since 1988. Before joining the Company, Mr. Hopper
held general management, operations management and marketing management
positions in the medical products industry, including service with divisions
of Bristol-Myers Squibb (Zimmer, Inc.) and British Oxygen Corporation (Ohmeda).
43
<PAGE>
Jeffrey A. Blair has been Senior Vice President and Chief
Operaring Officer since June, 1997. Mr. Blair was previously
Senior Vice President of Aequitron Medical, Inc. since 1992.
Prior to Aequitron, Mr. Blair served in senior management
positions with American Hospital Supply Corporation, Baxter
Healthcare, British Oxygen Corporation, and
Sentinel Monitoring, Inc.
Anthony W. Borowicz, who became Vice President, Finance and
Treasurer as of January 1, 1996, has been Controller of the
medical products group since 1993, and prior thereto was an
Accounting Operations Manager of the medical products group
since 1985. Mr. Borowicz has served in various other capacities
at the Company since 1981.
Frank M. D'Amore has been Vice President and General Counsel
since December 1997. Mr. D'Amore had been an Assistant General
Counsel, since 1994, with Alcon Laboratories, a Nestle, S.A.
subsidiary which manufactures pharmaceuticals and medical
devices. He previously has been a Partner with the Philadelphia
law firm of Saul, Ewing, Remick & Saul since 1992.
Kenneth D. Rolfes, who became Vice President, Operations, on
January 1, 1996, has been the Manager of the Cherry Hill, New
Jersey Manufacturing and Product Development Operation of the
Company for the past eight years. Mr. Rolfes has over twenty-
five years experience in manufacturing companies, including NCR
and Control Data Corporation, with technically based products,
equipment and consumables. Mr. Rolfes is currently National
Director for the Association for Manufacturing Excellence and is
a Director for the Mid Atlantic Employers Association, a
manufacturing association located in Southeastern Pennsylvania,
New Jersey, Maryland and Delaware.
Jan O. Reicis has been Vice President, Human Resources and Corporate
Information Services since February 1997. Mr. Reicis had served as
Human Resources Manager at the Company since 1994. Prior thereto,
Mr. Reicis was Director of Human Resources at Moog Controls, Inc.
since 1989.
M. Catherine Militello who became Vice President, North American
Medical Marketing as of July 1996, has been Director, North
American Medical Marketing since December 1993. Prior thereto,
Ms. Militello was a Product Manager, Fetal Monitoring
Products/New Product Development since 1991.
Edward J. Sulick who became Vice President, North American
Medical Sales as of July 1996, has held the position of
Director, North American Medical Sales since 1991. Prior to
1991, Mr. Sulick was a District Sales Manager (U.S.) since 1985.
Edward M. Roth III who became Vice President, Industrial Sales
and Marketing as of July 1996 has been Director, North American
Industrial Sales and Marketing since 1993 and prior thereto, he
was a Sales and Marketing Manager (U.S.) since 1981.
Patricia A. Baubonis has been Corporate Secretary since 1989. In
addition, she has been the Manager of Legal Services since 1979.
Ms. Baubonis has served in various other capacities at the
Company since 1970.
44
<PAGE>
Michael B. Rothfeld became the Chairman of the Board of the
Company upon consummation of the Acquisition. Mr. Rothfeld is consultant
to Bessemer Partners & Co. A family partnership established by
Mr. Rothfeld is a member of the general partner of Bessemer. From
1989 through 1997, Mr. Rothfeld was the sole shareholder and president of
corporations which were the manager and/or general partner of
the general partner of Bessemer and its predecessor. From 1989
through 1997, Mr. Rothfeld was the sole shareholder of a
corporation which was a general partner of Bessemer Partners &
Co. Mr. Rothfeld was Managing Director of Bessemer Securities
Corporation (BSC), the principal limited partner of Bessemer and
its predecessor, from July 1989 to June 1993.
Ward W. Woods became a Director of the Company upon consummation
of the Acquisition. Mr. Woods has since 1989 been the sole shareholder
and president of corporations which are a principal manager
and/or managing general partner of the general partner of
Bessemer and its predecessor. Mr. Woods is the sole shareholder
of a corporation which is a managing general partner of Bessemer
Partners & Co. Mr. Woods is President and Chief Executive
Officer of Bessemer Securities LLC.(BSLLC) formed in June of
1996, and of BSC, the principal limited partners of Bessemer.
Mr. Woods joined BSC in 1989. Mr. Woods is Chairman of the
Board of Essex International, Inc. and a Director of Boise
Cascade Corporation, Kelley Oil & Gas Corporation and several
private companies.
Stuart S. Janney, III became a Director of the Company upon
consummation of the Acquisition. Mr. Janney was elected in
January 1995 as Chairman of the Board of Directors of BSC, the
Bessemer Group Incorporated, Bessemer Trust Company, N.A., and
Bessemer Trust Company of Florida. Mr. Janney was elected Chairman
of the Board of Managers of BSLLC upon its formation in June 1996.
BSLLC and BSC are the principal limited partners of Bessemer. Prior to
January 1995, Mr. Janney was with Alex. Brown & Sons Inc., where he spent
nine years, most recently as Managing Director and head of asset
management. Mr. Janney is a director of Essex International, Inc. and
a number of private companies, foundations and institutions.
Pursuant to the By-laws of the Company, as amended in connection
with the Acquisition, the Company's Board of Directors consists of five
directors or such greater or lesser number as may be fixed from
time to time by a majority of the total number of directors
which the Company would have if there were no vacancies on the
Company's Board of Directors.
The term in office of each director ends when his successor has
been elected at the next following annual meeting of
stockholders and qualified or upon his removal or resignation.
The term in office of each executive officer ends when his
successor has been elected and qualified or upon his removal or
resignation.
The Executive Compensation Committee of the Company consists of
three directors, a majority of whom may not be employees of the
Company. The Executive Compensation Committee is responsible for
policies, procedures and other matters relating to employee
benefit and compensation plans, including compensation of the
executive officers as a group. The Executive Compensation
Committee is also responsible for policies, procedures and other
matters relating to management development. The members of the
Executive Compensation Committee are Michael B. Rothfeld, Ward
W. Woods and Stuart S. Janney, III.
Directors who are not employees will continue to receive an annual retainer of
$7,500, a fee of $1,000 for each meeting of the Company's Board of Directors
attended and a fee of $500 per year per committee of the Board such director
serves on. All directors will be reimbursed for all expenses in connection with
rendering services as such.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning compensation
earned by the chief executive officer and each of the other four most highly
compensated executive officers who received cash compensation in excess of
$100,000 (collectively, the "Named Executive Officers") for services rendered in
all capacities (including service as a director of Holdings or an officer or
director of its subsidiaries) during the Company's last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ----------- ----------
SECURITIES
NAME AND UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(a) OPTIONS (#) PAYOUTS($) COMPENSATION($)(b)
----------------------------------- ---- ---------- ------------ ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Duane B. Hopper
President and Chief 1997 336,375 -- -- -- 25,858
Executive Officer . 1996 325,000 143,203 23,088 -- 20,058
Kenneth D. Rolfes
Vice President, North 1997 197,600 -- -- -- 19,512
American Operations . 1996 190,000 43,071 13,588 -- 14,345
Anthony W. Borowicz
Vice President, 1997 156,000 -- -- -- 10,424
Finance . 1996 150,000 34,003 13,588 -- 5,259
Edward J. Sulick
Vice President, North
American Medical Sales 1997 143,500 -- -- -- 11,979
Information Services . 1996 135,000 30,804 7,807 -- 17,642
Edward M. Roth III
Vice President, North American 1997 139,725 -- -- -- 7,651
Industrial Sales and Marketing . 1996 135,000 33,417 7,807 -- 14,444
- ---------------
</TABLE>
(a) Includes bonuses earned during the year, paid in the following year.
(b) Includes life insurance premiums paid by the Company,
tax preparation and financial estate planning, the matching by the Company
of employee contributions under the Company's Savings Program.
46
<PAGE>
STOCK OPTION GRANTS
The following table sets forth certain information with respect to employee
options ("options") to purchase shares of common stock and preferred stock of
Holdings awarded during 1996 to the Named Executive Officers. All such options
were non-qualified options.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZED VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED STOCK PRICE APPRECIATION FOR
OPTIONS TO EMPLOYEES IN EXERCISE PRICE OPTION TERM(1)
NAME GRANTED (#) 1997 ($/SHARE) EXPIRATION DATE 5% ($) 10% ($)
---- ------------- ---- -------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Duane B. Hopper 13,813 28.6% $ 10 2/28/2006 86,871 220,145
4,144/(3)/ $100 2/28/2006 260,614 660,447
3,947/(2)/ $ 10 2/28/2006 -- --
1,184/(2)(3)/ $100 2/28/2006 -- --
Kenneth D. Rolfes 10,453 16.9% $ 10 9/28/2005 65,740 166,595
1,938/(3)/ $100 9/28/2005 121,880 308,867
1,197/(3)/ $100 2/28/2006 75,279 190,771
Anthony W. Borowicz 10,453 16.9% $ 10 9/28/2005 65,740 166,595
1,938/(3)/ $100 9/28/2005 121,880 308,867
1,197/(3)/ $100 2/28/2006 75,279 190,771
Edward J. Sulick 6,005 9.7% $ 10 9/28/2005 37,766 95,705
1,114/(3)/ $100 9/28/2005 70,059 177,543
688/(3)/ $100 2/28/2006 43,268 109,650
Edward M. Roth III 6,005 9.7% $ 10 9/28/2005 37,766 95,705
1,114/(3)/ $100 9/28/2005 70,059 177,543
688/(3)/ $100 2/28/2006 43,268 109,650
</TABLE>
/(1)/ As required by rules of the Securities and Exchange Commission, the
dollar amounts in the these two columns represent the hypothetical gain or
"option spread" that would exist for the options based on assumed 5% and 10%
annual compounded rates of stock price appreciation over the full option term.
/(2)/ These options vest only if Bessemer and its affiliates realize a 25%
internal rate of return on their investment in Holdings.
/(3)/ Consists of options to purchase 15% Cumulative Redeemable Preferred Stock
of Holdings having a stated value of $100 per share and being subject to
mandatory redemption on September 15, 2010. Upon exercise, the holder of these
options will receive the indicated number of shares of Preferred Stock
underlying the options plus an additional number of shares of Preferred Stock
having a stated value equal to the cumulative dividends which would have been
payable on such underlying shares from the date of grant through the date of
exercise.
The following table sets forth as to each of the Named Executive Officers
information with respect to options exercised during 1996 and the status of
their options on December 31, 1996: (i) the number of shares of common stock of
Holdings underlying options exercised during 1996; (ii) the aggregate dollar
value realized upon exercise of such options; (iii) the total number of shares
of common stock and preferred stock of Holdings underlying exercisable and non-
exercisable stock options held on December 31, 1996; and (iv) the aggregate
dollar value of in-the-money exercisable and non-exercisable stock options on
December 31, 1997.
47
<PAGE>
AGGREGATED OPTION EXERCISES
IN FISCAL YEAR ENDED DECEMBER 31, 1997
WITH RESPECT TO HOLDINGS COMMON STOCK AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXCERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997 ($) (2)
NAME EXERCISE # VALUE REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
---- ---------- ------------------ ----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Duane B. Hopper -- -- 75,818 / 54,708 5,698,496 /2,163,332
Kenneth D. Rolfes -- -- 8,659 / 4,929 559,161 / 300,155
Anthony W. Borowicz -- -- 8,659 / 4,929 559,161 / 300,155
Edward J. Sulick -- -- 5,650 / 2,832 385,051 / 172,412
Edward M. Roth III -- -- 4,975 / 2,832 321.283 / 172,412
</TABLE>
/(1)/Includes options to acquire common stock of Holdings and options to acquire
preferred stock of Holdings.
/(2)/Based on a price of approximately $10 per share of common stock and $100
per share of preferred stock on December 31, 1997.
The option exercise price of all the options held by the Named Executive
Officers is the fair market value of the underlying securities on the date of
grant or, in the case of roll-over options, the exercise price equivalent to the
exercise price of the predecessor option based on the fair market value of the
underlying securities at the time of the Acquisition.
The options may generally be exercised for one year after death or total
disability. All options terminate immediately if the holder's employment is
terminated. The terms of the options shown in the above table are generally ten
years.
PENSION PLAN
The Company's domestic pension plan (the "Pension Plan"), restated as of
January 1, 1989, generally covers all domestic employees who have completed one
year of service (including employees covered by the Pension Plan prior to the
amendment), excluding employees covered by collective bargaining agreements that
do not provide for participation. Under the Pension Plan, the amount of annual
benefits payable at age 65 are (subject to a maximum benefit limitation) equal
to (a) 1.5% of the participant's final average salary (defined generally as the
participant's average monthly earnings for the participant's five highest-paid
consecutive years within such participant's last ten years of service)
multiplied by the total number of years of service with the Company and
fractions thereof, less (b) 1.5% of such participant's estimated primary Social
Security benefit multiplied by the total number of years of service with the
Company and fractions thereof. The amount computed under clause (b) of the
preceding sentence may not exceed 50% of the primary Social Security benefit.
Earnings considered for purposes of determining benefits under the Pension Plan
include full salary, wages and regular commissions, but do not include bonuses,
incentive commissions or amounts included in a participant's gross income with
respect to stock options or restricted stock. The Pension Plan provides for
reduced benefits upon early retirement for participants who reach age 55 and are
vested. Employees who were participants on January 1, 1978 are entitled to the
larger of the benefit computed under the current plan formula or the formula in
effect prior to an amendment to the Pension Plan on January 1, 1978. An employee
becomes 100% vested upon the earliest to occur of: (i) completion of five years
of service, (ii) the date such employee reaches age 65, provided that such
employee is then employed by the Company or, (iii) the date such employee
suffers a disability, as determined by the committee administering the Pension
Plan, while employed by the Company.
48
<PAGE>
The following table illustrates estimated annual benefits calculated as a
straight life annuity provided through the Pension Plan assuming retirement in
1995 at age 65. The estimated annual benefits shown have been reduced by 50% of
the employee's primary Social Security benefit payable at retirement.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
FINAL
AVERAGE ANNUAL YEARS OF CREDITED SERVICE*
-----------------------------------------------------------
COMPENSATION 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS
-------------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 2,557 $ 5,113 $ 7,670 $10,226 $12,783 $15,340
75,000 4,432 8,863 13,295 17,726 22,158 26,590
100,000 6,307 12,613 18,920 25,226 31,533 37,840
125,000 8,182 16,363 24,545 32,726 40,908 49,090
150,000 10,057 20,113 30,170 40,226 50,283 60,340
175,000 11,932 23,863 35,795 47,726 59,658 71,590
200,000 13,807 27,613 41,420 55,226 69,033 82,840
<CAPTION>
Maximum eligible compensation for final 5 years:
<S> <C>
1997 ............................. $150,000
1996 ............................. 150,000
1995 ............................. 150,000
1994 ............................. 235,840
1993 ............................. 228,860
$914,700
--------
Average:........................... $182,940
======== ========
</TABLE>
- - --------------
* The Pension Plan contains maximum benefit limitations (generally $120,000)
based on the requirements of the Internal Revenue Code of 1986, as amended (the
"Code").
The credited years of service under the Pension Plan, and the amounts of
covered compensation received during the twelve months preceding January 1,
1998, for the officers named in the cash compensation table are as follows:
Duane B. Hopper, 10 years, $150,000; Kenneth D. Rolfes, 12 years, $150,000;
Anthony W. Borowicz, 17 years, $150,000; Edward J. Sulick, 24 years, $143,500
and Edward M. Roth III, 30 years, $139,725.
SAVINGS PROGRAM
The Company maintains a savings program for employees (the "Savings Program"),
which is qualified under Section 401(k) of the Code. All regular employees of
the Company in the United States are eligible to participate in the Savings
Program. The Savings Program consists of a tax deferred account to which
participants may contribute on a pre-tax basis. For each eligible employee who
elects to participate in the Savings Program and makes a contribution thereto,
the Company makes a matching contribution. The matching contribution is 100% of
the first 1% of the amount contributed by the employee to the extent that the
employee contributes at least 1% of his compensation. The maximum contribution
for any participant for any year is 6% of such participant's compensation.
Contributions to the Savings Program are invested, as the employee directs, in a
money market fund, guaranteed investment contract (GIC) fund, fixed income fund,
balanced fund or equity funds.
49
<PAGE>
EMPLOYMENT AGREEMENT WITH DUANE B. HOPPER
Holdings and the Company entered into an employment agreement with Mr. Hopper
effective September 28, 1995, which was amended by the parties on December 12,
1996 (the "Hopper Employment Agreement"). The Hopper Employment Agreement
expires on December 31, 1998 subject to renewal by mutual agreement unless
either party gives 180 days prior notice of its intention not to renew. The
Hopper Employment Agreement also provides for a three-year noncompetition
covenant. Under the Hopper Employment Agreement, Mr. Hopper receives a base
salary of $336,375, subject to cumulative annual increases for inflation, and
is entitled to receive an annual bonus as determined by the Company's Board of
Directors.
Under the Amendment to the Hopper Employment Agreement, the Company agreed to
grant Mr. Hopper a Base Option to purchase 60,541 shares of Holdings common
stock and 18,163 shares of Holdings preferred stock, a Performance Option to
purchase 17,298 shares of Holdings common stock and 5,189 shares of Holdings
preferred stock and a Special Common Option to purchase additional shares of
Holdings common stock in certain circumstances (collectively, the " New
Options"). In addition, Mr. Hopper has received roll-over options ("Rollover
Options") to acquire Holdings common stock and Holdings preferred stock in
substitution for all existing options held by Mr. Hopper prior to the
consummation of the Transactions, which have exercise prices determined in
accordance with specified formulas and which entitle Mr. Hopper to receive, at
the option of Holdings, either cash or shares of Holdings common stock or
Holdings preferred stock, as the case may be, equal to the number of such shares
he could have received if he reinvested the value of his existing options in
shares of Holdings common stock or Holdings preferred stock, as the case may be,
at the price paid by Bessemer in the Acquisition.
Additional terms of the Hopper Employment Agreement are described below.
Employee Loan
The Company has made available to Mr. Hopper a loan (the "Employee Loan") up to
a maximum amount of $400,000. The Employee Loan matures on the tenth
anniversary of the Effective Time unless earlier prepaid. Mr. Hopper is
required to prepay the Employee Loan upon the occurrence of certain events,
including the Company's acceleration of such loan following the termination of
Mr. Hopper's employment. The Employee Loan is a recourse loan and is secured by
a first priority security interest in Mr. Hopper's shares of Holdings' capital
stock and Rollover Options.
In the event the Company accelerates the Employee Loan as provided in the Hopper
Employment Agreement, then Mr. Hopper shall have the right, subject to certain
limitations, to require Holdings to repurchase the shares of Holdings capital
stock or Rollover Options (at Mr. Hopper's option) (but not New Options) held by
Mr. Hopper in an amount such that the net cash proceeds are sufficient to repay
all amounts due under the Employee Loan, at a cash purchase price equal to the
then fair market value of such securities. Mr. Hopper will be required to use
such proceeds to pay all amounts then outstanding under the Employee Loan
(including accrued but unpaid interest).
Severance
If Holdings terminates the employment of Mr. Hopper without cause, Mr. Hopper
will be entitled to receive certain payments and benefits as severance including
(i) continuation of his base salary for a specified period, (ii) a prorated
bonus, (iii) except in certain circumstances, continuation of coverage under all
non-cash, non-retirement benefit plans of the Company
(i.e., medical, life, accident and disability insurance) for a period of 18
months after such termination and (iv) the Rollover Options remaining
outstanding.
50
<PAGE>
Termination upon Death or Incapacity
If Mr. Hopper's employment is terminated due to his death or incapacity, then
(i) the coverage in effect under the Company's medical plan immediately prior to
his death or incapacity shall continue in effect for a period of 12 months from
the date of such termination of employment, (ii) Mr. Hopper (or his estate) will
be entitled to receive a prorated bonus to the date of termination, and (iii)
the Rollover Options remain outstanding.
Put Options
In the event of termination of Mr. Hopper's employment either (i) due to Mr.
Hopper's death or incapacity or (ii) by Holdings and the Company without cause,
then Mr. Hopper shall have the right to require Holdings to repurchase all (but
not less than all) the Holdings capital stock and Rollover Options (but not New
Options) held by Mr. Hopper for a cash purchase price equal to the then fair
market value of such securities.
EMPLOYMENT AGREEMENTS WITH OTHER SENIOR EXECUTIVES
The Company has entered into employment agreements with Mr.
Jeffrey A. Blair, Mr. Frank M. D'Amore, Mr. Anthony W. Borowicz,
Mr. Kenneth D. Rolfes, Mr. Edward M. Roth III, Mr. Edward J. Sulick,
Ms. Patricia A. Baubonis, Ms Catherine M. Militello and
Mr. Jan O. Reicis on the terms described below.
The terms of the employment agreements with the others senior
executives (the "Senior Executive Employment Agreements") are
substantially similar and are described below.
Term
The term of the contracts for Jeffrey Blair and Jan Reicis
commenced on June 2, 1997 and the term of the contract for Frank
D'Amore commenced on December 1, 1997. These contracts
terminate on December 31, 1999. The term of each of the Other Senior
Executive Employment Agreements commenced on September 28,
1995 and terminates on December 31, 1998. Each of the Senior
Executive Employment Agreements may be extended for an
additional term upon mutual agreement of the parties.
Compensation
Under the Senior Executive Employment Agreements, base salaries
are: Ms.Baubonis, $98,800; Mr. Rolfes, $197,600; Mr. Borowicz, $156,000;
Mr. Blair, $225,000; Mr. D'Amore, 190,000; Mr. Roth, $139,725;
Mr. Sulick, $143,500; and Ms. Militello, $129,375, in each case
subject to cumulative annual increases for inflation. The Senior
Executive Employment Agreements also provide for the payment of
an annual a bonus as determined by the Board of Directors.
Severance
In the event of termination of the employment without cause, the senior
executive will be entitled to the following payments and benefits as severance:
(i) continuation of the base salary for a period of 12 months from the date of
termination (subject to extension in certain circumstances), (ii) a prorated
bonus and (iii) continuation of coverage under all non-cash, non-retirement
benefit plans of the Company for a period of up to 12 months after such
termination.
51
<PAGE>
Termination upon Death or Incapacity
If employment is terminated due to death or incapacity, then the senior
executive (or his or her estate) is entitled to: (i) continuation of coverage
under the Company's medical plan for a period of up to 12 months and (ii) a
prorated bonus.
Non-Competition/Non-Disclosure
Each of the Senior Executive Employment Agreements contains a two-year non-
competition covenant effective following termination of employment (subject to
certain limitations) and a confidentiality agreement with regard to non-
disclosure of proprietary information of Holdings, the Company and their
subsidiaries.
1997 OFFICERS INCENTIVE PLAN
The senior executives of the Company are eligible to participate in the 1997
Officers Incentive Plan. The 1997 Officers Incentive Plan provides for the
payment of cash awards of up to 100% of such executive's base salary based on
the achievement of performance goals.
1997 STOCK OPTION PLAN
The Graphic Holdings 1997 Stock Option Plan (the "Plan") authorizes the grant to
officers and key employees of the Company of options to purchase shares of not
more than 200,000 Holdings common stock and not more than 60,000 of Holdings
preferred stock. No person may be granted options under the Plan representing
an aggregate of more than 80,000 shares of Common Stock and an aggregate of more
than 25,000 shares of Preferred Stock. The options granted under the Plan are
non-qualified stock options and will be granted by the Compensation Committee of
the Board of Directors (the "Committee"). To date, 122,098 options to purchase
Common Stock and 36,630 options to purchase Preferred Stock have been granted to
employees of the Company.
The purchase price of the Common Stock and/or Preferred Stock, as applicable,
under each option shall be determined by the Committee, but generally shall not
be less than 100% of the fair market value per share of the Common Stock or
Preferred Stock, as applicable, on the date the option is granted.
Conditions to exercisability and expiration of Options under the Plan are
contained in the Plan and the stock option agreements evidencing such Options to
be entered into between Holdings and each participant. The Committe may in its
discretion prescribe that any option is exercisable in installments. The Plan
provides that, upon the termination of the employment of any participant for
cause or the voluntary termination of any participant, the option will expire
upon such termination date, and such option will no longer be exercisable by
such participant after such termination date. The Plan also provides that if a
participant (i) dies or (ii) terminates employment due to disability, the option
must be exercised prior to the date of its expiration or 180 days from the date
of the participant's death or cessation of employment due to disability,
whichever occurs first; and if the participant's employment is involuntarily
terminated without cause by the Company, to the extent that the option may be
exercised it must be exercised prior to the date of expiration or 30 days from
the date of the participant's termination of employment, whichever occurs first.
In the event of a sale of all or substantially all of the assets or
outstanding voting securities of the Company, on the effective date of such sale
the Plan and, to the extent not then exercised, all then outstanding option
grants thereunder shall be terminated and cancelled without further cost or
liability to the Company provided, however, that in the event the Company enters
into a binding agreement with respect to any such sale, the Company shall
provide notice of such agreement to each holder of options by not fewer than 30
days before the effective date of such sale transaction.
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As a result of the Acquisition, all the outstanding capital stock of Holdings
is owned by Bessemer and its affiliates (which own, on a fully diluted basis,
approximately 90% of such outstanding capital stock) and the Management
Investors (who collectively own, on a fully diluted basis, the remaining
approximately 10%), and Holdings owns 100% of the capital stock of the Company.
In connection with the Transactions, Bessemer and the Management Investors
entered into the Stockholders Agreement described below.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
STOCKHOLDERS AGREEMENT
The Stockholders Agreement (the "Stockholders Agreement") among Bessemer, GH
Acquisition and the Management Investors contains customary provisions relating
to the rights and obligations of the Management Investors, such as the
following: (i) the Management Investors have agreed to vote all their shares of
Holdings capital stock in the manner directed by Bessemer, except in certain
limited circumstances; (ii) the Management Investors are generally permitted to
transfer such capital stock for 10 years (or following any earlier public
offering); (iii) the Management Investors have tag-along rights in the event of
a public offering or private sale of such capital stock by Bessemer, and
Holdings and Bessemer have drag-along rights and rights of first refusal with
respect to the Management Investors' shares; (iv) Holdings has the right to call
any or all shares of a Management Investor at any time within one year following
cessation of such Management Investor's employment with the Company; and (v)
each Management Investor has the right to put all his shares (and any roll-over
options) to Holdings at any time within specified periods following cessation of
such Management Investor's employment due to death or disability.
ADVISORY SERVICES AGREEMENT
Pursuant to an advisory services agreement among Holdings, the Company and an
affiliate of Bessemer, the Company has agreed to pay such affiliate an annual
advisory fee of $750,000.
53
<PAGE>
EMPLOYEE LOAN
As described under "Item 11. Executive Compensation--Employment Agreement with
Duane B. Hopper" the Company has agreed to make loans of up to $400,000
available to Mr. Hopper, President and Chief Executive Officer of the Company,
pursuant to the Hopper Employment Agreement. The Employee Loan bears interest at
a rate equal to the lowest interest rate that would not result in its being a
"below market loan" as defined in Section 7872 of the Internal Revenue Code. No
loans are outstanding under the Employee Loan as of December 31, 1997.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AS OF DECEMBER 31, 1995,
1996, AND 1997.
The consolidated financial statements filed as a part of this Report are
listed beneath Item 8 at page 22 of this Report.
(b) FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts (Schedule II)
(c) All other schedules are omitted as the required informtion is not
applicable or the information is presented in the consolidated financial
statements or the related notes.
(d) The following exhibits are incorporated by reference herein or
annexed to this annual report:
EXHIBIT DESCRIPTION
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-4 (File No. 33-99094)).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-4 (File No. 33-99094)).
4.1 Indenture, dated as of September 15, 1995, between the Company and
United States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-4 (File No. 33-99094)).
4.2 Exchange and Registration Rights Agreement, dated September 28,
1995, between the Company and Chemical Securities Inc. (incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-4 (File No. 33-99094)).
4.3 Form of 12% Senior Subordinated Notes due 2005 of the Company
(incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-4 (File No. 33-99094)).
10.1 Agreement and Plan of Merger dated August 3, 1995, among GH
Acquisition Corporation, Graphic Holdings, Inc. and the Company
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
10.2 Purchase Agreement dated September 21, 1995, between the
Company and Chemical Securities, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-4 (File
No. 33-99094)).
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. Description
- ----------- ----------------------------------------------------------------------
<C> <S>
10.3 Employment Agreement dated as of September 28, 1995, among GH
Acquisition Corporation, Graphic Holdings, Inc., the Company and
Duane B. Hopper (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-4 (File No. 33-99094)).
10.4 Commercial Lease between Acadia Properties, Inc. and the Company
dated November 1, 1984, as modified (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-4 (File
No. 33-99094)).
10.5 Share Purchase Agreement dated as of December 23, 1995, among
the Company, Dan S. Sandel and the selling shareholders named
therein (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4 (File No. 33-99094)).
10.6 Credit Agreement dated as of September 28, 1995, as Amended and
Restated through February 29, 1996, among the Company, Graphic Holdings,
Inc., various lending institutions and Chase Bank, as Agent (incorporated
by reference to 1996 form 10-K).
21.1 List of subsidiaries of the Company.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule
</TABLE>
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAPHIC CONTROLS CORPORATION
Date: March 31, 1998
By /s/ Duane B. Hopper
---------------------------------
DUANE B. HOPPER, PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Duane B. Hopper and Michael B. Rothfeld, and each
of them his true and lawful attorneys-in-fact and agents with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each of
them, full power and authority to do and perform each and every act and thing
required and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that the attorneys-in-fact and any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Duane B. Hopper President, Chief Executive March 31, 1997
- -------------------------------------------
DUANE B. HOPPER Officer and Chief
Operating Officer
and Director
/s/ Anthony W. Borowicz Vice President, Finance March 31, 1997
- -------------------------------------------
ANTHONY W. BOROWICZ and Principal Financial
Officer and Principal
Accounting Officer
/s/ Michael B. Rothfeld Chairman of the Board March 31, 1997
- -------------------------------------------
MICHAEL B. ROTHFELD and Director
Director March 31, 1997
- -------------------------------------------
WARD W. WOODS, JR.
/s/ Stuart S. Janney, III Director March 31, 1997
- -------------------------------------------
STUART S. JANNEY, III
</TABLE>
57
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders of the
Company.
58
<PAGE>
Financial Statement Schedules
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
GRAPHIC CONTROLS CORPORATION & SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged to Charged to at End
Description of Period Expense Other Accts Deductions of Period
----------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $382 $ (78) $ 0 $ 47(1) $257
Allowance for returns 400 4,658 4,658(2) 400
---- ------ --- ------ ----
Total $782 $4,580 $ 0 $4,705 $657
==== ====== === ====== ====
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $338 $ 16 $49 $ 21(1) $382
Allowance for returns 362 2,426 2,388(2) 400
---- ------ --- ------ ----
Total $700 $2,442 $49 $2,409 $782
==== ====== === ====== ====
Period ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $474 $ (43) $ 93(1) $338
Allowance for returns 334 470 442(2) 362
---- ------ --- ------ ----
Total $808 $ 427 $ 0 $ 535 $700
==== ====== === ====== ====
Period ended September 28, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $403 $ 96 $ 25(1) $474
Allowance for returns 406 1,614 1,686(2) 334
---- ------ --- ------ ----
Total $809 $1,710 $ 0 $1,711 $808
==== ====== === ====== ====
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Returns from customers during the year.
59
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
SUBSIDIARY OF THE COMPANY JURISDICTION OF ORGANIZATION
Tronomed, Inc. California
Tronomed Express, Inc. California
Graphic Controls (Australia) Pty. Ltd. Australia
Graphic Controls Canada Ltd. Canada
Controle Graficos Ibericos, S.A. Spain
Devon Industries, Inc. California*
* Devon Industries, Inc. became a subsidiary of the Company as of
February 29, 1996.
60
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 626
<SECURITIES> 0
<RECEIVABLES> 35,937
<ALLOWANCES> (657)
<INVENTORY> 32,091
<CURRENT-ASSETS> 69,782
<PP&E> 42,736
<DEPRECIATION> (13,660)
<TOTAL-ASSETS> 346,075
<CURRENT-LIABILITIES> 46,055
<BONDS> 201,625
0
0
<COMMON> 0
<OTHER-SE> 77,968
<TOTAL-LIABILITY-AND-EQUITY> 346,075
<SALES> 257,493
<TOTAL-REVENUES> 257,493
<CGS> 143,232
<TOTAL-COSTS> 143,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (78)
<INTEREST-EXPENSE> 23,084
<INCOME-PRETAX> (2,262)
<INCOME-TAX> 360
<INCOME-CONTINUING> (2,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,622)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
