<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number: 0-2349
GRAPHIC CONTROLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-0834173
- ----------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
189 VAN RENSSELAER STREET, P.O. BOX 1271, BUFFALO, NY 14240
- ----------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (716) 853-7500
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
At the date of this filing, there were 100 shares, par value $1.00 per share of
common stock outstanding, all of which was owned by Graphic Holdings, Inc.
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GRAPHIC CONTROLS CORPORATION
FORM 10-Q
INDEX
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
June 30, 1998 and December 31, 1997................................................... 1
Condensed consolidated statements of income
-- three months ended June 30, 1998 and 1997
six months ended June 30, 1998 and 1997............................................ 2
Condensed consolidated statements of cash flow
-- six months ended June 30, 1998 and 1997............................................ 3
Notes to condensed consolidated financial statements
-- June 30, 1998...................................................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 5-7
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K................................................ 8
Signature............................................................................... 9
</TABLE>
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PART I. FINANCIAL INFORMATION
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
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(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 626 $ 373
Accounts receivable, net............................. 35,280 36,397
Inventories.......................................... 32,091 31,927
Income tax recoverable............................... 730 396
Other................................................ 1,055 1,027
-------- --------
Total current assets............................... 69,782 70,120
Property, plant and equipment:
Land................................................. 1,095 1,094
Buildings and improvements........................... 7,390 7,375
Machinery and equipment.............................. 34,278 30,340
-------- --------
42,763 38,809
Less accumulated depreciation........................ 13,660 16,107
-------- --------
29,103 22,702
Goodwill, net......................................... 224,221 221,259
Other assets.......................................... 22,969 25,095
-------- --------
$346,075 $339,176
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Cash overdraft....................................... $ 4,446 $ 2,542
Accounts payable..................................... 14,081 14,054
Accrued expenses..................................... 13,133 13,589
Deferred income taxes................................ 2,230 2,230
Current portion of long-term debt.................... 12,165 12,758
-------- --------
Total current liabilities.......................... 46,055 45,173
Long-term debt........................................ 201,625 196,725
Deferred income taxes................................. 240 234
Other non-current liabilities......................... 20,187 20,110
Shareholder's equity:
Common stock ($1 par)
Authorized - 5,000,000 shares; issued & outstanding
100 shares.......................................... -- --
Additional paid-in capital........................... 82,366 82,366
Retained earnings (accumulated deficit).............. (2,910) (3,473)
Equity adjustment from foreign currency translation.. (1,488) (1,959)
-------- --------
Total shareholder's equity......................... 77,968 76,934
-------- --------
$346,075 $339,176
======== ========
</TABLE>
(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
-1-
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GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 62,867 $ 66,969 $ 126,333 $ 132,479
Cost of sales................................. 35,485 38,646 69,382 76,713
---------- ---------- --------- ---------
Gross profit.................................. 27,382 28,323 56,951 55,766
Selling, general and administration expenses.. 18,770 19,272 37,181 38,239
Amortization expense 2,154 2,120 4,303 4,289
Other non-recurring expense................... 1,857 1,329 2,948 1,965
---------- ---------- --------- ---------
Total operating expense..................... 22,781 22,721 44,432 44,493
---------- ---------- --------- ---------
Operating income.............................. 4,601 5,602 12,519 11,273
Interest expense.............................. (5,836) (5,457) (11,470) (10,880)
---------- ---------- --------- ---------
Income (loss) before income taxes............. (1,235) 145 1,049 393
Income tax expense (benefit).................. (237) 428 1,063 956
---------- ---------- --------- ---------
Net income (loss)............................. $ (998) $ (283) $ (14) $ (563)
========== ========== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
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<S> <C> <C>
Operating activities:
Net income (loss).................................... $ (14) $ (563)
Depreciation and amortization........................ 8,257 8,447
Changes in assets and liabilities.................... (9,468) (4,752)
-------- ---------
Net cash provided (used) by operations............... (1,225) 3,132
-------- ---------
Investing activities:
Additions to property, plant and equipment........... (3,168) (2,588)
Proceeds from sale of property, plant and equipment.. -- 5,414
-------- ---------
Net cash provided (used) in investing activities..... (3,168) (2,826)
-------- ---------
Financing activities:
Repayment of senior debt............................. (2,313) (7,147)
Decrease in cash overdraft........................... (2,954) (1,904)
Proceeds from senior bank facilities................. 9,358 2,840
-------- ---------
Net cash provided (used) in financing activities..... 4,091 (6,211)
-------- ---------
Increase (decrease) in cash and cash equivalents...... (302) (253)
Cash and cash equivalents at beginning of period...... 563 626
-------- ---------
Cash and cash equivalents at end of period............ $ 261 $ 373
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Graphic Controls Corporation and Subsidiaries (the "Company") have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three- and six-month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
DECEMBER 31 JUNE 30
1997 1998
----------- --------
Raw materials................ $11,644 $10,305
Work in process.............. 2,116 2,635
Finished products............ 18,331 18,987
------- -------
$32,091 $31,927
======= =======
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
Net Sales for the three months ended June 30, 1998 were $67.0 million compared
to $62.9 million for the corresponding three months ended June 30, 1997, an
increase of 6.5%. Domestic medical sales increased by 9.7% in the three months
ended June 30, 1998 over the same period last year by reflecting positive growth
in National Accounts and Alternate Site markets. Industrial sales declined by
6.2% compared to last year. International sales increased by 11% compared to
last year.
Gross Profit for the second quarter of 1998 was $28.3 million, compared to $27.4
million for the second quarter 1997. The Company's gross profit percentage
decreased to 42.3% in the second quarter of 1998 from 43.4% in the second
quarter of 1997. The decrease is partially attributable to the timing effect
of lower medical products selling prices on certain large national account
contracts. Gross margins, however, improved from 41.9% in the first quarter
of 1998. The improvement is due to the higher fixed manufacturing absorption
expense due to increased medical sales volume and manufacturing cost
productivity improvements.
Selling, General & Administrative Expenses (SG&A) for the second quarter of 1998
were $19.3 million, compared to $18.8 million for the second quarter 1997. As a
percentage to sales, SG&A expense decreased to 28.8% in the second quarter of
1998 from 29.9% in the second quarter of 1997. The decrease in SG&A expense as
a percentage of net sales is partially attributable to the increased sales and
expense reduction activities.
Nonrecurring Expense for the three months ended June 30, 1998 of $1.3 million
decreased by $.5 million from the comparable period last year. This expense
represents costs primarily associated with the contract with Thomas Group
Incorporated and employee severance costs.
Operating Income for the the three months ended June 30, 1998 of $5.6 million
increased by $1.0 million compared to the same quarter last year, an increase
of 21.8%. As a percentage to sales, operating margins improved to 8.4% in the
second quarter of 1998 from 7.3% in the second quarter of 1997.
Net Interest Expense for the three months ended June 30, 1998 of $5.5 million
decreased by $.4 million compared to the same period last year. The decrease
was the result of decreased indebtedness of approximately $25 million compared
to June 1997.
-5-
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Net Sales for the six months ended June 30, 1998 were $132.5 million, an
increase of $6.2 million or 4.9% from net sales of $126.3 million for the
corresponding six months ended June 30, 1997. Medical sales increased
by 8.9%, Industrial sales decreased by 6.9% and International sales decreased
by .8% for the six months ended June 1998 compared to the corresponding period
in 1997.
Gross Profit for the first six months of fiscal 1998 was $55.8 million, a
decrease of $1.2 million from gross profit of $57.0 million for the
corresponding fiscal period. The majority of the decrease is attributable to
the timing effects of the lower medical national account selling prices and
higher first quarter 1997 sales due to timing issues relating to clearing
backordered shipments.
Selling, General and Administrative Expenses (SG&A) of $38.2 million increased
2.7% for the first six months of fiscal 1998 from $37.2 million in the first
half of 1997. As a percentage of net sales, expenses decreased from 29.4% to
28.9% for the first half of 1998 compared to 1997.
Nonrecurring Expense and other charges decreased by $0.9 million for the six
months ended June 30, 1998 compared with the same period last year from $2.9
million to $2.0 million.
Operating Income decreased by $1.2 million from $12.5 million in the first six
months of 1997 to $11.3 million in the first half of fiscal 1998 as a result
of the foregoing factors. Earnings before interest, taxes, depreciation,
amortization, and other nonrecurring expenses were $22.1 million for the six
months ended June 30, 1998, a decrease of 8.4% from the first six months of
1997.
Net Interest Expense was $10.9 million for the first half of fiscal 1998
compared to $11.5 million for the same period last year. The decrease was the
result of decreased indebtedness of approximately $25 million compared to June
1997.
Liquidity and Capital Resources. Cash flows provided by operations for the
first six months of fiscal 1998 was $3.1 million as compared to $1.2 million
used by operations for the six months ended June 1997. Operating cash flows
for 1997 were negatively impacted by an increase in inventories of approximately
$5.5 million due to the ramp up for the projected increase in sales for the
Premier contract and the unanticipated slowdown in distributor purchases.
Net cash provided investing activities was $2.8 million, reflecting $2.6 million
in purchases of machinery and equipment to primarily support the growth in
medical products and proceeds of $5.4 million from a sale/leaseback of
equipment.
Cash flows used in financing activities were $6.2 million for the first half
ended June 30, 1998, primarily representing repayment of borrowings under the
Company's bank line of credit. On June 30, 1998 the Company had aggregate
borrowings under its credit facility of $134.5 million and $26.8 million
available under its bank line of credit.
Management believes that the funds generated from operations, along with the
Company's current working capital position and bank credit, will be sufficient
to satisfy the Company's capital requirements for the foreseeable future.
The Effect Of The Year 2000 Compliance
The Company is in the process of implementing a new enterprise-wide software
program that will solve year 2000 compliance issues. The Company anticipates
completing this program in mid 1999. Management believes that the repair of
existing systems or the purchase of new software will not have a material
effect on the financial results of the company.
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Forward-Looking Statements. Statements, either written or oral, which express
the Company's expectation for the future with respect to financial performance
or operating strategies can be identified as forward-looking statements.
Caution must be taken to consider these statements in light of the following
factors: current and contemplated cost-containment measures will be successfully
implemented; key distributors will make purchases at the same level as their
sales; demand for the Company's products will follow recent growth trends; key
customers will comply with the terms of their contract; competitors will not
introduce new products which will substantially reduce Graphic Controls' market
share in its most significant product lines; and the Company will continue to
manufacture high quality products at competitive costs and maintain or increase
product pricing. In the event any of the above factors do not occur as
management anticipates, actual results could differ materially from the
expectations expressed in the forward-looking statements.
-7-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
-8-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Graphic Controls Corporation
-------------------------------------------
Registrant
August 14, 1998 Anthony W. Borowicz
------------------ -------------------------------------------
Date Anthony W. Borowicz, Vice President-Finance
(Principal Financial Officer and Duly
Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 373
<SECURITIES> 0
<RECEIVABLES> 36,836
<ALLOWANCES> (439)
<INVENTORY> 31,927
<CURRENT-ASSETS> 70,120
<PP&E> 38,809
<DEPRECIATION> (16,107)
<TOTAL-ASSETS> 339,176
<CURRENT-LIABILITIES> 45,173
<BONDS> 196,725
0
0
<COMMON> 0
<OTHER-SE> 76,934
<TOTAL-LIABILITY-AND-EQUITY> 339,176
<SALES> 132,479
<TOTAL-REVENUES> 132,479
<CGS> 76,713
<TOTAL-COSTS> 121,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 10,880
<INCOME-PRETAX> 393
<INCOME-TAX> 956
<INCOME-CONTINUING> (563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (563)
<EPS-PRIMARY> (5.63)
<EPS-DILUTED> (5.63)
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