<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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.
<PAGE>
GRAPHIC CONTROLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets
March 31, 1998 and December 31, 1997.................................................. 1
Condensed consolidated statements of operations
-- three months ended March 31, 1998 and 1997.......................................... 2
Condensed consolidated statements of cash flow
-- three months ended March 31, 1998 and 1997.......................................... 3
Notes to condensed consolidated financial statements
-- March 31, 1998...................................................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 5-6
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K................................................. 7
Signature............................................................................... 8
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
----------- ----------
(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 626 $ 437
Accounts receivable, net............................. 35,280 37,781
Inventories.......................................... 32,091 31,257
Income tax recoverable............................... 730 173
Other................................................ 1,055 1,397
-------- --------
Total current assets............................... 69,782 71,045
Property, plant and equipment:
Land................................................. 1,095 1,095
Buildings and improvements........................... 7,390 7,401
Machinery and equipment.............................. 34,278 35,656
-------- --------
42,763 44,152
Less accumulated depreciation........................ 13,660 15,754
-------- --------
29,103 28,398
Goodwill, net......................................... 224,221 222,739
Other assets.......................................... 22,969 23,640
-------- --------
$346,075 $345,822
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Cash overdraft....................................... $ 4,446 $ 4,137
Accounts payable..................................... 14,081 12,139
Accrued expenses..................................... 13,133 11,195
Deferred income taxes................................ 2,230 2,230
Current portion of long-term debt.................... 12,165 12,444
-------- --------
Total current liabilities.......................... 46,055 42,145
Long-term debt........................................ 201,625 205,554
Deferred income taxes................................. 240 242
Other non-current liabilities......................... 20,187 20,156
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) (3,190)
Equity adjustment from foreign currency translation.. (1,488) (1,451)
-------- --------
Total shareholder's equity......................... 77,968 77,725
-------- --------
$346,075 $345,822
======== ========
</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-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1998
----------------- ------------------
<S> <C> <C>
Net sales...................................... $ 63,466 $ 65,510
Cost of sales.................................. 33,754 38,067
---------- ----------
Gross Profit................................... 29,712 27,443
Selling, general and administration expenses... 18,411 18,967
Amortization expense........................... 2,094 2,169
Other nonrecurring expense. ................... 1,289 636
---------- ----------
Total operating expenses..................... 21,794 21,772
---------- ----------
Operating income............................... 7,918 5,671
Interest expense............................... (5,634) (5,423)
----------- ----------
Income before income taxes..................... 2,284 248
Income tax expense............................. 1,300 528
--------- ----------
Net income (loss).............................. $ 984 $ (280)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income (loss)............................. $ 984 $ (280)
Depreciation and amortization................. 4,134 4,284
Changes in assets and liabilities............. (9,154) (6,741)
-------- ---------
Net cash used by operations................. (4,036) (2,737)
-------- ---------
Investing activities:
Additions to property, plant & equipment...... (1,660) (1,351)
-------- ---------
Net cash used in investing activities....... (1,660) (1,351)
-------- ---------
Financing activities:
Repayment of senior debt...................... (375) (2,938)
Decrease in cash overdraft.................... (2,954) (309)
Proceeds from senior bank facilities.......... 9,119 7,146
-------- --------
Net cash provided by financing activities... 5,790 3,899
-------- ---------
Increase (decrease) in cash and cash equivalents 94 (189)
Cash and cash equivalents at beginning of period 563 626
-------- ---------
Cash and cash equivalents at end of period..... $ 657 $ 437
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC CONTROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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-month period ended March 31, 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):
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
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<S> <C> <C>
Raw materials................ $18,331 $10,664
Work in process.............. 2,116 3,090
Finished products............ 11,644 17,503
------- -------
$32,091 $31,257
======= =======
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997.
Net Sales increased by 3.2% from $63.5 million in the first quarter ended March
31, 1997 to $65.5 million for the three months ended March 31, 1998. Domestic
medical sales increased by 8.0% in the three months ended March 31, 1998 over
the same period last year. Domestic medical unit volume increased by
approximately 14% compared to last year. Partially offsetting the increased
volume was the full effects of pricing discounts offered on large purchasing
group contracts. The full effect of these price discounts were not realized
until the second half of 1997. Industrial sales declined by 7.4% in the first
three months ended March 31, 1998, due to timing issues relating to clearing
backordered shipments in 1997. International revenues declined by $0.5 million
or 12.6% primarily due to foreign currency effects from the strength of the U.S.
dollar in comparison with foreign currencies.
Gross profit decreased from $29.7 million for the first quarter ended March
31, 1997 to $27.4 million for the first quarter ended March 31, 1998, a decrease
of $2.3 million or 7.6%. The majority of the decrease is attributable to the
timing effects of the lower medical products selling prices and the lower
Industrial sales volume. Gross margins as a percentage of sales declined
from 46.8% in the first quarter 1997 to 41.9% for the first quarter 1998 as a
result of the aforementioned factors.
Selling, General & Administrative Expenses increased by $0.6 million or 3.0%
from $18.4 million in the three months ended March 31, 1997 to $19.0 million
in 1998. The increase was primarily attributable to increased volume related
freight and sales commission expenses. As a percentage of sales, expenses
remained at 28.7% for the first quarter 1998 compared to last year.
Nonrecurring Expense decreased by $0.7 million from $1.3 million for the three
months ended March 1997 to $0.6 million in 1998. This expense represents costs
primarily associated with the contract with Thomas Group Incorporated. The
Thomas Group has been contracted to assist in the profit enhancing activities of
the Company. Their focus will be on reducing order fulfillment and new product
development cycle time, reducing working capital requirements and other
corporate productivity measures aimed at increasing revenue growth and
improving margins.
Operating Income decreased by $2.2 million from $7.9 million in the three months
ended March 31, 1997 to $5.7 million for the same period this year. The decrease
was principally the result of the expected timing effects of the medical selling
price reductions and lower Industrial sales volume compared with last year.
Net Interest Expense decreased from $5.6 million in the three months ended
March 31, 1997 to $5.4 million for same period this year. The decrease was
the result of the decreased indebtedness of approximately $18 million compared
to March 1997.
-5-
<PAGE>
Liquidity and Capital Resources. Cash flows used by operations for the first
quarter 1998 was $2.7 million as compared to $4.0 million used by operations
for the three months ended March 1997. Operating cash flows for 1998 were
impacted by an increase in accounts receivable primarily due to the increased
sales in the month of March 1998.
Net cash used by investing activities was $1.4 million reflecting purchases
of machinery and equipment to primarily support the growth in medical
products.
Cash flows from financing activities were $3.9 million for the first quarter
1998. The increase was provided by borrowings under the Company's revolving
bank line of credit to support the temporary increase in working capital. On
March 31, 1998, the Company had aggregate borrowings under its credit facility
of $143.0 million and $20.9 million available under its bank line of credit.
In the first quarter, the Company amended its Credit Agreement (see Exhibit
10.7) in connection with the Company's forecast on sales to the Premier
Alliance and to reflect one time costs and related savings relating to the
Thomas Group's initiatives.
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.
-6-
<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
----------- -----------------------
10.7 Amendment to Credit Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
<PAGE>
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Graphic Controls Corporation
-----------------------------
Date May 15, 1998 /s/ Anthony W. Borowicz
- ------------------------- ------------------------
Anthony W. Borowicz,
Vice President - Finance
(Principal Financial Officer and
Duly Authorized Officer)
-8-
<PAGE>
AMENDMENT
AMENDMENT, dated as of March 17, 1998 (this "Amendment"), to the
Credit Agreement as of September 28, 1995, as amended and restated through
February 29, 1996 (as further amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), among Graphic Controls Corporation,
a New York corporation (the "Borrower"), Graphic Holdings, Inc. a Delaware
corporation ("Holdings"), the several banks and other financial institutions
from time to time parties thereto (the "Lenders"), the Co-Agents named therein
and the Chase Manahattan Bank (as successor to Chemical Bank), a New York
banking corporation, as agent for the Lenders (the "Agent").
W I T N E S S E T H :
WHEREAS, the Borrower, Holdings, the Lenders and the Agent desire
that certain provisions of the Credit Agreement be amended in the manner
provided for in this Amendment;
NOW THEREFORE, in consideration of the premises herein contained and
for other good and valuable considerations, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein which are defined in the Credit Agreement, as amended hereby, are
used herein as therein defined.
2. Amendment of Section 8.4. Section 8.4 of the Credit Agreement is
hereby amended by deleting from paragraph (d) the amount of "$10,000,000" and
substituting therefor the amount of "$15,000,000".
3. Amendment of Section 8.5. Section 8.5 of the Credit Agreement is
hereby amended by deleting from paragraph (a) the amount of "$8,500,000" and
substituting therefor the amount of "$10,000,000".
<PAGE>
4. Amendment of Section 8.13. Section 8.13 of the Credit Agreement
is hereby amended by deleting the columns captioned "Test Period Ending" and
"Ratio" and substituting therefor the following:
<TABLE>
<CAPTION>
Test Period Ending Ratio
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<S> <C> <C>
March 31, 1998 1.75 to 1.00
June 30, 1998 1.75 to 1.00
September 30, 1998 1.75 to 1.00
December 31, 1998 2.00 to 1.00
March 31, 1999 2.00 to 1.00
June 30, 1999 2.00 to 1.00
September 30, 1999 2.25 to 1.00
December 31, 1999 2.25 to 1.00
March 31, 2000 2.50 to 1.00
June 30, 2000 2.50 to 1.00
September 30, 2000 2.50 to 1.00
December 31, 2000 2.50 to 1.00
March 31, 2001 and 2.50 to 1.00
each March 31, June 30,
September 30 and
December 31 thereafter
</TABLE>
<PAGE>
5. Amendment of Section 8.14. Section 8.14 of the Credit Agreement
is hereby amended by deleting the columns captioned "Fiscal Quarter" and "Ratio"
and substituting therefor the following:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C> <C>
March 31, 1998 3.60 to 1.00
June 30, 1998 3.50 to 1.00
September 30, 1998 3.50 to 1.00
December 31, 1998 3.25 to 1.00
March 31, 1999 3.00 to 1.00
June 30, 1999 3.00 to 1.00
September 30, 1999 2.75 to 1.00
December 31, 1999 2.50 to 1.00
March 31, 2000 2.50 to 1.00
June 30, 2000 2.25 to 1.00
September 30, 2000 2.25 to 1.00
December 31, 2000 2.25 to 1.00
March 31, 2001 and 2.25 to 1.00
each March 31, June 30,
September 30 and
December 31 thereafter
</TABLE>
6. Effectiveness. This Amendment shall become effective as of the
date first written above on the condition that (a) the Borrower shall have
delivered to the Agent duly executed copies of this Amendment, (b) the Agent
shall have received duly executed copies of the Acknowledgment and Consent
attached hereto signed by each of the Guarantors and (c) the Required Lenders
shall have executed this Amendment.
7. Amendment Fee. In the event that this Amendment becomes effective
on or before March 27, 1998, the Borrower will pay to each Lender which executes
and returns this Amendment on or prior to March 27, 1998 an amendment fee equal
to .1% of the sum of such Lender's Revolving Commitment and outstanding Term
Loans, such fee to be payable on March 27, 1998.
8. Representations and Warranties. (a) The respective representations
and warranties made by each of the Borrower and the other Loan Parties
contained in the Credit Documents to which each is a party are true and correct,
in all material respects, on and as of the date hereof after giving effect to
this Amendment; and
(b) Each of the Borrower and Holdings has the power and authority and
the legal right to make and deliver this Amendment and has taken all necessary
action to authorize the execution and delivery of this Amendment.
9. No Other Amendments or Waivers. Except as expressly waived
herein, the Credit Agreement shall continue to be, and shall remain, in full
force and effect in accordance with its terms.
10. Counterparts. This Amendment may be executed in counterparts and
all of the said counterparts taken together shall be deemed to constitute one
and the same instrument.
11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
12. Expenses. The Borrower agrees to pay or reimburse the Agent for
all of its out-of-pocket costs and expenses incurred in connection with the
development, preparation, negotiation and execution of this Amendment,
including, without limitation, the reasonable fees and disbursements of counsel
to the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their duly authorized officers as of the date first
written above.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 437
<SECURITIES> 0
<RECEIVABLES> 38,088
<ALLOWANCES> (307)
<INVENTORY> 31,257
<CURRENT-ASSETS> 71,045
<PP&E> 44,152
<DEPRECIATION> (15,754)
<TOTAL-ASSETS> 345,822
<CURRENT-LIABILITIES> 42,145
<BONDS> 205,554
0
0
<COMMON> 0
<OTHER-SE> 77,725
<TOTAL-LIABILITY-AND-EQUITY> 345,822
<SALES> 65,510
<TOTAL-REVENUES> 65,510
<CGS> 38,067
<TOTAL-COSTS> 59,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> 5,423
<INCOME-PRETAX> 248
<INCOME-TAX> 528
<INCOME-CONTINUING> (280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (280)
<EPS-PRIMARY> (2.80)
<EPS-DILUTED> (2.80)
</TABLE>
