<PAGE> 1
=================================================================
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.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter Ended Commission File Number
March 31, 1997 333-08421
____________________________
GOSS GRAPHIC SYSTEMS, INC.
Incorporated in the IRS Employer Identification No.
State of Delaware 25-1200273
700 Oakmont Lane
Westmont, Illinois 60559-5546
(630) 850-5600
Indicate by check 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
that 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
--- ---
Registrant had 100 shares of Common Stock, par value $0.01 per share,
outstanding at May 10, 1997.
=================================================================
<PAGE> 2
GOSS GRAPHIC SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information: Page No.
------------------------------- --------
<S> <C>
Item 1 - Financial Statements
Balance Sheets - March 31, 1997 and
September 30, 1996 3
Statements of Operations - Three Months ended
March 31, 1997 and 1996. 4
Five and One-Half Months ended
March 31, 1997, Fourteen Days
ended October 14, 1996, and Six
Months ended March 31, 1996 5
Statements of Cash Flows - Five and One-Half Months
ended March 31, 1997, Fourteen Days ended
October 14, 1996, and Six Months ended
March 31, 1996 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II - Other Information:
----------------------------
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
----------
Exhibit Index 22
-------------
</TABLE>
-2-
<PAGE> 3
GOSS GRAPHIC SYSTEMS, INC.
BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET ---------------------
MARCH 31, 1997 (A) SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................... $20.3 $2.3
Accounts receivable, net......................... 119.6 122.5
Customer notes receivable, current portion........ 15.2 67.4
Inventories....................................... 159.8 148.8
Deferred income taxes............................. 0.0 33.3
Other current assets.............................. 14.6 4.8
------ ------
Total current assets......................... 329.5 379.1
------ ------
Property and equipment, net....................... 164.5 140.4
Customer notes receivable......................... 0.0 154.9
Goodwill, net..................................... 304.0 135.2
Deferred financing fees and other assets.......... 37.1 14.4
------ ------
Total assets...................................... $835.1 $824.0
====== ======
LIABILITIES, ROCKWELL'S NET
INVESTMENT AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion-term loan......................... $7.5 $0.0
Revolving credit facilities....................... 19.6 0.0
Notes payable..................................... 0.0 39.2
Accounts payable.................................. 61.9 63.9
Advance payments from customers................... 119.2 88.1
Accrued liabilities............................... 118.1 91.7
Other current liabilities......................... 53.7 25.2
------ ------
Total current liabilities.................... 380.0 308.1
Other liabilities................................. 33.4 23.4
Deferred income taxes............................. 0.0 9.0
Senior term loan.................................. 67.5 0.0
12% Senior subordinated notes due 2006............ 225.0 0.0
------ ------
Total liabilities................................. 705.9 340.5
------ ------
Contingencies and commitments..................... -- --
Rockwell's net investment......................... 483.5
------
Common stock, 100 shares issued and outstanding,
$0.01 par value................................. 0.0
Paid in capital................................... 162.1
Retained earnings................................. (29.2)
Currency translation adjustment................... (3.7)
------
Total shareholder's equity........................ 129.2
Total liabilities, Rockwell's net investment
and shareholder's equity.......................... $835.1 $824.0
====== ======
</TABLE>
(A) Due to the Acquisition and the related purchase accounting, financial
statements for the Company (period starting October 15, 1996), are not
comparable to those of the Predecessor Company. See Notes to the
Financial Statements for additional information.
The Notes to the Financial Statements are an integral part of these Financial
Statements
-3-
<PAGE> 4
GOSS GRAPHIC SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Consolidated Combined Statements of Operations
Statement of Operations (Predecessor Company)
----------------------- ---------------------
Three Months Ended Three Months Ended
March 31, 1997 (A) March 31, 1996
------------------- --------------
<S> <C> <C>
Net sales........................... $146.0 $232.7
Cost of sales....................... 109.5 188.6
Amortization of inventory........... 11.9 0
-------- -------
Gross profit...................... 24.6 44.1
Operating Expenses.................. 25.7 33.7
-------- -------
Operating (loss) profit............. (1.1) 10.4
-------- -------
Interest (expense).................. (9.0) (2.0)
Interest income and other
income (expense)................... 0.4 4.2
-------- -------
Income (loss) before taxes.......... (9.7) 12.6
Income tax provision (credit)...... 0.0 7.6
-------- -------
Net income (loss)................... $(9.7) $5.0
-------- ------
Net loss per common share (B)....... $(97,000)
--------
Weighted average shares of
common stock outstanding (B)........ 100
--------
</TABLE>
(A) Due to the Acquisition and the related purchase accounting, the financial
statements for the Company (period starting October 15, 1996) are not
comparable to those of the Predecessor Company. See Notes to the
Financial Statements for additional information.
(B) Weighted average number of shares of common stock outstanding, and net
loss per common share for periods prior to October 15, 1996, have not been
presented due to the ownership by Rockwell.
The Notes to the Financial Statements are an integral part of these Financial
Statements
-4-
<PAGE> 5
GOSS GRAPHIC SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Consolidated Combined Statements of Operations
Statement of Operations (Predecessor Company)
----------------------- ----------------------------------------
Five and One-Half
Months Ended Fourteen Days Ended Six Months Ended
March 31, 1997 (A) October 14, 1996 March 31, 1996
------------------ ------------------- ----------------
<S> <C> <C> <C>
Net sales............................. $240.4 $4.6 $343.1
Cost of sales......................... 183.6 7.6 277.8
Amortization of inventory............. 21.8 0.0 0.0
--------- ---- ------
Gross profit...................... 35.0 (3.0) 65.3
Operating Expenses.................... 46.4 4.0 61.9
--------- ---- ------
Operating (loss) profit............... (11.4) (7.0) 3.4
--------- ---- ------
Interest (expense).................... (17.0) (0.2) (3.3)
Interest income and other
income (expense).................. 0.3 0.7 10.2
Income (loss) before taxes............ (28.1) (6.5) 10.3
Income tax provision (credit)....... 1.1 (2.4) 6.4
--------- ---- ------
Net income (loss)..................... $(29.2) $(4.1) $3.9
--------- ---- ------
Net loss per common share (B)......... $(292,000)
---------
Weighted average shares of
common stock outstanding (B)......... 100
---------
</TABLE>
(A) Due to the Acquisition and the related purchase accounting, the financial
statements for the Company (period starting October 15, 1996) are not
comparable to those of the Predecessor Company. See Notes to the
Financial Statements for additional information.
(B) Weighted average number of shares of common stock outstanding, and net
loss per common share for periods prior to October 15, 1996, have not been
presented due to the ownership by Rockwell.
The Notes to the Financial Statements are an integral part of these Financial
Statements
-5-
<PAGE> 6
GOSS GRAPHIC SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN MILLIONS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Consolidated Combined Statements of Cash Flows
Statement of Cash Flows (Predecessor Company)
----------------------- -------------------------------------------
Five and One-Half Months Ended Fourteen Days Ended Six Months Ended
March 31, 1997 (A) October 14, 1996 March 31, 1996
----------------- ---------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income ............................................ $(29.2) $(4.1) $3.9
Adjustments to net (loss) income to arrive at net cash (used for)
provided by operating activities:
Depreciation and amortization .............................. 16.2 0.9 13.9
Amortization of debt cost .................................. 1.3 -- --
Amortization of inventory step-up .......................... 21.8 -- --
Changes in assets and liabilities:
Accounts receivable, and inventories, net ................ (27.5) 3.5 4.4
Customer notes receivable ................................ 12.6 16.3 14.0
Accounts payable ......................................... (7.7) 0.4 (13.4)
Advance payments from customers .......................... 22.0 9.1 (27.3)
Other assets and liabilities ............................. (7.6) (9.2) (14.1)
------------- ------------- -------------
Net cash (used for) provided by operating
activities .............................................. 1.9 16.9 (18.6)
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures ......................................... (2.2) -- (2.0)
Acquisition of Rockwell Graphic Systems ...................... (601.1) -- --
Other ........................................................ (3.7) (0.6) 1.4
------------- ------------- -------------
Net cash used for investing activities ..................... (607.0) (0.6) (0.6)
------------- ------------- -------------
FINANCING ACTIVITIES:
Issuance of senior subordinated notes ........................ 225.0 -- --
Sale of customer notes receivable ............................ 137.1 -- --
Issuance of common stock ..................................... 162.1 -- --
Borrowings under term loan ................................... 75.0 -- --
Net borrowings under revolving credit facility ............... 19.6 -- --
Repayment of foreign long-term debt .......................... -- (25.9) (1.5)
Borrowings under foreign debt agreements ..................... -- -- 60.0
Net cash transferred from (to) Rockwell ...................... -- 11.7 (22.0)
------------- ------------- -------------
Net cash provided by (used for) financing activities ....... 618.8 (14.2) 36.5
Net increase (decrease) in cash .............................. 13.7 2.1 17.3
Cash and cash equivalents at beginning of period ............. 6.6 2.3 6.7
------------- ------------- -------------
Cash and cash equivalents at end of period ................... $20.3 $4.4 $24.0
------------- ------------- -------------
</TABLE>
(A) Due to the Acquisition and the related purchase accounting, the financial
statements of the Company (period starting October 15, 1996) are not
comparable to those of the Predecessor Company. See Notes to the
Financial Statements for additional information.
The Notes to the Financial Statements are an integral part of these Financial
Statements
-6-
<PAGE> 7
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Unless the context requires otherwise, references to "Goss" mean, at all
times prior to the date of consummation of the Acquisition (as defined below),
the Graphic Systems business unit of Rockwell International Corporation
("Rockwell") and, at all times on or after the date of the Acquisition, Goss
Graphic Systems, Inc. and its subsidiaries.
Goss Graphic Systems, Inc. (the "Company") is a Delaware corporation
organized by Stonington Partners, Inc. ("Stonington") on behalf of Stonington
Capital Appreciation 1994 Fund, L.P. (the "Fund") to acquire (the
"Acquisition") the operations of the Graphic Systems business unit (the
"Predecessor Company") of Rockwell. The Company is a manufacturer and supplier
of web offset printing press systems for newspaper, commercial and insert
printing. The Company's world headquarters is located in Westmont, Illinois
and the Company has U.S. manufacturing operations in Cedar Rapids, Iowa and
Reading, Pennsylvania, and international operations in the United Kingdom,
France, Germany and Japan. The Company also has an investment in a joint
venture in Shanghai, China.
On October 14, 1996, the Company acquired Goss from Rockwell. The
Acquisition was effected through the purchase by the Company of all the
outstanding stock of Rockwell Graphic Systems, Inc., a Delaware corporation
("Goss Delaware"), Rockwell Systemes Graphiques Nantes, a societe anonyme
organized under the laws of the Republic of France ("Goss France"), and through
the purchase by the Company and certain wholly owned foreign subsidiaries of
the assets and the assumption of liabilities which constitute the remainder of
Goss. Immediately after the Acquisition, the Company merged with and into Goss
Delaware. The purchase price for the Acquisition was $601.4 million, which
consisted of $525.9 million in cash, subject to certain adjustments, 47,500
shares of preferred stock, $1,000 liquidation preference per share, issued by
GGS Holdings, Inc. ("Holdings"), which directly owns all of the capital stock
and assets of the Company, and approximately $28.0 million of transaction and
acquisition costs. The Acquisition has been accounted for under the
purchase method of accounting. The purchase is subject to a post closing
computation of certain working capital amounts. Management anticipates that
this adjustment will be finalized by year end.
Simultaneous with the closing of the Acquisition, Holdings raised $116.5
million of equity financing, comprised of $111.5 million in cash from the sale
of common stock of Holdings to the Fund, $1.0 million in cash from the sale of
common stock to an affiliate of a limited partner of the Fund, and $4.0 million
in cash from the sale (the "Management Placement") of common stock to certain
members of the Company's management. Holdings financed $2.0 million of the
Management Placement. The balance of the funds needed to consummate the
Acquisition and pay related fees and expenses came from: $225.0 million in
proceeds from the Company's issuance of 12% Senior Subordinated Notes due 2006;
$137.1 million in proceeds from the sale of a portfolio of notes receivable
issued in connection with customer financing provided by Goss to purchasers of
its products; and $75.3 million in borrowings under a new credit agreement
between Goss Delaware, Bankers Trust Company and certain other lenders
(see Note 6).
The accompanying consolidated financial statements present the financial
position of the Company at March 31, 1997, and the financial position of the
Predecessor Company at September 30, 1996; the results of operations and cash
flows for the Company from the Acquisition date, October 14, 1996, to the end
of the
-7-
<PAGE> 8
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS-(Continued)
Company's second fiscal quarter, March 31, 1997 ("Five and One-Half Months
Ended March 31, 1997"), and for the Predecessor Company from October 1, 1996 to
October 14, 1996, and the six months ended March 31, 1996; and the results of
operations for the Company for the quarter ended March 31, 1997 and for the
Predecessor Company for the quarter ended March 31, 1996. The financial
statements of the Predecessor Company have been prepared in accordance with
generally accepted accounting principles utilizing the accounting practices and
procedures of Goss and have been derived from the accounting records of
Rockwell and its subsidiaries. The financial position and results of
operations of the Company for the period ended March 31, 1997, include certain
opening balance sheet adjustments related to the allocation of the purchase
price to the assets and liabilities acquired (see Note 3).
Prior to the Acquisition, the Predecessor Company benefited from certain
direct services which were provided by Rockwell, including centralized billing
for benefit claim payments for active U.S. employees, data processing,
telecommunications, research and certain insurance. These direct expenses are
included in the financial statements. In addition, Rockwell also provided
certain common services, such as cash management and other treasury services,
legal, patent, tax, insurance administration, corporate accounting, audit
communications, benefit administration services and general management. These
common expenses were allocated by Rockwell using the proportion of divisional
sales to total corporate sales and such allocations are included in the
financial statements of the Predecessor Company. Management believes the
manner in which common expenses have been allocated for the services provided
is reasonable. The Company now either performs such services or, for an
interim period, purchases services from Rockwell as provided for by the
Acquisition agreement.
The unaudited financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
but do not include all information and footnotes required by generally accepted
accounting principles. In the opinion of management, the financial statements
included herein reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation. These financial statements are not
necessarily indicative of a full year's results of operations. The
accompanying financial statements should be read in conjunction with the
combined financial statements and the related notes included in the Company's
Registration Statement on Form S-1 filed on October 10, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company and the Predecessor Company recognize revenue on a
percentage-of-completion basis, utilizing the units-of-delivery method. Units
are considered delivered when title passes to the customer in accordance with
the contract terms, which may precede actual delivery to the customer. At
March 31, 1997 and September 30, 1996, cumulative revenues were recorded for
$78.4 million and $128.9 million, respectively, on presses awaiting delivery to
customers for which title had transferred. Revenue recognized during the
quarter ended March 31, 1997, for presses awaiting delivery amounted to $26.1
million. Revenue on installation contracts is recognized using the
completed-contract method except for certain installation contracts, generally
in amounts over $1.0 million, for which the percentage-of-completion,
cost-to-cost method is utilized.
-8-
<PAGE> 9
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS-(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 reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
3. ACQUISITION
The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated on a
preliminary basis to the tangible and intangible assets and liabilities of the
Company based on their respective fair values as of the date of the
Acquisition. The preliminary estimates of fair value may be revised at a later
date.
The preliminary allocation of the total purchase price to the assets and
liabilities acquired is as follows (in millions):
<TABLE>
<CAPTION>
PURCHASE PRICE
<S> <C>
Purchase price of common stock and assets $573.4
Commissions, fees and expenses 28.0
------
Total Purchase Price $601.4
------
PRELIMINARY ALLOCATION OF PURCHASE PRICE
Total current assets, net of deferred taxes $321.0
Property and equipment 178.1
Customer notes 137.1
Other long-term assets 37.0
Goodwill 300.1
Liabilities assumed (371.9)
------
Total Purchase Price $601.4
------
</TABLE>
-9-
<PAGE> 10
The following unaudited pro forma financial information reflects the
Acquisition as if it had occurred at the beginning of each of the periods
presented. The pro forma information is presented for information purposes
only and is not necessarily indicative of what would have occurred had the
Acquisition been consummated as of those dates (in millions, except per share
data):
Pro Forma
-----------------------------------
Six Months Six Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
[S] [C] [C]
Net sales $245.0 $343.1
Net loss (35.1) (28.5)
Net loss per $(351,000) $(285,000)
common share
Earnings before interest, taxes, depreciation, amortization, and other
non-cash items ("EBITDA") is presented below to provide additional information
related to the debt servicing ability of the Company and not as an alternative
measure of operating results or cash flow from operations as determined in
accordance with generally accepted accounting principals (in millions):
<TABLE>
<CAPTION>
Five and One-Half Six Months
Months Ended Ended
March 31, 1997 March 31, 1996
----------------- --------------
<S> <C> <C>
EBITDA $26.6 $23.8
</TABLE>
-10-
<PAGE> 11
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
4. REORGANIZATION COSTS
In connection with the Acquisition, the Company recorded reserves related
to the costs to reorganize the Company's U.S. and international operations. The
costs are primarily for severance payments for terminated employees and
realignment and rearrangement of manufacturing operations. The following table
summarizes the reserves for these costs at March 31, 1997 (in millions):
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Employee termination $10.5
Realign operations 5.0
-----
$15.5
-----
</TABLE>
For the Five and One-Half months ended March 31, 1997, approximately $9.5
million related to the reorganization was incurred.
-11-
<PAGE> 12
5. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
---- ----
<S> <C> <C>
Materials $50.7 $53.4
Work in process 44.8 46.4
Finished goods 27.1 24.8
Long-term contracts 18.0 16.6
Parts 19.2 30.1
Less allowance to reduce certain inventories to LIFO - -- (22.5)
------- --------
Inventories, net $ 159.8 $ 148.8
------- --------
</TABLE>
Long-term contracts consist of inventoried costs of assembled parts
relating to units of delivery contracts. Such inventoried costs include direct
costs of manufacturing and allocable overhead costs which are not expected to
be realized within one year. Inventoried costs under long-term contracts do
not include any amounts subject to uncertainty as to their determination or
realization.
6. DEBT
The Company has notes (the "Notes") issued under an Indenture, dated
October 15, 1996 (the "Indenture"), between the Company and The Bank of New
York, as Trustee (the "Trustee"). The Notes are unsecured senior subordinated
obligations of the Company, limited to $225.0 million aggregate principal
amount, and will mature on October 15, 2006. The Notes bear interest at 12%
per annum, payable semi-annually in April and October. Subject
to certain conditions and dates, the Notes are, in part, redeemable in whole or
in part at the option of the Company. The payment of the principal and
interest on the Notes are subordinate in right to the prior payment in full of
all Senior Debt (as defined in the
-12-
<PAGE> 13
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS-(CONTINUED)
Indenture) under the Bank Facilities (as defined below). The Indenture
contains certain covenants, including limitations on debt, restricted
payments and sales of certain assets.
In connection with the Acquisition, the Company entered into borrowing
agreements with Bankers Trust Company and certain other lenders (collectively,
the "Lenders") providing for (i) five-year term loan facilities aggregating
$75.0 million (the "Term Loan Facility"), and (ii) five-year revolving credit
facilities aggregating $150.0 million inclusive of letters of credit to be
issued thereunder (the "Revolving Credit Facility" and together with the Term
Loan Facility, the "Bank Facilities"). The funds from the Bank Facilities were
lent directly to the Company, its wholly owned corporation in Japan ("Goss
Japan") and its wholly owned corporation in the United Kingdom ("Goss U.K.").
The Term Loan Facility consists of a term loan in an original principal
amount of $25.0 million made to the Company, a term loan in an original
principal amount of $25.0 million made to Goss U.K. and a term loan in an
original principal amount of $25.0 million made to Goss Japan. The Term Loan
Facility has a final maturity date of five years after the date of the initial
funding under the Bank Facilities. The Company is required to make prepayments
on the Term Loan Facility and/or reduce the commitments under the Revolving
Credit Facility under certain circumstances, including upon certain asset sales
and issuance of debt or equity securities. The Company is also required to
make such prepayments and/or reductions in an amount equal to 75% of the
Company's and its subsidiaries' consolidated excess cash flow for each fiscal
year, payable within 90 days after the end of the applicable fiscal year. The
Term Loan Facility bears interest, at the Company's option, at the customary
base rate plus 1.0%-1.5% (depending on the Company's leverage ratio at such
time) or at the customary reserve adjusted Euro-Dollar rate plus 2.0-2.5%
(depending on the Company's leverage ratio at such time). As of March 31,
1997, the Company's interest rate on the loans outstanding under the Term Loan
Facility was an average of 8.09%.
The Revolving Credit Facility will mature September 30, 2001, and consists
of a revolving credit facility in an original amount of up to $100.0 million
made available to the Company, a revolving credit facility in an original
amount of up to $100.0 million made available to Goss U.K., and a revolving
credit facility in an original amount of up to $25.0 million made available to
Goss' Japan; the total of which may not, in the aggregate, exceed the U.S.
dollar equivalent of $150.0 million, in each case under which revolving loans
may be made, provided that in no event will the aggregate outstanding amount of
such revolving loans used for working capital requirements and general
corporate purposes exceed the U.S. dollar equivalent of $110.0 million at any
one time, and under which letters of credit may be issued. The Revolving
Credit Facility bears interest, at the Company's option, at the customary base
rate plus 1.0%-1.5% (depending on the Goss' leverage ratio at such time) or at
the customary reserve adjusted Euro-Dollar rate plus 2.0-2.5% (depending on the
Goss' leverage ratio at such time). As of March 31, 1997, the Company's
interest rate on loans outstanding under the Revolving Credit Facility was
10.0%, and the available line of credit remaining was $86.0 million.The Company
provides letters of credit to guarantee the performance under certain long-term
contracts under the Revolving Credit Facility. Such letters of credit
outstanding were $48.4 million as of March 31, 1997.
The proceeds of the Term Loan Facility and approximately $0.3 million
under the Revolving Credit Facility were used to pay the cash portion of the
purchase price for the Acquisition and to pay fees and expenses in connection
with the Acquisition and the related financing. The Revolving Credit Facility
is also available to provide for the working capital requirements and general
corporate purposes of the Company and its subsidiaries; to issue commercial
letters of credit and standby letters of credit to support workers'
compensation contingencies and for other corporate purposes to be agreed upon.
The Bank Facilities are guaranteed by Holdings and by each of the
Company's domestic subsidiaries and, in addition, the Company guarantees the
Bank Facilities provided to Goss U.K. and Goss Japan.
-13-
<PAGE> 14
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS-(CONTINUED)
The Bank Facilities contain certain financial covenants, including, but
not limited to, a minimum fixed charge coverage test, a minimum Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) test, a minimum
net worth test and a maximum leverage test. In addition, the Bank Facilities
contain other customary affirmative and negative covenants relating to (among
other things) limitations on other indebtedness, liens, investments,
guarantees, restricted junior payments, mergers and acquisitions, sale of
assets, capital expenditures, leases, transactions with affiliates and conduct
of business, with customary exceptions and baskets. The Bank Facilities
contain customary events of default, including failure to make payments when
due, defaults under other agreements or instruments of indebtedness,
noncompliance with covenants, breaches of representations and warranties,
bankruptcy, judgments in excess of specified amounts, invalidity of guarantees,
impairment of security interests in collateral and certain changes of control.
7. INCOME TAXES
For the Five and One-Half months ended March 31, 1997, the Company
reported a loss before taxes of $28.1 million. The Company has not recorded a
U.S. tax benefit for these reported losses. This loss will be available to
offset future taxable income. The Company was profitable outside the U.S.
and non-U.S. income taxes have been provided on these profits.
8. CONTINGENCIES AND COMMITMENTS
LEGAL CONTINGENCIES
Goss has pending against it or may be subject to various lawsuits, claims
and proceedings related primarily to employment, commercial (including press
performance issues) and safety and health matters. Although it is not
presently possible to determine the outcome of these matters, management
believes their ultimate disposition will not have a material adverse effect on
Goss' financial position or liquidity, although it is possible that the
resolution of such lawsuits, claims and proceedings could be material to the
results of operations in a given period.
-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR
The Three Months ending March 31, 1997 compared to the
Three Months ending March 31, 1996
RESULTS OF OPERATIONS
ORDERS AND BACKLOG
New customer orders for the three months ending March 31, 1997, were
$181.4 million as compared to $236.7 million for the three months ending March
31, 1996. Excluding a 1996 newspaper order from an European customer for $73.1
million, orders have increased $17.8 million from the previous year. Newspaper
orders increased $48.5 million which were partially offset by lower insert and
commercial orders in the Americas. The 1996 insert orders included a $12.5
million order from a Middle Eastern customer. Backlog as of March 31, 1997 was
$518.2 million as compared to $388.7 million as of September 30, 1996.
NET SALES
Net sales for the quarter were $146.0 million, which is $86.7 million (or
37.3%) lower than the previous year's net sales of $232.7 million. The lower
sales were primarily attributable to 1996 containing three large newspaper
shipments of approximately $68.2 million to customers in the Asia-Pacific
region and lower insert sales in the Americas. The lower insert sales were
primarily attributable to 1996 having two large orders from an American and
Middle Eastern customer.
GROSS PROFIT
Gross profit of $24.6 million for the quarter was lower than the previous
year's quarter of $44.1 million. The decrease is attributable to the
amortization of the step-up in inventory utilized in the purchase method of
accounting and lower sales volume. Excluding this amortization, gross profit
for the quarter ending March 31, 1997 was 25.0% of sales. This is an
improvement of 6.0 percentage points, or $8.8 million when compared to the
quarter ending March 31, 1996. Lower manufacturing costs are the primary
reason for this improvement.
OPERATING EXPENSES
The operating expenses for the quarter were $25.7 million which is 23.7%
lower than the $33.7 million in expenses for the quarter ending March 31, 1996.
This decrease of $8.0 million reflects lower spending due to cost reductions
and the one-time restructuring charges taken in 1996 partially offset by higher
depreciation resulting from the asset step-ups related to the Acquisition.
OPERATING PROFIT
The operating loss of $1.1 million for the quarter includes $13.1 million
in amortization and depreciation charges for asset step-ups related to the
Acquisition. Excluding these charges, operating profit for the quarter was
$12.0 million. When compared to the quarter ending March 31, 1996, the
operating profit improved by $1.6 million, or 15.4%. This is primarily due to
improved gross margins (lower manufacturing costs) and lower operating
expenses.
NET INTEREST AND OTHER EXPENSE
Net interest and other expenses of $8.6 million is an increase of $10.8
million from the previous year's quarter. This is primarily due to acquisition
debt, deferred financing fees, and the sale of the customer note portfolio,
which provided interest income in 1996.
-15-
<PAGE> 16
TAXES
For the quarter ending March 31, 1997, the Company reported a net loss
before taxes of $9.7 million. The Company has not recorded a U.S. tax benefit
for this loss. This loss will be available to offset future taxable income.
During the quarter ending March 31, 1996, the Predecessor Company was
included in Rockwell's U.S. and foreign consolidated groups with other
Rockwell companies. A tax expense of $7.6 million was recorded on the $12.6
million profit for the quarter.
NET INCOME
A net loss of $9.7 million for the quarter compares to a profit of $5.0
million for the same period last year. This is primarily attributable to $22.2
million for amortization of certain purchase accounting asset step-ups,
deferred financing fees, and the interest expense associated with the
Acquisition debt and $2.2 million of net interest income in 1996 from the
customer note portfolio which was subsequently sold.
FIVE AND ONE-HALF MONTHS ENDING MARCH 31, 1997
COMPARED TO THE SIX MONTHS
ENDING MARCH 31, 1996
RESULTS OF OPERATIONS
ORDERS AND BACKLOG
New customer orders for the five and one-half months ending March 31, 1997
were $373.2 million as compared to $321.9 million for the six months ending
March 31, 1996. Excluding a 1996 newspaper order from a European customer for
$73.1 million, orders have increased $124.4 million from the previous year.
Newspaper orders increased $119.8 million while insert and commercial orders
increased $4.6 million. Backlog as of March 31, 1997 was $518.2 million as
compared to $388.7 million as of September 30, 1996.
NET SALES
Net sales for the five and one-half month period were $240.4 million which
is $102.7 million (or 29.9%) lower than the previous year's net sales of $343.1
million. The lower sales are primarliy attributable to three newspaper
shipments of approximately $74.7 million to customers in the Asia-Pacific
region, lower insert sales in the Americas and the shortened period.
GROSS PROFIT
Gross profit of $35.0 million for the current period was lower than the
previous year's period of $65.3 million by $30.3 million. The decrease is
attributable to the amortization of the step-up in inventory utilized in the
purchase method of accounting and lower sales. Excluding this amortizaton,
gross profit for the five and one-half months ending March 31, 1997, are 23.6%
of sales. This is an improvement of 4.6 percentage points when compared to the
same period of the previous year. Lower manufacturing costs are the primary
reason for this improvement.
-16-
<PAGE> 17
OPERATING EXPENSES
Operating expenses for the five and one-half months ending March 31, 1997
of $46.4 million are $15.5 million or 25.0% lower than the $61.9 million in
expenses for the six month period of 1996. The decrease primarily reflects
lower spending due to cost reductions, one-time restructuring charges in 1996
and the shortened period partially offset by higher goodwill and depreciation
expenses resulting from the Acquisition.
OPERATING PROFIT
The operating loss of $11.4 million for the five and one-half month period
ending March 31, 1997 includes $24.1 million in amortization and depreciation
charges for asset step-ups related to the Acquisition. Excluding these
charges, operating profit for the five and one-half month period ending March
31, 1997 was $12.7 million. When compared to the six months ending March 31,
1996, the operating profit improved by $9.3 million. This is primarily due to
improved gross margins (lower manufacturing costs) and lower operating
expenses.
NET INTEREST AND OTHER EXPENSE
Net interest and other expense of $16.7 million is an increase of $23.6
million from the previous year's six months results. This is primarily due to
acquisition debt, deferred financing fees, and the sale of the customer note
portfolio, which provided interest income in 1996.
TAXES
For the five and one-half month period ending March 31, 1997, the Company
reported a net loss before taxes of $28.1 million. The Company has not
recorded a U.S. tax benefit for this loss. This loss will be available to
offset future taxable income. The Company was profitable outside the U.S. and
non U.S. income taxes have been provided for on these profits.
During the six month period ending March 31, 1996, the Predecessor Company
was included in Rockwell's U.S. and foreign consolidated groups with other
Rockwell companies. A tax expense of $6.4 million was recorded for the $10.3
million profit during the six month period.
NET INCOME
A net loss of $29.2 million for the five and one-half month period ending
March 31, 1997 compares to a net profit of $3.9 million for the six month
period ending March 31, 1996. This is primarily attributable to $41.1 million
for amortization of certain purchase accounting asset step-ups, deferred
financing fees, and the interest expense associated with the Acquisition debt
and $6.9 million of net interest income in 1996 from the customer note
portfolio which was subsequently sold.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations is $1.9 million for the five and one-half
months ending March 31, 1997. The net cash used by operations for the six
months ending March 31, 1996 was $18.6 million. This positive cash flow and
resulting cash and cash equivalents of $20.3 in 1997 million are primarily due
to higher advance payments from customers on improved orders. This improved
cash flow was partially offset by higher accounts receivable and inventories
balances.
-17-
<PAGE> 18
The working capital for the five and one-half months ending March 31, 1997
was a negative $50.5 million, as compared to a positive $71.0 million on
September 30, 1996. This change is attributable to lower accounts receivable
of $55.1 million, lower tax assets and certain liabilities recorded in
conjunction with the Acquisition.
Property and equipment of $164.5 million net, increased $24.1 million over
the September 30, 1996 position. The change was primarily due to the $38.0
million asset valuation write-ups which occurred at the time of the
Acquisition.
The long-term portion of customer notes receivable was zero at March 31,
1997 as compared to a September 30, 1996 balance of $154.9 million. Long-term
notes receivable were sold at the time of the Acquisition.
Goodwill valuations were $304.0 million on March 31, 1997, $168.8 million
higher than the September 30, 1996 balance. This increase reflects the amount
of goodwill recorded upon the start-up of the new Company and is being
amortized over forty years.
Accrued liabilities increased $26.4 million from September 30, 1996 to
$118.1 million at March 31, 1997 and other current liabilities increased $28.5
million from September 30, 1996 to $53.7 million for the period ending March
31, 1997. These increases were primarily due to the liabilities associated
with the Acquisition. These liabilities included certain transaction costs,
reorganization costs, and certain liabilites that had been previously recorded
at Rockwell which are now reflected on the Company's Balance Sheet.
To finance the purchase from Rockwell, the Company secured $75.0 million
in senior term loans (short-term portion is $7.5 million) and issued $225.0
million of 12% unsecured senior subordinated notes maturing on October 15,
2006. This debt did not exist on September 30, 1996.
Rockwell's net investment of $483.5 million was eliminated as a result of
the Acquisition.
Paid in capital of $162.1 million is a new item compared to the September
30, 1996 balance sheet. $114.6 million was contributed to the Company by
"Holdings" to effect the acquisition of Goss from Rockwell. "Holdings"
represents the newly formed Delaware corporation organized by Stonington
Partners, Inc., on behalf of Stonington Capital Appreciation 1994 Fund, L.P.
and represents 1,165,000 shares of common stock. Pay-in-kind perpetual
preferred stock valued at $47.5 million (47,500 shares) was issued to Rockwell
at a one thousand dollars liquidation preference per share and has been
recorded on the Company's financial statements as additional paid-in capital.
As of March 31, 1997 the Company had $86.0 million of available credit
under its $150.0 million revolving credit facility. In addition to short-term
borrowings of $19.6 million, the Company had Letters of Credit outstanding of
$51.3 million ($48.4 million related to long-term contracts) and negative
working capital of $50.5 million. The negative working capital reflects
certain liabilities associated with the Acquisition as well as lower accounts
receivable and tax assets. The Company believes its credit facilities, along
with cash generated from operations, will be sufficient to meet its needs for
working capital and capital expenditures.
-18-
<PAGE> 19
Adjusted earnings before interest, taxes, depreciation and amortization
("adjusted EBITDA") as defined in the Bank Facilities for the five and one-half
months ended March 31, 1997 was $26.6 million. Adjusted EBITDA is
presented to provide additional information related to the debt servicing
ability of the Company, not as an alternative measure of operating results or
cash flow from operations as determined in accordance with generally accepted
accounting principles.
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) depends
on future performance and financial results, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond its control. Based upon the current level of
operations and anticipated growth, management of the Company believes that
available cash flow, together with available borrowings under the Bank
Facilities and other sources of liquidity, will be adequate to meet the
Company's anticipated future requirements for working capital, capital
expenditures, and scheduled payments of principal of, and interest on, its
senior debt, and interest on the Notes. However, a portion of principal
payments at maturity on the Notes may require refinancing. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that future borrowings will be available in an amount sufficient
to enable the Company to service its indebtedness, including the Notes, or to
make necessary capital expenditures, or that any refinancing would be available
on commercially reasonable terms or at all.
-19-
<PAGE> 20
PART II. -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 Certificate of Incorporation (filed as Exhibit 3.1
to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Commission File No.
333-08421))
Exhibit 3.2 Bylaws (filed as Exhibit 3.2 to Amendment No. 1 to
the Company's Registration Statement on Form S-1
(Commission File No. 333-08421))
Exhibit 27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K for the quarter ended
March 31, 1997.
-20-
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GOSS GRAPHIC SYSTEMS, INC.
Date: May 10, 1997 By: /s/ WILLIAM G. FERKO
--------------------------
William G. Ferko
Vice President &
Chief Financial Officer
-21-
<PAGE> 22
GOSS GRAPHIC SYSTEMS, INC.
FORM 10-Q
Exhibit Index
For the Quarter Ended March 31, 1997
Exhibit
Number Exhibit
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to Amendment No. 1
to the Company's Registration Statement on Form S-1 (Commission File
No. 333-08421))
3.2 Bylaws (filed as Exhibit 3.2 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Commission File No. 333-08421))
27.1 Financial Data Schedule for the five and one-half months ended
March 31, 1997, filed herewith.
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOSS
GRAPHIC SYSTEMS, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 135
<ALLOWANCES> 24
<INVENTORY> 160
<CURRENT-ASSETS> 329
<PP&E> 164
<DEPRECIATION> 235
<TOTAL-ASSETS> 835
<CURRENT-LIABILITIES> 380
<BONDS> 292
0
0
<COMMON> 0
<OTHER-SE> 129
<TOTAL-LIABILITY-AND-EQUITY> 835
<SALES> 146
<TOTAL-REVENUES> 146
<CGS> 109
<TOTAL-COSTS> 121
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (10)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10)
<EPS-PRIMARY> (97,000)
<EPS-DILUTED> (97,000)
</TABLE>
