<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 Quarterly Period Ended Commission File Number
December 31, 1996 333-08421
-----------------------
GOSS GRAPHIC SYSTEMS, INC.
Incorporated in the IRS Employer Identification No.
State of Delaware 13-3888069
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 February 10, 1997.
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<PAGE> 2
GOSS GRAPHIC SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
INDEX
<TABLE>
<S> <C>
Part I - Financial Information: Page No.
Item 1 - Financial Statements
Balance Sheets - December 31, 1996 and
September 30, 1996 3
Statements of Operations - Two and One-Half Months
ended December 31, 1996, Fourteen Days
ended October 14, 1996 and Three Months
ended December 31, 1995 4
Statements of Cash Flows - Two and One-Half Months
ended December 31, 1996, Fourteen Days
ended October 14, 1996 and Three Months
ended December 31, 1995 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II - Other Information:
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
</TABLE>
-2-
<PAGE> 3
GOSS GRAPHIC SYSTEMS, INC.
BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET ----------------------
DECEMBER 31, 1996(A) SEPTEMBER 30, 1996
------------------------ ----------------------
<S> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents $22.5 $2.3
Accounts receivable, net 93.4 122.5
Customer notes receivable, current portion 33.4 67.4
Inventories 165.4 148.8
Deferred income taxes 0.0 33.3
Other current assets 12.5 4.8
------ ------
Total current assets 327.2 379.1
------ ------
Property and equipment, net 174.7 140.4
Customer notes receivable 0.0 154.9
Goodwill, net 305.3 135.2
Deferred income taxes 0.2 1.5
Deferred financing fees and other assets 38.1 12.9
------ ------
Total assets $845.5 $824.0
====== ======
LIABILITIES, ROCKWELL'S NET
- ---------------------------
INVESTMENT AND SHAREHOLDER'S EQUITY
- -----------------------------------
Current liabilities:
Current portion-term loan $ 1.2 $0.0
Revolving credit facilities 3.9 0.0
Notes payable 0.0 39.2
Accounts payable 48.7 63.9
Advance payments from customers 131.4 88.1
Accrued liabilities 131.0 91.7
Other current liabilities 48.3 25.2
------ ------
Total current liabilities 364.5 308.1
Other liabilities 36.3 23.4
Deferred income taxes 0.2 9.0
Senior term loan 73.8 0.0
12% Senior subordinated notes due 2006 225.0 0.0
------ ------
Total liabilities 699.8 340.5
------ ------
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 (19.5)
Currency translation adjustment 3.1
------
Total shareholder's equity 145.7
------
Total liabilities, Rockwell's net investment
and shareholder's equity $845.5 $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)
----------------------- ---------------------
Two and One-Half Months Ended Fourteen Days Ended Three Months Ended
December 31, 1996(A) October 14, 1996 December 31, 1995
-------------------- ----------------------------------
<S> <C> <C> <C>
Net sales $94.4 $4.6 $110.4
Cost of sales 74.3 7.6 89.2
Amortization of inventory 9.8 0.0 0.0
------- ------ ------
Gross profit 10.3 (3.0) 21.2
Operating Expenses 20.6 4.0 28.2
------- ------ ------
Operating (loss) profit (10.3) (7.0) (7.0)
------- ------ ------
Interest (expense) (8.0) (0.2) (1.3)
Interest income and other
income (expense) (0.1) 0.7 6.0
Income (loss) before taxes (18.4) (6.5) (2.3)
Income taxes 1.1 (2.4) (1.2)
------- ------ ------
Net income (loss) ($19.5) ($4.1) ($1.1)
======= ====== ======
Net loss per common share (B) ($195,000)
=========
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 CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Consolidated Combined Statements of Cash Flows
Statement of Cash Flows (Predecessor Company)
----------------------- -----------------------------------------
Two and One-Half
Months Ended Fourteen Days Ended Three Months Ended
December 31, 1996 (A) October 14, 1996 December 31, 1995
------------------------ ------------------ --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(19.5) $(4.1) $(1.1)
Adjustments to net (loss) income to arrive at net
cash (used for) provided by operating activities:
Depreciation 4.7 0.6 5.1
Intercompany purchases from Allen Bradley -- -- 5.2
Allocation of common expenses from Rockwell -- 0.1 1.3
Amortization of goodwill and other assets 3.9 0.2 1.4
Amortization of inventory step-up 9.8 -- --
Provision for doubtful accounts receivable 0.2 -- 0.2
Provision for doubtful notes receivable -- -- 0.6
Changes in assets and liabilities:
Accounts receivable, net 5.7 11.2 18.6
Inventories, net (0.9) (7.7) (30.8)
Customer notes receivable (5.6) 16.3 21.4
Accounts payable (20.9) 0.4 (22.7)
Advance payments from customers 34.2 9.1 7.6
Accrued liabilities (0.5) (0.4) (1.2)
Other assets (9.5) (0.5) (27.9)
Other liabilities 10.1 (8.3) (6.8)
----- ------ ------
Net cash (used for) provided by
operating activities 11.7 16.9 (29.1)
----- ------ ------
INVESTING ACTIVITIES:
Capital expenditures (1.0) -- (1.2)
Acquisition of Rockwell Graphic Systems (601.1) -- --
Other 3.2 (0.6) 3.7
----- ------ ------
Net cash used for investing
activities (598.9) (0.6) 2.5
----- ------ ------
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 3.9 -- --
Repayment of foreign long-term debt -- (25.9) (1.5)
Borrowings under foreign debt agreements -- -- 39.2
Net cash transferred from (to) Rockwell -- 11.7 (15.9)
----- ------ ------
Net cash provided by (used for)
financing activities 603.1 (14.2) 21.8
Net increase (decrease) in cash 15.9 2.1 (4.8)
Cash and cash equivalents at beginning of period 6.6 2.3 6.7
----- ------ ------
Cash and cash equivalents at end of period $22.5 $4.4 $1.9
===== ====== ======
</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
-5-
<PAGE> 6
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. This adjustment has not yet been
finalized.
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 (see Note 7); $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 7).
The accompanying consolidated financial statements present the
financial position of the Company at December 31, 1996, and the
financial position of the Predecessor Company at September 30, 1996;
and the results of operations and cash flows for the Company from the
Acquisition date, October 14, 1996, to the end of the Company's first
fiscal quarter, December 31, 1996 ("Period Ended December 31, 1996"),
and for
-6-
<PAGE> 7
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
the Predecessor Company, from October 1, 1996, to October 14,
1996, and the quarter ended December 31, 1995. 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
December 31, 1996, include certain opening balance sheet adjustments
related to the allocation of the purchase price to the assets and
liabilities acquired (see Note 3).
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 provides 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
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. The accompanying financial statements should be
read in conjunction with the combined financial statements and the
related notes included in the Company's Form S-1 Registration
Statement 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 December 31, 1996 and September
30, 1996, cumulative revenues were recorded for $63.6 million and
$128.9 million, respectively, on presses awaiting delivery to
customers for which title had transferred. Revenue recognized during
the two and one-half months ended December 31, 1996, for presses
awaiting delivery amounted to $19.0 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.
-7-
<PAGE> 8
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash and short-term
investments having maturities of three months or less at time of
purchase. The carrying amount of cash and cash equivalents
approximates fair market value.
INVENTORIES
Inventories are stated at the lower of cost or market. For the
Predecessor Company, inventory cost was determined on a last-in,
first-out (LIFO) basis for U.S. locations and on a first-in, first-out
(FIFO) basis for non-U.S. locations. The Company determines
inventory for all locations using the FIFO method.
Reserves are provided for excess inventory on a
location-by-location basis based on an analysis of historical usage
and management's estimate of future inventory requirements. Such
reserves are based on the carrying cost of the related inventory.
Inventories are classified as a current asset and include certain
amounts not expected to be realized within one year.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful life of the asset (generally three to
thirteen years for machinery and equipment and up to fifty years for
buildings). Leasehold improvements are amortized over the shorter of
the useful life of the asset or the remaining lease term. Where
applicable, interest has been capitalized and included in property and
equipment. Printing presses which are maintained as demonstration and
test development units on a long-term basis are included in property
and equipment and depreciated over their estimated useful life
(generally five to twelve years). Significant renewals and
improvements are capitalized. Maintenance and repairs, as well as
renewals of minor amounts, are charged to expense.
PRODUCT WARRANTY
Product warranty costs include all costs associated with repairs
through the end of the expressed warranty period. These costs are
accrued considering historical warranty cost experience and a periodic
assessment of expected warranty costs associated with each sale.
Unreimbursed costs to repair equipment after the warranty period
are incurred solely at the discretion of management and are expensed
as incurred.
WORKERS' COMPENSATION AND PRODUCT AND GENERAL LIABILITY COSTS
The financial statements include the estimated costs, including
costs not reimbursable under insurance contracts, of settling workers'
compensation and product and general liability claims. These
estimates are determined from historical claims incurred experience,
using actuarial computations of the estimated ultimate settlement
costs of such claims, including claims incurred but not yet reported.
-8-
<PAGE> 9
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS-(Continued)
GOODWILL
Goodwill represents the excess of the cost of the purchased
businesses over the fair value of the net assets at the date of
acquisition. Goodwill is being amortized over forty years.
Amortization of goodwill totaled $1.9 million for the Period Ended
December 31, 1996, $0.2 million for the fourteen days ended October
14, 1996, and $1.4 million for the three months ended December 31,
1995.
Management periodically reviews the realizability of goodwill
based on an evaluation of remaining useful lives, cash flows, and
profitability projections, and has determined there is no impairment
at December 31, 1996.
INCOME TAXES
Income taxes are accounted for using the liability method,
whereby deferred income taxes reflect the net effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
PENSION PLANS AND RETIREE MEDICAL BENEFITS
Certain U.S. employees participated in Rockwell defined benefit
pension plans. Pursuant to the Acquisition, the employees who
participated in these plans ceased to accrue benefits as of October
14, 1996. The Company now has a defined contribution plan. In
addition, the Company has stand-alone pension plans covering certain
employees in the United Kingdom, Germany and Japan. These plans were
assumed as part of the Acquisition.
POST-RETIREMENT BENEFITS
The Company continues to offer post-retirement benefits to active
employees at the Reading and Cedar Rapids facilities and the
obligation for these benefits was assumed by the Company. The
post-retirement obligation for retirees was retained by Rockwell.
INCURRED BUT UNPAID MEDICAL CLAIMS
The Company and the Predecessor Company provide benefits to
active U.S. employees for medical care, dental care and prescription
drugs. The liability recognized for benefit claims which have been
incurred but not paid is $0.5 million at both December 31, 1996, and
September 30, 1996.
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.
-9-
<PAGE> 10
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATMENTS-(Continued)
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>
<S> <C>
PURCHASE PRICE
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>
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):
<TABLE>
<CAPTION>
Pro Forma
---------
Quarter Ended Quarter Ended Year Ended
December 31, 1996 December 31, 1995 September 30, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net sales $99.0 $110.4 $698.1
Net income (24.0) (21.8) (35.2)
Net income per
common share ($240,000) ($218,000) ($352,000)
</TABLE>
-10-
<PAGE> 11
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 December 31, 1996 (in millions):
<TABLE>
Total
<S> <C>
Employee termination $17.0
Realign operations 5.0
-----
$22.0
=====
</TABLE>
For the period ended December 31, 1996, approximately $3.0
million related to the reorganization was incurred.
5. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
------------- --------------
<S> <C> <C>
Materials $48.9 $53.4
Work in process 48.5 46.4
Finished goods 29.6 24.8
Long-term contracts 18.0 16.6
Parts 20.4 30.1
Less allowance to reduce certain inventories to LIFO - (22.5)
-
------- --------
Inventories, net $ 165.4 $ 148.8
======= ========
</TABLE>
Inventory valuation reserves were $75.7 million and $43.2 million at
December 31, 1996, and September 30, 1996, respectively.
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.
-11-
<PAGE> 12
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
--------------- --------------
<S> <C> <C>
Land and land improvements $35.7 $33.2
Buildings and building improvements 64.8 77.9
Machinery, equipment and tooling 76.0 255.7
Construction in progress 4.0 2.7
--------------- --------------
Total $180.5 $369.5
Less accumulated depreciation (5.8) (229.1)
--------------- --------------
Property and equipment, net $174.7 $140.4
=============== ==============
</TABLE>
7. 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 semiannually.
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 under the Bank
Facilities (as defined in the Indenture). 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 Japanese corporation ("Goss
Japan") and its wholly owned English company ("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
-12-
<PAGE> 13
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
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 December 31, 1996, the
Company's interest rate was an average of 8.07%.
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 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 December 31, 1996, the Company's interest
rate was 9.75%.
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.
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.
-13-
<PAGE> 14
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
8. INCOME TAXES
For the two and one-half months ended December 31, 1996, the
Company reported a loss before taxes of $18.4 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 on these
profits.
9. CONTINGENCIES AND COMMITMENTS
LEGAL CONTINGENCIES
In the normal course of business, various lawsuits and claims are
initiated against Goss related to sales contracts. Among such claims
that have advanced to litigation are a lawsuit filed by a commercial
press customer in January 1997, seeking unspecified damages, and an
arbitration proceeding initiated by another commercial press customer
in June 1996 seeking refunds and damages totaling $3.8 million. While
it is not presently possible to determine the ultimate resolution of
these matters, management believes such matters will not have a
material adverse effect on Goss' financial position or liquidity
although it is possible an adverse outcome could materially affect the
results of operations in a given period.
In addition, as part of an asset purchase agreement with an
acquiror of certain assets of the Goss business in 1988, the acquiror
agreed to defend and indemnify Goss for certain product liability
claims. The acquiror seeks resolution of this dispute through
mediation proceedings alleging certain information was recently
received that materially increased the acquiror's risk of defending
and indemnifying against the product liability claims. The acquiror
is seeking to prospectively discharge its obligations for such defense
and indemnity. As part of these proceedings, the acquiror also
refused to indemnify Goss in three pending product liability claims
which collectively are estimated to represent an exposure of
approximately $1.0 million. While the ultimate resolution of these
proceedings cannot presently be determined, management intends to
vigorously defend against these matters and believes their ultimate
resolution will not have a material adverse effect on Goss' financial
position, results of operations or liquidity.
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.
ENVIRONMENTAL CONTINGENCIES
Goss has received either notices of potential liability or third
party claims under the federal Comprehensive Environmental Response,
Compensation and Liability Act at six offsite disposal facilities
(Superfund Sites). Goss has entered into settlement agreements with
the Environmental Protection Agency (EPA) at two of these sites and a
settlement proposal is pending at a third site, none of which is
material to the financial statements either individually or
collectively. With respect to the fourth site, at which Goss has
-14-
<PAGE> 15
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
been named a potentially responsible party (PRP), its share of the clean up
costs are estimated to approximate $0.2 million of the potential
estimated cost for final site remediation of $10.0 million. At the fifth
and sixth sites, although Goss has been implicated as a PRP, Goss believes
its involvement, if any, is not significant. Although current law imposes
joint and several liability on any party determined to be responsible at a
Superfund Site, management believes, based upon all available information,
that the ultimate resolution of these matters will not have a material
adverse effect on Goss' financial position, results of operations or
liquidity.
Goss' Reading, Pennsylvania facility has been operating a
groundwater remediation system under a 1981 Consent Order with the
Commonwealth of Pennsylvania as a result of historical waste disposal
practices. Recent data indicates that certain hazardous constituents
in the groundwater have decreased over time, while data on other
constituents is inconclusive. Goss plans to submit a proposal to the
Pennsylvania Department of Environmental Resources to terminate
remediation and conduct monitoring only at the site pursuant to recent
statutory authority to determine cleanup limits consistent with the
results of a site-specific assessment. Management has been advised
that, given the site location and aquifer use, the proposal is
technically appropriate and may result in the termination of
groundwater remediation at this site. Management believes that any
liability with respect to either continuing groundwater remediation or
conducting a site-specific risk assessment in order to complete such
remediation will not have a material adverse effect on Goss' financial
position, results of operation or liquidity.
COMMITMENTS
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 $49.9
million as of December 31, 1996.
10. RELATED PARTY TRANSACTIONS
The Company continues to purchase the following services from
Rockwell International Corporation: research and development
engineering support, data processing services, telecommunication
services and the continued use of previously shared facilities. The
charge for these services is the same that Rockwell charges its
operating units for similar services and amounts to $0.4 million for
the two and one-half months ending December 31, 1996.
The Company also continues to purchase drive systems, press
controls and related products from Allen-Bradley (a Rockwell
company). These obligations have been classified as trade payables
beginning October 15, 1996.
-15-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR
The Two and one-half Months ending December 31, 1996 compared to the Three
Months ending December 31, 1995
Financial results reported within are for the two and one half
months period beginning October 15, 1996, and ending December 31,
1996. This is considered Goss' first quarter for fiscal year 1997.
This document compares this shortened period to the previous year's
first fiscal quarter, which consisted of three full months ending
December 31, 1995.
RESULTS OF OPERATIONS
ORDERS AND BACKLOG
New customer orders for the two and one-half months ending
December 31, 1996, were $191.8 million as compared to $85.1 million
for the three months ending December 31, 1995. Backlog as of December
31, 1996 was $496.0 million as compared to $451.4 million as of
December 31, 1995 and $388.7 million as of September 30, 1996.
NET SALES
Net sales for this two and one half month period were $94.4
million, which is $16.0 million (or 14.5%) lower than the previous
year's net sales of $110.4 million. The lower sales, which were
mostly due to the shortened period, does not include revenues recorded
in the first two weeks of October 1996. These revenues were primarily
for the parts, service, and installation revenues recorded in the
first two weeks of October 1996.
GROSS PROFIT
Gross profit of $10.3 million for the shortened period was lower
than the previous year's full quarter total of $21.2 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 amortization, gross profit for the two and
one-half months ending December 31, 1996, are 21.3% of sales. This is
an improvement of 2.1 percentage points when compared to the quarter
ending December 31, 1995. Lower manufacturing costs are the primary
reason for this improvement.
OPERATING EXPENSES
The operating expenses for the shortened period were $20.6
million which is 27.0% lower than the $28.2 million in expenses for
the three month period ending December 31, 1995. Of this reduction,
$4.0 million pertains to the fourteen days ended October 14, 1996.
The remaining decrease of $3.6 million reflects lower spending due to
cost reductions offset by higher depreciation resulting from the
Acquisition.
-16-
<PAGE> 17
OPERATING PROFIT
The operating loss of $10.3 million for the shortened quarter
includes $11.0 million in amortization and depreciation charges for
asset step-ups related to the acquisition. Excluding these charges,
operating profit for the shortened period was $0.7 million. When
compared to the quarter ending December 31, 1995, the operating profit
improved by $7.7 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 of $8.1 million is an increase of $12.8
million from the previous year full quarter. This is primarily due to
acquisition debt, deferred financing fees, and the sale of the
customer note portfolio, which provided interest income in 1995.
TAXES
For the period ended December 31, 1996, the Company reported a
net loss before taxes of $18.4 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 on these profits.
During the period ended December 31, 1995, the Predecessor
Company was included in Rockwell's U.S. and foreign consolidated
groups with other Rockwell companies. A tax benefit of $1.2 million
was recorded for the $2.3 million loss during the quarter.
NET INCOME
A net loss of $19.5 million for the shortened quarter compares to
a net loss of $1.1 million for the full three months ending December
31, 1995. The higher loss is primarily attributable to the
amortization of certain purchase accounting asset step-ups, deferred
financing fees, and the interest expense associated with the
acquisition debt.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations is $11.7 million for the
shortened period ending December 31, 1996. The net cash used by
operations for the quarter ending December 31, 1995 was $29.1 million.
This positive cash flow and resulting cash and cash equivalents of
$22.5 million are primarily due to higher advance payments from
customers on improved orders and backlogs. This increase was
partially offset by a decrease in trade accounts payable.
The working capital for the period ending December 31, 1996 was a
negative $37.3 million, as compared to $71.0 million on September 30,
1996. This change is attributable to lower accounts receivable of $29.1
million, lower tax assets and certain other current liabilities recorded in
conjunction with the Acquisition.
Property and equipment of $174.7 million net, increased $34.3
million over the September 30, 1996 position. The change was due to
the $38.0 million asset valuation write-ups which occurred at the
time of Acquisition.
-17-
<PAGE> 18
The long-term portion of customer notes receivable was zero at
December 31, 1996 as compared to a September 30, 1996 balance of
$154.9 million. Long-term notes receivable were sold at the time of
acquisition, to provide funding for the purchase.
Goodwill valuations were $305.3 million on December 31, 1996,
$170.1 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. The increase
since the Acquisition reflects the foreign currency translation effect
for goodwill related to the Company's foreign subsidiaries.
Accrued liabilities increased $39.3 million from September 30,
1996 to $131.0 million at December 31, 1996. The increase was
primarily due to the establishment of reserves for start-up costs of
the new Company.
Other current liabilities increased $23.1 million from September
30, 1996 to $48.3 million for the period ending December 31, 1996.
The increase was primarily due to the establishment of reserves for
start-up costs of the new company. These costs included certain
transaction costs and reorganization costs. In addition, certain
liabilities that had been recorded at Rockwell were recorded as a
result of the Acquisition.
To finance the purchase from Rockwell, the Company secured $75.0
million in senior term loans (short-term portion is $1.2 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 approximately $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. $47.5 million of pay-in-kind perpetual preferred
stock (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 December 31, 1996 the Company had $93.2 million of
available credit under its $150.0 million revolving credit facility.
In addition to short-term borrowings of $3.9 million, the
Company had Letters of Credit outstanding of $52.9 million ($49.9
million related to long-term contracts) and negative working capital
of $37.3 million. The Company believes these facilities, along with
cash generated from operations, will be sufficient to meet its needs
for working capital and capital expenditures.
-18-
<PAGE> 19
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings
Goss is a defendant along with Rockwell and BT Commercial
Corporation (BTCC) in a lawsuit filed by a commercial customer of the
Company. The lawsuit, which was filed on January 2, 1997 in the state
of Wisconsin, requests unspecified damages due to breach-of-contract.
Although it is not presently possible to determine the outcome of
this matter, management believes its ultimate disposition will not
have a material effect on Goss' financial position or liquidity,
although it is possible that the resolution on such proceeding could
be material to the results of operations in a given period.
Rockwell Graphic Systems (the Predecessor Company) was a
defendant in a lawsuit involving patent infringement issues
(Heidelberger Druckmaschinen AG v. Hantscho Commercial Products, Inc.
and Rockwell Graphic Systems, Inc.). Rockwell had agreed to fully
indemnify the Company for this matter which was settled and dismissed
in December 1996 without financial participation by the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 -- Financial Data Schedule
(b) No reports were filed on Form 8-K for the quarter ended
December 31, 1996.
-19-
<PAGE> 20
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: February 10, 1997. By: /s/ WILLIAM G. FERKO
------------------------------------
William G. Ferko
Vice President &
Chief Financial Officer
-20-
<PAGE> 21
GOSS GRAPHIC SYSTEMS, INC.
FORM 10-Q
Exhibit Index
For the Quarter Ended December 31, 1996
Exhibit
-------
Number Exhibit
------- -------
27.1 Financial Data Schedule for the quarter ended December 31, 1996,
filed herewith.
-21-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOSS
GRAPHIC SYSTEMS, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWO
AND ONE-HALF MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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