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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997
OF
GOSS GRAPHIC SYSTEMS, INC.
a Delaware Corporation
IRS Employer Identification No. 25-1200273
SEC File Number 333-08421
700 OAKMONT LANE
WESTMONT, ILLINOIS 60559-5546
(630) 850-5600
Goss (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 and (2) has
been subject to such filing requirements for the past 90 days.
Goss had 100 shares of Common Stock outstanding at February 17, 1998, all of
which were held by an affiliate.
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FORM 10-Q
FOR THE QUARTER ENDED
DECEMBER 31, 1997
INDEX
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PART I -- FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements.
Balance Sheets -- December 31, 1997 and September 30, 1997........................ 2
Statements of Operations -- Three months ended
December 31, 1997, two and one-half months
ended December 31, 1996 and fourteen days ended
October 14, 1996................................................................ 3
Statements of Cash Flows -- Three months ended
December 31, 1997, two and one-half months
ended December 31, 1996 and fourteen days ended
October 14, 1996................................................................ 4
Notes to Financial Statements..................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 7
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 9
SIGNATURES............................................................................ 10
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1
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GOSS GRAPHIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
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ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 26.0 $ 49.6
Accounts receivable, net.......................................................... 155.4 174.7
Inventories, net.................................................................. 209.2 163.8
Other current assets.............................................................. 18.6 10.8
------ ------
Total current assets.............................................................. 409.2 398.9
Property and equipment, net......................................................... 166.8 167.8
Goodwill, net....................................................................... 317.1 315.3
Other assets........................................................................ 33.7 24.8
------ ------
Total assets...................................................................... $ 926.8 $ 906.8
------ ------
------ ------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................................. $ 93.3 $ 111.6
Short-term debt................................................................... 95.8 49.6
Current portion of long-term debt................................................. 7.7 10.6
Advance payments from customers................................................... 120.8 84.9
Other current liabilities......................................................... 147.6 171.4
------ ------
Total current liabilities......................................................... 465.2 428.1
Long-term debt, less current portion................................................ 282.7 291.2
Other liabilities................................................................... 63.8 62.0
------ ------
Total liabilities................................................................. 811.7 781.3
Minority interest................................................................... 8.4 8.2
Common stock, 100 shares authorized and outstanding, $0.01 par value................ 0.0 0.0
Additional paid in capital.......................................................... 162.2 162.2
Retained earnings................................................................... (52.5) (41.9)
Cumulative translation adjustment................................................... (3.0) (3.0)
------ ------
Total shareholder's equity.......................................................... 106.7 117.3
------ ------
Total liabilities and shareholder's equity.......................................... $ 926.8 $ 906.8
------ ------
------ ------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements
2
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GOSS GRAPHIC SYSTEMS, INC.
STATEMENT OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)
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<CAPTION>
COMBINED
CONSOLIDATED STATEMENT OF
STATEMENT OF OPERATIONS OPERATIONS
-------------------------------------- (PREDECESSOR COMPANY)
FOR THE THREE ---------------------
MONTHS ENDED FOR THE TWO AND FOR THE FOURTEEN
DECEMBER 31, ONE-HALF MONTHS ENDED DAYS ENDED
1997 DECEMBER 31, 1996 OCTOBER 14, 1996
--------------- --------------------- ---------------------
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Net sales........................... $ 106.0 $ 94.4 $ 4.6
Cost of sales....................... 89.4 74.3 10.2
Amortization of inventory step-up... 0.0 9.8 0.0
------ ------ -----
Gross profit...................... 16.6 10.3 (5.6)
Operating expenses.................. 20.9 18.8 3.8
Goodwill amortization............... 2.3 1.9 0.2
------ ------ -----
Operating profit.................. (6.6) (10.4) (9.6)
Other income........................ 0.1 0.0 0.7
Interest expense.................... (10.9) (8.0) (0.2)
------ ------ -----
Loss before income taxes.......... (17.4) (18.4) (9.1)
Provision/(benefit) for income
taxes.............................. (6.8) 1.1 (3.4)
------ ------ -----
Net loss............................ $ (10.6) $ (19.5) $ (5.7)
------ ------ -----
------ ------ -----
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements
3
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GOSS GRAPHIC SYSTEMS, INC.
STATEMENT OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
STATEMENT OF
CONSOLIDATED CASH FLOWS
STATEMENT OF CASH FLOWS (PREDECESSOR
------------------------------------ COMPANY)
FOR THE THREE FOR THE TWO AND -------------------
MONTHS ENDED ONE-HALF MONTHS FOR THE FOURTEEN
DECEMBER 31, ENDED DAYS ENDED
1997 DECEMBER 31, 1996 OCTOBER 14, 1996
--------------- ------------------- -------------------
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OPERATING ACTIVITIES:
Net loss.......................... $ (10.6) $ (19.5) $ (5.7)
Depreciation...................... 5.1 4.7 0.6
Amortization of inventory
step-up......................... 0.0 9.8 0.0
Amortization of intangible
assets.......................... 2.3 3.9 0.2
Changes in assets and liabilities:
Accounts receivable............. 19.3 10.0 27.4
Inventory....................... (45.4) 30.9 (7.7)
Accounts payable................ (18.3) (27.6) 3.1
Customer advances............... 35.9 30.1 9.1
Other assets.................... (15.6) 25.1 (7.5)
Other liabilities............... (21.8) (45.4) (2.5)
------ ------- ------
NET CASH FROM OPERATING
ACTIVITIES.................. (49.1) 22.0 17.0
------ ------- ------
INVESTING ACTIVITIES:
Capital expenditures.............. (4.2) (1.0) 0.0
Other............................. 0.0 3.1 (0.6)
Investment in affiliate........... (5.1) 0.0 0.0
Acquisition of Rockwell Graphic
Systems, net of cash acquired of
$7.2............................ 0.0 (602.4) 0.0
------ ------- ------
NET CASH FROM INVESTING
ACTIVITIES.................. (9.3) (600.3) (0.6)
------ ------- ------
FINANCING ACTIVITIES:
Issuance of senior subordinated
notes........................... 0.0 225.0 0.0
Sale of customer notes
receivable...................... 0.0 137.1 0.0
Capital contributions............. 0.0 162.1 0.0
Net borrowings under revolving
credit facilities............... 46.2 1.6 0.0
Term loan, original amount
borrowed........................ 0.0 75.0 0.0
Repayment of term loan............ (9.1) 0.0 0.0
Repayment of mortgages............ (2.3) 0.0 0.0
Repayment of foreign long-term
debt............................ 0.0 0.0 (25.9)
Net cash transferred from
Rockwell........................ 0.0 0.0 11.6
------ ------- ------
NET CASH FROM FINANCING
ACTIVITIES...................... 34.8 600.8 (14.3)
------ ------- ------
Net (decrease)/increase in cash..... (23.6) 22.5 2.1
Cash at the beginning of the
period............................. 49.6 0.0 2.3
------ ------- ------
Cash at the end of the period....... $ 26.0 $ 22.5 $ 4.4
------ ------- ------
------ ------- ------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements
4
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GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 31, 1997
1. BASIS OF PRESENTATION
In the opinion of Goss Graphic Systems, Inc. ("Goss") the unaudited
financial statements contain all adjustments, consisting solely of adjustments
of a recurring nature, necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
statements should be read in conjunction with Goss's Form 10-K for the year
ended September 30, 1997. The results of operations for the three months ended
December 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1998.
Data presented for the period ended December 31, 1996 does not include the
fourteen-day period from October 1, 1996 through October 14, 1996. This brief
"stub period" preceded Goss's acquisition on October 15, 1996. As a result,
comparisons between fiscal 1998 and 1997 involve comparisons of a three month
period to a two and one-half month period. The consolidated statement of cash
flows for 1997 included herein has been restated to reflect the final
acquisition-date balance sheet.
2. INVENTORIES
Net inventories are summarized as follows (in millions):
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DECEMBER 31, SEPTEMBER 30,
1997 1997
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Materials................................... $ 70.5 $ 61.7
Work in process............................. 62.7 42.2
Finished goods.............................. 41.3 33.0
Parts....................................... 34.7 26.9
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Total inventories, net.................... $ 209.2 $ 163.8
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</TABLE>
3. DEBT
The debt obligations of Goss are as follows (in millions):
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<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
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Short-term debt............................. $ 95.8 $ 49.6
Term loan................................... 12.8 21.9
Mortgage loans.............................. 52.6 54.9
Senior subordinated notes................... 225.0 225.0
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Total debt................................ $ 386.2 $ 351.4
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------ ------
</TABLE>
5
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GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONTINGENCIES AND COMMITMENTS
LEGAL CONTINGENCIES
In the normal course of its business, Goss is subject to various claims and
lawsuits. Typically, these matters consist of product liability claims brought
by the individuals who operate the equipment that Goss sold, disputes with
customers over the performance and completion of installation of equipment, and
workers' compensation claims by Goss's own employees.
It is not presently possible to determine the outcome of these claims and
lawsuits against Goss. However, Goss maintains as an accrued liability a reserve
that is its present estimate of the total cost to resolve all of these matters.
Management does not believe that the ultimate disposition of any of these
matters will have a material adverse effect on Goss's financial position or
liquidity, although it is possible that the resolution of these matters 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 off-site disposal facilities or so-called "Superfund
Sites". Goss's share of the responsibility for these Superfund Sites generally
is minor, and although current law imposes joint and several liability on any
party deemed to be responsible at a Superfund Site, management believes that the
ultimate resolution of these matters will not be material to Goss.
Goss's Reading, Pennsylvania facility has been operating a groundwater
remediation system under a 1981 Consent Order with the Commonwealth of
Pennsylvania as a result of its, and its predecessor's, historical waste
disposal practices. Goss currently is performing remediation and testing the
site pursuant to a remediation proposal approved by the Commonwealth.
Rockwell International Corporation (Goss's former owner) has agreed to
indemnify Goss for expenses attendant to environmental matters existing on
October 14, 1996 to the extent of one-half of those expenses in excess of
$1,000,000. Goss maintains as an accrued liability a reserve that is its present
estimate of the total cost to resolve all of these matters.
COMMITMENTS
Goss in certain instances provides letters of credit to guarantee the
performance of presses under certain long-term contracts. Such letters of credit
outstanding were $10.3 million as of December 31, 1997. Goss intends to perform
fully the underlying contracts and does not expect to incur any material
liability beyond customary amounts for warranty and similar claims.
5. SUBSEQUENT EVENTS
On January 29, 1998 Goss amended and restated its $150.0 million revolving
credit facility to permit borrowings up to $200.0 million in multiple
currencies. The amended facility contains less restrictive financial covenants.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Goss's 1997 first quarter, which ended December 31, 1996, does not include
the fourteen-day "stub" period from October 1, 1996 through October 14, 1996
which preceded Goss's acquisition on October 15, 1996. As a result, comparisons
between fiscal 1998 and 1997 involve comparisons of a three month period to a
two and one-half month period.
Readers are urged to consider carefully the financial statements and related
notes contained elsewhere in this report and in Goss's Form 10-K for its fiscal
year ended September 30, 1997 as they read the discussion below.
RESULTS OF OPERATIONS
NET SALES
Goss's net sales for the first quarter of fiscal 1998 increased by 12.2% to
$106.0 million due to a higher backlog of customer commitments at the end of
fiscal 1997 which resulted in higher deliveries in the first quarter of 1998.
The changes in net sales, including equipment and parts, by product line were:
- Sales of small newspaper presses increased by 52.8% to $39.9 million. Two
significant shipments in the quarter accounted for most of the increase.
Also contributing to the overall increase is the inclusion of $4.6 million
of sales by Goss's China joint venture which had been reported as an
equity investment but now is consolidated for financial reporting
purposes.
- Sales of commercial presses more than doubled to $6.3 million due to the
fact that there were no equipment shipments during the first quarter of
fiscal 1997.
- Sales of large newspaper presses decreased 4.1% to $57.9 million. The
decrease reflects normal fluctuations in the large newspaper press
business due to the timing of orders and shipments.
- Sales of insert presses decreased by 67.2% to $1.9 million. Goss
attributes this decrease to normal quarterly fluctuations in the demand
for this product.
GROSS PROFIT
Gross profit-- I.E., net sales less cost of sales and amortization of
inventory step-up -- for the first quarter of fiscal 1998 increased by 59.8% to
$16.6 million. Goss's gross profit margin increased from 11.0% in 1997 to 15.7%
in 1998. In 1997, gross profit included $9.8 million in amortization of the
step-up in the value of inventory following the acquisition. Excluding this
non-recurring item, 1997 gross profit was $20.1 million or 21.3% of sales.
Adjusted for this item, the decrease in gross profit and gross profit margin was
primarily due to lower gross profit margins on sales to large and small
newspapers. Further details on gross profit by product line (excluding
amortization of the inventory step-up in 1997) are provided below:
- For sales to large and small newspapers, gross profit decreased by 17.3%
to $15.6 million. The gross profit margin for these sales decreased to
16.0% in 1998 from 21.9% in 1997. The decrease in gross profit and gross
profit margin is due to costs attendant to the realignment and relocation
of certain manufacturing from Goss's Reading, Pennsylvania facility to the
Company's Cedar Rapids, Iowa facility and to the start-up of Universal 70
production at Reading.
- Gross profit on sales of commercial press equipment increased from $0.8
million in 1997 to $1.2 million in 1998. The gross profit margin decreased
from 37.8% in 1997 to 18.8% in 1998 due to unfavorable product mix.
- Gross profit on sales of insert press equipment decreased by $0.7 million
to a gross loss of $0.2 million in 1998 due to the low sales volume for
this product.
7
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OPERATING EXPENSES
Operating expenses -- I.E., selling, general, administrative and research
and development expenses -- increased by 11.2% to $20.9 million in 1998. This
increase results from a comparison of the two and one-half month 1997 quarter
with the three month 1998 quarter.
INTEREST EXPENSE
Interest expense increased from $8.0 million to $10.9 million in 1998. The
increase is due in part to the comparison of the two and one-half month 1997
quarter with the three month 1998 quarter and to increased borrowing under the
Company's revolving credit facility during the 1998 quarter.
INCOME TAXES
An income tax benefit of $6.8 million, at an effective rate of 39.1%, was
recorded in 1998, as compared to the income tax provision of $1.1 million that
was recorded in 1997. The 1998 rate is based on
Goss's projected overall effective tax rate for the entire year, which will be
re-evaluated periodically throughout the year. In 1997, an income tax benefit
was not recorded primarily due to losses resulting from the amortization of the
inventory step-up recorded in purchase accounting in the first year following
the acquisition.
NET INCOME/LOSS
Goss's net loss decreased from $19.5 million to $10.6 million in 1998. This
decrease in net loss is attributable to the amortization of the inventory
step-up in 1997 and the $6.8 million income tax benefit recorded in 1998,
partially offset by lower gross profit margins in 1998 and the comparison of the
two and one-half month 1997 quarter with the three month 1998 quarter.
FINANCIAL CONDITION
In 1998 operating activities used $49.1 million of cash compared to 1997
when operating activities provided $22.0 million of cash. This negative cash
flow from operations in 1998 is primarily due to the build up of inventory
resulting from an increased backlog of customer commitments scheduled to ship
during the remainder of fiscal 1998, a $7.8 million post-closing purchase price
adjustment paid to Rockwell International Corporation on November 7, 1997 and
the October 1997 semi-annual interest payment on the senior subordinated notes.
Other than cash flow from operations, Goss's primary source of liquidity has
been its secured bank facility. As of December 31, 1997, the facility permitted
Goss to borrow up to $162.8; $150.0 million on a revolving basis and $12.8 on a
term basis. As of December 31, 1997, borrowings and letters of credit under this
facility totaled $157.8 million. On January 29, 1998, Goss amended and restated
the facility to permit borrowings up to $200.0 million in multiple currencies.
The amended facility contains less restrictive financial covenants.
As a result of the acquisition, Goss is a leveraged business. As a
consequence, Goss is dependent upon its bank facility to provide essential
liquidity, and borrowings under that facility are dependent upon Goss's
fulfillment of the facility's financial covenants. Should Goss at some future
time not be able to satisfy those financial covenants it would significantly,
and negatively, impact Goss's business by, among other things, restricting
growth in sales or necessitating Goss's obtaining a replacement credit facility.
8
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(a) Exhibit 3.1 Certificate of Incorporation of Goss*
Exhibit 3.2 By-Laws of Goss*
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
Goss's current report on Form 8-K, filed on February 12, 1998, is incorporated
by reference.
</TABLE>
* Incorporated by reference to the exhibits to the Registration Statement of
Goss as filed with the Securities and Exchange Commission, File No.
333-08421.
9
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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.
By: /s/ WILLIAM G. FERKO
-----------------------------------------
William G. Ferko
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
Date: February 17, 1998 PRINCIPAL ACCOUNTING OFFICER)
10
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED FINANCIAL STATEMENTS OF GOSS GRAPHIC SYSTEMS, INC. FOR
THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25
<SECURITIES> 1
<RECEIVABLES> 171
<ALLOWANCES> 16
<INVENTORY> 209
<CURRENT-ASSETS> 409
<PP&E> 169
<DEPRECIATION> 29
<TOTAL-ASSETS> 927
<CURRENT-LIABILITIES> 465
<BONDS> 290
0
0
<COMMON> 0
<OTHER-SE> 162
<TOTAL-LIABILITY-AND-EQUITY> 927
<SALES> 106
<TOTAL-REVENUES> 106
<CGS> 84
<TOTAL-COSTS> 110
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (17)
<INCOME-TAX> (6)
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
