<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 1999
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 May 14, 1999, all of which
were held by an affiliate.
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<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements
Consolidated Balance Sheet--March 31, 1999 and December 31, 1998....................................... 2
Consolidated Statement of Operations--Three months ended March 31, 1999 and 1998....................... 3
Consolidated Statement of Cash Flows--Three months ended March 31, 1999 and 1998....................... 4
Notes to Consolidated Financial Statements............................................................. 5
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations............ 9
PART II--OTHER INFORMATION:
Item 6--Exhibits and Reports on Form 8-K................................................................. 13
SIGNATURES................................................................................................. 14
</TABLE>
1
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOSS GRAPHIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 16.6 $ 57.1
Accounts receivable, net.............................................................. 132.7 125.3
Inventories, net...................................................................... 273.5 277.1
Other current assets.................................................................. 24.1 19.4
----------- ------------
Total current assets.................................................................. 446.9 478.9
Property and equipment, net............................................................. 179.8 186.2
Goodwill, net........................................................................... 303.3 308.0
Other assets............................................................................ 28.2 27.7
----------- ------------
Total assets.......................................................................... $ 958.2 $ 1,000.8
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 154.8 $ 170.9
Revolving credit facilities........................................................... 176.1 178.9
Current portion of long-term debt..................................................... 4.4 5.2
Advance payments from customers....................................................... 152.3 178.6
Other current liabilities............................................................. 186.1 194.7
----------- ------------
Total current liabilities............................................................. 673.7 728.3
Long-term debt, less current portion.................................................... 274.3 275.5
Other liabilities....................................................................... 58.2 59.5
----------- ------------
Total liabilities....................................................................... 1,006.2 1,063.3
Minority interest....................................................................... 7.9 8.8
Common stock, 100 shares authorized and outstanding, $0.01 par value.................... 0.0 0.0
Additional paid in capital.............................................................. 197.9 162.2
Retained earnings....................................................................... (245.3) (228.9)
Minimum pension obligation.............................................................. (5.3) (5.3)
Cumulative translation adjustment....................................................... (3.2) 0.7
----------- ------------
Total shareholders' equity.............................................................. (55.9) (71.3)
----------- ------------
Total liabilities and shareholders' equity.............................................. $ 958.2 $ 1,000.8
----------- ------------
----------- ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
2
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales.................................................................................... $ 149.3 $ 138.1
Cost of sales................................................................................ 132.2 119.6
--------- ---------
Gross profit............................................................................... 17.1 18.5
Operating expenses........................................................................... 20.0 22.4
Goodwill amortization........................................................................ 2.0 2.5
--------- ---------
Operating loss............................................................................. (4.9) (6.4)
Other (expense) income....................................................................... 0.0 (0.8)
Interest expense............................................................................. (12.0) (9.9)
--------- ---------
Loss before income taxes................................................................... (16.9) (17.1)
Provision (benefit) for income taxes......................................................... (0.5) 8.7
--------- ---------
Net loss................................................................................... $ (16.4) $ (25.8)
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................................................................... $ (16.4) $ (25.8)
Depreciation................................................................................. 5.4 5.0
Amortization of goodwill..................................................................... 2.0 2.5
Changes in assets and liabilities:
Accounts receivable........................................................................ 4.0 (9.7)
Inventory.................................................................................. 3.7 (52.8)
Accounts payable........................................................................... (16.0) 8.8
Customer advances.......................................................................... (19.9) 53.5
Other current liabilities.................................................................. (8.6) 13.9
Other assets............................................................................... (3.1) 5.8
Other liabilities.......................................................................... (3.6) (3.6)
--------- ---------
Net cash provided by (used for) operating activities..................................... (52.5) (2.4)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures......................................................................... (2.3) (8.5)
Investment in affiliate...................................................................... 0.0 (0.2)
--------- ---------
Net cash used for investing activities..................................................... (2.3) (8.7)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities............................................. (2.7) 40.6
Repayment of term loan....................................................................... 0.0 (12.8)
Capital contribution......................................................................... 17.7 0.0
Repayment of mortgage notes and other obligations............................................ (0.7) (1.0)
--------- ---------
Net cash provided by financing activities.................................................. 14.3 26.8
--------- ---------
Net increase (decrease) in cash................................................................ (40.5) 15.7
Cash at the beginning of the period............................................................ 57.1 26.0
--------- ---------
Cash at the end of the period.................................................................. $ 16.6 $ 41.7
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Goss Graphic Systems, Inc. ("Goss" or the "Company"), the
unaudited financial statements contain all adjustments, solely 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, 1998.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
In June 1998, the Board of Directors approved a change in Goss's fiscal
year-end from September 30 to December 31, effective for the calendar year
beginning January 1, 1999. This report is the first report of the Company under
its new fiscal year.
Certain reclassifications have been made to the 1998 financial statements to
conform to the classifications used in 1999.
2. INVENTORIES
Net inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
Materials........................................................... $ 121.3 $ 111.8
Work in process..................................................... 90.6 94.6
Finished goods...................................................... 33.8 41.9
Parts............................................................... 27.8 28.8
----------- ------
Total inventories, net............................................ $ 273.5 $ 277.1
----------- ------
----------- ------
</TABLE>
3. WORKFORCE REDUCTION CHARGE
During the quarter ended December 31, 1998, Goss initiated a five percent
reduction in its worldwide workforce. This reduction, which affected both
salaried and hourly jobs, resulted in a charge for severance costs of $7.1
million. Approximately 185 employees are being terminated in this action.
Substantially all of the severance costs will be paid by the end of 1999. As of
March 31, 1999, approximately $3.1 million in severance costs had been paid.
4. DEBT
The debt obligations of Goss are as follows (in millions):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
Revolving credit facilities......................................... $ 176.1 $ 178.9
Mortgage loans...................................................... 50.2 52.3
Senior subordinated notes........................................... 225.0 225.0
Other debt obligations.............................................. 3.5 3.4
----------- ------
Total debt........................................................ 454.8 459.6
Less current portion................................................ 180.5 184.1
----------- ------
Long-term debt...................................................... $ 274.3 $ 275.5
----------- ------
----------- ------
</TABLE>
5
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
Goss's $200 million revolving credit facility contains covenants which must
be satisfied at the end of each fiscal quarter and generally cover Goss's
performance during the preceding four fiscal quarters. On August 31, 1998, Goss
entered into the First Amendment to the credit facility which contained revised
covenants for the quarters ended September 30, 1998, and thereafter. These
covenants were predicated upon Goss's business plan at that time, and
subsequently it became apparent that Goss would not be able to fulfill those
covenants. As a result, Goss and its lenders amended these covenants in the
Second Amendment to the credit facility dated as of January 12, 1999. See Item
2, Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional detail.
5. CONTINGENCIES
LEGAL CONTINGENCIES
In the normal course of its business, the Company is subject to various
claims and lawsuits. Typically, these matters consist of product liability
claims brought by the individuals who operate the equipment that the Company
sold, disputes with customers over the performance and completion of
installation of equipment, and workers' compensation claims by the Company's own
employees.
It is not presently possible to determine the outcome of the claims and
lawsuits against the Company. However, the Company 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 the Company'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
The Company has received either notices of potential liability or
third-party claims under the Federal Comprehensive Environmental Response,
Compensation, and Liability Act at four off-site disposal facilities or
so-called "Superfund Sites". The Company'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 the Company.
The Company'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. The Company has completed remediation at the site pursuant
to a remediation proposal approved by the Commonwealth and has submitted a
monitoring proposal to the Commonwealth for approval.
Rockwell has agreed to indemnify the Company for expenses attendant to
existing environmental matters to the extent of one-half of those expenses in
excess of $1.0 million. The Company maintains as an accrued liability a reserve
that is its present estimate of the total cost to resolve all of these matters.
6
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SEGMENT REPORTING
Information on Goss's reportable operating segments is detailed below. The
column labelled "Other" consists of corporate expenses that are not allocable to
the geographic operating segments and eliminations of intersegment activity.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999 AMERICAS EUROPE ASIA OTHER TOTAL
- ---------------------------------------------------------------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales to external customers..................................... $ 99.6 $ 31.5 $ 18.2 $ 0.0 $ 149.3
Intersegment sales.............................................. 4.3 10.6 0.0 (14.9) 0.0
Operating profit/(loss)......................................... 0.4 (2.0) 0.0 (3.3) (4.9)
Other (expense)/income.......................................... 0.0 0.0
Interest expense................................................ (12.0) (12.0)
Income/(loss) before income taxes............................... (16.9)
Total assets.................................................... $ 281.5 $ 272.4 $ 142.9 $ 261.4 $ 958.2
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1998 AMERICAS EUROPE ASIA OTHER TOTAL
- --------------------------------------------------------------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales to external customers.................................... $ 63.3 $ 64.0 $ 10.8 $ 0.0 $ 138.1
Intersegment sales............................................. 4.9 12.7 0.0 (17.6) 0.0
Operating profit/(loss)........................................ (10.6) 9.7 (1.2) (4.3) (6.4)
Other (expense)/income......................................... (0.8) (0.8)
Interest expense............................................... (9.9) (9.9)
Income/(loss) before income taxes.............................. (17.1)
Total assets................................................... $ 340.3 $ 289.3 $ 114.4 $ 256.2 $ 1000.2
</TABLE>
7. COMPREHENSIVE INCOME
As of October 1, 1998 Goss adopted SFAS No. 130 "Reporting Comprehensive
Income" which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
Goss has chosen to disclose comprehensive income, which encompasses net income
and foreign currency translation adjustments, in the notes to the consolidated
financial statements.
Total comprehensive income is as follows (in millions):
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss..................................................................... $ (16.4) $ (25.8)
Other comprehensive income:
Foreign currency translation adjustment.................................... (3.9) (0.3)
--------- ---------
Total comprehensive loss..................................................... $ (20.3) $ (26.1)
--------- ---------
--------- ---------
</TABLE>
8. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Deriviative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 1999. SFAS 133 requires all derivative instruments to
be recorded on the balance sheet at their fair value and that changes in the
derivative's fair
7
<PAGE>
GOSS GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. NEW ACCOUNTING STANDARDS (CONTINUED)
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Goss has not yet determined the impact that the adoption of
SFAS 133 will have on its earnings or statement of financial position. However,
Goss anticipates that, due to its limited use of derivative instruments and the
nature of its derivative transactions, the adoption of SFAS 133 will not have a
significant effect on its results of operations or its financial position.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1998 as they read the discussion below.
RESULTS OF OPERATIONS
NET SALES
Goss's net sales for the fiscal quarter ended March 31, 1999 increased by
8.1% or $11.2 million to $149.3 million compared to the quarter ended March 31,
1998. Sales in the Americas increased by $36.3 million to $99.6 million due to
the timing of shipments to large and small newspaper customers in 1999. Sales in
Europe decreased by $32.5 million to $31.5 million as a lower order backlog at
December 31, 1998 resulted in reductions in shipments to large and small
newspaper customers. The quarter ended March 31, 1998 contained a major large
newspaper equipment sale of $20.2 million to one European customer. Sales in
Asia increased by $7.4 million to $18.2 million as a higher order backlog at
December 31, 1998 resulted in increased shipments to small newspaper customers.
GROSS PROFIT
Gross profit decreased by $1.4 million to $17.1 million. 1998 included
non-recurring charges of $3.7 million for manufacturing restructuring in the
Americas and $1.2 million for loss contract provisions on large newspaper
contracts. Excluding these non-recurring items, gross profit decreased by $6.3
million and the gross profit margin decreased from 16.9% to 11.4%. The change in
gross profit and gross profit margin, excluding these non-recurring charges, is
explained below.
- Gross profit in the Americas increased by $0.4 million to $9.9 million and
the gross profit margin decreased from 15.0% to 9.9%. The increase in
gross profit is due to increased sales volume and a favorable product mix
while the decrease in gross profit margin is due to unrecovered fixed
costs resulting from unused capacity. In addition, 1998 included income
from a property tax refund and expense credits from adjustments of product
warranty reserves and an adjustment of the depreciable lives of fixed
assets.
- Gross profit in Europe decreased by $8.4 million to $4.1 million and the
gross profit margin decreased from 19.5% to 12.9%. The decrease in gross
profit and gross profit margin is due to lower sales volume and lower
margins on sales to large newspaper customers.
- Gross profit in Asia increased by $1.7 million to $3.5 million and the
gross profit margin increased from 17.4% to 19.4%. The increase in gross
profit and gross profit margin is due to increased sales volumes and
higher margins on sales to large newspaper customers.
OPERATING EXPENSES
Operating expenses--I.E., engineering, selling, general and administrative
expenses--decreased 10.7% to $20.0 million. 1998 included $4.3 million in
engineering costs associated with the development of a new insert press.
Excluding these development engineering costs, the increase of $1.9 million is
due to higher engineering and administrative expenses. Engineering expenses
increased due to costs associated with new engineering information systems,
including depreciation thereof, and the timing of the capitalization of
contract-related engineering costs into inventory. Administrative expenses
increased as a result of depreciation expense on a new financial information
system and comparison against the prior period in which incentive compensation
accruals were adjusted downward.
9
<PAGE>
INTEREST EXPENSE
Interest expense increased by $2.1 million due to increased borrowings under
Goss's revolving credit facility.
INCOME TAXES
The provision for income taxes decreased from $8.7 million in 1998 to a $0.5
million benefit in 1999. The expense in 1998 arose from the reevaluation in that
quarter of the effective income tax rate to be used for the year.
FINANCIAL CONDITION AND LIQUIDITY
In the quarter ended March 31, 1999, operating activities used $52.5 million
of cash compared to 1998 when operating activities used $2.4 million of cash.
The negative cash flow from operations in 1999 is due to a higher level of
payments to suppliers and lower customer advances. Cash used in investing
activities decreased to $2.3 million in 1999 from $8.7 million in 1998 due to
lower spending on capital projects. Financing activities provided a net $14.3
million in cash in 1999, including collections of $17.7 million of the $35.6
million in accounts receivable that were contributed to Goss's capital by
Stonington Financing, Inc. in January 1999.
Other than cash flow from operations, Goss's primary source of liquidity is
its revolving credit facility which permits borrowings up to $200 million,
including up to $175 million in letters of credit. As of March 31, 1999,
borrowings and letters of credit under this facility, excluding $2.2 million of
revolving credit relating to Goss's joint venture in China, totaled $195.2
million, a decrease of $3.0 million from the end of the prior fiscal quarter.
Goss's revolving credit facility contains 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,
and a maximum leverage test. These covenants are described more fully in Section
7.6 of the January 29, 1998 credit facility agreement, a copy of which was filed
with the Securities and Exchange Commission as Exhibit 4.2 to Goss's Form 8-K
dated February 12, 1998, as amended by a First Amendment to Credit Agreement
dated as of August 31, 1998 and a Second Amendment to Credit Agreement dated as
of January 12, 1999, filed with the Securities and Exchange Commission as
Exhibit 4.2 to Goss's Form 10-K for its fiscal year ended September 30, 1998 and
is incorporated herein by reference.
As a consequence of its earnings levels and cash flows, Goss was not in
compliance with these financial covenants as of the quarter ended March 31,
1998. Goss's lenders waived this non-compliance (as well as non-compliance as of
the end of the quarter ended June 30, 1998), and on August 31, 1998, Goss
entered into the First Amendment which contained revised covenants for the
quarter ended September 30, 1998 and thereafter. These covenants were predicated
upon Goss's business plan at that time, and subsequently it became apparent that
Goss would not be able to fulfill these covenants. As a result, Goss and its
lenders amended those covenants in the Second Amendment. As part of the Second
Amendment, the revolving credit facility also was amended to include various
limitations on Goss's operation and borrowing, including a limitation on the
amount that can be borrowed by Goss based upon its accounts receivable,
inventory, equipment, real property and intellectual property. In general, this
limitation is similar to the limitation contained in the revolving credit
facility prior to January 29, 1998. Also as part of the Second Amendment,
Stonington Financing Inc., ("Stonington") was required to make a capital
contribution to Goss, which took the form of the purchase by Stonington and the
contribution to Goss of the accounts receivable previously sold to BT Commercial
Corporation (see below). Stonington made this contribution on January 28, 1999.
The Second Amendment provides Goss with financial covenants consistent with
anticipated financial performance, but in exchange therefor Goss has less
flexibility in other areas.
10
<PAGE>
On November 30, 1998, Goss sold approximately $35.6 million in accounts
receivable to BT Commercial Corporation. This sale was permitted by Goss's
revolving credit facility and was intended to provide Goss with additional
liquidity beyond what was then available under the revolving credit facility.
Generally, the receivables that were sold were expected to mature between
February and May, 1999. The sale was without recourse to Goss although the
collectibility of the receivables was guaranteed by an affiliate of Stonington,
a related party.
In addition to the revolving credit facility, Goss also is party to an
indenture under which it issued $225 million in subordinated notes and mortgage
loans on certain of its facilities. Copies of these agreements are included as
Exhibits 4.1, 4.4 and 4.5 to Goss's Form 10-K for its fiscal year ended
September 30, 1997 and are incorporated herein by reference. The indenture
contains covenants similar to those in the revolving credit facility and
includes cross-default provisions under which an event of default under the
revolving credit facility would also be considered an event of default under the
indenture.
Goss, because of the acquisition, is a highly leveraged business. As a
consequence, it is dependent upon its bank credit facility to provide essential
liquidity, and borrowings under that facility are dependent upon Goss's
fulfillment of the financial covenants that it contains. Violations of the
financial covenants contained in the bank credit facility can be waived, and
certain covenants have been waived or not enforced as a result of Goss's
financial performance as its credit needs expanded. Should Goss at some future
time not be able to satisfy those financial covenants it would significantly,
and negatively, affect Goss's business by, among other things, restricting
growth in sales or necessitating Goss's obtaining a replacement credit facility.
Goss's ability to obtain a replacement facility would be dependent on the
financial markets and its financial condition at that time.
Goss's operating losses for the fiscal year 1998, the transition quarter
ended December 31, 1998, and the fiscal quarter ended March 31, 1999 have caused
it to access a substantial portion of its available liquidity. As a result, Goss
has taken certain actions intended to increase its profitability and the
availability of liquidity, including senior management changes, a revised
business plan, workforce reductions, a sale of $35.6 million in accounts
receivable, a renegotiation of its Revolving Credit Facility, and a capital
contribution by Stonington of $35.6 million.
However, Goss's customer orders for the 1999 fiscal quarter of $94.5 million
are substantially below the prior year level of $230.4 million and its order
backlog at March 31, 1999 has dropped to $527.1 million from $606.3 million at
December 31, 1998 and $818.9 million at March 31, 1998.
This drop in orders, combined with the fact that liquidity from existing
sources has been substantially exhausted, makes it likely that Goss will need to
secure additional sources of capital. The Company is exploring options for
injecting additional capital into Goss; however, there can be no assurance that
these efforts will be successful.
YEAR 2000
Goss uses software and related technologies throughout its business and in
certain of its products that will be affected by the Year 2000 issue which
involves the inability of date sensitive computer applications to process dates
beyond the year 1999. A comprehensive inventory and assessment of business
systems and processes that may be affected by Year 2000 issues have been
completed in each country in which Goss operates.
Goss has also completed an investigation of Year 2000 issues related to the
functionality of its press systems which included a comprehensive review of Goss
press models sold over a period of more than thirty years and has found no
date-related issues that would render presses inoperable on the arrival of the
year 2000. Certain date functionality issues were identified with some older
press systems and software upgrades have been developed to solve these issues.
Where necessary, customers have been notified of these issues and many presses
have already been upgraded.
11
<PAGE>
Goss's U.S. manufacturing facilities are in the process of implementing new
Year 2000 compliant manufacturing and financial applications which include
general ledger, accounts receivable, accounts payable, inventory, purchasing,
engineering and order entry. The Cedar Rapids implementation was completed on
May 3, 1999 and the Reading implementation is scheduled for July 1999. Goss's
headquarters and parts facility in Westmont, Illinois have already implemented
new manufacturing and financial systems which are Year 2000 compliant.
The majority of systems in Europe are already Year 2000 compliant with the
exception of Nantes, France where most systems will either have codes changed on
existing software or will be upgraded to Year 2000 compliant versions. These
modifications are expected to be completed by June 1999 except for the
purchasing system which will be replaced by a fully integrated module of the
general ledger package and should be operational by October 1999. In Japan
system modification began in October 1998. Modification of individual programs
has commenced and is scheduled for completion by June 30, 1999.
Certain non-IT systems, such as telephone and voice mail systems, time and
labor collection systems and other desktop computer systems, have been assessed
and all necessary upgrades have been scheduled for completion by the fourth
quarter of 1999.
The expected cost to convert all business systems to be Year 2000 compliant
is approximately $17.6 million, the majority of which are capital expenditures.
About 72% of these costs have been incurred as of March 31, 1999. These costs do
not include certain costs incurred in the U.K. over the last two years to
upgrade systems as part of an overall systems upgrade strategy as these costs
were not tracked separately.
As part of Goss's Year 2000 assessment, the Company's vendors and suppliers
are being contacted about Year 2000 issues affecting their business and
products. In addition to requesting information about their plans, Goss may
require significant vendors to document Year 2000 compliance through a separate
self-audit questionnaire.
Although Goss's management believes that it will be successful in avoiding
any significant disruption in its business, given the complexity and number of
potential risks, there can be no guarantee that the Company's efforts will be
successful. If Goss's efforts to achieve Year 2000 compliance are unsuccessful,
the result could have a material adverse effect on Goss's results of operations
and financial condition. The potential adverse effects include the inability to
order materials, manufacture and distribute products and process daily business
transactions. In the event certain systems are not operational in time to avoid
a Year 2000 issue, Goss has planned to manually accumulate and process data
necessary to continue operations. At such time as these systems become Year 2000
compliant, the manually accumulated data will be loaded and processed into the
new systems.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Report are forward-looking.
While Goss believes that these statements are accurate, Goss's business is
dependent upon general economic conditions, various conditions specific to its
industry, and future trends and these factors could cause actual results to
differ materially from the forward-looking statements that have been made.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) Exhibit 27.1 Financial Data Schedule
</TABLE>
13
<PAGE>
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.
<TABLE>
<S> <C> <C>
GOSS GRAPHIC SYSTEMS, INC.
DATE: MAY 17, 1999 By: /s/ JOSEPH P. GAYNOR, III
-----------------------------------------
Joseph P. Gaynor, III
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOSS GRAPHIC
SYSTEMS, INC. AND CONTAINS UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
MARCH 31, 1999 AND THE QUARTER ENDED MARCH 31, 1998 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> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 162
<ALLOWANCES> 29
<INVENTORY> 273
<CURRENT-ASSETS> 447
<PP&E> 236
<DEPRECIATION> 56
<TOTAL-ASSETS> 958
<CURRENT-LIABILITIES> 674
<BONDS> 279
0
0
<COMMON> 0
<OTHER-SE> 198
<TOTAL-LIABILITY-AND-EQUITY> 958
<SALES> 149
<TOTAL-REVENUES> 149
<CGS> 132
<TOTAL-COSTS> 154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (17)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (16)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
