<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2000
OF
GOSS HOLDINGS, INC.
SEC File Number 333-08421
a Delaware corporation
IRS Employer Identification No. 36-4326281
700 OAKMONT LANE
WESTMONT, ILLINOIS 60559-5546
(630) 850-5600
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.
The registrant has filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by
a court.
The registrant had 10,000,000 shares of Common Stock outstanding
at November 10, 2000.
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GOSS HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 2
Consolidated Statements of Operations - For the three month
and nine month periods ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
1
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOSS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $33.0 $ 29.9
Accounts receivable, net 120.4 133.9
Inventories, net 163.0 151.7
Other current assets 17.0 8.3
------- -------
Total current assets 333.4 323.8
Property and equipment, net 120.7 140.7
Goodwill, net 247.4 261.7
Assets held for sale 18.1 24.6
Other assets 26.5 33.4
------- -------
Total assets $746.1 $784.2
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $95.8 $164.2
Short-term debt 63.9 23.4
Current portion of long-term debt 6.7 5.3
Advance payments from customers 172.8 134.2
Other current liabilities 174.4 199.8
------ -------
Total current liabilities 513.6 526.9
Long-term debt, less current portion 304.0 302.0
Other liabilities 35.8 36.2
------ -------
Total liabilities 853.4 865.1
Minority interest 8.5 8.5
Common stock - $.01 par value, 15,000,000 shares
authorized; 10,000,000 shares outstanding 0.1 0.1
Additional paid in capital 77.4 76.8
Retained earnings (186.9) (164.1)
Cumulative translation adjustment (6.4) (2.2)
------ -------
Total shareholders' equity (115.8) (89.4)
------ -------
Total liabilities and shareholders' equity $746.1 $784.2
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
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GOSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $145.4 $112.2 $417.7 $422.1
Cost of sales 117.5 102.7 344.0 397.3
------- ------- ------- -------
Gross profit 27.9 9.5 73.7 24.8
Operating expenses 21.3 23.7 62.8 71.0
Legal settlement 0.0 0.0 (20.0) (5.0)
Restructuring charges 0.0 11.3 0.0 12.6
Goodwill amortization 1.8 2.1 5.5 6.2
------- ------- ------- -------
Operating profit (loss) 4.8 (27.6) 25.4 (60.0)
Other expense (2.7) (1.3) (5.1) (1.8)
Interest expense (11.4) (10.5) (32.7) (34.3)
------- ------- ------- -------
Loss before income taxes (9.3) (39.4) (12.4) (96.1)
Provision (benefit) for income taxes 4.4 (1.5) 10.3 (2.7)
------- ------- ------- -------
Net loss $(13.7) $(37.9) $(22.7) $(93.4)
======= ======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
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GOSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(22.7) $(93.4)
Depreciation 16.0 17.8
Loss on sale of fixed assets 2.3 0.0
Amortization of goodwill 5.5 6.2
Non-cash interest on subordinated notes 12.1 0.0
Changes in assets and liabilities:
Accounts receivable 13.5 6.2
Inventory (11.3) 46.5
Accounts payable (68.4) (9.6)
Customer advances 38.6 (30.7)
Other current liabilities (24.9) (24.7)
Other assets 5.2 (9.2)
Other liabilities (0.5) (5.8)
-------- --------
Net cash used for operating activities (34.6) (96.7)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (2.3) (6.2)
Proceeds from fixed asset sales 5.1 0.0
-------- --------
Net cash provided by (used for) investing activities 2.8 (6.2)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities 40.5 41.3
Capital contribution 0.0 24.0
Repayment of mortgage notes and other obligations (5.6) (3.1)
-------- --------
Net cash provided by financing activities 34.9 62.2
-------- --------
Net increase (decrease) in cash 3.1 (40.7)
Cash at the beginning of the period 29.9 57.2
-------- --------
Cash at the end of the period $33.0 $16.5
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements
4
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GOSS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the management of Goss Holdings, 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 December 31, 1999. The results of operations for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
Certain reclassifications have been made to the 1999 financial statements to
conform to the classifications used in 2000.
2. INVENTORIES
Net inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Materials $66.3 $64.7
Work in process 62.4 57.9
Finished goods 13.3 4.7
Parts 21.0 24.4
------ ------
Total inventories, net $163.0 $151.7
====== ======
</TABLE>
3. WORKFORCE REDUCTION CHARGES
The Company recorded charges of $7.1 million and $14.7 million in the fiscal
quarters ended December 31, 1998 and 1999, respectively, for severance costs
relating to workforce reductions. The financial statements at September 30, 2000
contain accrued liabilities of $3.5 million for the remaining severance costs to
be paid pursuant to these reductions. Approximately $13.0 million in severance
costs relating to these reductions were paid in the nine months ended September
30, 2000.
5
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4. DEBT
The debt obligations of Goss are as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Revolving credit facilities $63.9 $ 23.4
Term loan 148.1 150.0
Mortgage loans 45.8 51.2
Senior subordinated notes 115.0 103.0
Other debt obligations 1.8 3.1
------- -------
Total debt 374.6 330.7
Less current portion 70.6 28.7
------- -------
Long-term debt $304.0 $302.0
======= =======
</TABLE>
On November 19, 1999, Goss Graphic Systems, Inc., a wholly-owned subsidiary of
Goss Holdings, Inc., and its lenders entered into the Second Amended and
Restated Multicurrency Credit Agreement (the "Bank Facility"). The Bank
Facility, as amended on December 3, 1999 by the First Amendment to Credit
Agreement and Limited Consent, initially provided for total borrowings of $250
million, consisting of a term loan in the amount of $150 million, and a $100
million revolving credit facility. The revolving credit facility permitted the
making of revolving loans and the issuance of letters of credit in the aggregate
amount of $100 million, with the issuance of letters of credit limited to a
total of $75 million.
On August 30, 2000, Goss Graphic Systems, Inc. and certain of the lenders under
its Bank Facility entered into the Second Amendment To Credit Agreement and
Limited Consent (the "Second Amendment"). The Second Amendment amended the Bank
Facility by providing (1) until May 31, 2001, an additional $15.0 million in
revolving borrowing capacity, (2) a waiver which allows Goss to retain, until
March 31, 2001, sale proceeds of up to $4.5 million from the sale of its
Reading, Pennsylvania facility (which was sold in the third quarter for $4.2
million), and (3) a revised definition of Earnings Before Interest, Taxes,
Depreciation, and Amortization ("EBITDA"), for financial covenant compliance
purposes, which excludes net non-ordinary gains and allows, in fiscal 2000, the
exclusion of certain expense charges. Borrowings under the additional $15.0
million line will bear interest at a rate equal to, at the Company's option, the
Banker's Trust base rate plus 4.00% or the applicable offshore rate plus 5.00%.
The Bank Facility, as amended, matures on September 30, 2003, provides for
scheduled repayments of the term loan starting in December of 2002, scheduled
reductions in the revolving credit commitments starting in March of 2002, the
repayment of the $4.2 million in sale proceeds from the Reading facility by
March 31, 2001, and the termination at May 31, 2001 of the additional $15.0
million credit line resulting from the Second Amendment. As of September 30,
2000 the term loan was fully utilized and borrowings and letters of credit
under the $115 million
6
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revolving loan portion of the Bank Facility, excluding $2.2 million of
revolving credit relating to Goss's joint venture in China, totaled $97.1
million.
The Bank Facility contains certain financial covenants which must be satisfied
at the end of each quarter, are cumulative from the period starting on January
1, 2000, and at December 31, 2000 become rolling twelve month covenants. At
September 30, 2000, Goss was in compliance with these covenants.
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
resolution 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.
On March 7, 2000, Goss filed a federal lawsuit under the Antidumping Act of
1916 against MAN Roland Druckmaschinen AG, Koenig & Bauer AG, Mitsubishi
Heavy Industries, Ltd., Tokyo Kikai Seisakusho, Ltd. and their United States
subsidiaries. The lawsuit claims unspecified damages as a result of the
importation of large newspaper presses into the United States by the
defendants and the sale of these presses at prices substantially below those
prevailing in foreign markets. While Goss believes it is entitled to receive
significant damages in this action, there can be no assurance that it will be
successful.
In June of 2000, the U.S. Court of Appeals for the Federal Circuit upheld the
determination by the Court of International Trade ("CIT") that the
International Trade Commission ("ITC") properly found that the U.S. printing
press industry was threatened with injury by unfairly-traded imports from
Germany and Japan. The ruling was in response to an appeal filed by the
affected German and Japanese producers to the earlier CIT ruling. The only
appeal alternative remaining to the German and Japanese producers with regard
to the ITC threat determination is with the U.S. Supreme Court. On October
12, 2000, the Japanese producers of large newspaper printing presses filed an
appeal at the U.S. Court of Appeals for the Federal Circuit, challenging the
Department of Commerce final determinations that established the antidumping
duty margins imposed on Japanese imports. These margins were earlier upheld
by the CIT. A decision on this appeal may occur within the next 12 months.
7
<PAGE>
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. In
connection with the sale of the Reading, Pennsylvania facility in the quarter
ended September 30, 2000, the Company entered into a Consent Order and
Agreement with the Pennsylvania Department of Environmental Protection
("PADEP") and the buyer of the Reading facility that obligates the Company to
complete investigation of, and to the extent necessary, remediation of
historical contamination at the site. Once completed, PADEP will execute a
release from liability and covenant not to sue the Company and the buyer of
the Reading facility for all contaminants identified in the various
investigation and remediation reports. The Company believes the remediation
at the site is complete and that final investigation and monitoring will be
completed by December 2001.
Rockwell International Corporation, the Company's former owner, 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.
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.
8
<PAGE>
6. SEGMENT REPORTING
Information on Goss's reportable operating segments is detailed below. Beginning
January 1, 2000, Goss restructured its operations to include three geographic
profit center organizations and separate global manufacturing and engineering
cost center organizations. The column labeled "Other" includes the manufacturing
and engineering organizations, corporate expenses and eliminations of
intersegment activity. 1999 segment information has been restated to conform to
the new organizational structure.
<TABLE>
<CAPTION>
AMERICAS EUROPE ASIA OTHER TOTAL
-------- ------ ---- ----- -----
<S> <C> <C> <C> <C> <C>
TRHEE MONTHS ENDED SEPTEMBER 30, 2000
Sales to external customers $67.8 $28.3 $49.3 $0.0 $145.4
Intersegment sales 3.2 5.2 0.7 (9.1) 0.0
Gross profit/(loss) 6.3 6.7 15.1 (0.2) 27.9
Operating profit/(loss) 1.1 3.3 11.7 (11.3) 4.8
Other expense (2.7) (2.7)
Interest expense (11.4) (11.4)
Loss before income taxes (9.3)
Total assets $177.7 $217.7 $150.3 $200.4 $746.1
THREE MONTHS ENDED SEPTEMBER 30, 1999
Sales to external customers $43.0 $34.6 $34.6 $0.0 $112.2
Intersegment sales 2.3 1.2 0.0 (3.5) 0.0
Gross profit/(loss) 5.2 5.9 5.0 (6.6) 9.5
Operating profit/(loss) (2.9) 0.4 2.2 (27.3) (27.6)
Other expense (1.3) (1.3)
Interest expense (10.5) (10.5)
Loss before income taxes (39.4)
Total assets $257.0 $234.5 $152.6 $252.6 $896.7
NINE MONTHS ENDED SEPTEMBER 30, 2000
Sales to external customers $203.2 $90.1 $124.4 $0.0 $417.7
Intersegment sales 12.7 19.0 1.7 (33.4) 0.0
Gross profit/(loss) 26.6 20.7 37.5 (11.1) 73.7
Operating profit/(loss) 9.0 10.0 27.2 (20.8) 25.4
Other expense (5.1) (5.1)
Interest expense (32.7) (32.7)
Loss before income taxes (12.4)
Total assets $177.7 $217.7 $150.3 $200.4 $746.1
NINE MONTHS ENDED SEPTEMBER 30, 1999
Sales to external customers $207.8 $130.2 $84.1 $0.0 $422.1
Intersegment sales 9.2 16.2 0.4 (25.8) 0.0
Gross profit/(loss) 11.0 22.3 12.9 (21.4) 24.8
Operating profit/(loss) (15.3) 9.0 4.5 (58.2) (60.0)
Other expense (1.8) (1.8)
Interest expense (34.3) (34.3)
Loss before income taxes (96.1)
Total assets $257.0 $234.5 $152.6 $252.6 $896.7
</TABLE>
9
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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 Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(13.7) $(37.9) $(22.7) $(93.4)
Other comprehensive income:
Foreign currency translation
adjustment (2.1) 3.5 (4.2) (1.7)
------- ------- ------- -------
Total comprehensive loss $(15.8) $(34.4) $(26.9) $(95.1)
======= ======= ======= =======
</TABLE>
8. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" . SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 will require that all derivatives be recorded on the balance
sheet at their fair value and that changes in the derivative's fair 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 No.
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 No. 133 will
not have a significant effect on its results of operations or its financial
position.
On December 3, 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB No. 101") which provides the
Commission's views on applying generally accepted accounting principles to
revenue recognition in financial statements. SAB No. 101 is effective for
Goss's fiscal year ended December 31, 2000. Goss does not believe that the
adoption of SAB No. 101 will have a significant effect on its results of
operations or its financial position.
10
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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 December 31, 1999 as they read the discussion below.
RESULTS OF OPERATIONS
ORDERS
Goss's new orders for the quarter ended September 30, 2000 were $208.7 million,
an increase of $118.5 million over the $90.2 million in orders received for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
new orders were $551.1 million, an increase of $290.7 million over the $260.4
million in orders received for the nine months ended September 30, 1999. The
order increase for both the quarter and for the nine months was attributable to
increases in all three geographic regions of the Company.
Goss's backlog of unshipped orders increased to $507.2 million at September 30,
2000 from $458.8 million at June 30, 2000 and $409.3 million at December 31,
1999. The increases occurred in all three geographic regions of the Company.
NET SALES
QUARTER ENDED SEPTEMBER 30, 2000
Goss's net sales for the fiscal quarter ended September 30, 2000 of $145.4
million increased by 29.6% or $33.2 million compared to the quarter ended
September 30, 1999. Sales in the Americas increased by $24.8 million to $67.8
million due to the timing of shipments to large newspaper customers and due
to a higher order backlog for small newspaper, insert, and parts and service
customers in 2000. Sales in the 1999 period for the Americas were also
negatively affected by shipment delays resulting from Goss's inability to
access sufficient capital resources to purchase materials and services in the
period leading up to its Chapter 11 filing, as well as post-filing delays
attributable to the time required to negotiate terms with suppliers. Sales in
Europe decreased by $6.3 million to $28.3 million due to the timing of
shipments to small newspaper customers. Sales in Asia increased by $14.7
million to $49.3 million due to the timing of shipments to large newspaper
customers and as a result of a higher order backlog for small newspaper
customers in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net sales for the first nine months of 2000 were $417.7 million, a decrease
of $4.4 million or 1.0% from the first nine months of 1999. Sales decreases
in the Americas and Europe of $4.6
11
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and $40.1 million to $203.2 and $90.1 million, respectively, were partially
offset by a sales increase in Asia of $40.3 million to $124.4 million. In the
Americas, decreased sales to small newspaper and commercial customers
attributable to a lower order backlog as of December 31, 1999 were partially
offset by increased sales to insert and parts and service customers resulting
from increased order levels in 2000. Sales in the 1999 period were also
negatively affected by shipment delays resulting from Goss's inability to
access sufficient capital resources to purchase materials and services in the
period leading up to its Chapter 11 filing, as well as post-filing delays
attributable to the time required to negotiate terms with suppliers. The
sales decrease in Europe was attributable to lower shipments to large and
small newspaper customers resulting from a lower order backlog at December
31, 1999 as well as the timing of shipments. The increase in Asia is the
result of the timing of shipments to large newspaper customers.
GROSS PROFIT
Gross profit for the quarter ended September 30, 2000 of $27.9 million
increased by $18.4 million compared to the quarter ended September 30, 1999
and the gross profit margin increased from 8.5% to 19.2%. Gross profit for
the nine months ended September 30, 2000 of $73.7 million increased $48.9
million compared to the nine months ended September 30, 1999. The 1999 period
included significant charges totaling $14.4 million in the Americas.
Excluding the 1999 significant charges of $14.4 million, gross profit for the
nine months ended September 30, 2000 increased by $34.5 million and the gross
profit margin increased from 9.3% to 17.6%. The change in gross profit and
gross profit margin, excluding the significant charges referred to above, is
explained in more detail below.
QUARTER ENDED SEPTEMBER 30, 2000
For the quarter ended September 30, 2000, gross profit in the Americas
increased by $1.1 million to $6.3 million and the gross profit margin
decreased from 12.1% to 9.3%. Gross profit in Europe increased by $0.8
million to $6.7 million and the gross profit margin increased from 17.1% to
23.7%. Gross profit in Asia increased by $10.1 million to $15.1 million and
the gross profit margin increased from 14.5% to 30.6%. The gross loss from
global cost centers decreased by $6.4 million to $0.2 million. The increase
in gross profit and gross profit margin for the quarter is due to increased
sales volumes, product cost reductions, an increase in the proportion of
sales from higher margin parts and service sales, and the elimination of
unrecovered fixed manufacturing costs associated with the Reading,
Pennsylvania facility, which was closed in December of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000
For the nine months ended September 30, 2000, gross profit in the Americas
increased by $7.2 million to $26.6 million and the gross profit margin
increased from 9.3% to 13.1%. Gross profit in Europe decreased $1.6 million to
$20.7 million and the gross profit margin increased from 17.1% to 23.0%.
Gross profit in Asia increased $24.6 million to $37.5 million and the gross
profit margin increased from 15.3% to 30.1%. The gross loss from global cost
centers decreased by $4.3 million to $11.1 million. The increase in gross
profit and gross profit margin for the nine
12
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months ended September 30, 2000 is due to product cost reductions, an
increase in the proportion of sales from higher margin parts and service
sales, and the elimination of unrecovered fixed manufacturing costs
associated with the Reading, Pennsylvania facility.
OPERATING EXPENSES
Operating expenses, which consist primarily of engineering, selling, general and
administrative expenses, decreased 10.1% to $21.3 million for the quarter. The
1999 period included a $1.8 million charge for bad debts. Excluding the bad debt
charges, operating expenses decreased by $0.6 million, or 2.7%. This decrease is
the result of the 1999 workforce reduction and reduced spending for engineering
and administrative expenses.
Operating expenses for the nine months ended September 30, 2000 were $62.8
million, a decrease of $8.2 million or 11.5% from 1999. The 1999 period included
a $4.9 million charge for bad debts. Excluding the bad debt charges, operating
expenses decreased by $3.3 million, or 5.0%. This decrease is the result of the
1999 workforce reduction and reduced spending for engineering and administrative
expenses.
LEGAL SETTLEMENT
The Company recorded income of $20.0 million and $5.0 million as a result of
payments received pursuant to a legal settlement, for the nine months ended
September 30, 2000 and 1999, respectively.
RESTRUCTURING CHARGES
Results for the quarter and nine month periods ended September 30, 1999 were
charged with $11.3 million and $12.6 million, respectively, for expense items
that were incurred by the Company pursuant to its 1999 reorganization under
Chapter 11 of the Bankruptcy Code. These items consisted of professional
fees, bank fees, and the write-off of deferred issue costs on the
pre-petition senior subordinated notes.
INTEREST EXPENSE
Interest expense increased by $0.9 million for the quarter and decreased by
$1.6 million for the nine-month period ended September 30, 2000. The increase
for the quarter is due to the fact that the Company's pre-petition senior
subordinated notes stopped accruing interest in the 1999 period and the
effect of higher interest rates in 2000, partially offset by lower debt
levels. The decrease for the nine-month period is due to lower debt balances
in 2000, partially offset by the effect of higher interest rates.
INCOME TAXES
For the quarter ended September 30, 2000, the provision for income taxes
increased from a benefit of $1.5 million in the 1999 period to a $4.4 million
expense. For the nine-month period
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ended September 30, 2000, the provision increased from a benefit of $2.7
million in the 1999 period to a $10.3 million expense. The increases for the
2000 quarter and nine-month periods are due to an increase in the amount of
taxable income generated in countries where Goss is in a tax liability
position.
FINANCIAL CONDITION AND LIQUIDITY
For the nine months ended September 30, 2000, operating activities used $34.6
million of cash compared to the nine months ended September 30, 1999 when
operating activities used $96.7 million of cash. The decrease in cash used
from operations in 2000 is due to the increase in net income for the period,
partly offset by higher payments to trade creditors, including the $60.1
million in payments made to pre-petition trade creditors. Commencing on
January 26, 2000, May 5, 2000, and August 16, 2000, Goss made payments of
approximately $19.8 million, $20.1 million, and $20.2 million, respectively,
to its pre-petition trade creditors, representing the three payments required
by the Plan of Reorganization as approved by the Bankruptcy Court for the
District of Delaware. Cash from investing activities increased to $2.8
million of cash provided in 2000 from $6.2 million of cash used in 1999 due
to lower spending on capital projects and proceeds from asset sales. The
Company sold its Reading, Pennsylvania facility during the quarter ended
September 30, 2000 and received sales proceeds of $4.2 million. Financing
activities provided a net $34.9 million in cash in 2000.
Other than cash flow from operations, Goss's primary source of liquidity is
the Goss Graphic Systems, Inc. bank credit facility (the "Bank Facility"),
which, as amended by the Second Amendment, permits borrowings up to $265
million, consisting of a term loan in the amount of $150 million and a $115
million revolving credit facility. The revolving credit facility permits the
making of revolving loans and the issuance of letters of credit in the
aggregate amount of $115 million, with the issuance of letters of credit
limited to a total of $75 million. The Bank Facility matures on September 30,
2003 and provides for scheduled repayments of the term loan starting in
December of 2002, scheduled reductions in the revolving credit commitments
starting in March of 2002, the repayment of the $4.2 million in sale proceeds
from the Reading facility by March 31, 2001, and the termination at May 31,
2001 of the additional $15.0 million credit line resulting from the Second
Amendment. As of September 30, 2000, the term loan was fully utilized and
borrowings and letters of credit issued under the $115 million revolving loan
portion of the facility, excluding $2.2 million of revolving credit relating
to Goss's joint venture in China, totaled $97.1 million, an increase of $12.1
million from the end of the prior fiscal quarter.
On August 30, 2000, Goss Graphic Systems, Inc. and certain of the lenders
under the Bank Facility entered into the Second Amendment To Credit Agreement
and Limited Consent (the "Second Amendment"). The Second Amendment amended
the Bank Facility by providing (1) until May 31, 2001, an additional $15.0
million in revolving borrowing capacity, (2) a waiver which allows Goss to
retain, until March 31, 2001, sale proceeds of up to $4.5 million from the
sale of its Reading, Pennsylvania facility, and (3) a revised definition of
Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"),
for financial covenant compliance purposes, which excludes net non-ordinary
gains and allows, in fiscal 2000, the exclusion of certain expense charges.
Borrowings under the additional $15.0 million line will
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bear interest at a rate equal to, at the Company's option, the Banker's Trust
base rate plus 4.00% or the applicable offshore rate plus 5.00%
The Bank Facility contains certain financial covenants, including, but not
limited to, a minimum fixed charge coverage test, a minimum EBITDA test, and
a maximum capital spending test. These covenants are described more fully in
Section 7.6 of the Bank Facility Agreement, a copy of which was filed with
the Securities and Exchange Commission as Exhibit 4.2 to Goss's Form 10-K for
the year ended December 31, 1999 and is incorporated herein by reference, and
in the Second Amendment , which is filed herewith as Exhibit 4.2 to this Form
10-Q. Goss was in compliance with these covenants at September 30, 2000.
In addition to the revolving credit facility, Goss also is party to an
indenture under which it issued $112.5 million in subordinated notes and has
mortgage loans on certain of its facilities. A copy of the indenture
agreement is included as Exhibit 4.1 to Goss's Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference. The mortgage loans
are included as Exhibits 4.4 and 4.5 to Goss's Form 8-K as filed with the
Securities and Exchange Commission on February 12, 1998, and are incorporated
herein by reference. The indenture contains covenants which restrict, among
other things, the Company's ability to incur additional debt and pay
dividends, 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 was in compliance with the covenants
contained in the indenture at September 30, 2000.
On July 25, 2000, the U.S. Bankruptcy Court for the District of Delaware
issued a final decree closing the Chapter 11 cases of GGS Holdings, Inc. (a
predecessor company of Goss Holdings, Inc.), Goss Graphic Systems, Inc., and
Goss Realty L.L.C.
Goss 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. 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.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Report may be deemed to be
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 results indicated by
the forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of Goss's Form 10-K for the year ended December 31, 1999 addresses
the Company's exposure to market risk from changes in interest rates and
foreign currency exchange rates. No material changes in this exposure have
occurred since December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June of 2000, the U.S. Court of Appeals for the Federal Circuit upheld the
determination by the Court of International Trade ("CIT") that the
International Trade Commission ("ITC") properly found that the U.S. printing
press industry was threatened with injury by unfairly-traded imports from
Germany and Japan. The ruling was in response to an appeal filed by the
affected German and Japanese producers to the earlier CIT ruling. The only
appeal alternative remaining to the German and Japanese producers with regard
to the ITC threat determination is with the U.S. Supreme Court. On October
12, 2000, the Japanese producers of large newspaper printing presses filed an
appeal at the U.S. Court of Appeals for the Federal Circuit, challenging the
Department of Commerce final determination that established the antidumping
duty margins imposed on Japanese imports. These margins were earlier upheld
by the CIT. A decision on this appeal may occur within the next 12 months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 First Amendment dated December 3, 1999 to Credit
Agreement and Limited Consent among Goss Graphic
Systems, Inc. and the parties named therein.
4.2 Second Amendment dated August 30, 2000 to Credit
Agreement and Limited Consent among Goss Graphic
Systems, Inc. and the parties named therein
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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 HOLDINGS, INC.
Date: November 14, 2000 By: /s/ Joseph P. Gaynor, III
------------------------------------------
Joseph P. Gaynor, III, Executive Vice President and
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
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