-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZMOZGKecuh0shCPRcFpXEYd+caccl3lN4F+yNr9Jq8opMasIXXO+p0V4cU0LFJh DaQPNqxZahyfdpKUvOmwTA== 0001047469-99-001201.txt : 19990115 0001047469-99-001201.hdr.sgml : 19990115 ACCESSION NUMBER: 0001047469-99-001201 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOSS GRAPHIC SYSTEMS INC CENTRAL INDEX KEY: 0001018214 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 251200273 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-08421 FILM NUMBER: 99506640 BUSINESS ADDRESS: STREET 1: 700 OAKMONT LANE STREET 2: 48TH FLOOR CITY: WESTMONT STATE: IL ZIP: 60559-5546 BUSINESS PHONE: 6308505600 MAIL ADDRESS: STREET 1: GOSS GRAPHIC SYSTEMS INC STREET 2: 700 OAKMONT LANE CITY: WESTMONT STATE: IL ZIP: 60559-5546 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 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 does not have any securities registered pursuant to Section 12(b) and 12(g) of the Act. 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 (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. Goss is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K. Goss had 100 shares of Common Stock outstanding at January 12, 1999, all of which were held by an affiliate. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GOSS GRAPHIC SYSTEMS, INC. PART I ITEM 1. BUSINESS Goss Graphic Systems, Inc., "Goss" or the "Company," is the leading producer of newspaper and insert printing press systems and a major producer of commercial printing press systems. Established in Chicago in 1885, Goss was acquired by GGS Holdings, Inc. on October 15, 1996 through the acquisition of Rockwell Graphic Systems, Inc. from Rockwell International Corporation. Goss's 1997 fiscal year ended September 30, 1997. The fiscal year data referred to in this Item does not include the fourteen day "stub period" from October 1, 1996 through October 14, 1996 which preceded the acquisition. PRODUCTS AND SERVICES WEB OFFSET PRESS SYSTEMS All of the printing press systems manufactured by Goss use web offset technology. In "offset" printing, the text and images of a publication are photographically or electronically transferred onto flexible printing plates. The plates are wrapped around "plate cylinders" in a press unit. As a plate cylinder rotates, it is first coated with a water-based solution and then with an oil-based ink. Since the ink is oil based, it adheres only to the areas on the plate that are not covered with water (I.E., the text or image.) The ink on the plate then is transferred in a mirror-image to a second cylinder, a "blanket cylinder," which rotates to come into contact with the paper where the ink is transferred again, reversing from a mirror-image back to a normal image. In the "web" printing process, the paper is fed continuously through the press from a large paper roll in a long ribbon that forms a complex web of paper. This contrasts with sheet-fed printing in which individual sheets of paper are fed through the press and printed one-by-one. Web printing is substantially faster than sheet-fed printing, and for larger print runs, more economical. Printing press systems vary substantially in design and size. Typically, a large newspaper press system consists of multiple press units fed by separate paper rolls with the resulting webs being merged together, folded and cut. For multiple-color printing, the individual press units frequently are arranged into horizontal units or stacked in vertical "towers" several floors high with one unit for each of the basic colors. Press units vary in width and the number of plates contained on the plate cylinders, which facilitate printing in different formats. Commercial presses differ in that the webs run horizontally through the units and frequently there is additional auxiliary equipment, such as dryers and chilling units, designed specifically to meet commercial printing needs such as printing on high-gloss paper. 1 Large newspaper press systems typically range in price from $6 million to $100 million, while commercial press systems typically range between $4 million and $12 million and small newspaper and insert press systems typically range between $1 million and $8 million. In addition to the press units manufactured by Goss, press systems include ancillary equipment such as electronic controls; reel stands which feed, splice and control paper tension; register and cut-off control devices; dampening systems; noise and dust control devices; and ink control devices. Each ancillary device is available from a number of suppliers, and Goss is not dependent upon any one supplier. In connection with its initiative to standardize the ancillary equipment on each of its major press systems (E.G., Newsliner, Universal), Goss has entered into long-term partnerships with certain suppliers. INDUSTRY SEGMENT Goss's products fall into three broad categories: - newspaper press systems for publishers of national, regional and local news; - commercial press systems for printers of brochures and promotional materials, catalogues, magazines, books, financial publications and directories; and - insert press systems for printers of advertising inserts, including Sunday newspaper inserts and direct mail/point-of-purchase inserts. Goss also provides parts and service support for the equipment that it sells. NEWSPAPER PRESS SYSTEMS Goss's core business, in which it has been engaged for 114 years, is the production of newspaper press systems. Goss produces "large newspaper" press systems, which use 50" and wider paper for large national and metropolitan newspapers, and "small newspaper" press systems, which use 36" wide paper for smaller regional and local newspapers. All are sold under the "Goss" trade name. Goss custom designs and engineers each newspaper press system to meet the specific printing requirements and physical space limitations of its customers. Sales of new equipment to large newspaper customers, together with additions and modifications to existing equipment, accounted for approximately 44% of Goss's fiscal 1998 sales. Sales to and additions and modifications for small newspaper customers accounted for approximately 31% of Goss's fiscal 1998 sales. Goss's principal products in this area are its Newsliner (for large newspapers) and Universal (for small newspapers) models. 2 COMMERCIAL PRESS SYSTEMS Sales from Goss's commercial press business represented approximately 6% of its fiscal 1998 sales. Goss's principal products in this area are its M16, G18 and G25 and special applications of its Universal product line. Until the acquisition, Goss sold commercial press systems under the "Baker-Perkins" and "Hantscho" trade names. Goss now is selling them under the "Goss" trade name. INSERT PRESS SYSTEMS Sales from Goss's insert press business represented approximately 7% of Goss's fiscal 1998 sales. Goss's principal products in this area are its Magnum and C700 models. These insert press systems also are marketed exclusively under the "Goss" trade name and are sold principally to customers in North America. AFTERMARKET PARTS AND CUSTOMER SERVICE Goss provides aftermarket parts and customer service in connection with the equipment that it has sold. Sales of aftermarket parts and equipment were approximately 12% of Goss's fiscal 1998 sales. Although some non-consumable parts are manufactured to customer order, as of September 30, 1998 Goss had parts in inventory of approximately $30.8 million. Service and technical support include site preparation and inspection, equipment installation, preventative and corrective maintenance, paper width changes and color capability upgrades. Service and technical support is provided by Goss's staff of approximately 275 field service engineers and additional field services engineers who work for Goss's international agents. (Elsewhere in this Report the financial results of Goss's aftermarket parts and customer service operations are reported as part of the product lines to which they are attendant.) PRODUCT DEMAND, MARKETING AND COMPETITION Goss's success is dependent upon the demand for its products in the heavily competitive market in which it operates. DEMAND CHARACTERISTICS Given the significant cost of presses, both industry and Goss's sales can vary substantially depending upon the timing of large press purchases. This phenomenon is exacerbated by the long useful life of newspaper presses -- typically twenty-five years -- and the deferability of press replacement. During periods of economic growth, higher advertising expenditures lead to an increase in color and page count demand and the profitability of publishers, thus encouraging demand for printing presses generally to increase. Conversely, during periods of economic recession, demand for press capacity generally decreases. Over the longer term, Goss believes that continued demand for newspaper presses will be driven by a number of factors, including: 3 - ECONOMIC GROWTH OF DEVELOPING COUNTRIES. Strong economic growth typically results in higher personal incomes and increased advertising expenditures. These factors, together with higher literacy rates, newspaper circulation, color content and page counts, drive demand for additional press capacity. - FINANCIAL MARKETS. Press demand can be impacted significantly by interest rates and currency fluctuations. In periods of high interest rates or low currency values for a potential purchaser's country, purchases can be deferred. - INNOVATION. Press demand historically has increased in response to press innovations before returning to more normalized levels of demand. A newspaper's ability to enhance quality, add color and increase productivity while reducing paper waste and staffing are important considerations as it evaluates whether and when to add press equipment or replace an old press. Accordingly, the aggregate demand for printing presses as well as the demand for a particular manufacturer's products is driven in part by the development of new products which achieve market acceptance and provide tangible return on investment. - REPLACEMENT. Although press life can be extended through refurbishing, enhancements and proper maintenance, older presses result in declining productivity and quality, in each case relative to that offered by new presses, ultimately requiring that, over time, they be replaced. INSTALLED BASE Goss estimates that over one-half of all daily newspapers worldwide print on Goss presses. Goss is one of only six major global suppliers of web offset newspaper press systems and is the only supplier to have manufacturing, engineering and sales operations in North America, Europe and Asia. Goss's installed base of presses provides it with both service and parts opportunities as well as an advantageous relationship with printers in connection with the sale of new equipment. SALES FORCE Goss maintains a direct sales force of approximately 65 individuals and an extensive network of 50 local agents covering 94 countries. A sale to a prospective customer can take several years from the initial planning phase to the final sale. As a consequence, Goss's sale process requires consistent long-term customer contact and service. 4 INTERNATIONAL OPERATIONS During fiscal year 1998, approximately 48% of Goss's revenue was generated from sales by international operations. International sales and operating profit for prior years and identifiable assets attributable to foreign geographic territories are summarized in note 18 to Goss's 1998 financial statements contained in Part II. BACKLOG As of September 30, 1998, the total contract price of the backlog of customer commitments for presses and related installations was $637.1 million, a 5% increase in the backlog from September 30, 1997. Approximately 83% of this backlog is scheduled for delivery through December 31, 1999. COMPETITION The global newspaper printing press, insert printing press and commercial printing press industries are heavily competitive in most product categories and geographic regions. While competition is in part based on product features, technological capabilities, quality, reliability and ability to meet the specialized needs of customers, many purchasers utilize a multi-round, price-focused bidding process that can result in a significantly competitive impact on pricing and gross profit margins. Goss's primary competitors for sales of large newspaper press systems are MAN Roland AG and Koenig & Bauer-Albert ("KBA") AG of Germany. Other suppliers are Wifag AG of Switzerland, Mitsubishi Heavy Industries Ltd. and Tokyo Kikai Seisakusho, Ltd. of Japan. Competing major suppliers of small newspaper press systems are MAN Roland and KBA. The major supplier of commercial presses in the U.S. is Heidelberg Web, a subsidiary of Heidelberger Druckmaschinen AG of Germany. Other competitors include MAN Roland and Mitsubishi. Goss's only significant competitor for insert printing press systems is Heidelberg Web. Over the past several years, certain foreign suppliers of large newspaper printing presses have sought to increase their U.S. sales by offering aggressive pricing and terms. As a result of pricing actions by Goss's foreign competitors, on June 30, 1995, Goss filed an anti-dumping duty petition with the U.S. Commerce Department and the International Trade Commission alleging that competitors from Japan and Germany were selling large newspaper printing presses and components in the U.S. at less than fair value and were materially injuring a U.S. industry. As a result of Goss's petition, the Commerce Department and the ITC initiated anti-dumping investigations. 5 On July 16, 1996, the U.S. Commerce Department issued final determinations that imports from Japan and Germany had been sold at less than fair value. On August 21, 1996, the ITC also determined that imports from Japan and Germany caused material injury or the threat of material injury to the U.S. industry. Based on these determinations, the U.S. Customs Service was directed to require cash deposits of anti-dumping duties with respect to such imports at rates that range from 30% to 62% AD VALOREM. On appeal, the anti-dumping orders were upheld by the Court of International Trade. The actual duties assessed could be increased or reduced through annual administrative reviews, which are currently underway The extent to which anti-dumping duties will benefit Goss's competitive position in the U.S. market, if at all, cannot be projected with assurance. SIGNIFICANT SUPPLIERS AND CUSTOMERS Raw materials and ancillary equipment utilized in Goss's press systems are available from a number of suppliers, and Goss is not dependent upon any one supplier. The newspaper, commercial and insert printing businesses are substantially fragmented, and Goss is not dependent upon any one printer, or a related group of printers, for a material portion of its revenue. RESEARCH AND DEVELOPMENT AND INTELLECTUAL PROPERTY Goss has an active research and development program and spent approximately $17.8 million, $14.1 million and $22.2 million on research and development in fiscal 1998, 1997 and 1996, respectively. Goss views its continuation of significant research and development activities as critical to its long-term competitiveness. In 1997, Goss introduced its Advanced Digital Offset Printing Technologies concept press, "ADOPT-Registered Trademark-," which incorporates five break-through technologies: (1) a digitally imaged lithographic cylinder surface that is erasable and reusable, (2) single fluid lithography which requires no dampener, (3) variable cut-off, (4) shaftless and gearless drive, and (5) completely gapless cylinders. The result of a long-term research and development effort, Goss believes that certain of these technologies will be ready for market at the turn of the century. Although patents and trademarks are critical to Goss's competitive role in its industry, no single or related group of patents or trademarks is material to Goss. Goss-Registered Trademark-, Newsliner-Registered Trademark-, Colorliner-Registered Trademark-, Metroliner-Registered Trademark-, Universal-Registered Trademark-, Community-Registered Trademark-, G18-Registered Trademark-, G25-Registered Trademark-, Magnum-Registered Trademark-, Suburban-Registered Trademark- and Urbanite-Registered Trademark- are registered trademarks belonging to Goss. Trademark applications are pending for "ADOPT", "Colorflow", "SSC Magnum" and "Uniliner". 6 EMPLOYEES As of September 30, 1998 Goss's employees consisted of:
NUMBER OF SALARIED EMPLOYEES Executive Management 21 Operations 463 Sales, Marketing and Customer Service 461 Engineering: Design and Product Engineering 307 Research and Product Development 68 Support 34 Finance and Information Systems 154 Human Resources and Other 95 ----- Total Salaried 1,603 HOURLY (1) 1,710 ----- TOTAL 3,313 (2) ----- -----
Substantially all of Goss's hourly employees are represented by various national, local or trade unions and are covered by collective bargaining agreements. (1) Does not include temporary employees hired from time to time to meet Goss's installation services requirements. (2) Includes 812 employees in Goss's China joint venture. OTHER INFORMATION Goss was incorporated in Delaware in 1969 and is the successor to Goss Printing Company, which was formed in 1885, Miehle Printing Press and Manufacturing Company, which was formed in 1890, and the Dexter Company, which was formed in 1880. Goss, Miehle and Dexter combined in 1957 and were acquired by Rockwell in 1969. Goss's executive offices are located at 700 Oakmont Lane, Westmont, Illinois 60559-5546. Its telephone number is (630) 850-5600. Goss files reports and other information with the Securities & Exchange Commission pursuant to 7 the Securities Exchange Act of 1934. These materials are available on the SEC's web site at http:\\www.sec.gov. Copies of the materials will be provided upon the request of any security holder addressed to the Secretary of Goss. ITEM 2. PROPERTIES As of September 30, 1998, Goss's principal properties consisted of:
SQUARE PERCENT FACILITY LOCATION STATUS FUNCTION FEET UTILIZED* Reading, Pennsylvania Owned Assembly, engineering 458,628 95% Cedar Rapids, Iowa Owned Machining, assembly, engineering 346,200 100% Preston, England Owned Administration, machining, assembly, 270,000 100% engineering, warehousing Westmont, Illinois Owned Headquarters, sales, engineering 280,674 85% Nantes, France Owned Administration, assembly, engineering, 263,300 100% warehousing Cicero, Illinois Leased Staging, assembly, warehousing 79,556 100% Sayama, Japan Owned Assembly, engineering, warehousing 75,280 100% Westmont, Illinois Leased Parts warehouse 33,350 100% Offenbach, Germany Leased Parts warehouse 10,000 100% Tokyo, Japan Leased Administration, sales 10,000 100% Shanghai, China Owned Machining, assembly, engineering, 500,000 100% warehousing
* Percent utilized assumed facility is operating one shift only. Goss's Westmont facility secures a $29.4 million mortgage held by LaSalle National Bank. This mortgage matures in 2007, bears interest at 8.66% per annum and is being amortized on a 20-year schedule. The Sayama, Japan facility secures $19.8 million in mortgages held by Industrial Bank of Japan and Sanwa Bank, which mortgages mature in 2007, bear interest at 3.25% per annum and are being amortized over 10 years. 8 ITEM 3. LEGAL PROCEEDINGS 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 sold by Goss, disputes with customers over the performance and completion of equipment installation, and workers' compensation claims by Goss's employees. PRODUCT LIABILITY In the event of injury, the individuals who operate printing press equipment almost universally are limited by workers' compensation laws in the amount that they can recover from their employers. As a consequence, in cases involving a significant injury, the injured operators frequently bring "product liability" claims against the manufacturer of the equipment alleging that the equipment was improperly designed or manufactured, even though the equipment may be decades old. Goss maintains insurance with a $250,000 per occurrence deductible for product liability claims made after October 15, 1996. In connection with the acquisition, Goss assumed product liability claims made prior to October 15, 1996 for which Rockwell had a self-insured retention of $2 million and a $1 million per occurrence deductible. EQUIPMENT PERFORMANCE AND INSTALLATION Printing equipment is complex and expensive, and when disputes arise regarding the performance and completion of installation of equipment, it is not uncommon for those disputes to involve significant amounts. In some instances, those disputes result in litigation. No litigation of this type is currently pending that management believes is likely to be material. 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 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 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 million. 9 GENERAL Goss maintains reserves for accrued liabilities that are its present estimates of the total costs to resolve the contingencies described above. However, it is impossible to determine the outcome of contingencies of these types in advance, and there can be no assurances that a court will not enter a substantial award against Goss for one or more of the contingencies of these types. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Goss did not submit any matters to its shareholder for a vote during its fourth fiscal quarter. PART II ITEM 5. MARKET FOR GOSS'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS All of Goss's common stock is held by GGS Holdings, Inc., which was formed by Stonington Partners, Inc. for the purpose of acquiring Goss from Rockwell International Corporation. Accordingly, there is no trading market for Goss's common stock. Since the acquisition, Goss has not paid any cash dividends nor does it expect to pay any in the foreseeable future. In addition, Goss's credit arrangements impose substantial restrictions on dividends. ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data has been derived from Goss's accounting records for fiscal 1998 and 1997 and from the accounting records of Rockwell Graphic Systems, Inc., as owned and managed by Rockwell International Corporation, for the three prior fiscal years. As a result of the acquisition, including the effects of purchase accounting and the Company's new debt and equity structure, the data presented for 1998 and 1997 may not be comparable to data for years prior to the acquisition. Readers are urged to consider this data in conjunction with the audited financial statements and related footnotes contained in Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7. Data presented for the fiscal year ended September 30, 1997 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 twelve month period to an eleven and one-half month period. 10
COMBINED DATA FOR THE PERIOD COMBINED DATA FOR THE CONSOLIDATED DATA FOR THE ENDED YEARS ENDED SEPTEMBER 30, YEARS ENDED SEPTEMBER 30, OCTOBER 14 (PREDECESSOR COMPANY) ------------------------- ---------- ------------------------- 1998 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Business line net sales Newspaper $ 647.7 $ 529.3 $ 3.1 $ 586.8 $ 547.2 $ 485.8 Commercial 62.6 62.8 0.3 58.2 103.4 101.7 Insert 53.8 40.7 1.2 53.2 58.7 60.7 ---------- --------- --------- --------- --------- --------- Total net sales 764.1 632.8 4.6 698.2 709.3 648.2 Business line operating income (loss) (a) Newspaper (21.2) 46.4 (2.7) 25.2 71.2 44.5 Commercial (14.9) (1.4) (6.2) (38.6) (13.7) (17.0) Insert (19.4) 3.2 (0.5) 3.8 5.0 5.5 ---------- --------- --------- --------- --------- --------- Total business line (55.5) 48.2 (9.4) (9.6) 62.5 33.0 operating income (loss) Rockwell common expense allocation (b) 0.0 0.0 (0.1) (8.5) (8.3) (6.8) Patent litigation (c) 0.0 0.0 0.0 (1.0) (3.0) 0.0 Restructuring charges (d) 0.0 0.0 0.0 (3.9) 0.0 0.0 Customer notes operating and bad debt expense (e) 0.0 0.0 (0.1) (4.0) (5.1) (19.6) Amortization of inventory step-up (f) 0.0 (46.7) 0.0 0.0 0.0 0.0 ---------- --------- --------- --------- --------- --------- Operating profit (loss) (55.5) 1.5 (9.6) (27.0) 46.1 6.6 Other income (expense), net (5.2) 1.0 0.0 (3.5) 1.9 (2.1) Income (loss) before interest, income taxes, cumulative effect of an accounting change and extraordinary item (60.7) 2.5 (9.6) (30.5) 48.0 4.5 Interest income (expense), net (46.4) (38.7) (0.2) (6.0) 0.0 (3.4) Customer notes interest income, net 0.0 0.0 0.7 17.1 12.4 13.6 ---------- --------- --------- --------- --------- --------- Income (loss) before income taxes, cumulative effect of an accounting change and extraordinary item (107.1) (36.2) (9.1) (19.4) 60.4 14.7 Income tax (provision) credit (7.6) (0.5) 3.4 3.7 (24.2) (5.3) Extraordinary loss on early extinguishment of debt 0.0 (5.2) 0.0 0.0 0.0 0.0 ---------- --------- --------- --------- --------- --------- Net income (loss) $ (114.7) $ (41.9) $ (5.7) $ (15.7) $ 36.2 $ 9.4 ---------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- OTHER DATA: Backlog (at period end) $ 637.1 $ 606.1 $ 388.7 $ 480.7 $ 537.7 Depreciation and amortization 26.7 78.5 0.8 27.2 29.7 29.3 Other non cash items 2.6 0.3 0.0 0.0 0.0 0.0 EBITDA (g) (24.6) 80.3 (5.0) 57.4 83.9 55.5 Net cash provided by (used for) operating activities (60.9) 17.6 17.0 71.5 157.5 71.3 Net cash used for investing activities (36.7) (616.4) (0.6) (14.7) (9.4) (25.7) 11 Net cash provided by (used) for financing activities 78.1 648.4 (14.3) (61.2) (155.5) (37.2) Capital expenditures 27.0 11.0 0.0 5.9 11.5 11.6 Balance sheet data (at period end): Total assets 1,016.1 906.8 816.0 947.0 950.9 Total debt 429.4 351.4 39.2 2.6 4.1 Net equity (0.2) 117.3 n/a n/a n/a Rockwell's net investment in Rockwell Graphic Systems n/a n/a $ 457.1 $ 543.1 $ 628.7
(a) Business line operating income for 1996 includes a $33.4 million charge for a change in accounting estimate with respect to certain product and contract performance accruals relating to years prior to fiscal 1996. (b) Rockwell common expense allocation represents expenses charged by Rockwell on a percentage of sales basis for administrative and management services such as corporate oversight, cash management, treasury, legal, patent, tax, insurance, general management and administration, corporate accounting and communication services. (c) Patent litigation represents expenses related to an alleged patent infringement, the liability for which was retained by Rockwell. See note 18 to the 1996 audited combined financial statements. (d) The restructuring charge recorded in 1996 represents reserves associated primarily with severance payments for terminated employees and the closure of certain redundant facilities. (e) Customer notes operating expenses and bad debt expenses represent expenses associated with Goss's portfolio of customer notes which was sold in conjunction with the acquisition. (f) Amortization of inventory step-up resulting from the utilization of the purchase method of accounting as part of the acquisition. The inventory step-up was fully amortized at September 30, 1997. (g) EBITDA represents business line operating income less Rockwell common expense allocation and amortization of inventory step-up plus depreciation and amortization and other non-cash items. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered as an alternative to operating income as determined in accordance with GAAP, as an indicator of Goss's operating performance or as an alternative to net cash provided by (used for) operating activities as determined in accordance with GAAP. In 1996, EBITDA excludes $48.3 million of charges relating to certain product and performance accruals which the company considers to be of a non-recurring nature, of which $33.4 million relates to changes in estimates for product and contract performance issues for sales recorded, or, in the case of contract performance issues, for orders taken, prior to October 1, 1995. In 1998, EBITDA includes $1.6 million of other income which consists primarily of interest income and minority interest expense. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Goss's fiscal year ended September 30, 1998. Data presented for the fiscal year ended September 30, 1997 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 twelve month period to an eleven and one-half month period. In addition, fiscal 1996 information relates to the business of Rockwell Graphic 12 Systems, Inc. as owned and managed by Rockwell International Corporation. As a result of the acquisition, including the effects of purchase accounting and the Company's new debt and equity structure, year-over-year comparisons of fiscal data may not provide a fully accurate view of Goss's current business or future prospects. Readers are urged to consider carefully the financial statements and related notes contained elsewhere in this report as they read the discussion below. RESULTS OF OPERATIONS -- FISCAL 1998 AND FISCAL 1997 NET SALES Goss's net sales for fiscal 1998 increased by 20.7% to $764.1 million due primarily to a higher order backlog at the end of fiscal 1997 which resulted in higher deliveries in fiscal 1998. The changes in net sales, including equipment and parts, by product line were: - Sales of large newspaper presses increased 5.4% for fiscal 1998 to $389.2. Sales in the web offset printing press business regularly fluctuate due to the timing of large orders, as was the case in fiscal 1998 in which there was a major sale to a European customer. Also contributing to the increase during fiscal 1998 were significant sales to two Pacific Rim customers. These increases were offset by a $20.3 million reduction in sales in the U.S. primarily due to shipments deferred to fiscal 1999 at the request of customers and as a result of additional engineering requirements relating to newly developed presses that otherwise would have shipped. - Sales of small newspaper presses increased 61.4% for fiscal 1998 to $258.5 million. Higher worldwide volumes, primarily of Universal presses in the U.S. and Europe, which more than doubled in fiscal 1998, accounted for this increase. - Sales of insert presses increased 32.3% for fiscal 1998 to $53.8 million. The increase was due to significant shipments to a customer in the second and third quarters of 1998. - Sales of commercial presses generally were unchanged at $62.6 million. GROSS PROFIT Gross profit, which reflects net sales less cost of sales and amortization of inventory step-up, decreased 33.9% to $60.7 in fiscal 1998. Goss's gross profit margin decreased from 14.5% in fiscal 1997 to 8.0% in fiscal 1998. Several significant items affected these results. In 1997, gross profit reflected amortization of a $46.7 million step-up in the value of inventory following Goss's 1996 acquisition. The 1998 13 results were affected by additional costs resulting from the realignment of Goss's U.S. manufacturing operations during a time of increased production volumes. This realignment, which began in 1997 and continued into 1998, was undertaken in response to increased market demand for Goss's Universal presses and the desire to reduce manufacturing costs. In the realignment, Goss's Reading, Pennsylvania plant was converted into an assembly-only facility with Universal production capability and certain functions were outsourced to suppliers or relocated to Goss's Cedar Rapids, Iowa facility. These costs, which totaled $13.8 million, generally consisted of start-up costs paid to new suppliers, costs of maintaining temporarily idle facilities while production was being moved, and workforce realignments. Through the end of fiscal 1998, Goss has pursued a business strategy with the objective of substantially increasing the level of orders and backlog. Pursuant to this strategy, Goss entered into several large contracts in the Americas to supply newly-developed newspaper press models at highly competitive price levels. The heavy production levels associated with these contracts, and the additional effort required to accommodate the new models and features, placed heavy demands on the U.S. production and engineering facilities, which were already affected by manufacturing realignment activities. As a result, several of these contracts, are in a loss position. These loss contracts, some of which were shipped in 1998 and some of which remain in backlog at September 30, 1998, resulted in a net charge of $24.5 million in 1998. Also pursuant to this strategy, Goss purchased significant amounts of materials in the U.S. based upon anticipated orders. These orders did not occur as anticipated, resulting in a significant growth in inventory. Consequently, in the fourth quarter of 1998, Goss evaluated the net realizable value of its inventories and recorded a charge of $17.1 million to reflect current net realizable values. During fiscal 1998, Goss also incurred $4.0 million of unanticipated costs associated with completing its first shipments of a newly-developed insert press and folder. Excluding these significant items which totaled $59.4 million in 1998 and $46.7 million in 1997, gross profit for fiscal 1998 was $120.1 million or 15.7% of sales as compared to $138.7 million or 21.9% of sales in 1997. The decrease in gross profit and gross profit margin in fiscal 1998 was due generally to the effects of price competition and the mix of products sold. Further details on gross profit by product line, excluding the significant items mentioned above, are provided below: - For sales to large and small newspapers, gross profit for fiscal 1998 decreased by $4.6 million to $114.5 million and the gross profit margin decreased to 17.7% from 22.5% in 1997. The decrease in gross profit and gross profit margin for fiscal 1998 was due to lower pricing and the mix of products sold. Several large newspaper contracts that shipped in 1998 did not contribute any gross profit . - Gross profit on sales of insert press equipment for fiscal 1998 decreased by $7.6 million to $0.8 million and the gross profit margin decreased to 1.4% from 20.6% in 1997. These changes are due to lower pricing and the shipment in 1998 of a major contract for a newly developed press and folder which was in a loss position. 14 - Gross profit on sales of commercial press equipment for fiscal 1998 decreased by $6.4 million to $4.8 million and the gross profit margin decreased to 7.7% from 17.8% in 1997. The decrease in gross profit and gross profit margin is due to a charge of $5.5 million in fiscal 1998 relating to a product performance issue and the mix of products sold. OPERATING EXPENSES Operating expenses -- I.E., selling, general and administrative expenses -- increased by $18.9 million to $89.2 million in 1998 due to increased marketing efforts, depreciation expenses resulting from the implementation of new information systems and increased charges for bad debts in 1998. In addition, 1997 did not include the fourteen-day October 1996 stub period in which operating expenses totaled $3.1 million. RESEARCH AND PRODUCT DEVELOPMENT Research and product development costs increased by $3.7 million to $17.8 million for 1998 primarily due to engineering costs of $4.3 million associated with the development of a new insert press in fiscal 1998. OTHER INCOME Other income decreased by $1.1 million in 1998 to $1.6 million. In 1997, other income was favorably affected by the settlement of certain customer disputes. LOSS ON INVESTMENT IN AFFILIATE In 1998, Goss made a 20% equity investment in DALiM Gmbh, a pre-press software specialist. On November 18, 1998 DALiM filed for bankruptcy and the net investment of $6.8 million as of September 30, 1998 was written-off. INTEREST EXPENSE Interest expense increased by $7.7 million in 1998 due to increased borrowings under the Company's revolving credit facility during 1998 and accrued interest relating to a customer settlement issue partially offset by lower interest rates. NET LOSS Goss's net loss increased from $41.9 million to $114.7 million in 1998. This increase is attributable to the reasons described above. 15 RESULTS OF OPERATIONS -- FISCAL 1997 AND FISCAL 1996 NET SALES Goss's net sales for fiscal 1997 decreased by 9.4% to $632.8 million due primarily to a lower order backlog at the end of fiscal 1996 which resulted in lower deliveries in fiscal 1997. The changes in net sales, including equipment and parts, by product line were: - Sales of large newspaper presses decreased by 13.5% to $369.2 million. Sales in the web offset printing press business regularly fluctuate due to the timing of large orders, as was the case in fiscal 1996 which included a major sale to a Pacific Rim customer. Also contributing to the decrease during fiscal 1997 was a $13.0 million reduction in sales in Japan resulting from the adverse effect of currency translations due to the weakening of the Yen versus the U.S. dollar. - Sales of small newspaper presses generally were unchanged at $160.1 million. This result includes a lower level of sales in the U.S. and Europe offset by the inclusion in sales of approximately $16.2 million by Goss's China joint venture. This venture previously was reported as an equity investment but now is consolidated for financial reporting purposes. - Sales of commercial presses increased by 7.9% to $62.8 million. Goss attributes this increase to quality improvements in its commercial line of equipment and a resulting improvement in market acceptance for that line. - Sales of insert presses decreased by 23.6% to $40.7 million. Goss attributes this decline to a continued consolidation among insert printers resulting in lower demand for this product generally. GROSS PROFIT Gross profit for fiscal 1997 decreased by 12.0% to $92.0 million. Goss's gross profit margin declined from 15.0% in fiscal 1996 to 14.5% in fiscal 1997. However, two significant items affected these results. Fiscal 1996 results include a $25.1 million charge for a change in estimate with respect to certain product and contract performance accruals related to sales recorded, or, in the case of contract performance issues, related to orders taken, prior to fiscal 1996. Also, fiscal 1997 results include $46.7 million in amortization of the step-up in the value of Goss's inventory which was revalued in connection with the acquisition. Excluding these non-recurring items, fiscal 1996 gross profit is $129.8 million or 18.6% of sales and fiscal 1997 gross profit is $138.7 million or 21.9% of sales. Adjusting for these items, the improvement in gross profit and gross profit margin was primarily due to the positive effect of manufacturing cost reduction initiatives. 16 Further details on gross profit by product line (excluding amortization of the inventory step-up in 1997) are provided below. - For sales to newspapers, gross profit decreased by 7.7% to $119.7 million. The gross profit margin for these sales improved to 22.6% in fiscal 1997 from 18.2% in fiscal 1996. - Gross profit on sales of commercial press equipment increased from a gross loss of $12.4 million to a gross profit of $10.8 million. The gross profit margin improved from (21.3%) in fiscal 1996 to 17.2% in fiscal 1997. - Gross profit on sales of insert press equipment decreased by 21.2% to $8.2 million. However, the gross profit margin on these sales improved from 19.5% in fiscal 1996 to 20.1% in fiscal 1997. OPERATING EXPENSES Operating expenses decreased by 29.9% to $92.2 million in fiscal 1997. This decrease is attributable to non-recurring charges in fiscal 1996 associated with a $1.0 million patent litigation settlement, $3.9 million in restructuring charges and an $8.3 million charge for changes in estimates with respect to product and contract performance issues relating to sales recorded prior to fiscal year 1996. Also, fiscal 1996 included $4.1 million of expense associated with the customer note portfolio sold at the time of the acquisition and an $8.5 million expense allocation from Rockwell. However, even excluding these fiscal 1996 charges, operating expenses decreased by 12.9% or approximately $13.7 million. This decrease is attributable to several factors, including workforce reductions and benefit plan restructuring. INTEREST EXPENSE AND OTHER ITEMS Net interest expense increased from $6.0 million to $38.7 million in 1997. This increase is primarily attributable to the acquisition and the incurrence of the attendant debt. In addition, fiscal 1996 results include interest income from a customer note portfolio which was sold at the time of the acquisition. Included as an extraordinary item in fiscal 1997 is the write-off of $5.2 million in loan origination costs attributable to the prepayment of a portion of the term loan. NET INCOME/LOSS Goss's net loss increased from $15.7 million to $41.9 million for 1997. This increase in net loss is attributable to purchase accounting adjustments and higher interest expense partially offset by improved gross profit margins and lower operating expenses. 17 OUTLOOK The outlook for calendar year 1999 in Goss's European and Asia Pacific operations, which represent approximately half of Goss's total sales volume, is favorable. However, Goss faces significant challenges in its Americas' business unit. Although orders in fiscal 1998 were strong and the Americas' unit backlog at September 30, 1998 amounted to $365.4 million, estimated gross margins on orders in backlog indicate that profitability in the Americas unit will lag that of other regions. In general, Goss sees no near term reduction in worldwide demand for new presses or for color upgrades and expansion for existing presses. Recent advertising expenditure projections indicate positive advertising environments in most countries, which suggests continued demand for additional color capacity by newspaper publishers. At September 30, 1998, the backlog of customer commitments for presses and related installations was $637.1 million a 5.1% increase over the backlog at September 30, 1997 of $606.1 million. Backlog increased by 13.0% in the Americas and 72.6% in the Asia Pacific region while decreasing 35.2% in Europe. While management believes that it has established a reliable plan to improve profitability in the Americas operations, the plan requires the execution of a substantial number of initiatives some of which may not be successful. A significant shortfall in performance relative to this plan could result in reduced liquidity and the inability to comply with loan covenants. 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. 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. These implementations are expected to be completed by May 1, 1999 in Cedar Rapids and by June 1, 18 1999 in Reading. 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 will be replaced by a fully integrated module of the general ledger package and should be operational by September 1999. In Japan system modification began in October 1998 and is currently in the final planning stage. Individual modules will be implemented beginning in January 1999 and will be completed by June 1999. Financial systems may not be completed until November 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 will be scheduled for completion by the fourth quarter of 1999. The expected cost to convert all business systems to be Year 2000 compliant is approximately $17.3 million, the majority of which are capital expenditures. About 64% of these costs have been incurred as of September 30, 1998. 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 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. EUROPEAN MONETARY UNION Goss has not completed its assessment of the effect of the initiation of the European Monetary Union that will result in the issuance of a single currency ("the euro") for use in participating countries. This conversion will result in required modifications to certain computer systems hardware and software for Goss's European operations. Goss does not believe the conversion will 19 have a material effect on its results of operations. In 1999, Goss will further analyze the effect of the euro conversion, including the related conversion costs and long-term competitive implications. FINANCIAL CONDITION In 1998, operating activities used $60.9 million of cash compared to 1997 when operating activities provided $17.6 million of cash. The negative cash flow from operations in 1998 was primarily due to the net loss of $114.7 million, increased accounts receivable due to increased sales, the buildup of inventory resulting from an increased backlog of firm and forecasted customer commitments and from significant purchases made based on anticipated sales, offset by increased trade payables and customer advances. Capital expenditures increased by $16.0 million to $27.0 million in 1998 due to the implementation of new information systems and the conversion of Goss's Reading, Pennsylvania plant to an assembly-only facility. In 1998, Goss made an equity investment of $7.5 million in DALiM Gmbh, a pre-press software specialist. 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 September 30, 1998, borrowings and letters of credit under this facility, excluding $2.5 million of revolving credit relating to Goss's joint venture in China, totaled $171.7 million, an increase of $55.4 million from the end of the prior fiscal year. 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, a minimum net worth test, a maximum leverage test and a minimum asset coverage 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 herewith as Exhibit 4.2, and is incorporated herein by reference. The financial covenants are based on the Company's operating results and cash flows and, with the exception of the minimum net worth and minimum asset coverage covenants, cover performance during the preceding four fiscal quarters. The covenants become more stringent over time. Covenant noncompliance entitles the lenders to declare a default under the credit facility and accelerate repayment of outstanding amounts and, as a result of the Second Amendment, automatically block payment of interest on Goss's subordinated notes without any further action. 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 20 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 those covenants in the Second Amendment and, as so amended, Goss's management believes that it will be able to comply with the covenant structure contained in its revolving credit facility. 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., will be required to make a capital contribution to Goss, which will take 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 has agreed to make this contribution. Taken together, the First Amendment and the Second Amendment provide Goss with financial covenants that should be easier to achieve, but in exchange therefor provide Goss less flexibility in other areas. 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. Although 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. 21 Goss's operating loss for fiscal year 1998 has caused it to access a substantial portion of its available liquidity. As a result, Goss has taken certain actions subsequent to September 30, 1998 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 commitment by an affiliate of Stonington to make a capital contribution of at least $35 millions. The capital contribution is expected to be in the form of the receivable previously guaranteed by Stonington. While Goss's management believes that these actions will result in improved profitability and the ability to obtain necessary liquidity, there can be no assurances that they will be successful. FORWARD LOOKING STATEMENTS Certain of the statements contained in this Report, including those under "Outlook," "Year 2000" and "Financial Condition," 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. In particular: - Newspaper press sales historically have been negatively influenced by increases in the cost of newsprint. - Purchases of printing equipment historically have been dependent upon general economic conditions and, in particular in connection with sales to newspapers, advertising expenditures and page count. As discussed under Item 1 above, press purchases frequently can be deferred, and declines in general economic conditions can negatively impact Goss's sales. - Goss's primary competitors are located in Germany and Japan. Currency markets and long-term interest rates recently have provided its competitors with pricing advantages. To the extent currency rates fluctuate in the future, these pricing advantages may increase, and Goss's sales would decrease. - Selection of equipment frequently is dependent upon the technological features. To the extent that Goss's competition develops new technology that is attractive to purchasers and Goss does not promptly develop comparable technology, Goss will be at a disadvantage and sales are likely to decline. - Frequently industry capacity exceeds market demand resulting in severe price competition. This price competition can hurt both sales and gross profit margins. 22 - Goss is a leveraged business. As a consequence, its profitability is sensitive to increases in interest rates, and the negative impact of any decrease in operating results is likely to be more significant than it would be if Goss was less leveraged. In addition, since Goss is dependent on its bank credit facility for liquidity, any inability to fulfill its commitments under the facility or a replacement facility -- whether as a result of the failure to satisfy financial covenants or otherwise -- would have a significant negative impact to Goss. - Goss's realignment of its manufacturing facilities was only recently completed. Production is not yet as efficient as intended, and Goss has had various difficulties in obtaining components at prices that would enable it to price its products as competitively as desired. This, in turn, for as long as it continues, will negatively impact revenue and gross profit. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Goss is exposed to market risk from changes in interest rates and foreign currency exchange rates which may adversely affect its results of operations and financial condition. Goss seeks to minimize these risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Goss does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. Goss uses foreign currency forward contracts to hedge the exposure to adverse changes in foreign currency exchange rates. Goss's principal currency exposures relate to the British pound, the French franc and the Japanese yen against the U.S. dollar. Goss's exposure to changes in foreign currency exchange rates arise from intercompany loans utilized to finance foreign subsidiaries, receivables, payables and firm commitments arising from international transactions. Goss attempts to hedge significant exposures with internal natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through derivative financial instruments with third parties using forward contracts. Gains and losses on these transactions are offset by the gain or loss on the underlying transaction. The gains and loses on such contracts are summarized in note 4 to Goss's 1998 financial statements contained in Part II. A 10% appreciation of the U.S. dollar at September 30, 1998 market rates would increase the unrealized value of Goss's forward contracts by $6.5 million. Conversely, a 10% depreciation of the U.S. dollar at September 30, 1998 market rates would decrease the unrealized value of Goss's forward contracts by $6.5 million. In either scenario, the gain or loss on the forward contracts is offset by the gain or loss on the underlying transaction and, therefore, has no affect on future earnings or cash flows. 23 Goss periodically uses derivative financial instruments to hedge its exposure to changes in foreign currency exchange rates for the translated U.S. dollar value of net income of certain foreign subsidiaries. Forward contracts used to hedge net income are marked to market and any resulting gains or losses are recognized immediately in net income. No such instruments are outstanding as of September 30, 1998. Goss also has an interest rate cap agreement to manage its exposure to interest rate changes related to its Revolving Credit Facility. The effect of a 1% change in interest rates on Goss's interest rate sensitive financial instruments is approximately $1.2 million per annum. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Data presented for the period ended September 30, 1997 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 twelve month period to an eleven and one-half month period. In addition, fiscal 1996 information relates to the business of Rockwell Graphic Systems, Inc. as owned and managed by Rockwell International Corporation. As a result of the acquisition, including the effects of purchase accounting and the Company's new debt and equity structure, year-over-year comparisons of fiscal data may not provide a fully accurate view of Goss's current business or future prospects. 24 INDEPENDENT AUDITORS' REPORT To Goss Graphic Systems, Inc.: We have audited the accompanying consolidated balance sheets of Goss Graphic Systems, Inc. (a Delaware Corporation which acquired Rockwell Graphic Systems on October 14, 1996 - See Note 1), as of September 30, 1998 and 1997, and the related consolidated statements of operations and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Goss Graphic Systems, Inc. as of September 30, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois January 12, 1999 25 GOSS GRAPHIC SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In Millions)
ASSETS At September 30, ---------------------------- Current assets: 1998 1997 ------- ------ Cash and cash equivalents $30.1 $49.6 Accounts receivable, net 212.1 174.7 Inventories, net 234.7 163.8 Other current assets 22.5 10.8 ------- ------ Total current assets 499.4 398.9 Property and equipment, net 176.2 167.8 Goodwill, net 312.4 315.3 Other assets 28.1 24.8 ------- ------ Total assets $1,016.1 $906.8 -------- ------ -------- ------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $185.0 $111.6 Revolving credit facilities 151.0 49.6 Current portion of long-term debt 4.7 10.6 Advance payments from customers 126.9 84.9 Other current liabilities 206.2 171.4 ------- ------ Total current liabilities 673.8 428.1 Long-term debt, less current portion 273.7 291.2 Other liabilities 60.0 62.0 ------- ------ Total liabilities 1,007.5 781.3 Minority interest 8.8 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 (156.6) (41.9) Minimum pension obligation (5.3) 0.0 Cumulative translation adjustment (0.5) (3.0) -------- ------ Total shareholders' equity (0.2) 117.3 -------- ------ Total liabilities and shareholders' equity $1,016.1 $906.8 -------- ------ -------- ------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 26 GOSS GRAPHIC SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Millions)
For The Years Ended September 30, ------------------------- 1998 1997 ------- ------- Net sales $764.1 $632.8 Cost of sales 703.4 494.1 Amortization of inventory step-up 0.0 46.7 ------- ------- Gross profit 60.7 92.0 Operating expenses 89.2 70.3 Research and product development 17.8 14.1 Goodwill amortization 9.2 7.8 ------- ------- Operating loss (55.5) (0.2) Other income 1.6 2.7 Write-off of investment in affiliate (6.8) 0.0 Interest expense (46.4) (38.7) ------- ------- Loss before income taxes and extraordinary item (107.1) (36.2) Provision for income taxes 7.6 0.5 ------- ------- Loss before extraordinary item (114.7) (36.7) Extraordinary loss on early extinguishment of debt 0.0 (5.2) ------- ------- Net loss $(114.7) $(41.9) -------- ------- -------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 27 GOSS GRAPHIC SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions)
For The Years Ended September 30, OPERATING ACTIVITIES: ----------------------- 1998 1997 -------- -------- Net loss $(114.7) $(41.9) Depreciation 17.5 23.9 Amortization of inventory step-up 0.0 46.7 Amortization of goodwill 9.2 7.8 Extraordinary loss on early extinguishment of debt 0.0 5.2 Write-off of investment in affiliate 6.8 0.0 Changes in assets and liabilities: Accounts receivable (37.4) (37.9) Inventory (70.9) (4.4) Accounts payable 73.4 35.3 Customer advances 42.0 (16.4) Other current liabilities 34.8 5.7 Other assets (20.2) 18.9 Other liabilities (1.4) (25.3) -------- ------- Net cash (used for) provided by operating activities (60.9) 17.6 -------- ------- INVESTING ACTIVITIES: Capital expenditures (27.0) (11.0) Other (2.2) (3.0) Investment in affiliate (7.5) 0.0 Acquisition of Rockwell Graphic Systems, net of cash acquired of $7.2 0.0 (602.4) -------- ------- Net cash used for investing activities (36.7) (616.4) -------- ------- FINANCING ACTIVITIES: Issuance of senior subordinated notes 0.0 225.0 Sale of customer notes receivable 0.0 137.1 Capital contributions 0.0 162.2 Net borrowings under revolving credit facilities 101.4 47.3 Term loan, original amount borrowed 0.0 75.0 Repayment of term loan (21.9) (53.1) Issuance of mortgage notes 0.0 54.9 Other borrowings 4.3 0.0 Repayment of mortgage notes (5.7) 0.0 -------- ------- Net cash provided by financing activities 78.1 648.4 -------- ------- Net (decrease) increase in cash (19.5) 49.6 Cash at the beginning of the period 49.6 0.0 -------- ------- Cash at the end of the period $30.1 $49.6 -------- ------- -------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 28 GOSS GRAPHIC SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 1. BASIS OF PRESENTATION Goss Graphic Systems, Inc. (the "Company" or "Goss") is a Delaware corporation incorporated April 9, 1996, by Stonington Partners, Inc. ("Stonington") on behalf of Stonington Capital Appreciation 1994 Fund, L.P. (the "Fund") to acquire (the "Acquisition") the operations of the Graphic Systems business unit ("Rockwell Graphic Systems") of Rockwell International Corporation ("Rockwell"). The Company is a manufacturer and supplier of web offset printing press systems for newspaper, commercial, and insert printing. The original $1,000 investment in exchange for common stock and additional paid in capital is the Company's only transaction for the period ended September 30, 1996, and as such, no income or cash flow statements are presented for the period. The Company's world headquarters is located in Westmont, Illinois, and the Company has U.S. manufacturing operations in Cedar Rapids, Iowa, and Reading, Pennsylvania, and international operations in the United Kingdom, France, Germany, and Japan. The Company also has a controlling interest in a joint venture in Shanghai, China. On October 14, 1996, the Company acquired Rockwell Graphic Systems from Rockwell. The Acquisition was effected through the purchase by the Company of all the outstanding stock of Rockwell Graphic Systems, Inc., a Delaware corporation ("Goss Delaware"), Rockwell Systemes Graphiques Nantes, a societe anonyme organized under the laws of the Republic of France ("Goss France"), and through the purchase by the Company and certain wholly-owned foreign subsidiaries of the assets and the assumption of liabilities which constitute the remainder of the Company. Immediately after the Acquisition, the Company merged with and into Goss Delaware. The purchase price for the Acquisition was $601.8 million, which consisted of $525.9 million in cash, subject to certain adjustments, 47,500 shares of preferred stock, $1,000 liquidation preference per share, issued by GGS Holdings, Inc. ("Holdings"), which directly owns all of the capital stock of the Company, and approximately $28.4 million of transaction and acquisition costs. The purchase price was subject to a post closing adjustment based upon the computation of certain working capital amounts. This adjustment totaled $7.8 million and is in addition to the $525.9 million mentioned above and was paid on November 7, 1997. The Acquisition has been accounted for under the purchase method of accounting; accordingly, the results of operations for fiscal year 1997 included in the accompanying consolidated financial statements cover the period from October 15, 1996, to September 30, 1997. Simultaneous with the closing of the Acquisition, Holdings raised $116.5 million of equity financing, comprised of $111.5 million in cash from the sale of common stock of Holdings to the Fund, $1.0 million in cash from the sale of Holdings common stock to an affiliate of a limited partner of the Fund, and $4.0 million in cash from the sale of Holdings common stock to certain members of the Company's management (the "Management 29 GOSS GRAPHIC SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Placement"). Holdings financed $2.0 million of the Management Placement. The balance of the funds needed to consummate the Acquisition and pay related fees and expenses came from: $225.0 million in proceeds from the Company's issuance of 12% Senior Subordinated Notes due 2006 (see Note 10); $137.1 million in proceeds from the sale of a portfolio of notes receivable issued in connection with customer financing provided by Rockwell Graphic Systems to purchasers of its products; and $75.3 million in borrowings under a new credit agreement between Goss Delaware, Bankers Trust Company and certain other lenders (see Note 10). 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Company's consolidated financial statements include the accounts of its domestic and foreign subsidiaries and its majority-owned joint venture. All intercompany transactions are eliminated. REVENUE RECOGNITION The Company recognizes revenue on press system units when title passes to the customer in accordance with the contract terms, which may precede actual delivery to the customer. When a current contract estimate indicates a loss, provision is made for the total estimated loss. The sales value of presses awaiting delivery amounted to $113.4 million and $177.0 million at September 30, 1998 and 1997, respectively. Revenues on installation contracts are recognized using the completed-contract method except for certain installation contracts, generally in amounts over $1.0 million, for which the percentage-of-completion, cost-to-cost method is utilized. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of cash and short-term investments having maturities of three months or less at the time of purchase. INVENTORIES Inventories are stated at the lower of cost or market. Inventory cost is determined on a first-in, first-out (FIFO) method and include material, labor, and manufacturing overhead. 30 Reserves are provided for excess inventory on a location-by-location basis based on an analysis of historical usage and management's estimate of future inventory requirements. Such reserves are based on the carrying cost of the related inventory. Inventories are classified as a current asset and include certain amounts not expected to be realized within one year. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset (generally three to thirteen years for machinery and equipment and up to fifty years for buildings). Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. Presses which are maintained as test development units on a long-term basis are included in property and equipment and depreciated over their estimated useful lives (generally five to twelve years). Significant renewals and betterments are capitalized, and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense. PRODUCT WARRANTY Product warranty costs include all costs associated with repairs through the end of the expressed warranty period. These costs are accrued considering historical warranty cost experience and a periodic assessment of expected warranty costs associated with each sale. Unreimbursed costs to repair equipment after the warranty period are incurred solely at the discretion of management and are expensed as incurred. WORKERS' COMPENSATION AND PRODUCT AND GENERAL LIABILITY COSTS The financial statements include estimated costs, including costs not reimbursable under insurance contracts, of settling workers' compensation and product and general liability claims. These estimates are determined from historical claims incurred experience, using actuarial computations of the estimated ultimate settlement cost of such claims, including claims incurred but not yet reported. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. For the periods ended September 30, 1998 and 1997, these costs totaled $17.8 million and $14.1 million, respectively. 31 GOODWILL Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at October 14, 1996. Goodwill is being amortized over 40 years using the straight line method. Accumulated amortization of goodwill totaled $16.8 million and $7.8 million at September 30, 1998 and 1997, respectively. LONG-LIVED ASSETS The Company continuously evaluates whether events and circumstances have occurred which indicate that the remaining estimated useful lives of its intangibles and other long-lived assets may warrant revision or that the remaining balance of such assets may not be recoverable. The Company uses an estimate of the related undiscounted cash flows or, in the case of goodwill, undiscounted operating earnings, over the remaining life of the asset in measuring whether or not the asset is recoverable. INCOME TAXES Income taxes are accounted for using the liability method, whereby deferred income taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Based on the weight of both negative and positive evidence, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation reserve is established. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency for the European and Pacific Rim subsidiaries is the applicable local currency. The translation from the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate prevailing during the period. The gains and losses resulting from such translations are included in stockholders' equity. 32 FISCAL YEAR CHANGE In June 1998, the Board of Directors approved a change in the Company's fiscal year-end from September 30 to December 31, effective for the calendar year beginning January 1, 1999. A three-month fiscal transition period from October 1, 1998, to December 31, 1998, will precede the start of the new calendar cycle. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information" which will be effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 requires disclosure of certain information about operating segments, products and services, geographic areas and major customers. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits" which is also effective for fiscal year beginning after December 15, 1997. SFAS No. 132 requires additional information on charges in the benefit obligations and fair values of plan assets. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for 2000. SFAS No.133 will require that all derivatives be recorded on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the changes in the fair value of the hedged assets, liabilities or firm commitments. Management believes that the effect of these statements will not have a material effect on Goss's financial reporting. RECLASSIFICATIONS Certain reclassifications have been made to the 1997 financial statements to conform to the classifications used in 1998. 3. THE ACQUISITION The Acquisition has been accounted for under the purchase method of accounting. Accordingly, the purchase price has been allocated to the tangible and intangible assets and liabilities of the Company based on their respective fair values as of the date of the Acquisition. 33 The final allocation of the total purchase price to the assets and liabilities acquired is as follows (in millions): PURCHASE PRICE Purchase price of common stock and assets $573.4 Post-closing additional purchase price 7.8 Commissions, fees and expenses 28.4 ------- Total Purchase Price $609.6 ------- ------- FINAL ALLOCATION OF PURCHASE PRICE Total current assets, net of deferred taxes $360.3 Property and equipment 192.6 Customer notes 137.1 Other long-term assets 28.7 Goodwill 322.9 Liabilities assumed (432.0) -------- Total Purchase Price $609.6 ------- -------
The following unaudited pro forma financial information reflects the Acquisition as if it had occurred at the beginning of each of the periods presented. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred had the Acquisition been consummated as of those dates (in millions):
Pro Forma (unaudited) ----------------------------------------- Year ended Year ended September 30, 1997 September 30, 1996 ------------------ ------------------ Net sales $632.8 $698.2 Net loss (46.4) (95.9)
4. FINANCIAL INSTRUMENTS Goss enters into various financial instruments in the normal course of business. Goss does not hold or issue financial instruments for trading or speculative purposes. Periodically, Goss analyzes its derivative positions to assess the current and projected status of these agreements. 34 FOREIGN EXCHANGE CONTRACTS Goss enters into forward exchange contracts to manage foreign exchange exposure related to transactions, assets and liabilities that are subject to risk from foreign currency rate fluctuations. These include product cost revenues and expenses; associated receivables and payables; intercompany obligations and receivables; and other related cash flows. The table below summarizes, by currency, the contractual amounts of Goss's foreign exchange contracts at September 30, 1998. Foreign currency amounts are translated at exchange rates as of September 30, 1998. The "buy" amounts represent the U.S. dollar equivalent of commitments to purchase foreign currency, and the "sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies.
Currency Buy Sell -------- --- ---- British pound $ 2.9 $5.4 French franc 40.1 0.0 Japanese yen 12.8 3.5 ---- --- Total $55.8 $8.9 ----- ---- ----- ----
INTEREST RATE CAP Goss also had an interest rate cap agreement at 9% per annum, which expired October 15, 1998, to manage its exposure to interest rate changes related to its Revolving Credit Facility. CREDIT AND RISK Goss enters into financial instruments with banks with which Goss has continuing business relationships and regularly monitors the credit ratings of its counter parties. Goss sells its products to a world wide customer base and extends credit to its customers based upon ongoing credit evaluations and security is obtained if required. Concentrations of credit risk with respect to trade receivables are limited due to Goss's large customer base; however, periodic concentrations can occur due to the cyclical nature of Goss's business. FAIR VALUE Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," and No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," require disclosure of the fair value of financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for such financial instruments as defined by the Statements. 35 Cash and short-term investments: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Senior subordinated notes: The estimated fair value of the senior subordinated notes is based on the market price at which it was listed at year-end. This was 91% of par on September 30, 1998 and 112% of par on September 30, 1997. Term loan: The estimated fair value of the term loan at September 30, 1997, which was based on LIBOR, is equal to its carrying value. Mortgage loans: The estimated fair value of the mortgage loans on the Sayama, Japan, and Westmont, Illinois, properties is based on prevailing interest rates and credit spreads. Foreign currency contracts: The Company enters into foreign currency forward exchange contracts to protect against adverse currency rate fluctuations. The carrying amount reported in the balance sheet for derivatives approximates fair market value. Letters of credit: The fair value of letters of credit is estimated to approximate their contractual amounts. The carrying value and estimated fair value of the Company's financial instruments are as follows (in millions):
At September 30, -------------------------------------------- 1998 1997 --------------------------------- ---------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and cash equivalents $30.1 $30.1 $49.6 $49.6 Senior subordinated notes 225.0 204.8 225.0 252.0 Term loan 0.0 0.0 21.9 21.9 Mortgage - Westmont, IL 29.4 30.7 30.0 30.0 Mortgage - Sayama, Japan 19.8 20.8 24.9 24.9 Foreign currency contracts 0.2 0.2 0.3 0.3 Other debt obligations 4.2 4.2 0.0 0.0 Off balance sheet financial instruments: Letters of credit 23.2 23.2 66.7 66.7
36 5. REORGANIZATION COSTS In connection with the Acquisition, the Company recorded reserves of $26.5 million related to the costs to reorganize the Company's U.S. and international operations. The costs are primarily for severance payments for approximately 400 terminated employees and for realignment of manufacturing operations. Expenditures for reorganization activities were approximately $20.8 during the year ended September 30, 1997, with the balance substantially expended in the year ended September 30, 1998. 6. ACCOUNTS RECEIVABLE Accounts receivable are summarized as follows (in millions):
At September 30, ------------------------------- 1998 1997 ----- ---- Trade accounts receivable $207.3 $154.5 Unbilled receivables 15.0 26.5 Notes receivable 11.4 9.6 Less allowance for doubtful accounts (21.6) (15.9) ------ ------ Accounts receivable, net $212.1 $174.7 ------ ------ ------ ------
The activity of the allowance for doubtful accounts is summarized as follows (in millions):
At September 30, -------------------------------- 1998 1997 ------ ----- Beginning of year $(15.9) $0.0 Acquisition 0.0 (14.9) Consolidation of Joint Venture 0.0 (1.5) Additions, net of recoveries (9.0) 0.0 Charges 3.3 0.5 --- --- End of year $(21.6) $(15.9) ------- ------- ------- -------
37 As of September 30, 1998 accounts receivable included $32.5 million of retainage held by customers pending final acceptance of equipment. This balance was $40.7 million at September 30, 1997. Unbilled receivables consist principally of revenues recognized on press system units where title has passed to the customer in accordance with the terms of the contract, which is prior to the occurrence of the contractual billing terms. Unbilled receivables are invoiced in accordance with the terms of contract provisions and do not include any amounts subject to uncertainty as to their realization. Substantially all amounts are expected to be billed and collected within one year. 7. INVENTORIES Net inventories are summarized as follows (in millions):
At September 30, ------------------------ 1998 1997 ---- ---- Materials 104.8 $61.7 Work in process 58.6 42.2 Finished goods 42.5 33.0 Parts 28.8 26.9 ---- ---- Total inventories, net 234.7 $163.8 ----- ------ ----- ------
The inventory acquired from Rockwell Graphic Systems as part of the Acquisition was revalued to its fair market value as of the date of the Acquisition. The excess of the fair market value of that inventory over its carrying value to Rockwell Graphic Systems as of the date of Acquisition was $46.7 million. The $46.7 million step-up was charged to expense by the Company in fiscal year 1997, as the revenue was recorded on the underlying inventory. 38 8. PROPERTY AND EQUIPMENT Property and equipment are summarized below (in millions):
At September 30, ------------------------- 1998 1997 ---- ---- Land and land improvements $29.9 $30.7 Buildings and building improvements 72.4 64.6 Machinery, equipment and tooling 108.0 87.6 Construction in progress 12.2 8.8 ---- --- Total 222.5 191.7 Less accumulated depreciation (46.3) (23.9) ------ ------ Property and equipment, net $176.2 $167.8 ------ ------ ------ ------
9. OTHER CURRENT LIABILITIES Other current liabilities are summarized below (in millions):
At September 30, -------------------------- 1998 1997 ---- ---- Accrued post shipment costs $42.9 $38.8 Accrued contract costs 74.1 61.3 Loss contract reserves 25.8 6.8 Salaries, wages and employee benefits 11.3 14.0 Interest 15.8 13.5 Purchase price adjustment 0.0 7.8 Agents commissions 8.3 6.5 Taxes 4.2 1.3 Other 23.8 21.4 ---- ---- Total other current liabilities $206.2 $171.4 ------ ------ ------ ------
39 10. DEBT The debt obligations of the Company consist of the following (in millions):
At September 30, ----------------- 1998 1997 ---- ---- Revolving credit facility (interest of 8.7% and 10.0% at year end) $151.0 $49.6 Term loan, due 2001, interest rate of LIBOR plus 2.5% 0.0 21.9 8.66% mortgage loan on Westmont, IL office building due 2007 29.4 30.0 3.25% Yen-based mortgage loan on Sayama, Japan, plant due 2007 19.8 24.9 Senior subordinated 12% notes due 2006 225.0 225.0 Other debt obligations with interest at 7.9% to 8.7% 4.2 0.0 --- --- Total debt 429.4 351.4 Less current portion 155.7 60.2 ----- ---- Long-term debt $273.7 $291.2 ------ ------ ------ ------
Maturities of long-term debt for the next five years are as follows: 1999, $4.7 million; 2000, $4.6 million; 2001, $4.1 million; 2002, $3.5 million; 2003, $3.5 million and $258.0 million thereafter. In connection with the Acquisition, the Company entered into borrowing agreements with Bankers Trust Company and certain other lenders providing for (i) five-year term loan facilities aggregating $75.0 million (the "Term Loan Facility"), and (ii) five-year revolving credit facilities aggregating $150.0 million inclusive of letters of credit to be issued thereunder (the "Revolving Credit Facility" and together with the Term Loan Facility, the "Bank Facilities"). The funds from the Bank Facilities were lent directly to the Company, its wholly owned English company ("Goss U.K."), and its wholly owned Japanese corporation ("Goss Japan"). The Term Loan Facility originally consisted of a principal amount of $75.0 million made available in equal amounts to the Company, Goss U.K., and Goss Japan. The Term Loan Facility bears interest at the Company's option, at the Bankers Trust's base rate plus 1.0% - 1.5% (depending on the Company's leverage ratio at such time) or at a reserve adjusted Euro-Dollar rate plus 2.0% - 2.5% (depending on the Company's leverage ratio). The interest rate at September 30, 1997, on the Term Loan Facility was 8.2%. During the fourth quarter of fiscal 1997, the term loans in the U.S. and Japan were reduced by $53.1 million with the proceeds from mortgage loans made with respect to the Company's facilities in Westmont, Illinois, and Sayama, Japan. The unamortized debt cost of $5.2 million related to this early retirement of debt was written off as an 40 extraordinary charge in fiscal 1997. The remaining balance of the term loan was paid off in fiscal 1998. The Revolving Credit Facility will mature on September 30, 2001, and originally consisted of a revolving credit facility in an amount of up to $150.0 million. On January 29, 1998, Goss amended and restated its Revolving Credit Facility to add Goss France as a Borrower, to permit borrowings up to $200.0 million in multiple currencies, under which Revolving Loans may be made and under which Letters of Credit may be issued up to an aggregate sublimit of $175.0 million, and to provide for the working capital requirements and general corporate purposes, including making repurchases of the Company's outstanding Senior Subordinated Notes. The Revolving Credit Facility bears interest at the Company's option, at Bankers Trust's base rate plus 1.0% - 1.75 % (depending on the Company's leverage ratio at such time) or the reserve adjusted Euro-Dollar rate plus 2.0% - 2.75% (depending on the Company's leverage ratio at such time). The Company's average interest rate was 8.8% and 10.0% for the periods ended September 30, 1998 and 1997, respectively, on borrowing under the Revolving Credit Facility. The maximum amount borrowed under the Revolving Credit Facility, excluding letters of credit, was $166.8 million and $75.5 million and the average amount borrowed was $122.3 million and $27.5 million during the periods ended September 30, 1998 and 1997, respectively. As of September 30, 1998, borrowings and letters of credit under this facility, excluding $2.5 million of revolving credit relating to Goss's joint venture in China, totaled $171.7 million, an increase of $55.4 million from the end of the prior fiscal year. The Bank Facilities are guaranteed by Holdings and by each of the Company's domestic subsidiaries and, in addition, the Company guarantees the Bank Facilities provided to Goss U.K., Goss France, and Goss Japan. Among other restrictions, the Bank Facilities contain certain financial covenants, including, but not limited to, a minimum fixed charge coverage test, a minimum Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) test, a minimum net worth test, a maximum leverage test, and a minimum asset coverage test. In addition, the Bank Facilities contain other customary affirmative and negative covenants relating to (among other things) limitations on dividends, other indebtedness, liens, investments, guarantees, restricted junior payments, mergers and acquisitions, sales of assets, capital expenditures, leases, transactions with affiliates, and conduct of business, with customary exceptions and baskets. The Bank Facilities contain customary events of default, including failure to make payments when due, defaults under other agreements or instruments of indebtedness, noncompliance with covenants, breaches of representations and warranties, bankruptcy, judgments in excess of specified amounts, invalidity of guarantees, impairment of security interests in collateral, and certain changes of control. The covenants contained in the Revolving Credit Facility must be satisfied at the end of each quarter and generally cover the Company's performance during the preceding four fiscal quarters. The covenants become more stringent over time. Covenant noncompliance entitles the 41 lenders to declare a default under the Revolving Credit Facility and accelerate repayment of outstanding amounts. As a consequence of its earnings levels and cash flows, the Company was not in compliance with these financial covenants as of the quarter ended March 31, 1998. The Company'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, the Company entered into the First Amendment which contained revised covenants for the quarters ended September 30, 1998, and thereafter. These covenants were predicated upon the Company's business plan at that time, and subsequently it became apparent that the Company would not be able to fulfill those covenants. As a result, the Company and its lenders amended those covenants in the Second Amendment and, as so amended, the Company's management believes that it will be able to comply with the covenant structure contained in its Revolving Credit Facility. As part of the Second Amendment, the Revolving Credit Facility also was amended to include various limitations on the Company's operation and borrowing, including a limitation on the amount that can be borrowed by the Company 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 Partners, Inc., or one of its affiliates, will be required to make a capital contribution to the Company, which will take the form of the purchase by Stonington and the contribution to the Company of the accounts receivable previously sold to BT Commercial Corporation (see below). Stonington has agreed to make this contribution. Management believes that taken together, the First Amendment and the Second Amendment provide the Company with financial covenants that should be easier to achieve, but in exchange therefor provide the Company less flexibility in other areas. The Company has notes (the "Notes") issued under an Indenture, dated October 15, 1996 (the "Indenture"), between the Company and The Bank of New York, as Trustee. The Notes are unsecured senior subordinated obligations of the Company, limited to $225.0 million aggregate principal amount, and will mature on October 15, 2006. The Notes bear interest at 12% per annum, payable semiannually. Subject to certain conditions and dates, the Notes are, in part, redeemable in whole or in part at the option of the Company. The payment of principal and interest on the Notes is subordinated to the Senior Debt under the Bank Facilities (as defined in the Indenture). 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. 42 11. INCOME TAXES The components of the provision (credit) for income taxes are as follows (in millions):
September 30, ----------------------- 1998 1997 ---- ---- Current: United States $0.0 $0.0 Non-United States 3.3 2.2 State and local 0.0 0.0 --- --- Total current 3.3 2.2 --- --- Deferred: United States 0.0 0.0 Non-United States 4.3 (1.7) State and local 0.0 0.0 --- --- Total deferred 4.3 (1.7) --- ----- Provision for income taxes $7.6 $0.5 ---- ---- ---- ----
A reconciliation of the statutory U.S. Federal income tax rate to the effective income tax rate is as follows:
September 30, ------------------------- 1998 1997 ---- ---- Federal statutory rate 35.0% 35.0% Effect of: Non deductible expenses (2.5)% (1.0)% Goodwill amortization (2.4)% (2.7)% Net loss for which no benefit has been provided (38.4)% (32.2)% Other 1.2% (0.6)% ---- ------ Effective Tax Rate (7.1)% (1.5)% ------ ------ ------ ------
43 The domestic and foreign components of the loss before income taxes and extraordinary items is as follows:
September 30, ---------------------- 1998 1997 ---- ---- Domestic $(119.8) $(34.5) Foreign 12.7 (1.7) ---- ------- Total $(107.1) $(36.2) -------- ------- -------- -------
The company expects to have net operating loss carryforwards of approximately $159.8 million in the U.S., $19.1 million in the United Kingdom and $0.5 in Japan as of September 30, 1998. $64.2 million of the U.S. loss will expire after December 2011 and $95.6 million will expire after December 2012. The United Kingdom loss can be carried forward indefinitely. Based upon the difficulty in predicting the amount of future taxable income by jurisdiction in the U.S. and the United Kingdom, management has decided to establish a valuation allowance to offset fully any deferred tax asset otherwise attributable to the existence of these losses. Current and noncurrent deferred income tax assets arise principally from the following (in millions):
September 30, --------------------------- 1998 1997 ---- ---- Current: Inventory reserves $12.7 $4.2 Product warranty reserves 7.6 1.1 Contract reserves 7.8 3.6 Accrued compensation 2.1 3.1 Reorganization reserves 0.4 5.1 Other 3.4 2.7 --- --- --- --- Total current asset 34.0 19.8 ---- ---- ---- ---- Noncurrent: Insurance reserves 0.0 3.1 Property and equipment (5.4) (2.1) Goodwill (6.1) (2.5) Tax loss carryforwards 70.4 28.1 Other 4.9 1.9 --- --- Total noncurrent asset 63.8 28.5 ---- ---- ---- ---- Valuation allowance (U.S. and U.K.) (95.6) (42.6) ------ ------ ------ ------ Net deferred tax asset $2.2 $5.7 ---- ---- ---- ----
44 12. PENSION PLANS The Company has pension plans covering certain of its employees in the United States, the United Kingdom, Germany, and Japan. Amounts included in the accompanying balance sheet for these plans are as follows (in millions):
At September 30, 1998 At September 30, 1997 --------------------------------- ------------------------------- Accumulated Assets Accumulated Assets Benefits Exceeding Benefits Exceeding Exceeding Accumulated Exceeding Accumulated Assets Benefits Assets Benefits ------ -------- ------ -------- Accumulated benefit obligation, principally vested $36.0 $33.7 $7.0 $52.3 Effect of salary increases 2.9 9.1 2.4 7.9 --- --- --- --- Projected benefit obligation 38.9 42.8 9.4 60.2 Fair value of plan assets 28.7 39.8 4.0 68.0 ---- ---- --- ---- Plan assets greater than (less than) projected benefit obligation (10.2) (3.0) (5.4) 7.8 Unrecognized prior service cost 0.1 0.5 0.0 0.0 Unrecognized (gains)/losses 6.9 8.2 (0.4) (2.5) Additional minimum liability (5.3) 0.0 0.0 0.0 ----- --- --- --- Prepaid (accrued) pension costs $(8.5) $5.7 $(5.8) $5.3 ------ ---- ------ ---- ------ ---- ------ ----
Net periodic pension cost for the Company's plans included in the accompanying statements of operations consist of the following (in millions):
1998 1997 ---- ---- Service cost-benefits earned during the year $1.8 $1.7 Interest accrued on accumulated benefit obligation 4.9 5.1 Actual return on plan assets 5.1 (5.5) Net amortization and deferral (11.6) (0.5) ------ ----- Net periodic pension cost $0.2 $0.8 ---- ---- ---- ----
The above pension amounts were determined using a June 30 measurement date and the following assumptions:
1998 1997 ---------------- ---------------- Discount rate 2.5% - 6.5% 4.0% - 8.0% Annual salary increase 3.0% - 3.5% 3.0% - 4.5% Asset return 3.0% - 8.5% 3.5% - 9.0%
The Company sponsors defined contribution plans covering its U.S. salaried employees and certain of its hourly employees. Employer contributions to these plans which were charged to expense totaled $3.4 million in 1998 and $2.1 million in 1997. 45 13. RETIREMENT MEDICAL PLANS AND POST EMPLOYMENT BENEFITS The Company provides retiree medical and life insurance benefits for certain of its hourly U.S. employees. Under Statement of Financial Accounting Standard No. 106, retiree benefits are viewed as a type of deferred compensation and are treated as if they are earned over the working life of the employees, and the cost should be fully charged to operations by the earliest date the employee is eligible to retire. The Company funds the benefits of these plans on a cash basis as benefits are incurred. There are no assets that have been segregated and restricted to provide for post-retirement benefits. The components of retirement medical expense are as follows (in millions):
1998 1997 ---- ---- Service cost $0.7 $0.6 Interest cost 1.1 1.0 --- --- Retirement medical expense $1.8 $1.6 ---- ---- ---- ----
The retirement medical obligation was comprised of the following (in millions):
At September 30, --------------------- 1998 1997 ---- ---- Retirees $0.3 $0.3 Active employees: Eligible to retire 3.8 3.0 Not eligible 15.4 11.2 ---- ---- Retirement medical obligations 19.5 14.5 Unrecognized actuarial loss (3.2) (0.0) ----- ----- Accrued retirement medical liability $16.3 $14.5 ----- ----- ----- -----
The above retirement medical amounts were computed using a June 30 measurement date and the following assumptions:
1998 1997 ---- ---- Discount rate 6.75% 7.75% Health care cost trend rate 8.00% 8.00%
The health care cost trend rate assumption has a significant effect on the obligation amounts reported. If the assumed health care cost trend rate was increased by one percentage point, this would increase the retirement medical obligation at September 30, 1998 by $4.4 million and the retirement medical expense for 1998 by $0.4 million. 46 14. SHAREHOLDERS' EQUITY A summary of changes in shareholders' equity is as follows (in millions):
For the period For the period 10/01/97 to 10/15/96 to 9/30/98 9/30/97 ------- ------- Beginning Balance $117.3 $0.0 Net loss (114.7) (41.9) Minimum pension liability adjustment (5.3) 0.0 Currency translation 2.5 (3.0) Capital contributed 0.0 162.2 --- ----- Ending Balance $(0.2) $117.3 ------ ------ ------ ------
15. LEASES The Company leases certain operating assets with various renewal options. Consolidated rental expense was $2.7 million and $3.2 million for the periods ended September 30, 1998 and 1997, respectively. At September 30, 1998, the future minimum lease payments under operating and capital leases were as follows (in millions):
OPERATING CAPITAL LEASES LEASES ------ ------ Oct-Dec, 1998 $0.4 $0.2 1999 1.5 0.6 2000 1.3 0.6 2001 0.7 0.6 2002 0.2 0.2 Thereafter 0.1 0.0 ---- ---- Total $4.2 2.2 ---- ---- Less: amounts representing interest and executory costs 0.3 ---- Net present values $1.9 ---- ----
16. RELATED PARTY TRANSACTIONS The Company purchases drive systems, press controls, and related products from Allen-Bradley, a subsidiary of Rockwell, the holder of the preferred stock issued by Holdings as part of the Acquisition. Such purchases totaled $18.6 million in 1998 and $18.0 million in 1997. The Company also purchases certain services from Rockwell, including data processing, telecommunications, and research pursuant to a services agreement with Rockwell which extended 47 through 1998. Such purchases totaled $3.7 million in 1998 and $4.5 million in 1997. The Company paid a one-time transaction and financing advisory fee in 1997 of $6.0 million to Stonington related to the Acquisition which has been capitalized as part of the transaction cost. 17. CONTINGENCIES AND COMMITMENTS 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 six 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. 48 COMMITMENTS The Company in certain instances provides letters of credit to guarantee the performance of presses under certain long-term contracts. Such letters of credit outstanding were $9.9 million as of September 30, 1998, and $15.4 million as of September 30, 1997. The Company intends to perform fully the underlying contracts and does not expect to incur any material liability beyond customary amounts for warranty and similar claims. 18. GEOGRAPHIC AND EXPORT SALES INFORMATION The following tables present information about the Company by geographic area (in millions):
Fiscal Year 1998: Asia - ---------------- U.S. Europe Pacific Eliminations Total ---- ------ ------- ------------ ----- Net sales to customers $395.8 $267.8 $100.5 $--- $764.1 Transfers between geographic locations 16.4 55.5 0.1 (72.0) --- Operating profit (loss) (82.5) 22.0 5.0 --- (55.5) Net identifiable assets 596.8 285.3 134.0 --- 1,016.1 Fiscal Year 1997: Asia - ---------------- U.S. Europe Pacific Eliminations Total ---- ------ ------- ------------ ----- Net sales to customers $352.8 $192.0 $88.0 $ --- $632.8 Transfers between geographic locations 10.9 29.7 --- (40.6) --- Operating profit (loss) (11.2) 7.2 3.8 --- (0.2) Net identifiable assets 508.1 271.2 127.5 --- 906.8
Transfers between geographic areas are recorded at amounts generally in excess of cost. The resultant income is assigned to the geographic area of manufacture. In computing operating profit, interest income and expense, other income and expense, and income taxes have not been added or deducted. Export sales from the U.S. were $114.4 million or 15% of the Company's net sales for the period ended September 30, 1998. They were $142.6 million or 23% of the Company's net sales for the period ended September 30, 1997. These sales were principally to customers in South America. 49 19. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes for the periods ended September 30, 1998 and 1997, are as follows (in millions):
1998 1997 ------- ------- Interest paid $40.5 $23.2 Income taxes paid $2.7 $4.6
20. STOCK OPTIONS PLAN Holdings, the Company's parent company, has established the Management Stock Incentive Plan (the "Plan") for various members of the Company's management. As permitted by Statement of Financial Accounting Standard No. 123, the Company accounts for this Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost under this Plan been determined, the Company's net loss would have been increased to the following pro forma amounts (in millions):
September 30, ------------- 1998 1997 ---- ---- As Reported $114.7 $41.9 Pro Forma $115.6 $42.9
Holdings may grant options for up to 71,500 shares under the Plan. The number of options allowed under the Plan is expected to be increased by the Board of Directors subsequent to September 30, 1998. Certain options granted during 1998 were issued in anticipation of this increase in available grants. Under the Plan stock options expire 10 years from the date of grant. The incentive options vest ratably over a five year period. The vesting of performance options are dependent on the Company's future results of operations through the fiscal year end 2001 but in any event will vest by October 15, 2006. 50 Information with respect to options granted under the Company's stock option plan is as follow:
September 30, 1998 September 30, 1997 ------------------ ------------------ Shares Wtd. Avg. Shares Wtd. Avg. (000) Ex Price (000) Ex Price ----- -------- ----- -------- Outstanding at beginning of year 68.4 n/a 0.0 n/a Granted 9.3 $100.00 69.2 $100.00 Exercised 0.0 n/a 0.0 n/a Forfeited (5.0) $100.00 (0.8) $100.00 Expired/canceled 0.0 n/a 0.0 n/a ----- ----- Outstanding at end of year 72.7 $100.00 68.4 $100.00 ----- ----- ----- ----- Exercisable at end of year 0 0 Weighted average fair value $42.92 $48.09 of options granted
All of the 72,700 options outstanding at September 30, 1998 have exercise and weighted average exercise prices of $100.00 and a weighted average remaining contractual life of 8.21 years. None of these options are exercisable. The minimum value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest of 5.61%; expected life of 10 years; and no expected dividend yield or volatility. 21. INVESTMENT IN AFFILIATE In November 1997, the Company made a $5.0 million, or 15%, equity investment in DALiM Gmbh, a pre-press software specialist. The Company made additional investments of $2.5 million in fiscal year 1998, increasing its equity participation to more than 20%. In 1998, the Company also recorded equity losses of $0.7 million, including related goodwill amortization. On November 18, 1998, DALiM filed for bankruptcy due to insolvency. As a result, the Company determined that its net investment was impaired and the balance of $6.8 million was written off in fiscal 1998. 51 22. SUBSEQUENT EVENTS The Company's operating loss for fiscal year 1998 has caused it to utilize a substantial portion of its available liquidity. As a result, the Company has taken certain actions subsequent to September 30, 1998 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 (see Note 10 for a summary of the Amendment), and a commitment by an affiliate of Stonington to make a capital contribution of at least $35 million. The capital contribution is expected to be made in the form of the receivables previously guaranteed by Stonington. While the Company's management believes that these actions will result in improved profitability and the ability to obtain necessary liquidity, there can be no assurances that they will be successful. On November 19, 1998, the Company announced a five percent reduction of its worldwide workforce. This reduction, which affected both salaried and hourly jobs, refocused efforts on improving process flow associated with new product manufacturing and customer service. The major emphasis involved realignment of the North American operation, which serves the Company's largest installed customer base. The severance cost relating to this workforce reduction is approximately $6.7 million and will be charged to expense during the quarter ending December 31, 1998. 52 INDEPENDENT AUDITORS' REPORT To Rockwell Graphic Systems: We have audited the accompanying combined balance sheet of Rockwell Graphic Systems, a business unit of Rockwell International Corporation (Rockwell Graphic Systems - see Note 1), as of September 30, 1996, and related combined statements of operations and cash flows for the year then ended and the combined statements of operations and cash flows for the fourteen day period ended October 14, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above, present fairly, in all material respects, the financial position of Rockwell Graphic Systems as of September 30, 1996, and the results of its operations and cash flows for the year then ended and the fourteen day period ended October 14, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1, the accompanying financial statements referred to above have been prepared from the separate records maintained by Rockwell Graphic Systems and are not necessarily indicative of the conditions that would have existed or the results of operations if Rockwell Graphic Systems had been operated as an unaffiliated company. Portions of certain expenses represent allocations of corporate expenses applicable to Rockwell International Corporation as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois November 25, 1997 53 ROCKWELL GRAPHIC SYSTEMS COMBINED BALANCE SHEET AT SEPTEMBER 30, 1996 (In Millions)
ASSETS Current assets: Cash and cash equivalents $2.3 Accounts receivable, net 112.6 Customer notes receivable, current portion 67.4 Inventories 148.8 Deferred income taxes 36.7 Other current assets 4.8 ----- Total current assets 372.6 Property and equipment, net 140.4 Customer notes receivable, net 154.9 Goodwill, net 135.2 Other assets 12.9 ----- Total assets $816.0 ----- ----- LIABILITIES AND ROCKWELL'S NET INVESTMENT Current liabilities: Accounts payable 53.7 Notes payable 39.2 Advance payments from customers 88.1 Accrued compensation 12.8 Due to related parties 11.1 Income tax payable 7.7 Other current liabilities 132.3 ----- Total current liabilities 344.9 Other liabilities 11.3 Deferred income taxes 2.7 ----- Total liabilities 358.9 Rockwell's net investment 457.1 ----- Total liabilities and Rockwell's net investment $816.0 ----- -----
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 54
ROCKWELL GRAPHIC SYSTEMS COMBINED STATEMENT OF OPERATIONS (In Millions) For The For The Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Net sales $698.2 $4.6 Cost of sales 593.6 10.2 ----- ---- Gross profit 104.6 (5.6) Operating expenses: Engineering 30.8 0.9 Sales and marketing 35.9 1.1 General and administrative 51.5 1.9 Rockwell common expense allocation 8.5 0.1 Patent litigation 1.0 0.0 Restructuring charge 3.9 0.0 --- --- Total operating expenses 131.6 4.0 ----- --- Operating (loss) profit (27.0) (9.6) Interest income 17.1 0.7 Interest expense: Related parties (3.8) (0.2) Other (2.2) 0.0 Other income (expense), net (3.5) 0.0 ----- --- Income (loss) before income taxes (19.4) (9.1) Provision (credit) for income taxes (3.7) (3.4) ----- ----- Net (loss) income $(15.7) $(5.7) ------- ------ ------- ------
The accompanying Notes to Combined financial Statements are an integral part of these statements. 55
ROCKWELL GRAPHIC SYSTEMS COMBINED STATEMENT OF CASH FLOWS (in Millions) For The For The Fourteen Year Ended Days Ended September 30, October 14, 1996 1996 ------------- ------------ OPERATING ACTIVITIES: Net (loss) income $(15.7) $(5.7) Depreciation 22.4 0.6 Amortization of intangible assets 4.8 0.2 Intercompany purchases from Allen Bradley 27.5 0.0 Allocation of common expenses from Rockwell 8.5 0.1 Provision for doubtful accounts receivable 1.3 0.0 Provision for doubtful customer notes receivable 2.4 0.0 Deferred income taxes (5.5) (1.2) Changes in assets and liabilities: Account receivable, net 11.4 11.1 Inventories 72.2 (7.7) Customer notes receivable 9.4 16.3 Accounts payable (25.3) 3.1 Advance payments from customers (66.3) 9.1 Due to related parties 0.3 (3.3) Accrued compensation (3.3) (0.4) Other assets and liabilities 27.4 (5.2) ---- ----- Net cash from operating activities 71.5 17.0 ---- ---- INVESTING ACTIVITIES: Property and equipment additions (5.9) 0.0 Other (8.8) (0.6) ----- ----- Net cash from investing activities (14.7) (0.6) ------ ----- FINANCING ACTIVITIES: Repayment of foreign long-term debt (2.6) (25.9) Borrowings 39.2 0.0 Net cash transferred from (to) Rockwell (97.8) 11.6 ------ ---- Net cash from financing activities (61.2) (14.3) ------ ----- Net (decrease) increase in cash (4.4) 2.1 Cash at the beginning of the period 6.7 2.3 Cash at the end of the period $2.3 $4.4 ---- ---- ---- ----
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 56 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND FOR THE FOURTEEN DAYS ENDED OCTOBER 14, 1996 1. BASIS OF PRESENTATION The accompanying combined financial statements (the "Statements") present the financial position, results of operations and cash flows of Rockwell Graphic Systems ("RGS"), a business unit of Rockwell International Corporation. The Statements have been prepared in accordance with generally accepted accounting principles utilizing the accounting practices and procedures of RGS and have been derived from the accounting records of Rockwell International Corporation and its subsidiaries ("Rockwell"). The Statements are not necessarily indicative of the financial position, results of operations or cash flow had RGS operated as a stand-alone company. RGS is a leading manufacturer and supplier of web offset printing press systems for newspaper, commercial and insert printing. RGS includes the world headquarters located in Westmont, Illinois, as well as U.S. manufacturing operations in Cedar Rapids, Iowa and Reading, Pennsylvania. Substantially all U.S. operations are included within Rockwell Graphic Systems, Inc., a wholly-owned subsidiary of Rockwell, except for the Reading facility which is directly owned by Rockwell. RGS also includes international operations of indirect wholly-owned subsidiaries of Rockwell in the United Kingdom, France and Germany and operations in Japan performed by a wholly-owned subsidiary of Rockwell Graphic Systems, Inc. RGS also has an investment in a joint venture in China. Rockwell's cash resources in the U.S., the United Kingdom and Germany are managed under a centralized system wherein receipts are deposited to Rockwell corporate accounts and disbursements are centrally funded. Accordingly, the Statements do not include cash, marketable securities or borrowings, or related interest income, expense, receivables or payables arising from these cash management activities in the U.S., the United Kingdom and Germany. The majority of customer notes receivable relating to RGS are held and administered by Rockwell International Credit Corporation. Rockwell subsidiaries in the United Kingdom, France, Australia and Canada also hold notes receivable from RGS customers. These notes and related interest income are included in the Statements. RGS benefits from certain direct services which are provided by Rockwell, including centralized billing for benefit claim payments for active U.S. employees, data processing, telecommunications, research and certain insurance. These direct expenses are included in the Statements. In addition, Rockwell also provides certain common services, such as cash management and other treasury services, legal, patent, tax, insurance administration, corporate accounting, audit, communications, benefit administration services and general management. 57 These common expenses are allocated by Rockwell using the proportion of divisional sales to total corporate sales and such allocations are included in the Statements. Management believes the manner in which common expenses have been allocated for the services provided is reasonable. It is not practical for management to estimate the level of expense that might have been incurred for the services provided had RGS operated as a separate stand-alone entity, however, it is possible that services utilized and the costs of such services may differ from those that would result from transactions among unrelated parties. RGS' investment in and operating results of Hall Processing Systems and the assets at the Peterborough, England site have been excluded from the Statements because they do not represent ongoing operations of the business. Hall Processing Systems is a joint venture which is 50% owned by RGS, and is being liquidated by Rockwell. The Peterborough, England site is a former RGS facility which is being held for sale by Rockwell and at which there are no ongoing operations. Intercompany accounts have been excluded from the assets and liabilities of RGS and included in Rockwell's net investment except for the payables by RGS to Allen-Bradley Company, Inc. ("Allen-Bradley"), a subsidiary of Rockwell, resulting from inventory purchases by RGS during the 30 days preceding the date of the Statements. There are no significant operating activities with other Rockwell subsidiaries. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION RGS recognizes revenue on a percentage-of-completion basis, utilizing the units-of-delivery method. Units are considered delivered when title passes to the customer in accordance with the contract terms, which may precede actual delivery to the customer. When a current contract estimate indicates a loss, provision is made for the total estimated loss. At September 30, 1996, RGS had recorded cumulative revenues of $128.9 million on presses awaiting delivery to customers for which title had transferred. Revenues recognized for the year ended September 30, 1996 for presses awaiting delivery amounted to $90.7 million There were no revenues recognized for the fourteen days ended October 14, 1996 for presses awaiting delivery. Revenues on installation contracts is recognized using the completed-contract method except for certain installation contracts, generally in amounts over $1.0 million, for which the percentage-of-completion, cost-to-cost method is utilized. 58 CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of cash and short-term investments having maturities of three months or less at the time of purchase. The carrying amount of cash and cash equivalents approximates fair market value. INVENTORIES Inventories are stated at the lower of cost or market. Inventory cost is generally determined on a last-in, first-out (LIFO) method for U.S. locations and on a first-in, first-out ("FIFO") method for non-U.S. locations. Reserves are provided for excess inventory on a location-by-location basis based on an analysis of historical usage and management's estimate of future inventory requirements. Such reserves are based on the carrying cost (LIFO or FIFO) of the related inventory. Inventories are classified as a current asset and include certain amounts not expected to be realized within one year. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset (generally three to thirteen years for machinery and equipment and up to fifty years for buildings). Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. Where applicable, interest has been capitalized and included in property and equipment. Presses which are maintained as test development units on a long-term basis are included in property and equipment and depreciated over their estimated useful life (generally five to twelve years). Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense. SOFTWARE DEVELOPMENT RGS expenses all costs associated with the programming and development of new operating systems for its presses. Costs associated with specific sales contracts generally are capitalized in inventory and charged to cost of sales as revenues are recognized. 59 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) PRODUCT WARRANTY Product warranty costs include all costs associated with repairs through the end of the expressed warranty period. These costs are accrued considering historical warranty cost experience and a periodic assessment of expected warranty costs associated with each sale. Unreimbursed costs to repair equipment after the warranty period are incurred solely at the discretion of management and are expensed as incurred. WORKERS, COMPENSATION AND PRODUCT AND GENERAL LIABILITY COSTS The Statements include RGS' estimated costs, including costs not reimbursable under insurance contracts, of settling workers' compensation and product and general liability claims. These estimates are determined from RGS' historical claims incurred experience, using actuarial computations of the estimated ultimate settlement cost of such claims, including claims incurred but not yet reported. GOODWILL Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at dates of acquisition. Goodwill is being amortized generally over 40 years, except for goodwill of $28.6 million arising from Rockwell's acquisition of Miehle Goss Dexter which occurred prior to 1971 and is not being amortized. Accumulated amortization of goodwill totaled $26.0 million at September 30, 1996. Management has reviewed the realizability of goodwill based on an overall evaluation of remaining useful lives and projected cash flows and profitability of RGS and has determined that there is no impairment at October 14, 1996. INCOME TAXES Income taxes are accounted for using the liability method, whereby deferred income taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Based on the weight of both negative and positive evidence, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation reserve is established. 60 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) INCURRED BUT UNPAID MEDICAL CLAIMS RGS provides benefits to active U.S. employees for medical care, dental care and prescription drugs. The liability for benefit claims which have been incurred but not paid is estimated to be $0.5 million at September 30, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Subsequent to November 3, 1995, the date as of which it issued its 1995 financial statements, RGS and its successor (see note 20) changed its estimates with respect to certain product and contract performance accruals, some of which related to sales recorded prior to October 1, 1995. The most significant change in estimates related to product performance accruals provided for the commercial and newspaper business lines. During 1996, RGS recorded additional accruals of $33.4 million for changes in estimates related to product and contract performance issues for sales recorded, or in the case of contract performance issues, for orders taken, prior to October 1, 1995. FOREIGN CURRENCY TRANSLATION The functional currency for the European and Japanese subsidiaries is the applicable local currency. The translation from the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate prevailing during the period. The gains and losses resulting from such translations are included in Rockwell's net investment. The balance of cumulative translation adjustment at September 30, 1996 was $15.5 million and is included in Rockwell's net investment. 61 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) 3. FINANCIAL INSTRUMENTS The Statements include customer notes receivable, long-term debt and foreign currency forward exchange contracts. RGS provides financing for sales to certain customers in the form of promissory notes. The notes are collateralized by the equipment, accrue interest at varying rates (6.25% to 13.25%) based on the contractual terms of each agreement and generally have terms of up to ten (10) years. The accrual of interest is discontinued when a note becomes 90 days past due or when RGS is notified by the customer of a significant equipment problem. RGS' customers are not concentrated by geographic area, but are concentrated in the publishing and printing businesses. RGS reviews a customer's credit history before extending credit and establishes an allowance for uncollectible amounts based on management's evaluation of the collectability of outstanding balances considering such factors as the payment status of the notes and management's estimate of the fair market value of the collateral. To reduce credit risk, RGS performs a review of the customer's credit history and retains a security interest on the equipment financed. The estimated fair value of customer notes receivable was $213.8 million at September 30, 1996 based on prevailing interest rates for performing notes and on the collateral value of the related presses for past due notes. RGS enters into foreign currency forward exchange contracts to protect against adverse currency rate fluctuations. The notional amounts of these contracts totaled $82.8 million at September 30, 1996, and the contracts mature at various dates through June 1997. RGS has deferred $2.5 million of losses on these contracts at September 30, 1996. 4. ACCOUNTS RECEIVABLE Accounts receivable at September 30, 1996 are summarized as follows (in millions): Trade accounts receivable $124.3 Unbilled receivables 3.2 Less allowance for doubtful accounts (14.9) ------ Accounts receivable, net $112.6 ------ ------ 62 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) The activity of the allowance for doubtful accounts is summarized as follows (in millions):
For The For the Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Beginning of period $5.0 $14.9 Provision 11.2 0.0 Charges (1.3) 0.0 ---- --- End of year $14.9 $14.9 ----- ----- ----- -----
As of September 30, 1996 accounts receivable include $35.2 million of retainage held by customers pending final acceptance of equipment. Unbilled receivables consists principally of revenues recognized on contracts under the units-of-delivery method of accounting. Unbilled receivables are billed in accordance with the terms of contract provisions and do not include any amounts subject to uncertainty as to their realization. Substantially all amounts are expected to be billed and collected within one year. 5. CUSTOMER NOTES RECEIVABLE Customer notes receivable at September 30, 1996 are summarized as follows (in millions):
Customer notes receivable $244.7 Less allowance for doubtful notes (22.4) --------- Notes receivable, net 222.3 Less current portion (67.4) --------- Long-term notes receivable, net $154.9 --------- ---------
On October 1, 1995, RGS adopted statement of Financial Accounting Standards No. 114, "Accounting By Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which requires the evaluation of the collectibility of principal and contractual interest of certain impaired customer notes in assessing the need for an allowance for customer notes. Customer notes are considered impaired when, based on current information 63 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) and events, it is probable that RGS will be unable to collect all amounts due according to the contractual terms of the note agreement. Impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate and/or the fair value of collateral. As of September 30, 1996, $49.8 million of customer notes are considered to be impaired, for which $9.6 million has been reserved for within the allowance for doubtful notes. The adoption of Statements of Financial Accounting Standards Nos. 114 and 118 did not have a material effect on the results of operations for the year ended September 30, 1996. 6. INVENTORIES Net inventories at September 30, 1996 are summarized as follows (in millions): Materials $53.4 Work in process 46.4 Finished goods 24.8 Long-term contracts 16.6 Parts 30.1 Less allowance to reduce certain inventories to LIFO (22.5) ------ Inventories, net $148.8 ------ ------
Inventory valuation reserves were $43.2 million at September 30, 1996. Long-term contracts consist of inventoried costs of assembled parts relating to unit of delivery contracts. Such inventoried costs include direct costs of manufacturing and allocable overhead costs which are not expected to be realized within one year. Inventoried costs under long-term contracts do not include any amounts subject to uncertainty as to their determination or realization. 64 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) 7. PROPERTY AND EQUIPMENT Property and equipment at September 30, 1996 are summarized below (in millions): Land and land improvements $ 33.2 Buildings and building improvements 77.9 Machinery, equipment and tooling 255.7 Construction in progress 2.7 ------ Total 369.5 Less accumulated epreciation (229.1) ------ Property and equipment, net $140.4 ------ ------
8. OTHER ASSETS - INVESTMENT IN JOINT VENTURE Shanghai Rockwell Graphic Systems Co. Ltd. ("SRGSL"), a joint venture with Shanghai Printing & Packaging Machinery Corporation, is accounted for using the equity method. SRGSL was formed in Shanghai, People's Republic of China, on December 8, 1993 and the joint venture agreement has an operating term of 40 years. SRGSL is engaged in the manufacture and sale of printing presses. RGS has a commitment to contribute a total of $9.0 million, which includes equipment and technical support, and $1.0 million of cash, to SRGSL for a 60% interest in the joint venture after all such contributions have been made. As of September 30, 1996, RGS has contributed $6.6 million to the joint venture, which includes $1.6 million of cash and $4.2 million of machinery and equipment currently being refurbished or awaiting shipment to China. 9. OTHER CURRENT LIABILITIES Other current liabilities at September 30, 1996 are summarized below (in millions): Product warranty costs $ 58.0 Accrued contract costs 31.1 Accrued product liability and workers' compensation costs 15.3 Other 27.9 ------ Other current liabilities $132.3 ------ ------
65 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) 10. INCOME TAXES The operations of RGS in the U.S., U.K., and France are included in the consolidated income tax returns of Rockwell in each of these countries. Accordingly, the combined balance sheets do not include current income taxes receivable, payable or tax contingencies related to these operations. The income tax provisions included in the combined statements of operations have been determined as if RGS were a separate taxpayer. The components of the provision (credit) for income taxes are as follows (in millions):
For The For The Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Current: United States $(8.0) $(1.5) Non-United States 10.9 (0.5) State and local (1.1) (0.2) ----- ----- Total current 1.8 (2.2) ----- ----- Deferred: United States (4.2) (1.0) Non-United States (0.7) 0.0 State and local (0.6) (0.2) ----- ----- Total deferred (5.5) (1.2) ----- ----- Provision for income taxes $(3.7) $(3.4) ----- ----- ----- -----
66 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) A reconciliation of the statutory U.S. Federal income tax rate to the effective income tax rate is as follows:
For The For The Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Federal statutory rate 35.0% 35.0% Effect of: State and local taxes 8.8 4.0 Goodwill amortization (9.2) (0.5) Foreign sales corporation benefit 6.0 0.0 Foreign tax expense (19.0) (1.9) Other (2.5) 0.8 -------- ------- Effective Tax Rate 19.1% 37.4% -------- ------- -------- -------
The domestic and foreign components of income (loss) before income taxes are as follows (in millions):
For The For The Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Domestic $(34.3) $(7.2) Foreign 14.9 (1.9) ---- ---- Total $(19.4) $(9.1) ------ ----- ------ -----
67 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) Current and noncurrent deferred income tax assets at September 30, 1996 arise principally from the following (in millions): Current: Inventory reserves $11.7 Product warranty reserves 10.4 Self-insurance reserves 7.2 Other 7.4 ----- Total current asset $36.7 ----- ----- Noncurrent: Notes receivable $10.1 Property and equipment (17.6) Retirement benefits 4.8 ----- Total noncurrent liability $(2.7) ----- -----
RGS has not provided for U.S. income and foreign withholding taxes on undistributed earnings of its Japanese subsidiary because management intends to permanently reinvest these earnings. Undistributed earnings of this subsidiary were $21.8 million and $22.1 million at October 14, 1996 and September 30, 1996, respectively, and the associated taxes would be $2.2 million and $2.2 million, respectively. Taxes on undistributed earnings of RGS' operations in the U.K. and France have not been provided as distributions to their respective parent companies are non-taxable transactions. 11. PENSION PLANS Rockwell has pension plans which cover certain RGS employees and provide for monthly pension payments to eligible U.S. employees upon retirement. Pension benefits for U.S. salaried employees are based on years of credited service and compensation. Pension benefits for certain U.S. hourly employees are based on years of service and specified benefit amounts. U.S. pension assets are primarily equity securities, U.S. Government obligations and fixed income investments whose values are subject to fluctuations of the securities market. 68 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) At September 30, 1996 the assets for the entire Rockwell International pension plan for U.S. employees of $9,961 million exceeded the accumulated benefit obligation of the plan of $7,941 million. The accumulated benefit obligations related to RGS participants in this plan at September 30, 1996 are as follows (in millions): Accumulated benefit obligation, principally vested: Active employees $ 63.9 Retired and other 96.8 ------ Total $160.7 ------ ------
Certain RGS employees in the United Kingdom participate in a pension plan sponsored by Rockwell. At September 30, 1996, assets of $11.1 million exceeded the accumulated benefit obligations of this plan of $9.7 million. The accumulated benefit obligation related to RGS participants in this plan was $7.4 million at September 30, 1996. The combined statements of operations include $0.1 million and $2.3 million for the fourteen days ended October 14, 1996 and the year ended September 30, 1996, respectively, related to RGS' portion of the service cost of active participants of these pension plans in the U.S. and U.K. Amounts related to accrued pension obligations for participants and related assets of these plans are not included in RGS' combined balance sheets. 69 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) In addition, RGS has stand-alone pension plans covering certain of its employees in the United Kingdom, Germany and Japan. Amounts included in the accompanying combined balance sheet at September 30, 1996 for these stand-alone plans are as follows (in millions):
Accumulated Assets Benefits Exceeding Exceeding Accumulated Assets Benefits ------ -------- Accumulated benefit obligations, principally vested $4.2 $43.6 Effect of salary increases 1.6 9.0 --- --- Projected benefit obligation 5.8 52.6 Fair value of plan assets 1.8 54.7 --- ---- Plan assets greater than (less than) projected benefit obligation (4.0) 2.1 Unamortized amounts: Transition --- (3.4) Net actuarial losses (0.1) 1.3 Prior service cost 0.3 4.1 Prepaid (accrued) pension costs $(3.8) $4.1 ----- ---- ----- ----
Net pension cost for stand-alone RGS plans for non-U.S. employees included in the accompanying combined statement of operations consist of the following (in millions):
For The For The Fourteen Year Ended Days Ended September 30, 1996 October 14, 1996 ------------------ ---------------- Service cost-benefits earned during the year $2.1 $0.1 Interest accrued on accumulated benefit 4.4 0.2 obligation Expected return on plan assets (4.5) (0.2) Prior service cost amortization 0.4 0.0 Amortization of net actuarial gains 0.1 0.0 Transition asset amortization (0.6) 0.0 ---- ---- Net pension cost $1.9 $0.1 ---- ---- ---- ----
70 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) The above pension amounts were determined using a June 30, 1996 measurement date and the following assumptions:
1996 ---- Discount rate 4.0%-8.0% Annual salary increase 4.5% Asset return 4.0%-9.0%
Rockwell sponsors defined contribution plans covering all U.S. RGS salaried employees and certain hourly employees. Employer contributions to these plans, which were charged to costs and expenses, totaled $0.2 million for the fourteen days ended October 14, 1996 and $3.7 million for the year ended September 30, 1996 . 12. RETIREMENT MEDICAL PLANS AND POST EMPLOYMENT BENEFITS Rockwell has retirement medical plans which cover RGS U.S. employees and provide for the payment of medical costs of eligible employees and dependents upon retirement. Since RGS employees participate in these Rockwell retirement medical plans, accrued post-retirement benefit obligations for participants in these plans are not included in RGS' combined balance sheet. The retirement medical obligation related to RGS participants in these plans at September 30, 1996 is as follows (in millions): Retirees $34.8 Active employees: Eligible to retire 9.2 Not eligible 11.9 ---- Retirement medical obligations $55.9 ----- -----
The combined statement of operations include $0.7 million in charges related to RGS' portion of service cost of active participants of these plans for 1996. The above retirement medical amounts were computed using a June 30, 1996 measurement date and the following assumptions:
1996 ---- Discount rate 7.75% Health care cost trend rate 8.00%
The health care cost trend rate is assumed to decline to 5.5% after 2015. 71 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) 13. LEASES RGS leases certain operating assets with various renewal options. Combined rental costs were $0.1 million and $3.2 million for the fourteen days ended October 14, 1996 and for the year ended September 30, 1996, respectively. Minimum future rental commitments under non-cancelable operating lease arrangements at September 30, 1996 were (in millions): 1997 $0.3 1998 1.3 1999 1.2 2000 1.1 2001 0.7 Thereafter 0.1 ---- Total $4.7 ---- ----
14. REVOLVING CREDIT FACILITIES RGS Japan has revolving credit agreements with various banks which permit borrowings aggregating approximately $26.0 million at September 30, 1996. Borrowings under the credit facilities bear interest at the Japan prime rate which was 1.625% at September 30, 1996. The credit facilities generally do not contain expiration dates. Borrowings under three of the credit facilities totaling approximately $23.3 million are guaranteed by Rockwell. As of September 30, 1996, borrowings under all credit facilities totaled $13.3 million. During the period ended September 30, 1996, Rockwell Systemes Graphiques Nantes S.A. (RGS' business in France) entered into credit facilities with two banks which permit borrowings up to $30.5 million bearing interest with rates ranging from the Paris Interbank Rate plus .25% to 4.00%. Borrowings under the credit facilities are guaranteed by Rockwell. As of September 30, 1996, borrowings under the credit facilities totaled $25.9 million. 15. RESEARCH AND DEVELOPMENT Research and development costs were $0.9 million and $22.2 million for the fourteen days ended October 14, 1996 and for the year ended September 30, 1996, respectively, and are expensed as incurred. 72 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) 16. RELATED PARTY TRANSACTIONS RGS purchases drive systems, press controls and related products from Allen-Bradley, a subsidiary of Rockwell. Such purchases totaled $27.5 million in 1996. There were no material purchases for the fourteen days ended October 14, 1996. A summary of changes in Rockwell's net investment in RGS for the year ended September 30, 1996 is as follows (in millions): Balance at the beginning of year $543.1 Net loss (15.7) Currency translation and other (8.5) Allocation of common expenses from Rockwell 8.5 Non-cash intercompany purchases 27.5 Net transfers to Rockwell (97.8) ------ Balance at end of year $457.1 ------ ------
17. GEOGRAPHIC AND EXPORT SALES INFORMATION The following table presents information about RGS by geographic area (in millions):
Period Asia Ended U.S. Europe Pacific Eliminations Total ----- ---- ------ ------- ------------ ----- Net sales to customers 10/14/96 $3.7 $0.8 $0.1 $--- $4.6 09/30/96 406.7 206.7 84.8 --- 698.2 - ----------------------------------------------------------------------------------------------------------------------------- Transfers between geographic locations 10/14/96 --- 0.1 --- (0.1) --- 09/30/96 13.6 27.3 --- (40.9) --- - ----------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) 10/14/96 (8.0) (1.3) (0.3) --- (9.6) 09/30/96 (24.1) (4.5) 1.6 --- (27.0) - ----------------------------------------------------------------------------------------------------------------------------- Net identifiable assets 09/30/96 451.4 272.5 92.1 --- 816.0
73 ROCKWELL GRAPHIC SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS-(CONTINUED) Transfers between geographic areas are recorded at amounts generally in excess of cost. The resultant income is assigned to the geographic area of manufacture. In computing operating profit, interest income and expense, other income and expense and income taxes have not been added or deducted. Export sales from the U.S. were $0.6 million, or 13% and $182.6 million, or 26% of the Company's net sales for the fourteen days ended October 14, 1996 and the year ended September 30, 1996, respectively. These sales were principally to customers in South America. 18. CONTINGENCIES AND COMMITMENTS LEGAL CONTINGENCIES In November 1995, the U.S. District Court for the Southern District of New York issued a judgment relating to a patent infringement matter that RGS is liable for damages and interest which management estimates to total approximately $17.0 million. At November 3, 1995, the date as of which it issued its 1995 financial statements, it was management's estimate that the minimum probable liability was $3.0 million and this amount was recorded in the combined statement of operations. Subsequent to November 3, 1995, management revised its estimate of the minimum probable liability and recorded an additional $1.0 million of expense during the year ended September 30, 1996. Pursuant to the Acquisition (see note 20), Rockwell has agreed to indemnify RGS for any damages that may be determined to be payable in such action and to treat such as a retained liability. The matter was settled in December 1996 by a payment by Rockwell to the plaintiff. In the normal course of business, various lawsuits and claims are initiated against RGS related to sales contracts. One of these matters is a lawsuit brought by Daily News, LP alleging fraud, negligent misrepresentations, breach of contract, and bad faith in connection with the Daily News' 1994 purchase of Goss Newsliner printing presses. Daily News seeks compensatory and punitive damages in an unspecified amount. The Company believes the suit is spurious and meritless and is vigorously defending this matter. Other such claims included a lawsuit filed by a commercial press customer in February, 1996 seeking unspecified damages, and an arbitration proceeding initiated by another commercial press customer in June, 1996 seeking refunds and damages totaling $3.8 million. The Company and the customers have entered into settlement agreements with respect to these matters. The Company maintains as accrued liabilities reserves that are its present estimate of the total cost to fulfill its obligations under these settlement agreements. 74 As part of an asset purchase agreement with an acquirer of certain assets of the RGS business in 1988, the acquirer agreed to defend and indemnify RGS for certain product liability claims. The acquirer has initiated informal meditation proceedings against RGS and Rockwell alleging that certain information was recently received from RGS that materially increased the acquirer's risk for defending and indemnifying against the product liability claims. The acquirer is seeking to prospectively discharge its obligations for such defense and indemnity. As part of these proceedings, the acquirer also refused to indemnify RGS in three pending product liability claims which collectively are estimated to represent an exposure to RGS of approximately $1.0 million. While the ultimate resolution of these proceedings cannot presently be determined, management intends to vigorously defend against these matters and believes that their ultimate resolution will not have a material adverse effect on RGS' financial position, results of operations or liquidity. RGS has pending against it or may be subject to various lawsuits, claims and proceedings related primarily to employment, commercial (including press performance issues) and safety and health matters. Although it is not presently possible to determine the outcome of these matters, management believes their ultimate disposition will not have a material adverse effect on RGS' financial position or liquidity, although it is possible that the resolution of such lawsuits, claims and proceedings could be material to the results of operations in a given period. ENVIRONMENTAL CONTINGENCIES RGS 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 (Superfund Sites). RGS has entered into settlement agreements with the Environmental Protection Agency (EPA) at two of these sites and a settlement proposal is pending at a third site, none of which is material to the financial statements either individually or collectively. With respect to the fourth site, at which RGS has been named a potentially responsible party (PRP), its share of the clean up costs are estimated to approximate $200,000 of the potential estimated cost for final site remediation of $10.0 million. At the fifth and sixth sites, RGS has been implicated as a PRP. However, RGS believes its involvement, if any, is not significant. Although current law imposes joint and several liability on any party determined to be responsible at a Superfund Site, management believes, based upon all available information, that the ultimate resolution of these matters will not have a material adverse effect on RGS' financial position, results of operations or liquidity. RGS' 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 company's, historical waste disposal practices. Recent data indicate that certain hazardous constituents in the groundwater have decreased over time, while the data on other constituents is inconclusive. Goss plans to submit a proposal to the Pennsylvania Department of Environmental Resources to terminate remediation at the site pursuant to recent statutory 75 authority to determine cleanup limits consistent with the results of a site-specific risk assessment. Management has been advised that, given the site location and aquifer use, the proposal is technically appropriate and may result in the termination of groundwater remediation at this site. Management believes that any liability with respect to either continuing groundwater remediation or conducting a site-specific risk assessment in order to complete such remediation will not have a material adverse effect on RGS' financial position, results of operation or liquidity. COMMITMENTS Rockwell provides letters of credit to guarantee the performance of RGS under certain long-term contracts. Such letters of credit outstanding were $0.9 million as of September 30, 1996. The fair value of these letters of credit is estimated to approximate their contractual amounts. 19. SUPPLEMENTAL CASH FLOW INFORMATION (IN MILLIONS)
1996 ---- Income tax payments (Japan) $ 1.0 Interest payments (non-U.S.) 1.1 Non-cash investment in joint venture 5.0
20. ACQUISITION OF ROCKWELL GRAPHIC SYSTEMS On October 14, 1996, Goss Graphic Systems, Inc., (the "Company") a Delaware corporation organized by Stonington Partners, Inc., on behalf of Stonington Capital Appreciation 1994 Fund L.P. (the "Fund") acquired RGS from Rockwell (the "Acquisition"). The Acquisition was effected through the purchase by the Company of all the outstanding stock of Rockwell Graphic Systems, Inc., a Delaware corporation ("Goss Delaware") and Rockwell Systemes Graphiques Nantes, a societe anonyme organized under the laws of the Republic of France ("Goss France"), and through the purchase by the Company and certain wholly owned foreign subsidiaries of the assets and the assumption of liabilities which constitute the remainder of RGS. Immediately after the Acquisition, the Company merged with and into Goss Delaware. The purchase price for the Acquisition was $601.8 million which consisted of $525.9 million in cash, subject to certain adjustments, and 47,500 shares of preferred stock, $1,000 liquidation preference per share, issued by GGS Holdings, Inc., ("Holdings") which directly owns all of the capital stock of the Company, and approximately $28.4 million of transaction and acquisition costs. The purchase price was subject to a post closing adjustment based upon the computation of certain working capital amounts. This adjustment totaled $7.8 million and is in addition to the $525.9 million mentioned above. The Acquisition has been accounted for under the purchase method of accounting. 76 Simultaneous with the closing of the Acquisition, Holdings raised $116.5 million of equity financing, comprised of $111.5 million in cash from the sale of common stock of Holdings to the Fund, $1.0 million in cash from the sale of Holdings common stock to an affiliate of a limited partner of the Fund, and $4.0 million in cash from the sale of common stock to certain members of the Company's management (the "Management Placement"). Holdings financed $2.0 million of the Management Placement. The balance of the funds needed to consummate the Acquisition and to pay related fees and expenses came from: $225 million in proceeds from the Company's issuance of 12% Senior Subordinated Notes due 2006; $137.1 million in proceeds from the sale of a portfolio of notes receivable issued in connection with customer financing provided by RGS to purchasers of its products; and $75.3 million in borrowings under a new credit agreement between Goss Delaware, Bankers Trust Company and certain other lenders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disclosure is required pursuant to this Item. 77 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the directors of Goss:
NAME AGE PERIOD SERVED/TERM* ---- --- ------------------- J. Joe Adorjan 60 October 15, 1996 to Present Alfred C. Daugherty 75 October 15, 1996 to Present Robert F. End 43 October 15, 1996 to Present Joseph P. Gaynor, III 55 October 29, 1998 to Present James J. Kerley 75 October 15, 1996 to Present Robert M. Kuhn 56 October 15, 1996 to Present Alexis P. Michas 40 October 15, 1996 to Present Robert J. Mylod, Jr. 31 October 15, 1996 to Present James P. Sheehan 56 October 15, 1996 to Present
* Each director is elected for a one-year term. J. JOE ADORJAN has served as Chairman of the Board, Chief Executive Officer and President of Borg Warner Security Corporation, a supplier of guard, alarm, armored transport, courier and other protective services, since January 1996, October 1995 and April 1995, respectively. Prior thereto he was President of Emerson Electric Co., a manufacturer of electronic, electrical and other products, from 1992 to 1995. Mr. Adorjan is also a Director of The Earthgrains Company, ESCO Electronics Corporation, Illinova Corporation and Loomis, Fargo & Co. ALFRED C. DAUGHERTY was Chairman of Duracell International Inc., a manufacturer of premium batteries, until his retirement January 1, 1995. Mr. Daugherty was Executive Vice President of Dart Industries Inc., a maker of consumer products and chemical specialties, as well as a Director until his retirement on October 1, 1993. Mr. Daugherty is also a Director of Blue Bird Corporation and A. Duda & Sons, Inc. 78 ROBERT F. END has been a Partner and Director of Stonington since 1993. He has also been a Consultant of Merrill Lynch Capital Partners, Inc., a private investment firm associated with Merrill Lynch & Co., since 1994; a Director of MLCP since 1993; a Partner of MLCP from 1993 to 1994; and Vice President of MLCP from 1989 to 1993. Mr. End was also a Managing Director of the Investment Banking Division of Merrill Lynch & Co. from 1993 to July 1994 and a Director of the Investment Banking Division of Merrill Lynch & Co. from 1990 to 1993. Mr. End is also a Director of Packard BioScience Company and United Artists Theatre Circuit, Inc. JOSEPH P. GAYNOR, III has served as Executive Vice President Administration, Chief Financial Officer and Treasurer since November 1998 and as Executive Vice President, Chief Financial Officer and Treasurer since August 1998. Prior thereto he served as Managing Director of Shattuck Hammond, an investment banking unit of PricewaterhouseCoopers Securities, L.L.C. from 1997 to August 1998. Mr. Gaynor also served as the Executive Vice President and Chief Financial Officer of Primary Health Systems, Inc. From 1995 to 1996 and as Chief Financial Officer of the Chicago Sun Times Company from 1990 to 1994. JAMES J. KERLEY served as non-executive Chairman of Rohr, Inc., a manufacturer of jet engine and other components for aircraft, from 1993 to 1994. Prior thereto he served as Vice Chairman and Chief Financial Officer of Emerson Electric Co., a manufacturer of electrical products and systems for consumer, commercial, industrial and defense markets. Mr. Kerley is also a Director of Borg-Warner Automotive, Inc. and DT Industries, Inc. ROBERT M. KUHN has served as President and Chief Executive Officer since November 1998. Prior thereto Mr. Kuhn served as Chairman of the Board and Chief Executive Officer of Goss since October 1996 and as President since October 1995. Prior thereto he served as Senior Vice President, Business Development of United Technologies Corporation and President of Hamilton Standard, the aerospace subsidiary of United Technologies since 1991. ALEXIS P. MICHAS has been the Managing Partner and a Director of Stonington since 1993 and the Managing Partner and a Director of Stonington II since 1994. He has also been a Director of Merrill Lynch Capital Partners, Inc. since 1989, a Partner of MLCP from 1993 to 1994 and Senior Vice President of MLCP from 1989 to 1993. Mr. Michas was also a Managing Director of the Investment Banking Division of Merrill Lynch & Co. from 1991 to July 1994. Mr. Michas is also a Director of Blue Bird Corporation, Borg-Warner Automotive, Inc., Borg-Warner Security Corporation, Dictaphone Corporation and Packard BioScience Company. ROBERT J. MYLOD, JR. has been a Principal of Stonington since January 1996 and an Associate of Stonington from 1993 to 1995. He has been a Consultant to Merrill Lynch Capital Partners, Inc. since 1994, an Associate of MLCP from 1993 to 1994 and an Analyst of MLCP from 1989 to 1992. Mr. Mylod was an Associate of the Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith Incorporate from 1993 to 1994. JAMES P. SHEEHAN has served as Chairman of the Board since November 1998. Mr. 79 Sheehan has been self-employed as a private investor since January 1994. Prior thereto he served as President and Chief Operating Officer of A.H. Belo Corp., a media company that publishes newspapers and televises programs through owned stations. The following table sets forth information concerning the executive officers of Goss in addition to Messrs. Kuhn and Gaynor, who are listed above:
NAME AGE POSITION/TERM* ---- --- ------------- Alex G. Brnilovich, Jr. 47 Executive Vice President, North America Frank D. Jurenka 61 Vice President, US Operations Jack E. Merryman 51 Senior Vice President, General Counsel and Secretary Alan P. Sheng 54 Senior Vice President, Global Technology and Development Richard J. Sutis 55 Executive Vice President, Asia Pacific Randall Thomas 49 Executive Vice President and General Manager, Europe
* Officers are elected annually by the Board of Directors and can be removed at any time. ALEX G. BRNILOVICH, JR. has served as Executive Vice President, Americas since November 1998 and as Senior Vice President, North America from October to November 1998. Prior thereto, Mr. Brnilovich served as President of Asea Brown Boveri (ABB) Power Generation, Inc. From 1996 to 1998; President of ABB Turbine Services from 1993 to 1996; and President of ABB Utilities Steam Turbine from 1991 to 1993. FRANK D. JURENKA has serviced as Vice President Operations since 1993. JACK E. MERRYMAN has served as Senior Vice President, General Counsel and Secretary since 1998 and as Vice President, General Counsel and Secretary since 1996. Prior thereto Mr. Merryman served as General Counsel and Secretary for Reliance Electric Company, a subsidiary of Rockwell which makes industrial motors and drive systems, since 1995; as Assistant General 80 Counsel & Assistant Secretary from 1993 to 1995; and as Senior Counsel from 1987 to 1993. ALAN P. SHENG has served as Senior Vice President, Global Technology and Development since 1998 and as Vice President, Global Technology and Development since 1992. RICHARD J. SUTIS has served as Executive Vice President, Asia Pacific since 1998 and as Vice President, Asia Pacific since 1996. From 1994 to 1996 Mr. Sutis served as Vice President, Business Development and Strategy for Stevens International, Inc., a manufacturer and marketer of complete web fed printing and packaging systems. Prior thereto Mr. Sutis served as Goss's Director, Program Management from 1991 to August 1994. RANDALL THOMAS has served as Executive Vice President & General Manager, Europe since 1998 and as Vice President & General Manager, Europe since 1992. 81 ITEM 11. EXECUTIVE COMPENSATION The following table set forth the cash compensation paid by Goss during fiscal 1998 and 1997 and by Rockwell Graphic Systems, Inc. and or Rockwell International Corporation during fiscal 1996 to (i) Goss's Chief Executive Officer, and (ii) each of Goss's four most highly compensated executive officers other than the CEO who were serving at September 30, 1998: SUMMARY COMPENSATION TABLE
OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION ALL OTHER COMPENSATION --------------------------- ---- ------ ----- ------------ ---------------------- ($) ($) ($) ($) Frank D. Jurenka 1998 183,000 -0- 5,026(8) 25,790(2) 1997 177,420 77,821 (3) (3) 1996 174,033 83,500 (3) (3) Robert M. Kuhn 1998 577,500 -0- (3) $143,965(4) President & Chief Executive Officer 1997 554,600 545,738 (3) 200,004(5) 1996 400,000 -0- (3) 135,587(6) - - 5,843(8) Jack E. Merryman 1998 180,000 -0- (3) (3) Senior Vice President, General Counsel 1997 163,300 110,565 (3) (3) & Secretary 1996 131,668 35,000(7) (3) (3) Richard J. Sutis 1998 175,000 -0- 5,651(8) (3) Executive Vice President, Asia Pacific 1997 152,496 100,053 (3) (3) - - - (3) (3) Randall Thomas 1998 222,772 -0- (3) (3) Executive Vice President General 1997 200,093 133,275 (3) (3) Manager, Europe 1996 180,400 92,400 (3) (3)
(1) Bonus amounts do not include retention and sale of business bonuses in the aggregate amount of $1,803,000 paid by Rockwell International Corporation to eleven officers subsequent to their cessation of employment by Rockwell. (2) Includes $12,657 for company car, $11,033 for club dues and $2,100 for financial planning. 82 (3) No disclosure required. (4) Includes $15,134 for company car, $2,698 for club dues, $1,497 for financial planning, $50,332 for long-term disability insurance and $74,304 for personal transportation costs. (5) Includes $15,078 for company car, $2,252 for club dues, $2,139 for financial planning, $53,619 for long-term disability insurance, $44,700 for personal transportation costs and a $82,216 lump-sum relocation payment. (6) Includes $13,014 for company car, $8,589 for club membership fee and dues, $53,619 for long-term disability insurance, and $60,365 in personal transportation costs. (7) In addition to this amount, Mr. Merryman received a signing bonus of $63,670 when he joined Goss in June 1996. (8) Amounts are for retiree savings plans. Goss has not granted any stock options, stock appreciation rights or shares of restricted stock. Key members of management, including the executive officers named above, have been granted incentive and performance stock options, and independent directors have been awarded shares of restricted stock of, GGS Holdings Inc., Goss's sole common shareholder, pursuant to a Management Stock Incentive Plan as summarized by the following table: 83 GGS HOLDINGS INC. STOCK INCENTIVE PLAN TABLE
INCENTIVE PERFORMANCE SHARES OF NAME AND PRINCIPAL POSITION OPTIONS* OPTIONS* RESTRICTED STOCK --------------------------- ------- ------- ---------------- Joseph P. Gaynor, III 4,000 4,000 -0- Executive Vice President Administration, Chief Financial Officer & Treasurer Frank D. Jurenka 750 750 -0- Vice President, US Operations Robert M. Kuhn 13,000 13,000 -0- President & Chief Executive Officer Jack E. Merryman 3,000 3,000 -0- Senior Vice President, General Counsel & Secretary Richard J. Sutis Executive Vice President, Asia Pacific 1,500 1,500 -0- Randall Thomas 3,250 3,250 -0- Executive Vice President & General Manager, Europe J. Joe Adorjan -0- -0- 1,875 Director Alfred C. Daugherty -0- -0- 1,875 Director James J. Kerley -0- -0- 1,875 Director James P. Sheenan -0- -0- 1,875 Director All others as a group 10,850 10,850 -0-
* Dollar value of all incentive and performance options is $42.92 to $48.09. See footnote 20 to 1998 financial statements. 84 The options vest and become exercisable ratably over a five year term provided (i) the participant continues to be employed by GGS Holdings or a subsidiary in the case of incentive options and (ii) certain predetermined financial performance goals are met in the case of performance options. To date no options have been exercised. Restrictions on 20% of the restricted stock lapsed at the closing of the acquisition; the remaining restrictions will lapse ratably over four years. PENSION PLANS Goss does not maintain a pension or defined benefit plan for its domestic non-union employees. Prior to the acquisition, Mr. Merryman participated in the Rockwell Retirement Income Plan for Salaried Employees. Rockwell is solely responsible for, and has retained full power and authority with respect to the amendment and termination of, the plan. The estimated annual benefit at age 62 under the Rockwell retirement plan for Mr. Merryman is $23,627. Goss assumed and adopted the Rockwell PMCX Pension Scheme for its U.K. employees in connection with the acquisition. Mr. Thomas participates in the renamed Goss Graphic Systems, Inc. United Kingdom Executive Pension Plan, which is contracted out of the earnings related portion of the state earnings related pension scheme (SERPS). Participants in the Plan pay reduced national insurance contributions with the Company making up the difference. The benefit formula under the Plan is calculated as follows: 1/30th multiplied by the participant's final pensionable salary (the average of the previous 12 months basic annual salary) multiplied by pensionable service (years and months of continuous service from the date of entry into the Plan) minus an amount equivalent to the SERPS benefit accrued in respect to any pensionable service during which the participant was not contracted out of the SERPS. The overall maximum pension to which a participant is entitled under the Plan is 2/3rds of final pensionable salary minus the SERPS benefit to which the participant is entitled. Participants who retire on or after age 55 but before the normal retirement age of 60 receive a "reserved pension" which is generally reduced 3% for each year of early retirement. At September 30, 1998, Mr. Thomas' estimated annual benefit at age 60 under the Plan was $147,123. COMPENSATION OF DIRECTORS Goss's independent directors receive $1,500 per board meeting and $750 per committee meeting attended with the exception of the committee chairman who receives $1,000 per committee meeting attended. Mr. Sheehan is not compensated by Goss for his services as Chairman of the Board. All board members are reimbursed their travel and other expenses in connection with meeting attendance. 85 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of Goss's common stock is owned by GGS Holdings Inc. The common stock of GGS Holdings Inc. is held by Stonington and certain of its affiliates, Merrill Lynch KECALP, the directors and certain members of management of Goss. (SEE Item 11 above.) Goss does not have any outstanding preferred stock. However, GGS Holdings has preferred stock outstanding that is held by Rockwell International Corporation. The terms of the preferred stock entitle Rockwell to elect two directors of GGS Holdings in certain events. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Goss purchases drive systems, press controls and related products from Allen-Bradley, a subsidiary of Rockwell. These purchases totaled $18.6 million in fiscal 1998. Also, in connection with the acquisition Rockwell agreed to provide Goss certain support services for which Goss paid Rockwell $3.7 million in fiscal 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Annual Report on Form 10-K. 1. Financial Statements - Consolidated Balance Sheets as of September 30, 1998 and September 30, 1997, and Consolidated Statements of Operations, and Cash Flows for the year ended September 30, 1998 and the period ended September 30, 1997 for Goss. - Combined Statements of Operations and Cash Flows for the fourteen days ended October 14, 1996 and for the year ended September 30, 1996 for Rockwell Graphic Systems, Inc. 2. Financial Schedules None 86 3. Exhibits 2.1 Stock and Asset Purchase Agreement dated as of April 26, 1996, between Rockwell International Corporation and Goss and Amendment to Stock and Asset Purchase Agreement dated as of July 18, 1996, between Rockwell International Corporation and Goss * 3.1 Certificate of Incorporation of Goss * 3.2 By-Laws of Goss * 4.1 Form of Indenture between Goss and The Bank of New York, Trustee relating to the 12% Senior Subordinated Notes due 2006 * 4.2 Credit Agreement among Goss and the parties named therein, as amended in 1998 **/*** 4.3 Form of Certificate of Designation of the 61/2% Redeemable Pay-in-Kind Preferred Stock of GGS Holdings, Inc. * 4.4 Mortgage Note and Mortgage between Goss Realty, L.L.C. and LaSalle National Bank relating to Westmont, Illinois facility. ** 4.5 Loan Agreements and related mortgage documents (summary English translations) between Goss Graphic Systems Japan and Sanwa Bank and Goss Graphic Systems Japan and Industrial Bank of Japan relating to Sayama, Japan facility ** 10.1 Form of Subscription Agreement for the Management Placement**** * 10.2 Form of Subscription Agreement for Stonington Investment * 10.3 Form of Subscription Agreement for Equity Private Placement * 10.4 Form of Stockholders Agreement * 87 10.5 Employment Agreement dated as of September 26, 1996, between Goss and Robert M. Kuhn**** * 10.6 Form of Management Stock Incentive Plan**** * 10.7 Form of Incentive Option Agreement**** * 10.8 Form of Performance Option Agreement**** * 10.9 Form of Restricted Stock Agreement**** * 10.10 Principal terms of employment for Joseph P. Gaynor, III**** *** 21.1 List of subsidiaries of Goss ***** 27.1 Financial Data Schedule
* Incorporated by reference to the exhibits to the Registration Statement of Goss as filed with the Securities and Exchange Commission, File No. 333-08421. ** Incorporated by reference to the exhibits to the Form 8-K of Goss as filed with the Securities and Exchange Commission on February 12, 1999. *** Filed herewith. **** Management contract or compensatory plan or arrangement. ***** Incorporated by reference to the exhibits to the Form 10-K Goss filed with the Securities and Exchange Commission with respect to its fiscal year ended September 30, 1997. (b) Reports on Form 8-K. Goss did not file any reports on Form 8-K during the fourth quarter of fiscal 1998. (c) Exhibits. See the exhibit list included as part of paragraph (a) (3) above. (d) Financial Statement Schedules. None. 88 SIGNATURES 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, thereto duly authorized on January 11, 1999. GOSS GRAPHIC SYSTEMS, INC. By: /s/ Robert M. Kuhn ----------------------- Robert M. Kuhn, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed on January 11, 1999, by the following persons on behalf of the Registrant and in the capacities indicated. NAME TITLE ---- ----- /s/ Robert M. Kuhn - ------------------------------ Robert M. Kuhn President and Chief Executive Officer (Principal Executive Officer) /s/ Joseph P. Gaynor, III - ------------------------------ Joseph P. Gaynor, III Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ J. Joe Adorjan - ------------------------------ J. Joe Adorjan Director /s/ Alfred C. Daugherty - ------------------------------ Alfred C. Daugherty Director /s/ Robert F. End - ------------------------------ Robert F. End Director /s/ James J. Kerley - ------------------------------ James J. Kerley Director /s/ Alexis P. Michas - ------------------------------ Alexis P. Michas Director /s/ Robert J. Mylod, Jr. - ------------------------------ Robert J. Mylod, Jr. Director /s/ James P. Sheehan - ------------------------------ James P. Sheehan Director 89 EX-4.2 2 EXHIBIT 4.2 FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of August 31, 1998 and entered into by and among GOSS GRAPHIC SYSTEMS, INC., a corporation organized under the laws of the State of Delaware ("COMPANY") and whose registered office is at 700 Oakmont Lane, Westmont, Illinois 60559, GOSS GRAPHIC SYSTEMS LIMITED (Company Number 3212468), a company organized under the laws of England ("GOSS UK") and whose registered office is at Greenbank Street, Preston, Lancashire PR1 7LA, GOSS SYSTEMES GRAPHIQUES NANTES, S.A., a SOCIETE ANONYME organized under the laws of the Republic of France ("GOSS FRANCE") and whose registered office is at 20, rue de Koufra, 44300 Nantes, GOSS GRAPHIC SYSTEMS JAPAN CORPORATION, a corporation organized under the laws of Japan ("GOSS JAPAN"; and together with Company, Goss UK and Goss France, the "BORROWERS") and whose registered office is at Mitsuya Toranomon Building, 22-14 Toranomon 1-Chome, Minato-Ku, Tokyo 105, THE FINANCIAL INSTITUTIONS ACTING AS LENDERS AND LISTED ON THE SIGNATURE PAGES HEREOF, THE FINANCIAL INSTITUTIONS ACTING AS INDEMNIFYING LENDERS AND LISTED ON THE SIGNATURE PAGES HEREOF, BANKERS TRUST COMPANY, as administrative agent for the Lenders (in such capacity, "ADMINISTRATIVE AGENT") and whose registered office is at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006, and CREDIT SUISSE FIRST BOSTON ("CSFB"), as syndication agent for Lenders (in such capacity, "SYNDICATION AGENT") and whose offices are at 11 Madison Avenue, New York, New York 10010, and, for purposes of Section 4 hereof, the Credit Support Parties (as defined in Section 4 hereof) listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Multicurrency Credit Agreement dated as of January 29, 1998, by and among Borrowers, Lenders, Indemnifying Lenders, Administrative Agent, Syndication Agent and certain other parties (the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Borrower and Lenders desire to amend the Credit Agreement to permit each of Company and its Subsidiaries to change its Fiscal Year-end from September 30 to December 31; and WHEREAS, Borrowers and Lenders also desire to amend the Credit Agreement to (i) amend certain of the defined terms contained therein, (ii) amend certain of the financial covenants contained therein, and (iii) make certain other amendments, all as more specifically set forth herein: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1 1.1 AMENDMENTS TO SECTION 1: PROVISIONS RELATING TO DEFINED TERMS. A. Amendments to Existing Definitions. Subsection 1.1 of the Credit Agreement is hereby amended as follows: the definitions "Applicable Base Rate Margin", "Applicable Offshore Rate Margin", "Consolidated Adjusted EBITDA" and "Fiscal Year" are each hereby amended by deleting each definition in its entirety and substituting the following therefor: "'APPLICABLE BASE RATE MARGIN' means, as of any date of determination, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio:
CONSOLIDATED LEVERAGE RATIO APPLICABLE BASE RATE MARGIN --------------------------- --------------------------- greater than or equal to 6.75:1.00 1.75% less than 6.75:1.00 1.50% but greater than or equal to 5.75:1.00 less than 5:75:1.00 1.25% but greater than or equal to 4.50:1.00 less than 4.50:1.00 1.00% but greater than or equal to 3.50:1.00 less than 3.50:1.00 0.75% but greater than or equal to 3.00:1.00 less than 3.00:1.00 0.50% but greater than or equal to 2.50:1.00 less than 2.50:1.00 0.25% but greater than or equal to 2.00:1.00 less than 2.00:1.00 0.00%
; PROVIDED that until adjusted in accordance with the provisions of subsection 2.2A, the Applicable Base Rate Margin shall be 1.75% per annum effective on the First Amendment Effective Date. `APPLICABLE OFFSHORE RATE MARGIN' means, as of any date of determination, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio:
CONSOLIDATED LEVERAGE RATIO APPLICABLE OFFSHORE RATE MARGIN --------------------------- ------------------------------- greater than or equal to 6.75:1.00 2.75%
2
CONSOLIDATED LEVERAGE RATIO APPLICABLE OFFSHORE RATE MARGIN --------------------------- ------------------------------- less than 6.75:1.00 2.50% but greater than or equal to 5.75:1.00 less than 5:75:1.00 2.25% but greater than or equal to 4.50:1.00 less than 4.50:1.00 2.00% but greater than or equal to 3.50:1.00 less than 3.50:1.00 1.75% but greater than or equal to 3.00:1.00 less than 3.00:1.00 1.50% but greater than or equal to 2.50:1.00 less than 2.50:1.00 1.25% but greater than or equal to 2.00:1.00 less than 2.00:1.00 1.00%
; PROVIDED that until adjusted in accordance with the provisions of subsection 2.2A, the Applicable Offshore Rate Margin shall be 2.75% per annum effective on the First Amendment Effective Date. `CONSOLIDATED ADJUSTED EBITDA' means, for any period, (a) the sum, without duplication, of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, (vi) expenses related to the RGS Customer Notes, (vii) for any period including December 31, 1998 only, salary and workforce reductions in an amount not to exceed $6,500,000, which reductions shall take place no later than December 31, 1998, and (viii) other non-cash items reducing Consolidated Net Income LESS (b) the sum, without duplication, of the amounts for such period of (i) income related to the RGS Customer Notes and (ii) other non-cash items increasing Consolidated Net Income, all of the foregoing determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. `FISCAL YEAR' means the fiscal year of Company and its Subsidiaries ending on September 30 of each calendar year; PROVIDED that, upon due and proper authorization by the boards of directors of Company and its Subsidiaries, Company and its Subsidiaries may change their Fiscal Year-end from September 30 to December 31 commencing with the fifteen-month Fiscal Year ending December 31, 1999." 3 B. AMENDMENTS TO EXISTING DEFINITIONS. Subsection 1.1 of the Credit Agreement is hereby further amended as follows: (i) by deleting the "." at the end of the definition of "CONSOLIDATED INTEREST EXPENSE" and substituting the following therefor: "; PROVIDED FURTHER that with respect to discounts relating to sales of Accounts, which sales are off-balance sheet and non-recourse to Company and its Subsidiaries, such discounts shall be included in the definition of `Consolidated Interest Expense' for purposes of this Agreement." (ii) by (x) deleting the reference to "and" immediately prior to clause (iii) of the proviso contained therein and (y) deleting the "." at the end of the definition of "ASSET SALE" and substituting the following therefor: ", and (iv) the sale of Accounts, notes and other evidences of Indebtedness, whether secured or unsecured, which sale is non-recourse to Company and its Subsidiaries, in each case in the ordinary course of business and consistent with the past practices of Company and its Subsidiaries as part of a governmental sponsored or private agency export credit program." (iii) by adding the following sentence to the end of the definition of "INVESTMENT": "The definition of `Investment' shall not include any Indebtedness or Accounts that are current assets and that arose from sales of goods and services in the ordinary course of business and consistent with the past practices of Company and its Subsidiaries." C. ADDITION OF NEW DEFINITIONS. Subsection 1.1 of the Credit Agreement is hereby further amended by adding thereto the following definitions which shall be inserted in proper alphabetical order: "'ACCOUNT' means, with respect to any Person, all present and future rights of such Person to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance. `ELIGIBLE ACCOUNTS RECEIVABLE VALUE' means, with respect to a Person, the book value of all Accounts of such Person which may be properly classified as accounts receivable in conformity with GAAP LESS customary reserves for returns, discounts, deductions, claims, credits, charges or other customary allowances in conformity with GAAP. 4 `ELIGIBLE INVENTORY VALUE' means, with respect to a Person, the gross book value of all Inventory of such Person which may be properly classified as inventory in conformity with GAAP LESS customary reserves for damaged, obsolete or worn-out goods, goods returned by customers or other customary allowances in conformity with GAAP. `FIRST AMENDMENT EFFECTIVE DATE' means the date on which that certain First Amendment to Credit Agreement dated as of August 31, 1998 by and among Borrowers, Lenders, Indemnifying Lenders, Administrative Agent and Syndication Agent becomes effective in accordance with its terms, which date shall be no later than September 18, 1998. `INVENTORY' means, with respect to any Person, all goods, merchandise and other personal property which are held by such Person for sale or lease, including those held for display or demonstration, including without limitation raw materials, works in progress, finished goods and spare parts. `YEAR 2000 PROBLEM' means any significant risk that computer hardware, software or equipment containing embedded microchips essential to the business or operations of Company or any of its Subsidiaries will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of times or time periods occurring before January 1, 2000, including the making of accurate leap year calculations." 1.2 AMENDMENTS TO SECTION 2: AMOUNTS AND TERMS OF COMMITMENTS AND LOANS. Subsection 2.2A of the Credit Agreement is hereby amended by deleting the reference to "the Applicable Base Rate Margin, the Applicable Offshore Rate Margin and" contained in the last sentence of such subsection 2.2A. 1.3 AMENDMENTS TO SECTION 6: BORROWERS' AFFIRMATIVE COVENANTS. Section 6 of the Credit Agreement is hereby amended by adding at the end of said Section 6 a new subsection 6.11 as follows: "6.11 YEAR 2000 COVENANT. Each Borrower has reviewed, or will expeditiously review, its operations and those of its Subsidiaries with a view to assessing whether its businesses, or the businesses of any of its Subsidiaries, will be vulnerable to a Year 2000 Problem or to the effects of a Year 2000 Problem suffered by any of Company's or any of its Subsidiaries' major commercial counter-parties. Each Borrower shall take all actions necessary and commit adequate resources 5 to assure that its computer-based and other systems (and those of all Subsidiaries) are able to effectively process data, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem that could cause a Material Adverse Effect. At the request of Administrative Agent, each Borrower will provide Administrative Agent with assurances and substantiations (including without limitation the results of internal or external audit reports prepared in the ordinary course of business) reasonably acceptable to Administrative Agent as to the capability of each Borrower and its Subsidiaries to conduct its and their businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem causing a Material Adverse Effect. Each Borrower represents and warrants that it has a reasonable basis to believe that no Year 2000 Problem will cause a Material Adverse Effect." 1.4 AMENDMENTS TO SECTION 7: BORROWERS' NEGATIVE COVENANTS. A. INDEBTEDNESS. Subsection 7.1(ix) of the Credit Agreement is hereby amended by deleting the reference to "$7,500,000" contained therein and substituting "$25,000,000" therefor. B. CONTINGENT OBLIGATIONS. Subsection 7.4 of the Credit Agreement is hereby amended as follows: (i) by deleting the reference to "$10,000,000" contained in clause (iii) of said subsection 7.4 and substituting "$20,000,000" therefor; and (ii) by (x) deleting the reference to "and" immediately prior to subclause (c) contained therein and (y) deleting the ";" at the end of clause (ix) of said subsection 7.4 and adding the following therefor: "; and (d) may become and remain liable with respect to the sale of Accounts, notes and other evidences of Indebtedness, whether secured or unsecured, which sale is non-recourse to Company and its Subsidiaries, in each case in the ordinary course of business and consistent with the past practices of Company and its Subsidiaries as part of a government sponsored or private agency export credit program, so long as such liability relates only to interest rate changes between the time of the origination of such Indebtedness and its repayment and to Company's and its Subsidiaries' title to the Indebtedness being sold, its or their authority to enter into sale transactions, and other representations and warranties (other than with respect to the obligor's repayment of Indebtedness) as are customary for such sale transactions;" C. RESTRICTED JUNIOR PAYMENTS. Subsection 7.5 of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: 6 "7.5 RESTRICTED JUNIOR PAYMENTS. No Borrower shall nor shall any Borrower permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; PROVIDED that (i) Company may make payments of regularly scheduled interest in respect of the Senior Subordinated Notes, in accordance with the terms of and to the extent required by, and subject to the subordination provisions contained in, the Senior Subordinated Note Indenture; (ii) Company may make repurchases of Senior Subordinated Notes in an aggregate amount not to exceed $25,000,000 (including principal, interest, premiums, fees and other expenses) so long as (x) no Event of Default or Potential Event of Default shall have occurred and be continuing or shall be caused thereby and (y) the Consolidated Leverage Ratio, after giving PRO FORMA effect to such repurchases and any Indebtedness incurred in connection therewith, for the immediately preceding four consecutive Fiscal Quarter period prior to such date of determination does not exceed 3.00:1.00; and (iii) so long as (x) no Event of Default or Potential Event of Default shall have occurred and be continuing or shall be caused thereby and (y) the Consolidated Leverage Ratio for the immediately preceding four consecutive Fiscal Quarter period prior to such date of determination does not exceed 3.00:1.00, Company may make Restricted Junior Payments to Holdings (X) in an aggregate amount not to exceed $500,000 in any Fiscal Year (PROVIDED that, in the event Company changes its Fiscal Year-end from September 30 to December 31, then for such fifteen-month Fiscal Year such aggregate amount shall not exceed $625,000) in order to permit Holdings to pay general administrative costs and expenses, (Y) in an aggregate amount not to exceed in the aggregate $1,000,000 in any Fiscal Year (PROVIDED that, in the event Company changes its Fiscal Year-end from September 30 to December 31, then for such fifteen-month Fiscal Year such aggregate amount shall not exceed $1,250,000; PROVIDED FURTHER that the unused portion of such $1,000,000 (or $1,250,000 for such fifteen-month Fiscal Year) may be carried forward to the succeeding Fiscal Year, but only to an aggregate amount not to exceed $2,000,000 of such Restricted Junior Payments for any given Fiscal Year (or $2,500,000 for such fifteen-month Fiscal Year)) or $5,000,000 during the term of this Agreement PLUS the net cash proceeds of any issuance of Holdings Common Stock to Management Investors and other officers and employees of Company and its Subsidiaries in accordance with the terms of the Stockholders Agreement and the Management Investment Incentive Plan, which net cash proceeds have been contributed to Company, and (Z) in an amount necessary to permit Holdings to discharge the consolidated tax liabilities of Holdings, Company and Company's Subsidiaries, in each case so long as Holdings applies the amount of any such Restricted Junior Payment for such purpose." 7 D. MINIMUM FIXED CHARGE RATIO. Subsection 7.6A of the Credit Agreement is hereby amended by deleting the table contained therein in its entirety and substituting the following therefor:
" PERIOD MINIMUM FIXED CHARGE RATIO --------------- -------------------------- September 30, 1998 0.80:1.00 December 31, 1998 0.80:1.00 March 31, 1999 0.95:1.00 June 30, 1999 1.20:1.00 September 30, 1999 1.20:1.00 December 31, 1999 1.40:1.00 March 31, 2000 1.40:1.00 June 30, 2000 1.40:1.00 September 30, 2000 1.40:1.00 December 31, 2000 1.50:1.00 March 31, 2001 1.50:1.00 June 30, 2001 1.50:1.00 September 30, 2001 1.50:1.00 December 31, 2001 1.50:1.00 March 31, 2002 1.50:1.00 June 30, 2002 1.50:1.00 September 30, 2002 1.50:1.00 December 31, 2002 1.50:1.00"
E. MAXIMUM CONSOLIDATED LEVERAGE RATIO. Subsection 7.6B of the Credit Agreement is hereby amended by deleting the table contained therein in its entirety and substituting the following therefor:
MAXIMUM CONSOLIDATED " PERIOD LEVERAGE RATIO ------------- -------------------- September 30, 1998 9.75:1.00 December 31, 1998 9.00:1.00 March 31, 1999 7.75:1.00 June 30, 1999 6.10:1.00 September 30, 1999 6.10:1.00 December 31, 1999 5.35:1.00 March 31, 2000 4.75:1.00 June 30, 2000 4.75:1.00 September 30, 2000 4.75:1.00 December 31, 2000 4.75:1.00 March 31, 2001 4.75:1.00 June 30, 2001 4.75:1.00
8
MAXIMUM CONSOLIDATED " PERIOD LEVERAGE RATIO ------------- -------------------- September 30, 2001 4.75:1.00 December 31, 2001 4.75:1.00 March 31, 2002 4.75:1.00 June 30, 2002 4.75:1.00 September 30, 2002 4.75:1.00 December 31, 2002 4.75:1.00"
F. MINIMUM CONSOLIDATED ADJUSTED EBITDA. Subsection 7.6C of the Credit Agreement is hereby amended by deleting the table contained therein in its entirety and substituting the following therefor:
MINIMUM CONSOLIDATED " PERIOD ADJUSTED EBITDA ----------- -------------------- September 30, 1998 $30,000,000 December 31, 1998 $36,000,000 March 31, 1999 $44,000,000 June 30, 1999 $60,000,000 September 30, 1999 $60,000,000 December 31, 1999 $75,000,000 March 31, 2000 $75,000,000 June 30, 2000 $75,000,000 September 30, 2000 $75,000,000 December 31, 2000 $75,000,000 March 31, 2001 $80,000,000 June 30, 2001 $80,000,000 September 30, 2001 $80,000,000 December 31, 2001 $80,000,000 March 31, 2002 $80,000,000 June 30, 2002 $80,000,000 September 30, 2002 $80,000,000 December 31, 2002 $80,000,000
; PROVIDED that, for purposes of this subsection 7.6C only, (i) with respect to the Fiscal Quarter ended on September 30, 1998, Consolidated Adjusted EBITDA shall be for the 9 immediately preceding one Fiscal Quarter period; (ii) with respect to the Fiscal Quarter ended on December 31, 1998, Consolidated Adjusted EBITDA shall be for the immediately preceding two-consecutive Fiscal Quarter period; (iii) with respect to the Fiscal Quarter ended on March 31, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding three-consecutive Fiscal Quarter period; and (iv) for each subsequent Fiscal Quarter after the Fiscal Quarter ended on March 31, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding four-consecutive Fiscal Quarter period ending as of the last day of any Fiscal Quarter occurring during any of the periods set forth above." G. MINIMUM CONSOLIDATED NET WORTH. Subsection 7.6D of the Credit Agreement is hereby amended by deleting the table set forth therein in its entirety and substituting the following therefor:
MINIMUM CONSOLIDATED " PERIOD NET WORTH ------------- -------------------- September 30, 1998 $72,000,000 December 31, 1998 $62,000,000 March 31, 1999 $55,000,000 June 30, 1999 $55,000,000 September 30, 1999 $65,000,000 December 31, 1999 $70,000,000 March 31, 2000 $65,000,000 June 30, 2000 $67,000,000 September 30, 2000 $72,000,000 December 31, 2000 $74,000,000 March 31, 2001 $76,000,000 June 30, 2001 $78,000,000 September 30, 2001 $80,000,000 December 31, 2001 $85,000,000 March 31, 2002 $85,000,000 June 30, 2002 $85,000,000 September 30, 2002 $85,000,000 December 31, 2002 $85,000,000"
H. MINIMUM ASSET COVERAGE. Subsection 7.6 is hereby amended by adding immediately after subsection 7.6D the following: "E. MINIMUM ASSET COVERAGE. Company shall not permit the sum of (x) 85% of the Eligible Accounts Receivable Value of Company and its Subsidiaries PLUS (y) 65% of the Eligible Inventory Value of Company and its Subsidiaries to be less than the product of (a) 1.10 MULTIPLIED BY (b) the aggregate 10 principal amount of all outstanding Loans and Letters of Credit, in each case as of the last day of the Fiscal Quarter for which such determination is being made." I. RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. Subsection 7.7 of the Credit Agreement is hereby amended by (a) deleting the reference to "$30,000,000 for any given Fiscal Year" contained in clause (iii) and substituting "$30,000,000 for any given Fiscal Year (PROVIDED that, in the event Company changes its Fiscal Year-end from September 30 to December 31, then for such fifteen-month Fiscal Year such aggregate amount shall not exceed $37,500,000)" therefor, and (b) deleting the reference to "$5,000,000 for any given Fiscal Year" contained in clause (v) and substituting "$5,000,000 for any given Fiscal Year (PROVIDED that, in the event Company changes its Fiscal Year-end from September 30 to December 31, then for such fifteen-month Fiscal Year such aggregate amount shall not exceed $6,250,000)" therefor. J. CONSOLIDATED CAPITAL EXPENDITURES. Subsection 7.8 of the Credit Agreement is hereby amended by deleting the table contained therein in its entirety and substituting the following therefor:
MAXIMUM CONSOLIDATED " FISCAL YEAR CAPITAL EXPENDITURES ------------------- ---------------------- Fiscal Year 1998 $27,500,000 Fiscal Year 1999 $20,000,000 Fiscal Year 2000 and each Fiscal Year thereafter $20,000,000
; PROVIDED that, in the event Company changes its Fiscal Year-end from September 30 to December 31, then for such fifteen-month Fiscal Year the Maximum Consolidated Capital Expenditures Amount shall not exceed $25,000,000." G. FISCAL YEAR. Subsection 7.14 is hereby amended by deleting it in its entirety and substituting the following therefor: "7.14 FISCAL YEAR. None of Company nor any of its Subsidiaries shall change its Fiscal Year-end from September 30 or December 31, as the case may be, without giving 60 days notice to Administrative Agent and Lenders of such change." 1.5 AMENDMENTS TO EXHIBITS. ATTACHMENT I to EXHIBIT VI to the Credit Agreement is hereby amended as follows: (i) by deleting the reference to "$7,500,000" set forth in Item A.14 of said ATTACHMENT I to EXHIBIT VI and substituting "$25,000,000" therefor; 11 (ii) by deleting the reference to "$10,000,000" set forth in Item C.2 of said ATTACHMENT I to EXHIBIT VI and substituting "$20,000,000" therefor; (iii) by (x) deleting the reference to "$500,000" set forth in Item D.7 of said ATTACHMENT I to EXHIBIT VI and substituting "$500,000(1)" therefor, and (y) adding the following text of such footnote 1 at the bottom of the appropriate page of said ATTACHMENT I to EXHIBIT VI: "(1) In the event that Company changes its Fiscal Year-end from September 30 to December 31, then such maximum permitted amount shall be $625,000"; (iv) by adding (x) footnote 2 [2] immediately after the reference to "(for the four-Fiscal Quarter period ending __________, _______)" set forth in the introductory line of Item G of said ATTACHMENT I to EXHIBIT VI and (y) the following text of such footnote 2 at the bottom of the appropriate page of said ATTACHMENT I to EXHIBIT VI: "(2) With respect to (i) the Fiscal Quarter ended on September 30, 1998, Consolidated Adjusted EBITDA shall be for the immediately preceding one Fiscal Quarter period; (ii) the Fiscal Quarter ended on December 31, 1998, Consolidated Adjusted EBITDA shall be for the immediately preceding two-consecutive Fiscal Quarter period; (iii) the Fiscal Quarter ended on March 31, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding three-consecutive Fiscal Quarter period; and (iv) each subsequent Fiscal Quarter after the Fiscal Quarter ended on March 31, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding four-consecutive Fiscal Quarter period ending as of the last day of any Fiscal Quarter."; (v) by (x) adding the following as the new line 7 to Item G of said ATTACHMENT I to EXHIBIT VI: "7. Salary and workforce reductions (for any period including December 31, 1998 only and not to exceed $6,500,000): $___________"; (y) renumbering the original lines 7 through 11 as new lines 8 through 12; and (z) deleting the parenthetical contained in the original line 10 (the new line 11) in its entirety and substituting the following therefor: "((1+2+3+4+5+6+7+8)-(9+10))"; (vi) by (x) deleting the reference to "$30,000,000" set forth in Item I.2 of said ATTACHMENT I to EXHIBIT VI and substituting "$30,000,0003" therefor, and (y) adding the following text of such footnote 3 at the bottom of the appropriate page of said ATTACHMENT I to EXHIBIT VI: "(3) In the event that Company changes its Fiscal Year-end from September 30 to December 31, then such maximum permitted amount shall be $37,500,000"; (vii) by (x) deleting the reference to "$5,000,000" set forth in Item I.6 of said ATTACHMENT I to EXHIBIT VI and substituting "$5,000,000(4)" therefor, and 12 (y) adding the following text of such footnote 4 at the bottom of the appropriate page of said ATTACHMENT I to EXHIBIT VI: "(4) In the event that Company changes its Fiscal Year-end from September 30 to December 31, then such maximum permitted amount shall be $6,250,000"; and (viii) by adding immediately after Item J of said ATTACHMENT I to EXHIBIT VI the following: "K. MINIMUM ASSET COVERAGE (as of ___________, _______). 1. Eligible Accounts Receivable Value: $___________ 2. 85% of Eligible Accounts Receivable Value (0.85 x Item K.1): $___________ 3. Eligible Inventory Value: $___________ 4. 65% of Eligible Inventory Value (0.65 x Item K.3): $___________ 5. Aggregate principal amount of all outstand- ing Loans and Letters of Credit: $___________ 6. Product of 1.10 MULTIPLIED BY Item K.5: $___________ 7. Sum of Item K.3 PLUS Item K.4 (Item K.7 may not exceed Item K.6): $___________" SECTION 2. CONDITIONS TO EFFECTIVENESS Section 1 of this Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "FIRST AMENDMENT EFFECTIVE DATE"): A. BORROWER DOCUMENTS. On or before the First Amendment Effective Date, each Borrower shall deliver to Lenders (or to Administrative Agent for Lenders) the following, each, unless otherwise noted, dated the First Amendment Effective Date: 13 1. Resolutions of its Board of Directors approving and authorizing the execution, delivery and performance of this Amendment, certified as of the First Amendment Effective Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; 2. Signature and incumbency certificates of their respective officers executing this Amendment; and 3. Six executed copies of this Amendment. B. EXECUTION OF AMENDMENT BY REQUISITE LENDERS. On or before the First Amendment Effective Date, Requisite Lenders shall have executed and delivered copies of this Amendment to Administrative Agent. C. FEES. On or before the First Amendment Effective Date, Company shall pay to Administrative Agent, for distribution to each Lender who executes this Amendment on or before the First Amendment Effective Date in proportion to that Lender's Pro Rata share of the Revolving Loan Commitments, an amendment fee equal to 0.250% of the Revolving Loan Commitments. D. OTHER PROCEEDINGS. On or before the First Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Administrative Agent and such counsel, and Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request. SECTION 3. BORROWERS' REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, each Borrower represents and warrants to each Lender that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. Each Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "AMENDED AGREEMENT"). B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of each Borrower. C. NO CONFLICT. The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of the Amended Agreement do not 14 and will not (i) violate any provision of any law or any governmental rule or regulation applicable to such Borrower or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of such Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on such Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of such Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of such Borrower or any of its Subsidiaries (other than Liens created under any of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of such Borrower or any of its Subsidiaries. D. GOVERNMENTAL CONSENTS. The execution and delivery by each Borrower of this Amendment and the performance by such Borrower of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been duly executed and delivered by each Borrower and are the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 5 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default. SECTION 4. ACKNOWLEDGEMENT AND CONSENT Company is a party to certain Guaranties and each Borrower is a party to certain Collateral Account Agreements, Security Agreements, Pledge Agreements, Trademark Security Agreements, Patent Security Agreements and Mortgages pursuant to which such Borrower has created Liens in favor of Administrative Agent on certain Collateral to secure the Obligations. Holdings is a party to a Guaranty and certain Security Agreements and Pledge Agreements pursuant to which Holdings has (i) guarantied the Obligations and (ii) created Liens in favor of Administrative Agent on certain Collateral to secure its 15 obligations under the Guaranty. Each Borrower and Holdings are collectively referred to herein as the "CREDIT SUPPORT PARTIES", and all such Guaranties and Collateral Documents referred to above are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS". Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guarantee or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of the Borrowers now or hereafter existing under or in respect of the Amended Agreement. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the First Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party (other than the Borrowers) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. SECTION 5. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (i) On and after the First Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" 16 or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of any Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. B. FEES AND EXPENSES. Each Borrower acknowledges that all costs, fees and expenses as described in subsection 10.2 of the Credit Agreement incurred by Administrative Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrowers. C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. D. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. E. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 17 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. GOSS GRAPHIC SYSTEMS, INC., as a Borrower By: ______________________ Title: ___________________ GOSS GRAPHIC SYSTEMS LIMITED, as a Borrower By: ______________________ Title: ___________________ GOSS SYSTEMES GRAPHIQUES NANTES S.A., as a Borrower By: ______________________ Title: ___________________ GOSS GRAPHIC SYSTEMS JAPAN CORPORATION, as a Borrower By: ______________________ Title: ___________________ GGS HOLDINGS, INC., as a Credit Support Party By: ______________________ Title: ___________________ 18 LENDERS: BANKERS TRUST COMPANY, as Administrative Agent and as a Lender By: _________________________ Title: ______________________ 19 CREDIT SUISSE FIRST BOSTON, as Syndication Agent and as a Lender By: ______________________________ Title:____________________________ By: ______________________________ Title: ___________________________ 20 THE BANK OF NOVA SCOTIA, as a Lender By:_____________________________ Title: _________________________ 21 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, as a Lender By: ______________________________ Title: ___________________________ 22 THE BANK OF NEW YORK, as a Lender By: ______________________________ Title: ___________________________ 23 NATIONSBANK, N.A., as a Lender By: ______________________________ Title: ___________________________ 24 CREDIT AGRICOLE INDOSUEZ, as a Lender By: _______________________________ Title: ____________________________ By: _______________________________ Title: ____________________________ 25 DEUTSCHE FINANCIAL SERVICES CORPORATION, as a Lender and as an Indemnifying Lender By: _______________________________ Title: ____________________________ 26 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By: ______________________________ Title: ___________________________ 27 THE FUJI BANK, LIMITED, as a Lender By: ______________________________ Title: ___________________________ 28 HARRIS TRUST AND SAVINGS BANK, as a Lender By: _____________________________ Title: __________________________ 29 THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY, as a Lender and as an Indemnifying Lender By: ______________________________ Title: ___________________________ 30 LASALLE NATIONAL BANK, as a Lender By: _______________________________ Title: ____________________________ 31 NATIONAL BANK OF CANADA, A CANADIAN CHARTERED BANK, as a Lender By: _______________________________ Title: ____________________________ By: _______________________________ Title: ____________________________ 32 THE SANWA BANK, LIMITED, CHICAGO BRANCH, as a Lender By: _______________________________ Title: ____________________________ 33 GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: ________________________________ Title: _____________________________ 34 NATIONAL WESTMINSTER BANK PLC, NASSAU BRANCH, as a Lender By: _______________________________ Title: Manager and Vice President NATIONAL WESTMINSTER BANK PLC, NEW YORK BRANCH, as a Lender By: _______________________________ Title: Manager and Vice President 35 BARCLAYS BANK PLC, as a Lender By: _________________________________ Title: ______________________________ 36 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: _________________________________ Title: ______________________________ By: _________________________________ Title: ______________________________ 37 CIBC INC., as a Lender and as an Indemnifying Lender By: _________________________________ Title: ______________________________ 38 SECOND AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVER This SECOND AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVER (this "AMENDMENT") is dated as of January 12, 1999 and entered into by and among GOSS GRAPHIC SYSTEMS, INC., a corporation organized under the laws of the State of Delaware ("COMPANY") and whose registered office is at 700 Oakmont Lane, Westmont, Illinois 60559, GOSS GRAPHIC SYSTEMS LIMITED (Company Number 3212468), a company organized under the laws of England ("GOSS UK") and whose registered office is at Greenbank Street, Preston, Lancashire PR1 7LA, GOSS SYSTEMES GRAPHIQUES NANTES, S.A., a SOCIETE ANONYME organized under the laws of the Republic of France ("GOSS FRANCE") and whose registered office is at 20, rue de Koufra, 44300 Nantes, GOSS GRAPHIC SYSTEMS JAPAN CORPORATION, a corporation organized under the laws of Japan ("GOSS JAPAN"; and together with Company, Goss UK and Goss France, the "BORROWERS") and whose registered office is at Mitsuya Toranomon Building, 22-14 Toranomon 1-Chome, Minato-Ku, Tokyo 105, THE FINANCIAL INSTITUTIONS ACTING AS LENDERS AND LISTED ON THE SIGNATURE PAGES HEREOF, THE FINANCIAL INSTITUTIONS ACTING AS INDEMNIFYING LENDERS AND LISTED ON THE SIGNATURE PAGES HEREOF, BANKERS TRUST COMPANY, as administrative agent for the Lenders (in such capacity, "ADMINISTRATIVE AGENT") and whose registered office is at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006, and CREDIT SUISSE FIRST BOSTON ("CSFB"), as syndication agent for Lenders (in such capacity, "SYNDICATION AGENT") and whose offices are at 11 Madison Avenue, New York, New York 10010, and, for purposes of Section 5 hereof, the Credit Support Parties (as defined in Section 5 hereof) listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Multicurrency Credit Agreement dated as of January 29, 1998, by and among Borrowers, Lenders, Indemnifying Lenders, Administrative Agent, Syndication Agent and certain other parties, as amended by that certain First Amendment dated as of August 31, 1998 (as so amended, the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Borrower and Lenders desire to amend the Credit Agreement to include a borrowing base with respect to Revolving Loans; and WHEREAS, Borrowers and Lenders also desire to amend the Credit Agreement to (i) amend certain of the defined terms contained therein, (ii) amend certain of the financial covenants contained therein, and (iii) make certain other amendments, all as more specifically set forth herein: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 AMENDMENTS TO RECITALS. The Recitals to the Credit Agreement are hereby amended by deleting the reference to "$175,000,000" contained in the second recital and substituting "up to $175,000,000" therefor. 1.2 AMENDMENTS TO SECTION 1: PROVISIONS RELATING TO DEFINED TERMS. A. AMENDMENTS TO EXISTING DEFINITIONS. Subsection 1.1 of the Credit Agreement is hereby amended as follows: the definitions "Applicable Base Rate Margin", "Applicable Offshore Rate Margin", "Commitment Fee Percentage", "Consolidated Leverage Ratio", "Eligible Accounts Receivable Value", "Eligible Inventory Value", "Inventory" and "Maximum Revolving Loan Commitments" are each hereby amended by deleting each definition in its entirety and substituting the following therefor: "APPLICABLE BASE RATE MARGIN" means, as of any date of determination, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio:
CONSOLIDATED LEVERAGE RATIO APPLICABLE BASE RATE MARGIN greater than or equal to 4.00:1.00 2.25% less than 4.00:1.00 2.00% but greater than or equal to 3.50:1.00 less than 3.50:1.00 1.75% but greater than or equal to 3.00:1.00 less than 3.00:1.00 1.50%
; PROVIDED that until adjusted in accordance with the provisions of subsection 2.2A, the Applicable Base Rate Margin shall be 2.25% per annum effective on the Second Amendment Effective Date. 2 "APPLICABLE OFFSHORE RATE MARGIN" means, as of any date of determination, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio:
CONSOLIDATED LEVERAGE RATIO APPLICABLE OFFSHORE RATE MARGIN greater than or equal to 4.00:1.00 3.25% less than 4.00:1.00 3.00% but greater than or equal to 3.50:1.00 less than 3.50:1.00 2.75% but greater than or equal to 3.00:1.00 less than 3.00:1.00 2.50%
; PROVIDED that until adjusted in accordance with the provisions of subsection 2.2A, the Applicable Offshore Rate Margin shall be 3.25% per annum effective on the Second Amendment Effective Date. "COMMITMENT FEE PERCENTAGE" means, as of any date of determination, 0.500% per annum. "CONSOLIDATED LEVERAGE RATIO" means, as at any date of determination, the ratio of (x) Consolidated Total Debt, as of the last day of the Fiscal Quarter for which such determination is being made, to (y) Consolidated Adjusted EBITDA for the four-Fiscal Quarter period ending as of the last day of the Fiscal Quarter for which such determination is being made. "ELIGIBLE ACCOUNTS RECEIVABLE" means the aggregate amount of all Accounts of all Borrowers deemed by Administrative Agent in the exercise of its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, the face amount of such Accounts shall be reduced by the amount of all returns, discounts, deductions, claims, credits, charges, or other allowances. Unless otherwise approved in writing by Administrative Agent, an Account shall not be an Eligible Account Receivable if: (a) it arises out of a sale made by a Borrower to an Affiliate; or (b) the goods giving rise to such Account have been shipped, delivered and invoiced, and title has passed, to the account debtor and such Account is classified by a Borrower in accordance with its past practices and procedures as an "account receivable not yet due" (collectively, the "EXTENDED PAYMENT ACCOUNTS"), but only to the extent (1) the aggregate amount of all such Extended Payment Accounts of all Borrowers exceeds 20% of all Accounts of all Borrowers or (2) final payment on such an Extended Payment Account shall not be received by such Borrower within 270 days after shipment and delivery of the goods giving rise to such Extended Payment Account; or (c) it is unpaid more than 90 days after the original payment due date; or 3 (d) it is from the same account debtor or its Affiliate and fifty percent (50%) or more of all Accounts from that account debtor (and its Affiliates) are ineligible under (c) above; or (e) when aggregated with all other Accounts of an account debtor, such Account exceeds 25% in face value of all Accounts of all Borrowers then outstanding, but only to the extent of such excess, unless such excess is supported by an irrevocable letter of credit satisfactory to Administrative Agent (as to form, substance and issuer) and assigned to Administrative Agent; or (f) the account debtor for such Account is a creditor of any Borrower, has or has asserted a right of setoff against such Borrower, or has disputed its liability or otherwise has made any claim with respect to such Account or any other Account which has not been resolved, in each case to the extent of the amount owed by such Borrower to such account debtor, the amount of such actual or asserted right of setoff, or the amount of such dispute or claim, as the case may be; or (g) the account debtor is (or its assets are) the subject of any of the events described in subsection 8.6 or 8.7; or (h) (1) such Account is not payable in Dollars, an Offshore Currency or any other freely convertible or exchangeable currency or (2) the account debtor for such Account is located outside the United States, the EU or Japan, except to the extent (x) the aggregate amount of such Accounts of all Borrowers which do not comply with sub-clause (2) above does not exceed 20% of the aggregate amount of all Accounts of all Borrowers, or (y) such Account is supported by an irrevocable letter of credit, a guaranty or any other financing arrangement, in each case satisfactory to Administrative Agent (as to form, substance and issuer) and assigned to Administrative Agent; or (i) the sale to the account debtor is on a bill-and-hold, guarantied sale, sale-and-return, sale on approval or consignment basis or made pursuant to any other written agreement providing for repurchase or return; or (j) Administrative Agent determines by its own credit analysis that collection of such Account is uncertain or that such Account may not be paid; or (k) the account debtor is any federal, state, local, provincial, or other comparable or similar governmental authority, agency or instrumentality; PROVIDED that if the account debtor is the United States of America, the UK, France or Japan, or any department, agency or instrumentality thereof, such Account shall not be ineligible solely as a result of this clause (k) if the applicable Loan Party duly assigns its rights to payment of such Account to Administrative Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. ss.ss. 3727 et seq.) or the comparable law, code or regulation in the UK, France or Japan, as the case may be; or 4 (l) such Account does not comply with all requirements of all applicable laws, rules, regulations and orders of any governmental authority, including without limitation the Federal Consumer Credit Protection Act, the Federal Truth in Lending Act, Regulation Z of the Board of Governors of the Federal Reserve System and all Environmental Laws; or (m) such Account arises as a result of any progress billing or such Account is subject to any adverse security deposit, progress payment or other similar advance made by or for the benefit of the applicable account debtor; or (n) the goods giving rise to such Account are subject to any Secured Customer Financing Arrangement or Customer Financing Note Guaranty; or (o) it is not subject to a valid and perfected First Priority Lien in favor of Administrative Agent or does not otherwise conform to the representations and warranties contained in the Loan Documents; PROVIDED that no Account which is otherwise an Eligible Account Receivable shall be excluded under this clause (o) solely as a result of (i) in the case of Goss UK and Goss France, the account debtor for such Account is located in a jurisdiction other than that of the UK or France so long as such account debtor is in the EU; and (ii) in the case of Goss Japan, such Account is not subject to a perfected Lien in favor of Administrative Agent solely because (x) no notification of Administrative Agent's security interest in such Account has been provided to the account debtor or (y) Administrative Agent has not taken possession of any drafts or checks related to such Account; or (p) it is an Account with a customer credit balance that is unpaid more than 90 days after the original payment date for which a debit balance exists; or (q) it is not owned solely by a Borrower or such Borrower does not have good, valid and marketable title thereto; PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "ELIGIBLE INVENTORY" means the aggregate amount of Inventory of all Borrowers deemed by Administrative Agent in the exercise of its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, such Inventory shall be valued at the lower of cost or market, on a basis consistent with Borrowers' current and historical accounting practice. Unless otherwise approved in writing by Administrative Agent, an item of Inventory shall not be included in Eligible Inventory if: 5 (a) it is not owned solely by a Borrower or such Borrower does not have good, valid and marketable title thereto; or (b) it is not located in the United States, the UK, France or Japan; or (c) other than finished goods constituting Inventory subject to a Secured Customer Financing Arrangement which are in the process of being installed by a Borrower for a period which does not exceed six months ("SPECIFIED FINISHED GOODS"), it consists of goods or Inventory (including consigned goods or Inventory) not located on property owned or leased by any Borrower or in a contract warehouse; PROVIDED that such goods or Inventory (other than consigned goods or Inventory) shall not be excluded under this clause (c) if such goods are located on property owned or leased by any Borrower or in a contract warehouse, in each case that is subject to a Collateral Access Agreement executed by any applicable mortgagee, lessor or contract warehouseman, as the case may be, and such goods are segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; or (d) it is not subject to a valid and perfected First Priority Lien in favor of Administrative Agent except, with respect to Inventory stored at sites described in clause (c) above, for Liens for unpaid rent or normal and customary warehousing charges; PROVIDED that no Inventory which is otherwise Eligible Inventory shall be excluded under this clause (d) solely as a result of, in the case of Goss UK and Goss France, Specified Finished Goods are being installed in a jurisdiction other than that of the UK or France so long as they are being installed in the EU; or (e) it consists of goods returned or rejected by any Borrower's customers, or goods (other than Specified Finished Goods) in transit to third parties (other than to warehouse sites covered by a Collateral Access Agreement); or (f) it consists of raw materials constituting Inventory which are sub-assemblies or works in process or other partially manufactured goods constituting Inventory; or (g) it is not first-quality goods, is obsolete or slow moving, or is not accountable due to loss or shrinkage or valuation capitalization, or does not otherwise conform to the representations and warranties contained in the Loan Documents; or 6 (h) it consists of Inventory to be included in finished goods and such Inventory has been assigned to specific contracts with customers who have made advance payments with respect to such Inventory on such contracts; PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "INVENTORY" means, with respect to a Person, all goods, merchandise and other personal property which are held by such Person for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service, including without limitation (but without duplication) raw materials, components, works in process, finished goods (including without limitation all completed offset newspaper press systems, insert web offset press systems and commercial web offset printing presses, or accessories thereto, and other related goods and merchandise, in each case constituting finished goods which are held for sale or lease by such Person, including those held for display or demonstration), spare parts (including without limitation all components, goods, merchandise or spare parts relating to press equipment held for sale or lease by such Person in connection with the servicing, maintenance or repair of finished goods sold or leased by such Person), or other materials used or consumed, or to be used or consumed, in the business of such Person; PROVIDED that "Inventory" shall not include any materials or other items that would otherwise constitute "Equipment". "MAXIMUM REVOLVING LOAN COMMITMENTS" means, as of any date of determination, (x) for any Borrower, the Dollar Equivalent of the Revolving Loan Commitments available to such Borrower as set forth in the most recent Notice of Allocation delivered by Borrowers to Administrative Agent pursuant to subsection 2.1A(i)(b), and (y) for all Borrowers, (1) for the period from and including the Effective Date to but excluding January 1, 2001, the Dollar Equivalent of $200,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii), (2) for the period from and including January 1, 2001 to but excluding January 1, 2002, the Dollar Equivalent of $175,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii), and (3) for the period from and including January 1, 2002 through and including the Commitment Termination Date, the Dollar Equivalent of $150,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii)." B. AMENDMENTS TO EXISTING DEFINITIONS. Subsection 1.1 of the Credit Agreement is hereby further amended by deleting the reference to "$175,000,000" contained in the definition of "Letters of Credit Suballocation" and substituting "the Maximum Letter of Credit Amount" therefor. 7 C. ADDITION OF NEW DEFINITIONS. Subsection 1.1 of the Credit Agreement is hereby further amended by adding thereto the following definitions which shall be inserted in proper alphabetical order: "BORROWING BASE" means, as at any date of determination, an aggregate amount equal to: (i) eighty-five percent (85%) of Eligible Accounts Receivable of all Borrowers, PLUS (ii) sixty-five percent (65%) of Eligible Inventory of all Borrowers, PLUS (iii) fifty percent (50%) of Eligible Equipment of all Borrowers, PLUS (iv) fifty percent (50%) of Eligible Real Property of all Borrowers, PLUS (v) fifty percent (50%) of Eligible Intellectual Property of all Borrowers, MINUS (vi) the aggregate amount of reserves, if any, established by Administrative Agent in the exercise of its Permitted Discretion against Eligible Accounts Receivable, Eligible Inventory, Eligible Equipment, Eligible Real Property and Eligible Intellectual Property of Borrowers; PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may (a) increase or decrease reserves against Eligible Accounts Receivable, Eligible Inventory, Eligible Equipment, Eligible Real Property and Eligible Intellectual Property of Borrowers and (b) reduce the advance rates provided in this definition, or restore such advance rates to any level equal to or below the advance rates in effect as of the Second Amendment Effective Date. "BORROWING BASE CERTIFICATE" means a certificate substantially in the form of EXHIBIT XXVI annexed hereto delivered by Borrowers pursuant to subsection 6.1(xx). Borrowers shall complete such Borrowing Base Certificate based on the respective Dollar, Sterling, Franc, Mark or Yen amounts reflected for Accounts, Inventory, Equipment, Real Property Assets or Intellectual Property on Borrowers' financial books and records and shall, in addition, provide the Dollar Equivalent of such Sterling, Franc, Mark or Yen amounts as of the date of such Borrowing Base Certificate. For purposes of determining compliance with the provisions of this Agreement, Administrative Agent shall utilize the Dollar Equivalent of such Sterling, Franc, Mark or Yen amounts. "BTCC RECEIVABLES PURCHASE AGREEMENTS" means that certain receivables purchase agreement, dated as of November 27, 1998, entered into by and between BT Commercial Corporation and Company, and any and all related agreements, including without limitation any related put agreements, executed and delivered in connection with such receivables purchase agreement. 8 "CONTRIBUTED ACCOUNTS" means the Accounts, as set forth on SCHEDULE 1.1(B) annexed hereto, purchased by BT Commercial Corporation from Company and which Contributed Accounts, with a face value of not less than $35,000,000, shall be purchased by Stonington Equity Sub from BT Commercial Corporation and contributed by Stonington Equity Sub to Company as the Stonington 1999 Equity Contribution, in each case pursuant to the BTCC Receivables Purchase Agreements. "ELIGIBLE EQUIPMENT" means the aggregate amount of all Equipment of all Borrowers deemed by Administrative Agent in the exercise of its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, such Equipment shall be valued at the liquidation value of such Equipment. Unless otherwise approved in writing by Administrative Agent, an item of Equipment shall not be included in Eligible Equipment if: (a) it is not owned solely by a Borrower or such Borrower does not have good, valid and marketable title thereto; or (b) it is not located in the United States, the UK, France or Japan; or (c) it is not subject to a valid and perfected First Priority Lien in favor of Administrative Agent; or (d) it is not first-quality goods, is obsolete or slow moving, or does not otherwise conform to the representations and warranties contained in the Loan Documents; PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "ELIGIBLE INTELLECTUAL PROPERTY" means the aggregate amount of all Intellectual Property of all Borrowers deemed by Administrative Agent in the exercise of its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, such Intellectual Property shall be valued at fair market value. Unless otherwise approved in writing by Administrative Agent, an item of Intellectual Property shall not be included in Eligible Intellectual Property if: (a) it is not owned solely by a Borrower or such Borrower does not have good, valid and marketable title thereto; or (b) it is not subject to a valid and perfected First Priority Lien in favor of Administrative Agent, or does not otherwise conform to the representations and warranties contained in the Loan Documents; 9 PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "ELIGIBLE REAL PROPERTY" means the aggregate amount of all Real Property Assets of all Borrowers deemed by Administrative Agent in the exercise of its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, such Real Property Assets shall be valued at fair market value. Unless otherwise approved in writing by Administrative Agent, an item of Real Property Assets shall not be included in Eligible Real Property Assets if: (a) it is not owned solely by a Borrower or such Borrower does not have good, valid and marketable title thereto; or (b) it is not located in the United States, the UK, France or Japan; or (c) it is not subject to a valid and perfected First Priority Lien in favor of Administrative Agent, or does not otherwise conform to the representations and warranties contained in the Loan Documents; PROVIDED that Administrative Agent, in the exercise of its Permitted Discretion, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "EQUIPMENT" means, with respect to a Person, all equipment in all of its forms, all parts thereof and all accessions thereto owned or held by such Person, including without limitation all equipment, parts and accessions relating to the manufacture, production, servicing, maintenance or repair of press systems, printing presses and related finished goods and spare parts; PROVIDED that "Equipment" shall not include any materials or other items that would otherwise constitute "Inventory". "EU" means the European Union. "INTELLECTUAL PROPERTY" means, with respect to a Person, any trademarks, servicemarks, tradenames, tradesecrets, business names, logos, patents, licenses and copyrights, any applications thereof, any registration and franchise rights and interest relating thereto, and any other intellectual property of any type, and any goodwill associated with any of the foregoing, owned or held by such Person. "INVESTMENT AGREEMENT" means that certain Investment Agreement dated as of January 12, 1999 entered into by and between Stonington Equity Sub and Holdings. 10 "MAXIMUM LETTER OF CREDIT AMOUNT" means, as of any date of determination, for all Borrowers, (1) for the period from and including the Effective Date to but excluding January 1, 2001, the Dollar Equivalent of $175,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii), (2) for the period from and including January 1, 2001 to but excluding January 1, 2002, the Dollar Equivalent of $150,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii), and (3) for the period from and including January 1, 2002 through and including the Commitment Termination Date, the Dollar Equivalent of $125,000,000 LESS the aggregate amount of all reductions made to all Revolving Loan Commitments pursuant to subsections 2.4A(ii) and 2.4.A(iii). "PERMITTED DISCRETION" means Administrative Agent's good faith judgment based upon any factor which it believes in good faith: (i) will or could adversely affect the value of any Collateral, the enforceability or priority of Administrative Agent's Liens thereon or the amount which Administrative Agent and Lenders would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral; (ii) suggests that any collateral report or financial information delivered to Administrative Agent by any Person on behalf of any Loan Party is incomplete, inaccurate or misleading in any material respect; (iii) materially increases the likelihood of a bankruptcy, reorganization or other insolvency proceeding involving any Borrower or any of its Subsidiaries or any of the Collateral; or (iv) creates or reasonably could be expected to create a Potential Event of Default or Event of Default. In exercising such judgment, Administrative Agent may consider such factors already included in or tested by the definition of Eligible Accounts Receivable, Eligible Inventory, Eligible Equipment, Eligible Real Property and Eligible Intellectual Property, as well as any of the following: (i) the financial and business climate of any Borrower's industry and general macroeconomic conditions, (ii) changes in collection history and dilution with respect to any such Borrower's Accounts, (iii) changes in demand for, and pricing of, any such Borrower's Inventory, (iv) changes in any concentration of risk with respect to such Accounts, Inventory, Equipment, Real Property Assets or Intellectual Property, and (v) any other factors that change the credit risk of lending to any Borrower on the security of such Accounts, Inventory, Equipment, Real Property Assets or Intellectual Property, including without limitation any foreign exchange risks or uncertainties. The burden of establishing lack of good faith shall be on Borrowers. "SECOND AMENDMENT EFFECTIVE DATE" means the date on which that certain Second Amendment to Credit Agreement dated as of January 12, 1999 by and among Borrowers, Lenders, Indemnifying Lenders, Administrative Agent and Syndication Agent becomes effective in accordance with its terms, which date shall be no later than January 13, 1999. "STONINGTON 1999 EQUITY CONTRIBUTION" means the equity contribution by Stonington Equity Sub to Company through Holdings of the Contributed Accounts. "STONINGTON EQUITY SUB" means Stonington Financing Inc., a Delaware corporation and an Affiliate of Stonington." 11 1.3 AMENDMENTS TO SECTION 2: AMOUNTS AND TERMS OF COMMITMENTS AND LOANS. A. ALLOCATION OF REVOLVING LOAN COMMITMENTS; NOTICES OF ALLOCATION. Subsection 2.1A(i)(b) of the Credit Agreement is hereby amended by deleting the reference to "$175,000,000" contained therein and substituting "the Maximum Letter of Credit Amount" therefor. B. LIMITATION ON REVOLVING LOANS. Subsection 2.1A(i)(c) of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: (c) LIMITATION ON REVOLVING LOANS. Anything contained in this Agreement to the contrary notwithstanding, the Revolving Loans and the Revolving Loan Commitments shall be subject to the limitations that: (1) in no event shall the Total Utilization of Commitments for all Borrowers then in effect exceed the Maximum Revolving Loan Commitments for all Borrowers then in effect; (2) in no event shall the Total Utilization of Commitments for any Borrower then in effect exceed the Maximum Revolving Loan Commitments for such Borrower then in effect; (3) in no event shall the Total Utilization of Commitments for all Borrowers then in effect exceed the Borrowing Base for all Borrowers then in effect; and (4) with respect to any Borrower, in no event shall the Dollar Equivalent of the sum of (x) the aggregate principal amount of all outstanding Revolving Loans made to such Borrower (other than Revolving Loans made for the purpose of repaying any Refunded Swing Line Loans in the case of Company, or reimbursing the applicable Issuing Lender for any amount drawn under any Letter of Credit but not yet so applied in the case of all Borrowers) PLUS (y) in the case of Company, the aggregate principal amount of all outstanding Swing Line Loans made to Company, exceed the Revolving Loan Suballocation for such Borrower then in effect." C. SWING LINE LOANS. Subsection 2.1A(ii) of the Credit Agreement is hereby amended by deleting the second paragraph contained therein in its entirety and substituting the following therefor: "Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the limitations that: 12 (1) in no event shall the Total Utilization of Commitments for all Borrowers then in effect exceed the Maximum Revolving Loan Commitments for all Borrowers then in effect; (2) in no event shall the Total Utilization of Commitments for Company then in effect exceed the Maximum Revolving Loan Commitments for Company then in effect; (3) in no event shall the Total Utilization of Commitments for all Borrowers then in effect exceed the Borrowing Base for all Borrowers then in effect; and (4) in no event shall the Dollar Equivalent of the sum of (x) the aggregate principal amount of all outstanding Revolving Loans made to Company (other than Revolving Loans made for the purpose of repaying any Refunded Swing Line Loans, or reimbursing the applicable Issuing Lender for any amount drawn under any Letter of Credit but not yet so applied) PLUS (y) the aggregate principal amount of all outstanding Swing Line Loans made to Company, exceed the Revolving Loan Suballocation for Company then in effect." D. RATE OF INTEREST. Subsection 2.2A of the Credit Agreement is hereby amended by deleting the last paragraph contained therein in its entirety and substituting the following therefor: "Upon delivery of the Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(xvii), each of the Applicable Base Rate Margin and the Applicable Offshore Rate Margin shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the first day of the Fiscal Quarter immediately succeeding the Fiscal Quarter in which Administrative Agent receives such Margin Determination Certificate; PROVIDED that if a Margin Determination Certificate is not delivered at the time required pursuant to subsection 6.1(xvii), the highest "Applicable Base Rate Margin" and "Applicable Offshore Rate Margin", as the case may be, shall be applicable from such time until delivery of the succeeding Margin Determination Certificate; PROVIDED FURTHER that if a Margin Determination Certificate erroneously indicates an applicable margin more favorable to Borrowers than should be afforded by the actual calculation of the Consolidated Leverage Ratio, each Borrower shall promptly pay additional interest, letter of credit fees and all other applicable fees, as the case may be, to correct for such error." E. PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. Subsection 2.4A(iii)(a) of the Credit Agreement is hereby amended by deleting the proviso contained therein in its entirety and substituting the following therefor: 13 "PROVIDED, HOWEVER, that up to $10,000,000 of Net Asset Sale Proceeds received by Borrowers and their respective Subsidiaries from Asset Sales permitted under subsection 7.7(iv) shall be used to prepay Loans, but shall not be required to be used to permanently reduce Revolving Loan Commitments pursuant to this subsection 2.4A(iii)(a), so long as such proceeds are reinvested by Borrowers or their Subsidiaries within 180 days after receipt of such proceeds in similar assets of similar fair market value." F. PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE OF EQUITY SECURITIES. Subsection 2.4A(iii)(d) of the Credit Agreement is hereby amended by deleting the "." at the end of the first sentence contained therein and substituting the following therefor: "; PROVIDED, HOWEVER, that the Net Equity Proceeds from the equity contribution made to Company by Stonington Equity Sub pursuant to subsection 6.12(i) shall be excluded from the provisions of this subsection 2.4A(iii)(d)." G. PREPAYMENTS DUE TO RESTRICTIONS OF REVOLVING LOAN COMMITMENTS OR CURRENCY FLUCTUATIONS. Subsection 2.4A(iii)(g) of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: (g) PREPAYMENTS DUE TO RESTRICTIONS OF REVOLVING LOAN COMMITMENTS OR CURRENCY FLUCTUATIONS. If (I) on any Computation Date Administrative Agent shall have determined that the Total Utilization of Commitments exceeds the Maximum Revolving Loan Commitments (whether for a particular Borrower or all Borrowers) because of a change in applicable rates of exchange between Dollars and Offshore Currencies, (II) at any time the Total Utilization of Commitments for all Borrowers exceeds the Maximum Revolving Loan Commitments for all Borrowers then in effect, (III) the Total Utilization of Commitments for any Borrower exceeds the Maximum Revolving Loan Commitments for such Borrower then in effect, or (IV) the Total Utilization of Commitments for all Borrowers exceeds the Borrowing Base for all Borrowers then in effect, then Administrative Agent shall give notice to the applicable Borrower(s) that a prepayment is required under this subsection 2.4A(iii)(g), and (1) in the case of Company, Company shall promptly (x) prepay FIRST its Swing Line Loans and SECOND its Revolving Loans and/or (y) cash collateralize its outstanding Letters of Credit, and (2) in the case of a Borrower other than Company, such Borrower shall promptly (x) prepay its Revolving Loans and/or (y) cash collateralize its outstanding Letters of Credit, in each case to the extent necessary so that the Total Utilization of Commitments shall not exceed the Maximum Revolving Loan Commitments (whether for such Borrower or all Borrowers) then in effect or the Borrowing Base for all Borrowers then in effect, as the case may be." 1.4 AMENDMENTS TO SECTION 3: LETTERS OF CREDIT. 14 A. Subsection 3.1A(i) of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: (i) any Letter of Credit if, after giving effect to such issuance, (I) the Total Utilization of Commitments for all Borrowers would exceed (x) the Maximum Revolving Loan Commitments for all Borrowers then in effect or (y) the Borrowing Base for all Borrowers then in effect, or (II) the Total Utilization of Commitments for any Borrower would exceed the Maximum Revolving Loan Commitments for such Borrower then in effect;" B. Subsection 3.1A(ii) of the Credit Agreement is hereby amended by deleting the reference to "$175,000,000" contained therein and substituting "the Maximum Letter of Credit Amount" therefor. 1.5 AMENDMENTS TO SECTION 6: BORROWERS' AFFIRMATIVE COVENANTS. A. MONTHLY FINANCIALS. Subsection 6.1(i) of the Credit Agreement is hereby amended by (1) deleting the reference to "45 days" contained therein and substituting "30 days" therefor, (2) deleting the reference to "and" immediately after clause (a) contained in such subsection 6.1(i), and (3) deleting the ";" at the end of clause (b) contained therein and substituting the following: , and (c) a report comparing the achievements of Company with respect to contract margin improvement, collection of Accounts and disposition of stale Inventory against the corresponding figures from the Financial Plan for the current Fiscal Year;" B. QUARTERLY FINANCIALS. Subsection 6.1(ii) of the Credit Agreement is hereby amended by: (1) deleting the reference to "within 45 days after the end of each Fiscal Quarter" contained therein and substituting the following therefor: "within (x) 45 days after the end of each Fiscal Quarter (other than the Fiscal Quarter ended on September 30, 1999) and (y) 31 days after the end of the Fiscal Quarter ended on September 30, 1999"; and (2) adding at the end of such subsection 6.1(ii) the following as a new proviso: "PROVIDED, HOWEVER, that Company will deliver to Administrative Agent and Lenders, as soon as available and in any event within 30 days after August 31, 1999, the consolidated and consolidating (by Region and by product line) balance sheets of each Borrower and its Subsidiaries as at the end of the eight-consecutive month period ended on August 31, 1999 and the related consolidated and consolidating (by Region and by product line) statements of income, stockholders' equity and cash flows of such Borrower and its Subsidiaries for the eight-consecutive month period ended on August 31, 1999, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of such Borrower and its Subsidiaries as at August 31, 1999 and the results of their operations and their cash flows for the eight-consecutive month period ended August 31, 1999, subject to changes resulting from audit and normal year-end adjustments." 15 C. BORROWING BASE CERTIFICATES. Subsection 6.1 of the Credit Agreement is hereby amended by (1) renumbering the existing subsection 6.1(xx) as subsection 6.1(xxii) and (2) adding a new subsection 6.1(xx) and a new subsection 6.1(xxi) as follows: (xx) BORROWING BASE CERTIFICATE: (a) as soon as available and in any event within thirty (30) days after the last Business Day of each month ending after the Second Amendment Effective Date or (b) as soon as available and in any event within three (3) Business Days after a written request from Administrative Agent, a Borrowing Base Certificate dated as of the last Business Day of such month or such date of request, as applicable, together with any additional schedules and other information as Administrative Agent may reasonably request, and such Borrowing Base Certificate shall, with respect to Equipment, Real Property Assets and Intellectual Property, use the most recently available appraised values for Equipment, Real Property Assets and Intellectual Property; (xxi) PAYMENTS RELATING TO THE SENIOR SUBORDINATED NOTES: five (5) days prior to Company, directly or indirectly, declaring, ordering, paying, making or setting apart any sum for any Restricted Junior Payment in respect of the Senior Subordinated Notes a written notice from Company specifying its intent to declare, order, pay, make or set apart such sum for such Restricted Junior Payment, the amount of such Restricted Junior Payment and the date such payment is to be made; and" D. INSPECTION; AUDITS; APPRAISALS; LENDER MEETING. Subsection 6.5 of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: 6.5 INSPECTION; AUDITS; APPRAISALS; LENDER MEETING. A. INSPECTION RIGHTS. Each Borrower shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Administrative Agent (which may include representatives of any Lender at such Lender's expense) to visit and inspect any of the properties of such Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that such Borrower may, if it so chooses, be present at or participate in any such discussion). 16 B. AUDITS AND APPRAISALS. Upon the request of Administrative Agent, each Borrower shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Administrative Agent to conduct one or more audits of all Accounts and Inventory of Loan Parties and one or more appraisals of all Equipment, Real Property Assets and Intellectual Property of Loan Parties, in each case during each twelve-month period after the Second Amendment Effective Date (exclusive of any audits or appraisals required under subsection 6.12(ii) (the "BASE AUDITS AND APPRAISALS")), or upon the occurrence and during the continuation of an Event of Default, such additional audits of Accounts and Inventory and appraisals of Equipment, Real Property Assets and Intellectual Property as Administrative Agent may require, each such audit and/or appraisal to be substantially similar in scope and substance to the Base Audits and Appraisals, all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested. C. LENDER MEETING. Without in any way limiting the foregoing, each Borrower will participate in a meeting of Administrative Agent and Lenders at least once during each Fiscal Year to be held at such Borrower's corporate offices (or such other location as may be agreed to by such Borrower and Administrative Agent) at such time as may be agreed to by such Borrower and Administrative Agent." E. MATTERS RELATING TO SECOND AMENDMENT. Section 6 of the Credit Agreement is hereby amended by adding at the end of said Section 6 a new subsection 6.12 as follows: 6.12 MATTERS RELATING TO SECOND AMENDMENT. (i) EQUITY CONTRIBUTION; INVESTMENT AGREEMENT. No later than January 29, 1999, Stonington Equity Sub shall have contributed the Stonington 1999 Equity Contribution to Company through Holdings. Stonington Equity Sub and Holdings shall have executed and delivered the Investment Agreement and none of the parties thereto shall enter into any agreement which purports to materially amend, supplement or otherwise modify such Investment Agreement without the written consent of Requisite Lenders, as contemplated under the Investment Agreement. In the event that Company has not collected the full amount of the Contributed Accounts on or before July 28, 1999, Holdings shall deliver the Notice of Investment Date and Amount (as defined in the Investment Agreement) to Stonington Equity Sub within the times specified in the Investment Agreement and Stonington Equity Sub shall invest in Holdings an amount in Cash of up to $5,000,000 (the "INVESTMENT AMOUNT") within the times specified in the Investment Agreement, but in any event no later than September 15, 1999, in each case pursuant to the Investment Agreement; PROVIDED, HOWEVER, that in the event that Company, through Holdings, exchanges uncollected or deficient Contributed Accounts for such Investment Amount, the face value of such uncollected or deficient Contributed Accounts so exchanged shall not exceed the Investment Amount. Upon receipt of the Investment Amount, Holdings shall immediately contribute, as common equity, the Investment Amount to Company. 17 (ii) AUDITS AND APPRAISALS OF CERTAIN ASSETS OF BORROWERS. Administrative Agent shall have received (x) no later than 30 days after the Second Amendment Effective Date, completed audits of Accounts and Inventory of Borrowers located in North America from PricewaterhouseCoopers LLP or such other independent auditors satisfactory to Administrative Agent, (y) no later than 60 days after the Second Amendment Effective Date, completed audits of Accounts and Inventory of Borrowers located outside of North American from one or more independent auditors satisfactory to Administrative Agent, and (z) no later than 120 days after the Second Amendment Effective Date, completed appraisals from one or more independent appraisers satisfactory to Administrative Agent with respect to (1) all Equipment of Borrowers and (2) such other assets of Borrowers deemed by Administrative Agent to require appraisals, in each case such audits or appraisals shall be in form, scope and substance satisfactory to Administrative Agent and, with respect to the appraisals, satisfying the requirements of, and to the extent required under, any applicable laws and regulations. Notwithstanding any other provision contained herein to the contrary, Borrowers shall pay all costs and expenses of PricewaterhouseCoopers LLP and any other independent auditors or appraisers relating to the audits and appraisals referenced in this subsection 6.12(ii)." F. CASH MAINTENANCE. Section 6 of the Credit Agreement is hereby further amended by adding at the end of said Section 6 a new subsection 6.13 as follows: 6.13 CASH MAINTENANCE. Each Borrower shall, and shall cause each of its Subsidiaries to, (x) deposit, transfer and otherwise maintain all Cash in Deposit Accounts established and maintained with Lenders and (y) maintain all Cash Equivalents with Lenders. Any Cash of a Borrower not on deposit or otherwise maintained in a Deposit Account established and maintained with a Lender and any Cash Equivalents not maintained with a Lender, in each case as of the Second Amendment Effective Date, shall be transferred by such Borrower to a Deposit Account established and maintained with a Lender or to a Lender, as the case may be, no later than thirty (30) days after the Second Amendment Effective Date. In the event that a Lender is replaced pursuant to subsection 2.8 or a financial institution is no longer a Lender under this Agreement, then all Cash and Cash Equivalents maintained with such former Lender shall be transferred to a Lender no later than thirty (30) days after such former Lender is replaced or is no longer a Lender, as the case may be." 1.6 AMENDMENTS TO SECTION 7: BORROWERS' NEGATIVE COVENANTS. A. INDEBTEDNESS. Subsection 7.1(ix) of the Credit Agreement is hereby amended by deleting the reference to "$25,000,000" contained therein and substituting "$7,500,000" therefor. B. INVESTMENTS; JOINT VENTURES. Subsection 7.3(vii) of the Credit Agreement is hereby amended by deleting the reference to "7.7(v)" contained therein and substituting "7.7(iv)" therefor. 18 C. RESTRICTED JUNIOR PAYMENTS. Subsection 7.5 of the Credit Agreement is hereby amended by deleting in its entirety clause (i) set forth in the proviso contained in such subsection 7.5 and substituting the following therefor: (i) Company may make payments of regularly scheduled interest in respect of the Senior Subordinated Notes, in accordance with the terms of and to the extent required by, and subject to the subordination provisions contained in, the Senior Subordinated Note Indenture (PROVIDED that Company may make such regularly scheduled interest payments only on the scheduled interest payment dates specified in the Senior Subordinated Notes and Senior Subordinated Note Indenture and Company may not prepay or otherwise pay in advance any amounts payable under the Senior Subordinated Notes or the Senior Subordinated Note Indenture on a date other than the applicable scheduled payment date specified in the Senior Subordinated Notes or Senior Subordinated Note Indenture, as the case may be);" D. MINIMUM FIXED CHARGE RATIO. Subsection 7.6A of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: A. MINIMUM FIXED CHARGE RATIO. Company shall not permit the ratio of (i) Consolidated Adjusted EBITDA to (ii) Consolidated Fixed Charges for any four-Fiscal Quarter period ending on any of the dates set forth below to be less than the correlative ratio indicated:
PERIOD MINIMUM FIXED CHARGE RATIO December 31, 1999 0.75:1.00 March 31, 2000 0.90:1.00 June 30, 2000 0.95:1.00 September 30, 2000 1.05:1.00 December 31, 2000 1.15:1.00 March 31, 2001 1.20:1.00 June 30, 2001 1.25:1.00 September 30, 2001 1.30:1.00 December 31, 2001 1.40:1.00 March 31, 2002 1.50:1.00 June 30, 2002 1.50:1.00 September 30, 2002 1.50:1.00 December 31, 2002 1.50:1.00 and thereafter
19 ; PROVIDED that Company shall not be subject to a minimum ratio of (i) Consolidated Adjusted EBITDA to (ii) Consolidated Fixed Charges for the four-Fiscal Quarter periods ending on March 31, 1999, June 30, 1999 and September 30, 1999 only." E. MAXIMUM CONSOLIDATED LEVERAGE RATIO. Subsection 7.6B of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: B. MAXIMUM CONSOLIDATED LEVERAGE RATIO. Company shall not permit its Consolidated Leverage Ratio for any four-fiscal Quarter period ending on any of the dates set forth below to exceed the correlative ratio indicated:
MAXIMUM CONSOLIDATED PERIOD LEVERAGE RATIO March 31, 2000 10.00:1.00 June 30, 2000 9.00:1.00 September 30, 2000 8.00:1.00 December 31, 2000 6.75:1.00 March 31, 2001 6.75:1.00 June 30, 2001 6.50:1.00 September 30, 2001 6.00:1.00 December 31, 2001 5.50:1.00 March 31, 2002 5.50:1.00 June 30, 2002 5.50:1.00 September 30, 2002 5.00:1.00 December 31, 2002 4.75:1.00 and thereafter
; PROVIDED that Company shall not be subject to a maximum Consolidated Leverage Ratio for the four-Fiscal Quarter periods ending on March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999 only; PROVIDED, HOWEVER, that Company shall not permit its Consolidated Total Debt as of the last day of any Fiscal Quarter ending on any dates set forth below to exceed the correlative amount indicated:
MAXIMUM CONSOLIDATED PERIOD TOTAL DEBT March 31, 1999 $475,000,000 June 30, 1999 $475,000,000 September 30, 1999 $475,000,000 December 31, 1999 $450,000,000"
20 F. MINIMUM CONSOLIDATED ADJUSTED EBITDA. Subsection 7.6C of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: C. MINIMUM CONSOLIDATED ADJUSTED EBITDA. (i) Company shall not permit Consolidated Adjusted EBITDA for any four-Fiscal Quarter period ending as of the last day of any Fiscal Quarter ending on any of the dates set forth below to be less than the correlative amount indicated:
MINIMUM CONSOLIDATED PERIOD ADJUSTED EBITDA March 31, 1999 $(5,000,000) June 30, 1999 $ 7,000,000 September 30, 1999 $20,000,000 December 31, 1999 $38,000,000 March 31, 2000 $45,000,000 June 30, 2000 $50,000,000 September 30, 2000 $55,000,000 December 31, 2000 $63,000,000 March 31, 2001 $64,000,000 June 30, 2001 $66,000,000 September 30, 2001 $69,000,000 December 31, 2001 $73,000,000 March 31, 2002 $74,000,000 June 30, 2002 $75,000,000 September 30, 2002 $76,000,000 December 31, 2002 $78,000,000 and thereafter
; PROVIDED that, for purposes of this subsection 7.6C only, (i) with respect to the Fiscal Quarter ended on March 31, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding one Fiscal Quarter period; (ii) with respect to the Fiscal Quarter ended on June 30, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding two-consecutive Fiscal Quarter period; (iii) with respect to the Fiscal Quarter ended on September 30, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding three-consecutive Fiscal Quarter period; and (iv) for each subsequent Fiscal Quarter after the Fiscal Quarter ended on September 30, 1999, Consolidated Adjusted EBITDA shall be for the immediately preceding four-consecutive Fiscal Quarter period ending as of the last day of any Fiscal Quarter ending on any of the dates set forth above. 21 (ii) Company shall not permit Consolidated Adjusted EBITDA for the eight-consecutive month period ended on August 31, 1999 to be less than $13,500,000; PROVIDED that if (a) Company fails to comply with this subsection 7.6C(ii) and Administrative Agent, on behalf of Lenders, delivers to the trustee under the Senior Subordinated Note Indenture (the "TRUSTEE") a Blockage Notice (as defined in the Senior Subordinated Note Indenture), such notice to be delivered in accordance with the terms of the Senior Subordinated Note Indenture, (b) Administrative Agent and Lenders receive from Company on or before October 31, 1999 the financial statements required to be delivered under subsection 6.1(ii) for the Fiscal Quarter ended on September 30, 1999, (c) such financial statements demonstrate that Company is in compliance with the provisions of subsection 7.6 for the period ended on September 30, 1999, and (d) no other Event of Default or Potential Event of Default shall have occurred and be continuing, then Administrative Agent, on behalf of Lenders, shall send to the Trustee no later than November 10, 1999 a notice terminating the Payment Blockage Period (as defined in the Senior Subordinated Note Indenture) resulting from the Blockage Notice delivered pursuant to the immediately preceding proviso." G. MINIMUM CONSOLIDATED NET WORTH. Subsection 7.6D of the Credit Agreement is hereby amended by deleting it in its entirety. H. MINIMUM ASSET COVERAGE. Subsection 7.6E is hereby amended by deleting subsection 7.6E in its entirety. I. RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. Subsection 7.7 of the Credit Agreement is hereby amended by (1) deleting in its entirety the reference to "all or any part of its business, property or fixed assets" in the introductory paragraph of such subsection 7.7 and substituting "all or any part of its business, property or fixed assets (including without limitation any Accounts or other accounts receivables)"; (2) deleting clause (iii) of such subsection 7.7 in its entirety; and (3) renumbering clauses (iv) and (v) as clauses (iii) and (iv) respectively. J. CONSOLIDATED CAPITAL EXPENDITURES. Subsection 7.8 of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: 7.8 CONSOLIDATED CAPITAL EXPENDITURES. No Borrower shall nor shall any Borrower permit any of its Subsidiaries to make or incur Consolidated Capital Expenditures, in any Fiscal Year indicated below, in an aggregate amount in excess of the corresponding amount set forth below opposite such Fiscal Year: 22
MAXIMUM CONSOLIDATED FISCAL YEAR CAPITAL EXPENDITURES Fiscal Year 1999 $15,000,000 Fiscal Year 2000 and each Fiscal Year thereafter $20,000,000
K. DISPOSAL OF SUBSIDIARY STOCK. Subsection 7.11 of the Credit Agreement is hereby amended by deleting the reference to "7.7(i) and (v)" contained therein and substituting "7.7(i) and (iv)" therefor. 1.7 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT. A. BREACH OF CERTAIN COVENANTS. Subsection 8.3 of the Credit Agreement is hereby deleted in its entirety and substituting the following therefor: 8.3 BREACH OF CERTAIN COVENANTS. Failure of any Borrower to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or failure of Company to deliver at the times specified in subsection 6.1(ii) the financial statements required under the proviso set forth in subsection 6.1(ii) or the financial statements for the Fiscal Quarter ended on September 30, 1999 required under subsection 6.1(ii); or" B. FAILURE TO MAKE STONINGTON 1999 EQUITY CONTRIBUTION; FAILURE TO PERFORM UNDER INVESTMENT AGREEMENT. Section 8 of the Credit Agreement is hereby amended by (i) deleting the ":" at the end of subsection 8.16 contained therein and substituting "; or" therefor, and (ii) adding immediately after subsection 8.16 the following as a new subsection 8.17 and new subsection 8.18: 8.17 FAILURE TO MAKE STONINGTON 1999 EQUITY CONTRIBUTION. Stonington Equity Sub shall have failed to contribute to Company the Stonington 1999 Equity Contribution on or before January 29, 1999; or 8.18 FAILURE TO PERFORM UNDER INVESTMENT AGREEMENT. Holdings shall have failed to deliver the Notice of Investment Date and Amount (as defined in the Investment Agreement) to Stonington Equity Sub within the times specified in the Investment Agreement or Holdings shall have failed to perform its other obligations under the Investment Agreement, or Stonington Equity Sub shall have failed to invest in Holdings, within the times specified in the Investment Agreement, the full amount of the Investment Amount (as defined in subsection 6.12(i)) in Cash:" 23 1.8 AMENDMENTS TO EXHIBITS. A. COMPLIANCE CERTIFICATE. ATTACHMENT I to EXHIBIT VI to the Credit Agreement is hereby amended by deleting it in its entirety and substituting therefor a new ATTACHMENT I substantially in form of ANNEX A annexed hereto. B. BORROWING BASE CERTIFICATE. The Exhibits to the Credit Agreement are hereby amended by adding a new EXHIBIT XXVI (Form of Borrowing Base Certificate) thereto substantially in the form of ANNEX B annexed hereto. 1.9 AMENDMENTS TO SCHEDULES. The Schedules to the Credit Agreement are hereby amended by adding a new SCHEDULE 1.1(B) (Contributed Accounts) thereto substantially in the form of ANNEX C annexed hereto. 1.10 AMENDMENTS TO SECURITY AGREEMENT EXECUTED BY HOLDINGS. The Security Agreement executed and delivered by Holdings on the Effective Date (the "HOLDINGS SECURITY AGREEMENT") is hereby amended by deleting SCHEDULE I annexed thereto in its entirety and substituting therefor a new SCHEDULE I substantially in the form of ANNEX D annexed hereto. 1.11 AMENDMENTS TO SECURITY AGREEMENT EXECUTED BY COMPANY. The Security Agreement executed and delivered by Company on the Effective Date (the "COMPANY SECURITY AGREEMENT") is hereby amended as follows: (i) by deleting the reference to "Secured Party" contained in Section 1(e) of such Company Security Agreement and substituting "Secured Party or any Lender" therefor; and (ii) by deleting SCHEDULE I annexed thereto in its entirety and substituting therefor a new SCHEDULE I substantially in the form of ANNEX E annexed hereto. SECTION 2. LIMITED WAIVER. A. LIMITED WAIVER. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of Borrowers herein contained, Lenders hereby waive compliance with the provisions of subsections 7.6 and 7.8 of the Credit Agreement to the extent, and only to the extent, necessary to permit: 24 (i) the ratio of Consolidated Adjusted EBITDA to Consolidated Fixed Charges for the four-Fiscal Quarter period ending on September 30, 1998 and the four-Fiscal Quarter period ending on December 31, 1998 to be less than the correlative ratios set forth in the table contained in subsection 7.6A; (ii) the Consolidated Leverage Ratio for the four-Fiscal Quarter period ending on September 30, 1998 and the four-Fiscal Quarter period ending on December 31, 1998 to be higher than the correlative ratios set forth in the table contained in subsection 7.6B; (iii) the Consolidated Adjusted EBITDA for the four-Fiscal Quarter period ending on September 30, 1998 and the four-Fiscal Quarter period ending on December 31, 1998 to be lower than the correlative amounts set forth in the table contained in subsection 7.6C; (iv) the Consolidated Net Worth for the period ending on September 30, 1998 and the period ending on December 31, 1998 to be lower than the correlative amounts set forth in the table contained in subsection 7.6D; and (v) the Consolidated Capital Expenditures for Fiscal Year 1998 to be higher than the correlative amount set forth in the proviso contained in subsection 7.8. B. LIMITATION OF WAIVER. Without limiting the generality of the provisions of subsection 10.6 of the Credit Agreement, the waiver set forth above shall be limited precisely as written and relates solely to the noncompliance by Company with the provisions of subsections 7.6 and 7.8 of the Credit Agreement in the manner and to the extent described above, and nothing in this Amendment shall be deemed to: (a) constitute a waiver of compliance by Borrowers with respect to (i) subsections 7.6 and 7.8 of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein (whether in connection with the noncompliance of Borrowers of the financial covenants described above or otherwise); or (b) prejudice any right or remedy that Administrative Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Amendment) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. 25 SECTION 3. CONDITIONS TO EFFECTIVENESS Sections 1 and 2 of this Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "SECOND AMENDMENT EFFECTIVE DATE"): A. BORROWER DOCUMENTS. On or before the Second Amendment Effective Date, each Borrower shall deliver to Lenders (or to Administrative Agent for Lenders) the following, each, unless otherwise noted, dated the Second Amendment Effective Date: 1. Resolutions of its Board of Directors approving and authorizing the execution, delivery and performance of this Amendment, certified as of the Second Amendment Effective Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; 2. Signature and incumbency certificates of their respective officers executing this Amendment; and 3. Six executed copies of this Amendment. B. EXECUTION OF AMENDMENT BY REQUISITE LENDERS. On or before the Second Amendment Effective Date, Requisite Lenders shall have executed and delivered copies of this Amendment to Administrative Agent. C. INVESTMENT AGREEMENT. On or before the Second Amendment Effective Date, Company shall have delivered to Administrative Agent a fully executed or conformed copy of the Investment Agreement. D. BORROWING BASE. On or before the Second Amendment Effective Date, Borrowers shall have delivered to Administrative Agent a Borrowing Base Certificate, substantially in the form of ANNEX B annexed hereto, prepared as of a recent date prior to the Second Amendment Effective Date. For purposes of calculating the Eligible Equipment, Eligible Real Property and Eligible Intellectual Property for such Borrowing Base Certificate delivered pursuant to this Section 3D, Borrowers may use the appraised values for Equipment, Real Property Assets and Intellectual Property as determined in August 1996, which values are set forth on SCHEDULE I annexed hereto. E. FEES. On or before the Second Amendment Effective Date, Company shall pay (x) an amendment fee, for each Lender which executes this Amendment on or before the Second Amendment Effective Date, equal to each such Lender's Pro Rata Share of 0.500% of the Revolving Loan Commitments, all such amendment fees to be paid to Administrative Agent for distribution to the applicable Lenders, and (y) such other fees payable on or before the Second Amendment Effective Date. F. OTHER PROCEEDINGS. On or before the Second Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Administrative Agent and such counsel, and Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request. 26 SECTION 4. BORROWERS' REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, each Borrower represents and warrants to each Lender that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. Each Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "AMENDED AGREEMENT"). B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of each Borrower. C. NO CONFLICT. The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of the Amended Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to such Borrower or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of such Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on such Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of such Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of such Borrower or any of its Subsidiaries (other than Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of such Borrower or any of its Subsidiaries. D. GOVERNMENTAL CONSENTS. The execution and delivery by each Borrower of this Amendment and the performance by such Borrower of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. BINDING OBLIGATION. This Amendment and the Amended Agreement have been duly executed and delivered by each Borrower and are the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 27 F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 5 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. G. ABSENCE OF DEFAULT. Other than the Events of Default waived pursuant to Section 2 hereof, no event has occurred and is continuing, and no event will result from the consummation of the transactions contemplated by this Amendment, in each case that would constitute an Event of Default or a Potential Event of Default. Neither Holdings nor Company nor any of their respective Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION 5. ACKNOWLEDGEMENT AND CONSENT Company is a party to certain Guaranties and each Borrower is a party to certain Collateral Account Agreements, Security Agreements, Pledge Agreements, Trademark Security Agreements, Patent Security Agreements and Mortgages pursuant to which such Borrower has created Liens in favor of Administrative Agent on certain Collateral to secure the Obligations. Holdings is a party to a Guaranty and certain Security Agreements and Pledge Agreements pursuant to which Holdings has (i) guarantied the Obligations and (ii) created Liens in favor of Administrative Agent on certain Collateral to secure its obligations under the Guaranty. Goss Realty, L.L.C., a Delaware limited liability company ("GOSS REALTY") is a party to a Subsidiary Guaranty pursuant to which Goss Realty has guarantied the Obligations. Each Borrower, Holdings and Goss Realty are collectively referred to herein as the "CREDIT SUPPORT PARTIES", and all such Guaranties and Collateral Documents referred to above are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS". Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guarantee or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of the Borrowers now or hereafter existing under or in respect of the Amended Agreement. 28 Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party (other than the Borrowers) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. SECTION 6. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (i) On and after the Second Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of any Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. 29 B. FEES AND EXPENSES. Each Borrower acknowledges that all costs, fees and expenses as described in subsection 10.2 of the Credit Agreement incurred by Administrative Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrowers. C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. E. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. GOSS GRAPHIC SYSTEMS, INC., as a Borrower By: Title: GOSS GRAPHIC SYSTEMS LIMITED, as a Borrower By: Title: GOSS SYSTEMES GRAPHIQUES NANTES S.A., as a Borrower By: Title: GOSS GRAPHIC SYSTEMS JAPAN CORPORATION, as a Borrower By: Title: GGS HOLDINGS, INC., as a Credit Support Party By: Title: GOSS REALTY, L.L.C., as a Credit Support Party By: Title: LENDERS: BANKERS TRUST COMPANY, as Administrative Agent and as a Lender By: Title: CREDIT SUISSE FIRST BOSTON, as Syndication Agent and as a Lender By: Title: By: Title: THE BANK OF NOVA SCOTIA, as a Lender By: Title: BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, as a Lender By: Title: THE BANK OF NEW YORK, as a Lender By: Title: NATIONSBANK, N.A., as a Lender By: Title: CREDIT AGRICOLE INDOSUEZ, as a Lender By: Title: By: Title: DEUTSCHE FINANCIAL SERVICES CORPORATION, as a Lender and as an Indemnifying Lender By: Title: THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By: Title: THE FUJI BANK, LIMITED, as a Lender By: Title: HARRIS TRUST AND SAVINGS BANK, as a Lender By: Title: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY, as a Lender and as an Indemnifying Lender By: Title: LASALLE NATIONAL BANK, as a Lender By: Title: NATIONAL BANK OF CANADA, A CANADIAN CHARTERED BANK, as a Lender By: Title: By: Title: THE SANWA BANK, LIMITED, CHICAGO BRANCH, as a Lender By: Title: GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: Title: NATIONAL WESTMINSTER BANK PLC, as a Lender By: Title: Manager BARCLAYS BANK PLC, as a Lender By: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: Title: By: Title: CIBC INC., as a Lender and as an Indemnifying Lender By: Title: EX-10.10 3 EXHIBIT 10.10 PRINCIPAL TERMS OF EMPLOYMENT FOR JOSEPH T. GAYNOR, III Base Salary: $250,000 per annum Cash Incentive Award: Up to 65% of base salary pursuant to Incentive Compensation Plan Vacation: 15 days per annum Other: $2,500 annual allowance for financials/tax or estate planning and company automobile Possible Investment: Up to $250,000 in GGS Holdings plus, subject to availability of a loan from Goss, up to an additional $350,000 Stock Options: Options to purchase 8,000 GGS Holdings Shares EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GOSS GRAPHIC SYSTEMS, INC. FOR THE YEAR ENDED 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 23 7 234 22 311 499 222 46 1,016 674 429 0 0 0 0 1,016 764 764 703 703 113 9 46 (107) 8 (115) 0 0 0 (115) 0 0
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