GENERAL BINDING CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

Commission File Number 0-2604

GENERAL BINDING CORPORATION
(Exact name of registrant as specified in its charter)

36-0887470
(I.R.S. employer identification No.)

Delaware
(State or other jurisdiction of incorporation or organization)

One GBC Plaza,
Northbrook, Illinois 60062
(Address of principal executive offices, including zip code)

(847) 272-3700
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ____

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No ____

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

	Outstanding at
Class	April 30, 2004
Common Stock, $0.125 par value	13,788,149
Class B Common Stock, $0.125 par value	2,398,275

GENERAL BINDING CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004
Table of Contents

PART I	Financial Information	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003	2

	Condensed Consolidated Statements of Income for the three months ended March 31, 2004 and 2003	3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II	Other Information

Item 6.	Exhibits and Reports on Form 8-K	23

	Signatures	24

GENERAL BINDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000 omitted)

			March 31,	December 31,
			2004	2003
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$ 5,565	$ 9,568
	Receivables, less allowances for doubtful accounts
		and sales returns: 2004 - $16,273, 2003 - $16,614	129,370	128,391
	Inventories:
		Raw materials	17,969	19,239
		Work in process	7,902	6,445
		Finished goods	68,026	60,556
		Total inventories	93,897	86,240
	Deferred tax assets		21,540	22,002
	Other		12,411	11,912
		Total current assets	262,783	258,113

Total capital assets at cost			277,179	275,860
Less - accumulated depreciation			(185,684)	(180,874)
	Net capital assets		91,495	94,986
Goodwill and other intangible assets, net of accumulated amortization			150,652	150,775
Other			26,672	25,476
	Total assets		$ 531,602 =======	$ 529,350 =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$ 52,355	$ 51,253
	Accrued liabilities		83,069	85,119
	Notes payable		5,222	5,819
	Current maturities of long-term debt		14,675	14,176
		Total current liabilities	155,321	156,367
Long-term debt, less current maturities			283,576	282,019
Other long-term liabilities			36,016	36,755
Stockholders' equity:
	Common stock		1,962	1,962
	Class B common stock		300	300
	Additional paid-in capital		26,799	26,727
	Retained earnings		63,859	63,409
	Treasury stock		(22,102)	(23,588)
	Accumulated other comprehensive income		(14,129)	(14,601)
		Total stockholders' equity	56,689	54,209
Total liabilities and stockholders' equity			$ 531,602 =======	$ 529,350 =======

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

GENERAL BINDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000 omitted, except per share data)

		Three months ended March 31,
		2004	2003
		(Unaudited)	(Unaudited)

Net sales		$ 170,931	$ 169,435
Cost of sales:
	Product cost of sales, including development and engineering	105,606	101,965
Selling, service and administrative		56,199	57,549
Amortization of intangible assets		188	188
Restructuring		823	1,405
Interest expense		6,792	9,298
Other expense (income), net		345	(325)
	Income (loss) before income taxes	978	(645)
Income tax expense (benefit)		528	(728)
Net income		$ 450 ====	$ 83 ====
Other comprehensive (loss) income, net of taxes:
	Foreign currency translation adjustments	(406)	2,010
	Income on derivative financial instruments	878	953
Comprehensive income		$ 922 ====	$ 3,046 =====

Earnings per common share:
	Basic and Diluted (1)	$ 0.03 ====	$ 0.01 =====

Weighted average number of common shares outstanding:
	Basic (2)	16,111	15,951
	Diluted (2)	16,881	16,206


(1)	Amounts represent per share amounts for both Common Stock and Class B Common Stock.
(2)	Weighted average shares includes both Common Stock and Class B Common Stock.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

GENERAL BINDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)

				Three months ended March 31,
				2004	2003
Cash flows from operating activities:				(unaudited)	(unaudited)
	Net income/(loss)			$ 450	$ 83
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation		4,928	5,615
		Amortization		1,297	1,247
		Restructuring and other expenses		823	1,405
		Provision for doubtful accounts and sales returns		731	772
		Provision for inventory reserves		1,498	1,149
		(Increase) decrease in non-current deferred taxes		(925)	29
		(Increase) decrease in other long term assets		(1,118)	(491)
		Other		(85)	2,442
		Changes in current assets and liabilities:
			Increase in receivables	(2,056)	(2,665)
			(Increase) decrease in inventories	(9,377)	2,111
			Increase in other current assets	(535)	(4,034)
			(Increase) decrease in deferred tax assets	1	(126)
			Increase (decrease) in accounts payable and accrued liabilities	(134)	(6,168)
			Decrease in accrued income taxes	(100)	(2,195)

	Net cash (used in) operating activities			(4,602)	(826)

Cash flows from investing activities:
		Capital expenditures		(1,576)	(1,423)
		Payments for acquisitions and investments		(604)	(1,026)
		Proceeds from sale of plant and equipment		-	11

	Net cash (used in) investing activities			(2,180)	(2,438)

Cash flows from financing activities:
		Proceeds from long-term borrowings-maturities greater than 90 days		17,981	-
		Repayments of long-term debt-maturities greater than 90 days		(15,642)	(74,625)
		Net change in borrowings-maturities of 90 days or less		45	69,177
		(Decrease) increase in current portion of long-term debt		(887)	-
		Payments for debt issuance costs		(78)	(20)
		Contribution (distribution) related to Tax Allocation Agreement		-	2,537
		Proceeds from the exercise of stock options		1,126	128

	Net cash provided by (used in) financing activities			2,545	(2,803)

		Effect of exchange rates on cash		234	(104)

Net decrease in cash and cash equivalents				(4,003)	(6,171)

Cash and cash equivalents at the beginning of year				9,568	18,251

Cash and cash equivalents at the end of the period				$ 5,565 ======	$ 12,080 =======

Supplemental Disclosure of Cash Flow Information
	Cash Paid During the Period for:
		Interest		$ 3,473	$ 5,665
		Income Taxes paid (recovered)		1,706	(583)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

GENERAL BINDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of General Binding Corporation and its subsidiaries ("GBC" or the "Company"). These financial statements have been prepared by GBC, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. GBC believes that the disclosures included in these condensed consolidated financial statements are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in GBC's 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments necessary to present fairly the financial position of GBC as of March 31, 2004 and Decemb er 31, 2003 and the results of their operations and cash flows for the three months ended March 31, 2004 and 2003 have been included. Operating results for any interim period are not necessarily indicative of results that may be expected for the full year.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates by management in determining the entity's assets, liabilities, revenues and expenses. Such estimates and management judgement include the allowance for doubtful accounts and sales returns, allowances for slow-moving and obsolete inventory, deferred income tax valuation allowance, tax reserves, and long-lived assets. Actual results could differ from the estimates used by management.

Certain amounts for prior periods have been reclassified to conform to the 2004 presentation.

(2) Stock Compensation Plan

GBC has stock-based compensation plans for employees and non-employee directors that provide for the issuance of stock options and restricted stock units. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for these plans. In accordance with the intrinsic value method, no compensation expense is recognized for the Company's fixed stock option plans.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to all stock-based compensation (000 omitted):

	Three months ended March 31,
	2004	2003
Net income, as reported	$ 450	$ 83
Add: Stock-based compensation expense included in reported net income, net of tax	432	111
Deduct: Total stock-based compensation expense determined under the fair value method, net of tax	$(1,120)	$(684)
Pro forma net income (loss)	$ (238)	$(490)
Earnings (loss) per share - basic and diluted
As reported	$ 0.03 ======	$ 0.01 =====
Pro forma	$ (0.01) ======	$(0.03) =====

Pro forma compensation expense for stock options was calculated using the Black-Scholes model, with the following weighted-average assumptions for grants in 2004 and 2003 respectively: expected life of ten years for 2004 and 2003; expected volatility of 59% and 56%; and risk-free interest rates of 4.41% and 3.78%. The weighted-average fair values of stock options granted during the periods were $12.02 and $6.09 in 2004 and 2003, respectively.

(3) Borrowings

A significant portion of GBC's long-term funding has been provided through its primary senior credit facility (the "Primary Facility"). As of March 31, 2004, the Primary Facility was comprised of a $72.5 million multicurrency revolving credit facility and term loans totaling $120.0 million. Outstanding borrowings under the Primary Facility at March 31, 2004 included $120 million for the term loan, and outstanding letters of credit of $13.1 million which reduces GBC's availability under the revolving credit line. GBC is also party to a mortgage financing arrangement under which certain of its real estate holdings and equipment are pledged as collateral ("Mortgage Financing"), as well as a multicurrency revolving credit facility in the Netherlands ("the Netherlands Facility"). As of March 31, 2004, the outstanding balances on the Mortgage Financing and the Netherlands Facility were $13.1 million and $5.2 million, respectively.

Interest rates on the Primary Facility are variable and are set at LIBOR plus 3.75% for borrowings under the $72.5 million multicurrency revolving credit line, and LIBOR plus 4.50% for the term loan. Borrowings under the Primary Facility are subject to a "pricing grid" which provides for lower interest rates in the event that certain of GBC's financial ratios improve in future periods.

GBC must meet certain restrictive financial covenants as defined under the Primary Facility. The covenants become more restrictive over time and require the Company to maintain certain ratios related to total leverage, senior leverage, fixed charge coverage, as well as a minimum level of consolidated net worth. There are also other covenants, including restrictions on dividend payments, acquisitions, additional indebtedness, and capital expenditures. In addition to the restrictive covenants, multicurrency revolving credit line borrowings are subject to a "borrowing base" which is determined based upon certain formulas tied to GBC's trade receivables and inventory. With the exception of its assets pledged under the Mortgage Financing, substantially all of the assets of General Binding Corporation and its domestic subsidiaries, as well as a portion of the equity in certain foreign subsidiaries are pledged as collateral under the Primary Facility.

As of and for the three months ended March 31, 2004, the Company was in compliance with all debt covenants.

Long-term debt consisted of the following at March 31, 2004 and December 31, 2003 (000 omitted):

March 31,

December 31,

     2004

       2003

Credit Facilities

U.S. Dollar borrowings - Term loan - (weighted average floating interest rate of 5.64% at March 31, 2004 and 5.66% at December 31, 2003)

                              $   120,000

$   122,500

Euro borrowings - Netherlands Facility (weighted average floating interest rate of 4.5% at March 31, 2004)


             5,226


                      - -

Industrial Revenue/Development Bonds ("IRB" or "IDB")

IDB, due March 2026 - (floating interest rate of 1.12% at March 31, 2004 and 1.25% at December 31, 2003)

             6,840

               6,840

Notes Payable

Senior Subordinated Notes, U.S. Dollar borrowing, due 2008 - (fixed
interest rate of 9.375%)


         150,000


           150,000

Notes Payable, U.S. Dollar borrowing, due monthly August 2003 to July 2008 - (fixed interest rate of 6.62%)

           13,148

             13,798

Other borrowings

             8,259

               8,876

Total debt

         303,473

           302,014

Less-current maturities

         (19,897)

            (19,995)

Total Long-term debt

      $283,576
      =======

         $282,019
         =======

(4) Earnings Per Share

GBC's Certificate of Incorporation provides for 40,000,000 authorized shares of common stock, $0.125 par value per share, and 4,796,550 shares of Class B common stock, $0.125 par value per share. Each Class B share is entitled to 15 votes and is to be automatically converted into one share of common stock upon transfer thereof. All of the Class B shares are owned by Lane Industries, Inc., GBC's majority stockholder.

The following table illustrates the computation of basic and diluted earnings per share (000 omitted except per share data):

Three months ended March 31,

    2004

     2003

Numerator:

Net income available to common shareholders

        $    450
        =====

           $     83
           =====

Denominator:

Denominator for basic earnings per share - Weighted average number of common Shares outstanding (1)

         16,111

           15,951

Effect of dilutive securities:

Employee stock options (3)

              539

                107

Restricted stock units

              231

               148

Denominator for diluted earnings per share - Adjusted weighted-average shares (1) and assumed conversions

        16,881

          16,206

Earnings per share - basic and diluted (2)

           $0.03
           ====

             $0.01
            ====

(1) Weighted average shares includes both Common Stock and Class B Common Stock.
(2) Amounts represent per share amounts for both Common Stock and Class B Common Stock.
(3) As of March 31, 2004, GBC had 1,939,335 stock options outstanding with an exercise or conversion price below the market value on that date.

(5) Restructuring and Other

During the first quarter of 2004, GBC recorded restructuring charges of $0.8 million related to workforce reduction programs which were announced in 2003. During the first quarter of 2003, GBC recorded additional restructuring charges of $1.4 million related to the subleasing of a manufacturing facility in Buffalo Grove, Illinois. The additional charge represents the incremental difference between GBC's obligation under the lease and the rental payments to be received from the subtenant.

The components of the restructuring expenses are as follows (000 omitted):

Three months ended March 31,

     2004

     2003

Severance and early retirement benefits

           $ 823

            $      -

Contractual lease expenses

                  -

              1,405

Total restructuring expenses

           $ 823
           ====

           $1,405
           =====

Management believes that the restructuring provisions recorded will be adequate to cover estimated restructuring costs that will be paid in future periods. The balance in the restructuring reserve at March 31, 2004 is primarily related to severance, asset write-downs, lease expenses, early retirement and other benefit expenses to be paid in future periods.

Changes in the restructuring reserve for the three months ended March 31, 2004 were as follows (000 omitted):

Severance

Asset
Impairment
and Other
Exit Costs

Lease Cancellation Costs

Total

Balance at December 31, 2003

      $ 5,416

        $ 560

        $ 2,268

       $8,244

Activities during the year:

Provisions

            823

               -

                  -

            823

Cash charges

           (888)

            (31)

              (78)

           (997)

Non-cash charges

                -

         (133)

                  -

           (133)

Balance at March 31, 2004⁽¹⁾

      $ 5,351
      =====

         $ 396
         ====

         $2,190
        =====

       $ 7,937
       =====

(1) The restructuring reserve at March 31, 2004 consisted of $6.0 million related to current items reported in the balance sheet as a separate item and $1.9 million related to long-term lease cancellation costs reported in the balance sheet as a component of other long-term liabilities.

(6) Retirement Plans and Post-Retirement Benefits

The following table summarizes the components of net periodic pension cost for the Company's retirement plans (000 omitted):

		Three months ended March 31, 2004		Three months ended March 31, 2003
		Domestic	International	Domestic	International
Service Cost		$ 65	$ 583	$ 69	$ 361
Interest Cost		10	947	7	675
Expected return on plan assets		-	(1,156)	-	(636)
Amortization of unrecognized:
	Net transaction obligation	-	-	-	1
	Recognized losses	1	151	-	68
	Prior service cost	-	(17)	-	(12)
	Total	$ 76 ===	$ 508 ====	$ 76 ===	$ 457 ====

Company contributions		$ - ===	$ 205 ====	$ - ===	$ 135 ====

The following summarizes the components of net periodic post-retirement benefit cost (000 omitted):

		Three months ended March 31,
		2004	2003
Service cost		$ 219	$ 182
Interest cost		159	133
Amortization of unrecognized:
	Net transaction obligation	11	21
	Recognized losses	61	28
	Total	$ 450 ====	$ 364 ====

(7) Business Segments

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," GBC has identified three reportable operating segments based on the organization of GBC into business groups comprised of similar products and services.

The Commercial and Consumer Group (CCG) focuses on "consumer-ready" products that leverage GBC's leadership among customers of its binding, laminating and information-display products in the work, school and home environments.

The Industrial and Print Finishing Group (IPFG) targets print-for-pay and other finishing customers who use GBC's professional-grade finishing equipment and supplies as a part of their mass production of sophisticated, professional applications.

The Europe Group distributes many "consumer-ready" binding, laminating and visual communication products to customers in the work, school and home environments. In addition, the Europe Group markets professional-grade finishing equipment and supplies to commercial reprographic centers.

The Commercial and Consumer Group's revenues are primarily derived from the sale of binding, punching and laminating equipment and related supplies, visual communications products (writing boards, bulletin boards, easels, etc.), document shredders, custom binders and folders, and desktop accessories, as well as maintenance and repair services through both indirect channels (resellers, including office product superstores, contract/commercial stationers, wholesalers, mail order companies, mass marketers and other dealers) and direct channels (salespersons, telemarketers, internet portals, etc.). The Commercial and Consumer Group's products and services are sold to customers which include the home markets and office markets, commercial reprographic centers, educational and training markets, and government agencies throughout North and South America and the Asia/Pacific region. The Europe Group distributes many of the Commercial and Consumer Group's products to customers in Europe.

The Industrial and Print Finishing Group's revenues are primarily derived through sales of thermal and pressure sensitive films, mid-range and commercial high-speed laminators and large-format digital print laminators. The Industrial and Print Finishing Group's products and services are sold worldwide through direct and dealer channels to commercial reprographic centers, and commercial printers.

Expenses incurred by the three reportable segments described above relate to costs incurred to manufacture or purchase products, as well as selling, general and administrative costs. For internal management purposes and the presentation below, operating income is calculated as net sales less (i) product cost of sales, (ii) selling, service and administrative expenses and (iii) amortization of other intangibles.

GBC does not separately identify interest expense or income taxes for its operating segments. Additionally, certain expenses of a corporate nature and certain shared service expenses are not allocated to the business groups. Sales between business groups are recorded at cost for

domestic business units, and cost plus a normal profit margin for sales between domestic and international business units. GBC's business groups record expenses for certain services provided and expense allocations; however, the charges and allocations between business groups are not significant.

Segment data is provided below for the three months ended March 31, 2004 and 2003 (000 omitted):

	Unaffiliated Customer Sales		Affiliated Customer Sales
	Three months ended March 31,		Three months ended March 31,
	2004	2003	2004	2003

Commercial and Consumer Group	$105,428	$ 109,570	$ 1,724	$ 2,251
Industrial and Print Finishing Group	37,803	33,534	6,281	5,199
Europe	27,700	26,331	3,350	3,510
Eliminations	-	-

	Severance	Asset Impairment and Other Exit Costs	Lease Cancellation Costs	Total

Balance at December 31, 2003	$ 5,416	$ 560	$ 2,268	$8,244
Activities during the year:
Provisions	823	-	-	823
Cash charges	(888)	(31)	(78)	(997)
Non-cash charges	-	(133)	-	(133)
Balance at March 31, 2004⁽¹⁾	$ 5,351 =====	$ 396 ====	$2,190 =====	$ 7,937 =====