Page 1 of 23
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-14399
WESTERN PUBLISHING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1104930
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
444 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 688-4500
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 21,023,274 shares
outstanding as of December 7, 1994.
Page 2 of 23
WESTERN PUBLISHING GROUP, INC. AND
SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets--
October 29, 1994 (Unaudited) and January 29, 1994 4
Condensed Consolidated Statements of Operations--
Three months ended October 29, 1994
and October 30, 1993 (Unaudited) 6
Condensed Consolidated Statements of Operations--
Nine months ended October 29, 1994
and October 30, 1993 (Unaudited) 7
Condensed Consolidated Statements of Cash Flows--
Nine months ended October 29, 1994
and October 30, 1993 (Unaudited) 8
Notes to Condensed Consolidated Financial
Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBITS
Exhibit 15 - Letter re: unaudited interim financial
information 23
Page 3 of 23
INDEPENDENT ACCOUNTANTS' REPORT
Western Publishing Group, Inc.
New York, New York
We have reviewed the accompanying condensed consolidated balance sheet of
Western Publishing Group, Inc. and subsidiaries as of October 29, 1994, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods and nine-month periods ended October 29, 1994 and October
30, 1993. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Western Publishing Group, Inc. and
subsidiaries as of January 29, 1994, and the related consolidated statements of
operations, common stockholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated May 13, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of January 29, 1994 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Milwaukee, Wisconsin
December 9, 1994
Page 4 of 23
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share and Per Share Data)
<TABLE>
<CAPTION>
October 29, January 29,
ASSETS 1994 1994
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 55,790 $ 9,513
Accounts receivable 132,792 137,921
Inventories 117,549 121,178
Prepublication and prepaid advertising costs 6,286 7,720
Royalty advances 2,483 2,970
Recoverable income taxes 7,647 12,830
Deferred income taxes 13,099 20,823
Net assets held for sale 24,784 88,523
Other current assets 5,090 10,361
------- -------
Total current assets 365,520 411,839
------- -------
OTHER ASSETS 12,085 12,447
------- -------
PROPERTY, PLANT AND EQUIPMENT 118,822 108,601
Less accumulated depreciation and
amortization 45,292 41,351
------- -------
Total property, plant and equipment 73,530 67,250
IDENTIFIED INTANGIBLES AND COST IN EXCESS
OF NET ASSETS ACQUIRED (GOODWILL), less
accumulated amortization of $18,646 and
$17,066, respectively 12,000 13,580
------- -------
$463,135 $505,116
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share and Per Share Data)
<TABLE>
<CAPTION>
October 29, January 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable 23,914 $ 40,532
Accrued compensation and fringe benefits 10,850 10,644
Income taxes 508 342
Notes payable to banks 54,000
Other current liabilities 37,595 27,342
------- -------
Total current liabilities 126,867 78,860
------- -------
NONCURRENT LIABILITIES AND CREDITS:
Long-term debt 149,824 229,812
Accumulated postretirement benefit obligation 27,209 25,949
Other 1,857 1,837
------- -------
Total noncurrent liabilities and credits 178,890 257,598
------- -------
CONVERTIBLE PREFERRED STOCK -Series A, 20,000
shares authorized, no par value, 19,970
shares issued and outstanding; at mandatory
redemption amount 9,985 9,985
------- -------
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000
shares authorized, 21,232,074 and
21,167,324 shares issued 212 212
Additional paid-in capital 80,905 80,213
Retained earnings 70,510 82,714
Cumulative translation adjustments (1,412) (1,644)
------- -------
150,215 161,495
Less cost of Common Stock in treasury -
208,800 shares 2,822 2,822
------- -------
Total common stockholders' equity 147,393 158,673
------- -------
$463,135 $505,116
======= =======
</TABLE>
See Notes to Condensed Consolidated
Financial Statements.
Page 6 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
October 29, October 30,
1994 1993
(Unaudited)
<S> <C> <C>
REVENUES: $130,306 $201,930
-------- --------
COSTS AND EXPENSES:
Cost of sales 89,986 136,574
Selling, general and administrative 35,325 57,010
Gain on streamlining plan (20,352)
-------- --------
Total costs and expenses 104,959 193,584
-------- --------
INCOME BEFORE INTEREST EXPENSE
AND INCOME TAXES 25,347 8,346
INTEREST EXPENSE 4,678 4,300
-------- --------
INCOME BEFORE INCOME TAXES 20,669 4,046
INCOME TAXES 15,286 1,620
-------- --------
NET INCOME $5,383 $2,426
======== ========
INCOME PER COMMON SHARE $0.25 $0.11
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,020 20,959
======== ========
</TABLE>
See Notes to Condensed Consolidated
Financial Statements.
Page 7 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended
October 29, October 30,
1994 1993
(Unaudited)
<S> <C> <C>
REVENUES: $303,889 $444,214
-------- --------
COSTS AND EXPENSES:
Cost of sales 222,705 303,337
Selling, general and administrative 94,851 145,339
Gain on streamlining plan (20,352)
Provision for writedown of division 28,180
-------- --------
Total costs and expenses 297,204 476,856
-------- --------
INCOME (LOSS) BEFORE INTEREST EXPENSE,
INCOME TAXES (BENEFIT) AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 6,685 (32,642)
INTEREST EXPENSE 13,566 11,810
-------- --------
LOSS BEFORE INCOME TAXES (BENEFIT)
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (6,881) (44,452)
INCOME TAXES (BENEFIT) 4,686 (12,600)
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (11,567) (31,852)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (14,800)
-------- --------
NET LOSS ($11,567) ($46,652)
======== ========
LOSS PER COMMON SHARE:
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ($0.58) ($1.55)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (0.71)
-------- --------
NET LOSS ($0.58) ($2.26)
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,988 20,955
======== ========
</TABLE>
See Notes to Condensed Consolidated
Financial Statements.
Page 8 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 29, October 30,
1994 1993
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($11,567) ($46,652)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 7,385 8,754
Amortization of intangibles arising from
acquisition 2,930 3,666
Provision for losses on accounts receivable 592 4,307
Provision for writedown of division 26,639
Cumulative effect of change in accounting
principle (before income tax benefit) 24,300
Other 760 (4,174)
Changes in assets and liabilities:
Accounts receivable 4,795 (67,323)
Inventories 4,037 (13,651)
Prepublication, prepaid advertising costs
and royalty advances 1,947 (1,310)
Net assets held for sale (50,563)
Other current assets 5,306 (3,709)
Accounts payable (17,036) (7,635)
Accrued compensation and fringe benefits 206 208
Income taxes 5,434 (18,042)
Deferred income taxes 8,483 (12,145)
Other current liabilities 10,175 (1,586)
------- -------
Net cash used in operating activities (27,116) (108,353)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of plant and equipment (14,560) (17,002)
Proceeds from streamlining plan sales 114,204
Return of investment in joint venture 500 1,400
------- -------
Net cash provided by (used in) investing
activities 100,144 (15,602)
------- -------
</TABLE>
(Continued on Next Page)
Page 9 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 29, October 30,
1994 1993
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock (exercise
of options) $ 640 $ 280
(Decrease) increase in notes payable (26,000) 115,000
Costs in connection with amendment of credit
facility (767)
Dividends paid on Preferred Stock (637) (637)
Other (18) (20)
------ -------
Net cash provided by (used in) financing
activities (26,782) 114,623
------ -------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 31 (30)
------ -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 46,277 (9,362)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 9,513 10,441
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $55,790 $ 1,079
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $15,642 $14,463
====== =======
Income taxes $ 444 $ 7,555
====== =======
</TABLE>
See Notes to Condensed Consolidated
Financial Statements.
Page 10 of 23
WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
October 29, 1994 and the results of operations for the three month and nine
month periods ended October 29, 1994 and October 30, 1993 and cash flows for the
nine months ended October 29, 1994 and October 30, 1993.
The results of operations for any interim period are not necessarily indicative
of the results to be expected for the full fiscal year.
These financial statements should be read in conjunction with the consolidated
financial statements of the Company contained in the Company's Annual Report on
Form 10-K for the year ended January 29, 1994.
NOTE B - Inventories
Inventories consisted of the following:
October 29, January 29,
1994 1994
(In thousands)
Raw materials $ 15,120 $ 14,913
Work in process 22,782 28,783
Finished goods 79,647 77,482
-------- --------
$117,549 $121,178
======== ========
NOTE C - Sale and Phase Out of Operations; Provision for Write-down
of Division; Net Assets Held for Sale
Sale and Phase Out of Operations
On November 29, 1993, the Company announced that it had recently been approached
by several companies expressing a desire to discuss a business combination. The
Board of Directors of the Company authorized the retention of two investment
banking firms as its advisors to explore alternatives to maximize shareholder
value. Based on an analysis of various alternatives, on April 7, 1994, the
Company adopted a plan (the "Plan") designed to improve its competitive position
and reduce its cost structure through the sale or phase out of certain
operations, property divestitures and consolidations, and a workforce reduction.
Page 11 of 23
The Plan included the following major components:
o An agreement in principle to sell the game and puzzle operation (including
certain inventories) to Hasbro, Inc. ("Hasbro"). This transaction was
completed on August 4, 1994 for cash proceeds of approximately $97,000,000.
o The decision to exit the Direct Marketing Continuity Club and School Book Club
businesses. The sale of the School Book Club business was consummated on July
1, 1994 for cash proceeds of approximately $4,300,000 and the sale of the
Direct Marketing Continuity Club business was completed on October 7, 1994
for cash proceeds of approximately $10,225,000.
o The closedown and sale of the Company's Fayetteville, North Carolina
manufacturing and distribution facility, which is primarily dedicated to the
game and puzzle operation but was not included in the sale to Hasbro. This
facility is expected to close in the fourth quarter of Fiscal 1995 and will be
for sale effective January 1, 1995.
o The decision to streamline the Company's publishing business so as to focus on
its core competencies. This includes a reduction in the management,
administrative and direct labor workforces. Following the closing of the
Fayetteville facility, the Company will have reduced its overall employment by
approximately 1,200 positions.
The net assets of the game, puzzle, direct marketing and school book club
operations and the Fayetteville facility were classified as net assets held for
sale. The net cash proceeds arising from the Plan were utilized to repay
outstanding debt under the Company's Revolving Credit Agreement. During the
third quarter ended October 29, 1994, the Company recorded a net gain from the
Plan of $20,352,000 ($12,396,000, net of income taxes), inclusive of operating
losses of the game, puzzle, direct marketing and school book club operations
from January 30, 1994 through their respective disposition dates.
For the three and nine months ended October 30, 1993, the game, puzzle, direct
marketing and school book club operations had revenues of approximately
$48,000,000 and $90,500,000, respectively. Subsequent to January 29, 1994, the
statement of operations does not include the results of these businesses.
Provision for Write-Down of Division
On May 12, 1993, the Board of Directors of the Company directed management to
review the operations of the Advertising Specialty Division of the Company's
Penn Corporation subsidiary and evaluate various strategic alternatives,
including its disposition. Accordingly, the Company established a provision,
including operating losses through the expected disposition date, to write-down
the assets of the Division to net realizable value.
Page 12 of 23
On April 29, 1994, the Company entered into a letter of intent to sell this
Division for approximately $14,000,000, subject to customary conditions. On
June 10, 1994, the Company announced that negotiations with one of the two
buyers of this Division had terminated. However, certain other industry
participants, who had expressed a strong interest in the Vitronic(Registered)
and K-Studio(Registered) portion of the Division, were considering its
acquisition. On August 5, 1994, the sale of the Ritepoint(Registered) and
Adtrend(Registered) businesses of the Division was completed for cash proceeds
of approximately $5,650,000. The sale of the Vitronic(Registered) and
K-Studio(Registered) businesses was completed on November 7, 1994 for net cash
proceeds of approximately $8,350,000. The net cash proceeds from the sale of
this Division were utilized to repay outstanding debt under the Revolving Credit
Agreement.
Revenues and losses before interest expense and income taxes of the Division,
exclusive of the provision for write-down, included in the accompanying
statements of operations for the nine months ended October 30, 1993 were
$7,202,000 and $(2,083,000), respectively. Subsequent to May 1, 1993, the
statements of operations do not include the results of the Division.
Net Assets Held for Sale
As of October 29, 1994 and January 29, 1994, net assets held for sale consisted
of the following:
October 29, January 29,
1994 1994
(In thousands)
Current assets (including accounts
receivable and inventories of
$16,352,000 and $48,768,000,
respectively) $ 16,578 $ 60,020
Property, plant and equipment, net 16,336 32,655
Other assets (primarily identified
intangibles and goodwill), net 22,679 27,933
-------- --------
55,593 120,608
Less:
Current liabilities (7,031) (5,680)
Provision for write-down, net of
Division operations subsequent
to May 1, 1993 (23,778) (26,405)
-------- --------
Net assets held for sale $ 24,784 $ 88,523
======== ========
Page 13 of 23
NOTE D - Notes Payable to Banks
Concurrent with the completion of the sale of the game and puzzle operation on
August 4, 1994, the Revolving Credit Agreement was amended to provide for
aggregate borrowings of $70 million, including letters of credit of $5 million.
Following the sale of the Vitronic(Registered) and K-Studio(Registered)
businesses of the Company's Advertising Specialty Division, the facility
provided for aggregate borrowings of $37 million, including letters of credit of
$5 million. Additionally, financial covenants with respect to certain ratios
and tangible net worth requirements were eliminated through November 1994.
NOTE E - Postretirement Benefits
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("FASB") No. 106, "Employers' Accounting For Postretirement
Benefits Other Than Pensions". FASB No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services. The Company elected to recognize the cumulative effect of
this obligation on the immediate recognition basis. For the nine months ended
October 30, 1993, the cumulative effect of this change in accounting principle
reduced earnings by $24,300,000 ($14,800,000, net of income taxes).
NOTE F - Income (loss) Per Common Share
Income (loss) per common share was computed as follows:
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 29, October 30, October 29, October 30,
1994 1993 1994 1993
(In thousands, except for per share data)
Net income (loss) $ 5,383 $ 2,426 $(11,567) $(46,652)
Preferred dividend
requirements (212) (212) (637) (637)
------- ------- -------- --------
Income (loss) applicable
to common stock $ 5,171 $ 2,214 $(12,204) $(47,289)
======= ======= ======== ========
Weighted average common
shares outstanding 21,020 20,959 20,988 20,955
======= ======= ======== ========
Income (loss) per common
share $ 0.25 $ 0.11 $ (0.58) $ (2.26)
======= ======= ======== ========
Page 14 of 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenues for the quarter ended October 29, 1994 decreased $71.6 million (35.5%)
to $130.3 million as compared to $201.9 million for the quarter ended October
30, 1993 and decreased $140.3 million (31.6%) to $303.9 million as compared to
$444.2 million for the nine months ended October 30, 1993. On May 12, 1993, the
Board of Directors of the Company directed management to review the operations
of the Advertising Specialty Division of the Company's Penn Corporation
subsidiary and evaluate various strategic alternatives, including its
disposition. Further, on April 7, 1994, the Company announced the adoption of a
plan (the "Plan" or "streamlining plan") to improve the Company's competitive
position and reduce its operating cost structure through the sale or phase out
of certain operations, property divestitures and consolidations, and a reduction
in the management, administrative and direct labor workforces. The Plan
included the sale of the game and puzzle operation, the exiting from the direct
marketing continuity clubs and school book club businesses, the closure and sale
of the Company's Fayetteville, North Carolina manufacturing and distribution
facility and streamlining the Company's publishing business so as to focus on
its core competencies. Therefore, subsequent to the Company's quarter ended May
1, 1993, the results of operations do not include the results of the Advertising
Specialty Division and subsequent to January 29, 1994, the results of operations
do not include the results of those businesses sold or closed as part of the
aforementioned Plan. The revenues of the Advertising Specialty Division and the
operations disposed of under the Plan were $9.5 million and $58.7 million for
the third quarter and nine months of fiscal 1995, respectively.
During the quarter ended October 29, 1994, the game and puzzle operation was
sold to Hasbro, Inc. for cash proceeds of approximately $97.0 million, and the
Company completed the sale of the Ritepoint(Registered) and Adtrend(Registered)
businesses of its Advertising Specialty Division for cash proceeds of
approximately $5.65 million, as well as the sale of the Direct Marketing
Continuity Club business for $10.2 million. During the quarter ended July 30,
1994, the Company completed the sale of its School Book Club business for cash
proceeds of approximately $4.3 million. Additionally, on November 7, 1994, the
Company completed the sale of the Vitronic(Registered) and K-Studio(Registered)
businesses for cash proceeds of approximately $8.35 million.
Excluding revenues of the operations disposed of under the Plan, revenues
decreased $22.9 million (14.9%) and $40.3 million (11.7%) for the three and nine
months ended October 29, 1994 as compared to the prior year. Consumer Products
Segment revenues of the ongoing operations decreased $19.9 million (14.6%) for
the quarter and decreased $30.4 million (10.2%) for the nine months ended
October 29, 1994. The decline for the quarter resulted from lower sales of
non-Western products which arose under the Company's Total Category Management
programs as the management of the Books "R" Us program at Toys "R" Us was
assumed by Toys "R" Us at the beginning of Fiscal
Page 15 of 23
1995; lower sales of interactive electronic storybooks as the growth in new
electronic storybook formats was offset by original formats approaching the end
of their life cycle; and the continued reductions in retailers' on-hand
inventories, resulting in a slower order rate as restocking and future orders
were delayed. Additionally, the decrease for the nine month period was further
impacted by the decline in domestic consumer product sales caused by
distractions resulting from the contemplated sale of the Company; market
uncertainties and employee concerns associated with announced and implemented
overhead reduction measures and the sales of certain of the Company's businesses
as outlined in the Plan; and reduced customer traffic in the Company's primary
retail accounts resulting from the unusually severe weather conditions
throughout most of the country during the first quarter. Commercial product
segment revenues (other than revenues of the Advertising Specialty Division),
which are comprised of printing services, decreased $3.0 million (17.5%) and
$9.9 million (21.2%) for the quarter and nine months ended October 29, 1994.
The decline for the quarter and nine months was due to decreases in sales of
graphic products, kits, software products and custom publishing.
Price increases in the Consumer Products Segment were approximately 3.0%. Sales
of printing services are the result of individual agreements entered into with
customers as to price and services performed. Accordingly, the effects on
inflation cannot be determined on the sales of printing services.
Income before interest expense and income taxes for the quarter ended October
29, 1994 was $25.3 million as compared to $8.3 million for the quarter ended
October 30, 1993. This improvement of $17.0 million was the result of a $20.4
million gain on the streamlining plan and a $21.7 million decrease in selling,
general and administrative expenses partially offset by a $25.0 million decrease
in gross profit. For the nine months ended October 29, 1994, the income before
interest expense, income tax benefit and cumulative effect of a change in
accounting principle was $6.7 million as compared to a loss of $32.6 million for
the nine months ended October 30, 1993. This improvement of $39.3 million was
the result of the aforementioned streamlining plan gain and a $50.5 million
decrease in selling, general and administrative expenses partially offset by a
$59.7 million decrease in gross profit. In addition, operations for the nine
months ended October 30, 1993 included a $28.2 million pre-tax provision to
write-down the carrying value of the assets of the Advertising Specialty
Division to their estimated net realizable value.
Gross profit decreased $25.0 million (38.3%) to $40.3 million for the quarter
ended October 29, 1994, as compared to $65.4 million for the quarter ended
October 30, 1993. Gross profit decreased $59.7 million (42.4%) to $81.2 million
for the nine months ended October 29, 1994 as compared to $140.9 million for the
nine months ended October 30, 1993. As a percentage of revenues, the gross
profit margin decreased to 30.9% and 26.7% for the quarter and nine months ended
October 29, 1994 from 32.4% and 31.7% for the quarter and nine months ended
October 30, 1993, respectively. For ongoing operations, gross profit
Page 16 of 23
for the quarter ended October 29, 1994 decreased $8.6 million (17.7%), to $40.3
million as compared to $49.0 million in the prior year and decreased $26.8
million (24.8%) to $81.2 million for the nine months ended October 29, 1994 as
compared to $108.0 million for the nine months ended October 30, 1993. As a
percentage of revenues, the gross profit margin decreased to 30.9% and 26.7% for
the quarter and nine months ended October 29, 1994 as compared to 32.0% and
31.4% for comparable periods of the prior year. In the Consumer Products
Segment, gross profit decreased $8.5 million (18.1%) to $38.6 million for the
quarter ended October 29, 1994 and $24.3 million (23.9%) to $77.4 million for
the nine months as compared to the prior year. As a percentage of revenues, the
consumer gross profit margin decreased to 33.2% and 29.0% for the quarter and
nine months of fiscal 1995 as compared to 34.6% and 34.2% for the quarter and
nine months of fiscal 1994, respectively. A substantial portion of the decrease
in gross profit margin for the quarter and nine months was due to lower
production in response to the Company's continued efforts to reduce inventories,
resulting in negative manufacturing variances. Additionally, the decrease in
gross profit was attributable to a change in product mix, which caused an
increase in royalty costs and increased freight costs associated with category
management and direct store shipment programs. In the Commercial Products
Segment, the gross profit margin of printing services increased to 12.3% from
10.8% of revenues for the quarter, and decreased to 10.3% from 13.4% for the
nine months as compared to the prior year. The increase for the quarter was due
to a more favorable product mix, offset in part by unfavorable manufacturing
variances. For the nine months, the decrease was primarily due to unfavorable
manufacturing variances and the change in sales mix to lower margin services.
Selling, general and administrative expenses for the quarter ended October 29,
1994 decreased $21.7 million (38.0%) to $35.3 million and decreased $50.5
million (34.7%) to $94.9 million for the nine months ended October 29, 1994 as
compared to $57.0 million and $145.3 million for the quarter and nine months
ended October 30, 1993, respectively. For ongoing operations, selling, general
and administrative expenses for the quarter ended October 29, 1994 decreased
$4.5 million (11.3%) to $35.3 million as compared to $39.8 million for the
quarter ended October 30, 1993. For the nine months ended October 29, 1994,
selling, general and administrative expenses for ongoing operations decreased
$8.2 million (8.0%) to $94.9 million as compared to $103.1 million in the prior
year. For the quarter, the decrease was primarily attributable to decreased
sales promotion costs, including the costs of corrugated displays, permanent
racks and co-op advertising, partially offset by higher consumer advertising.
For the nine months, the decrease was attributable to lower sales promotion
costs partially offset by increased consumer advertising. Additionally, the
nine months ended October 30, 1993 included start up costs associated with the
category management program at Toys "R" Us.
Page 17 of 23
Interest expense for the quarter increased $.4 million to $4.7 million as
compared to $4.3 million in fiscal 1994 and for the nine months increased $1.8
million to $13.6 million as compared to $11.8 million in fiscal 1994. The
increase was due to higher interest rates. Total average outstanding debt
decreased to $233.2 million for the nine months of fiscal 1995 from $235.7
million for the nine months of fiscal 1994 (see Financial Condition, Liquidity
and Capital Resources), while average interest rates increased from 6.7% to
7.7%. The increase in average interest rates resulted primarily from the
increase in short term rates.
The Company's income tax provision for the quarter and nine months ended October
29, 1994 includes income taxes resulting from the streamlining plan gain and an
effective income tax benefit rate of 12% from ongoing operations, which
represents the Company's estimate of its effective tax rate for the full year.
The disproportionate provision results from the reversal of deferred income tax
assets as a result of the sale of the Advertising Specialty Division, the
streamlining plan gain, alternative minimum tax and losses for which no benefit
has been provided. For the nine months ended October 30, 1993, the income tax
benefit rate was 28.3%, as certain capital losses associated with the
Advertising Specialty Division were not expected to be realized.
Net income for the quarter ended October 29, 1994 was $5.4 million or $.25 per
share as compared to net income of $2.4 million or $.11 per share for the
quarter ended October 30, 1993. The loss for the nine months ended October 29,
1994, before the streamlining plan gain, the provision for write-down of
Division and the cumulative effect of a change in accounting principle
(postretirement benefits other than pensions) was $24.0 million or $1.17 per
share, compared to a loss of $10.1 million or $.51 per share for the nine months
ended October 30, 1993. During the nine months ended October 29, 1994, the
Company recorded a pre-tax net gain from the streamlining plan of $20.4 million
($12.4 million, net of income taxes) or $0.59 per share. Therefore, the net
loss for the nine months ended October 29, 1994 was $11.6 million or $.58 per
share. During the nine months ended October 30, 1993, the Company adopted
Statement of Financial Accounting Standards ("FASB") No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", using the immediate
recognition method. As a result, the Company recorded a pre-tax non-cash charge
of $24.3 million ($14.8 million, net of income taxes) or $.71 per share as a
cumulative effect of a change in accounting principle in the statement of
operations. Further, the Company's provision for write-down of Division was
$28.2 million ($21.8 million, net of income taxes) or $1.04 per share.
Therefore, the net loss for the nine months ended October 30, 1993 was $46.7
million or $2.26 per share.
Page 18 of 23
Financial Condition, Liquidity and Capital Resources
Operations for the nine months ended October 29, 1994, including the
streamlining plan gain but excluding non-cash charges for depreciation,
amortization and the provision for losses on accounts receivable utilized cash
of approximately $.7 million. The operations for the nine months ended October
30, 1993 including the provision for the write-down of Division but excluding
depreciation, amortization, provision for losses on accounts receivable and the
adoption of FASB No. 106 utilized cash of approximately $3.3 million. During
the nine months ended October 29, 1994 and October 30, 1993, other changes in
assets and liabilities, resulting from operating activities amounted to $26.4
million and $105.1 million, respectively, resulting in net cash used in
operating activities of $27.1 million and $108.4 million, respectively.
Acquisitions of property, plant and equipment were $14.6 million during the nine
months ended October 29, 1994 as compared to $17.0 million during the nine
months ended October 30, 1993. Fiscal 1995 capital expenditures include costs
associated with the Company's new order processing, customer service and
inventory management system and the completion of its third Golden Books
Showcase store which opened in New York City in April 1994. The Company is
currently finalizing its previously announced plans to undertake a facility
expansion of its paper tableware and party goods operations in Kalamazoo,
Michigan in conjunction with the Company's Plan to improve its competitive
position and reduce its overall operating cost structure. Although the Company
is committed to an expansion, no material contracts for this facility expansion
have been made.
During the nine months ended October 29, 1994, the Company utilized cash for
financing activities by repaying $26.0 million of outstanding borrowings under
its Revolving Credit Agreement. Cash provided by financing activities during
the nine months ended October 30, 1993 were primarily from borrowings of $115.0
million under the Company's Revolving Credit Agreement.
Working capital decreased to $238.7 million from $333.0 million at January 29,
1994. The decrease in working capital is due in part to the reclassification of
the loans outstanding under the Revolving Credit Agreement at October 29, 1994
of $54.0 million as the Company's Revolving Credit Agreement expires on May 31,
1995. The balance of the decline is primarily attributable to the reduction in
borrowings under the Revolving Credit Agreement as a result of the completion of
the Plan.
The Company's Revolving Credit Agreement, dated November 12, 1992, initially
provided for a line of credit totaling $200 million. The facility provides for
the seasonal working capital requirements of the Company. In October, 1993, the
Revolving Credit Agreement was amended to provide credit availability of $140
million from December 28, 1993 until the third quarter of fiscal 1995.
Subsequently, the Revolving Credit Agreement was further amended to provide for
borrowings up to
Page 19 of 23
$125 million through July 31, 1994 and $140 million thereafter; in each case,
including letters of credit of $10 million. Concurrent with the completion of
the sale of the game and puzzle operation on August 4, 1994, the Revolving
Credit Agreement was amended to provide for aggregate borrowings of $70 million,
including letters of credit of $5 million. Following the sale of the
Vitronic(Registered) and K-Studio(Registered) businesses of the Company's
Advertising Specialty Division, the facility provided for aggregate borrowings
of $37 million, including letters of credit of $5 million. In the first quarter
of fiscal 1996, borrowings may not exceed $15 million for a period of thirty
consecutive days.
The Company's management believes that the credit facilities available under the
Revolving Credit Agreement are sufficient to meet the Company's borrowing
needs. Management anticipates that a long term credit facility sufficient to
sustain growth and meet the Company's seasonal borrowing needs will be
consummated prior to the expiration of the current facility.
The completion of the Plan has had and will have a favorable effect on the
Company's financial position, results of operations and future capital
requirements. Annual operating costs savings associated with the Plan,
exclusive of the impact of the sale of the game, puzzle, direct marketing and
school book club operations, began to be realized in the second quarter of
fiscal 1995. The Company will continue to evaluate opportunities for additional
cost savings. However, the Plan, as announced on April 7, 1994, has been
completed.
Page 20 of 23
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Shareholders of the Company was held
September 29, 1994.
b. The following persons were elected directors of the Company:
SHARES VOTING
INDIVIDUAL FOR WITHHELD ABSTAIN
------------------------- ---------- -------- -------
Robert A. Bernhard 18,071,567 301,268 -0-
Richard A. Bernstein 18,052,018 320,817 -0-
Samuel B. Fortenbaugh III 18,071,417 301,418 -0-
Alan S. Gordon 18,012,267 360,568 -0-
Jenny Morgenthau 18,069,061 303,774 -0-
Michael A. Pietrangelo 18,071,517 301,318 -0-
c. By a vote of 18,139,665 to 48,175 with 184,995 abstentions,
Deloitte & Touche LLP was elected as the Company's independent
auditors to audit the accounts of the Company for the fiscal year
ending January 28, 1995.
Page 21 of 23
ITEM 6. Exhibits and Reports on Form 8-K:
a. Exhibit 15 - Letter re: unaudited interim financial information.
b. No reports were filed on Form 8-K during the quarter for which
this report is filed.
Page 22 of 23
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN PUBLISHING GROUP, INC.
December 13, 1994 /s/ Richard A. Bernstein
Richard A. Bernstein
Chairman
December 13, 1994 /s/ Steven M. Grossman
Steven M. Grossman
Chief Financial Officer
Page 23 of 23
EXHIBIT 15
Western Publishing Group, Inc.
New York, New York
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of Western Publishing Group, Inc. and subsidiaries for the periods
ended October 29, 1994 and October 30, 1993, as indicated in our report dated
December 9, 1994; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended October 29, 1994, is
incorporated by reference in the following Registration Statements:
Form S-3:
File No. 33-36582
File No. 33-43214
Form S-8:
File No. 33-18430
File No. 33-18692
File No. 33-18693
File No. 33-28019
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Milwaukee, Wisconsin
December 9, 1994
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<LEGEND>
This schedule contains summary financial information extracted from Western
Publishing Group, Inc. and Subsidiaries Consolidated Financial Statements as
of and for the nine months ended October 29, 1994 and is qualified in its
entirety by reference to such financial statements.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> OCT-29-1994
<CASH> 55,790
<SECURITIES> 0
<RECEIVABLES> 145,186
<ALLOWANCES> 12,394
<INVENTORY> 117,549
<CURRENT-ASSETS> 365,520
<PP&E> 118,822
<DEPRECIATION> 45,292
<TOTAL-ASSETS> 463,135
<CURRENT-LIABILITIES> 126,867
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0
<COMMON> 212
<OTHER-SE> 147,181
<TOTAL-LIABILITY-AND-EQUITY> 463,135
<SALES> 300,987
<TOTAL-REVENUES> 303,889
<CGS> 222,705
<TOTAL-COSTS> 317,556
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<INTEREST-EXPENSE> 13,566
<INCOME-PRETAX> (6,681)
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