SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 2, 1996
Golden Books Family Entertainment, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-14399 06-1104930
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
850 Third Avenue, New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 753-8500
(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
On July 30, 1996, Golden Books Family Entertainment, Inc. (the
"Company" or "Golden Books") announced that it is seeking to raise $100 million
through the sale of convertible preferred securities to be issued by a
financing vehicle to be known as the Golden Books Financing Trust ("Golden
Books Finance" or the "Trust"), a Delaware business trust. The Company will
own all of the common securities in the Trust and the Trust will offer for
sale Convertible Trust Originated Preferred Securities (the "Convertible
TOPrS[sm]" or "Preferred Securities"). The Preferred Securities will have an
aggregate liquidation preference of $100 million and will be convertible at
the option of their holders into Common Stock, par value $.01 per share, of
the Company ("Company Common Stock").
The Preferred Securities will not be registered and have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and will be sold in the Unites States in a private placement under Rule
144A. The Preferred Securities may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
In connection with the offering for sale of the Preferred
Securities (the "Offering"), the Company prepared an offering memorandum (the
"Offering Memorandum"), in which the Company described its new business
strategy and set forth certain financial and other information. Included below
are selected portions of the "Risk Factors" section of the Offering
Memorandum, as well as the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" sections of the Offering
Memorandum. Also included are those sections of the Offering Memorandum
describing (i) the Company's strategic transaction with Hallmark Cards, Inc.
("Hallmark") (the "Hallmark Investment"), (ii) the Company's acquisition
of substantially all of the assets of Broadway Video Entertainment, L.P.
("BVE, L.P.")(the "Acquisition") and (iii) a charge of $80 million (in addition
to the previously disclosed $16 million charge) to be recorded in the second
quarter financial statements of the Company.
Selected information from the Offering Memorandum is set forth
below. The inclusion of such information is for disclosure purposes only and
does not constitute an offer to sell or a solicitation of an offer to purchase
the Preferred Securities or any other securities of the Company.
<PAGE>
RISK FACTORS
LOSSES
During fiscal 1994, 1995 and 1996, the Company experienced net losses of
$55.8 million, $17.6 million and $67 million, respectively. For the fiscal
quarter ended May 4, 1996, the Company experienced net losses of $8.8
million. The Company's net losses have resulted primarily from significant
declines in revenues (which were in part attributable to sales of portions of
the Company's business) without commensurate reductions in costs and
expenses. If the Company's strategy is successful, the Company still does not
expect to generate positive net income until fiscal 1999 at the earliest. The
Company's return to profitability is dependent in part on the successful
implementation of management's new strategy. There can be no assurance that
this strategy will be successful, that the Company will not continue to
experience net losses or that the Company's net losses will not increase.
The Company expects to reflect substantial write-downs and other charges,
which will be primarily non-cash in nature, in fiscal 1997, beginning with
the Company's second quarter financial statements. Based upon the
determinations made to date, including adjustments in the carrying value of
assets held for sale, the Company will record charges of approximately $80
million in connection with its restructuring plan in its second quarter
financial statements. In addition, as previously disclosed, the Company will
record previously disclosed charges in the second quarter of approximately
$16 million as a result of the issuance of Series B Preferred Stock to Golden
Press Holding, L.L.C. ("GPH") (the "GPH Transaction") and related transactions.
RISKS OF IMPLEMENTATION OF NEW STRATEGY
The Company's management team is in the initial stages of implementing the
Company's new strategy. As part of this strategy, the Company intends to make
changes in its existing product lines, introduce new product lines, enlarge
the Golden Books character library and exploit new distribution channels for
its products. The Company's strategy also involves revitalizing its
editorial, sales and marketing functions. Management also has initiated an
expense reduction program that builds upon the Company's already-taken
cost-saving measures. In addition, the Company has decided to divest Penn
Corporation ("Penn"). There can be no assurance that the Company will be able
to successfully implement all or any part of its strategy, including its
expense reduction program and the divestiture of Penn, or that the
implementation of this strategy will increase the profitability of the
Company or improve its cash flow. In addition, the Company's restructuring
measures will in part be offset by the incurrence of additional expenses in
retaining new management and editorial staff as well as other upgrading
measures relating to the Company's new strategy.
DEPENDENCE ON AND RELATIONSHIPS WITH KEY CUSTOMERS AND LICENSORS
During fiscal 1996, approximately 36% of the Company's children's
publishing revenues and 28% of the Company's revenues generally were
attributable to sales to the Company's four largest customers. The loss of
any such customer or a substantial decrease in business from any such
customer would have a material adverse effect on the Company.
The Company believes that the variety and popularity of characters
(whether licensed or owned) is among the most important factors that
differentiate the Company's products from those of its competitors.
Approximately 73% of the Company's children's publishing revenues were
attributable to products utilizing characters and other properties licensed
by the Company from third parties. Approximately 47% of fiscal 1996
children's publishing revenues were attributable to children's products
incorporating characters and properties licensed from the Company's five
largest sources of licensed property. The character licenses covering
characters licensed by the Company generally have two to three year terms.
The Company's main character license from The Walt Disney Company ("Disney")
pertaining to the use in children's storybooks and color/activity books of
Disney characters expires on December 31,
<PAGE>
1997. Management intends to seek the renewal of this license. While the
Company believes that its relationship with Disney is good, competition for
licenses is strong and there can be no assurance that such license, or any of
the Company's other licenses, will be renewed on favorable terms if at all.
The loss of any of the Company's principal licenses would have a material
adverse effect on the Company. In addition, the loss of a significant license
by the Company would impair its distribution capabilities which, in turn,
could adversely affect its ability to obtain new licenses and to renew
existing licenses on favorable terms, if at all.
The Company's relationships with a number of its significant customers and
licensors have been contentious from time to time because of disputes, in the
case of its customers, relating to prior pricing, return and merchandising
policies and, in the case of its licensors, alleged non-compliance by the
Company with certain license terms. New management has taken steps to repair
these relationships and believes that it has been successful in this regard.
However, there can be no assurance that such relationships, or other
relationships with customers and/or licensors, will not again become
contentious in the future, which could have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The implementation of the Company's strategy will require the active
participation of its new management team and, in particular, Richard E.
Snyder, the Company's Chairman and Chief Executive Officer. The loss of the
services of Mr. Snyder could have a material adverse effect on the ability of
the Company to implement its strategy. The loss of any of the other members
of the Company's new management team could adversely affect the
implementation of selected aspects of the Company's strategy or delay the
implementation of such aspects until a qualified replacement can be obtained.
In addition to adversely affecting the ability of the Company to implement
its strategy, the loss of any of the foregoing key employees of the Company
could otherwise have a material adverse effect on the Company. The Company
does not maintain "key-man" insurance in respect of Mr. Snyder or any of its
other key employees.
In order to fully implement its strategy, the Company may need to hire
additional senior creative personnel. Competition for such personnel is
intense and the failure by the Company to attract and retain additional
senior members of its creative staff could adversely affect the
implementation of selected aspects of the Company's strategy.
COMPETITION
The children's publishing market is highly competitive. Competition is
based primarily on price, quality, distribution, marketing and licenses. In
mass market sales, the Company faces competition primarily from smaller
competitors. In the trade and specialty trade categories, the Company's
principal competitors are large publishing companies. The Company also
competes for a share of consumer spending on children's entertainment and
educational products against companies that market a broad range of products
utilizing a broad range of technologies that are unrelated to those marketed
by the Company.
The market for licenses also is highly competitive and the Company
competes against many other licensees for significant licenses. In recent
years, licensors have fragmented licenses, which has reduced the cost of
purchasing a license. As a result, smaller bidders have been able to enter
the market for licenses, which has resulted in increased competition in this
market.
The Company also experiences strong competition for its other products and
services, based on a number of factors, including, but not limited to, price,
quality, formats, delivery and licenses.
Many of the Company's current competitors have greater financial resources
than the Company and, in selected markets, greater experience than the
Company. The markets which the Company intends to enter as part of its growth
strategy each contain a number of competing entities, many of which have
greater resources and experience with respect to these markets than the
Company.
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The Company's operations also may be adversely affected by a number of
factors beyond its control, including economic downturns, cyclical variations
in the markets for its products and related products of other companies and
changes in consumer preferences.
RISKS RELATING TO INTELLECTUAL PROPERTIES
In furtherance of the Company's strategy, the Company will acquire BVE,
L.P.'s extensive library of character-based family entertainment properties.
The value of the materials in the BVE, L.P. library, as well as the Company's
library, both to the Company as a licensor and as an end user, is subject to
consumer taste. There can be no assurance that these properties will be
attractive to third-party licensees or that they will be suitable for
inclusion in the Company's products. If properties that are being exploited
cease to be attractive to third-party licensees, licensing revenue from such
licenses will decrease.
In view of the complex nature of the Company's intellectual property
rights (including those to be acquired from BVE, L.P.), there is a risk of
third parties asserting claims of ownership or infringement or asserting a
right to payment with respect to the past, present or future exploitation of
such properties. There can be no assurance that the Company would prevail in
any such claim. In addition, the Company's ability to demonstrate, maintain
or enforce these rights may be difficult. Impairments or difficulties in
demonstrating the Company's ownership or license rights in such properties
could adversely affect the ability of the Company to generate revenue from or
use such properties. In many cases, the rights owned or being acquired by the
Company are limited in scope, do not extend to exploitation in all present or
future media or in perpetuity and may not include the right to create
derivative works, such as merchandising and character rights, remakes or
sequels.
DILUTION
As of May 8, 1996, after giving effect to the GPH Transaction, the Company
had 34,437,932 shares of issued and outstanding Company Common Stock on a
fully-diluted basis. After giving effect to the GPH Transaction, the
Offering, the Acquisition and the Hallmark Investment (including the issuance
of shares of Company Common Stock and options to purchase Company Common
Stock to Mr. Snyder pursuant to the anti-dilution provisions of his
employment agreement), based on an assumed stock price of $10.375, the
Company will have approximately 47,243,017 issued and outstanding shares of
Company Common Stock on a fully-diluted basis.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has historically experienced significant fluctuations in
quarterly operating results. The children's publishing business in general is
seasonal and depends to a significant extent on the Christmas selling season,
resulting in a disproportionately higher percentage of revenues in the
Company's third fiscal quarter (between 30% and 35% of children's publishing
revenues over the three most recently completed fiscal years). The BVE, L.P.
business to be acquired in the Acquisition also is expected to add to the
volatility of the Company's quarterly results. The Company's quarterly
operating results also will fluctuate based on the timing of the introduction
of products that utilize licensed characters, which, in the case of
characters appearing in movies, will be dependent upon the timing of the
movie release. In addition, the Company's quarterly operating results may
fluctuate significantly due to the seasonality of new product introductions,
changes in sales and product mixes and the timing of selling and marketing
expenses. Many of the Company's new products will have a lengthy development
cycle. As a result, these products may not begin to generate revenues during
the accounting period in which costs and expenses attributable to the
development and introduction of such products are incurred. Significant
fluctuations in the Company's quarterly operating results could adversely
affect the Company's cash flow, which could adversely affect the Company's
ability to pay interest on its indebtedness.
COST OF PAPER SUPPLIES AND OTHER MATERIAL COSTS
In fiscal 1996, paper supply purchases, exclusive of Penn, totaled
approximately $47 million. Paper supplies and other material costs constitute
a significant portion of the Company's product costs and are susceptible to
numerous factors beyond the control of the Company. Significant increases in
these costs could have a material adverse effect on the Company's operating
results.
<PAGE>
CONTROL OF THE COMPANY
GPH, which is controlled by Warburg, Pincus Ventures, L.P. ("WPV"), owns
13,000 shares of Series B Preferred Stock of the Company ("Series B Preferred
Stock"), convertible into an aggregate of 6,500,000 shares of Company Common
Stock (20.3% of the issued and outstanding shares of Company Common Stock
after giving effect to such conversion, the issuance of Company Common Stock
in connection with the Acquisition and the Hallmark Investment and the
issuance of additional shares of Company Common Stock to Richard E. Snyder in
connection with the foregoing transactions and the Offering pursuant to his
employment agreement with the Company). The Series B Preferred Stock votes on
an as-converted basis with the Common Stock on all matters submitted to a
vote of the stockholders of the Company, including the election of directors.
GPH also has irrevocable proxies with respect to 3,996,771 shares of Company
Common Stock (12.5% of the issued and outstanding shares of Company Common
Stock after giving effect to the conversion of the Series B Preferred Stock
and the consummation of the transactions described in the parenthetical
above) owned by Richard A. Bernstein and certain trusts affiliated with Mr.
Bernstein. Pursuant to such proxy, GPH generally has the power to vote such
shares in such manner as it deems proper. As a consequence of such Series B
Preferred Stock ownership and proxy, GPH, upon consummation of the
transactions described above, will control approximately 32.8% of the total
voting power of the Company. The Series B Preferred Stock entitles GPH,
during the first four years following issuance, to receive dividends of
approximately 195,000 shares of Company Common Stock per fiscal quarter of
the Company (subject to certain adjustments). GPH also holds a Warrant (the
"Warrant") to purchase 3,250,000 shares of Company Common Stock (subject to
anti-dilution adjustments) that will be exercisable beginning on May 8, 1998,
subject to acceleration upon certain circumstances. Such Warrant will be
exercisable until May 8, 2003.
For so long as at least one-half of the shares of Series B Preferred Stock
initially issued are owned by GPH and certain of its affiliates, certain
matters will be subject to the consent of the holders of a majority of the
shares of Series B Preferred Stock. Furthermore, the holders of the Series B
Preferred Stock will have the right to elect up to one-third of the members
of the Board of Directors (the "Series B Directors"), each of the current
members of which was nominated by GPH in connection with its investment in the
Company. The appointment of additional members of the Board of Directors of the
Company in connection with the Acquisition will provide GPH with the right to
designate two additional directors; however, GPH has advised the Company that it
does not presently intend to exercise such right, although it reserves the right
to do so in the future.
The foregoing factors provide GPH with significant influence over the
management and policies of the Company. The foregoing factors also may render
it more difficult for a third party to effect a change of control of the
Company without the consent of GPH and may thereby discourage third parties
from any attempt to acquire control of the Company.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive and evolving
environmental laws and regulations regarding the clean-up and protection of
the environment and worker health and safety. The Company believes that it is
in material compliance with applicable environmental requirements. However,
there can be no assurance that in the future the Company will not receive
notices that certain of its operations are not in compliance with its permits
or other environmental requirements, that current environmental requirements
will not become more onerous or that new laws and regulations will not be
adopted or become applicable to the Company. Any of the foregoing could
result in the imposition of fines or penalties, operating constraints, the
issuance of judicial or administrative orders requiring the Company to cease
operating a facility, increased operating and capital expenditures or other
liabilities, any of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
[END OF RISK FACTORS]
<PAGE>
ACQUISITION OF BROADWAY VIDEO ENTERTAINMENT ASSETS
Pursuant to an Asset Purchase Agreement dated as of July 30, 1996, among
BVE, L.P., Broadway Video Enterprises, Inc., Lone Ranger Music, Inc.,
Palladium Limited Partnership, LRM Acquisition Corp., the Company and Golden
Books Productions, Inc. ("Golden Books Productions"), (the "Asset Purchase
Agreement"), Golden Books Productions, which is a subsidiary of Golden Books
Entertainment, will acquire, among other things, substantially all of BVE,
L.P.'s and its affiliates' television and film library properties (which
constitutes substantially all of the assets of BVE, L.P.) and will assume
payables and all liabilities incurred in connection with the exploitation of
such assets after the closing for a purchase price of $81 million in cash
plus a number of shares of Company Common Stock that have an aggregate market
value of $10 million; provided, however, that in no event shall the number of
such shares be greater than 1,000,000 or less than 666,667. In addition,
pursuant to the Asset Purchase Agreement, following the closing thereunder,
the cash purchase price may be adjusted based upon the working capital at
closing and based upon the 1996 cash flow generated by BVE, L.P. through the
closing date. A total of $5 million of such purchase price was paid by Golden
Books Productions upon execution of the Asset Purchase Agreement. The shares
of Company Common Stock included in the purchase price (and any cash placed
in escrow in place of such stock pursuant to the terms of the Asset Purchase
Agreement) will be held in an escrow account (the "Escrow Account") for a
period of at least one year to satisfy any indemnification obligations of
BVE, L.P. and its affiliates under the Asset Purchase Agreement.
The Asset Purchase Agreement contains customary representations,
warranties and covenants. The respective obligations of the buying and
selling parties to consummate the acquisition are subject to the satisfaction
or waiver on or before the closing of certain conditions, including (i)
approval of the Acquisition under the Hart-Scott-Rodino Anti-trust
Improvements Act of 1976, as amended, (ii) Eric Ellenbogen, who is the
President of BVE, L.P.'s general partner and who will become the President of
the Company's new Golden Books Entertainment Group division and Executive
Vice President of the Company upon consummation of the Acquisition, not
having become deceased or permanently disabled, (iii) the representations and
warranties contained in the Asset Purchase Agreement being true and correct
on the closing date and (iv) all other conditions to closing, including the
consummation of the Offering, having been complied with in all material
respects. Under the Asset Purchase Agreement, the closing thereunder must
occur on or before October 31, 1996 unless extended by Golden Books
Productions or the Company for one month periods thereafter until December
31, 1996 upon the payment to BVE, L.P. by Golden Books Productions or the
Company prior to each such one month extension of $2 million, which payments
will be credited towards the purchase price under the Asset Purchase
Agreement upon its consummation.
Upon consummation of the Acquisition, Lorne Michaels, who indirectly owns
BVE, L.P., and Eric Ellenbogen will be appointed to the Board of Directors of
the Company.
Under the Asset Purchase Agreement, the Company and Golden Books
Productions, on the one hand, and BVE, L.P. and its affiliates, on the other
hand, have agreed to indemnify one another for certain breaches of
representations, warranties and covenants. Subject to limited exceptions, (i)
no claims under the indemnity may be asserted against such indemnifying
parties unless such claims exceed $3 million in the aggregate, in which event
the indemnifying parties shall be obligated to indemnify for the total amount
of all claims, and (ii) no claims under the indemnity may be asserted against
such indemnifying parties which are in excess of the value of the stock and
any cash held in the Escrow Account.
The consummation of the Acquisition is expected to occur as soon as
practicable after the consummation of the Offering. The conditions to the
closing of the Acquisition could, in the case of regulatory approvals, delay
the closing or, if such conditions are not satisfied or waived, cause the
Acquisition not to be consummated. If the Acquisition is not consummated, the
Asset Purchase Agreement provides for up to $9 million in liquidated damages
(which would include the $5 million payment made by Golden Books Productions
upon the execution of the Asset Purchase Agreement and any extension payments
made by the Company or Golden Books Productions) to be paid to BVE, L.P. if
the Asset Purchase Agreement is terminated due to a breach by the Company of
the Asset Purchase Agreement.
<PAGE>
HALLMARK STRATEGIC ALLIANCE
As its initial strategic alliance, on July 30, 1996, the Company entered
into the Hallmark Agreement pursuant to which H C Crown Corp., a wholly owned
subsidiary of Hallmark ("H C Crown"), has agreed to purchase $25 million of
Company Common Stock at a price equal to 95% of the average closing price of
the Company Common Stock on The Nasdaq National Market ("Nasdaq") on the ten
trading days following the pricing of the Offering, subject to a minimum
market price of $8.00 and a maximum market price of $12.00 per share. If the
Offering is not priced before August 30, 1996, the price of the Company Common
Stock to be purchased by Hallmark will equal 95% of the average closing price of
the Company Common Stock on Nasdaq on the ten trading days prior to the Closing,
subject to minimum market price of $10 and a maximum market price of $12 per
share. Such purchase is expected to be consummated during September 1996.
Hallmark and the Company are discussing a strategic relationship between the two
companies, including Hallmark's expressed interest in a further investment of an
additional $25 million in Company Common Stock, on terms to be negotiated.
Hallmark is entitled to have Irvine O. Hockaday, Jr., the President and Chief
Executive Officer of Hallmark elected to the Company's Board of Directors.
Hallmark's further investment is premised on the good faith effort of
Hallmark and the Company to work together to develop constructive working
relationships across appropriate lines of business, including, but not
limited to, personal expression, family entertainment and personal
development products. The Company is seeking additional strategic
relationships that management believes will enhance stockholder value.
Hallmark has agreed not to sell any Company Common Stock so acquired to
any buyer, except in a broadly distributed public offering, if, after the
consummation of such sale, such buyer would own 5% or more of the Company
Common Stock then outstanding on a fully-diluted basis. Hallmark will be
entitled to one demand registration right beginning on the first anniversary
of the Hallmark Investment and will be entitled to piggyback registration
rights for three years; provided, that, for the first two years following the
closing of the Hallmark Investment, Hallmark will not be permitted to sell in
excess of that number of shares of Company Common Stock which it could sell
under the volume limitations of Rule 144 under the Securities Act. If GPH
sells a majority of its Company Common Stock (determined on an as-converted
basis) or WPV sells a majority of its interest in GPH, the foregoing transfer
restrictions will lapse and Hallmark's demand registration right will become
immediately exercisable. In addition, Hallmark has agreed not to at any time
own more than 15% of the outstanding Company Common Stock without the consent
of the Company, except as a result of any action taken solely by the Company.
If the Company's Board of Directors has determined to conduct a process with
a view to selling a majority interest in the Company, Hallmark will be
permitted to participate on the same basis as third parties.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is the largest publisher of children's books in the North
America retail market. The Company creates, publishes and markets an
extensive range of children's entertainment products, including "Little
Golden Books" and other storybooks, coloring/activity books, electronic
storybooks, puzzles, educational workbooks, reference books and novelty book
formats. The Company has published its flagship product line, "Little Golden
Books," for over 50 years.
During each of the 1996, 1995 and 1994 fiscal years, the Company
experienced net losses of $67 million, $17.6 million and $55.8 million,
respectively. These losses have resulted primarily from significant declines
in revenues (which were in part attributable to the sale of significant
portions of the Company's business) without commensurate reduction in
operating expenses.
The following discussion should be read in conjunction with the audited
consolidated financial statements of the Company for the three fiscal years
ended February 3, 1996 and related notes thereto and the unaudited
consolidated statements of the Company for the quarters ended May 4, 1996 and
April 29, 1995 and the related notes thereto.
SHIFT IN BUSINESS STRATEGY
On May 8, 1996, GPH, an investment vehicle formed by WPV, Richard E.
Snyder and Barry Diller, invested $65 million in the Company. At that time,
the Company's name was changed from Western Publishing Group, Inc. to Golden
Books Family Entertainment, Inc., and Mr. Snyder, the former Chairman and
Chief Executive Officer of Simon & Schuster, Inc. ("Simon & Schuster"), was
appointed Chairman and Chief Executive Officer of the Company.
Since May 8, 1996, Mr. Snyder has assembled a new management team of
experienced professionals. Mr. Snyder and his management team are
implementing a new business strategy to build a leading family entertainment
company that creates, publishes and licenses children's entertainment
products. The Company intends to build on the Company's position as a leader
in the children's publishing market, utilizing the strength of the Golden
Books brand to provide family-oriented content through multiple media. The
principal elements of the Company's business strategy are to (i) revitalize
existing publishing operations, (ii) expand core publishing product lines,
(iii) expand into new distribution channels, (iv) expand the Golden Books
brand name into non-publishing media and products and (v) enlarge the Golden
Books character library. Consistent with this strategy is the proposed
acquisition of BVE, L.P.
As part of management's plan to return the Company's core publishing
business to profitability and to redeploy assets, new management has taken a
number of strategic actions and, accordingly, made decisions with respect to
certain of its assets.
New management has determined that Penn does not fit the Company's future
strategic direction, and, accordingly, will divest Penn. Therefore, Penn will
be classified as an asset held for sale in the Company's second quarter
financial statements. In addition, the Company will intensify its effort to
sell its former game and puzzle facility in Fayetteville, North Carolina,
which is closed and is classified as an asset held for sale.
In addition, new management is in the process of reviewing the Company's
operations with a view to reducing the costs of those operations and creating
an operating environment conducive to the pursuit of its new business
strategy. As a consequence of this review, which is expected to be completed
by the end of fiscal 1997, the Company expects to record substantial
write-downs and other charges in fiscal 1997 beginning with the Company's
second quarter financial statements. These charges are expected to be
primarily non-cash in nature. The Company has decided to discontinue or
replace certain product lines and expeditiously liquidate related inventory
and other slow-moving inventory. In addition, the Company will take charges
associated with its plans to resolve differences with its customers and
licensors with a view to mending and improving relationships with them and to
resolve certain other legal matters.
Based upon the determinations made to date in connection with the
implementation of its strategic plan, including adjustments in the carrying
value of assets held for sale, the Company will record charges of
approximately $80 million in its second quarter financial statements (to be
reflected in cost of sales, selling, general and administrative expenses and
restructuring costs). The Company's restructuring plan
<PAGE>
builds upon cost-saving measures that were taken by the Company through the
first quarter of fiscal 1997. Largely as a result of these measures, selling,
general and administrative expenses for the quarter ended May 4, 1996
decreased by $7.4 million as compared to the quarter ended April 29, 1995.
The Company believes that, based on the carrying value of both the assets
held for sale and the inventory described above, it will realize cash
proceeds in excess of $30 million on the sale of these assets. Such proceeds
and cash attributable to the Company's cost savings will be used in
connection with the Company's change in strategic focus and other
restructuring measures.
In addition, as previously disclosed, the Company will record charges of
approximately $16 million in the second quarter as a result of the GPH
Transaction and related transactions.
OVERVIEW
The Company has incurred net losses for the past three fiscal years and
for the first quarter of fiscal 1997. The financial results since fiscal 1994
primarily reflect the impacts of: (i) business divestitures; (ii) the decline
in sales of electronic storybook products; (iii) retailer resistance to
recent price increases; and (iv) the relative popularity of licensed
characters.
o Business Divestitures. During fiscal 1994 and fiscal 1995, the Company
sold its game and puzzle operation and its advertising specialty, direct
marketing and school book club operations. In addition, the Company
discontinued a number of product lines which prior management did not
believe were core to the ongoing business of the Company. The sales of
these operations, which accounted for approximately $177 million in fiscal
1993 revenues (representing 27% of the Company's consolidated revenues in
such fiscal year), were not matched by corresponding reductions in ongoing
costs.
o Electronic Storybook Products. In 1990, the Company acquired Sight &
Sound, Inc. ("Sight & Sound") and in fiscal 1993 had worldwide sales of
electronic storybook products in excess of $100 million. Since that time,
the Company's sales of electronic storybooks have declined substantially
as the product category has matured and retail prices and the number of
units sold have decreased. In addition, the market has become increasingly
competitive based on price, licenses and format innovations. As a result,
the Company is no longer developing any new products utilizing the
traditional Sight & Sound technology, although it is exploring replacement
electronic book technologies. Worldwide sales of the Company's electronic
storybooks products in fiscal 1996 totaled $45 million.
o Price Increases. During the first quarter of fiscal 1997, the Company
attempted to impose price increases averaging 20% to 30% on many of its
storybooks and coloring/activity books. These increases encountered
resistance from certain mass retailers, thereby reducing sales in the
first quarter of fiscal 1997. The Company is taking steps to improve its
relations with these retailers.
o Relative Popularity of Licensed Characters. The Company seeks to
capitalize on the popularity generated by new releases of movies, home
videos and television broadcasts by its licensors. In any given year, the
Company's sales levels can be impacted by the relative success of those
releases for which the Company has licensed characters. For example, the
products licensed by the Company in fiscal 1995 with respect to the Disney
movie The Lion King generated substantially higher sales within the same
product format than products licensed in fiscal 1996 featuring Disney's
Pocahontas characters.
Variability in Quarterly Results. The children's publishing business in
general is seasonal and depends significantly on the Christmas selling
season, resulting in a disproportionately higher percentage of revenues in
the third fiscal quarter (between 30% and 35% of children's publishing
revenues over the three most recently completed fiscal years.) The Company's
quarterly operating results also fluctuate based on the timing of the
introduction of products that utilize licensed characters, which, in the case
of characters appearing in movies, will be dependent upon the timing of the
movie release, as well as the relative popularity of those movies. In
addition, the Company's quarterly operating results may fluctuate
significantly due to the timing of selling and marketing expenses and changes
in sales and product mixes. The BVE, L.P. business to be acquired in the
Acquisition also is expected to add to the volatility of the Company's
quarterly results.
<PAGE>
Historical Segment Reporting. Historically, the Company has reported
operating results under two segments: (i) the Consumer Products Segment; and
(ii) the Commercial Products Segment. The Consumer Products Segment included
children's publishing operations and Penn. The Commercial Products Segment
included the Commercial Printing Division.
Penn Corporation. Penn will be classified as an asset held for sale in the
Company's second quarter financial statements. A table of Penn's operating
results for fiscal years 1996, 1995 and 1994 is provided below (in
thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Sales ......... $ 52,986 $ 58,809 $ 59,265
Net loss(a) .. (19,690) (14,991) (43,386)
</TABLE>
- ------------
(a) Includes interest expense of $16,423, $13,391 and $10,086 for fiscal
1996, 1995 and 1994, respectively, as charged to Penn by its parent.
Fiscal 1994 also includes a provision for write down of a division of
$28,180.
FISCAL QUARTER ENDED MAY 4, 1996 COMPARED TO FISCAL QUARTER ENDED APRIL 29,
1995
Revenues for the quarter ended May 4, 1996 decreased $17.0 million (19.9%)
to $68.9 million, as compared to $85.9 million for the quarter ended April
29, 1995. Consumer Products Segment revenues decreased $16.6 million (23.3%)
for the quarter ended May 4, 1996. The decrease resulted from (i) the
continuing decline in sales of the Company's interactive electronic
storybooks due to competitive factors, limited new product introductions and
price reductions implemented on certain of the Company's mature formats, (ii)
the discontinuation of the sourcing and sale of third party ("guest")
publisher product for Storyland locations at Wal Mart Stores, Inc. ("Wal
Mart"), as the previously announced decision to return the operation of the
program to Wal Mart management was implemented at the beginning of the fiscal
year, (iii) the decline in sales of the Company's international operations as
product utilizing licenses associated with major motion pictures released in
fiscal 1996 and certain new character licenses did not have the consumer
acceptance or longevity of prior years' products and (iv) the continuing
sales decline at Penn due to a combination of the declining popularity of
products utilizing licensed characters released in prior years, the success
of new product introductions featuring competitors' licensed characters and
the impending loss of a significant license at the end of fiscal 1996.
Commercial Product Segment revenues decreased $.4 million (3.4%) for the
quarter ended May 4, 1996. The decrease for the quarter was due to the
decline in the Company's educational kit business, which more than offset
increases in the sales of graphic products and custom publishing services.
However, the decline in the educational kit business was primarily due to the
timing of scheduled projects.
Price increases in the Consumer Products Segment were approximately 12.5%.
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.
The loss before interest expense and the (benefit) provision for income
taxes for the quarter ended May 4, 1996 was $5.8 million, as compared to a
loss of $9.8 million for the quarter ended April 29, 1995. The $4.0 million
improvement was the result of a $3.4 million decrease in gross profit offset
by a $7.4 million decrease in selling, general and administrative expenses.
Gross profit decreased $3.4 million (16.6%) to $16.9 million for the
quarter ended May 4, 1996, as compared to $20.3 million for the quarter ended
April 29, 1995. As a percentage of revenues, the gross profit margin
increased to 24.6% for the quarter ended May 4, 1996 from 23.7% for the
quarter ended April 29, 1995. In the Consumer Products Segment, gross profit
decreased $2.9 million (16.0%) to $15.2 million for the quarter ended May 4,
1996, as compared to the quarter ended April 29, 1995. As a percentage of
revenues, the Consumer Products Segment gross profit margin increased to
27.9% for the quarter ended May 4, 1996, as compared to 25.5% for the quarter
ended April 29, 1995. The increase in gross profit margin resulted from price
increases across several of the Company's core Consumer Products Segment
categories, lower product returns and a favorable shift in product mix. These
gross margin improvements were partially offset by the reduction in the
carrying value of certain non-core discontinued product categories.
<PAGE>
In the Commercial Products Segment, the gross profit margin of printing
services decreased to 12.2% for the quarter ended May 4, 1996 from 15.1% for
the quarter ended April 29, 1995. The decrease was primarily due to
unfavorable manufacturing variances.
Selling, general and administrative expenses for the quarter ended May 4,
1996 decreased $7.4 million (24.5%) to $22.7 million as compared to $30.1
million for the quarter ended April 29, 1995. This decrease is primarily the
result of a significant reduction in selling expenses resulting from the
sales and merchandising force reorganization which was completed in January
1996. In addition, sales promotion costs, including the costs of corrugate
displays, sell sheets and co-op advertising declined as operating cost
efficiencies were realized.
Interest expense for the quarter ended May 4, 1996 decreased $.5 million
to $3.0 million, as compared to $3.5 million in the quarter ended April 29,
1995. The decrease was due to lower average debt outstanding, attributable to
the Company having repaid all outstanding notes under its revolving credit
agreement during the first quarter of fiscal 1996, and lower interest rates
in the first quarter of fiscal 1997. Total average outstanding debt decreased
to $149.8 million for the quarter ended May 4, 1996, from $164.9 million for
the quarter ended April 29, 1995, while average interest rates decreased to
8.0% for the quarter ended May 4, 1996, as compared to 8.5% for the quarter
ended April 29, 1995. The decrease in the average interest rates resulted
primarily from the composition of the average debt outstanding.
The Company does not anticipate any significant provision or benefit for
income taxes in fiscal 1997. As such, operations for the first quarter do not
include an income tax benefit from domestic operations as no tax benefit was
provided on operating losses. Profitable operating results in subsequent
periods will benefit from an income tax rate which will be lower than the
statutory rate due to the reinstatement of deferred tax assets for which a
valuation allowance was established. For the quarter ended April 29, 1995, an
income tax benefit from operations was not provided as no income tax
provision or benefit was anticipated.
The loss for the quarter ended May 4, 1996 was $8.8 million or $0.41 per
share, compared to a loss of $13.3 million or $0.64 per share for the quarter
ended April 29, 1995. The operating results reflect the normal seasonality of
the Company's business, which historically incurs an operating loss in the
first quarter. As the Consumer Products Segment ships product to its
retailing customers in anticipation of the holiday selling season, the
Company experiences a greater portion of its total revenues in the second
half of the fiscal year.
During fiscal 1996, the Financial Accounting Standards Board ("FASB")
issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The adoption of this statement in
the first quarter of fiscal 1997 did not have a material effect on the
Company's financial statements.
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1996)
COMPARED TO FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1995)
Revenues for the year ended February 3, 1996 decreased $28.3 million
(7.0%) to $374.3 million as compared to $402.6 million for the year ended
January 28, 1995. Consumer Products Segment revenues decreased $33.9 million
(9.8%) for the year. The decrease resulted from the decline in unit and
dollar sales of the Company's interactive electronic storybooks and products
reflecting the competitive environment, the maturity of certain older formats
and the price reductions implemented by the Company on a number of formats in
the third quarter of fiscal 1996 in an effort to further reduce its inventory
of these products. In addition, the Company experienced lower sales in its
paper tableware and party goods division as the performance of certain
licensed products declined in comparison to the prior year. The reduced
productivity of these licensed products is attributable to their declining
popularity with the consumer as these products approach maturity and in light
of the fiscal 1996 performance of certain licenses utilized by competitors.
Sales in the Company's other core Consumer Products Segment categories,
including picture, color and activity books rebounded in the fourth quarter,
in comparison to the comparable period of the prior year, and concluded
fiscal 1996 with minor increases over the prior year. All product categories
utilizing licenses associated with major motion pictures released in fiscal
1996 experienced
<PAGE>
lower sales as compared to products utilizing major motion picture releases
in fiscal 1995. Further, the minor sales increases of core products and
decreases in sales of non-core products resulted, in part, from financial
setbacks at a number of the Company's regional mass merchant customers and
the non-quantifiable impact of the personnel distractions resulting from the
contemplated sale of a major interest in the Company and the resulting change
in management. Commercial Product Segment revenues which are comprised of
printing services, increased $5.6 million (9.9%) for the year ended February
3, 1996. The increase for the year reflects double-digit growth in the
Company's graphic products and kit businesses, partially offset by a decline
in custom publishing sales.
Price decreases in the Consumer Products Segment were approximately 4%.
This decline primarily resulted from pricing adjustments of the Company's
older electronic storybook formats to reflect the ongoing competitive
pressures in this category and inventory reduction measures partially offset
by minor price increases in other product categories. Sales of printing
services in the Commercial Products Segment are the result of individual
agreements entered into with customers as to price and services performed.
Accordingly, the effects of inflation cannot be determined on the sales of
printing services.
The loss before interest expense and income taxes for the year ended
February 3, 1996 was $42.9 million, as compared to income of $2.5 million for
the year ended January 28, 1995. During fiscal 1996, the Company recorded an
$8.7 million provision for restructuring and closure of operations and an
additional gain of $2.0 million from its streamlining plan as certain costs
and expenses of implementing the plan were less than originally anticipated.
During fiscal 1995, the Company recorded a $20.4 million gain on its
streamlining plan and a $1.1 million reduction to the Company's previously
recorded provision for write-down of the Advertising Specialty Division.
Excluding the fiscal 1996 and fiscal 1995 non-recurring items, the loss
before interest expense and income taxes increased $17.2 million. The
increase was the result of a $12.3 million decrease in gross profit, and a
$4.9 million increase in selling, general and administrative expenses.
Gross profit for the year ended February 3, 1996 was $92.9 million, as
compared to $105.1 million for the year ended January 28, 1995, a decrease of
11.7%. As a percentage of revenues, the gross profit margin decreased to
24.8% for fiscal 1996, as compared to 26.1% for fiscal 1995. In the Consumer
Products Segment, gross profit decreased $13.8 million (14.1%) to $84.4
million for the year ended February 3, 1996, as compared to the year ended
January 28, 1995. As a percentage of revenues, the Consumer Products Segment
gross profit margin decreased to 27.1% for fiscal 1996 as compared to 28.5%
for fiscal 1995. A portion of the decrease in gross profit margin for the
year resulted from unfavorable manufacturing variances as actual production
was less than planned due to the Company's lower sales level and its
continued efforts to reduce inventories.
Increased raw material prices for certain selling grades of paper, certain
price decreases in the Consumer Products Segment and the sell down of
inventory related to non-core discontinued product categories at less than
historical margins also contributed to the decline in the gross profit
margin. The gross profit margin decline was mitigated by lower royalties as a
percentage of sales, reflecting a product mix shift from licensed to
proprietary products. In the Commercial Products Segment, the gross profit
margin of printing services increased to 13.4% in fiscal 1996 from 12.0% in
fiscal 1995. The increase for the year was due to lower unfavorable
manufacturing variances.
Selling, general and administrative expenses for the year ended February
3, 1996 increased $4.9 million (3.9%) to $129.0 million, as compared to
$124.1 million for the year ended January 28, 1995. The increase for the year
primarily was attributable to accelerated amortization of the Company's
Storyland racks as a result of the resumption of the operation of the Wal
Mart Storyland program by Wal-Mart management at the beginning of the first
quarter of fiscal 1997. In addition, fiscal 1996 reflects a full year of
depreciation of the Company's order processing, customer service and
inventory management system that was placed in service during the fourth
quarter of fiscal 1995.
Interest expense for the year decreased $4.7 million to $12.9 million as
compared to $17.6 million in fiscal 1995. The decrease was due to lower
average debt outstanding as the Company repaid all outstanding notes under
its revolving credit agreement in the first quarter of fiscal 1996, partially
offset by higher interest rates in the first quarter of fiscal 1996 and the
costs associated with the Company's
<PAGE>
Receivable Purchasing Agreement. Total average outstanding debt decreased to
$152.8 million in fiscal 1996 from $221.3 million in fiscal 1995, while
average interest rates increased from 7.9% to 8.2%. The increase in average
interest rates resulted primarily from the increase in first quarter
short-term rates and the composition of the average debt outstanding.
The Company's provision for income taxes was $11.3 million and $2.5
million for the years ended February 3, 1996 and January 28, 1995,
respectively. The fiscal 1996 provision includes a non-cash charge of $13.9
million, reflecting an increase in the income tax valuation allowance as the
future realization of existing deductible temporary differences was
uncertain. The effective income tax rates from operations of 20.3% in fiscal
1996 and 16.3% in fiscal 1995 are significantly below the Federal statutory
rate due to losses incurred during each year for which no tax benefit has
been recognized. In fiscal 1995, the disproportionate provision was partially
offset by permanent differences relating to the sale of the Advertising
Specialty Division. Profitable operating results in subsequent years will
benefit from an income tax provision rate which will be lower than the
statutory rate due to the reinstatement of deferred tax assets for which
valuation allowances have been established. At February 3, 1996, the Company
had available net operating loss carryforwards of approximately $65.9 million
for Federal income tax purposes and approximately $6.5 million for state
income tax purposes. In addition, the Company had tax credit carryforwards of
approximately $3.7 million.
The loss for the year ended February 3, 1996, before the provision for
restructuring and closure of operations, the additional gain on the Company's
streamlining plan and the non-cash write-off of deferred income taxes, was
$46.4 million or $2.25 per share, compared to a loss of $18.4 million or $.91
per share, before the gain on the Company's streamlining plan, the adjustment
of the previously recorded provision for write-down of the Advertising
Specialty Division and the non-cash write-off of deferred income taxes.
During the year ended February 3, 1996, the Company recorded net
non-recurring charges of $20.6 million or $.98 per share for the provision
for restructuring and closure of operations, the additional gain on the
Company's streamlining plan and the non-cash write-off of deferred income
taxes. Therefore, the net loss for fiscal 1996 was $67.0 million or $3.23 per
share. During the year ended January 28, 1995, the Company recorded
non-recurring gains of $21.5 million ($13.2 million, net of income taxes) or
$.62 per share for the Company's streamlining plan and the adjustment of the
previously recorded provision for write-down of the Advertising Specialty
Division and a non-cash charge of $12.4 million or $.59 per share for the
write-off of deferred income taxes. Therefore, the net loss for fiscal 1995
was $17.6 million or $.88 per share.
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1995)
COMPARED TO FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1994)
On May 12, 1993, the Company established a provision, including operating
losses through the expected disposition date, to write-down the assets of the
Advertising Specialty Division of Penn to net realizable value. Further, on
April 7, 1994, the Company announced the adoption of its streamlining plan
designed to improve its competitive position and reduce its operating cost
structure through the sale, divestiture, consolidation or phase out of
certain operations, properties and products, and a reduction in its
management, administrative and direct labor workforces. This plan included
the sale of the game and puzzle operation, the exit from 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 and
facilities sold or closed as part of the Company's streamlining plan.
During the year ended January 28, 1995, the game and puzzle operation was
sold to Hasbro, Inc. for cash proceeds of $101.4 million; the sale of the
Advertising Specialty Division was completed for cash proceeds of $14.0
million; the Direct Marketing Continuity Clubs business was sold for cash
proceeds of $10.2 million and the Company completed the sale of its School
Book Club business for cash proceeds of $4.3 million.
<PAGE>
Revenues for the year ended January 28, 1995 decreased $214.1 million
(34.7%) to $402.6 million, as compared to $616.7 million for the year ended
January 29, 1994. Excluding revenues of the operations disposed of under the
streamlining plan, revenues decreased $76.3 million (15.9%) for the year
ended January 28, 1995, as compared to the prior year. Consumer Products
Segment revenues from ongoing operations decreased $68.7 million (16.6%) for
fiscal 1995. The decline resulted from (i) lower sales of non-Company
products after the management of the Books "R" Us program at Toys "R" Us,
Inc. ("Toys "R" Us") was assumed by Toys "R" Us at the beginning of fiscal
1995, (ii) lower sales of interactive electronic storybooks as the growth in
new electronic storybook formats was offset by original formats approaching
maturity and (iii) the continued reductions in retailers' on-hand
inventories, resulting in a slower order rate for restocking and future
orders. Additionally, the decrease for the year was further impacted by the
decline in domestic consumer product sales caused by distractions resulting
from the previously 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 Company's streamlining plan. Commercial Product Segment
revenues (other than revenues of the Advertising Specialty Division)
decreased $7.6 million (11.7%) for the year ended January 28, 1995. The
decline for the year was due to decreases in sales of kits, services to third
party software developers and custom publishing.
Price increases in the Consumer Products Segment were approximately 3%.
Sales of printing services were the result of individual agreements entered
into with customers as to price and services performed. Accordingly, the
effects of inflation cannot be determined on the sales of printing services.
Income before interest expense and income taxes for the year ended January
28, 1995 was $2.5 million, as compared to a loss of $47.1 million for the
year ended January 29, 1994. This improvement of $49.6 million was the result
of a $20.4 million gain on the Company's streamlining plan, a $1.1 million
reduction to the Company's previously recorded provision for write-down of
the Advertising Specialty Division, a $78.9 million decrease in selling,
general and administrative expenses and a $79.0 million decrease in gross
profit. In addition, operations for the year ended January 29, 1994 included
a $28.2 million provision to write-down the carrying value of the assets of
the Advertising Specialty Division to their estimated net realizable value.
Gross profit for the year ended January 28, 1995 was $105.1 million, as
compared to $184.2 million for the year ended January 29, 1994, a decrease of
42.9%. As a percentage of revenues, the gross profit margin decreased to
26.1% for fiscal 1995, as compared to 29.9% for fiscal 1994. For ongoing
operations, gross profit for fiscal 1995 decreased $32.3 million (23.5%) to
$105.1 million, compared to $137.5 million in fiscal 1994. As a percentage of
revenues, the gross profit margin decreased to 26.1% for fiscal 1995, as
compared to 28.7% for fiscal 1994. In the Consumer Products Segment, gross
profit of ongoing operations decreased $32.3 million (24.7%) to $98.3 million
for the year ended January 28, 1995, as compared to the year ended January
29, 1994. As a percentage of revenues, the Consumer Products Segment gross
profit margin decreased to 28.5% for fiscal 1995, as compared to 31.5% for
fiscal 1994. A substantial portion of the decrease in gross profit margin for
the year arose from negative manufacturing variances due to lower production
in response to the Company's continuing efforts to reduce inventories.
Additionally, the decrease in gross profit margin 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 12.0% in fiscal 1995 from 10.7% in
fiscal 1994. The increase for the year was due to a more favorable product
mix.
Selling, general and administrative expenses for the year ended January
28, 1995 decreased $78.9 million (38.9%) to $124.1 million as compared to
$203.0 million for the year ended January 29, 1994. For ongoing operations,
selling, general and administrative expenses for the year ended January 28,
1995 decreased $19.6 million (13.6%) to $124.1 million, as compared to $143.7
million for the year ended January 29, 1994. The decrease was primarily
attributable to decreased sales promotion costs, including the costs of
corrugated displays and co-op advertising, and reduced personnel and other
costs resulting from the implementation of the Company's streamlining plan.
<PAGE>
Interest expense for the year increased $1.3 million to $17.6 million, as
compared to $16.3 million in fiscal 1994. While the increase was due to
higher interest rates, it was substantially offset by increased earnings from
invested cash balances of $1.2 million. Total average outstanding debt
decreased to $221.3 million for the year from $248.7 million for the previous
year, while average interest rates increased from 6.6% to 7.9%. The increase
in average interest rates resulted primarily from the increase in short term
rates.
The Company's income tax provision for fiscal 1995 included income taxes
resulting from the streamlining plan gain, the adjustment of the provision
for write-down of the Advertising Specialty Division and an effective income
tax benefit rate of 16.0% from operations. The effective income tax benefit
rate from operations was significantly below the Federal statutory rate due
to losses incurred during the year for which no tax benefit had been
recognized, partially offset by permanent differences relating to the sale of
the Advertising Specialty Division. Profitable operating results in
subsequent years will benefit from an income tax provision rate which will be
lower than the statutory rate due to the reinstatement of deferred tax assets
for which a valuation allowance was established in fiscal 1995. For the year
ended January 29, 1994, the income tax benefit rate was 35.2%.
The loss for the year ended January 28, 1995, before the streamlining plan
gain and the adjustment of the provision for write-down of Advertising
Specialty Division and the non-cash write-off of deferred income taxes was
$18.4 million or $.91 per share, compared to a loss of $21.7 million or $1.07
per share, before the provision for write-down of the Advertising Specialty
Division and the cumulative effect of a change in accounting principle
(postretirement benefits other than pensions), for the year ended January 29,
1994. During the year ended January 28, 1995, the Company recorded a gain on
streamlining plan of $20.4 million ($12.4 million, net of income taxes) or
$.59 per share, adjusted its provision for write-down of the Advertising
Specialty Division by $1.1 million ($.8 million, net of income taxes) or $.03
per share and recorded a non-cash charge of $12.4 million or $.59 per share
for the write-off of deferred income taxes. Therefore, the net loss for
fiscal 1995 was $17.6 million or $.88 per share. During the year ended
January 29, 1994, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions," using the immediate recognition method. As a result, the
Company recorded a 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 the Advertising Specialty Division was $28.2
million ($19.3 million, net of income taxes) or $.92 per share. Therefore,
the net loss for fiscal 1994 was $55.8 million or $2.70 per share.
EFFECTS OF INFLATION
For fiscal 1994 and the first three quarters of fiscal 1995, the Company's
raw material costs, principally paper, remained relatively stable. In the
fourth quarter of fiscal 1995 and throughout fiscal 1996, the Company
experienced increases in the price of paper due to increased demand,
decreases in imported paper and an overall reduction in industry capacity.
Pricing pressures make it difficult for the Company to recover the effect of
inflation and industry dynamics on costs and expenses. To the extent
possible, the Company's objective is to offset the impact of inflation
through productivity enhancements, product specification changes and price
increases.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Operations for the quarter ended May 4, 1996, excluding non-cash charges
for depreciation, amortization and the provision for losses on accounts
receivable, utilized cash of $4.3 million, as compared to $9.0 million for
the quarter ended April 29, 1995. For the quarters ended May 4, 1996 and
April 29, 1995, other changes in assets and liabilities resulting from
operating activities, utilized cash of $6.2 million and $4.3 million,
respectively, resulting in net cash used in operating activities of $10.5
million and $13.3 million, respectively.
Operations for the year ended February 3, 1996, excluding the non-cash
portion of the provision for restructuring and closure of operations, the
additional gain on the Company's streamlining plan, non-cash
<PAGE>
charges for depreciation, amortization and the provision for losses on
accounts receivable utilized cash of $49.6 million. The operations for the
year ended January 28, 1995, excluding the streamlining plan gain, the
adjustment of the previously recorded provision for write-down of Division,
non-cash charges for depreciation, amortization and the provision for losses
on accounts receivable utilized cash of $24.8 million. During the years ended
February 3, 1996 and January 28, 1995, other changes in assets and
liabilities resulting from operating activities, provided cash of $50.5
million and $38.4 million, respectively, resulting in net cash provided by
operating activities of $.9 million and $13.6 million in fiscal 1996 and
1995, respectively.
Acquisitions of property, plant and equipment were $2.3 million, $2.3
million, $17.9 million and $19.3 million during the quarters ended May 4,
1996 and April 29, 1995 and during the years ended February 3, 1996 and
January 28, 1995, respectively. Capital expenditures included costs
associated with the completion of the Company's new order processing,
customer service and inventory management system, the acquisition of a five
unit web press, conveyoring equipment for the Company's distribution centers
and the installation of emission control equipment in one of its
manufacturing facilities. In addition, during the second quarter of fiscal
1996, the Company commenced a facility expansion of its paper tableware and
party goods operations in Kalamazoo, Michigan, which is expected to be
completed in fiscal 1997. The construction of the building addition phase of
the expansion is estimated to cost $5.1 million, of which $4.4 million had
been expended through May 4, 1996. The Company anticipates incurring capital
expenditures in connection with its publishing operations of approximately $5
million in fiscal 1997.
Working capital decreased to $158.5 million as of May 4, 1996, from $165.3
million at February 3, 1996. This decrease resulted from the Company's
investment in property, plant and equipment and the funds required for its
operations during the first quarter of fiscal 1997. Working capital at
February 3, 1996, decreased to $165.3 million from $228.2 million at January
28, 1995. This decrease resulted from the Company's investment in property,
plant and equipment and the funds required by its operations during fiscal
1996. Further, during the third quarter of fiscal 1996, deferred income taxes
of $13.9 million, including $10.7 million of current deferred income taxes,
were charged to expense as the future realization of existing deductible
temporary differences is uncertain.
On January 31, 1996, the Company entered into an interim employment
agreement (the "Interim Employment Agreement") with Richard E. Snyder,
whereby Mr. Snyder became President of the Company. Pursuant to the Interim
Employment Agreement, the Company issued 599,465 shares of Common Stock to
Mr. Snyder at a price of $8.00 per share in exchange for a non-recourse note
in the amount of the purchase price, secured by a pledge of the shares. On
May 8, 1996, the Interim Employment Agreement was superseded by a five year
employment agreement (the "Snyder Employment Agreement"). Under the terms of
the Snyder Employment Agreement, Mr. Snyder receives annual compensation of
$500,000 and an opportunity to earn bonuses of up to $1 million each year.
Additionally, on May 8, 1996, Mr. Snyder received options to acquire
1,113,293 shares of Company Common Stock at a price of $12.81 per share, a
one-time special bonus based on the market price of the Company Common Stock,
supplemental retirement benefits, post-retirement medical benefits and
certain other benefits. In connection with the Offering, the Acquisition and
the Hallmark Investment, pursuant to the anti-dilution provisions of the
Snyder Employment Agreement, Mr. Snyder will receive approximately an
additional 86,674 shares of Company Common Stock, which will be paid for by a
non-recourse promissory note secured by a pledge of such stock, and options
to purchase approximately an additional 160,965 shares of Company Common
Stock exercisable at the market value of the Company Common Stock on the date
of grant. In connection with such adjustments, Mr. Snyder also will be
entitled to receive certain adjustments to the special bonuses provided for
in the Snyder Employment Agreement. A substantial portion of the costs
associated with Mr. Snyder's employment agreement will be charged to
operations in the second quarter of fiscal 1997.
During the year ended February 3, 1996, financing activities utilized cash
of $32.3 million ($49.1 million during the year ended January 28, 1995),
primarily by the repayment of $32.0 million ($48.0 million during the year
ended January 28, 1995) of outstanding borrowings under the Company's then
outstanding revolving credit agreement, and the agreement was terminated.
<PAGE>
During the year ended February 3, 1996, Golden Books Publishing entered
into an extendible one-year Receivables Purchasing Agreement, which includes
a letter of credit facility, with a financial institution providing for the
sale of certain trade accounts receivable on a non-recourse revolving basis,
up to a maximum of $62.5 million outstanding at any one time. As of the end
of the first quarter of fiscal 1997, there were no trade accounts receivables
outstanding under this program.
On May 8, 1996, the Company completed the GPH Transaction. GPH invested
$65.0 million of cash in the Company in exchange for 13,000 newly-issued
shares of Series B Preferred Stock and a warrant to purchase 3,250,000 shares
of Common Stock. The Series B Preferred Stock has a dividend rate of 12% per
annum, is convertible at $10.00 per share and does not have a mandatory
redemption date. Through May 8, 2000, the Series B Preferred Stock quarterly
dividend is payable in lieu of cash as 195,000 shares of Company Common
Stock, subject to certain adjustments based on the market price of the
Company Common Stock at the time that the dividend is paid. Thereafter,
Series B Preferred Stock dividends will be payable in cash. The Warrant,
which is not exercisable for the first two years following issuance, has a
seven year term and an exercise price of $10.00 per share. In addition, the
Company's Series A Convertible Preferred Stock was redeemed at its face
amount plus accrued dividends.
On July 30, 1996 the Company entered into the Hallmark Investment,
pursuant to which H C Crown Corp., an affiliate of Hallmark, has agreed to
purchase $25 million of Company Common Stock at a price equal to 95% of the
average closing price of the Company Common Stock on Nasdaq on the ten
trading days following the pricing of the Offering, subject to a minimum
market price of $8.00 and a maximum market price of $12.00 per share. Such
purchase is expected to be consummated during September 1996. Hallmark and
the Company are discussing a strategic relationship between the two
companies, including Hallmark's further investment of an additional $25
million in Company Common Stock, on terms to be negotiated.
The Company will have approximately $116 million in cash after giving pro
forma effect to the Offering, the Acquisition and the Hallmark Investment.
The Company believes that such amounts will be sufficient to meet its debt
service obligations, including its obligations under the Convertible
Debentures, to fund working capital needs for the forseeable future or to
pursue strategic opportunities, including acquisitions and joint ventures.
There can be no assurance that events in the future will not require the
Company to seek additional capital or, if so required, that adequate capital
will be available on terms acceptable to the Company.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
The Company's consolidated financial statements as of February 3, 1996 and
January 28, 1995 and for each of the three years in the period ended February
3, 1996 have been audited by Deloitte & Touche LLP ("Deloitte & Touche"),
independent auditors, as stated in their report (which report expresses an
unqualified opinion and includes an explanatory paragraph concerning the
adoption of Statement of Financial Accounting Standards No. 106) dated April
2, 1996.
On June 20, 1996, following consultation with the Board of Directors of
the Company, management of the Company dismissed Deloitte & Touche as the
independent auditors for the Company. On such date, management of the Company
engaged Ernst & Young LLP ("Ernst & Young") as the Company's independent
auditors. The Deloitte & Touche reports on the Company's consolidated
financial statements for the fiscal years ended January 28, 1995 and February
3, 1996 did not contain an adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles. Since January 30, 1994, the Company has not had any disagreements
with Deloitte & Touche on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures which, if not
resolved to the satisfaction of Deloitte & Touche, would have caused Deloitte
& Touche to make a reference to the subject matter of the disagreements in
connection with its report. Ernst & Young performed a review of the Company's
interim financial statements as of May 4, 1996, and for the three month
period then ended in accordance with the standards established by the
American Institute of Certified Public Accountants, and issued their report
dated July 30, 1996, as filed with the Securities and Exchange Commission on
Form 10-Q/A.
<PAGE>
BUSINESS
The Company is the largest publisher of children's books in the North
America retail market. The Company creates, publishes and markets an
extensive range of children's entertainment products, including "Little
Golden Books" and other storybooks, coloring/activity books, electronic
storybooks, puzzles, educational workbooks, reference books and novelty book
formats. The Company has published its flagship product line, "Little Golden
Books," for over 50 years.
The Company believes that Golden Books is one of the strongest consumer
brand franchises of children's products in the United States. Management
believes that the Golden Books brand name not only has strong consumer
recognition, but also a reputation among consumers for wholesomeness,
entertainment and spending quality time with a child. The Company's primary
customers are women with children or grandchildren. Based on preliminary
market research conducted on behalf of the Company in 1996, over half of the
women in the United States have bought the Golden Books brand. Management
believes that the favorable response to the Golden Books brand is comparable
to that of many companies with substantially greater financial resources and
significantly higher expenditures than the Company on marketing and brand
awareness.
Approximately 45% of the Company's fiscal 1996 children's publishing sales
were through mass merchandisers such as Wal Mart, K Mart Corp. ("K Mart") and
Target Stores, a division of the Dayton Hudson Corporation ("Target"), and toy
stores such as Toys "R" Us. In addition, but to a lesser extent, the
Company's children's publishing products are sold through the following
channels: national and regional bookstore chains; independent bookstores;
supermarkets and drugstores; and special markets such as book clubs, book
fairs and educational institutions. In fiscal 1996, approximately 8% of the
Company's children's publishing sales were generated outside of North
America.
The Company's predecessor was founded in 1907. On May 8, 1996, the Company
changed its name from Western Publishing Group, Inc. to Golden Books Family
Entertainment, Inc., reflecting its new strategy. The Company's principal
executive offices are located at 850 Third Avenue, New York, New York 10022.
The Company's telephone number is (212) 583-6700.
BUSINESS STRATEGY
The Company's strategy is to build a leading family entertainment company
that creates, publishes and licenses children's entertainment products. The
Company intends to build on its position as a leader in the children's
publishing market, utilizing the strength of the Golden Books brand to
provide family-oriented content through multiple media.
The Company believes that the Golden Books brand name is transferable to
new products and media. The Company's preliminary market research indicates
above average interest by mothers in purchasing additional products under the
Golden Books brand name if they were made available. In addition, the Company
believes that the Golden Books brand will enhance the appeal to consumers of
a wide variety of new family entertainment products.
The principal elements of the Company's strategy are: (i) the
revitalization of the Company's existing publishing operations; (ii) the
expansion of the Company's core publishing product lines; (iii) the expansion
into new distribution channels; (iv) the expansion of the Golden Books brand
name into non-publishing media and products; and (v) the enlargement of the
Golden Books character library. The Company intends to implement the
foregoing strategy through internal growth, strategic acquisitions, joint
ventures and other alliances.
New management is in the process of reviewing its operations with a view
to reducing the costs of those operations and creating an operating
environment conducive to the pursuit of its new business strategy. The
Company also has determined that Penn does not fit within its strategy and
intends to sell Penn.
REVITALIZE EXISTING PUBLISHING OPERATIONS
Improve Editorial Operations. Since May 8, 1996, the Company has increased
its commitment to the editorial and creative function. To improve the quality
of new publications, the Company has begun to
<PAGE>
recruit experienced executives with relationships among successful children's
artists and writers. Willa M. Perlman has joined the Company as President and
Publisher of the Children's Publishing Group of Golden Books Publishing and
Patricia A. Sullivan has joined the Company as Executive Vice President,
Sales, Marketing and Licensing of the Children's Publishing Group of Golden
Books Publishing.
New management also has met with certain of the Company's current outside
authors and licensors to confirm their commitment to working with the Company
in the future. In addition, the Company has taken steps to improve
relationships with potential and existing licensors, recently obtaining
renewal of its storybook and color/activity book license with Jim Henson
Productions, Inc. ("Henson") for the classic Muppet characters, which
management believes had been at risk of being lost to competitors. The
Company also has agreements in principle with respect to three new licensing
arrangements in connection with the movie re-release of the Star Wars
trilogy, the next Batman movie and The Big Bag, a new series from Children's
Television Workshop.
In addition to the foregoing undertakings to strengthen the Company's
relationships with its base of content providers, new management also has
begun the process of reformatting and repackaging the Company's extensive but
under-utilized library of existing titles. Some of these titles have remained
largely unchanged since they were originally published in the 1940's and
1950's.
Reorganize Sales and Marketing Functions. The Company has begun to
reorganize its sales and marketing functions, fully integrating and
restructuring them into customer-focused teams that target specific retail
accounts, coordinate specific promotions and liaison with important
licensors. In order to insure maximum responsiveness to customer needs, the
Company also is taking steps to ensure that these needs are channeled from
the Company's sales staff to its editorial staff. In addition, the Company
has put in place a new incentive program for its sales personnel. New
management also has met with key customers in order to improve relationships
with these customers, which the Company believes suffered under its prior
pricing, return and merchandising policies.
As part of its new marketing strategy, the Company is developing a more
consistent branding approach to better identify the Golden Books brand across
all products, some of which are not readily identifiable as Golden Books. The
branding platform includes a new logo and cover design which, together with
other aspects of Golden Books' trade dress, will serve immediately to
identify any Golden Books product to the consumer.
EXPAND CORE PUBLISHING PRODUCT LINES
Increase Utilization of Existing Assets. The Company expects that certain
of its existing owned characters, such as The Poky Little Puppy and Little
Lulu, can be utilized in new products at varying price points. In furtherance
of this portion of its strategy, the Company intends to create, using its
existing characters and titles, leveled reading series (a series of books
with increasing levels of reading difficulty), workbooks that contain
enhanced characteristics such as full color interiors, a hard-cover picture
book with a $6.00 retail price point and a flap-book line with a retail price
point of under $10.00. The Company believes that, because of their price
points, these products are particularly well suited for bookstores, where the
Company believes that its products are currently underrepresented.
The Company also intends to utilize certain of its existing licensed
characters in new products to the extent permitted by the terms of the
Company's licenses. These products will supplement the Company's existing
lines, as well as include new product lines in the Company's current price
categories and new product lines at higher price points such as leveled
reading series, workbooks, hardcover picture books and flap-books.
Develop a Line of Family-Related Adult Books. An Adult Publishing Group
has been formed within Golden Books Publishing to publish books that are
directed at adults and that include a family or parenting subject matter. To
date, that Group has agreements in principle to publish 31 new
parent-oriented titles. These titles (assuming that related definitive
agreements are reached) represent sufficient material for a two and a half
year publishing program and are expected to begin to be released by winter
1998. Some of the titles currently contemplated for release include The
Parents Answer Book, The Parents Book of Lists, The Parents Book of Baby Gear
and The Parents Fun and Fabulous Party Book. These
<PAGE>
titles are part of three planned co-branded series, comprising a total of 15
books, based on Parents magazine editorial content. The Adult Publishing
Group also has agreements in principle to publish two titles by Cristina
Ferrare, the television personality, and two titles by Judy Resnick, the
investment adviser.
Exploit New Technologies. The Company intends to exploit new technologies
that it believes can be profitable. The Company is exploring application of
new technologies to create a new generation of electronic books. Products
utilizing these technologies would replace the products featuring the
Company's traditional Sight & Sound technology.
EXPAND INTO NEW DISTRIBUTION CHANNELS
The Company has historically focused on mass market distribution and,
therefore, believes that there is considerable opportunity to expand its
distribution through other channels. One of the channels of distribution that
the Company has targeted for substantial growth is the national bookstore
market, which the Company believes is the fastest growing distribution
channel for children's publications in the United States. In 1995, the
bookstore market accounted for approximately 15% of total industry juvenile
publishing unit sales, but accounted for a negligible portion of the
Company's juvenile net sales. The Company intends to offer new products in
the $5.00 to $10.00 retail price range that it believes are particularly
well-suited for bookstores, including new lines of hard-cover picture books
with a $6.00 retail price point and a number of novelty book and book plus
formats (such as a book of jump-rope songs packaged with a jump-rope) with
retail price points under $10.00. The Company also intends to service
bookstores through dedicated sales representatives.
In addition to the national bookstore market, the Company intends to
target specialty stores, the growing religious bookstore market, electronic
retailing opportunities, educational sales, direct sales and direct marketing
programs. The Company also intends to increase its international distribution
and is exploring several options in this regard, including increasing its
number of exclusive distribution relationships and/or creating in-house
international marketing and distribution capabilities. Historically, the
Company has not devoted substantial resources to any of these segments of the
market and is, in the opinion of management, also underdistributed in these
areas.
EXPAND BRAND NAME INTO NON-PUBLISHING MEDIA AND PRODUCTS
The Company intends to expand the Golden Books name into new media,
including family-related video, television and film, where it believes that
the brand will enhance the appeal to consumers of a wide variety of family
entertainment products. The Company's expansion into new media will reflect
the family-oriented values currently associated with the Golden Books brand
and will target the Company's strategy of building a leading family
entertainment company. The Company also intends to license a number of its
properties and characters to third parties. The Company believes that
extension of the Golden Books brand into new media and licensing of the
Company's properties and characters will have a positive impact on sales of
many of the Company's existing products, in addition to providing a new and
previously untapped source of revenue. The principal elements of this portion
of the Company's strategy are described below.
Enter and Revitalize Home Video Offerings. The Company currently has
rights to approximately 50 hours of home video product, including video
rights to almost eleven hours of video material featuring Madeline, which
have not been consistently marketed or branded. The Company believes that the
Acquisition will give it the requisite volume and quality of product to
meaningfully compete in the home video market with Golden Books branded
content, as well as the ability to market and cross-promote through books,
video and television.
Exploit Licensing and Merchandising Opportunities. The Company intends to
generate revenues by licensing its copyrights and characters, including those
acquired from BVE, L.P., to third parties, both domestically and
internationally, for use on television, on home video and in ancillary media.
In
<PAGE>
connection with this portion of its strategy, the Company also will license
its characters and copyrights for use in new television programs, theatrical
films and home videos. In each case, the financing risk typically will be
underwritten by third parties. In addition, the Company intends to license
out merchandising rights in its characters for use in a variety of products.
Exploit Comic Book, Music and Other Existing Assets. At one time, the
Company had a significant presence in both children's comic books and music.
Management intends to review the Company's current comic book and music
assets in order to determine whether certain of these assets may be
appropriate for reintroduction. In addition, the Company will examine the
appropriateness of properties acquired from BVE, L.P. for comic book or music
products.
ENLARGE THE GOLDEN BOOKS CHARACTER LIBRARY
The Company intends to invest increased resources in the expansion,
through internal development and acquisitions, of its proprietary character
base in order to build up a larger backlist of titles that can be sold over
the course of several years and that can be produced in multiple media and
sold through multiple distribution channels. The acquisition of substantially
all of BVE, L.P.'s library of character-based family entertainment properties
is an important part of the Company's strategy to expand its library of
proprietary characters. BVE, L.P.'s library is comprised of copyrights,
trademarks or licenses to characters, television programs and motion
pictures, both animation and live action, and includes individual specials
and multiple episode series. Among the library titles are Rudolph the
Red-Nosed Reindeer, Frosty the Snowman, Santa Claus Is Coming to Town,
Lassie, Felix the Cat, Underdog, 52 half-hour episodes of Abbott and
Costello, The Lone Ranger and Tennessee Tuxedo.
In addition to increasing its owned character base, the Company also
intends to increase the number of characters licensed by the Company from
third parties. To this end, new management has agreements in principle with
respect to three new licensing arrangements for the creation of new
children's publishing products in connection with the movie re-release of the
Star Wars trilogy, the next Batman movie and The Big Bag, a new series from
Children's Television Workshop (the creator of Sesame Street). New management
also has aggressively pursued the renewal of existing licenses, recently
obtaining renewal of its storybook and color/activity book license with
Henson for the classic Muppets characters, which management believes was at
risk of being lost to competitors.
THE RESTRUCTURING PLAN AND OTHER CHARGES
As part of management's plan to return the Company's core publishing
business to profitability and to redeploy assets, new management has taken a
number of strategic actions and accordingly, made decisions with respect to
certain of its assets.
New management has determined that Penn does not fit the Company's future
strategic direction, and, accordingly, will divest Penn. Therefore, Penn will
be classified as an asset held for sale in the Company's second quarter
financial statements. In addition, the Company will intensify its effort to
sell its former game and puzzle facility in Fayetteville, North Carolina,
which is closed and is classified as an asset held for sale.
In addition, new management is in the process of reviewing the Company's
operations with a view to reducing the costs of those operations and creating
an operating environment conducive to the pursuit of its new business
strategy. As a consequence of this review, which is expected to be completed
by the end of fiscal 1997, the Company expects to record substantial
write-downs and other charges in fiscal 1997, beginning with the Company's
second quarter financial statements. These charges are expected to be
primarily non-cash in nature. The Company has decided to discontinue or
replace certain product lines and expeditiously liquidate related inventory
and other slow-moving inventory. In addition, the Company will take charges
associated with its plans to resolve differences with its customers and
licensors with a view to mending and improving relationships with them and to
resolve certain other legal matters.
Based upon the determinations made to date in connection with its
strategic plan, including adjustments in the carrying value of assets held
for sale, the Company will record charges of approximately $80 million in its
second quarter financial statements (to be reflected in cost of sales,
<PAGE>
selling, general and administrative expenses and restructuring costs). The
Company's restructuring plan builds upon cost-saving measures that were taken
by the Company through the first quarter of fiscal 1997. Largely as a result
of these measures, selling, general and administrative expenses for the
quarter ended May 4, 1996 decreased $7.4 million as compared to the quarter
ended April 29, 1995. The Company believes that, based on the carrying value
of both the assets held for sale and the inventory described above, it will
realize cash proceeds in excess of $30 million on the sale of these assets.
Such proceeds and cash attributable to the Company's cost savings will be
used in connection with the Company's change in strategic focus and other
restructuring measures.
In addition, as previously disclosed, the Company will record charges of
approximately $16 million in the second quarter as a result of the GPH
Transaction and related transactions.
PUBLISHING AND OTHER MEDIA
CHILDREN'S AND FAMILY PUBLISHING
The Company's children's products, which generally are designed to be
appropriate for children up to age eight, fall into four broad categories:
(i) "Classic Format;" (ii) electronic storybooks and CD-ROM; (iii) education
and reference; and (iv) trade and novelty. Historically, the Company has
distributed its children's publishing products primarily through mass market
channels (which include national discount store chains, such as Wal Mart, K
Mart and Target and Toys "R" Us), although, to a lesser extent, the Company
has sold children's products through bookstores and specialty retailers
(children's educational specialty retailers, other toy stores, supermarkets,
drugstores and warehouse clubs), special markets (such as school book clubs,
school book fairs, paperback jobbers, premium sales, catalogue sales and
educational institutions) and international channels. In fiscal 1996, $250
million, or 67%, of the Company's consolidated revenues were attributable to
Children's and Family Publishing. Of this amount, $175 million was
attributable to sales through mass market channels and bookstores and
specialty retailers.
A substantial portion of the Company's children's publishing products,
particularly its coloring/ activity book products, utilize characters
licensed from third parties. The Company believes that the variety and
popularity of characters is among its most important competitive factors.
During fiscal 1996, approximately 73% of the Company's children's publishing
sales were generated by products featuring popular children's characters
licensed by the Company from third parties, including, but not limited to,
characters from Sesame Street, Barbie, the Muppets, Superman and Barney. The
Company's character license with Disney allows the Company to use, in
selected product categories, all of Disney's animated characters, including
Mickey Mouse, Winnie the Pooh and Pinocchio and characters from The Little
Mermaid, The Lion King, Aladdin and Pocahontas, as well as characters from
new releases such as The Hunchback of Notre Dame, the fall 1996 home video
release of Toy Story and the November 1996 release of the live action version
of 101 Dalmatians. Approximately 47% of fiscal 1996 children's publishing
revenues were attributable to children's products incorporating characters
and properties licensed from the Company's five largest sources of licensed
property: Disney; DC Comics Inc. ("DC Comics"); Children's Television
Workshop; Mercer Mayer (the creator of Little Critters); and Mattel, Inc.
("Mattel").
Since the close of fiscal 1996, the Company, reflecting new management's
intention to grow the breadth of quality licensed characters available to its
products, has reached agreements in principle with respect to three new
licensing arrangements for the creation of new children's publishing products
in connection with the movie re-release of the Star Wars trilogy, the next
Batman movie and The Big Bag, a new series from Children's Television
Workshop. The Company also has taken steps to improve relationships with
potential and existing licensors, recently obtaining renewal of its storybook
and color/activity book license with Henson for the classic Muppet
characters, which management believes was at risk of being lost to
competitors.
The Company also intends to invest increased resources in the expansion,
through internal development and acquisitions, of its proprietary character
base in order to build up a larger backlist of titles that can be sold over
the course of several years and that can be produced in multiple media and
sold through multiple distribution channels. Although, over time, the Company
intends to increase both the number of owned and licensed characters featured
in its products, the Company intends to focus greater resources on creating
owned characters.
<PAGE>
According to the Book Industry Study Group, in 1995, the dollar value of
U.S. net publishers sales of juvenile trade books, which includes hardcover
and softcover books but excludes coloring/activity and electronic books, was
$1.4 billion and total consumer expenditures in this category were $2.3
billion. Net sales of juvenile trade books in the United States grew at a
compound annual rate of 5.8% for the five-year period ended December 31,
1995. In 1995, total unit sales of juvenile trade books in the United States
were 364.7 million or 42.9% of total U.S. trade book sales. Unit growth for
juvenile trade books for the five-year period ended December 31, 1995 was
3.3%. Unit sales of softcover juvenile trade books grew at a compound annual
rate of 9.5% for the five-year period ended December 31, 1995.
CLASSIC FORMAT PRODUCTS
The Company's Classic Format category of products consists of storybooks
and coloring/activity books and products, as described below. This category
of products accounts for the largest share of the Company's children's
publishing revenues and unit sales, in fiscal 1996 representing $116 million,
or 66%, of children's publishing revenues from sales through mass market
channels and bookstores and specialty retailers. Most products in the Classic
Format category are high volume products that carry a retail price under
$5.00. The volume and price point of these products makes them particularly
attractive to mass market retailers, although Classic Format products are
distributed through other channels to a lesser extent. The Company intends to
introduce new Classic Format products with higher price points to be sold in
bookstores and specialty retail stores.
Storybooks are published principally under the Golden Books and Little
Golden Books trademarks. In addition to storybooks in the foregoing format,
the Company also publishes paperback books and cloth and vinyl books for
babies. The Company's storybook products, in particular those bearing the
Golden Books brand, stress "classic" themes such as self-esteem, friendship,
family values and general issues associated with growing up. Typical
storylines involve topics such as dealing with a new school, family dynamics
and the pressures and rewards of friendships.
Coloring/activity books and products include coloring books, paint books,
sticker books, paper doll books, crayons and boxed activity products. The
Company markets these products under the Golden Book and Merrigold Press
trademarks. According to industry survey data, in calendar 1995, the Company
had a 50% market share in this category, in terms of retail units, making the
Company the industry leader in this product category.
The Company's coloring/activity books and products generally are designed
to be appropriate for children ages three to five and are designed to
encourage age-appropriate activities, particularly the development of
artistic and motor skills. They contain less thematic material than the
Company's storybooks and focus primarily on images and scenes utilizing
licensed or owned characters.
The Company intends to utilize selected properties and characters in the
Golden Books Entertainment library in its children's publishing products, in
particular in the storybook and coloring/activity book categories.
ELECTRONIC STORYBOOKS AND CD-ROM
The Company believes that it was the first to release electronic storybook
products and was at one time the leading manufacturer and distributor of
interactive children's books incorporating electronically produced audio
effects. However, in recent years, the Company's products in this category
have not been cost competitive with those of other manufacturers and the
Company's market share has declined substantially. In fiscal 1996, this
category of products accounted for $45 million, or 18%, of the Company's
overall children's publishing revenues and $30 million, or 12%, of the
Company's children's publishing revenues derived from mass market channels,
bookstores and specialty retailers.
In addition to electronic storybooks, the Company also designs and markets
computer-based products for children on CD-ROMs. In fiscal 1997, the Company
plans to launch six interactive storybooks in a CD-ROM format for children
ages three to six. At the present time, the Company has made no determination
to significantly expand its CD-ROM product offerings beyond the titles
discussed above.
<PAGE>
The Company's products in the electronic storybook and game and computer
category have a higher price point than the Company's Classic Format
products, with a retail price of between $5.00 and $20.00. Products in this
category are sold primarily to mass market accounts and independent
distributors, although CD-ROM titles are sold primarily through computer
stores and office superstores.
The Company intends to exploit new technologies that the Company believes
can be profitable, including new technologies, in the electronic storybook
category. The Company is exploring application of new technologies to create
a new generation of electronic books. Products utilizing these technologies
would replace the products featuring the Company's traditional Sight & Sound
technology.
EDUCATION AND REFERENCE
The Company's education and reference products consist of workbooks,
flashcards and reference books. This category of products accounted for
approximately $11 million, or 6%, of the Company's children's fiscal 1996
publishing revenues from sales through mass market channels and bookstores
and specialty retailers. The Company's workbook and flashcard products have
an average retail price point of $1.20 and its reference books have price
points between $4.00 and $5.00. All of such products are sold primarily
through mass market outlets. The Company intends to take advantage of sales
opportunities for these products through retail and specialty retail and
special markets distribution channels.
The Company intends to increase its product offerings in this category,
marketing workbooks that utilize both licensed and proprietary characters and
that contain enhanced characteristics such as full color interiors. To date,
the Company's workbook products instead primarily have utilized generic
characters. The Company also intends to create leveled reading series using
its existing characters and titles, as well as licensed characters, the use
in which is permitted under the Company's newest licenses.
TRADE AND NOVELTY PRODUCTS
The Company's current product offerings in this category consist of flap
books, pop-up books, book plus products and multiple format books. This
category of products accounted for $18 million, or 10%, of the Company's
children's fiscal 1996 publishing revenues from sales through mass market
channels and bookstores and specialty retailers ($8.0 million of which was
attributable to sales of third party publishing products under the Company's
now-discontinued Wal Mart Storyland program, under which the Company managed
the children's book departments in Wal Mart's stores). Products in this
category are in the $5.00 to $10.00 retail price range and, because their
average price point is generally too high for mass market distribution, are
primarily distributed through bookstores and specialty retail stores and
special markets.
The Company's product offerings in this category are at present limited
due to the Company's historical focus on products suitable primarily for mass
market distribution. However, the Company intends to expand its product
offerings in the trade and novelty category, with an emphasis on products
featuring the Company's proprietary characters. Products in this category
that the Company intends to introduce include a hardcover picture book line
with a $6.00 retail price point and a number of novelty book and book plus
formats with retail price points under $10.00. The Company believes that
significant sales opportunities for both its existing and proposed trade and
novelty products exist through bookstores, mass market, special market and
international distribution channels.
FAMILY-RELATED ADULT BOOKS
The Company's new management team is expanding the Golden Books brand into
trade books focusing on parenting and the family with the establishment of an
Adult Publishing Group within Golden Books Publishing. The Company expects to
introduce its first products in the family-related adult trade book category
in the fall of 1997, with initial revenues to be recognized in calendar 1998.
To date, the Adult Publishing Group already has agreements in principle to
publish 31 new parent-related titles. These titles (assuming that related
definitive agreements are reached) represent sufficient material for a two
and a half year publishing program, and are expected to begin to be released
by winter 1998. Some of the titles currently contemplated for release include
The Parents Answer Book,
<PAGE>
The Parents Book of Lists, The Parents Book of Baby Gear and The Parents Fun
and Fabulous Party Book. These titles are part of three planned co-branded
series, comprising a total of 15 books, based on Parents magazine editorial
contents. The Adult Publishing Group also has agreements in principle to
publish two titles by Cristina Ferrare, the television personality, and two
titles by Judy Resnick, the investment adviser.
The Company intends to distribute its family-oriented adult trade book
line primarily through bookstores, although the line also will include books
published in formats suitable for mass market distribution. The Company
intends to sell its family-oriented adult trade book line directly to
national bookstore chains, which account for approximately 75% of the trade
book market. It intends to enter into a distribution arrangement with a third
party for the distribution of its family-oriented adult book line to
independent bookstores.
GOLDEN BOOKS ENTERTAINMENT
As one of the first steps in implementing its strategy, the Company will
acquire, through a subsidiary of Golden Books Entertainment, for a purchase
price of $91 million ($81 million in cash and $10 million in Company Common
Stock), an extensive library of character-based family entertainment
properties, which constitutes substantially all of the assets of BVE, L.P.,
subject to certain of BVE, L.P.'s liabilities. BVE, L.P. is a private
partnership indirectly owned by Lorne Michaels, who also is the executive
producer of Saturday Night Live. BVE, L.P.'s library is comprised of
copyrights, trademarks or licenses to characters, television programs and
motion pictures, both animation and live action, and includes individual
specials and multiple episode series. Among the library titles are Rudolph
the Red-Nosed Reindeer, Frosty the Snowman, Santa Claus Is Coming to Town,
Lassie, Felix the Cat, Underdog, 52 half-hour episodes of Abbott and
Costello, The Lone Ranger and Tennessee Tuxedo.
The Company also will acquire BVE, L.P.'s 50% ownership interest in its
Broadway Comics joint venture with Jim Shooter, former Editor-In-Chief of
Marvel Comics. In addition, the Company will acquire BVE, L.P.'s 50%
ownership interest in McSpadden-Smith Music ("MSM"), a Nashville-based Music
publishing, marketing and management concern.
The Acquisition also will involve the retention by the Company of Eric
Ellenbogen, the President of the general partner of BVE, L.P., as President
of the Company's new Golden Books Entertainment Group division and Executive
Vice President of the Company, as well as many other key employees of such
general partner. The Company believes that Mr. Ellenbogen and such other key
employees will enable the Company to maximize the value of the BVE, L.P.
library assets as well as the Company's existing character assets. Upon
consummation of the Acquisition, Mr. Ellenbogen, along with Mr. Michaels,
will be appointed to the Board of Directors of the Company.
The Company intends to generate revenues from Golden Books Entertainment's
library, commencing upon the consummation of the Acquisition, by licensing
properties from the library to third parties, both domestically and
internationally, for use on television, on home video and in ancillary media.
The Company also intends, where its rights so permit, to license out specific
characters in Golden Books Entertainment's library (rather than the entire
property) for use in new television programs, theatrical films and home video
(in each case, the financing risk typically will be underwritten by third
parties). In addition, the Company intends to license out merchandising
rights in its characters for use in a variety of products.
The existing licenses granted to third-parties in respect of the
properties to be acquired from BVE, L.P. generally cover a limited time
period, usually of two to three years in duration. Additionally, BVE, L.P.
typically has granted narrow licenses so that the same property can be
simultaneously licensed to multiple parties for different purposes. This will
enhance the ability of Golden Books Entertainment to maximize license revenue
from the properties in its library.
In addition to generating licensing revenues, the Company intends to
utilize selected properties and characters in Golden Books Entertainment's
library in its children's publishing products, particularly in the storybook,
coloring/activity book and home video categories. The Company believes that
the acquisition of this library from BVE, L.P. will give it the requisite
volume and quality of product to
<PAGE>
meaningfully compete in the home video market with Golden Books branded
content, as well as the ability to market and cross-promote through books,
video and television.
Broadway Comics is focused on developing new characters with broad appeal
beyond comic books (i.e., in television, motion pictures, merchandising and
new media). McSpadden-Smith Music currently owns and administers over 1,300
copyrights, of which it has created approximately 80% and acquired
approximately 20%. To create new copyrights, MSM currently has eighteen
writers under contract. MSM's music has been performed and recorded in most
musical genres, including popular, rock, R&B, country and gospel, although
MSM's strongest markets are in country and contemporary Christian music. Last
year, approximately 200 MSM copyrights were licensed by record labels. At one
time, Golden Books had a significant presence in both children's comic books
and music. Management believes that there is consumer demand for Golden Books
product offerings in these areas and intends to take advantage of such
opportunities, utilizing in this regard properties acquired from BVE, L.P.
Management also intends to review the Company's current comic book and music
assets in order to determine whether certain of these assets may be
appropriate for reintroduction.
DISTRIBUTION AND SALES
The Company's children's publishing products are distributed through (i)
mass market, both directly and through independent distributors, (ii)
bookstores and specialty retail stores, (iii) special markets and (iv)
international distribution channels.
Historically, mass market distribution has accounted for the largest
portion of children's publishing product sales. During fiscal 1996,
approximately 45% of the Company's children's publishing product sales were
to mass merchants. Approximately 36% of these sales were attributable to its
four largest customers: Wal Mart (20%); Toys "R" Us (8%); K Mart (5%); and
Target (3%). To a lesser extent, the Company has distributed its children's
publishing products through other domestic distribution channels.
Internationally, the Company's children's publishing products are marketed
in approximately 80 countries and are published in English, Spanish,
Japanese, Korean and Portuguese. Books produced under subsidiary rights
licensing are issued in 23 languages, including Finnish, Indonesian and
Mandarin. The Company has the largest market share in the children's book
category in Canada. In fiscal 1996, approximately 8% of net sales
attributable to publishing products were generated outside of North America.
The Company's sales in Canada and, to a lesser extent, the United Kingdom
account for a majority of its international sales revenues.
BVE, L.P. exploits its library assets in all media and territories
worldwide directly or through sub-distributors. The Company intends to
continue to exploit the library assets to be held by Golden Books
Entertainment in the same manner.
The Company intends to distribute its family-oriented adult trade book
line primarily through bookstores, although the line also will include books
published in formats suitable for mass market distribution. The Company
intends to sell its family-oriented adult trade book line directly to
national bookstore chains, which account for approximately 75% of the trade
book market. It intends to enter into a distribution arrangement with a third
party for the distribution of its family-oriented adult book line to
independent bookstores.
Since May 8, 1996, the Company has begun to reorganize its sales and
marketing functions, fully integrating and restructuring them into
customer-focused teams that target specific retail accounts, coordinate
specific promotions and liaison with important licensors. In order to insure
maximum responsiveness to customer needs, the Company also is taking steps to
ensure that these needs are channeled from the Company's sales staff to its
editorial staff. In addition, the Company has put in place a new incentive
program for its sales personnel.
OWNED AND LICENSED INTELLECTUAL PROPERTY
During fiscal 1996, approximately 73% of the Company's children's
publishing revenues were generated by products featuring characters and
properties licensed by the Company from third parties.
<PAGE>
Most of the Company's character licenses have terms of up to three years.
Licenses from authors and illustrators are generally longer in duration,
often for the term of the copyright. Royalty rates paid by the Company
generally range from 8% to 13% of the net price received of the product
featuring the licensed characters and properties. Many license agreements
require advance royalty payments and minimum royalty guarantees and contain
editorial standards that govern the Company's use of the characters and
properties. Licenses usually can be canceled for failure to meet these
standards or certain other contractual obligations, although to date, none of
the Company's licenses has been canceled by the licensor for failure to meet
these standards or obligations. However, in connection with their renewal
some licenses have been reduced in scope. The licenses granted to the Company
generally are not exclusive. However, the current practice in the industry is
for licensors not to grant the same rights to more than one licensee. The
Company's licenses generally grant the Company usage rights only with respect
to certain product categories, as specified in the applicable license.
Although the Company believes that its owned and created characters also have
value, the Company has not focused on products featuring such characters and,
at present, generates negligible revenue from its owned characters.
BVE, L.P.'s library is comprised of copyrights, trademarks or licenses to
characters and television programs and motion pictures, both animation and
live action, and includes individual specials and multiple episode series.
The Company intends to invest increased resources in the expansion,
through internal development and acquisitions, of its proprietary character
base in order to build up a larger backlist of titles that can be sold over
the course of several years and that can be produced in multiple media and
sold through multiple distribution channels. In addition to increasing its
owned character base, the Company also intends to increase the number of
characters licensed by the Company from third parties.
COMMERCIAL PRINTING DIVISION
The Company, through the Commercial Printing Division of Golden Books
Publishing, Inc., a Delaware corporation and a wholly owned subsidiary of the
Company ("Golden Books Publishing"), provides creative, printing and
publishing services to third parties. The Company groups these activities
into three business categories: graphic art services and commercial printing;
educational kit manufacturing; and Custom Publishing services. In fiscal
1996, approximately $63 million, or 17%, of the Company's consolidated
revenues were attributable to the Commercial Printing Division.
A substantial portion of the Company's graphic art services and commercial
printing business is concentrated in the printing of books, industrial
manuals, catalogs, maps and promotional materials. The Company also engages
in commodity printing (such as tax instruction booklets and tax forms), which
business usually is obtained on a competitive bid basis and is generally
produced when the Company has production capacity available. Educational kit
manufacturing includes the development, printing, sourcing, packaging and
assembly of as many as 200 different components for one kit. Custom
Publishing includes the creation, design, production, assembly and
distribution for major consumer products and fast food companies of
customized products for their marketing and promotional programs.
The Commercial Printing Division's services are sold by approximately 30
employee sales representatives located in field offices throughout the United
States.
The Commercial Printing Division competes with numerous companies, the
largest of which is R.R. Donnelly & Sons Company. Competition, which is based
upon formats, price, quality and delivery, is intense, particularly in the
graphic art and commercial printing businesses.
PENN CORPORATION
Penn designs and produces decorated paper tableware, party accessories,
invitations, gift wrap products, stationery and giftware. In fiscal 1996,
approximately $53 million, or 14%, of the Company's consolidated revenues
were attributable to Penn.
Most of Penn's sales are to mass merchandisers and specialty paper product
stores. Penn markets its products to retailers through a combination of
independent sales representatives and its own internal sales force of 14
sales representatives.
<PAGE>
The competition in the industry in which Penn competes is strong and is
based on both price and licenses. Competitors of Penn who compete primarily
based on price include Unique Industries, Inc., Fonda Group, Inc. and Amscan,
Inc. Competitors of Penn who compete with it primarily on the basis of
licenses include Hallmark and American Greetings Corp. Penn has received
notice from Disney that it does not intend to renew Penn's Disney character
license following the expiration of such license on December 31, 1996.
The Company has announced that it intends to divest Penn and Penn will be
classified as an asset held for sale in the Company's second quarter
financial statements.
COMPETITION
The children's publishing market is highly competitive. Competition is
based primarily on price, quality, distribution, marketing and licenses. In
mass market sales, the Company faces competition primarily from smaller
competitors, including, but not limited to, Landoll, Inc., in the
coloring/activity category, Publications International, Ltd., in the
electronic storybook category, and School Zone Publishing Co., in the
educational workbook category. In the trade and specialty trade categories,
the Company's principal competitors are Random House, Inc., Simon & Schuster,
Scholastic Corp. and HarperCollins Publishers, Inc. The Company also competes
for a share of consumer spending on children's entertainment and educational
products against companies that market a broad range of products utilizing a
broad range of technologies that are unrelated to those marketed by the
Company.
The market for licenses also is highly competitive and the Company
competes against many other licensees for significant licenses. In recent
years, licensors have fragmented licenses, which has reduced the cost of
purchasing a license. As a result, smaller bidders have been able to enter
the market for licenses, which has resulted in increased competition in this
market.
Many of the Company's current competitors have greater financial resources
than the Company and, in selected markets, greater experience than the
Company. Many of the markets which the Company intends to enter each contain
a number of competing entities, many of which may have greater financial
resources and experience with respect to these markets than the Company.
MANUFACTURING
The Company manufactures the majority of its products from its plants in
Racine, Wisconsin and Cambridge, Maryland. Additional components and services
are obtained from third party vendors in the United States and abroad. The
Company's electronic products typically contain a higher portion of
outsourced content than its printed products, particularly the software and
electrical components.
The Company's management currently is evaluating its printing and other
manufacturing operations and may determine to revamp or outsource a greater
portion of these operations.
EMPLOYEES
The Company and its subsidiaries have approximately 2,000 employees,
calculated on a full-time equivalent basis, and 140 part-time employees.
Approximately 840 employees are represented by labor unions. The Company
negotiated new three-year contracts which began during the third quarter of
fiscal 1996 with (i) the Graphic Communications International Union, Local
223B, (ii) the International Brotherhood of Teamsters, Local 43, (iii) the
Graphic Communications International Union, Local 254M and (iv) the
International Union of Operating Engineers, Local 309, in each case on terms
it considers satisfactory. The Company's Canadian subsidiary has a contract
with Local 1024 of the United Rubber, Cork, Linoleum and Plastic Workers of
America AFL-CIO, CLC, which expires on December 31, 1997. Penn has a contract
with Local Union 7 of the International Brotherhood of Teamsters, which
expires on December 11, 1998. On September 30, 1996, the Company's contract
with the United Auto Workers, Local 1007, which represents 120 employees at
the Company's Racine plant, expires. The Company is beginning negotiations
for a new contract with this union. The Company believes that its relations
with its employees generally are good.
<PAGE>
Upon the consummation of the Acquisition, it is anticipated that
approximately an additional 25 employees will join the Company from BVE, L.P.
In connection with the production of storybooks and coloring/activity
books, the Company typically hires writers, illustrators and other creative
talent on a freelance, work-for-hire basis to complete its projects.
Similarly, to manufacture electronic storybooks the Company generally
outsources tasks such as electrical design and software programming while
retaining artistic supervision and control.
PROPERTIES
Certain information as to the significant properties used by the Company
in the conduct of its business is set forth in the following table:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET TYPE OF USE
- -------------------------- ------------- ------------------------------------------------------
<S> <C> <C>
New York, NY 35,000 Corporate offices; publishing offices; sales offices.
Racine, WI 960,000 Corporate, creative and marketing offices and printing
facilities.
Kalamazoo, MI 560,000 Corporate offices; manufacturing; warehousing and
distribution.
Coffeyville, KS 547,000 Warehousing and distribution.
Crawfordsville, IN 403,000 Warehousing and distribution.
Cambridge, MD 231,000 Printing; warehousing.
Cambridge, Ontario, Canada 148,000 Canadian corporate offices; sales offices; warehousing
and distribution.
W. Springfield, MA 41,000 Manufacturing; warehousing.
</TABLE>
All of the foregoing properties are owned by the Company, except for
90,000 leased square feet in Cambridge, Maryland and the Company's New York
offices. In addition to the properties described above, the Company owns or
rents various other properties that are used for administration, sales
offices and warehousing.
In addition to the foregoing properties, the Company also owns a 702,000
square foot facility in Fayetteville, North Carolina which was primarily used
in connection with the manufacture and distribution of games and puzzles.
During August 1994, the Company sold its game and puzzle operation to Hasbro,
Inc., although this facility was not included in the sale. As part of its
expense reduction program, the Company intends to accelerate the sale of this
facility. This facility currently is classified as an asset held for sale.
LEGAL PROCEEDINGS
Golden Books Publishing and Penn have been informed by the Environmental
Protection Agency (the "EPA") and/or state regulatory agencies that they may
be potentially responsible parties ("PRPs") and face liabilities under the
Comprehensive Environmental Response, Compensation, and Liability Act
(commonly known as "CERCLA" or "Superfund") or similar state laws at eight
sites that are currently undergoing investigation and/or remediation of
environmental contamination. In all cases, the relevant subsidiary is one of
a number of PRPs that have been identified by the EPA or the relevant state
agency with respect to the site.
Golden Books Publishing is a PRP at four sites in Wisconsin. With respect
to one of these sites, located at South Milwaukee, Golden Books Publishing
has been classified by the EPA in the de minimus category based upon the
EPA's initial allocation among PRPs. The EPA has identified approximately 100
PRPs at the site. Currently, approximately eighty members of the PRP group,
representing substantially all of the viable entities which could be expected
to contribute financially to a remedy, are negotiating the cost and timing of
the clean-up actions. While the final cost of the remedies has not been
determined, the Company does not believe its contribution will be material.
With respect to the second site, located at Muskego, the owner of the
landfill involved has previously acknowledged clean-up responsibility for
well over 50% of the total cost of the remedy. Over fifty of the remaining
PRPs have reached the final stages
<PAGE>
of negotiation regarding their respective final shares of this exposure.
Based on current information available, the Company estimates its liability
at less than $20,000. At the third site, located in unincorporated Racine
County, the Wisconsin Department of Natural Resources (the "WDNR") has
identified Golden Books Publishing as one of the parties responsible ("RP")
for remedying environmental damage caused by the presence of drums and other
containers of individual waste dating back almost 30 years. Golden Books
Publishing's waste drums were not authorized by Golden Books Publishing to be
disposed of at the site. The WDNR has named the current site owner and Golden
Books Publishing's former waste hauler as other RPs. To date, the WDNR has
ordered the Company to remove drums and minimal amounts of soils from the
site and to perform groundwater testing. The WDNR and the Company are
negotiating a settlement of Golden Books Publishing's total liability. At the
fourth site, Golden Books Publishing's liability pursuant to the terms of a
consent decree is limited to approximately 4% of the total remedial costs.
The current estimate of total costs is in the range of $22 million. In
accordance with the consent decree, the Company has provided for its share of
the probable clean-up costs.
A division of Penn has been identified as a PRP at a Kalamazoo, Michigan
site. The PRP identified as the largest waste contributor at the site is
conducting the clean-up and has entered into settlements with approximately
225 other PRPs. The remedy currently is estimated to cost $18 million. In
1992, the PRP and three municipalities filed a private cost recovery action
against Penn and approximately 40 other PRPs in the U.S. District Court for
the Western District of Michigan, captioned as Charter Township of Oshteno et
al. v. American Cyanamid Company, et al. The percentage of waste at the site
attributable to Penn is estimated by the plaintiff at approximately .0087% of
the total volume. Penn currently is in negotiations to settle its total
liability with the plaintiffs. This litigation is currently scheduled to
reach trial in early 1997.
At the Hertel Landfill in Plattekill, New York, Golden Books Publishing is
one of five PRPs sued by the EPA in 1994 for recovery of past EPA response
costs of approximately $2.5 million. In September 1991, the EPA approved a
remedial action for the Hertel Landfill site that currently is estimated to
cost $4.1 million other than groundwater remediation costs, if any are
required. One of the site's non-defendant PRPs has been complying with an EPA
unilateral administrative order requiring investigation and cleanup of the
site and is now seeking contribution towards its cost from Golden Books
Publishing and more than 20 other PRPs. At the time the 1991 order was
issued, Golden Books Publishing did not comply. As of June 26, 1996,
representatives of Golden Books Publishing reached agreement with the EPA to
come into compliance with the order and pay a penalty for previous
non-compliance. At the current time, the PRPs are attempting to negotiate the
appropriate allocation for responsibility at this site for final clean-up and
related costs. The Company and the government have not reached agreement on
matters other than the fixed penalty amount.
Golden Books Publishing also has been identified as a PRP at another site
located in Poughkeepsie, New York. Golden Books Publishing and eight other
PRPs received a notice letter in 1995 from the State of New York regarding
this site. New York State will be seeking recovery of its past oversight
costs of more than $600,000 plus future oversight and maintenance costs
associated with this site, currently estimated by the State at $830,000.
There has been no attempt made to develop an allocation or to identify all
PRPs to date, but the construction phase of the remedy has been completed by
other parties without Company involvement.
In 1989, Golden Books Publishing was identified as one of hundreds of PRPs
at a Superfund site in Maryland. Golden Books Publishing paid $2,795 for its
portion of the first phase of the clean-up which consisted of a surface
removal action. In the near future, Golden Books Publishing anticipates
entering into a final settlement of all of its remaining liabilities for less
than $15,000.
In addition to these environmental matters, Golden Books Publishing filed
an action in 1994 in the United States District Court, Eastern District of
Wisconsin captioned as Western Publishing Company Inc. v. MindGames, Inc.
seeking a declaration of rights in regard to Golden Books Publishing's
alleged breach of various of its obligations under its licensing agreement
with the defendant for distribution through 1994 of the adult board game
known as "Clever Endeavor." This case involves the Company's
<PAGE>
now-discontinued adult and children's game division. The defendant, believing
its board game had the potential to become one of the most popular of all
time, has maintained that certain of the alleged breaches entitle it to
damages of as much as $40 million. The Company believes that the demand for
such speculative future profits is barred by applicable law and has filed a
motion for summary judgment to that effect, which will be considered by the
Court later this year. Should such motion be denied, the Company believes
that the defendant faces serious obstacles of proof to establish such damages
to the satisfaction of a jury.
The Company is actively pursuing resolution of the aforementioned matters
or is awaiting further government response. While it is not feasible to
predict or determine the outcomes of these proceedings, it is the opinion of
management that their outcomes have been adequately reserved for and will not
have a materially adverse effect on the Company's financial position or
future results of operations.
The Company and its subsidiaries are parties to certain other legal
proceedings which are incidental to their ordinary business, none of which
the Company believes are material to the Company and its subsidiaries taken
together as a whole.
<PAGE>
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 hereunto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
Dated: August 2, 1996 By: /s/ Philip E. Rowley
Philip E. Rowley
Chief Financial Officer and
Executive Vice President
