UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14399
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1104930
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
850 Third Avenue, New York, New York 10022
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 753-8500
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 25,902,077 shares outstanding
as of December 2, 1996.
1
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
---------------------------------------
TABLE OF CONTENTS
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- 3
November 2, 1996 (Unaudited) and
February 3, 1996
Condensed Consolidated Statements of Operations-- 5
Three months ended November 2, 1996 and
October 28, 1995 (Unaudited)
Condensed Consolidated Statements of Operations-- 6
Nine months ended November 2, 1996 and
October 28, 1995 (Unaudited)
Condensed Consolidated Statements of Cash Flows-- 7
Nine months ended November 2, 1996 and
October 28, 1995 (Unaudited)
Notes to Condensed Consolidated Financial 9
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in Securities 20
Item 6. Exhibits and reports on Form 8-K 20
SIGNATURES 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 113,757 $ 45,223
Accounts receivable, net 70,693 61,033
Inventories 32,011 84,354
Net assets held for sale and
other current assets 30,827 32,413
--------- ---------
Total current assets 247,288 223,023
--------- ---------
OTHER ASSETS 7,443 14,429
--------- ---------
PROPERTY, PLANT AND EQUIPMENT 106,245 134,016
Less accumulated depreciation and amortization 53,563 58,566
--------- ---------
Total property, plant and equipment 52,682 75,450
--------- ---------
IDENTIFIED INTANGIBLES, FILM LIBRARY AND COST IN EXCESS
OF NET ASSETS ACQUIRED (GOODWILL), less accumulated
amortization of $1,572 and $21,205, respectively 92,736 9,063
--------- ---------
$ 400,149 $ 321,965
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
3
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 10,015 $ 19,000
Accrued compensation and fringe benefits 6,260 8,073
Other current liabilities 29,339 30,641
--------- ---------
Total current liabilities 45,614 57,714
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt 149,859 149,845
Accumulated postretirement benefit obligation 28,495 27,572
Other 21,501 2,481
--------- ---------
Total noncurrent liabilities 199,855 179,898
COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF GOLDEN BOOKS FINANCING TRUST
HOLDING SOLELY CONVERTIBLE DEBENTURES
111,524 --
CONVERTIBLE PREFERRED STOCK - Series A, 20,000
shares authorized, no par value, 19,970 shares issued and outstanding; at
mandatory redemption amount -- 9,985
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock - Series B, 13,000
shares authorized, no par value, 13,000 shares issued and outstanding; at
redemption amount 65,000 --
Common Stock, $.01 par value, 60,000,000 shares authorized, 25,848,577
and 21,875,539 shares issued 258 219
Additional paid in capital 119,278 87,044
Note receivable from sale of Common Stock -- (4,796)
Retained deficit (137,297) (3,608)
Cumulative translation adjustments (1,261) (1,669)
--------- ---------
45,978 77,190
Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822
--------- ---------
Total stockholders' equity 43,156 74,368
--------- ---------
$ 400,149 $ 321,965
========= =========
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
4
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
November 2, October 28,
1996 1995
---- ----
(Unaudited)
REVENUES:
<S> <C> <C>
$ 89,541 $ 105,216
--------- ---------
COSTS AND EXPENSES:
Cost of sales 67,001 81,205
Selling, general and administrative 34,768 35,715
Restructuring charges -- 8,701
--------- ---------
Total costs and expenses 101,769 125,621
--------- ---------
LOSS BEFORE DISTRIBUTIONS ON REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST, INTEREST EXPENSE AND
PROVISION FOR INCOME TAXES
(12,228) (20,405)
DISTRIBUTIONS ON REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST
2,206 --
INTEREST EXPENSE, net of interest income of $1,966 and
$597, respectively 1,027 3,158
--------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (15,461)
(23,563)
PROVISION FOR INCOME TAXES
74 13,925
NET LOSS
$ (15,535) $ (37,488)
========= =========
LOSS PER COMMON SHARE $ (0.73) $ (1.79)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 24,416 21,043
========= =========
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
November 2, October 28,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
REVENUES: $ 224,397 $ 283,428
--------- ---------
COSTS AND EXPENSES:
Cost of sales 198,952 213,952
Selling, general and administrative 110,234 95,200
Gain on streamlining plan -- (2,000)
Restructuring charges 40,680 8,701
--------- ---------
Total costs and expenses 349,866 315,853
--------- ---------
LOSS BEFORE DISTRIBUTIONS ON REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST, INTEREST EXPENSE AND
PROVISION FOR INCOME TAXES (125,469) (32,425)
DISTRIBUTIONS ON REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST 2,206 --
INTEREST EXPENSE, net of interest income of $2,922 and
$2,665, respectively 5,418 7,559
--------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (133,093) (39,984)
========= =========
PROVISION FOR INCOME TAXES 596 13,853
========= =========
NET LOSS $(133,689) $ (53,837)
========= =========
LOSS PER COMMON SHARE $ (6.07) $ (2.59)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 22,784 21,030
========= =========
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
November 2, October 28,
1996 1995
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (133,689) $ (53,837)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,328 11,075
Provision for losses on accounts receivable 2,087 1,206
Gain on streamlining plan -- (2,000)
Loss (gain) on disposition of plant and equipment 56 (396)
Restructuring charge 40,680 8,701
Other non-cash charges associated with strategic redirection
of the Company 39,450 --
Non-cash compensation expenses 14,315
Other 3,090 763
Changes in assets and liabilities:
Accounts receivable (19,924) (6,537)
Inventories 24,395 8,253
Accounts payable (11,658) 1,990
Deferred income taxes -- 13,886
Accrued compensation and fringe benefits (474) --
Other assets and liabilities (1,556) (9,770)
---------- ----------
Net cash used in operating activities (30,900) (26,666)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Broadway Video acquisition (81,000) --
Investment in joint venture (2,250) --
Acquisitions of plant and equipment (5,396) (12,010)
Proceeds from streamlining plan 639 6,589
Proceeds from disposition of plant and equipment 72 629
Other -- 350
---------- ----------
Net cash used in investing activities (87,935) (4,442)
---------- ----------
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
7
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
November 2, October 28,
1996 1995
---- ----
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Proceeds from issuance of Convertible Trust Originated Preferred
Securities $ 115,000 $ --
Issuance costs of Convertible Trust Originated Preferred Securities (3,636) --
Repayments under Credit Agreement -- (32,000)
Proceeds from issuance of Preferred Stock-Series B 65,000 --
Issuance costs of Preferred Stock-Series B (6,162) --
Redemption of Preferred Stock-Series A (9,985) --
Proceeds from sale of Common Stock, including the Hallmark
transaction 27,702 517
Dividends paid on Preferred Stock - Series A (646) (637)
--------- ---------
Net cash provided by (used in) financing activities 187,273 (32,120)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 96 12
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 68,534 (63,216)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 45,223 85,406
--------- ---------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 113,757 $ 22,190
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid (received) during the period for:
Interest 8,553 $ 11,828
Income taxes, net of refunds received (234) (5,101)
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
8
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
As more fully described in Note C - Change in Control and Strategic Direction
of Registrant, the condensed consolidated financial statements for the nine
month period ended November 2, 1996 include restructuring and other charges
aggregating $96.3 million, which consists of (i) $16.2 million in connection
with the sale of a significant equity interest in Golden Books Family
Entertainment, Inc. (formerly Western Publishing Group, Inc.) (the "Company")
to Golden Press Holding LLC, a Delaware limited liability company owned by
Richard E. Snyder, Barry Diller and Warburg, Pincus Ventures, L.P. ("GP
Holding") (the "GPH Transaction"), and (ii) $80.1 million in connection with
the implementation by the Company of its strategic plan to return its core
business to profitability and to redeploy assets. These charges were
recognized during the quarter ended August 3, 1996.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full fiscal period. The
business of the Company 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.
In connection with the transactions described in Note C, and as approved by
the requisite vote of the Company's stockholders, the name of the Company was
changed from Western Publishing Group, Inc. to Golden Books Family
Entertainment, Inc. In addition, the name of Western Publishing Company, Inc.,
the principal operating subsidiary of the Company ("WPC"), was changed to
Golden Books Publishing Company, Inc. ("Golden Books Publishing").
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position as of November 2, 1996 and the results of
operations for the three month and nine month periods ended November 2, 1996
and October 28, 1995 and cash flows for the nine month periods ended November
2, 1996 and October 28, 1995. The results of Golden Books Financing Trust (the
"Trust") are included in the Company's condensed consolidated financial
statements since its inception on August 20, 1996. The Trust is wholly owned
by the Company, has no independent operations and its assets consist solely of
the 8 3/4 Convertible Debentures due 2016 (the "Convertible Debentures") of
the Company and Golden Books Publishing (see NOTE H). The obligations of the
Trust, which consist of the 8 3/4% Convertible Trust Originated Preferred
Securities of the Trust (the "Preferred Securities"), are fully and
unconditionally guaranteed by the Company. The operations of the Golden Books
Entertainment Group division of Golden Books Publishing (the assets acquired
from Broadway Video Entertainment, L.P. (as hereinafter defined)) are included
in the condensed consolidated financial statements from the date of
acquisition, August 20, 1996 (see NOTE I). Certain reclassifications have been
made in the prior year condensed consolidated financial statements to conform
with the current year presentation. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company contained in the Company's Form 10-K for the year
ended February 3, 1996.
NOTE B - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
---- ----
(In Thousands)
<S> <C> <C>
Raw materials $ 4,456 $10,877
Work in process 7,250 13,014
Finished goods 20,305 60,463
------- -------
$32,011 $84,354
======= =======
</TABLE>
9
<PAGE>
NOTE C - Change in Control and Strategic Direction of Registrant
Control of Registrant
On May 8, 1996, the Company completed the sale of a significant equity
interest to GP Holding. The Company issued to GP Holding, for an aggregate
purchase price of $65,000,000, (i) 13,000 shares of the Company's Series B
Convertible Preferred Stock, no par value (the "Series B Preferred Stock"),
each of which shares is convertible into shares of the Company's common stock,
par value $.01 per share ("Common Stock"), at an initial conversion price of
$10 per share, and (ii) a warrant to purchase 3,250,000 shares of Common Stock
at an initial exercise price of $10 per share (the "GPH Transaction"). Net
proceeds associated with the transaction were $58.8 million, after giving
effect to $6.2 million of transaction costs. Net proceeds were partially used
to retire approximately $10.0 million of Series A Preferred Stock, no par
value (the "Series A Preferred Stock"), at its face amount plus $0.7 million
of related accrued dividends, in addition to payments of $3.4 million for
severance and transition costs.
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 (the "Snyder
Incentive Stock") to Mr. Snyder at a price of $8 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 "Employment Agreement"). Under the terms
of the Employment Agreement, Mr. Snyder is entitled to receive 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 Common Stock at a price of $12.81 per share
(the "Snyder Option"), special bonuses based on the market price of the Common
Stock, supplemental retirement benefits, post-retirement medical benefits and
certain other benefits. Accordingly, in the second quarter ended August 3,
1996, $12.8 million of costs associated with the Employment Agreement were
charged to operations. In connection with the offering of the Preferred
Securities (as more fully described in NOTE H), the Broadway Video Acquisition
(as hereinafter defined and as more fully described in NOTE I) and the
Hallmark Transaction (as hereinafter defined and as more fully described in
NOTE F), in accordance with the anti-dilution provisions of the Employment
Agreement, the Company issued 84,967 additional shares of Snyder Incentive
Stock, increased by 157,796 the number of shares exercisable under the Snyder
Option and adjusted the special bonuses provided for in the Employment
Agreement. This resulted in a charge of approximately $1.5 million for the
third quarter ended November 2, 1996.
Strategic Direction of Registrant
As part of new 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 the Company's assets.
During the second quarter ended August 3, 1996, new management determined that
Penn Corporation ("Penn"), a wholly owned subsidiary of the Company that
designs, produces and distributes decorated paper tableware, party accessories
and giftware, did not fit the Company's future strategic direction and,
accordingly, decided to divest Penn. Beginning with the Company's condensed
consolidated financial statements for the quarter ended August 3, 1996, Penn's
net assets have been classified as a net asset held for sale (see NOTE E). As
discussed in NOTE L, on November 13, 1996, the Company and Peacock Papers,
Inc. ("Peacock") signed a definitive agreement for the sale of the stock of
Penn to Peacock.
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. The Company expects to complete the review by December 28, 1996. As
a consequence of this review and the decision to sell Penn, the Company
recorded writedowns and other charges in the condensed consolidated financial
statements for the quarter ended August 3, 1996 totaling $80.1 million (in
addition to charges of $16.2 million in connection with the sale of a
significant equity interest to GP Holding) as follows: (i) a restructuring
charge totaling $40.7 million pertaining to a $30.1 million writedown of the
net assets of Penn to net realizable value, a $3.0 million reduction in the
net realizable value of the Company's Fayetteville facility and $7.6 million
in costs associated with the termination of certain customer program
initiatives; (ii) a cost of sales adjustment of $25.0 million comprised of
$17.6 million of costs pertaining to the Company's decision to discontinue or
replace certain product lines and expeditiously liquidate related inventory
and slow moving product and $7.4 million of other inventory related costs,
consisting primarily of licensor and prepublication costs; (iii) a selling,
general and administrative charge of $11.0 million relating to costs
associated with management's revised plans to resolve certain legal and
contractual matters; and (iv)
10
<PAGE>
adjustments to revenue totaling $3.4 million to establish reserves in
connection with the Company's plans to resolve differences with customers with
a view toward mending and improving the Company's relationships with its
customers.
The Company expects to record additional writedowns and other charges in the
quarter ended December 28, 1996 (see NOTE L for additional information
regarding the change to the Company's fiscal year-end), which may be
substantial.
NOTE D - Corporate Reorganization
On May 8, 1996, the Company effected a reorganization of certain of its
subsidiaries (the "Reorganization"). First, the Company conveyed to Golden
Books, Inc., a Delaware corporation and wholly owned subsidiary of the Company
("GB"), (i) all of the issued and outstanding shares of capital stock of Penn
and (ii) all of the issued and outstanding shares of capital stock of WPC.
Immediately thereafter, the Company caused GB to merge with and into WPC. In
connection with the Reorganization, the Company, WPC and GB entered into a
First Supplemental Indenture, dated as of May 8, 1996, with Marine Midland
Bank, a New York banking and trust company, as Successor Trustee, pursuant to
which WPC (the name of which was subsequently changed to Golden Books
Publishing Company, Inc.) was substituted for the Company as the obligor with
respect to the 7.65% Senior Notes due 2002 originally issued by the Company.
NOTE E - Net Assets Held for Sale
During fiscal 1995, prior management adopted a plan designed to improve the
Company's competitive position and reduce its cost structure through the sale,
divestiture, consolidation or phase out of certain operations, properties and
products and a workforce reduction. During the quarter ended October 28, 1995,
prior management recorded an $8.7 million provision for restructuring. This
was offset, in part, by a $2.0 million gain from a reorganization plan
established during the fiscal year ended January 28, 1995, which was
recognized during the quarter ended July 29, 1995. As of November 2, 1996, net
assets held for sale and other current assets include the Company's
Fayetteville facility, which was closed in conjunction with the sale of the
Company's game and puzzle business. A $3.0 million revision to the net
realizable value of this facility was recorded in the quarter ended August 3,
1996.
As discussed in Note C, during the quarter ended August 3, 1996, new
management decided to divest Penn. Accordingly, in that quarter, the Company
recorded a restructuring charge of $30.1 million to reflect the writedown of
Penn's assets to net realizable value. Beginning with the Company's condensed
consolidated financial statements for the quarter ended August 3, 1996, Penn's
net assets have been classified as a net asset held for sale and other current
assets. Penn's operations for the three and nine months ended November 2, 1996
and October 28, 1995 were as follows:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
------------------------------ ---------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $ 11,933 $ 13,463 $ 35,669 $ 44,163
Gross profit 3,312 2,715 7,567 10,592
Loss before interest expense
and provision for income taxes $ (733) $ (912) $ (2,499) $ (1,002)
</TABLE>
As discussed in Note L, on November 13, 1996, the Company and Peacock signed a
definitive agreement for the sale of the stock of Penn to Peacock.
11
<PAGE>
NOTE F - Stockholders' Equity
On May 8, 1996, pursuant to the sale of a significant equity interest in the
Company to GP Holding, and the requisite vote of the stockholders of the
Company (see NOTE C), an amendment to increase the authorized number of shares
of Common Stock from 40,000,000 to 60,000,000 shares was approved.
During the period from February 4, 1996 through December 5, 1996, the Company
granted to its directors and employees options to purchase, in the aggregate,
2,806,089 shares of Common Stock of the Company. Such options are exercisable
at the fair market value of the Common Stock on the date of grant (or, in the
case of options granted on account of the anti-dilution adjustment to Richard
E. Snyder's options, the date of the initial grant) and are exercisable
beginning between one and five years following such date and expire between
seven and ten years following such date, in each case, depending upon the
particular option grant.
On September 6, 1996, the Company completed the sale to H C Crown Corp., a
wholly owned subsidiary of Hallmark Cards Incorporated ("Hallmark"), of
2,356,198 shares of Common Stock for approximately $25.0 million (the
"Hallmark Transaction"). The sale represented the completion of the first step
in the Company's strategic relationship with Hallmark. The Company and
Hallmark are discussing a further $25.0 million investment by Hallmark in
Common Stock and the terms of their strategic alliance.
NOTE G - Loss Per Common Share
Loss per common share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands Except for Per Share Data)
<S> <C> <C> <C> <C>
Net loss $ (15,535) $ (37,488) $ (133,689) $ (53,837)
Preferred dividend requirements (2,145) (212) (4,706) (637)
------------ --------- ----------- -----------
Loss applicable to common stock $ (17,680) $ (37,700) $ (138,395) $ (54,474)
============ ========= =========== ===========
Weighted average common shares
outstanding 24,416 21,043 22,784 21,030
============ ========= =========== ===========
Loss per common share $ (0.73) $ (1.79) $ (6.07) $ (2.59)
============ ========= =========== ===========
</TABLE>
NOTE H - Private Placement of Convertible Trust Originated Preferred Securities
During August and September, 1996, the Company raised a total of $115.0
million through a private placement of the Preferred Securities under Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Preferred Securities were issued by the Trust, a Delaware business trust
financing vehicle. The Company owns all of the common securities of the Trust.
The net proceeds of such offering, after commissions and expenses, were $110.8
million. The Preferred Securities pay quarterly distributions at an annual
distribution rate of 8 3/4% (subject to any deferral of interest payments on
the Convertible Debentures by the Company and Golden Books Publishing), have
an aggregate liquidation preference of $115.0 million and are convertible at
the option of their holders into Convertible Debentures, which are immediately
convertible into Common Stock at an initial conversion price of $13.00 per
share.
12
<PAGE>
NOTE I - Acquisitions
On August 20, 1996, pursuant to an Asset Purchase Agreement, dated as of July
30, 1996, among Broadway Video Entertainment, L.P., Broadway Video
Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited Partnership
(collectively "BVELP"), the Company and certain of the Company's subsidiaries,
the Company acquired, among other things, substantially all of BVELP's
television and film library properties, and assumed payables and all
liabilities incurred in connection with the exploitation of such assets after
the closing, for an aggregate purchase price of approximately $81.0 million in
cash and $10.0 million in Common Stock (901,408 shares), as provided for in
the Asset Purchase Agreement (the "Broadway Video Acquisition"). On November
22, 1996, the Company paid an additional $0.9 million to BVELP in satisfaction
of the Company's obligations under the working capital adjustment provided for
in the Asset Purchase Agreement The Broadway Video Acquisition has been
accounted for under the purchase method of accounting using a preliminary
allocation of the purchase price which will be subject to final adjustment.
The cost in excess of net assets acquired and the film library are being
amortized over their estimated useful lives.
On August 14, 1996, the Company entered into an agreement with FUTECH
Educational Products, Inc. ("FUTECH"), pursuant to which the Company was
granted certain rights with respect to FUTECH's exclusive "talking pages"
technology.
NOTE J - Income Taxes
The Company does not anticipate any significant provision or benefit for
income taxes in the fiscal period ending December 28, 1996. As such,
operations for the three and nine months ended November 2, 1996 do not include
income tax benefit from domestic operations as no tax benefit was provided on
operating losses. The provisions for the three and nine months ended November
2, 1996 pertain principally to anticipated resolution of outstanding issues
from prior years. During the quarter ended October 28, 1995, a provision was
made for income taxes for the three and nine month periods then ended in the
amount of $13.9 million, reflecting an increase in the Company's income tax
valuation allowance.
NOTE K - Pro Forma Financial Information (Unaudited)
Unaudited pro forma results from operations as if (i) the GPH Transaction,
(ii) the issuance of additional shares pursuant to Richard Snyder's Employment
Agreement, (iii) the private placement of the Preferred Securities (iv) the
Broadway Video Acquisition and (v) the Hallmark Transaction had occurred at
the beginning of each respective period, are as follows:
<TABLE>
<CAPTION>
9 Months Ended
---------------------
November 2, October 28,
1996 1995
---------------------
(In Thousands Except for Per Share Data)
<S> <C> <C>
Revenues $ 234,716 $ 291,218
Net loss $ (140,314) $ (53,999)
Loss per common share $ (5.41) $ (2.46)
</TABLE>
NOTE L - Subsequent Events
On November 13, 1996, the Company and Peacock signed a definitive agreement
for the sale of the stock of Penn to Peacock. The transaction is subject to a
number of conditions, including, without limitation, financing by Peacock and
is anticipated to close prior to the year end.
On November 30, 1996, the Company changed its fiscal year so as to end on the
last Saturday of December in each year. As a result of the foregoing, the
fourth fiscal quarter in respect of the current fiscal year (Fiscal 1996) will
end on December 28, 1996 and the next fiscal year (Fiscal 1997) will begin on
December 29, 1996 and end on December 27, 1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General and Adoption of New Business Strategy
Certain of the matters discussed in this Item may constitute forward-looking
statements within the meaning of Section 7A of the Securities Act and, as
such, may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements of the Company for the three and
nine months ended November 2, 1996 and October 28, 1995 and the related notes
thereto.
The Company is the largest publisher of children's books in the North American
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. On May 8, 1996, GP Holding, an investment vehicle formed by Warburg,
Pincus Ventures, L.P., 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, was appointed Chairman and Chief Executive Officer of the Company.
Since May 8, 1996, Mr. Snyder has assembled a new management team. 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 name to provide family-oriented content
through multiple media.
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
the Company's assets.
During the quarter ended August 3, 1996, new management determined that the
Penn Corporation ("Penn"), a wholly owned subsidiary of the Company that
designs, produces and distributes decorated paper tableware, party accessories
and giftware, did not fit the Company's future strategic direction and,
accordingly, decided to divest Penn. Beginning with the Company's condensed
consolidated financial statements for the quarter ended August 3, 1996, Penn's
net assets have been classified as a net asset held for sale and other current
assets. On November 13, 1996, Golden Books Publishing entered into a stock
purchase agreement pursuant to which the Company agreed to sell Penn.
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. The Company expects to complete the review by December 28, 1996. As
a consequence of this review and the decision to sell Penn, the Company
recorded writedowns and other charges in its condensed consolidated financial
statements for the quarter ended August 3, 1996 totaling $80.1 million (in
addition to charges of $16.2 million in connection with the sale of a
significant equity interest to GP Holding) as follows: (i) a restructuring
charge totaling $40.7 million pertaining to a $30.1 million writedown of the
net assets of Penn to net realizable value, a $3.0 million reduction in the
net realizable value of the Company's Fayetteville facility and $7.6 million
in costs associated with the termination of certain customer program
initiatives; (ii) a cost of sales adjustment of $25.0 million comprised of
$17.6 million of costs pertaining to the Company's decision to discontinue or
replace certain product lines and expeditiously liquidate related inventory
and slow moving product and $7.4 million of other inventory related costs,
consisting primarily of licensor and prepublication costs, (iii) a selling,
general and administrative charge of $11.0 million relating to costs
associated with management's revised plans to resolve certain legal and
contractual matters; and (iv) adjustments to revenue totaling $3.4 million to
establish reserves in connection with the Company's plans to resolve
differences with customers with a view toward mending and improving the
Company's relationships with its customers.
On December 12, 1996, the Company announced that it had reached separate
agreements with the State of Wisconsin and the County and City of Racine to
manufacture the core products of the Company in a new facility in Racine and
to outsource
14
<PAGE>
all other printing. In connection with such agreements, the Company expects to
receive financial incentives from the State, County and City of approximately
$5.7 million in the aggregate, including low-cost financing and tax credits.
In addition, the Company also announced that it had reached separate
agreements with the five labor unions with which the Company contracts to
providing for wage and benefit reductions and work rule changes from each of
the labor unions. The Company plans to sell the existing manufacturing
facility in Racine and to build a new facility or renovate an existing
facility to manufacture the core products of the Company. The Company arrived
at the foregoing decisions as part of the ongoing review by new management of
all aspects of the Company's operations, systems and support functions.
The Company expects to record additional writedowns and other charges in the
quarter ended December 28, 1996, in part due to the decisions described in the
preceding paragraph, which may be substantial.
The Company's return to profitability is dependent in part on the successful
implementation of management's new strategy. If the new strategy is
successful, the Company still does not expect to generate positive net income
until fiscal 1998 at the earliest.
On November 30, 1996, the Company changed its fiscal year so as to end on the
last Saturday of December in each year. As a result of the foregoing, the
fourth fiscal quarter in respect of the current fiscal year (Fiscal 1996) will
end on December 28, 1996 and the next fiscal year (Fiscal 1997) will begin on
December 29, 1996 and end on December 27, 1997.
Three and nine months ended November 2, 1996 compared to three and nine months
ended October 28, 1995
As more fully discussed below, the condensed consolidated financial statements
of the Company for the nine month period ended November 2, 1996 include
restructuring and other charges aggregating $96.3 million (recognized during
the quarter ended August 3, 1996), which consist of (i) $16.2 million in
connection with the sale of a significant equity interest to GP Holding and
(ii) $80.1 million in connection with the Company's implementation of its
strategic plan to return its core business to profitability and to redeploy
assets.
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 includes publishing operations ("Publishing")
and Penn. The Commercial Products Segment includes the Commercial Printing
Division. During the three months ended November 2, 1996 the Company
established the Entertainment Segment which includes the operations of the
Broadway Video Acquisition (as hereinafter defined).
Revenues
Revenues for the quarter ended November 2, 1996 decreased $15.7 million
(14.9%) to $89.5 million, as compared to $105.2 million for the quarter ended
October 28, 1995, and decreased $55.6 million (19.6%) to $227.8 million for
the nine months ended November 2, 1996 (before giving effect to the $3.4
million reserve adjustment recorded during the quarter ended August 3, 1996 to
resolve differences with customers with a view toward mending and improving
the Company's relationships with its customers), as compared to $283.4 million
for the nine months ended October 28, 1995. The $15.7 million reduction for
the three months ended November 2, 1996 mainly consisted of a reduction of
$15.9 million (17.5%) in Consumer Products Segment revenues to $75.2 million
from $91.1 million for the three months ended October 28, 1995, and a $2.3
million (16.3 %) decrease in Commercial Products Segment revenues to $11.8
million from $14.1 million, offset by $2.5 million attributable to the
Entertainment Segment. The $55.6 million reduction for the nine months ended
November 2, 1996 consisted of a reduction of $56.7 million (23.6%) in Consumer
Products Segment revenues to $184.1 million from $240.8 million for the nine
months ended October 28, 1995 and a $1.4 million (3.5%) decrease in Commercial
Products Segment revenues to $41.2 million from $42.6 million for the nine
months ended October 28, 1995 offset by $2.5 million attributable to the
Entertainment Segment.
The $15.9 million Consumer Products Segment decrease for the quarter ended
November 2, 1996 was comprised of a $13.8 million (17.9%) decrease in
Publishing, a $1.6 (11.9%) million decrease from Penn and a $0.5 million
decrease in miscellaneous revenue. The $56.7 million Consumer Products Segment
decrease for the nine months ended November 2, 1996 was comprised of a $48.2
million (24.5%) decrease in Publishing and an $8.6 million (19.3%) decrease
from Penn. The three and nine month decreases in Publishing consisted of broad
based category declines arising from (i) the discontinuation of the sourcing
and sale of third party ("guest") publisher product for Storyland locations at
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;
15
<PAGE>
(ii) volume reductions arising from resistance from mass retailers to price
increases that the Company implemented beginning in the quarter ended May 4,
1996; (iii) 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; and (iv) the decline in sales of the Company's international
operations, which primarily resulted from product utilizing licenses
associated with major motion pictures released in the fiscal year ended
February 3, 1996 and certain new character licenses not having the consumer
acceptance or longevity of prior years' products. The three and nine month
declines in Penn's revenues were due to a combination of the declining
popularity of products utilizing licensed characters released in prior years,
the success of new products introduced by competitors and the impending loss
of a significant license at the end of the fiscal year ended February 3, 1996.
The Commercial Products Segment, which is comprised of creative, printing and
publishing services to third parties, decreased $2.3 million (16.3%) to $11.8
million for the quarter ended November 2, 1996, as compared to $14.1 million
for the quarter October 28, 1995, and $1.4 million (3.5%) to $41.2 million for
the nine months ended November 2, 1996, as compared to $42.6 million for the
nine months ended October 28, 1995. The decrease for the quarter ended
November 2, 1996 compare to the quarter ended October 28, 1995, was primarily
due to the timing of the revenue recognition of several contracts which will
now be completed during the quarter ended December 28, 1996. For the nine
months there was a general decline in revenue in the educational kit business.
Gross Profit
Gross profit decreased $1.5 million (6.3%) to $22.5 million for the quarter
ended November 2, 1996, as compared to $24.0 million for the quarter ended
October 28, 1995. For the nine months ended November 2, 1996, gross profit,
before consideration of $28.4 million of revenue and cost of sales adjustments
described above, decreased $15.6 million (22.5%) to $53.9 million, as compared
to $69.5 million for the nine months ended October 28, 1995. The $1.5 million
reduction in gross profit for the three months ended November 28, 1996 mainly
consisted of a $2.6 million (11.6%) reduction in Consumer Products Segment
gross profit to $19.8 million from $22.4 million for the three months ended
October 28, 1995, and a $0.5 million (31.3%) decrease in gross profit of the
Commercial Products Segment to $1.1 million from $1.6 million for the three
months ended October 28, 1995, offset by $1.6 million in gross profit from the
Entertainment Segment. The $15.6 million reduction in gross profit for the
nine months ended November 2, 1996, mainly consisted of a $16.3 million
(25.6%) decrease in Consumer Products Segment gross profit to $47.5 million
from $63.8 million for the nine months ended October 28, 1995, combined with a
$0.9 million (15.8%) decrease in gross profit of the Commercial Products
Segment to $4.8 million for the nine months ended November 2, 1996 from $5.7
million for the nine months ended October 28, 1995. As a percentage of
revenues, gross profit margin for the quarter ended November 2, 1996 increased
to 25.1% from 22.8% for the three months ended October 28, 1995 and, before
consideration of $28.4 million of revenue and cost of sales adjustments
recorded in the second quarter of 1996 and described above, decreased to 23.7%
for the nine months ended November 2, 1996 from 24.5% for the nine months
ended October 28, 1995.
The $2.6 million decrease in Consumer Products Segment gross profit for the
three months ended November 2, 1996 consisted of a $3.4 million (16.8%)
decrease in Publishing gross profit to $16.8 million from $20.2 million for
the three months ended October 28, 1995, offset by a $0.3 million (11.1%)
increase in Penn gross profit to $3.0 million from $2.7 million. The $16.3
million reduction in Consumer Products Segment gross profit, before the
revenue and cost of sales adjustments of $28.4 million previously discussed,
for the nine months ended November 2, 1996 consisted of a $13.0 million
(24.5%) decrease in Publishing gross profit to $40.0 million from $53.0
million for the nine months ended October 28, 1995 and a $3.3 million (31.1%)
decrease in Penn gross profit to $7.3 million from $10.6 million for the nine
months ended October 28, 1995. As a percentage of revenues, the Consumer
Products Segment gross profit margin for the three months ended November 2,
1996 increased to 26.3% from 24.6% for the three months ended October 28,
1995. For the nine months ended November 2, 1996, before the $28.4 million
revenue and cost of sales adjustments recorded in the quarter ended August 3,
1996 previously discussed, there was a decrease in the gross profit margin to
25.8%, as compared to 26.5% for the nine months ended October 28, 1995. As a
percentage of revenues, the Publishing gross profit margin for the three
months ended November 2, 1996 increased to 26.5% from 26.2% for the three
months ended October 28, 1995. For the nine months ended November 2, 1996
before the $28.4 million revenue and cost of sales adjustments previously
discussed, the gross profit margin remained unchanged at 26.9% when compared
to the nine months ended October 28, 1995. Penn's gross profit margin
increased to 25.2% for the three months ended November 2, 1996 from 20.0% for
the three months ended October 28, 1995. There was a decrease in Penn's gross
profit margin to 20.5% for the nine months ended November 2, 1996 from 24.0%
for the nine months end October 28, 1995. The decrease in gross profit and
gross profit margin in Publishing was primarily due to increases in licensor
sales costs offset by
16
<PAGE>
reductions in paper prices and by sales price increases. The decreases at Penn
were due to the revenue declines previously discussed.
In the Commercial Products Segment, the gross profit margin for printing
services decreased to 9.3% and 11.7% for the three and nine month periods
ended November 2, 1996, compared to 11.3% and 13.4% for the three and nine
months periods ended October 28, 1995. The decrease in gross profit margins
for the three and nine months ended November 2, 1996 was primarily due to
unfavorable manufacturing variances.
The Entertainment Segment had a 64.0% gross profit margin for the quarter
ended November 2, 1996. The results reported by the Entertainment Segment were
impacted by the transition of the Entertainment segment's operations to the
Company from BVELP and may be subject to adjustment prior to the year-end.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.9 million from $35.7
million to $34.8 million for the three months ended November 2, 1996 compared
to the three months ended October 28, 1995. The decrease for the nine months
ended November 2, 1996, before consideration of $11.0 million of charges
relating to costs associated with management's plans to resolve certain legal
and contractual matters and $16.2 million of expenses related to the
acquisition of an equity interest by GP Holding, was $12.2 million to $83.0
million from $95.2 million for the nine months ended October 28, 1995. These
decreases were primarily the result of significant reductions in employee
expenses attributable to the Company's workforce reduction initiative, which
included a significant sales and merchandising force reorganization, completed
in January 1996. In addition, sales promotion costs, including costs of
corrugated displays, sell sheets and co-operative advertising, declined as
overall volume declines were experienced. The $16.2 million of costs
pertaining to the equity investment by GP Holding included $3.6 million for
severance and transition costs and $12.6 million of costs related to Richard
Snyder's Employment Agreement. The percentage decreases in selling, general
and administrative expenses experienced in the nine months ended November 2,
1996 may not be realized during the quarter ended December 28, 1996 due to the
anticipated incurrence of additional expenses during such quarter attributable
to retaining new management and other upgrading measures relating to the
Company's new strategy.
Interest Expense, net
Interest expense, before consideration of interest income, for the three
months ended November 2, 1996 decreased $0.8 million to $3.0 million, as
compared to $3.8 million for the quarter ended October 28, 1995, and for the
nine months ended November 2, 1996 decreased $1.9 million to $8.3 million, as
compared to $10.2 million for the nine months ended October 28, 1995. The
decrease in interest expense for the nine months ended November 2, 1996 was
due to lower average debt outstanding, as the Company repaid all outstanding
notes under it Revolving Credit Agreement during the quarter ended April 29,
1995, and lower interest rates during the nine months ended November 2, 1996.
Total average outstanding debt decreased to $149.8 million for the nine months
ended November 2, 1996 from $153.9 million for the period ended October 28,
1995 (see "Financial Condition, Liquidity and Capital Resources" below), while
average interest rates decreased to 7.7% for the nine months ended November 2,
1996, as compared to 8.5% for the nine months ended October 28, 1995. The
decrease in average interest rates resulted primarily from changes in the
composition of the average debt outstanding.
Interest income for the three months ended November 2, 1996 increased $1.4
million to $2.0 million from $0.6 million for the three months ended October
28, 1996 and increased $0.3 million for the nine months ended November 2, 1996
to $2.9 million from $2.6 million for the nine months ended October 28, 1995.
The increase was due to increased cash balances resulting from the GPH
Transaction, the Offering of Preferred Securities and the Hallmark Transaction
(all as hereinafter described).
Income Taxes
The Company does not anticipate any significant provision or benefit for
income taxes in the fiscal period ending December 28, 1996. As such,
operations for the nine months ended November 2, 1996 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. The provisions for the three and nine months ended
November 2, 1996 pertained principally to anticipated resolution of
outstanding issues from prior years.
17
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Net Loss
The net loss for the quarter ended November 2, 1996 was $15.5 million, or
$(0.73) per common share, compared to a net loss of $37.5 million, or $(1.79)
per common share, for the quarter ended October 28, 1995. The net loss for the
nine months ended November 2, 1996 was $133.7 million, or $(6.07) per common
share, compared to a net loss of $53.8 million, or $(2.59) per common share,
for the nine months ended October 28, 1995. Results for the nine month period
ended November 2, 1996 included restructuring and other charges aggregating
$96.3 million, as previously discussed, compared to $8.7 million of
restructuring charges for the nine months ended October 28, 1995. The
operations for the nine months ended November 2, 1996 reflect the normal
seasonality of the Company's business.
Financial Condition, Liquidity and Capital Resources
Operations for the nine months ended November 2, 1996, excluding non-cash
charges for restructuring and other charges totaling $80.1 million, non-cash
compensation expenses of $14.3 million, depreciation, amortization, provision
for losses on accounts receivable and other non-cash charges, utilized cash of
approximately $21.7 million. Operations for the nine months ended October 28,
1995, excluding the streamlining plan gain, non-cash charges for
restructuring, depreciation, amortization and the provision for losses on
accounts receivable, utilized cash of approximately $34.5 million. During the
nine months ended November 2, 1996 and October 28, 1995, other changes in
assets and liabilities resulting from operating activities utilized cash of
$9.2 million and provided cash of $7.8 million, respectively, resulting in net
cash used in operating activities of $30.9 million and $26.7 million,
respectively. Acquisitions of property, plant and equipment were $5.4 million
during the nine months ended November 2, 1996, as compared to $12.0 million
during the nine months ended October 28, 1995. Capital expenditures for the
nine months ended November 2, 1996 included costs associated with the
completion of the acquisition of a five unit web press and conveyoring
equipment for the Company's distribution centers. In addition, during the
second quarter of the fiscal year ended February 3, 1996, the Company
commenced a facility expansion of its paper tableware and party goods
operations in Kalamazoo, Michigan, which was completed during the nine months
ended November 2, 1996, at a total cost of $5.1 million, $1.7 million of which
was expended during the nine months ended November 2, 1996.
Working capital at November 2, 1996 was $201.7 million, as compared to $165.3
million at February 3, 1996. The increase resulted from cash received from the
GPH Transaction, the offering of The Preferred Securities and the Hallmark
Transaction, and was partially offset by the Broadway Video Acquisition (as
hereinafter defined) and the investment in property, plant and equipment and
the funding requirements for the Company's operations during the nine months
ended November 2, 1996.
The Company believes that, based on the carrying value of both the assets held
for sale and the inventory to be discontinued or replaced in connection with
the Company's strategic actions, it will realize cash proceeds in excess of
$30.0 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 strategic measures.
As described above, the Company plans to sell its existing manufacturing in
Racine and to build a new facility or renovate an existing facility to
manufacture the core products of the Company. The capital expenditures
relating to such facility will be funded in part through low-cost financing.
In connection with the establishment of the new facility, the Company will
also receive tax credits, as well as wage and benefit reductions and work rule
changes from each of the labor unions.
All of the forgoing financial incentives aggregate approximately $5.7 million.
During the fiscal 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
third quarter of fiscal 1996, there were no trade accounts receivable
outstanding under this program.
Equity Investment
On May 8, 1996, the Company completed the GPH Transaction. GP Holding invested
$65 million of cash in the Company in exchange for 13,000 shares of
newly-issued shares of Series B Preferred Stock and a warrant to purchase
3,250,000 shares of Common Stock (the "Warrant"). The Series B Preferred Stock
has a dividend rate of 12% per annum, is convertible into Common Stock at an
initial conversion price of $10 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 with 195,000 shares of Common Stock,
subject
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<PAGE>
to certain adjustments based on the market price of the Common Stock at the
time that the dividend is paid. Thereafter, Series B Preferred Stock dividends
will be paid in cash. The Warrant, which is not exercisable for the first two
years following issuance, has a seven year term and an initial exercise price
of $10 per share. In connection with the GPH Transaction, the Company's Series
A Preferred Stock was redeemed at its face amount plus accrued dividends.
Offering of Preferred Securities
During August and September 1996, the Company raised a total of $115.0 million
through a private placement of the Preferred Securities under Rule 144A under
the Securities Act. The Preferred Securities were issued by the Trust, a
Delaware business trust financing vehicle. The Company owns all of the common
securities of the Trust. The net proceeds of such offering, after commissions
and expenses, were $110.8 million. The Preferred Securities pay quarterly
distributions at an annual distribution rate of 8-3/4% (subject to any
deferral of interest payments on the Convertible Debentures by the Company and
Golden Books Publishing), have an aggregate liquidation preference of $115.0
million and are convertible at the option of their holders into Convertible
Debentures which are immediately convertible into Common Stock of the Company
at an initial conversion price of $13.00 per share.
Acquisition of Broadway Video Entertainment Assets
On August 20, 1996, pursuant to an Asset Purchase Agreement, dated as of July
30, 1996, among Broadway Video Entertainment, L.P., Broadway Video
Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited Partnership
(collectively, "BVELP"), the Company and certain of the Company's
subsidiaries, the Company acquired, among other things, substantially all of
BVELP's television and film library properties, and assumed payables and all
liabilities
incurred in connection with the exploitation of such assets after the closing,
for an aggregate purchase price of approximately $81.0 million in cash and
$10.0 million in Common Stock (901,408 shares), as provided for in the Asset
Purchase Agreement (the "Broadway Video Acquisition"). On November 22, 1996,
the Company paid an additional $0.9 million to BVELP in satisfaction of the
Company's obligations under the working capital adjustment provided for in the
Asset Purchase Agreement. The Broadway Video Acquisition has been accounted
for under the purchase method of accounting using a preliminary allocation of
the purchase price which will be subject to final adjustment.
Strategic Alliance with Hallmark
On September 6, 1996, the Company completed the sale to H C Crown Corp., a
wholly owned subsidiary of Hallmark, of 2,356,198 shares of Common Stock for
approximately $25.0 million. The sale represented the completion of the first
step in the Company's strategic relationship with Hallmark. The Company and
Hallmark are discussing a further $25.0 million investment by Hallmark in
Common Stock and the terms of their strategic alliance.
FUTECH Agreement
On August 14, 1996, the Company entered into an agreement with FUTECH,
pursuant to which the Company was granted certain rights with respect to
FUTECH's exclusive "talking pages" technology. Pursuant to such agreement, the
Company paid approximately $2 million.
Agreement to Sell Penn Corp
On November 13, 1996, the Company and Peacock Papers, Inc. ("Peacock") signed
a definitive agreement for the sale of the stock of Penn to Peacock. The
transaction is subject to a number of conditions, including, without
limitation, financing by Peacock, and is anticipated to close prior to the
year end.
19
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
1 On August 20, 1996, in connection with the Broadway Video Acquisition,
the Company issued to BVELP 901,408 shares of Common Stock. Such shares
were issued to BVELP as partial consideration ($10.0 million) for the
sale by BVELP to a subsidiary of the Company of substantially all of
BVELP's television and film library properties. Such shares were issued
in connection with a privately negotiated transaction exempt from
registration under the Securities Act pursuant to Section 4(2) therof.
On August 20, 1996, the Company issued $100.0 million of Preferred
Securities. On September 9, 1996, the Company issued an additional $15.0
million of Preferred Securities pursuant to an overallotment option
granted with respect to the $100.0 million offering. The initial
purchasers (the "Initial Purchasers") in respect of the Preferred
Securities were Merrill Lynch & Co., Donaldson, Lufkin & Jenrette
Securities Corporation and SBC Warburg Inc. The Preferred Securities were
sold to the Initial Purchasers in a privately negotiated transaction
exempt from registration under the Securities Act pursuant to Section
4(2) therof. The Preferred Securities subsequently were resold to
qualified institutional buyers in reliance on Rule 144A under the
Securities Act. Golden Books Publishing paid the Initial Purchasers
approximately $3.0 million as compensation for arranging the investment
of the proceeds of the Preferred Securities in the Convertible
Debentures.
On September 6, 1996, the Company sold to H C Crown Corp., a
wholly-owned subsidiary of Hallmark, 2,356,198 shares of Common Stock for
approximately $25.0 million. Such shares were sold in a privately
negotiated transaction exempt from registration under the Securities Act
pursuant to Section 4(2) therof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
<S> <C>
10.1 Amended and Restated Declaration of Trust of Golden Books Financing Trust, dated
August 20, 1996*
10.2 Indenture, dated as of August 20, 1996, between The Bank of New York, as Indenture
Trustee, Golden Books Family Entertainment, Inc. and Golden Books Publishing
Company, Inc.*
10.3 Preferred Securities Guarantee Agreement, dated as of August 20, 1996, between Golden
Books Family Entertainment, Inc. and The Bank of New York, as Guarantee Trustee*
10.4 Registration Rights Agreement, dated August 20, 1996, among Golden Books Financing
Trust, Golden Books Family Entertainment, Inc., Golden Books Publishing Company,
Inc., Merrill Lynch & Co., Donaldson, Lufkin & Jenrette Securities Corporation and SBC
Warburg Inc.*
10.5 Registration Rights Agreement, dated as of September 6, 1996, between Golden Books
Family Entertainment, Inc. and H C Crown Corp.*
10.6 Amendment No. 1 to Asset Purchase Agreement, dated as of August 20, 1996 to Asset
Purchase Agreement, dated as of July 30, 1996 among Broadway Video Entertainment,
L.P., Broadway Video Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited
20
<PAGE>
Partnership, Golden Books Family Entertainment, Inc., Golden Books Publishing
Company, Inc. and LRM Acquisition Corp.*
10.7 Registration Rights Agreement, dated August 20, 1996, between Golden Books Family
Entertainment, Inc. and Broadway Video Entertainment, L.P.*
10.8 License Agreement, dated August 20, 1996, among Broadway Video Enterprises, Inc.,
Broadway Video Entertainment, L.P. and Golden Books Publishing Company, Inc.*
10.9 License Agreement, dated August 20, 1996, among Broadway Video, Inc., Broadway
Video International ltd, and Golden Books Publishing Company, Inc.*
10.10 License Agreement, dated August 20, 1996, between Broadway Video Enterprises, Inc.
and Golden Books Publishing Company, Inc.*
10.11 Trademark License Agreement, dated August 20, 1996, among Broadway Video, Inc.,
Broadway Video Entertainment, L.P., Golden Books Publishing Company, Inc. and LRM
Acquisition Corp.*
10.12 Sublease Agreement, dated as of August 20, 1996, between Broadway Video, Inc. and
LRM Acquisition Corp.*
10.13 Amended and Restated Employment Agreement, dated as of August 20, 1996, between
Golden Books Family Entertainment, Inc. and Richard E. Snyder*
10.14 Amended and Restated Non-Recourse Promissory Note, dated as of August 20, 1996,
executed by Richard E. Snyder in favor of Golden Books Family Entertainment, Inc.*
10.15 Amended and Restated Pledge Agreement, dated as of August 20, 1996, executed by
Richard E. Snyder*
27.1 Financial Data Schedule
* Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 3, 1996.
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated August 20,
1996, as amended by a Current Report on Form
8-K/A filed on October 15, 1996, reporting an
Item 2 "Acquisition or Disposition of Assets"
was filed with the Securities and Exchange
Commission.
A Current Report on Form 8-K, dated September
6, 1996, reporting Item 5 "Other Events" was
filed with the Securities and Exchange
Commission.
A Current Report on Form 8-K, dated September
25, 1996, reporting Item 5 "Other Events" was
filed with the Securities and Exchange
Commission.
A Current Report on Form 8-K, dated December
15, 1996, reporting an Item 8 "Change in
Fiscal Year" was filed with the Securities and
Exchange Commission.
</TABLE>
21
<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 thereunto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
December 13, 1996 /s/ Richard E. Snyder
------------------------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
December 13, 1996 /s/ Philip E. Rowley
------------------------------------
Philip E. Rowley
Executive Vice President and
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> NOV-02-1996
<CASH> 113,757
<SECURITIES> 0
<RECEIVABLES> 82,971
<ALLOWANCES> 12,278
<INVENTORY> 32,011
<CURRENT-ASSETS> 247,288
<PP&E> 106,245
<DEPRECIATION> 53,563
<TOTAL-ASSETS> 400,149
<CURRENT-LIABILITIES> 45,614
<BONDS> 149,859
111,524
65,000
<COMMON> 258
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 400,149
<SALES> 224,397
<TOTAL-REVENUES> 224,397
<CGS> 198,952
<TOTAL-COSTS> 349,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,340
<INCOME-PRETAX> (133,093)
<INCOME-TAX> 596
<INCOME-CONTINUING> (133,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133,689)
<EPS-PRIMARY> (6.07)
<EPS-DILUTED> 0
<FN>
For the attached financials, the value EPS-DILUTED is not applicable
</TABLE>
