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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 March 29, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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(Address of principal executive offices) (Zip Code)
(212) 583-6700
(Registrant's telephone number, including area code)
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(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: 26,376,842 shares outstanding as of
May 5, 1997.
1
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- 3
March 29, 1997 (Unaudited) and
December 28, 1996
Condensed Consolidated Statements of Operations-- 5
Three months ended March 29, 1997 and
March 30, 1996 (Unaudited)
Condensed Consolidated Statements of Cash Flows-- 6
Three months ended March 29, 1997 and
March 30, 1996 (Unaudited)
Notes to Condensed Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 15
SIGNATURES 16
2
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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)
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<TABLE>
<CAPTION>
ASSETS MARCH 29, DECEMBER 28,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 117,734 $ 139,686
Accounts receivable, net 39,182 41,415
Inventories 23,788 27,608
Net assets held for sale 19,553 19,779
Other current assets 14,590 12,385
----------------- -----------------
Total current assets 214,847 240,873
----------------- -----------------
OTHER ASSETS
Accounts receivable - long term 1,700 1,001
Other noncurrent assets 12,198 8,102
----------------- -----------------
Total other assets 13,898 9,103
----------------- -----------------
PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
of $42,021 as of March 29, 1997 and $40,672 as of December 28, 1996
27,813 27,504
FILM LIBRARY, net of accumulated amortization of $1,894 as of March 29, 1997 and
$1,082 as of December 28, 1996 59,856 60,668
GOODWILL, net of accumulated amortization of $705 as of March 29, 1997 and $405 as
of December 28, 1996 28,787 29,087
----------------- -----------------
TOTAL ASSETS $ 345,201 $ 367,235
================= =================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
3
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
MARCH 29, DECEMBER 28,
1997 1996
---- ----
<S> <C> <C>
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 22,382 $ 21,638
Accrued compensation and fringe benefits 3,204 5,787
Other current liabilities 33,772 45,238
----------------- -----------------
Total current liabilities 59,358 72,663
----------------- -----------------
NONCURRENT LIABILITIES
Long term debt 149,867 149,862
Accumulated postretirement benefit obligation 29,072 28,787
Deferred compensation and other deferred liabilities 24,708 25,072
----------------- -----------------
Total noncurrent liabilities 203,647 203,721
----------------- -----------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS
PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES
110,536 110,488
STOCKHOLDERS' DEFICIT:
Convertible Preferred Stock - Series B, 13,000 shares authorized,
no par value, 13,000 shares issued and outstanding; 65,000 65,000
Common Stock, $.01 par value, 60,000,000 shares authorized,
25,986,842 and 25,964,711 shares issued as of March 29, 1997 and
December 28, 1996, respectively 260 259
Additional paid in capital 120,601 120,376
Accumulated deficit (209,983) (201,111)
Cumulative translation adjustments (1,396) (1,339)
----------------- -----------------
(25,518) (16,815)
Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822
----------------- -----------------
Total stockholders' deficit (28,340) (19,637)
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 345,201 $ 367,235
================= =================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
4
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except for Per Share Data)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 29, MARCH 30,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
REVENUES:
Net sales $ 65,624 $ 67,314
Royalties and other income 192 653
------------------ ------------------
Total revenues 65,816 67,967
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COSTS AND EXPENSES:
Cost of sales 45,001 47,217
Selling, general and administrative 26,125 26,789
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Total costs and expenses 71,126 74,006
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LOSS BEFORE DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY,
INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, AND (BENEFIT)
PROVISION FOR INCOME TAXES (5,310) (6,039)
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES 2,516 -
INTEREST EXPENSE, NET OF INTEREST INCOME OF $1,900 AND $275,
RESPECTIVELY 1,054 3,150
------------------ ------------------
LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES
(8,880) (9,189)
(BENEFIT) PROVISION FOR INCOME TAXES (8) 1,511
------------------ ------------------
NET LOSS $ (8,872) $ (10,700)
================== ==================
NET LOSS PER COMMON SHARE $ (0.41) $ (0.50)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 29, MARCH 30,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,872) $ (10,700)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 2,603 4,632
Provision for losses on accounts receivable 616 (1,334)
Changes in assets and liabilities:
Decrease in accounts receivable 918 19,760
Decrease in inventories 3,820 2,817
Increase in refundable income taxes - (2,492)
(Increase) decrease in other current assets and
royalty advances (2,204) 4,444
Increase (Decrease) in accounts payable 744 (4,523)
Decrease in accrued compensation and fringe
benefits (2,583) (4,694)
Increase in deferred income taxes - 4,279
Other assets and liabilities (12,504) (7,293)
------------------ ------------------
Net cash (used in) provided by operating
activities (17,462) 4,896
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (1,658) (5,886)
Collateral for letter of credit associated with lease
for new corporate office (3,000) -
------------------ ------------------
Net cash used in investing activities (4,658) (5,886)
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
6
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 29, MARCH 30
1997 1996
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 226 -
------------------ ------------------
Net cash provided by financing activities 226 -
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(58) (108)
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(21,952) (1,098)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
139,686 33,840
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 117,734 $ 32,742
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest and distribution on Guaranteed
Preferred Beneficial Interests in the
Company's and Golden Books Publishing Company,
Inc.'s Convertible Debentures $ 8,253 $ 5,623
================== ==================
Income taxes, net of refunds received $ (27) $ (184)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
7
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of March 29, 1997 and the results of operations and cash
flows for the three month periods ended March 29, 1997 and March 30, 1996.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements of Golden Books Family
Entertainment, Inc. and Subsidiaries (the "Company") contained in the Company's
Form 10-K for the eleven month period ended December 28, 1996.
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 first
quarter of fiscal 1997 ended on March 29, 1997 and the comparable period of the
prior year ended on March 30, 1996. Certain reclassifications have been made to
the prior year condensed consolidated financial statements to conform with
current year presentation.
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 and fourth fiscal quarters.
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, which is the issuer of 8 3/4% Convertible Trust
Originated Preferred Securities, referred to in the Company's financial
statements as "the 8 3/4% Guaranteed Preferred Beneficial Interests in the
Company's and Golden Books Publishing Company Inc.'s Convertible Debentures"
(the "Preferred Securities"), is wholly owned by the Company, has no
independent operations and its assets consist solely of the $118.6 million in
aggregate principle amount of 8 3/4% Convertible Debentures due 2016 of the
Company and Golden Books Publishing Company, Inc. ("Golden Books Publishing")
(see Note D). The obligations of the Trust, which consist of the Preferred
Securities, are fully and unconditionally guaranteed by the Company.
NOTE B - Inventories
Inventories consisted of the following:
March 29, 1997 December 28, 1996
(In thousands)
Raw materials $ 2,506 $ 2,810
Work-in-process 3,080 1,829
Finished goods 14,952 19,719
Film library 3,250 3,250
----- -----
$23,788 $27,608
======= =======
NOTE C - Net Assets Held for Sale
As of March 28, 1997, net assets held for sale totaling approximately $19.6
million included, (i) the Fayetteville facility, which was closed in
conjunction with the sale of the Company's game and puzzle business, (ii) the
Cambridge facility, which is a part of the Commercial Printing Division, (iii)
the Fulford Street facility and (iv) the Creative Center, a facility of Golden
Books Publishing.
NOTE D - Preferred Securities
During the eleven months ended December 28, 1996, the Company raised a total of
$115.0 million through a private placement of Preferred Securities under Rule
144A under the Securities Act of 1933, as amended (the "Securities Act").
8
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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
approximately $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 Preferred Securities 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. The carrying amount of the
Preferred Securities approximates its fair value. Effective January 10, 1997,
the Company registered the resale of the Preferred Securities with the
Securities and Exchange Commission.
The Company and its subsidiary, Golden Books Publishing, are joint and several
obligors of the Preferred Securities and they have fully and unconditionally
guaranteed the Trust's obligations under the Preferred Securities. Separate
financial statements of Golden Books Publishing are not presented in their
entirety as the separate financial statements would not be materially different
from the consolidated financial statements of the Company. Summarized financial
statements of Golden Books Publishing as of and for the three months ended
March 28, 1997 are as follows (in thousands):
Current assets $ 166,303
Noncurrent assets 126,245
==================
Total Assets $ 292,548
==================
Current liabilities $ 100,538
Noncurrent liabilities 195,657
------------------
Total Liabilities 296,195
Preferred Securities 110,536
Stockholders' Deficit (114,183)
==================
Total Liabilities and Stockholders' Deficit $ 292,548
==================
Revenues $ 65,816
Gross profit 20,815
Loss before interest expense and benefit for income taxes (4,213)
Net loss (8,478)
The Indenture covering the Company's 7.65% Senior Notes due 2002 restricts the
ability of Golden Books Publishing to pay cash dividends or make other cash
distributions to the Company.
NOTE E - Loss Per Common Share
Loss per common share was computed as follows:
Three Months Ended
March 29, March 30,
1997 1996
(In thousands except for per share data)
Net loss $ (8,872) $(10,700)
Preferred dividend requirements (1,877) (212)
----------- -----------
Loss applicable to common stock $(10,749) $(10,912)
========= ===========
Weighted average common shares outstanding 25,983 21,669
========== ==========
Loss per common share $ (0.41) $ (0.50)
=========== ==========
9
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share" ("Opinion 15").
FAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS which excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. The statement also requires dual presentation of basic EPS
and diluted EPS on the face of the income statement of all periods presented.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15,
with some modifications. FAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. Early
adoption is not permitted and the statement requires restatement of all
prior-period EPS data presented after the effective date. The Company has not
yet determined whether the implementation of FAS 128 will have any impact on
the Company's per share amounts.
NOTE F - Contingencies
Golden Books Publishing and Penn Corporation ("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. In all cases
except those described below, the Company has resolved its liability or is in
the process of resolving its liability for amounts deemed not material.
Although the Company divested Penn in December, 1996, the Company has agreed to
indemnify Peacock Papers, Inc., the purchaser of Penn, against certain of
Penn's environmental liabilities, including the Cork Street Landfill and
Fulford Street Property, as discussed below.
The Wisconsin Department of Natural Resources (the "WDNR") alleges that the
Company is a responsible party for drums found at a site located in
unincorporated Racine County. The WDNR and the Company have entered into an
agreement which requires the Company to remove drums and soil from the site.
The disposal of these drums dates back almost 30 years. Golden Books Publishing
did not authorize disposal of its waste drums at the site. The Company's
obligations pursuant to this Agreement will be completed by mid-1997 at a cost
of less than $150,000.
At the Hunt's Landfill site in Racine County, Wisconsin, 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 the 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.
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 clean-up 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 of $625,000 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 reached a tentative allocation and are in the process
of negotiating a Consent Decree which will establish the Company's future
responsibilities at the site.
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.
On October 2, 1996, the Company received notice from the City Attorney of
Kalamazoo, Michigan that Beach Products, a division of Penn, will be asked to
participate in the remediation of the Cork Street Landfill site located in the
city, which was allegedly used by Beach Products in the past. Current cost
estimates for the remediation required at the site are as high as $24 million.
More that 70 entities will be requested to provided financial contribution to
the remediation.
On November 14, 1996, the Michigan Department of Environmental Quality
requested that corrective actions be taken as a result of the discovery of a
leaking underground storage tank system at the Fulford Street Property of the
Company on
10
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November 8, 1996. An initial site assessment is being completed by the
Company's outside consultant. Preliminary estimates indicate that the costs
associates with this release should not exceed $300,000.
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 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
resulting from lost profits and unpaid royalties. The Court recently granted
Golden Books Publishing's partial motion for summary judgment and held that the
defendant is precluded from recovering lost profits. Accordingly, the
defendant's damage claim is now limited to its unpaid royalties of $1.2
million. Golden Books Publishing denies that it has any liability to the
defendant.
In consideration of the aforementioned matters, the Company has recorded
accruals in the deferred compensation and other deferred liabilities account in
its condensed consolidated balance sheet on March 29, 1997.
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.
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.
11
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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 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND, AS SUCH, MAY INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE
OPERATIONS 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 Golden Books Family
Entertainment, Inc. and Subsidiaries (the "Company") for the three months ended
March 29, 1997 and March 30, 1996 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, Golden Press Holding, LLC, an investment vehicle formed
by Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested
$65.0 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 its 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 as described in prior periodic reports of the Company.
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 1998 at
the earliest.
THREE MONTHS ENDED MARCH 29, 1997 COMPARED TO THREE MONTHS ENDED MARCH 30, 1996
Historically, the Company has reported operating results under two segments:
(i) the Consumer Products Segment; and (ii) the Commercial Products Segment. In
addition, for the quarter ended March 29, 1997 the operating results of the
Entertainment Group (acquired on August 20, 1996) are reported separately as
the Entertainment Segment. The Consumer Products Segment includes publishing
operations ("Publishing") and, during the quarter ended March 30, 1996, Penn
Corporation ("Penn"), which was sold on December 23, 1996. The Commercial
Products Segment includes the Commercial Printing Division. The Entertainment
Segment includes home video, television program licensing, merchandising and
other character licensing.
Revenues
Revenues for the quarter ended March 29, 1997 decreased $2.2 million (3.2%) to
$65.8 million compared to $68.0 million for the quarter ended March 30, 1996.
Consumer Products Segment revenues decreased $12.6 million (24.0%) to $39.9
million for the quarter ended March 29, 1997 compared to $52.5 million for the
quarter ended March 30, 1996. The decrease resulted substantially from the sale
of Penn, which was sold in December of 1996. Revenues of $12.1 million for Penn
are included in the quarter ended March 30, 1996. Publishing revenues remained
consistent from period to period with a decrease in revenues from electronic
storybooks being offset by increases in the Company's Classic core Children's
Publishing.
12
<PAGE>
Commercial Products Segment revenues increased $0.2 million (1.2%) to $15.8
million for the quarter ended March 29, 1997 compared to $15.6 million for the
quarter ended March 30, 1996.
Entertainment Segment revenues for the quarter ended March 29, 1997 were $10.1
million.
Gross Profit
Gross profit increased $0.1 million (0.3%) for the quarter ended March 29, 1997
to $20.8 million compared to $20.7 million for the quarter ended March 30, 1996.
The gross profit for the quarter ended March 30, 1996 was impacted by an
inventory valuation adjustment of $2.7 million which reduced cost of goods sold.
As a percentage of revenues, the gross profit margin increased to 31.6% for
the quarter ended March 29, 1997 from 30.5% for the quarter ended March 30,
1996. In the Consumer Products Segment gross profit decreased $5.7 million
(29.6%) to $13.6 million for the quarter ended March 29, 1997 compared to
$19.3 million for the quarter ended March 30, 1996. As a percentage of revenues
the gross profit margin decreased to 33.9% for the quarter ended March 29,
1997 from 36.7% for the quarter ended March 30, 1996. The decrease in Consumer
Products Segment gross profit resulted from the exclusion of gross profit
associated with Penn ($3.7 million for the quarter ended March 30, 1996),
offset by manufacturing cost reductions and the impact of the $2.7 million
inventory valuation adjustment described above. The decrease in the Consumer
Products Segment gross profit margins were due primarily to the inventory
valuation adjustment in the quarter ended March 30, 1996 and manufacturing
cost savings achieved during the quarter ended March 29, 1997. Commercial
Products Segment gross profit increased $0.3 million (20.6%) to $1.9 million
for the quarter ended March 29, 1997 compared to $1.6 million for the quarter
ended March 30, 1996 and as a percentage of revenues, the gross profit margin
increased to 12.4% for the quarter ended March 29, 1997 compared to 10.4% for
the quarter ended March 30, 1996. The increase in Commercial Products Segment
gross profit and the gross profit margin was primarily due to manufacturing
variances which reduced manufacturing costs during the quarter ended March
29, 1997. The Entertainment Segment gross profit was $5.3 million. As a
percentage of revenues, the gross profit margin was 52.4%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses before consideration of $2.8
million of one time transition costs associated with the redirection of the
Company (comprising consulting costs of $1.3 million and Information Systems
changeover costs of $1.5 million) decreased $3.5 million to $23.3 million for
the quarter ended March 28, 1997 compared to $26.8 million for the quarter
ended March 30, 1996. The decreases were primarily due to the Company's
headcount reduction program, reductions in sales promotion costs and was also
impacted by the disposal of Penn and the acquisition of the Entertainment
Segment.
Interest Expense, net
Interest income for the quarter ended March 29, 1997 increased $1.6 million to
$1.9 million from $0.3 million for the quarter ended March 30, 1996. The
increase was due to increased cash balances resulting from (1) the sale of the
Company's Series B Convertible Preferred Stock to Golden Press Holding, LLC for
an aggregate purchase price of $65.0 million in May of 1996, (2) issuance of
Preferred Securities (defined hereafter) for $115.0 million in August of 1996
and (3) the sale of the Company's common stock for $25.0 million to HC Crown
Corporation, an affiliate of Hallmark Cards, Incorporated, in September of
1996, partially offset by the purchase of substantially all the assets of
Broadway Video Entertainment, L.P. in part for $81.0 million in cash, in August
of 1996 and the redemption of the Company's Series A Preferred Stock for $10.6
million in May of 1996.
Net interest expense (including the distributions on the guaranteed preferred
beneficial interest in the Company's and Golden Books Publishing's Convertible
Debentures (the "Preferred Securities") for the three months ended March 29,
1997 increased by $0.5 million to $3.6 million as compared to $3.1 million for
the quarter ended March 30, 1996. The increase in net interest expense was
primarily due to higher average debt outstanding resulting from the issuance of
the Preferred Securities in August of 1996 offset by higher levels of interest
income as described above. Total average outstanding debt (including the
Preferred Securities) increased to $265.0 million in the quarter ended March
29, 1997 compared to $149.8 million in the quarter ended March 30, 1996.
<PAGE>
Income Taxes
The Company does not anticipate any significant provision or benefit for income
taxes in the fiscal period ending December 27, 1997. As such, operations for
the three months ended March 29, 1997 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
13
<PAGE>
valuation allowance was established. The provision for the three months ended
March 30, 1996 pertained principally to anticipated resolution of outstanding
issues from prior years.
Net Loss
The net loss for the quarter ended March 29, 1997 was $(8.9) million, or
$(0.41) per common share, compared to a net loss of $(10.7) million, or $(0.50)
per common share, for the quarter ended March 30, 1996. The improvement was due
to the factors described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Operations for the quarter ended March 29, 1997, excluding one time transition
costs of $2.8 million resulting from the strategic redirection of the Company
and payments of restructuring costs accrued during the period ended December
28, 1996 of $1.2 million, utilized cash of approximately $13.4 million compared
to cash provided of $4.9 million for the quarter ended March 30, 1996. The
major source of operating cash flow in the quarter ended March 30, 1996 was
cash collections relating to sales made in the quarter ended December 30, 1995
which exceeded sales made in the quarter ended December 28, 1996 by
approximately $26 million. Acquisitions of property, plant and equipment were
$1.6 million during the three months ended March 29, 1997, as compared to $5.9
million during the three months ended March 30, 1996.
Working capital at March 29, 1997 was $155.5 million, as compared to $168.2
million at December 28, 1996. The decrease resulted from the investment in
property, plant and equipment and the funding requirements for the Company's
operations during the three months ended March 29, 1997.
The Company expects to spend approximately $17.7 million attributable to
transition costs to be incurred in connection with its strategic plan during
the remainder of fiscal 1997. As of March 29, 1997, the Company maintained
sufficient accruals for restructuring costs which are expected to be paid out
during the remainder of fiscal 1997.
The Company believes that, based on the carrying value of both certain assets
held for sale and inventory to be discontinued or replaced in connection with
the Company's strategic actions, it will realize cash proceeds in excess of
$20.0 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.
Additionally, the Company plans to sell its existing manufacturing facility in
Racine, Wisconsin and build a new facility to manufacture the core products of
the Company. The capital expenditures relating to such a 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 incentives, as well as
wage and benefit reductions and work rule changes from each of the labor
unions. All of the foregoing financial incentives aggregate approximately $5.0
million.
As of March 29, 1997, the Company had approximately $118 million in cash and
cash equivalents. The Company believes that such amounts will be sufficient to
fund working capital needed for the foreseeable future and to pursue strategic
opportunities, including acquisitions and joint ventures. It is not possible to
ascertain the effect on the Company's liquidity that would result from
potential future acquisitions, dispositions or debt repurchases. The Company
expects to evaluate all viable forms of financing when examining potential
future acquisitions or its capital structure. This could take the form of,
among other things, additional sales of stock or notes, bank and/or
institutional borrowings, or seller financing, as well as internally generated
funds. 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.
The Indenture covering the Company's 7.65% Senior Notes due 2002 restricts the
ability of Golden Books Publishing to pay cash dividends or make other cash
distributions to the Company.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
<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.
May 13, 1997 /s/ Richard E. Snyder
----------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
May 13, 1997 /s/ Philip E. Rowley
---------------------
Philip E. Rowley
Executive Vice President and
Chief Financial Officer
16
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