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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 September 26, 1998
------------------
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
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
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(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.)
888 Seventh Avenue, New York, New York 10106
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(Address of principal executive offices) (Zip Code)
(212) 547-6700
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(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: 27,899,047 shares outstanding as of
November 5, 1998.
1
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
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TABLE OF CONTENTS
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Page
Number
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
September 26, 1998 (Unaudited) and December 27, 1997 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss--Three months ended September
26, 1998 and September 27, 1997 (Unaudited) 5
Condensed Consolidated Statements of Operations and Comprehensive
Loss-- Nine months ended September 26, 1998 and September 27,
1997 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows--
Nine months ended September 26, 1998 and September 27, 1997 7
(Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 3. Default Upon Senior Notes 23
Item 6. Exhibits and reports on Form 8-K 23
SIGNATURES 24
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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)
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ASSETS SEPTEMBER 26, DECEMBER 27,
1998 1997
---- ----
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 15,004 $ 57,411
Accounts receivable, net 51,746 51,153
Inventories 43,149 34,659
Net assets held for sale 10,086 9,873
Other current assets 24,594 17,250
------------ -----------
Total current assets 144,579 170,346
------------ -----------
OTHER ASSETS
Accounts receivable - long term 4,846 3,207
Other noncurrent assets 17,330 17,126
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Total other assets 22,176 20,333
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PROPERTY PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization
of $38,657 as of September 26, 1998 and
$39,620 as of December 27, 1997 44,569 38,256
FILM LIBRARY, net of accumulated
amortization of $8,205 as of September
26, 1998 and $4,364 as of December 27, 1997 63,613 63,638
GOODWILL, net of accumulated amortization
of $2,505 as of September 26, 1998 and
$1,605 as of December 27, 1997 29,691 30,591
------------ -----------
TOTAL ASSETS $ 304,628 $ 323,164
============ ===========
See Notes to Condensed Consolidated
Financial Statements
3
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
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LIABILITIES AND STOCKHOLDERS' DEFICIT
SEPTEMBER 26, DECEMBER 27,
1998 1997
---- ----
(unaudited)
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CURRENT LIABILITIES
Accounts payable $ 25,148 $ 21,454
Revolving credit facility 27,415 -
Current portion long term debt 149,914 -
Notes payable 10,000 -
Accrued compensation and fringe benefits 1,737 5,887
Other current liabilities 53,397 47,225
---------- ---------
Total current liabilities 267,611 74,566
---------- ---------
NONCURRENT LIABILITIES
Long term debt - 149,897
Accumulated post-retirement benefit obligation 29,521 29,365
Deferred compensation and other deferred liabilities 28,211 19,938
---------- ---------
Total noncurrent liabilities 57,732 199,200
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GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY,
INC.'S CONVERTIBLE DEBENTURES 110,879 110,707
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, 27,899,047 and 26,887,313 shares issued
as of September 26, 1998 and December 27, 1997,
respectively 279 269
Additional paid in capital 128,957 128,533
Accumulated deficit (321,152) (250,791)
Cumulative foreign translation adjustments (1,856) (1,498)
--------- ---------
(128,772) (58,487)
Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822
--------- ---------
Total stockholders' deficit (131,594) (61,309)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 304,628 $ 323,164
========== =========
</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 AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)
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THREE MONTHS ENDED
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SEPTEMBER 26, SEPTEMBER 27,
1998 1997
---- ----
(unaudited)
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REVENUES $ 52,019 $ 53,341
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COSTS AND EXPENSES:
Cost of sales 45,430 37,742
Selling, general and administrative 19,807 29,421
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Total costs and expenses 65,237 67,163
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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
FOR INCOME TAXES (13,218) (13,822)
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES 2,516 2,516
INTEREST EXPENSE, NET OF INTEREST INCOME OF $205 AND $1,325 ,
RESPECTIVELY 3,316 1,637
------------------ ------------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (19,050) (17,975)
BENEFIT FOR INCOME TAXES (200) (76)
------------------ ------------------
NET LOSS (18,850)
(17,899)
OTHER COMPREHENSIVE LOSS :
FOREIGN CURRENCY TRANSLATION (199) (197)
------------------ ------------------
COMPREHENSIVE LOSS $ (19,049) $ (18,096)
================== ==================
NET LOSS PER BASIC COMMON SHARE $ (0.71) $ (0.76)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
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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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NINE MONTHS ENDED
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SEPTEMBER 26, SEPTEMBER 27,
1998 1997
---- ----
(unaudited)
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REVENUES $ 141,699 $ 169,788
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COSTS AND EXPENSES:
Cost of sales 124,241 118,239
Selling, general and administrative 72,493 78,193
------------------ ------------------
Total costs and expenses 196,734 196,432
------------------ ------------------
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
FOR INCOME TAXES (55,035) (26,644)
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES 7,548 7,548
INTEREST EXPENSE, NET OF INTEREST INCOME OF $1,230 AND $4,903,
RESPECTIVELY 8,235 3,970
------------------ ------------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (70,818) (38,162)
BENEFIT FOR INCOME TAXES (457) (99)
------------------ ------------------
NET LOSS (70,361) (38,063)
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION (358) (155)
------------------ ------------------
COMPREHENSIVE LOSS $ (70,719) $ (38,218)
================== ==================
NET LOSS PER BASIC COMMON SHARE $ (2.77) $ (1.69)
================== ==================
</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)
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NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
---- ----
(unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (70,361) $ (38,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 9,642 8,016
Gain on sale of equipment (331) -
Provision for losses on accounts receivable (485) 1,460
Other non-cash 1,180 (84)
Changes in assets and liabilities:
Increase in accounts receivable (1,747) (5,456)
Increase in inventories (8,490) (14,253)
Increase in other current assets (7,344) (5,458)
Increase in accounts payable 3,694 485
(Decrease) increase in accrued compensation and
fringe benefits (4,150) 539
Increase (decrease) other assets and liabilities 13,754 (15,233)
------------------ ------------------
Net cash used in operating activities (64,638) (68,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (11,840) (11,898)
Proceeds from sale of equipment 661 -
Additions to film library (3,816) (5,207)
Collateral for letter of credit associated with lease
for new corporate office - (7,186)
------------------ ------------------
Net cash used in investing activities (14,995) (24,291)
See Notes to Condensed Consolidated
Financial Statements
</TABLE>
7
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
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NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
---- ----
(unaudited)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facility $ 27,415 $ -
Net proceeds from notes payable 10,000 -
Common stock transactions 169 1,555
------------------ ------------------
Net cash provided by financing activities 37,584 1,555
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(358) (78)
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (42,407) (90,861)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 57,411 139,686
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,004 $ 48,825
================== ==================
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 $ 13,643 $ 19,021
================== ==================
Income taxes, net of refunds received $ 26 $ (276)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
8
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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 of Golden Books Family Entertainment, Inc. and Subsidiaries
(the "Company") as of September 26, 1998 and the results of operations and cash
flows for the three month and nine month periods ended September 26, 1998 and
September 27, 1997. 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 December 27, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. 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.
As discussed in Note B, the Company's recurring losses from operations,
liquidity and its ability to restructure existing debt with its creditors
and net capital deficiency raise substantial doubt about its ability to
continue as a going concern. These condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
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 condensed
consolidated 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 (the "TOPrS") of the Company and Golden Books Publishing Company, Inc.
("Golden Books Publishing") (see Note G). The obligations of the Trust, which
consist of the Preferred Securities, are fully and unconditionally guaranteed
by the Company. All material intercompany items and transactions have been
eliminated.
NOTE B - Liquidity and Business Outlook
------------------------------
On September 15, 1998, the Company announced that it was deferring, a $5.7
million interest payment on the 7.65% senior notes due 2002 (the "Senior
Notes") due on such date for a 30-day grace period in accordance with the
Indenture ("Indenture") governing the Senior Notes. Subsequently, on October
15, 1998, the Company announced that it would not pay the September 15th
interest payment. Accordingly, at October 15, the Company is in default under
the Indenture and as a result, the holders of the Senior Notes, at their
option, have the right (i) to demand that the entire $150.0 million principal
amount of the Senior Notes is currently due and payable and (ii) to foreclose
on the collateral securing the Senior Notes in accordance with the terms of the
Indenture and the Security Agreement between the Company and the Indenture
Trustee dated June 2, 1998. The Company does not have sufficient resources to
repay this obligation. As a result of the default, the Senior Notes have been
classified as a current liability on the accompanying condensed consolidated
balance sheet. The Company has not been informed of any such acceleration.
Due to the default under the Senior Notes, cross-default provisions regarding
the Company's $30.0 million Revolving Credit Facility (as defined) with
NationsCredit and its $25 million Loan Facility (as defined) with Golden
Press Holdings, LLC, (see Note F) have resulted in defaults under such
agreements. Accordingly, the lenders under the Revolving Credit Facility and
the Loan Facility have the right, at their option, to demand the acceleration
of all amounts
9
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due thereunder. The Company does not have sufficient resources to repay these
obligations. The Company has not been informed of any such acceleration.
The Company has been negotiating with a steering committee (the "Committee")
representing approximately $100 million of the Senior Notes. The Company is
completing a standstill agreement with the Committee pursuant to which the
Committee would agree to take no action against the Company through February
16, 1999, including no action with regard to the Company's decision not to make
the September 15th interest payment on the Senior Notes. As part of the
standstill agreement, it is contemplated that the Company's indebtedness under
the Senior Notes will be further supported by a lien on specified additional
collateral of the Company. The standstill agreement is subject to final
negotiation and execution of definitive documentation.
On November 4, 1998, the Company received a commitment letter from the CIT
Group pursuant to which, and subject to the execution of definitive
documentation and certain other conditions, including the CIT Group's
satisfaction with the terms and conditions of any standstill agreement, the
Company may borrow an aggregate amount of up to $45.0 million to be secured by
a lien on , among other things, the Company's inventory, receivables, trade
name and other intellectual property assets. Under the terms of the agreement,
the Company will pay a commitment fee of $1.1 million. Such financing
arrangements will be used to repay the Company's current $30.0 million
Revolving Credit Facility, which will be repaid out of a portion of the
proceeds of the new loan with the remainder being used for working capital
purposes.
In connection with the foregoing standstill and financing arrangements and,
upon terms and conditions to be finalized, Golden Press Holdings, LLC ("GPH")
will agree to convert its secured loan of $10.0 million to an unsecured
obligation. GPH will also waive and release the collateral heretofore granted
to it with respect to the previous borrowing, and will be relieved of its
obligations to loan up to an additional $15.0 million to the Company.
The Company also decided on November 5, 1998 that, pursuant to the documents
concerning the TOPrS it would exercise its right to defer the payment of
$2.5 million interest due on the TOPrS from November 20, 1998 until February
20, 1999. The Company also announced that in accordance with the consent of the
holders of its Series B Preferred Stock, the dividend due November 1, 1998 on
the Series B Preferred Stock would not be declared or paid.
The Company is also in the process of restructuring its financing in order to
remedy its liquidity deficiency and evaluating the potential sale of certain
business and operating assets. Due to the financial performance of the Company,
the Company is currently evaluating whether there has been an impairment to
goodwill and other long-lived assets and is assessing the actions necessary
which could include restructuring, reduction of costs and other actions, all of
which could result in substantial 1998 year end charges. The Company will be
conducting discussions with the Committee, as well as with representatives of
certain holders of TOPrS representing 56% of the approximately $110 million
aggregate principal amount with respect to an overall restructuring of the
Company's indebtedness. However, there can be no assurance that an agreement
will be reached with either the Committee or the representatives of the TOPrS
holders, or that any proposed restructuring plan will be implemented. If the
Company is not successful in reaching an agreement with respect to the
restructuring of its debt, and the Company cannot obtain additional capital,
the Company may be forced to seek other alternatives, including protection
under applicable bankruptcy laws.
As of September 26, 1998, the Company had a $123.0 million working capital
deficiency. This included approximately $15.0 million in cash and cash
equivalents.
NOTE C - Recent Accounting Pronouncements
--------------------------------
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which is effective for fiscal years beginning after December 15, 1997.
FAS 130 established new rules for the reporting and display of comprehensive
income and its components. FAS 130 requires the Company's foreign currency
translation adjustments, which are currently reported in stockholders' deficit,
to be included in other comprehensive income and the disclosure of total
comprehensive income. The Company adopted the requirements in the first quarter
of 1998.
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DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for fiscal
years beginning after December 15, 1997. FAS 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Although FAS 131
need not be applied to interim financial statements in the initial year of its
application, comparative information for interim periods in the initial year of
application must be reported in financial statements for interim periods in the
second year of application. Management has not yet completed its review of FAS
131, but its adoption will not have a material effect on the Company's
statement of position or revenues, only on the composition of its reportable
segments.
EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions
and Other Post-Retirement Benefits" ("FAS 132"), which is effective for fiscal
years beginning after December 15, 1997. FAS 132 standardizes the disclosure
requirements for pension and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain disclosure. FAS 132 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore
the Company will adopt the new requirements in 1998. Management has not
completed its review of FAS 132 but does not anticipate that its adoption will
have a material effect on the consolidated financial statements.
NOTE D - Inventories
-----------
Inventories consisted of the following:
September 26, December 27,
1998 1997
---- ----
(In thousands)
Raw materials $ 3,041 $ 2,373
Work-in-process 4,140 3,819
Finished goods 31,620 25,121
Film library 4,348 3,346
------------------ ------------------
$ 43,149 $ 34,659
================== ==================
NOTE E - Net Assets Held for Sale
------------------------
As of September 26, 1998, net assets held for sale totaling approximately $
10.1 million included the Company's, (i) Fayetteville facility, which was
closed in conjunction with the sale of the Company's game and puzzle business,
(ii) Creative Center, a facility of Golden Books Publishing, and (iii)
Coffeyville Distribution Center, a facility of Golden Books Publishing.
NOTE F- Debt
----
Senior Notes: The Company currently has outstanding $150,000,000 principal
amount of Senior Notes. Interest is payable semiannually on September 15th and
March 15th. The Indenture Agreement covering the Senior Notes contains certain
provisions limiting subsidiary indebtedness, guarantees, liens and the payment
of cash dividends on Preferred and Common Stock. On September 15, 1998, the
Company announced that it was deferring, at its option, a $5.7 million interest
payment on the Senior Notes due on such date for a 30-day grace period in
accordance with the Indenture governing the Senior Notes. Subsequently, on
October 15, 1998, the Company announced that it would not pay the September
15th interest
11
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payment. Accordingly, at October 15th the Company is in default under the
Indenture and as a result, the holders of the Senior Notes have the right (i)
to declare that the entire $150.0 million principal amount of the Senior Notes
is currently due and payable and (ii) to foreclose on the collateral securing
the Senior Notes in accordance with the terms of the Indenture and the Security
Agreement between the Company and the Indenture Trustee dated June 2, 1998. The
Company does not have sufficient resources to repay this obligation. As a
result of the default, the Senior Notes have been classified as a current
liability on the condensed consolidated balance sheet. The Company has not been
informed of any such acceleration. The Company has been negotiating with the
Committee representing approximately $100 million of the Senior Notes. As
described in Note B, the Company is completing a standstill agreement with the
Committee pursuant to which the Committee would agree to take no action against
the Company through February 16, 1999, it is contemplated that as part of the
standstill agreement, the Company's indebtedness under the Senior Notes will be
further supported by a lien on specified additional collateral of the Company.
Revolving Credit Facility: On June 3, 1998, the Company entered into a $30.0
million three-year revolving credit facility, with Nations Credit ("Line of
Credit"). Borrowings under the facility bear interest at the prime rate. The
Line of Credit is secured by certain receivables and inventory of Golden Books
Publishing. As a result of entering into the Line of Credit , Golden Books
Publishing amended the Indenture Agreement governing the Senior Notes due 2002
to, among other things, (i) permit Golden Books Publishing to secure up to
$30.0 million of borrowings and related obligations under the Line of Credit,
(ii) grant to the holders of the Senior Notes a security interest in certain
assets of Golden Books Publishing, (iii) add a guarantee from the Company and
(iv) add additional covenants and amend certain existing covenants. At
September 26, 1998, the Company had outstanding borrowings under the Line of
Credit totaling $27.4 million. As a result of the Company's failure to make the
required interest payment under the Indenture Agreement (see above), the
Company is not in compliance with certain convenants under the Line of Credit.
Accordingly, the lender at their option, may give notice that the amounts
outstanding are immediate due and payable. As described in Note B, the Company
announced that it has received a commitment letter to borrow up to $45.0
million from the CIT Group pursuant to, and subject to the execution of
definitive documentation and certain other conditions, including the CIT
Group's satisfaction with the terms and conditions of any standstill agreement
between the Company and holders of the Company's Senior Notes. Such financing
arrangements will replace the Company's current Line of Credit, which will be
repaid out of a portion of the proceeds of the new loan.
Notes Payable: On September 4, 1998, the Company entered into a $25.0 million
loan facility with GPH. The facility permits Golden Books Publishing to borrow
at its option, but subject to certain conditions, up to $25.0 million.
Borrowings under the loan facility are guaranteed by the Company and secured by
certain assets. All outstanding amounts under the facility are due, together
with accrued and unpaid interest, on September 9, 1999 or earlier under certain
conditions, including if certain assets of the Company are sold. Interest is
due monthly and is set at an initial rate of 5% per annum increasing to 7% in
February 1999, but the payment of interest may be deferred at the Company's
option until maturity. At September 26, 1998, the Company had outstanding
borrowings under the facility totaling $10.0 million. Due to the Company's
failure to make the September 15, 1998 interest payment on the Senior Notes,
the Company is in default under the terms of the note agreement. In connection
with the foregoing standstill and financing arrangements, as described in Note
B, and upon terms and conditions to be finalized, GPH has agreed to convert its
secured loan to the Company in the presently outstanding amount of $10 million
to an unsecured obligation. GPH will also waive and release the collateral
heretofore granted to it with respect to the previous borrowing, and will be
relieved of its obligations to loan up to an additional $15 million to the
Company.
NOTE G - 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"). 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 Convertible Debentures will
mature August 20, 2016, and may be redeemed, in whole or in part, at anytime
after the occurrence of a Tax Event or on an Investment Company Event.
Effective January 10, 1997, the Company registered the resale of the Preferred
Securities with the Securities and Exchange Commission.
12
<PAGE>
NOTE G - Preferred Securities (cont'd)
-----------------------------
The Company and its subsidiary, Golden Books Publishing, are joint and several
obligors of the Preferred Securities and the Company has 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 and nine months ended September 26, 1998 are as follows (in thousands):
September 26,
1998
--------------------
Current assets $ 140,066
Noncurrent assets 150,651
====================
Total Assets $ 290,717
====================
Current liabilities $ 380,875
Noncurrent liabilities 46,696
--------------------
Total Liabilities 427,571
Preferred Securities 110,879
Stockholders' Deficit (247,733)
====================
Total Liabilities and Stockholders' Deficit $ 290,717
====================
Three Months Ended Nine Months Ended
------------------ -----------------
September 26, September 26,
1998 1998
---- ----
Revenues $ 52,019 $ 141,699
Gross profit 6,589 17,458
Loss before interest expense
and benefit for income taxes (17,566) (61,555)
Net loss $ (25,839) $ (84,294 )
NOTE H - Loss Per Common Share
---------------------
Loss per common share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September September September 26, September 27,
26, 1998 27, 1997 1998 1997
------------- -------------- --------------- ---------------
(In thousands except for per share data) (In thousands except for per share data)
<S> <C> <C> <C> <C>
Net Loss $ (18,850) $ (17,899) $ (70,361) $ (38,063)
Preferred dividend requirements (798) (2,169) (5,198) (6,252)
-------------- -------------- -------------- -----------------
Loss applicable to basic common stock $ (19,648) $ (20,068) $ (75,559) $ (44,315)
============== =============== ============== =================
Weighted average basic common shares outstanding 27,525 26,489 27,278 26,204
-------------- --------------- -------------- -----------------
Loss per basic common share $ (.71) $ (.76) $ (2.77) $ (1.69)
============== =============== ============== =================
</TABLE>
NOTE I - Contingencies
-------------
On August 12, 1998, a class action complaint was filed in the United States
District Court for the Southern District of New York on behalf of all persons
who purchased the common stock of the Company between May 13, 1997 and August
4, 1998, inclusive (the "Class Period"). The complaint charges the Company and
certain officers and directors of the Company during
13
<PAGE>
the relevant time period were in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint alleges that the defendants
issued a series of materially false and misleading statements concerning the
impact of the Company's restructuring plan on the Company's financial
condition, liquidity and future prospects. The outcome of the case cannot be
predicted with any certainty. The Company believes that it has meritorious
defenses to the claims, and it intends to vigorously defend itself. However,
the Company is currently unable to determine the sufficiency of its resources
to withstand any material adverse effects if there were unsuccessful defense of
the suit.
On October 7, 1998, holders of the Company's TOPrS filed a class action
complaint based on allegations substantially identical to those in the August
12th common stockholders' complaint . The plaintiffs in both cases have moved
to consolidate the complaints.
Golden Books Publishing and Penn Corporation 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 know 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 not material. Although the
Company divested Penn in December 1996, the Company has agreed to indemnify
Peacock Papers, Inc. against certain of Penn's environmental liabilities,
including the Cork Street Landfill and Fulford Street Property discussed
herein.
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 has
completed the removal of drums and soil from the site.
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. Although the last phase of
construction activities was completed in 1996, Golden Books Publishing and the
other potentially responsible parties are obligated to fund the operation and
maintenance of the site for the next 20-30 years. The current estimate of the
total costs of such operation and maintenance is in the range of $14 million.
In accordance with the consent decree, the Company has established a reserve
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 $4.4
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. Additionally,
during 1997, Golden Books Publishing paid a total of $1,701,000 for the
remediation of the Hertel site, including settlement payments to other PRPs.
The Company, other PRPs and the government have reached an allocation and are
in the process of entering 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 $24,000,000.
More than 70 entities will be requested to provide financial contribution to
the remediation.
14
<PAGE>
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 November 8, 1996. An initial site assessment is being completed by
the Company's outside consultant. Current estimates indicate that the costs
associated with this release should not exceed $200,000. However, in the event
that the contamination has migrated off the Company's property, these costs
could increase.
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 defendant.
In consideration of the aforementioned matters, the Company has recorded
accruals in the "deferred compensation and other deferred liabilities" account
of approximately $5.9 million in the condensed consolidated balance sheet.
The Company is actively pursuing resolution of the aforementioned matters or,
in the case environmental matters, 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 these outcomes have been
adequately reserved for and will not have a materially adverse effect on the
Company's financial position or future results of operations.
The Company and its subsidiaries are parties to certain other legal proceedings
which are incidental to their ordinary business, none of which the Company
believes are material to the Company and its subsidiaries taken together as a
whole.
In July 1997, the Company acquired Shari Lewis Enterprises, Inc., expanding its
library with the addition of the Lamb Chop, Charlie Horse, and Hush Puppy
characters, books, television specials, films and home video titles. In January
of 1998, the Company began producing The Charlie Horse Music Pizza television
show. On August 2, 1998, Shari Lewis passed away. The Company is insured
against, and therefore will not suffer any material adverse financial impact
from the termination in production of the show caused by Shari Lewis's untimely
death.
The Company received a letter from the NASDAQ Stock Market, Inc. ("NASDAQ")
concerning the continued listing of the Company's common stock (GBFE) on the
Nasdaq National Market. The Company common stock has failed to maintain a
closing price of greater than or equal to $5.00 in accordance with Marketplace
Rule 4450(b)(4) under Maintenance Standard 1. The Company has been provided
with ninety (90) calendar days in which to regain compliance with Marketplace
Rule 4450(b)(4). If the Company is unable to demonstrate compliance on or
before the end of the ninety day period ended December 9, 1998, the Company's
securities will be delisted at the opening of business on December 11, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and nine
months ended September 26, 1998 and September 27, 1997 and the related notes
thereto.
15
<PAGE>
Financial Conditiion, Liquidity, Capital Resources and Business Outlook
The Company announced that it has engaged various financial advisors to assist
the Company in evaluating strategic opportunities to enhance shareholder value.
The Company has decided to pursue a financial restructuring of the Company.
There is no assurance that any transaction will result from the process.
On September 15, 1998, the Company announced that it was deferring a $5.7
million interest payment on the 7.65% senior notes due 2002 (the "Senior
Notes") due on such date for a 30-day grace period in accordance with the
Indenture ("Indenture") governing the Senior Notes. Subsequently, on October
15, 1998, the Company announced that it would not pay the September 15th
interest payment. Accordingly, at October 15, the Company is in default under
the Indenture and as a result, the holders of the Senior Notes, at their
option, have the right (i) to demand that the entire $150.0 million principal
amount of the Senior Notes is currently due and payable and (ii) to foreclose
on the collateral securing the Senior Notes in accordance with the terms of the
Indenture and the Security Agreement between the Company and the Indenture
Trustee dated June 2, 1998. The Company does not have sufficient resources to
repay this obligation. As a result of the default, the Senior Notes have been
classified as a current liability on the Company's condensed consolidated
balance sheet. The Company has not been informed of any such acceleration.
Due to the default under the Senior Notes, cross-default provisions regarding
the Company's $30.0 million Revolving Credit Facility (as defined) with
NationsCredit and their $25.0 million Loan Facility (as defined) with Golden
Press Holdings, LLC, have resulted in defaults under such agreements.
Accordingly, the lenders under the Revolving Credit Facility and the Loan
Facility have the right, at their option, to demand the acceleration of all
amounts due thereunder. The Company does not have sufficient resources to repay
these obligations. The Company has not been informed of any such acceleration.
The Company has been negotiating with a steering committee (the "Committee")
representing approximately $100 million of the Senior Notes. The Company is
completing a standstill agreement with the Committee pursuant to which the
Committee would agree to take no action against the Company through February
16, 1999, including no action with regard to the Company's decision not to make
the September 15th interest payment on the Senior Notes. As part of the
standstill agreement, it is contemplated the Company's indebtedness under the
Senior Notes will be further supported by a lien on specified additional
collateral of the Company. The standstill agreement is subject to final
negotiation and execution of definitive documentation.
On November 4, 1998, the Company received a commitment letter from the CIT
Group pursuant to which, and subject to the execution of definitive
documentation and certain other conditions, including the CIT Group's
satisfaction with the terms and conditions of any standstill agreement, the
Company may borrow an aggregate amount of up to $45.0 million to be secured by
a lien on, among other things, the Company's inventory, receivables, trade name
and other intellectual property assets. Under the terms of the agreement, the
Company will pay a commitment fee of $1.1 million. Such financing arrangements
will be used to repay the Company's current $30.0 million Revolving Credit
Facility, which will be repaid out of a portion of the proceeds of the new loan
with the remainder being used for working capital purposes.
In connection with the foregoing standstill and financing arrangements and,
upon terms and conditions to be finalized, Golden Press Holdings, LLC ("GPH")
will agree to convert its secured loan of $10.0 million to an unsecured
obligation. GPH will also waive and release the collateral heretofore granted
to it with respect to the previous borrowing, and will be relieved of its
obligations to loan up to an additional $15.0 million to the Company.
The Company also decided on November 5, 1998 that, pursuant to the documents
governing the TOPrS it would exercise its right to defer the payment of
$2.5 million interest due on the TOPrS from November 20, 1998 until February
20, 1999. The Company also announced that in accordance with the consent of the
holders of its Series B Preferred Stock, the dividend due November 1, 1998 on
the Series B Preferred Stock would not be declared or paid.
The Company is also in the process of restructuring its financing in order to
seek new sources of capital to remedy its liquidity deficiency and evaluating
the potential the sale of certain business and operating assets. Due to the
financial performance of the Company, the Company is evaluating whether there
has been an impairment to goodwill and other long-lived assets and is assessing
the actions necessary which could include restructuring, reduction of costs and
other actions, all of which could result in substantial 1998 year end charges.
The Company will be conducting discussions with the Committee, as well as with
representatives of certain holders of TOPrS representing 56% of the
approximately $110 million aggregate principal amount with respect to an
overall restructuring of the Company's indebtedness. However, there
16
<PAGE>
can be no assurance that an agreement will be reached with either the Committee
or the representatives of the TOPrS holders, or that any proposed restructuring
plan will be implemented. If the Company is not successful in reaching an
agreement with respect to the restructuring of its debt, and the Company cannot
obtain additional capital, the Company may be forced to seek other
alternatives, including protection under applicable bankruptcy laws.
As of September 26, 1998, the Company had a $123.0 million working capital
deficit, including approximately $15.0 million in cash and cash equivalents.
The Company has total liabilities of approximately of $325.3 million and assets
of $304.6 million. The Company's cash flow from operations (earnings before
interest, taxes, depreciation, and amortization and other non-cash items) for
the remainder of 1998 may not be sufficient to satisfy its demand for cash.
On June 3, 1998, the Company entered into a $30.0 million three-year revolving
credit facility with NationsCredit ("Line of Credit"). The Line of Credit is
secured by certain receivables and inventory of Golden Books Publishing. As a
result of entering into the Line of Credit , Golden Books Publishing amended
the Indenture Agreement governing the Senior Notes due 2002 to, among other
things, (i) permit Golden Books Publishing to secure up to $30.0 million of
borrowings and related obligations under the Line of Credit, (ii) grant to the
holders of the Senior Notes a security interest in certain assets of Golden
Books Publishing, (iii) add a guarantee from the Company and (iv) add
additional covenants and amend certain existing covenants. At September 26,
1998, the Company had outstanding borrowings under the Line of Credit totaling
$27.4 million. As a result of the Company's failure to make the required
interest payment under the Indenture Agreement, the Company is not in
compliance with certain convenants under the Line of Credit. Accordingly, the
lender at its option, may give notice that the amounts outstanding are
immediate due and payable. As stated above, the Company has received a
commitment to obtain a new working capital facility in the amount of $45.0
million. This new facility will be used to replace the Line of Credit with
NationsCredit. As part of the overall financial restructuring and new financing
arrangements, the Company will incur approximately $0.6 million of fees to
terminate the Line of Credit.
On September 4, 1998, the Company entered into a $25.0 million loan facility
with GPH. The facility permits Golden Books Publishing to borrow at its option,
but subject to certain conditions, up to $25.0 million. Borrowings under the
loan facility are guaranteed by the Company and secured by certain assets. All
outstanding amounts under the facility are due, together with accrued and
unpaid interest, on September 9, 1999 or earlier under certain conditions,
including if certain assets of the Company are sold. At September 26, 1998, the
Company had outstanding borrowings under the facility totaling $10.0 million.
Due to the Company's failure to make the September 15, 1998 interest payment on
the Senior Notes, the Company is in default under the terms of the note
agreement. In connection with the foregoing standstill and financing
arrangements and, upon terms and conditions to be finalized, GPH agreed to
convert its secured loan to the Company in the presently outstanding amount of
$10 million to an unsecured obligation. GPH will also waive and release the
collateral heretofore granted to it with respect to the previous borrowing, and
will be relieved of its obligations to loan up to an additional $15 million to
the Company.
Operations for the nine months ended September 26, 1998, excluding one-time
transition costs of $13.3 million resulting from the strategic redirection of
the Company and payments of restructuring costs accrued during the period ended
December 28, 1996 of $3.0 million, utilized cash of approximately $49.0 million
compared to cash utilized of $24.0 million, excluding one-time transition costs
of $5.1 million and payments of restructuring costs accrued during the period
ended December 28, 1996 of $2.8 million, for the nine months ended September
27, 1997. Acquisitions of property, plant and equipment were $11.8 million
during the nine months ended September 26, 1998, as compared to $11.9 million
during the nine months ended September 26, 1997.
As of September 26, 1998 the Company had a $123.0 million working capital
deficiency compared to working capital of $93.8 million at December 27, 1997.
The decrease resulted from a reclassification of the Senior Notes from
noncurrent liabilities to current liabilities, the funding requirements for the
Company's operations during the nine months ended September 26, 1998, the
payment of one-time transition and restructuring costs described above, and the
investment in property, plant and equipment.
The Company maintains accruals from previous restructuring totaling $2.0
million which are expected to be paid based upon contractual obligation. Due to
the financial performance of the Company, the Company is currently evaluating
whether there has been an impairment to goodwill and other long-lived assets
and is assessing the actions necessary which could include restructuring,
reduction of costs and other actions, all of which could result in substantial
year-end charges.
17
<PAGE>
The Indenture Agreement covering the Senior Notes restricts the ability of
Golden Books Publishing to pay cash dividends or make other cash distributions
to the Company, as well as the ability of the Company to pay cash dividends or
make other distributions on the Company's common stock. On June 2, 1998 Golden
Books Publishing amended the Indenture to, among other things, (i) permit
Golden Books Publishing to secure up to $30.0 million of borrowings and related
obligations under the Line of Credit, (ii) grant to the holders of the Senior
Notes a security interest in certain assets of Golden Books Publishing, (iii)
add a guarantee from the Company and (iv) add additional covenants and amend
certain existing covenants.
The Company does not anticipate any significant tax provision or benefit in the
fiscal period ending December 26, 1998. As such, operations for the three and
nine months ended September 26, 1998 do not include an income tax benefit from
domestic operations as no tax benefit was provided on operating losses. As the
Company has significant net operating loss carryforwards, 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. This presumes that
there has been no "change in control" of the Company with respect to 5%
shareholders, as defined in Internal Revenue Code Section 382. Should such a
change of control occur, the amount of loss carryforwards available for use in
any one year would most likely be substantially reduced and could expire
unused. The Company has not yet determined whether it has incurred a change of
control.
As part of the Company's plan to return its core publishing business to
profitability and to re-deploy assets, the Company incurred approximately $13.3
million in 1998 in one-time transition costs in connection with the Company's
strategic plan, consisting of : (i) $4.3 million in outsourcing premium and
(ii) $9.0 million in costs associated with the move to the new Racine
manufacturing facility. During 1997, the Company incurred one-time transition
costs of $11.5 million in connection with the Company's strategic plan. This
consisted of: (i) $3.1 million of moving costs associated with new facilities,
(ii) $3.5 million for outsourcing of the information technology department,
(iii) $4.5 million in consulting services associated with implementing the
strategic plan, and (iv) $0.4 million in other costs. The Company is evaluating
its strategic alternatives and accordingly does not expect to generate positive
net income until beyond year 2000 at the earliest.
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 27, 1997
The Company reports results under three segments: (i) the Consumer Products
Segment ("Consumer"), (ii) the Entertainment Segment ("Entertainment") and
(iii) the Commercial Products Segment ("Commercial"). Consumer includes the
Children's and Adult Publishing Divisions. Entertainment, which was formed
following the acquisition of Broadway Video, includes home video, television
program licensing, merchandising and other character licensing. Commercial
includes the Commercial Printing division and during the year ended December
28, 1997 included the Cambridge commercial printing operation which was sold
during December of 1997. Commercial makes use of excess capacity in the
Consumer manufacturing facility and is operated to absorb fixed overhead costs
of that operation and is not considered to be a core business segment of the
Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 changes the way
companies report segment information in financial statements. The Company has
not yet determined the impact of the implementation of FAS 131 on the Company's
segment reporting, but its adoption will not have a material effect on the
Company's statement of position or revenues, only on the composition of its
reportable segments.
Revenues
Total revenues for the three months ended September 26, 1998 decreased $1.3
million (2.4%) to $52.0 million compared to $53.3 million for the three months
ended September 27, 1997, and decreased $28.1 million (16.5%) to $141.7 million
from $169.8 million for the nine months ended September 26, 1998 compared to
the nine months ended September 27, 1997. Excluding operations that have been
sold, revenues increased $4.4 million (9.2%) to $52.0 million for the three
months ended September 26, 1998 compared to $47.6 million for the three months
ended September 27, 1997, and decreased $7.2 million (4.8%) to $141.7 million
from $148.9 million for the nine months ended September 26, 1998 compared to
the nine months ended September 27, 1997.
Consumer revenues increased $0.3 million (.7%) to $41.0 million for the three
months ended September 26, 1998 compared to $40.7 million for the three months
ended September 27, 1997, and decreased $5.7 million (4.8%) to $111.9 million
from $117.6 million for the nine months ended September 26, 1998 compared to
the nine months ended September 27, 1997. The
18
<PAGE>
increase in revenues for the Consumer Product Segments for the three months
ended September 26, 1998 was due to increased Children's book revenues of $2.1
million partially offset by a $1.9 million decline in Adult book revenues. The
increase in Children's book revenues was due to a $7.7 million, or 20% increase
in gross revenues primarily due to increased promotional activity, including
major promotions based on the Disney movie "A Bugs Life" and video "Simba's
Pride", a "Winnie the Pooh" theme based promotion, and the introduction of the
Company's new educational program "Road to Reading," partially offset by the
higher sales returns in 1998. The decrease in Adult book revenues was due to
the timing of a major release in 1997. The decline for the nine months ended
September 26, 1998 is principally due to temporary reductions in buying by
certain major retailers, including Zellers and K-Mart, in the first half of
1998 and higher sales returns in 1998. This decline was partially offset by
revenue increases in the Company's strategically priced Merrigold line and
increased business with Target and key distributors.
Entertainment revenues increased $3.1 million (67.4%) to $7.7 million for the
three months ended September 26, 1998 compared to $4.6 million for the three
months ended September 27, 1997, and increased $1.2 million (6.6%) to $19.3
million from $18.1 million for the nine months ended September 26, 1998
compared to the nine months ended September 27, 1997. The increase in revenue
for the three months ended September 26, 1998 was due primarily to increased
Home Video revenues associated with the newly released "Madeline" videos and
the beginning shipments of the Christmas Classic Videos. The increase in
revenues was partially offset by a decline in television revenues primarily due
to the timing of recording revenues for various television properties. The
increase for the nine months ended September 26, 1998 was also primarily due to
increased revenues in Home Video sales for newly released "Madeline" videos and
the beginning shipments of the Christmas Classic Videos as well as increased
television and merchandising revenues associated with the licensing of many
products. The increase was partially offset by the timing of revenues for a
major Christmas video promotion with the U.S. Postal Service during 1997.
Commercial revenues excluding operations that were sold (in the quarter ended
September 27, 1997 Cambridge operations had revenue of $5.7 million) increased
$1.0 million (43.5%) to $3.3 million for the three months ended September 26,
1998 compared to $2.3 million for the three months ended September 27, 1997 and
decreased $2.7 million (20.5%) to $10.5 million from $13.2 million for the nine
months ended September 26, 1998 compared to the nine months ended September 27,
1997. The increase in revenue for the three month period ended September 26,
1998 was due to the new facility being placed in service. The overall decline
for the nine month period ended September 26, 1998 was primarily due to the new
manufacturing facility not starting production until the second quarter of
1998.
Gross Profit
Total gross profit, excluding operations that were sold and one-time transition
costs, decreased $8.0 million to $6.6 million (54.8%) for the three months ended
September 26, 1998, from $14.6 million for the three months ended
September 26, 1997 and decreased $25.8 (54.2%) from $47.6 to $21.8 million for
the nine months ended September 26, 1998 compared to the nine months ended
September 27, 1997. As a percentage of revenues, total gross profit margin
before operations that have been sold and one-time transition costs decreased
to 12.7% for the three months ended September 26, 1998 from 30.7% for the three
months ended September 27, 1997 and decreased to 15.4% from 32.0% for the nine
months ended September 26, 1998 compared to the nine months ended September 27,
1997.
Consumer gross profit decreased $8.6 million (69.4%) to $3.8 million for the
three months ended September 26, 1998, compared to $12.4 million for the three
months ended September 27, 1997, and decreased $25.2 million (66.5%) to $12.7
million from $37.9 million for the nine months ended September 26, 1998,
compared to the nine months ended September 27, 1997. As a percentage of
revenues, the Consumer gross profit margin decreased to 9.3% for the three
months ended September 26, 1998 from 30.5% for the three months ended September
27, 1997, and decreased to 11.3% from 32.2% for the nine months ended September
26,1998, compared to the nine months ended September 27, 1997. The decrease in
gross profit and gross profit margin for the three months ended September 26,
1998 was primarily due to a provision recorded for royalty guarantees
totaling $3.8 million, along with higher manufacturing costs. Excluding the
provision for royalty guarantees, the gross profit decrease would have been
$4.8 million (38.7%), and as a percentage of revenue, the gross profit margin
would have been 18.5% for the three months ended September 26, 1998. The
decrease in gross profit and gross profit margin for the nine months ended
September 26, 1998 was primarily due to a provision for royalty advances and
guarantees totaling $9.4 millin along with higher manufacturing and
distribution costs and higher royalty rates associated with the Disney and
Mattel license agreements. Excluding this provision, the gross profit would
have been $22.1 million, a decrease of $15.8 million (41.7%) from the nine
months ended September 27, 1997, and as a percentage of revenue, the gross
profit margin would have been 19.7% for the nine months ended September 26,
1998.
19
<PAGE>
Entertainment gross profit increased $.6 million (27.3%) to $2.8 million for
the three months ended September 26, 1998 compared to $2.2 million for the
three months September 27, 1997, and decreased $.6 million (6.2%) to $9.1
million from $9.7 million for the nine months ended September 26, 1998,
compared to the nine months ended September 27, 1997. As a percentage of
revenues, the gross profit margin decreased to 36.4% for the three months ended
September 26, 1998 compared to 47.8% for the three months ended September 27,
1997, and decreased to 47.2% from 53.6% for the nine months ended September
26,1998, compared to the nine months ended September 27, 1997. The decrease in
the Entertainment Segment's gross profit margin for the three months ended
September 26, 1998 was primarily due to higher margins on television revenues
in 1997 compared to the margin on the product mix of home video sales in 1998.
The decline for the nine months ended September 26, 1998 is due to lower
margins on the product mix of sales, partially offset by higher margin
television license sales.
Commercial utilizes excess capacity in the consumer manufacturing facility and
is operated to absorb fixed overhead costs of that operation. In the future,
commercial cost of sales are expected to approximate revenues. In the three and
nine months ended September 27, 1997 Cambridge operations which were sold had a
gross profit of $.9 million and $3.9 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses before one-time transition costs
decreased $6.3 million to $19.8 million for the three months ended September
26, 1998 compared to $26.1 million for the three months ended September 27,
1997. The decrease was primarily attributable to ongoing corporate cost
reductions. One-time transition costs of $3.3 million for the three months
ended September 27, 1997 included $1.0 million of consulting costs, $1.7
million of information system changeover costs and $0.6 million of costs
associated with a move of the Company's Racine, Wisconsin manufacturing
facility. Selling, general and administrative expenses before one-time
transition costs decreased $6.4 million to $63.4 million for the nine months
ended September 26, 1998 compared to $69.8 million for the nine months ended
September 27, 1997. The decrease was primarily attributable to ongoing
corporate cost reductions. One-time transition costs of $9.0 million in the
nine months ended September 26, 1998 are primarily related to the move to the
new manufacturing facility. One-time transition costs of $8.4 million for the
nine months ended September 27, 1997 included $3.5 million of consulting costs,
$4.0 million of information system changeover costs and $0.9 million of costs
associated with a move of the Company's Racine, Wisconsin manufacturing
facility.
Interest Expense, net
Interest income for the three months ended September 26, 1998 decreased $1.5
million to $.2 million from $1.7 million for the three months ended September
27, 1997 and decreased $3.7 million to $1.2 million from $4.9 million for the
nine months ended September 26, 1998 compared to the nine months ended
September 26, 1997 The decrease in interest income was due to lower cash and
cash equivalent balances throughout the period.
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 September
26, 1998 increased by $0.5 million to $6.0 million, as compared to $5.5 million
for the three months ended September 27, 1997, and increased $0.6 million to
$17.0 million from $16.4 million for the nine months ended September 26, 1998,
compared to the nine months ended September 26, 1997. Total average outstanding
debt (including the Preferred Securities) was $287.7 million for the three
months ended September 26, 1998, $276.2 million for the nine months ended
September 26, 1998 and $265.0 million for the three and nine months period
ended September 27, 1997.
Net Loss
The net loss for the three months ended September 26, 1998 was $(18.8) million,
or $(.71) per basic common share, compared to a net loss of $(17.9) million, or
$(.76) per basic common share, for the three months ended September 27, 1997.
The net loss for the nine months ended September 26, 1998 was $(70.4) million,
or $(2.77) per basic common share, compared to a net loss of $(38.1) million,
or $(1.69) per basic common share, for the nine months ended September 27,
1997. The changes were due to the factors described above.
20
<PAGE>
YEAR 2000 COMPLIANCE
YEAR 2000 UPDATE
Management has initiated an enterprise-wide program to prepare the Company's
computer systems and applications for the Year 2000 (Y2K), as well as to
identify and address any other Y2K operational issues which may affect the
Company. Updates on the Company's Year 2000 program are presented regularly to
senior management.
The Company's Year 2000 program began in 1997 and is currently being
administered by internal staff augmented by outside consultants. The program
consists of the following three components relating to the Company's
operations: (i) Information Technology ("IT") computer systems and applications
that may be impacted by the Year 2000 problem, (ii) non-IT systems and
equipment which include embedded technology that may be impacted by the Year
2000 problem and (iii) third-party suppliers and customers with which the
Company has material relationships. Problems could arise from these
relationships if such parties fail to be Year 2000 compliant.
The general phases common to all three components of the Company's Year 2000
program are: (1) ASSESSMENT (the identification, assessment and prioritization
of the Y2K issues facing the Company in each of the above areas and the actions
to be taken in respect of such issues or items); (2) REMEDIATION
(implementation of the specific actions determined upon assessment, including
repair, modification or replacement of items that are determined not to be Year
2000 compliant); (3) TESTING (testing of the new or modified information
systems, other systems, and equipment to verify the Year 2000 readiness); (4)
CONTINGENCY PLANNING (designing contingency and business continuation plans for
the Company; and (5) IMPLEMENTATION (actual operation of systems and equipment
and, if necessary, the actual implementation of any contingency plans in the
event Year 2000 problems occur, notwithstanding the Company's remediation
program).
The progress to date of the three components in the Company's Year 2000 program
is as follows:
IT SYSTEMS AND APPLICATIONS. The principal IT systems and applications of the
Company affected by Year 2000 issues are Order Processing, Purchasing,
Manufacturing, Distribution Systems and Financial Systems. The Company has
completed the Assessment phase with respect to all IT systems and applications
and has begun remediation efforts. The Company anticipates that the replacement
phase related to these principal systems and applications should be completed
by the end of March 1999 and that the Testing, Contingency Planning and
Implementation phases should be substantially completed by the end of May 1999.
In addition, the Company expects to implement the remainder of Year 2000
remediated IT systems and applications based on current assessments prior to
September 30, 1999.
Excluding normal system upgrades, the Company estimates that total costs for
conversion and testing of new or modified IT systems and applications will
aggregate approximately $2.0 million to $2.2 million through fiscal 2000, of
which an aggregate of $.25 million had been incurred to date. Total conversion
and testing costs through fiscal 1999 are estimated at $1.9 million.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company which utilizes embedded technology affected by Y2K issues include:
security systems, elevator systems, HVAC, phone systems, business machines,
printing press equipment and distribution systems. The Company has completed
the Assessment of its principal non-IT equipment and has begun remediation. The
Company anticipates the Remediation phase related to these principal systems
should be substantially completed by the end of December, 1998 and that the
Testing, Contingency Planning and Implementation phases should be substantially
completed by the end of March, 1999. The Company estimates that total costs for
modifying or replacing new systems and equipment in this area will be
approximately $.50 million through fiscal 2000, of which an aggregate of $.05
million has been incurred to date. Total modification and replacement costs
through fiscal 1999 are estimated at $.45 million.
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party suppliers/vendors
affected by Year 2000 issues relates primarily to paper and printing supplies,
distribution/delivery services, fulfillment, licensing and financial services.
The Assessment phase for determining the Year 2000 readiness of the Company's
principal suppliers is ongoing; however the Company has received dates of
compliance from a majority of those suppliers. Concentration has been centered
on mission critical vendors without whom the Company would be at risk for doing
business.
21
<PAGE>
Substantially, all of the Company's principal suppliers have reported that they
have initiated Year 2000 programs. The Company will seek updates from these
parties to attempt to ascertain the adequacy of their programs as it relates to
the Company including personal contact interviews for those mission critical
suppliers. The Company anticipates that it will develop contingency plans with
respect to its principal third party suppliers by the end of May 1999. Costs to
the Company in this area, excluding costs due to unanticipated third party Year
2000 problems, will principally consist of internal staff costs, which are
not expected to be material.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program will be $2.5 million to $2.7
million, of which total program costs to date have been $.3million. Total
program costs through fiscal 1999 are estimated at $2.2 million to $2.4
million. These costs include costs related to the matters above, as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the Company for the Year 2000. The costs do
not include internal staff costs incurred or to be incurred in connection with
the implementation of the program. Costs are expected to be expensed as
incurred, and cash generated from the Company's operations or borrowings under
its credit agreements will fund such costs. The above-stated amounts have been
budgeted for the appropriate fiscal years. Projected Year 2000 costs for fiscal
1999 comprise approximately 15% to 20% of the Company's IT budget for that
period. Based on the current progress of the Company's Year 2000 program, the
Company anticipates its Year 2000 program to be substantially completed by
September 30, 1999. As a result of the Company's Year 2000 program, it is
anticipated that there may be delays in other new and continuing IT projects,
although diligence is being put forth to allow for concurrent development where
possible. However, no material adverse affect is expected from any delays, as
the Company has procedures in place to ensure that critical projects will be
handled in a timely manner. The cost of the Company's Year 2000 program and the
dates provided herein are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, many of which are
beyond the Company's control.
The failure to correct a material Year 2000 problem could result in an
interruption in certain normal business activities or operations of the
Company. Such interruptions could materially and adversely affect the Company's
financial condition, results of operations and cash flows. Based on current
plans and assumptions, the Company does not expect that the Year 2000 issue
will have an adverse impact on the Company as a whole. Due to the general
uncertainty inherent in the Year 2000 problem, however, there can be no
assurance that all Year 2000 problems will be foreseen and corrected, or if
foreseen, corrected on a timely basis, or that no material disruption to the
Company's business or operations will occur. Further, the Company's
expectations are based on the assumption that there will be no general failure
of external local, national or international systems (including power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those
scenarios in which unexpected failures would have a material adverse effect on
the Company and will attempt to develop contingency plans designed to deal with
such scenarios. There can be no assurance, however, that successful contingency
plans can, in fact, be developed or implemented.
22
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note I
ITEM 3. DEFAULT UPON SENIOR NOTES
See Note B
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
Exhibit Number Description
- -------------- -----------
4.1 Note Purchase Agreement dated as of September 8, 1998
between GPH, Golden Books Publishing Company, Inc.
("GBPC"), Golden Books Home Video, Inc. ("GBHV") and
Golden Books Family Entertainment, Inc. ("GBFE").
4.2 Pledge and Security Agreement dated as of September 8,
1998 between GBFE, GBPC, GBHV and GPH.
* Incorporated by reference to Form 8-K dated September 15, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
Current report on Form 8-K dated September 15, 1998.
23
<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.
November 9, 1998 /s/ Richard E. Snyder
------------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
November 9, 1998 /s/ John C. Ferrara
---------------------
John C. Ferrara
Executive Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000790706
<NAME> GOLDEN BOOKS FAMILY ENTERAINMENT, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 15,004
<SECURITIES> 0
<RECEIVABLES> 70,499
<ALLOWANCES> 18,753
<INVENTORY> 43,149
<CURRENT-ASSETS> 144,579
<PP&E> 83,226
<DEPRECIATION> 38,657
<TOTAL-ASSETS> 304,628
<CURRENT-LIABILITIES> 267,611
<BONDS> 0
279
0
<COMMON> 65,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 304,628
<SALES> 141,699
<TOTAL-REVENUES> 141,699
<CGS> 124,241
<TOTAL-COSTS> 196,734
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,783
<INCOME-PRETAX> (70,818)
<INCOME-TAX> (457)
<INCOME-CONTINUING> (70,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,361)
<EPS-PRIMARY> (2.77)
<EPS-DILUTED> 0
<FN>
For the attached financials, the value EPS-DILUTED is not applicable
</FN>
</TABLE>
