<PAGE>
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 28, 1998
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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
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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
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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: 27,294,814 shares
outstanding as of May 8, 1998.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
Number
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- 3
March 28, 1998 (Unaudited) and
December 27, 1997
Condensed Consolidated Statements of Operations 5
and Comprehensive Loss--Three months ended
March 28, 1998 and March 29, 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows-- 6
Three months ended March 28, 1998 and
March 29, 1997 (Unaudited)
Notes to Condensed Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
SIGNATURES 18
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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<TABLE>
<CAPTION>
MARCH 28, DECEMBER 27,
1998 1997
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(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,125 $ 57,411
Accounts receivable, net 42,395 51,153
Inventories 33,183 34,659
Net assets held for sale 9,877 9,873
Other current assets 18,896 17,250
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Total current assets 134,476 170,346
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OTHER ASSETS
Accounts receivable - long term 5,128 3,207
Other noncurrent assets 17,572 17,126
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Total other assets 22,700 20,333
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PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
of $41,055 as of March 28, 1998 and $39,620 as of December 27, 1997 43,213 38,256
FILM LIBRARY, net of accumulated amortization of $5,960 as of March 28, 1998 and
$4,364 as of December 27, 1997 62,304 63,638
GOODWILL, net of accumulated amortization of $1,905 as of March 28, 1998 and
$1,605 as of December 27, 1997 30,291 30,591
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TOTAL ASSETS $ 292,984 $ 323,164
================= =================
</TABLE>
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 Except for Share Data)
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<TABLE>
<CAPTION>
MARCH 28, DECEMBER 27,
1998 1997
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(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 19,632 $ 21,454
Accrued compensation and fringe benefits 5,779 5,887
Other current liabilities 38,926 47,225
----------------- -----------------
Total current liabilities 64,337 74,566
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NONCURRENT LIABILITIES
Long term debt 149,903 149,897
Accumulated postretirement benefit obligation 29,612 29,365
Deferred compensation and other deferred liabilities 20,291 19,938
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Total noncurrent liabilities 199,806 199,200
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GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS
PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 110,765 110,707
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,
27,099,814 and 26,887,313 shares issued as of March 28, 1998 and
December 27, 1997, respectively 271 269
Additional paid in capital 128,714 128,533
Accumulated deficit (271,663) (250,791)
Cumulative foreign translation adjustments (1,424) (1,498)
----------------- -----------------
(79,102) (58,487)
Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822
----------------- -----------------
Total stockholders' deficit (81,924) (61,309)
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 292,984 $ 323,164
================= =================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
4
<PAGE>
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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<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MARCH 28, MARCH 29,
1998 1997
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(unaudited)
<S> <C> <C>
$ 46,534 $ 65,816
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REVENUES
COSTS AND EXPENSES:
Cost of sales 36,975 45,001
Selling, general and administrative 25,696 26,125
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Total costs and expenses 62,671 71,126
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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 (16,137) (5,310)
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 $700 AND $1,900,
RESPECTIVELY 2,269 1,054
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LOSS BEFORE BENEFIT FOR INCOME TAXES (20,922) (8,880)
BENEFIT FOR INCOME TAXES (50) (8)
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NET LOSS (20,872) (8,872)
OTHER COMPREHENSIVE INCOME (LOSS) :
FOREIGN CURRENCY TRANSLATION 74 (57)
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COMPREHENSIVE LOSS $ (20, 798) $ (8,929)
================== ==================
NET LOSS PER BASIC COMMON SHARE $ (0.85) $ (0.41)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
<PAGE>
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 28, MARCH 29,
1998 1997
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(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,872) $ (8,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,304 2,603
Provision for losses on accounts receivable 155 616
Other non-cash 395 -
Changes in assets and liabilities:
Decrease in accounts receivable 6,682 918
Decrease in inventories 1,476 3,820
Increase in other current assets (1,646) (2,204)
(Decrease) increase in accounts payable (1,822) 744
Decrease in accrued compensation and fringe
benefits (108) (2,583)
Other assets and liabilities (8,480) (12,504)
------------------ ------------------
Net cash used in operating activities (20,916) (17,462)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (6,392) (1,658)
Additions to film library (235) -
Collateral for letter of credit associated with lease
for new corporate office - (3,000)
------------------ ------------------
Net cash used in investing activities (6,627) (4,658)
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 28, MARCH 29,
1998 1997
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(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options $ 183 $ 226
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Net cash provided by financing activities 183 226
EFFECT OF EXCHANGE RATE CHANGES ON CASH 74 (58)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (27,286) (21,952)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 57,411 139,686
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,125 $ 117,734
================== ==================
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 $ 8,253
================== ==================
Income taxes, net of refunds received $ 10 $ (27)
================== ==================
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
7
<PAGE>
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 March 28, 1998 and the results of
operations and cash flows for the three month periods ended March 28, 1998 and
March 29, 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.
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. All
material intercompany items and transactions have been eliminated.
NOTE B - Liquidity
As of March 28, 1998, the Company had approximately $70.2 million in working
capital, including approximately $30.1 million in cash. The continued
implementation of management's plan to return the Company's core publishing
business to profitability and to re-deploy assets (the "Plan") beyond the next
twelve months may require financial resources greater than the Company's
current cash position and future cash flow. Accordingly, the Company is
currently seeking additional financing. In connection therewith, the Company
has signed a commitment letter for a $30 million revolving credit facility
("Line of Credit"). Entering into the Line of Credit requires the appropriate
approval from a majority of the holders of the Company's $150 million, 7.65%
Senior Notes (the "Indenture"). Consequently, the Company is seeking approval
from a majority of the indenture holders. Management believes that they will
be successful in obtaining the Line of Credit. In the event the Company is
unable to obtain the approval of the majority of the holders of the 7.65%
Senior Note the Company is also seeking a receivables financing facility that
would not require approval of the Senior Note holders under the indenture.
Although the Company is confident that the financing alternatives will be
available, there can be no assurance that the desired elements of the financing
can be obtained on acceptable terms. If the Company does not consummate the
Line of Credit or the receivables financing, it may be required to seek other
alternative sources of financing.
8
<PAGE>
NOTE C - Recent Accounting Pronouncements
PER SHARE DATA
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is effective for fiscal
periods beginning after December 15, 1997. FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented to conform to the FAS 128 requirements. The Company
adopted the requirements in the first quarter of 1998.
Net loss per basic common share for the three months ended March 28, 1998 and
March 29, 1997, is based on the net loss for the period plus preferred
dividend requirements divided by the weighted average number of basic common
shares outstanding. Shares issuable upon the exercise of all common stock
equivalents consisting primarily of stock options and warrants are not
included in the computations since their effect is antidilutive.
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.
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 charges 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:
9
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March 28, 1998 December 27, 1997
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(In thousands)
Raw materials $ 2,392 $ 2,373
Work-in-process 4,182 3,819
Finished goods 22,725 25,121
Film library 3,884 3,346
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$ 33,183 $ 34,659
================== ==================
NOTE E - Net Assets Held for Sale
As of March 28, 1998, net assets held for sale totaling approximately $9.9
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 - 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.
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, 1998 are as follows (in thousands):
Current assets $ 113,784
Noncurrent assets 139,578
--------------
Total Assets $ 253,362
==============
Current liabilities $ 136,738
Noncurrent liabilities 188,748
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Total Liabilities 325,486
Preferred Securities 110,765
Stockholders' Deficit (182,889)
--------------
Total Liabilities and Stockholders' Deficit $ 253,362
==============
Revenues $ 46,534
Gross profit 11,481
Loss before interest expense and benefit for income taxes (16,897)
Net loss (19,881)
10
<PAGE>
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 G - Loss Per Common Share
Loss per common share was computed as follows:
Three Months Ended
------------------
March 28, 1998 March 29, 1997
-------------- --------------
(In thousands except for per share data)
Net Loss $ (20,872) $ (8,872)
Preferred dividend requirements (2,194) (1,877)
------------- ------------
Loss applicable to basic common stock $ (23,066) $ (10,749)
============= ============
Weighted average basic common
shares outstanding 27,077 25,983
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Loss per basic common share $ (0.85) $ (0.41)
============= ============
NOTE H - Contingencies
Golden Books Publishing and Penn have been informed by the Environmental
Protection Agency (the "EPA") and/or state regulatory agencies that they may
be potentially responsible parties ("PRPs") and face liabilities under the
Comprehensive Environmental Response, Compensation, and Liability Act
(commonly 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 $4.1
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.
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 interm
allocation and are in the process of negotiating a consent decree which will
establish the Company's future responsibilities at the site.
11
<PAGE>
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.
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 $6.5 million in the consolidated balance sheet.
On December 19, 1997, Contempo Colours, Inc. ("Contempo") filed suit against
Golden Books Publishing in the circuit court for the County of Kalamazoo,
Michigan, alleging damages arising out of a dispute between Contempo and
Golden Books Publishing relating to the sale to Contempo of Penn on December
23, 1996. The Company and Contempo entered into a standstill agreement with
respect to the suit on January 7, 1998, whereby Contempo agreed to suspend the
suit while the parties negotiated a settlement of all claims. In April 1998,
the Company and Contempo entered into a settlement agreement pursuant to which
Contempo agreed to drop the suit in exchange for the cancellation by the
Company of two notes issued to the Company by Contempo in an aggregate amount
of $4 million and the assumption by the Company of certain workers'
compensation expenses.
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.
Effective December 1996, the Company entered into a five-year outsourcing
agreement to manage its information technology services department. The amount
of annual service fees will vary with the cost of living adjustment and is
dependent upon the services provided, which services depend upon the Company's
volume of business and system needs.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL AND ADOPTION OF NEW BUSINESS STRATEGY
CERTAIN OF THE MATTERS DISCUSSED IN THIS ITEM MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 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 28, 1998 and March 29, 1997 and the related notes thereto.
As part of the Company's plan to return its core publishing business to
profitability and to re-deploy assets, the Company incurred approximately
$11.5 million in one-time transition costs during 1997 in connection with the
Company's strategic plan, consisting 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 anticipates that it will incur additional one-time
transition costs of approximately $13.0 million in 1998. The Company's return
to profitability is dependent in part on the successful implementation of
management's new strategy. As the Company's new strategy has not yet been
fully implemented, the Company does not expect to generate positive net income
until 1999 at the earliest.
THREE MONTHS ENDED MARCH 28, 1998 COMPARED TO THREE MONTHS ENDED MARCH 29, 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 Broadway Video Acquisition, includes home video, television
program licensing, merchandising and other character licensing. Commercial
includes the Commercial Printing division and during the year ended December
28, 1996 included the Cambridge commercial printing operations which was sold
during December of 1997. Commercial makes use of excess capacity in the
Consumer manufacturing facility and is operated to reduce 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 quarter ended March 28, 1998 decreased $19.3 million
(29.4%) to $46.5 million compared to $65.8 million for the quarter ended March
29, 1997. Excluding operations that have been sold, revenues declined $9.8
million (17.5%) to $46.5 million for the quarter ended March 28, 1998 compared
to $56.3 million for the quarter ended March 29, 1997.
Consumer revenues decreased $3.7 million (9.4%) to $36.2 million for the
quarter ended March 28, 1998 compared to $39.9 million for the quarter ended
March 29, 1997. The decline in Consumer revenues was primarily due to a major
promotion based on a "Star Wars" theme that took place during the first
quarter of 1997 which was not repeated in 1998. In addition, lower sales at
Toys-R-Us and Kmart had a negative impact on revenues during the quarter ended
March 28, 1998.
Entertainment revenues decreased $3.1 million (30.8%) to $7.0 million for the
quarter ended March 28, 1998 compared to $10.1 million for the quarter ended
March 29, 1997. The decline in Entertainment revenues was primarily due to the
timing of the revenue for a major annual Christmas video promotion with the
U.S. Postal Service.
13
<PAGE>
Commercial revenues excluding operations that were sold (in the quarter ended
March 29, 1997 Cambridge operations had revenue of $9.5 million) decreased
$3.0 million (47.3%) to $3.3 million for the quarter ended March 28, 1998
compared to $6.3 million for the quarter ended March 29, 1997. The decline in
revenues was primarily due to the lack of printing capacity resulting from the
move to the new manufacturing facility. During the current quarter, a
significant number of the printing presses were disassembled, moved and
reassembled.
Gross Profit
Total gross profit excluding operations that were sold and one-time transition
costs decreased $7.5 million (39.6%) for the quarter ended March 28, 1998 to
$11.5 million compared to $19.0 million for the quarter ended March 29, 1997.
As a percentage of revenues, total gross profit margin before operations that
have been sold and one-time transition costs decreased to 24.7% for the
quarter ended March 28, 1998 from 33.7% for the quarter ended March 29, 1997.
One-time transition costs of $1.9 million related to the move to the new
manufacturing facility.
Consumer gross profit decreased $6.2 million (45.4%) to $7.5 million for the
quarter ended March 28, 1998 compared to $13.7 million for the quarter ended
March 29, 1997. As a percentage of revenues, the Consumer gross profit margin
decreased to 20.7% for the quarter ended March 28, 1998 from 34.3% for the
quarter ended March 29, 1997. The decrease in gross profit margin is primarily
due to the lower level of sales, a product mix change to lower margin products
and higher manufacturing costs.
Entertainment gross profit decreased $1.3 million (24.6%) to $4.0 million for
the quarter ended March 28, 1998 compared to $5.3 million for the quarter
ended March 29, 1997. As a percentage of revenues, the gross profit margin
increased to 57.2% for the quarter ended March 28, 1998 compared to 52.4% the
quarter ended March 29, 1997. The improvement was primarily due to higher
margin television license sales.
Commercial utilizes excess capacity in the consumer manufacturing facility and
is operated to reduce fixed overhead costs of that operation. In the future,
commercial cost of sales are expected to approximate revenues. In the quarter
ended March 29, 1997 Cambridge operations which were sold had a gross profit
of $1.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses before one-time transition costs,
decreased $1.8 million to $21.5 for the quarter ended March 28, 1998 compared
to $23.3 million for the quarter ended March 29, 1997. This decrease reflects
ongoing corporate costs reductions partially offset by increased selling and
marketing costs. One-time transition costs of $4.2 million in the quarter
ended March 28, 1998 are primarily related to the move to the new
manufacturing facility. One-time transition costs of $2.8 million for the
quarter ended March 29, 1997 included $1.3 million of consulting costs and
$1.5 million of information system changeover costs.
Interest Expense, net
Interest income for the quarter ended March 28, 1998 decreased $1.2 million to
$0.7 million from $1.9 million for the quarter ended March 29, 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 March 28,
1998 and the three months ended March 29, 1997 was unchanged at $5.5 million.
Total average outstanding debt (including the Preferred Securities) was
unchanged at $265.0 million in the quarter ended March 28, 1998 and the
quarter ended March 29, 1997.
Income Taxes
The Company does not anticipate any significant provision or benefit for
income taxes in the fiscal period ending December 26, 1998. As such,
operations for the three months ended March 28, 1998 do not include an income
tax benefit from domestic operations as no tax benefit was provided on
operating losses. Profitable operating results in subsequent periods will
benefit from an income tax rate which will be lower than the statutory rate
due to the reinstatement of deferred tax assets for which a valuation
allowance was established.
14
<PAGE>
Net Loss
The net loss for the quarter ended March 28, 1998 was $(20.9) million, or
$(0.85) per basic common share, compared to a net loss of $(8.9) million, or
$(0.41) per basic common share, for the quarter ended March 29, 1997. The
deterioration was due to the factors described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 28, 1998, the Company had approximately $70.2 million in working
capital, including approximately $30.1 million in cash. The continued
implementation of management's plan to return the Company's core publishing
business to profitability and to re-deploy assets (the "Plan") beyond the next
twelve months may require financial resources greater than the Company's
current cash position and future cash flow. Accordingly, the Company is
currently seeking additional financing. In connection therewith, the Company
has signed a commitment letter for a $30 million revolving credit facility
("Line of Credit"). Entering into the Line of Credit requires the appropriate
approval from a majority of the holders of the Company's $150 million, 7.65%
Senior Notes (the "Indenture"). Consequently, the Company is seeking approval
from a majority of the indenture holders. Management believes that they will
be successful in obtaining the Line of Credit. In the event the Company is
unable to obtain the approval of the majority of the holders of the 7.65%
Senior Note the Company is also seeking a receivables financing facility that
would not require approval of the Senior Note holders under the indenture.
Although the Company is confident that the financing alternatives will be
available, there can be no assurance that the desired elements of the financing
can be obtained on acceptable terms. If the Company does not consummate the
Line of Credit or the receivables financing, it may be required to seek other
alternative sources of financing.
Operations for the quarter ended March 28, 1998, excluding one-time transition
costs of $6.1 million resulting from the strategic redirection of the Company
and payments of restructuring costs accrued during the period ended December
28, 1996 of $1.1 million, utilized cash of approximately $13.7 million
compared to cash utilized, excluding one-time transition costs of $2.8 million
and payments of restructuring costs accrued during the period ended December
28, 1996 of $1.2 million, of $13.4 million for the quarter ended March 29,
1997. Acquisitions of property, plant and equipment were $6.4 million during
the three months ended March 28, 1998, as compared to $1.7 million during the
three months ended March 29, 1997.
Working capital at March 28, 1998 was $70.2 million, as compared to $95.8
million at December 27, 1997. 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 28, 1998.
The Company expects to spend approximately $6.9 million for one-time
transition costs to be incurred in connection with its strategic plan during
the remainder of fiscal 1998. As of March 28, 1998, the Company maintained
sufficient accruals for restructuring costs which are expected to be paid out
during the remainder of fiscal 1998.
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
$10.0 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.
The Company will continue to consider acquisitions and joint ventures. The
Company expects to evaluate all viable forms of financing when examining
potential future acquisitions. There can be no assurance however, 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. Any computer program that
has date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or other
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Since early
15
<PAGE>
1997, the Company has been pursuing a strategy of replacing and updating its
information systems in connection with its change in strategic focus. The
Company believes that the costs of modifying and replacing those systems which
are not Year 2000 compliant will be approximately $10.3 million, of which
approximately $5.3 million represents new systems development, which will be
capitalized, and approximately $5.0 million represents making existing systems
year 2000 compliant, which will be expensed as incurred. In addition, the
Company is discussing with its vendors and customers the possibility of any
interface difficulties which may affect the Company. The project is estimated
to be completed prior to any anticipated impact on its operating systems. The
Company believes that with a modification and replacement strategy the Year
2000 issue will not pose significant conversion problems for its computer
systems. However, if this strategy is not completed on a timely basis, the
Year 2000 issue could have a material impact on the operations of the Company.
16
<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.
17
<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 12, 1998 /s/ Richard E. Snyder
-----------------------------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
May 12, 1998 /s/ John C. Ferrara
-----------------------------------------
John C. Ferrara
Executive Vice President and
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000790706
<NAME> GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-22-1998
<PERIOD-END> MAR-28-1998
<CASH> 30,125
<SECURITIES> 0
<RECEIVABLES> 64,176
<ALLOWANCES> 21,781
<INVENTORY> 33,183
<CURRENT-ASSETS> 134,476
<PP&E> 84,268
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<TOTAL-ASSETS> 292,984
<CURRENT-LIABILITIES> 64,337
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0
65,000
<COMMON> 271
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<TOTAL-LIABILITY-AND-EQUITY> 292,984
<SALES> 46,387
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<INCOME-PRETAX> (20,922)
<INCOME-TAX> (50)
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