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 June 26, 1999
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 -14399
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1104930
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
888 Seventh Avenue, New York, New York 10106
(Address of principal executive offices) (Zip Code)
(212) 547-6700
(Registrant's telephone number, including area code)
--------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 28,299,434 shares outstanding as of
August 9, 1999.
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
(DEBTOR-IN-POSSESSION)
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- 3
June 26, 1999 (Unaudited) and December 26, 1998
Condensed Consolidated Statements of Operations and
Comprehensive Loss-- 5
for the three months ended June 26, 1999 and
June 27, 1998 (Unaudited)
Condensed Consolidated Statements of Operations and 6
Comprehensive Loss-- for the six months ended June 26,
1999 and June 27, 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows-- 7
for the six months ended June 26, 1999 and June 27, 1998
(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited) 9
Item 2. Management's Discussion and Analysis of 21
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 3. Default Upon Senior Securities 30
Item 6. Exhibits and reports on Form 8-K 30
SIGNATURES 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- ------------------------------------------------------------------------------
<TABLE>
ASSETS
<S> <C> <C>
June 26, December 26,
1999 1998
------------ -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 8,158 $15,330
Accounts receivable, net 24,879 41,411
Inventories 28,942 33,068
Royalty advances 12,934 17,198
Other current assets 20,721 17,946
------------- ------------
Total current assets 95,634 124,953
------------- ------------
OTHER ASSETS
Accounts receivable-- long term 3,453 4,127
Other noncurrent assets 8,580 10,667
------------- ------------
Total other assets 12,033 14,794
------------- ------------
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation and
amortization of $39,334 at
June 26, 1999 and $37,946 at
December 26, 1998 27,954 29,955
FILM LIBRARY, net of accumulated
amortization of $9,592 at June 26, 1999
and $7,849 at December 26, 1998 54,924 55,858
GOODWILL, net of accumulated
amortization of $3,448 at
June 26, 1999 and $2,805
at December 26, 1998 28,747 29,391
------------ ------------
TOTAL ASSETS $219,292 $254,951
============ ============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
3
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
>
<S> <C> <C>
June 26, December 26,
1999 1998
---- ----
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 24,979 $ 26,002
Accrued compensation and fringe benefits 5,051 4,977
Revolving credit facility --- 21,637
DIP loan 7,500 ---
Loan facility --- 10,000
Long term debt in default --- 150,000
Guaranteed preferred beneficial interests in the Company's and
Golden Books Publishing Company, Inc.'s Convertible
Debentures --- 115,000
Other current liabilities 39,485 61,634
------------- -----------
Total current liabilities 77,015 389,250
------------- -----------
NONCURRENT LIABILITIES
Accumulated post-retirement benefit obligation 29,859 29,609
Deferred compensation and other deferred liabilities 29,465 25,173
Liabilities subject to compromise 288,706 ---
------------- ------------
Total noncurrent liabilities 348,030 54,782
------------- ------------
STOCKHOLDERS' DEFICIT:
Convertible Preferred Stock - Series B, 13,000 shares authorized, 65,000 65,000
no par value, 13,000 shares issued and outstanding;
Common Stock, $.01 par value, 60,000,000 shares authorized, 283 279
28,299,434 and 27,899,047 shares issued as of
June 26, 1999 and December 26, 1998, respectively
Additional paid in capital 132,034 128,956
Accumulated deficit (399,286) (379,390)
Accumulated other comprehensive loss (962) (1,104)
------------- ------------
202,931) (186,259)
Less cost of common stock in treasury - 208,800 shares 2,822 2,822
------------- ------------
Total common stockholders' deficit (205,753) (189,081)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 219,292 $ 254,951
============= ============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
4
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
Three Months Ended
June 26, 1999June 27, 1999
------------- ------------
<S> <C> <C>
REVENUES $31,855 $43,145
------------- ------------
COSTS AND EXPENSES:
Cost of sales 21,939 41,832
Selling, general and administrative 17,996 26,996
Gain on sale of assets (2,026) ---
------------- ------------
Total costs and expenses 37,909 68,828
------------- ------------
LOSS BEFORE REORGANIZATION ITEMS, DISTRIBUTIONS ON
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE COMPANY'S AND GOLDEN BOOKS PUBLISHING
COMPANY, INC.'S CONVERTIBLE DEBENTURES,
INTEREST INCOME, INTEREST EXPENSE AND
PROVISION (BENEFIT) FOR INCOME TAXES (6,054) (25,683)
REORGANIZATION ITEMS 2,205 ---
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS
PUBLISHING COMPANY, INC.'S CONVERTIBLE
DEBENTURES (Contractual distributions of $2,402 for the three
months ended June 26, 1999) --- 2,516
INTEREST INCOME (30) (354)
INTEREST EXPENSE (Contractual interest expense of $3,415 for the
three months ended June 26, 1999) 336 3,004
------------- ------------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (8,565) (30,849)
PROVISION (BENEFIT) FOR INCOME TAXES 35 (207)
------------- ------------
NET LOSS --- (30,642)
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION (8,600) (233)
------------- ------------
COMPREHENSIVE LOSS $(8,600) $(30,875)
============= ============
NET LOSS PER BASIC COMMON SHARE $ (0.30) $ (1.21)
============= ============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended
----------------
June 26, June 27,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
REVENUES $66,624 $89,679
------------- ------------
COSTS AND EXPENSES:
Cost of sales 46,446 78,807
Selling, general and administrative 34,752 52,691
Gain on sale of assets (5,391) ---
------------- ------------
Total costs and expenses 75,807 131,498
------------- ------------
LOSS BEFORE REORGANIZATION ITEMS, DISTRIBUTIONS
ON GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS
PUBLISHING COMPANY, INC.'S CONVERTIBLE
DEBENTURES, INTEREST INCOME, INTEREST EXPENSE
AND PROVISION (BENEFIT) FOR INCOME TAXES (9,183) (41,819)
REORGANIZATION ITEMS 5,351 ---
DISTRIBUTIONS ON GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN THE COMPANY'S AND
GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES (Contractual distributions of
$4,863 for the six months ended June 26, 1999) 1,628 5,032
INTEREST INCOME (179) (1,025)
INTEREST EXPENSE (Contractual interest expense of $7,455 for the
six months ended June 26, 1999) 3,356 5,944
------------- ------------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (19,339) (51,770)
PROVISION (BENEFIT) FOR INCOME TAXES 557 (257)
------------- ------------
NET LOSS (19,896) (51,513)
OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION 142 (159)
------------- ------------
COMPREHENSIVE LOSS $(19,754) $(51,672)
============= ============
NET LOSS PER BASIC COMMON SHARE $ (0.75) $ (2.06)
============= ============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended
----------------
June 26, 1999 June 27, 1998
------------- ------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,896) $(51,513)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,776 6,177
Non-cash interest expense 337 214
Reorganization items 5,351 --
Gains on sales of assets (5,391) (492)
Provision for losses on accounts receivable 229 232
Other non-cash -- 790
Changes in assets and liabilities:
Decrease in accounts receivable 15,357 10,855
Decrease (increase) in inventories 2,916 (2,660)
Increase in royalty advances (2,296) (2,706)
(Increase) decrease in other current assets (2,519) 13
Decrease in accounts payable (1,023) (2,023)
Increase (decrease) in accrued compensation and fringe benefits 74 (643)
Other assets and liabilities 842 (510)
------------- ------------
Net cash provided by (used in) operating activities before
reorganization items 757 (42,266)
Reorganization items (5,351) --
------------- ------------
Net cash used in operating activities (4,594) (42,266)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (1,207) (9,330)
Additions to film library (575) (2,494)
Proceeds from sales of assets 11,462 655
Deposits and other 1,737 --
------------- ------------
Net cash provided by (used in) investing activities 11,417 (11,169)
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
7
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended
----------------
June 29, June 27,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions -- 222
(Repayment) borrowings of Revolving Credit Facility (21,637) 12,618
Borrowings under DIP loan (post petition) 10,000 --
Repayments under DIP loan (post petition) (2,500) --
------------- ------------
Net cash (used in) provided by financing activities (14,137) 12,840
EFFECT OF EXCHANGE RATE CHANGES ON CASH 142 (159)
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,172) (40,754)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,330 57,411
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,158 $ 16,657
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense, including interest and distributions on
Guaranteed Preferred Beneficial Interests in the Company's
and Golden Books Publishing Company, Inc.'s Convertible Debentures $ 1,020 $ 10,774
============= ============
Income taxes, net of refunds received $ 459 $ 15
============= ============
Non-cash activity:
Stock conversion on Guaranteed Preferred Beneficial Interests in the
Company's and Golden Books Publishing Company, Inc.'s Convertible
Debentures $ 5,205 $ --
============= ============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
8
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
---------------------
Financial accounting and reporting during a Chapter 11 proceeding (See Note B,
below) is prescribed in Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly,
certain pre-petition liabilities, which may be subject to settlement, have been
classified as liabilities subject to compromise in the accompanying condensed
consolidated balance sheet at June 26, 1999. SOP 90-7 also requires that the
Company record all transactions incurred as a result of the Bankruptcy filing
separately as reorganization items on the condensed consolidated statement of
operations and comprehensive loss for the three and the six month periods ended
June 26, 1999.
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which assumes continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filings (See Note B, below) and
circumstances relating to these events, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. Certain events including a sale of the Company or parts thereof
may necessitate a material write down of assets, including goodwill associated
with the Company's businesses. These unaudited condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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 June 26, 1999 and the results of operations and cash flows
for the three and six month periods ended June 26, 1999 and June 27, 1998. These
unaudited 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 26, 1998.
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 condensed
consolidated financial statements as the Guaranteed Preferred Beneficial
Interests in the Company's and Golden Books Publishing Company Inc.'s
Convertible Debentures (the "TOPrS" or the "Preferred Securities"), is wholly
owned by the Company, has no independent operations and its assets consist
solely of the $109.8 million in aggregate principal amount of 8 3/4% Convertible
Debentures due 2016 of the Company and Golden Books Publishing Company, Inc.
("Golden Books Publishing") (see Note F). 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.
9
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE B - Liquidity and Business Outlook
------------------------------
The Company experienced liquidity difficulties as a result of operating losses,
working capital deficiencies and negative operating cash flows. These
difficulties hampered the Company's ability to fund day-to-day operations. As a
result, on February 26, 1999 the Company, as well as Golden Books Publishing and
Golden Books Home Video, Inc. (collectively, the "Debtors"), filed petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code"). The petitions were filed in the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court"). The
Debtors are continuing to operate their business and hold their assets as
debtors-in-possession. No trustee has been appointed. See Footnote 2 to the
consolidated financial statements of the Company contained in the Company's Form
10-K for the year ended December 26, 1998 for a description of the events
leading to the Bankruptcy filing.
As a result of incurring operating losses, working capital deficiencies and
negative operating cash flows, the Company, in 1998, defaulted on its Senior
Notes (as defined, see Note E), its then outstanding NationsCredit Revolving
Credit Facility (as defined, see Note E), and other obligations.
As a result of defaults, at December 26, 1998 the Senior Notes (as defined, see
Note E) are classified as a current liability on the accompanying condensed
consolidated balance sheet. As a result of the Bankruptcy filing, at June 26,
1999 the Senior Notes are classified as a liability subject to compromise on the
accompanying condensed consolidated balance sheet. Also as a result of defaults,
the Company's Revolving Credit Facility with NationsCredit (as defined, see Note
E) is classified as a current liability at December 26, 1998 on the accompanying
condensed consolidated balance sheet. The Company utilized the proceeds from the
DIP Loan (as defined) to repay all outstanding amounts under the Revolving
Credit Facility (see below for additional information). Further, as a result of
defaults, at December 26, 1998 the Loan Facility (as defined, see Note E) is
classified as a current liability on the accompanying condensed consolidated
balance sheet. As a result of the Bankruptcy filing, at June 26, 1999 the Loan
Facility is classified as a liability subject to compromise in the accompanying
condensed consolidated balance sheet.
The Company decided not to make a $5.7 million interest payment on the Senior
Notes due in September 1998. As a result of the Bankruptcy filing, the Company
has not paid a $5.7 million interest payment on the Senior Notes due in March
1999. The Company decided not to pay the cash and stock dividends due on the
Series B Preferred Stock in November 1998 and in February 1999. As a result of
the Bankruptcy filing, the Company has not paid dividends due in May and August
1999 on the Series B Preferred Stock. The Company also decided not to pay
interest on the TOPrS, due in accordance with the indenture underlying the
TOPrS, in November 1998 and in February 1999. As a result of the Bankruptcy
filing, the Company has not paid interest due on the TOPrS in May and August
1999.
As a result of the Bankruptcy filing, default provisions in the indenture
underlying the TOPrS have been violated. At December 26, 1998 the TOPrS are
classified as a current liability on the accompanying condensed consolidated
balance sheet and at June 26, 1999 the TOPrS are classified as a liability
subject to compromise on the accompanying condensed consolidated balance sheet.
As a result of the Company's failure to make interest payments on the Senior
Notes, a steering committee representing certain holders of the Senior Notes
(the "Senior Notes Steering Committee") was established. Additionally, as a
result of the Company's failure to make interest payments due on the TOPrS, a
steering committee representing certain holders of the TOPrS (the "TOPrS
Steering Committee") was established.
The Company, along with the Senior Notes Steering Committee and the TOPrS
Steering Committee engaged in extensive negotiations regarding a restructuring
of the Company's indebtedness and capital equity structure. These negotiations
resulted in an agreement in principle regarding the terms of the Company's
restructuring and the filing of the petition in the Bankruptcy Court on February
26, 1999. On March 25, 1999, the Company filed a Joint Plan of Reorganization
and the Disclosure Statement related to such Joint Plan of Reorganization. On
May 13, 1999, the Bankruptcy Court approved an amended Joint Plan of
Reorganization (the "Joint Plan of Reorganization") and an amended Disclosure
Statement pursuant to Section 1125 of the Bankruptcy Code. Ballots with respect
to the Joint Plan of Reorganization in the form approved by the Bankruptcy Court
have
10
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE B - Liquidity and Business Outlook (continued)
------------------------------
been circulated to those parties entitled to vote on it and a confirmation
hearing is scheduled for September 1, 1999. The Joint Plan of Reorganization
allows the Company to significantly reduce its existing debt, pay all trade
creditors in full and, under the direction of its current management team,
proceed with its publishing and entertainment operations. Under the Joint Plan
of Reorganization, the restructuring of the Company's indebtedness and revised
capital structure will be provided for as follows:
o The Senior Notes will be converted into (i) a new secured note in the
principal amount of $87.0 million due 2004, with interest at the rate of
10%, if paid in cash, or, at the Company's option for the first three
years, 13.5% payable in kind, and (ii) 42.5% of the Company's new common
stock to be issued post recapitalization, prior to dilution. The new note
will be secured by the existing collateral already granted to the holders
of the Senior Notes as well as certain additional collateral.
o The TOPrS indebtedness will be converted into 50% of the Company's new
common stock to be issued post recapitalization, prior to dilution.
o The Golden Press Holdings, L.L.C. ("GPH") loan in the amount of $10.0
million will be converted into 5% of the Company's new common stock to be
issued post recapitalization, prior to dilution.
Existing preferred and common shareholders will surrender their stock in
exchange for out-of-the money warrants to purchase 5% of the new Company's stock
to be allocated two-thirds to the preferred and one-third to the common
shareholders, to be issued post recapitalization, prior to dilution. The
restructuring also provides for a management stock incentive program for an
amount of common stock equal to 10% of the common stock issued on the effective
date of the Joint Plan of Reorganization. Of that amount, one-half (5%) will be
allocated to senior management upon the effective date with the balance being
made available for other management personnel and for future grants.
Additionally, on the effective date of the Joint Plan of Reorganization, Richard
E. Snyder's (the Company's current Chairman of the Board and Chief Executive
Officer) employment agreement will be amended, as more fully disclosed in the
Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in
consideration of his surrendering certain claims and rights under his current
employment agreement, 2-1/2% of the Company's new common stock, among other
things. The foregoing summary of the Joint Plan of Reorganization does not
purport to be complete and is subject to the terms of the Joint Plan of
Reorganization.
There can be no assurance that the Joint Plan of Reorganization as approved by
the Bankruptcy Court, or as it may be amended, will be confirmed by the
Bankruptcy Court. If the Company is unable to obtain approval of its Joint Plan
of Reorganization, the Company, its creditors and/or security holders may seek
other alternatives for the Company, including the sale of the Company or parts
thereof through an auction process.
The Debtors received approval from the Bankruptcy Court to pay in full
satisfaction and on a timely basis, all undisputed pre- petition obligations to
all of its current employees, including salaries, wages and benefits.
Additionally, on March 25, 1999, the Bankruptcy Court gave final approval to a
$55.0 million debtor-in-possession financing facility consisting of a $45.0
million credit facility and a $10.0 million term facility from The CIT Group
(the "DIP Loan"). The DIP Loan is for an initial period of two years with annual
renewals thereafter with interest rates ranging from the Prime Rate plus 1/8th
of 1% to 5/8th of 1%. Additionally, the DIP Loan contains various financial
covenants that the Company is required to maintain on a quarterly basis. The DIP
Loan-term facility is secured by certain property, receivables and inventory of
the Company. The Company utilized the proceeds from the DIP Loan to repay all
outstanding amounts under the then existing Revolving Credit Facility
(approximately $9.6 million) with the remainder available to fund operations
during the pendency of the Chapter 11 proceedings.
As previously noted, the Company is currently operating its business under the
supervision of the Bankruptcy Court and continuation of the Company as a going
concern is contingent upon, among other things, the ability to gain approval of
the requisite parties under the Bankruptcy Code and confirmation by the
Bankruptcy Court of the final Joint Plan of Reorganization, the ability to
comply with the DIP Loan and its ability to consummate the final Joint Plan of
Reorganization. Consummation of the Joint Plan of Reorganization will require
the Company to resolve certain material claims, to obtain exit financing and to
complete negotiations regarding the terms of the indenture governing the new
$87.0 million secured note. Under the Joint Plan
11
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE B - Liquidity and Business Outlook (continued)
------------------------------
of Reorganization, exit financing is limited to $60.0 million as long as the new
$87.0 million secured note is outstanding, and initially to $45.0 million. The
Company is negotiating terms of such exit financing for up to $60.0 million. The
Company has experienced recurring operating losses, working capital
deficiencies, negative operating cash flow and is currently in default under all
of its debt agreements. Those matters raise substantial doubt about the
Company's ability to continue as a going concern. In the event the Joint Plan of
Reorganization is confirmed and consummated, continuation of the Company as a
going concern is contingent on the Company's ability to return to profitability
and to generate sufficient cash flow to meet its operational and financing
requirements.
In January 1999, the Company sold its Coffeyville Distribution Center for
approximately $2.2 million, which resulted in a gain of approximately $1.5
million. Additionally, the Company sold its operating facility in Canada for
approximately $1.9 million, which resulted in a gain of approximately $1.9
million. The Canadian operation relocated to a leased facility after the sale.
Such gains of approximately $3.4 million were recorded as a gain on sale of
assets in the accompanying condensed consolidated statement of operations for
the six month period ended June 26, 1999.
In April 1999, the Company sold its Adult Publishing business for approximately
$11.0 million, which resulted in a gain of approximately $2.0 million. Such gain
has been recorded in the Company's condensed consolidated statement of
operations for the three and six month period ended June 26, 1999. The Company
has entered into a Letter of Intent to sell its Sturtevant, WI manufacturing
facility subject to the negotiation of a formal agreement and the satisfaction
of other substantial conditions.
The deadline fixed by the Bankruptcy Court for the filing of proofs of claim
relating to claims arising prior to the commencement of the Bankruptcy filing
has passed. The Company is in the process of analyzing the proofs of claim that
were filed.
12
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C - Liabilities Subject to Compromise and Reorganization Items
----------------------------------------------------------
Liabilities subject to compromise in the accompanying condensed consolidated
balance sheet includes the following amounts at June 26, 1999:
Debt:
Loan facility $10,000
Senior notes 150,000
Guaranteed preferred beneficial interests in the
Company's and Golden Books Publishing
Company, Inc.'s Convertible Debentures 109,795
-------
Total debt 269,795
Other long-term liabilities (principally interest expense) 18,911
-------
Total long-term liabilities subject to compromise $288,706
--------
SOP 90-7 requires that the Company record all transactions incurred as a result
of the Bankruptcy filing separately as reorganization items. Accordingly,
reorganization items included in the condensed consolidated statement of
operations and comprehensive loss includes the following for the three and six
month periods ended June 26, 1999 (in thousands):
Three months ended Six months ended
June 26, 1999 June 26, 1999
------------- -------------
Professional fees $ 1,837 $ 3,844
Temporary Help 93 93
Interest income 112 (140)
Financing costs 387 1,554
------------------ ----------------
$ 2,205 $ 5,351
================== ================
In accordance with SOP 90-7, the accompanying condensed consolidated balance
sheet includes approximately: (i) $14.8 million classified as accounts payable,
(ii) $9.9 million classified as other current liabilities, (iii) $29.9 million
classified as accumulated post-retirement benefit obligation and (iv) $14.2
million classified as deferred compensation and other deferred liabilities. Such
amounts consist of pre-petition obligations for which the Company has not yet
received approval from the Bankruptcy Court to pay in full satisfaction on a
timely basis. The Company also stopped recording interest expense related to its
debt facilities currently classified as liabilities subject to compromise
effective February 26, 1999 in accordance with the requirements of SOP 90-7.
13
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE D - Inventories
-----------
Inventories consisted of the following (in thousands)
June 26, December 26,
1999 1998
---- ----
(unaudited)
Raw materials $1,549 $1,911
Work-in-progress 2,445 2,914
Finished goods 21,698 24,993
Film library 3,250 3,250
---------------- ---------------
$28,942 $33,068
================ ===============
NOTE E - Debt
----
Senior Notes: The Company currently has outstanding $150.0 million principal
amount of $7.65% Senior Notes due 2002 (the "Senior Notes"). Interest is payable
semiannually on September 15th and March 15th. The Indenture 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. Subsequently, on October 15, 1998, the Company
announced that it would not pay the September 15th interest payment. As a
result, the Company is in default under the Indenture and the holders of the
Senior Notes have the right (i) to demand the entire $150.0 million principal
amount of the Senior Notes and (ii) to foreclose on the collateral securing the
Senior Notes. The Company does not have sufficient resources to repay this
obligation. As a result of the default, at December 26, 1998, the Senior Notes
are classified as a current liability on the condensed consolidated balance
sheet. In accordance with SOP 90-7 and as a result of the Bankruptcy filing, the
Company stopped recording interest expense related to the Senior Notes effective
February 26, 1999 and at June 26, 1999 the Senior Notes have been classified as
a liability subject to compromise on the accompanying condensed consolidation
balance sheet. As described in Note B, under the terms of the Joint Plan of
Reorganization, the Senior Notes will be converted into (i) a new secured note
in the principal amount of $87.0 million, due 2004, with interest at the rate of
10%, if paid in cash, or, at the Company's option for the first three years,
13.5% payable in kind, and (ii) 42.5% of the Company's new common stock to be
issued post recapitalization, prior to dilution. The note will be secured by the
existing collateral already granted to the holders of the Senior Notes as well
as certain additional collateral.
Revolving Credit Facility: On June 3, 1998, the Company entered into a $30.0
million three-year revolving credit facility with NationsCredit ("Revolving
Credit Facility"). Borrowings under the facility bore interest at the prime
rate. The Revolving Credit Facility was secured by certain receivables and
inventory of Golden Books Publishing. As a result of entering into the Revolving
Credit Facility, Golden Books Publishing amended the Indenture governing the
Senior Notes to, among other things, (i) permit Golden Books Publishing to
secure up to $30.0 million of borrowings and related obligations under the
Revolving Credit Facility, (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. As a result of the Company's failure to make the required
interest payment under the Indenture governing the Senior Notes (see above), the
Company was not in compliance with certain covenants under the Revolving Credit
Facility. Accordingly, the lender at its option could have given notice that the
amounts outstanding were immediate due and payable. As a result, at December 26,
1998 the Revolving Credit Facility was classified as a current liability on the
condensed consolidated balance sheet. The Company did not have sufficient
resources to repay this obligation. As described in Note B, on March 25, 1999,
the Company entered into the DIP Loan, a $55.0
14
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE E - Debt (continued)
----
million, three-year revolving credit ($45.0 million) and term facility ($10.0
million) with The CIT Group. The revolving credit and term facilities are for an
initial period of two years with annual renewals thereafter with interest rates
ranging from the Prime Rate plus 1/8% of 1% to 5/8% of 1%. Additionally, the
facility provided for various financial covenants which the Company is required
to maintain on a quarterly basis. The revolving credit and term facilities are
secured by certain receivables and inventory of the Company. The Company
utilized a portion of the proceeds from the DIP Loan to repay all of the then
outstanding amounts under the Company's Revolving Credit Facility of
approximately $9.6 million. At June 26, 1999, the Company has $7.5 million
outstanding under the DIP Loan.
Loan Facility: On September 4, 1998, the Company entered into a $25.0 million
loan facility with GPH (the "Loan Facility"). The Loan 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 Loan
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 June 26, 1999, the Company
had outstanding borrowings under the Loan 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 Loan Facility.
Accordingly, the lender at its option may give notice that the amounts
outstanding under the Loan Facility are immediately due and payable. The Company
has not been informed of any such acceleration of payment. Due to the default,
at December 26, 1998, the Loan Facility was classified as a current liability on
the condensed consolidated balance sheet. In accordance with SOP 90-7 and as a
result of the Bankruptcy filing, the Company stopped recording interest expense
related to the Loan Facility effective February 26, 1999 and at June 26, 1999
the Loan Facility has been classified as a liability subject to compromise in
the accompanying condensed consolidated balance sheet. As described in Note B,
under the Joint Plan of Reorganization, the Loan Facility in the amount of $10.0
million will be converted into 5% of the Company's new common stock to be issued
post recapitalization, prior to dilution. Additionally, GPH will also waive and
release the collateral extended to it with respect to the borrowings and will be
relieved of its obligation to loan up to an additional $15.0 million to the
Company.
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. In January 1999 certain holders of the
Preferred Securities converted $5.2 million worth of Preferred Securities for
400,003 shares of the Company's Common Stock. At June 26, 1999 the Preferred
Securities had a liquidation value of $109.8 million. The Convertible Debentures
will mature August 20, 2016, and may be redeemed, in whole or in part, at any
time after the occurrence of a Tax Event or on an Investment Company Event (as
defined). Effective January 10, 1997, the Company registered the resale of the
Preferred Securities with the Securities and Exchange Commission.
15
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE F - Preferred Securities (continued)
--------------------
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 June 26, 1999
and for the three and six month periods ended June 26, 1999 and June 27, 1998
are as follows (in thousands):
June 26, 1999
-------------
Current $89,244
Noncurrent assets 121,243
-------------
Total assets $210,487
=============
Current liabilities $197,394
Noncurrent liabilities 51,336
Liabilities subject to compromise 288,706
-------------
Total liabilities 537,436
Stockholders' deficit (326,949)
-------------
Total Liabilities and Stockholders' Deficit $210,487
=============
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
<S> <C> <C> <C> <C>
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $31,855 $43,145 $66,624 $89,679
Gross profit 9,916 1,313 20,178 10,872
Loss before interest expense income, reorganizational
items and(benefit) provision for income taxes (6,001) (25,169) (9,092) (43,989)
Reorganizational Items (2,205) -- (5,351) --
--------- --------- --------- ---------
Net loss $(11,230) $(32,567) $(25,147) $(58,455)
======== ========= ========= =========
</TABLE>
Due to its liquidity difficulties, the Company decided on November 5, 1998 that
it was deferring a $2.5 million interest payment on the Preferred Securities on
such date until February 20, 1999, in accordance with the indenture governing
the Preferred Securities. On February 20, 1999, the Company again decided that
it was deferring the $2.5 million interest payment on the Preferred Securities
in accordance with the indenture governing the Preferred Securities.
As a result of the Bankruptcy filing, the holders of the Preferred Securities,
at their option, can demand acceleration of the $109.8 million due under the
Preferred Securities agreement. The Company does not have sufficient resources
to repay this obligation. The Company has not been informed of any such
acceleration of payment. As a result of the default, at December 26, 1999, the
Preferred Securities are classified as a current liability on the accompanying
condensed consolidated balance sheet. In accordance with SOP 90-7 and as a
result of the Bankruptcy filing, the Company stopped recording interest expense
related to the Preferred Securities effective February 26, 1999 and at June 26,
1999 the Preferred Securities have been classified as a liability subject to
compromise on the accompanying condensed consolidated balance sheet. As
described in Note B, under the terms of the Joint Plan of Reorganization as
filed with the Bankruptcy Court (which is subject to approval), the Preferred
Securities will be converted into 50% of the Company's new common stock to be
issued post recapitalization, prior to dilution.
16
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE G - Loss Per Common Share
---------------------
Loss per common share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
<S> <C> <C> <C> <C>
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands except for per (In thousands except for per
share data) share data)
Net Loss $(8,600) $(30,642) $(19,896) $(51,513)
Preferred dividend requirements -- (2,206) (1,252) (4,400)
----------- ------------ ----------- ------------
Loss applicable to basic common stock $(8,600) $(32,848) $(21,148) $(55,913)
=========== ============ =========== ============
Weighted average basic common shares
outstanding 28,299 27,165 28,233 27,121
----------- ------------ ----------- ------------
Loss per basic common share $ (0.30) $ (1.21) $ (0.75) $ (2.06)
=========== ============ =========== ============
</TABLE>
In accordance with SOP 90-7 and as a result of the bankruptcy filing, the
Company stopped recording the preferred dividend requirements related to the
Series B Preferred Stock effective February 26, 1999
NOTE H - 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"). On October 7, 1998, holders of the
Company's TOPrS filed a class-action complaint based on substantially identical
allegations, which complaints were subsequently consolidated. The consolidated
complaint charges that the Company and certain officers and directors of the
Company during the relevant time period were in violation of Section 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. While the outcome of a
decision on these complaints cannot be predicted with any certainty, the Company
believes that it has meritorious defenses to the claims. The Company is in
settlement negotiations with representatives of the plaintiffs.
Golden Books Publishing and Penn Corporation ("Penn") have been informed by the
Environmental Protection Agency (the "EPA") and/or state regulatory agencies
that they may be potentially responsible parties ("PRPs") and face liabilities
under the Comprehensive Environmental Response, Compensation, and Liability Act
(commonly 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.
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.
17
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Contingencies (consolidated)
----------------------------
In 1991 the EPA issued a unilateral administrative order (the "1991 Order") to
the Company and four other PRPs, requiring the respondents to perform a remedial
design and remedial action at the Hertel Landfill Superfund Site in Plattekill,
New York (the "Site"). The Company did not agree to comply with the Order. EPA
subsequently sued the Company and other PRPs seeking recovery of its costs at
the Site. Various PRPs in the litigation brought claims for contribution against
each other and the Company. The Company settled its liability to the United
States for noncompliance with the 1991 Order and agreed to comply with the Order
by implementing the remedy at the Site, which is now estimated to cost up to
$4.9 million, excluding potential groundwater remediation costs. On July 9,
1998, the Company and other PRPs entered into a Consent Decree with the United
States and the State of New York to resolve their alleged liability for past
response costs and formalize their agreement to perform the remedy at the site.
Under the decree, the Company and the other settling parties are jointly and
severally obligated to perform the remedy and reimburse certain governmental
past and future costs. The Company has paid approximately $1.7 million toward
remedial costs since 1996 and has completed construction of the landfill cap.
The Company's share of future costs for operation and maintenance of the cap and
landfill monitoring are expected to be less than $500,000.
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 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 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 $5.7 million in the condensed consolidated balance sheet at
June 26, 1999. While it is not feasible to predict or determine the outcomes of
these matters, it is the opinion of management that the Company maintains
adequate reserves in the condensed consolidated balance sheet at June 26, 1999.
18
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Contingencies (continued)
-------------
The Company and its subsidiaries are parties to certain other legal proceedings
which are incidental to their ordinary business, none of which the Company
believes are material to the Company and its subsidiaries taken together as a
whole.
The Company's Common Stock was delisted from the NASDAQ National Market on
February 17, 1999 for failure to meet continued listing standards. The Company's
Common Stock is currently being quoted on the OTC bulletin board.
NOTE I - Industry Segments
-----------------
The Company has been reporting results under three operating segments: Consumer
Products, Entertainment and Commercial. The Company's Consumer Products Segment
is engaged in the creation, publication, manufacturing, printing and marketing
of story and picture books, coloring books and other activity books, interactive
electronic books and games, and products for children as well as multimedia
"entertainment" products. The Company's foreign operations within the Consumer
Products Segment consists of a sales subsidiary in Canada and a small sales
branch in the United Kingdom.
The Consumer Products segment includes the Company's Children's and Adult
Publishing divisions (the Adult Publishing division was sold in April 1999 --
See Note B). The Entertainment Segment includes the Company's extensive library
of character-based family entertainment properties. The Entertainment Segment's
library is comprised of copyrights, distribution rights, trademarks or licenses
relating to characters, television programs and motion pictures, both animation
and live action, and includes individual specials and multiple episode series.
The Commercial segment provides printing, graphic, creative and distribution
services and printing business. The Commercial segment 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 a core business segment
of the Company.
The Company evaluates performance based on several factors, of which the primary
measure is operating segment earnings before interest, taxes, depreciation and
amortization ("EBITDA").
19
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE I - Industry Segments (continued)
-----------------
Information by industry segment is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
<S> <C> <C> <C> <C>
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
---- ---- ---- ----
(In millions) (In millions)
Revenues:
Consumer Products $21.8 $34.7 $50.7 $71.0
Entertainment 8.4 4.6 12.3 11.6
Commercial 1.6 3.8 3.6 7.1
-------------- -------------- -------------- --------------
Total Revenues $31.8 $43.1 $66.6 $89.7
============== ============== ============== ==============
Gross Profit:
Consumer Products $4.4 $(1.0) $12.7 $4.5
Entertainment 5.5 2.3 7.5 6.4
Commercial -- -- -- --
-------------- -------------- -------------- --------------
Total Gross Profit $9.9 $1.3 $20.2 $10.9
============== ============== ============== ==============
SG&A
SG&A before transition costs $18.0 $22.2 $34.8 $43.7
Transition costs -- 4.8 -- 9.0
-------------- -------------- -------------- --------------
Total SG&A $18.0 $27.0 $34.8 $52.7
============== ============== ============== ==============
EBITDA
Gross profit $9.9 $1.3 $20.2 $10.9
SG&A (18.0) (27.0) (34.8) (52.7)
Gain on sale of assets 2.0 -- 5.4 --
Reorganization items (2.2) -- (5.3) --
-------------- -------------- -------------- --------------
Operating loss (8.3) (25.7) (14.5) (41.8)
Depreciation & amortization 3.3 2.9 6.8 6.2
-------------- -------------- -------------- --------------
EBITDA $(5.0) $(22.8) $(7.7) $(35.6)
============== ============== ============== ==============
Depreciation and Amortization:
Consumer Products $1.4 $1.0 $2.7 $2.4
Entertainment 1.0 1.2 2.2 2.4
Commercial 0.1 0.1 0.2 0.2
Corporate 0.8 0.6 1.7 1.2
-------------- -------------- -------------- --------------
Total Depreciation & $3.3 $2.9 $6.8 $6.2
Amortization
============== ============== ============== ==============
</TABLE>
20
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q and in particular Management's Discussion and
Analysis of Financial Condition and Results of Operations contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results of operations and
future financial condition may differ materially from those expressed or implied
in any such forward-looking statements as a result of many factors, including
factors that may be beyond the Company's control. The Company is currently
operating its business as debtor-in-possession under Chapter 11 and continuation
of the Company as a going concern is contingent upon, among other things, the
ability to gain approval of the requisite parties under the United States
Bankruptcy Code and confirmation by the Bankruptcy Court of the Company's
amended Joint Plan of Reorganization (the "Joint Plan of Reorganization"). In
addition, the Company's continuation as a going concern is contingent upon its
ability to comply with its debtor-in-possession financing facility and its
ability to consummate the final Joint Plan of Reorganization. Consummation of
the Joint Plan of Reorganization will require the Company to resolve certain
material claims, to obtain exit financing and to complete negotiations regarding
the terms of the indenture governing the new $87.0 million secured note. If the
Company's Joint Plan of Reorganization is confirmed and consummated,
continuation of the Company's business thereafter is dependent, among other
things, on the Company's ability to return to profitability and generate
sufficient cash flow to meet its operational and financing requirements. Other
factors that may cause actual results of operations and future financial
condition to differ from those expressed or implied in any forward-looking
statements contained herein include loss of key licenses, adverse changes in
relationships with key customers, the degree of acceptance of new product
introductions, the level of product returns, changes in consumer preferences,
such as the growth of computer-based products and consumer spending habits,
competition from existing and potential competitors, pricing pressures, costs of
labor and other costs and expenses, demographics and general economic
conditions. The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statements contained herein or that may be made from time to time by or on
behalf of the Company.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements of Golden Books Family
Entertainment, Inc. and Subsidiaries (Debtor-In-Possession) (the "Company") at
June 26, 1999 and for the three and six month periods ended June 26, 1999 and
June 27, 1998 and the related notes thereto.
Financial Condition, Liquidity and Capital Resources
As a result of incurring operating losses, working capital deficiencies and
negative operating cash flows, the Company, in 1998, defaulted on its Senior
Notes, its then outstanding NationsCredit Revolving Credit Facility, and other
obligations.
After extensive negotiations with the Senior Notes Steering Committee and the
Preferred Securities Steering Committee, the Company reached an agreement in
principle with its major creditors, pursuant to which its existing long-term
debt would be significantly reduced. In accordance with that agreement, the
Company and two of its subsidiaries on February 26, 1999 filed petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code. On May 13,
1999, the Bankruptcy court approved an amended Joint Plan of Reorganization and
an amended Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code.
Ballots with respect to the Joint Plan of Reorganization in the form approved by
the Bankruptcy Court have been circulated to those parties entitled to vote on
it and a confirmation hearing is scheduled for September 1, 1999.
The Company's condensed consolidated financial statements at June 26, 1999 and
for the three and six month periods ended June 26, 1999 have been prepared on a
going concern basis, which assumes continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the filing of the petitions in the pre-negotiated
Chapter 11 proceedings and circumstances relating to these events, such
realization of assets and liquidation of liabilities is subject to significant
uncertainty. These conditions raise substantial doubt as to the Company's
ability to continue as a going concern. Certain events, including a sale of the
Company or parts thereof may necessitate a material write-down of assets,
including goodwill associated with the Company's business.
21
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
The Joint Plan of Reorganization allows the Company to significantly reduce its
existing debt, pay all trade creditors in full and, under the direction of its
current management team proceed with its publishing and entertainment
operations. Under the Joint Plan of Reorganization approved by the Bankruptcy
Court on May 13, 1999, the restructuring of the Company's indebtedness and
revised capital structure will be provided for as follows:
o The Senior Notes will be converted into (i) a new secured note in the
principal amount of $87.0 million due 2004, with interest at the rate
of 10%, if paid in cash, or, at the Company's option for the first
three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new
common stock to be issued post recapitalization, prior to dilution. The
new note will be secured by the existing collateral already granted to
the holders of the Senior Notes as well as certain additional
collateral.
o The Preferred Securities indebtedness will be converted into 50% of the
Company's new common stock to be issued post recapitalization, prior to
dilution.
o The Golden Press Holdings, L.L.C. loan in the amount of $10.0 million
will be converted into 5% of the Company's new common stock to be
issued post recapitalization, prior to dilution.
Existing preferred and common shareholders will surrender their stock in
exchange for out-of-the money warrants to purchase 5% of the new Company's stock
to be allocated two-thirds to the preferred and one-third to the common
shareholders, to be issued post recapitalization, prior to dilution. The
restructuring also provides for a management stock incentive program for an
amount of common stock equal to 10% of the common stock issued on the effective
date of the Joint Plan of Reorganization. Of that amount, one-half (5%) will be
allocated to senior management upon the effective date with the balance being
made available for other management personnel and for future grants.
Additionally, on the effective date of the Joint Plan of Reorganization, Richard
E. Snyder's (the Company's current Chairman of the Board and Chief Executive
Officer) employment agreement will be amended, as more fully described in the
Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in
consideration of his surrendering certain claims and rights under his current
employment arrangements, 2-1/2% of the Company's new common stock, among other
things. The foregoing summary of the Joint Plan of Reorganization does not
purport to be complete and is subject to the terms of the Joint Plan of
Reorganization as filed with the Bankruptcy Court.
There can be no assurance that the Joint Plan of Reorganization as filed or
amended will be confirmed by the Bankruptcy Court and consummated. If the
Company is unable to obtain approval of its Joint Plan of Reorganization, the
Company, its creditors and/or equity security holders may seek other
alternatives for the Company, including the sale of the Company or parts thereof
through an auction process. Consummation of the Joint Plan of Reorganization is
dependent upon the completion of contractual arrangements for exit financing (up
to $60.0 million), resolution of certain material claims and the completion of
negotiations regarding the terms of the indenture governing the new $87.0
million secured note.
The Bankruptcy Court has approved a $55 million debtor-in-possession financing
facility consisting of a $45 million credit facility and a $10 million term
facility from The CIT Group (the "DIP Loan"). The DIP Loan is for an initial
period of two years with annual renewals thereafter with interest rates ranging
from the Prime Rate plus 1/8th of 1% to 5/8th of 1%. Additionally, the DIP Loan
contains various financial covenants which the Company is required to maintain
on a quarterly basis. The DIP Loan is secured by certain receivables and
inventory of the Company. The Company utilized the proceeds from the DIP Loan to
repay all outstanding amounts under the then outstanding NationsCredit Revolving
Credit Facility (approximately $9.6 million) with the remainder anticipated to
be utilized to fund operations during the pendency of the Chapter 11
proceedings.
Continuation of the Company as a going concern is contingent upon, among other
things, the ability to gain approval of the requisite parties under the
Bankruptcy Code and confirmation by the Bankruptcy Court of the final Joint Plan
of Reorganization, the ability to comply with the DIP Loan and the Company's
ability to consummate the final Joint Plan of Reorganization. Consummation of
the Joint Plan of Reorganization will require the Company to resolve certain
material claims, to obtain exit financing and to complete negotiations regarding
the terms of the indenture governing the new $87.0 million secured note. Under
the Joint Plan of Reorganization, exit financing is limited to $60.0 million as
long as the new $87.0 million secured note is outstanding, and initially to
$45.0 million. The Company is negotiating terms of such exit financing for up to
$60.0 million. The Company has experienced recurring operating losses, working
capital deficiencies, negative operating cash flow and is currently in default
under all of its debt agreements. Those matters raise substantial doubt about
the Company's ability to continue as a
22
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
going concern. In the event the Joint Plan of Reorganization is confirmed and
consummated, continuation of the Company as a going concern is contingent on the
company's ability to return to profitability and to generate sufficient cash
flow to meet its operational and financing requirements.
Assuming the Joint Plan of Reorganization is confirmed and consummated, the
Company is expected to adopt "Fresh Start Accounting" in accordance with SOP
90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7").
At June 26, 1999, working capital was approximately $18.6 million as compared to
a working capital deficiency of approximately $(264.3) million at December 26,
1998. The increase in working capital is primarily attributable to the
reclassification of the Company's debt facilities and accrued interest from
current liabilities at December 26, 1998 to liabilities subject to compromise at
June 26, 1999 in accordance with the requirements of SOP 90-7.
During 1999, the Company continued its disposition of non-core assets with the
sale of its Coffeyville Distribution Center for approximately $2.2 million,
which resulted in a gain of approximately $1.5 million. Additionally, the
Company sold its operating facility in Canada for approximately $1.9 million,
which resulted in a gain of approximately $1.9 million. The Canadian operation
relocated to a leased facility after the sale. In April 1999, the Company sold
its Adult Publishing business for approximately $11.0 million, which resulted in
a gain of approximately $2.0 million. Such gains of approximately $5.4 million
were recorded in gain on sale of assets in the Company's condensed consolidated
statement of operations and comprehensive loss for the six months ended June 26,
1999. The Company has entered into a Letter of Intent to sell its Sturtevant, WI
manufacturing facility subject to the negotiation of a formal agreement and the
satisfaction of other substantial conditions.
Cash Flow for the six months ended June 26, 1999 utilized cash of approximately
$7.2 million compared to cash utilized of approximately $40.8 million for the
six months ended June 27, 1998. The improvement in cash flow is primarily
attributable to the Company's reduction in operating loss, proceeds from the
sale of assets of approximately $11.4 million and decreases in accounts
receivable and inventory balances. Additionally, the six months ended June 26,
1999 included proceeds from the DIP loan of $7.5 million. Acquisitions of
property, plant and equipment were approximately $1.2 million during the six
months ended June 26, 1999, as compared to approximately $9.3 million during the
six months ended June 27, 1998. Additions to the Company's film library were
approximately $0.6 million during the six months ended June 26, 1999 as compared
to approximately $2.5 million during the six months ended June 26, 1998.
Three months ended June 26, 1999 compared to three months ended June 27, 1998
The Company has been reporting results under three operating segments the: (i)
Consumer Products, (ii) Entertainment, and (iii) Commercial Products Segments.
The Consumer Products Segment includes the Children's and Adult Publishing
Divisions (the Adult Publishing division was sold in April 1999 -- see above).
The Entertainment Segment includes the Company's extensive library of
character-based family entertainment properties. The Entertainment Segment's
library is composed of copyrights, distribution rights, trademark or licenses
relating to characters, television programs and motion pictures, both animation
and live action, and includes individual specials and multiple episodes. The
Commercial Products Segment provides printing, graphic, creative and
distribution services and printing business. The Commercial Products Segment
makes use of excess capacity in the Consumer manufacturing facility and is
operated to absorb fixed overhead costs of that operation. The Commercial
Products Segment is not considered to be a core business of the Company.
Revenues
Total revenues for the three months ended June 26, 1999 decreased $11.2 million
(26%) to $31.9 million compared to $43.1 million for the three months ended June
27, 1998. Revenues decreased in the Consumer Products and Commercial Products
segments; however, these decreases were partially offset by increased revenues
in the Entertainment Segment due to the factors described below. The Company
believes that the overall revenue decline is partially attributable to the
continuing impact of the February 26, 1999 Bankruptcy filing.
23
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Consumer Products revenues decreased $12.8 million (37%) to $21.8 million for
the three months ended June 26, 1999 compared to $34.7 million for the three
months ended June 27, 1998. Children's Publishing revenues decreased $11.2
million to $21.8 million for the three months ended June 26, 1999 compared to
$33.1 million for the three months ended June 27, 1998. The decline in
Children's Publishing revenue is mainly attributable to the Company's strategic
focus on changing the product mix towards more profitable product. The Company
also experienced decreases in sales related to key license products, reduced
purchases by certain mass retailers (including Wal-Mart, Target, Toys R Us, and
Caldor) and an overall decrease in the bookclub business. These decreases were
partially offset by a price increase on certain product lines in January 1999
and the launch of a new novelty product line in 1999. Additionally, the three
months ended June 27, 1998 included revenues from the Adult Publishing business
totaling approximately $1.7 million. The Adult Publishing business was sold in
April 1999. Accordingly the three months ended June 26, 1999 do not include any
revenue generated from the Adult Publishing business following the sale.
Entertainment revenues increased $3.8 million (83%) to $8.4 million for the
three months ended June 26, 1999 compared to $4.6 million for the three months
ended June 27, 1998. The increase is primarily attributable to a $4.5 million
increase in television related revenues relating to a multi-year contract for
the USA broadcasting rights for Frosty the Snowman and Rudolph the Red Nosed
Reindeer. The increase was partially offset by a $0.7 decline in merchandising
revenue for the period.
Commercial Products revenues decreased $2.2 million (58%) to $1.6 million for
the three months ended June 26, 1999 compared to $3.8 million for the three
months ended June 27, 1998.
Gross Profit
Total gross profit increased $8.6 million to $9.9 million for the three months
ended June 26, 1999, from $1.3 million for the three months ended June 27, 1998.
As a percentage of revenues, total gross profit margin increased to 31% for the
three months ended June 26, 1999 from 3% for the three months ended June 27,
1998. The increase was primarily attributable to improved gross profit margins
in the Consumer Products Segment and the Entertainment Segment as described
below.
Consumer Products gross profit increased $5.4 million to $4.4 million for the
three months ended June 26, 1999, compared to $(1.0) million for the three
months ended March 28, 1998. As a percentage of revenues, Consumer Products
gross profit margin increased to 20% for the three months ended June 26, 1999
from (3%) for the three months ended June 27, 1998. The improvement in gross
profit margin was primarily attributable to a change in the product mix toward
more profitable formats, a price increase in January 1999 and reduced
manufacturing and pre-production costs. This improvement was partially offset by
unfavorable capacity utilization in the Sturtevant manufacturing facility.
Entertainment gross profit increased $3.2 million to $5.5 million for the three
months ended June 26, 1999 compared to $2.3 million for the three months ended
June 27, 1998. As a percentage of revenues, the gross profit margin increased to
65% for the three months ended June 26, 1999 compared to 50% for the three
months ended June 27, 1998. The increase resulted primarily from the increased
television license revenue.
The Commercial Products Segment utilizes the Company's manufacturing facility
and third party manufacturers to provide printing, graphic and distribution
services to both the Company and third parties. Commercial cost of sales
approximates revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $9.0 million to $18.0
million for the three months ended June 26, 1999 compared to $27.0 million
(including one-time transition costs of $4.8 million) for the three months ended
June 27, 1998. This decrease is primarily a result of various management
initiatives that have streamlined operations and reduced overhead costs.
Gain on Sale of Assets
Gain on sale of assets of $2.0 million resulted from the sale of the Company's
Adult Publishing business for approximately $11.0 million.
24
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $2.2 million
includes $1.8 million in professional fees and $0.4 million in financing costs
primarily related to the DIP Loan, partially offset by interest income.
Interest Expense, Net
Interest income for the three months ended June 26, 1999 decreased approximately
$0.4 million to $35 thousand from $0.4 million for the three months ended June
27, 1998. The decrease in interest income was attributable to lower cash and
cash equivalent balances throughout the period.
Interest expense for the three months ended June 26, 1999 decreased by $5.2
million to $0.3 million, as compared to $5.5 million (including the
distributions on the guaranteed preferred beneficial interest in the Company's
and Golden Books Publishing's Convertible Debentures) for the three months ended
June 27, 1998. The Company stopped recording interest expense relating to its
debt facilities effective February 26, 1999 in accordance with the requirements
of SOP 90-7.
Income Tax
The provision for income taxes was $35 thousand for the three months ended June
26, 1999 compared to a benefit of $(0.2 million) for the three months ended June
27, 1998.
Net Loss
The net loss for the three months ended June 26, 1999 was $(8.6) million, or
$(0.30) per basic common share, compared to a net loss of $(30.9) million, or
$(1.21) per basic common share, for the three months ended June 27, 1998. The
decrease in net loss is attributable to the factors described above.
Six months ended June 26, 1999 compared to six months ended June 27, 1998
Revenues
Total revenues for the six months ended June 26, 1999 decreased $23.1 million
(26%) to $66.6 million compared to $89.7 million for the six months ended June
27, 1998. Revenues decreased in the Consumer Products and Commercial Products
Segments; however, these decreases were partially offset by increased revenues
in the Entertainment Segment due to the factors described below. The Company
believes that the overall revenue decline is partially attributable to the
continuing impact of the February 26, 1999 Bankruptcy filing.
Consumer Products revenues decreased $20.3 million (29%) to $50.7 million for
the six months ended June 26, 1999 compared to $71.0 million for the six months
ended June 27, 1998. Children's Publishing revenues decreased $19.6 million to
$47.5 million for the six months ended June 26, 1999 compared to $67.1 million
for the six months ended June 27, 1998. The decline in Children's Publishing
revenue is mainly attributable to the Company's strategic focus on changing the
product mix towards more profitable product. Additionally, the Company
experienced decreases in sales related to key license products, reduced
purchases by certain mass retailers (including Wal-Mart, Target, Toys R Us, and
Caldor), an overall decrease in the bookclub business and reduced international
sales. These decreases were partially offset by a price increase on certain
product lines in January 1999 and the launch of a new novelty product line in
1999 Revenues from the Adult Publishing business decreased $0.7 million to $3.2
million for the six months ended June 26, 1999 compared to $3.9 million for the
six months ended June 27, 1998. The Company sold the Adult Publishing business
in April 1999 Accordingly the six months ended June 26, 1999 do not include any
revenue generated from the Adult Publishing business after the sale.
25
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Entertainment revenues increased $0.7 million (6%) to $12.3 million for the six
months ended June 26, 1999 compared to $11.6 million for the six months ended
June 27, 1998. The increase is primarily attributable to an increase in
television related revenues relating to a multi-year contract for the USA
broadcasting rights for Frosty the Snowman and Rudolph the Red Nosed Reindeer.
The increase was partially offset by a decline in Home Video revenue for the
period due to decreased volume.
Commercial Products revenues decreased $3.5 million (49%) to $3.6 million for
the six months ended June 26, 1999 compared to $7.1 million for the six months
ended June 27, 1998.
Gross Profit
Total gross profit increased $9.3 million (85%) to $20.2 million for the six
months ended June 26, 1999, from $10.9 million for the six months ended June 27,
1998. As a percentage of revenues, total gross profit margin increased to 31%
for the six months ended June 26, 1999 from 12% for the six months ended June
27, 1998. The increase was attributable to improved gross profit margins in the
Consumer Products Segment and in the Entertainment Segment as more fully
described below.
Consumer Products gross profit increased $8.2 million to $12.7 million for the
six months ended June 26, 1999, compared to $4.5 million for the six months
ended June 27, 1998. As a percentage of revenues, Consumer Products gross profit
margin increased to 25% for the six months ended June 26, 1999 from 6% for the
six months ended June 27, 1998. The improvement in gross profit margin was
primarily attributable to a change in the product mix toward more profitable
formats, a price increase in January 1999, and reduced manufacturing and
pre-production costs. This improvement was partially offset by unfavorable
capacity utilization in the Sturtevant manufacturing facility.
Entertainment gross profit increased $1.1 million (17%) to $7.5 million for the
six months ended June 26, 1999 compared to $6.4 million for the six months ended
June 27, 1998. As a percentage of revenues, the gross profit margin increased to
61% for the six months ended June 26, 1999 compared to 56% for the six months
ended June 27, 1998. The increase resulted primarily from the increased
television license revenue.
The Commercial Products Segment utilizes the Company's manufacturing facility
and third party manufacturers to provide printing, graphic and distribution
services to both the Company and third parties. Commercial cost of sales
approximates revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $17.9 million to $34.8
million for the six months ended June 26, 1999 compared to $52.7 million
(including one-time transition costs of $9.0 million) for the six months ended
June 27, 1998. This decrease is primarily a result of various management
initiatives that have streamlined operations and reduced overhead costs.
Gain on Sale of Assets
Gain on sale of assets of $5.4 million includes the sale of the Company's
Coffeyville Distribution Center for approximately $2.2 million, which resulted
in a gain of approximately $1.5 million, the sale of the Company's operating
facility in Canada for approximately $1.9 million, which resulted in a gain of
approximately $1.9 million and the sale of the Company's Adult Publishing
business for approximately $11.0 million, which resulted in a gain of
approximately $2.0 million.
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $5.4 million
includes $3.8 million in professional fees and $1.6 million in financing costs
primarily related to the DIP Loan, partially offset by interest income.
26
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Interest Expense, Net
Interest income for the six months ended June 26, 1999 decreased $0.8 million to
$0.2 million from $1.0 million for the six months ended June 27, 1998. The
decrease in interest income was attributable 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, for the six months ended June 26, 1999 decreased by $6.0 million to
$5.0 million, as compared to $11 million for the six months ended June 27, 1998.
The Company stopped recording interest expense relating to its debt facilities
effective February 26, 1999 in accordance with the requirements of SOP 90-7.
Income Tax
The provision for income taxes was $0.6 million for the six months ended June
26, 1999 compared to a benefit of $(0.3 million) for the six months ended June
27, 1998. The increase in the provision for income taxes for the six months
ended June 26, 1999 relates primarily to gains recognized on certain asset
dispositions in Canada, where the Company files separate tax returns.
Net Loss
The net loss for the six months ended June 26, 1999 was $(19.9) million, or
$(0.75) per basic common share, compared to a net loss of $(51.5) million, or
$(2.06) per basic common share, for the six months ended June 27, 1998. The
decrease in net loss is attributable to the factors described above.
Year 2000 Compliance
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.
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 August 1999 and that the Testing, Contingency Planning and
Implementation phases should be substantially completed by the end of September
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.
27
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 $2.4 million of which an aggregate of
$1.3 million had been incurred to date.
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 August 1999 and that the
Testing, Contingency Planning and Implementation phases should be substantially
completed by the end of September, 1999. The Company estimates that only nominal
costs will be incurred for modifying or replacing systems and equipment in this
area.
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.
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, to
the extent necessary, with respect to its principal third party suppliers by the
end of August 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 $2.2 million to $2.6
million, of which total program costs to date have been $1.4 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 and will continue to be expensed or capitalized as
incurred, and cash generated from the Company's operations or borrowings under
its credit agreements will fund such future costs. 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. 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 which include contingency plans for certain types of interruptions,
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.
28
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Seasonality
The Company has historically experienced significant fluctuations in quarterly
operating results. The children's publishing business in general is seasonal and
depends to a significant extent on the Christmas selling season, generally
resulting in a disproportionately higher percentage of revenues in the Company's
third fiscal quarter. The Company's quarterly operating results also will
fluctuate based on the timing of the introduction of products that utilize
licensed characters, which, in the case of characters appearing in movies, will
be dependent upon the period in which costs and expenses attributable to the
development and introduction of such products are incurred.
29
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note H
ITEM 3. DEFAULT UPON SENIOR NOTES
See Note B
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
Exhibit Number Description
- -------------- -----------
2.1 Amended Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code, dated May 13, 1999 (Incorporated by reference to
Exhibit 2.1 of the Company's 8-K dated May 20, 1999).
2.2 Amended Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code for the Joint Plan of Reorganization of the Debtors,
dated May 13, 1999. (Incorporated by reference to Exhibit 2.2 of the
Company's 8-K dated May 20, 1999).
10.2 Restructuring Agreement, dated March 11, 1999 (Incorporated by
reference to Exhibit 2.3 of the Company's 8-K dated May 20, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
Report dated May 20, 1999
30
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 there unto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
August 9, 1999 /s/ Richard E. Snyder
---------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
August 9, 1999 /s/ Colin Finkelstein
---------------------
Colin Finkelstein
Chief Financial Officer
[Principal financial and accounting
officer]
31
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> JUN-26-1999
<CASH> 8,158
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<RECEIVABLES> 28,879
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<TOTAL-LIABILITY-AND-EQUITY> 219,292
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<OTHER-EXPENSES> 5,351
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,984
<INCOME-PRETAX> (19,339)
<INCOME-TAX> 557
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,896)
<EPS-BASIC> (0.75)
<EPS-DILUTED> [BLANK]<F1>
<FN>
<F1>For the attached financials, the value EPS-DILUTED is not applicable
</FN>
</TABLE>
