UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 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
November 8, 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
September 25, 1999 (Unaudited) and December 26, 1998
Condensed Consolidated Statements of Operations and 5
Comprehensive Loss-- for the three months ended
September 25, 1999 and September 26, 1998 (Unaudited)
Condensed Consolidated Statements of Operations and 6
Comprehensive Loss-- for the nine months ended September
25, 1999 and September 26, 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows-- 7
for the nine months ended September 25, 1999 and
September 26, 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements 9
(Unaudited)
Item 2. Management's Discussion and Analysis of 19
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 3. Default Upon Senior Securities 27
Item 6. Exhibits and reports on Form 8-K 27
SIGNATURES 28
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)
- --------------------------------------------------------------------------------
ASSETS
September 25, December 26,
1999 1998
------------- ------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,634 $15,330
Accounts receivable, net 42,607 41,411
Inventories 29,981 33,068
Royalty advances 6,407 17,198
Other current assets 19,052 17,946
---------- --------
Total current assets 102,681 124,953
---------- --------
OTHER ASSETS
Accounts receivable-- long term 3,829 4,127
Other noncurrent assets 8,112 10,667
---------- --------
Total other assets 11,941 14,794
---------- --------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated 27,040 29,955
depreciation and amortization of $40,816 at
September 25, 1999 and $37,946 at December 26, 1998
FILM LIBRARY, net of accumulated amortization of 54,137 55,858
$10,435 at September 25, 1999 and $7,849
at December 26, 1998
GOODWILL, net of accumulated amortization of 28,425 29,391
$3,771 at September 25, 1999 and $2,805
at December 26, 1998
---------- --------
TOTAL ASSETS $224,224 $254,951
======== ========
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)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 25, December 26,
1999 1998
------------- ------------
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 30,514 $ 26,002
Accrued compensation and fringe benefits 5,922 4,977
Revolving credit facility -- 21,637
DIP loan 18,863 --
Loan facility -- 10,000
Long term debt in default -- 150,000
Guaranteed preferred beneficial interests in -- 115,000
the Company's and Golden Books
Publishing Company, Inc.'s Convertible
Debentures
Other current liabilities 41,023 61,634
-------- --------
Total current liabilities 96,322 389,250
-------- --------
NONCURRENT LIABILITIES
Accumulated post-retirement benefit obligation 29,398 29,609
Deferred compensation and other deferred 24,914 25,173
liabilities
Liabilities subject to compromise 288,706 --
-------- --------
Total noncurrent liabilities 343,018 54,782
-------- --------
STOCKHOLDERS' DEFICIT:
Convertible Preferred Stock - Series B, 65,000 65,000
13,000 shares authorized, no par
value, 13,000 shares issued and
outstanding;
Common Stock, $.01 par value, 60,000,000 283 279
shares authorized, 28,299,434 and
27,899,047 shares issued as of September
25, 1999 and December 26, 1998,
respectively
Additional paid in capital 132,034 128,956
Accumulated deficit (408,682) (379,390)
Accumulated other comprehensive loss (929) (1,104)
-------- --------
(212,294) (186,259)
Less cost of common stock in treasury - 2,822 2,822
208,800 shares
-------- --------
Total common stockholders' deficit (215,116) (189,081)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 224,224 $ 254,951
========== ===========
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)
- --------------------------------------------------------------------------------
Three Months Ended
------------------
September 25, September 26,
1999 1998
------------- ------------
(unaudited)
REVENUES $ 42,445 $52,019
----------- -------
COSTS AND EXPENSES:
Cost of sales 27,143 45,430
Selling, general and administrative 18,220 19,807
----------- -------
Total costs and expenses 45,363 65,237
----------- -------
LOSS BEFORE REORGANIZATION ITEMS, DISTRIBUTIONS (2,918) (13,218)
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
REORGANIZATION ITEMS 5,922 --
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 September
25, 1999) -- 2,516
INTEREST INCOME (10) (205)
INTEREST EXPENSE (Contractual interest expense of
$3,509 for the three months ended September
25, 1999) 426 3,521
----------- -------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (9,256) (19,050)
PROVISION (BENEFIT) FOR INCOME TAXES 140 (200)
----------- -------
NET LOSS (9,396) (18,850)
OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION 33 (199)
----------- -------
COMPREHENSIVE LOSS $(9,363) $(19,049)
=========== ========
NET LOSS PER BASIC COMMON SHARE $(0.33) $(0.71)
=========== ========
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)
- --------------------------------------------------------------------------------
Nine Months Ended
------------------
September 25, September 26,
1999 1998
------------- ------------
(unaudited)
REVENUES $109,069 $141,699
COSTS AND EXPENSES:
Cost of sales 73,589 124,241
Selling, general and administrative 52,972 72,493
Gain on sale of assets (5,391) --
---------- ---------
Total costs and expenses 121,170 196,734
---------- ---------
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 (12,101) (55,035)
REORGANIZATION ITEMS 11,273 --
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS
PUBLISHING COMPANY, INC.'S CONVERTIBLE
DEBENTURES (Contractual distributions of
$7,265 for the nine months ended September
25, 1999) 1,628 7,548
INTEREST INCOME (189) (1,230)
INTEREST EXPENSE (Contractual interest expense of
$10,964 for the nine months ended September 25,
1999) 3,782 9,465
---------- ---------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (28,595) (70,818)
PROVISION (BENEFIT) FOR INCOME TAXES 697 (457)
---------- ---------
NET LOSS (29,292) (70,361)
OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION 175 (358)
---------- ---------
COMPREHENSIVE LOSS $ (29,117) $(70,719)
========== =========
NET LOSS PER BASIC COMMON SHARE $ (1.08) $ (2.77)
========== =========
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)
- -------------------------------------------------------------------------------
Nine Months Ended
------------------
September 25, September 26,
1999 1998
------------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(29,292) $(70,361)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 10,363 9,261
Non-cash interest expense 337 381
Reorganization items 11,273 --
Gains on sales of assets (5,391) (331)
Provision for losses on accounts receivable 415 (485)
Other non-cash -- 1,180
Changes in assets and liabilities,
net of disposals:
Increase in accounts receivable (2,936) (1,747)
Decrease (increase) in inventories 1,877 (8,490)
Decrease in royalty advances (4,051) (7,235)
Increase in other current assets (990) (109)
Increase in accounts payable 4,512 3,694
Increase (decrease) in accrued 945 (4,150)
compensation and fringe benefits
Other assets and liabilities 5,431 13,754
--------- --------
Net cash used in operating activities before
Reorganization items
Reorganization items (7,507) (64,638)
Net cash used in operating activities (11,273) --
--------- --------
(18,780) (64,638)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (1,790) (11,840)
Additions to film library (865) (3,816)
Proceeds from sales of assets 11,462 661
Deposits and other 1,876 --
--------- --------
Net cash provided by (used in)
investing activities 10,683 (14,995)
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)
- -------------------------------------------------------------------------------
Nine Months Ended
------------------
September 25, September 26,
1999 1998
------------- ------------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions -- 169
Repayment of Revolving Credit Facility (21,637) --
Borrowings under Revolving Credit Facility -- 27,415
Net Proceeds from notes payable -- 10,000
Borrowings under DIP loan (post petition) 21,363 --
Repayments under DIP loan (post petition) (2,500) --
---------- -----------
Net cash (used in) provided by
financing activities (2,774) 37,584
EFFECT OF EXCHANGE RATE CHANGES ON CASH 175 (358)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,696) (42,407)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,330 57,411
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,634 $ 15,004
========== ===========
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 $1,330 $13,643
========== ===========
Income taxes, net of refunds received $(55) $26
========== ===========
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 $__
========== ===========
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 September 25, 1999. SOP 90-7 also requires that
Golden Books Family Entertainment and Subsidiaries (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 nine month periods ended September 25,
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, due to the Company's liquidity difficulties as a result of
operating losses, working capital deficiencies, negative operating cash flows
and resulting Chapter 11 filings, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. The Bankruptcy Court (as
defined in Note B) has confirmed the Company's Joint Plan of Reorganization (as
defined in Note B). However, the Joint Plan of Reorganization has not been
consummated. Until consummation of the Joint Plan of Reorganization, there
remains uncertainty regarding the Company's ability to continue as a going
concern. These unaudited condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
If the Company's Joint Plan of Reorganization is consummated, continuation of
the Company as a going concern is dependent, among other things, on the
Company's ability to maintain lower operating costs, return to profitability and
generate sufficient cash flow to meet its operational and financing
requirements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 25, 1999 and the results of
operations and cash flows for the three and nine month periods ended September
25, 1999 and September 26, 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 in Note E), its then outstanding Revolving Credit Facility (as
defined in Note E), and other obligations. As a result of the defaults, at
December 26, 1998 the Senior Notes are classified as a current liability on the
accompanying condensed consolidated balance sheet. As a result of the Bankruptcy
filing, at September 25, 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 Revolving Credit Facility 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 below) to repay all outstanding amounts under the Revolving Credit
Facility. Further, as a result of defaults, at December 26, 1998 the Loan
Facility (as defined in Note E) is classified as a current liability on the
accompanying condensed consolidated balance sheet. As a result of the Bankruptcy
filing, at September 25, 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 $5.7 million interest payments on the Senior Notes due in March and
September 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 September 25, 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, steering committees representing certain holders of the Senior Notes and
the TOPrS were established. The Company 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 and subsequently the filing, amendment
and, under an order dated September 24, 1999, the confirmation by the Bankruptcy
Court of the Company's Joint Plan of Reorganization (the "Joint Plan of
Reorganization"). The Joint Plan of Reorganization only becomes effective upon
its consummation. The Joint Plan of Reorganization allows the Company to reduce
significantly 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
10.75%, if paid in cash, or, at the Company's option for the first three
years, 14.25% 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.
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)
------------------------------
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, upon consummation 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 confirmed by
the Bankruptcy Court will be consummated. Consummation of the Joint Plan of
Reorganization will require the Company to complete negotiations regarding the
terms of the new Senior Notes and complete its exit financing arrangements. If
the Company is unable to consummate its Joint Plan of Reorganization within 120
days from September 1, 1999, 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 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.
The Company's Sturtevant, WI printing facility's capacity exceeds the Company's
current needs. Because of the Company's inability to utilize the full capacity
of the facility, among other reasons, the facility is burdened by high operating
costs. The Company is negotiating the terms of agreements under which the
Company would sell the principal assets associated with the Sturtevant, WI
facility and the buyer would continue to manufacture certain of the Company's
publishing products at the facility. In connection with the pending sale, the
Company would be released from certain obligations relating to the operation of
the facility. The agreements are subject to, among other things, the approval of
the Bankruptcy Court, for which a hearing is scheduled on November 10, 1999. It
is anticipated that the closing of the sale of the Sturtevant facility will
occur before consummation of the Joint Plan of Reorganization.
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 comply with the
DIP Loan and its ability to consummate the Joint Plan of Reorganization.
Consummation of the Joint Plan of Reorganization will require the Company to
obtain exit financing and to complete negotiations regarding the terms of the
indenture governing the new $87.0
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)
---------------------------------
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
going concern. In the event the confirmed Joint Plan of Reorganization is
consummated, continuation of the Company as a going concern is contingent on the
Company's ability to maintain lower operating costs, 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.
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 aggregating approximately $5.4 million were recorded as a gain on sale of
assets in the accompanying condensed consolidated statement of operations for
the nine month period ended September 25, 1999.
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 September 25, 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 nine
month periods ended September 25, 1999 (in thousands):
Three months ended Nine months ended
September 25, 1999 September 25, 1999
------------------ -------------------
Professional fees $3,847 $7,691
Financing costs 256 1,810
Shareholder lawsuit (see Note H) 1,250 1,250
Severance 477 477
Temporary help 1 94
Other costs 155 155
Interest income ------ -------
(64) (204)
------- -------
$5,922 $11,273
======= =======
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 (continued)
----------------------------------------------------------
In accordance with SOP 90-7, the accompanying condensed consolidated balance
sheet includes approximately: (i) $14.5 million classified as accounts payable,
(ii) $10.0 million classified as other current liabilities, (iii) $29.4 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 received
approval from the Bankruptcy Court to pay in full satisfaction on a timely basis
upon the consummation of the Company's Joint Plan of Reorganization. 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.
NOTE D - Inventories
-----------
Inventories consisted of the following (in thousands)
September 25, December 26,
1999 1998
---- ----
(unaudited)
Raw materials $ 2,161 $1,911
Work-in-progress 2,381 2,914
Finished goods 22,189 24,993
Film library 3,250 3,250
$29,981 $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"). As a result of
various defaults, 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 September 25, 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
10.75%, if paid in cash, or, at the Company's option for the first three years,
14.25% 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"). As a result of various defaults, at December 26, 1998 the
Revolving Credit Facility was classified as a current liability on the condensed
consolidated balance sheet. As described in Note B, on March 25, 1999, the
Company entered into the DIP Loan, a $55.0 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
September 25, 1999, the Company has $18.9 million outstanding under the DIP
Loan.
13
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE E - Debt (continued)
----
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. Due to various defaults under the Loan
Facility, 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
September 25, 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 September 25, 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.
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 September 25,
1999 and for the three and nine month periods ended September 25, 1999 and
September 26, 1998 are as follows (in thousands):
September 25,
1999
----
Current $96,263
Noncurrent assets 119,610
-------------
Total assets $215,873
=============
Current liabilities $219,965
Noncurrent liabilities 46,297
---------
Liabilities subject to compromise 288,706
---------
Total liabilities 554,968
Stockholders' deficit (339,095)
-------------
Total Liabilities and
Stockholders' Deficit $215,873
=============
14
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE F - Preferred Securities (continued)
--------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $42,445 $52,019 $109,069 $141,699
Gross profit 15,302 6,589 35,480 17,458
Loss before interest
expense, interest
income, reorganizational
items and(benefit)
provision for income
taxes (2,886) (17,566) (11,978) (61,555)
Reorganizational Items (5,922) -- (11,273) --
----------------------------------------------------
Net loss $(12,146) $(25,839) $(37,293) $(84,294)
======== ======== ======== ========
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 various defaults under the indenture governing the Preferred
Securities, at December 26, 1998, 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 September 25, 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, the Preferred
Securities will be converted into 50% of the Company's new common stock to be
issued post recapitalization, prior to dilution.
NOTE G - Loss Per Common Share
---------------------
Loss per common share was computed as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands except for per (In thousands except for per
share data) share data)
Net Loss $(9,396) $(18,850) $(29,292) $(70,361)
Preferred dividend
requirements ---- (798) (1,252) (5,198)
-------- -------- -------- --------
Loss applicable to basic
common stock $(9,396) $(19,648) (30,544) $(75,559)
======= ======== ======= ========
Weighted average basic
common shares
outstanding 28,299 27,525 28,255 27,278
-------- -------- -------- --------
Loss per basic common
Share $(0.33) $(0.71) $(1.08) $ (2.77)
======= ======= ======= ==========
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.
15
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1997 and August 1998,
inclusive. 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. On October 12, 1999, the Court
approved a settlement of the consolidated actions. The Company has admitted no
wrongdoing but paid $1,250,000 toward the settlement.
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.
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,
16
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Contingencies (continued)
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 of approximately $7.0 million in the condensed consolidated balance
sheet at September 25, 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
September 25, 1999.
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 reports 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 makes use of excess capacity in the Consumer
manufacturing facility by providing printing and other services to third parties
pending the sale of the Sturtevant printing facility. The Commercial segment is
not considered to be a core business 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").
17
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTE I - Industry Segments (continued)
-----------------
Information by industry segment is set forth below:
Three Months Ended Nine Months Ended
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---- ---- ---- ----
(In millions) (In millions)
Revenues:
Consumer Products $37.5 $41.0 $88.3 $111.9
Entertainment 4.2 7.7 16.4 19.3
Commercial 0.8 3.4 4.4 10.5
-------- ----- ------ ------
Total Revenues $42.5 $52.1 $109.1 $141.7
======== ===== ====== =======
Gross Profit:
Consumer Products $14.0 $3.9 $26.7 $8.4
Entertainment 1.3 2.8 8.8 9.1
Commercial --- --- --- ---
-------- ----- ------ ------
Total Gross Profit $15.3 $6.7 $35.5 $17.5
======== ===== ====== =======
SG&A
SG&A before transi-
tion costs $18.2 $19.8 $53.0 $63.5
Transition costs --- --- --- 9.0
-------- ----- ------ ------
Total SG&A $18.2 $19.8 $53.0 $72.5
======== ===== ====== =======
EBITDA
Gross profit $15.3 $6.7 $35.5 $17.5
SG&A (18.2) (19.8) (53.0) (72.5)
Gain on sale of assets --- --- 5.4 ---
Reorganization items (6.0) --- (11.3) ---
Operating loss (8.9) (13.1) (23.4) (55.0)
Depreciation &
amortization 3.6 3.2 10.4 9.3
-------- ----- ------ ------
EBITDA $(5.3) $(9.9) $(13.0) $(45.7)
======== ===== ====== =======
Depreciation and
Amortization:
Consumer Products $ 1.0 $1.0 $3.8 $3.3
Entertainment 1.4 1.4 3.6 3.8
Commercial 0.3 0.2 0.5 0.4
Corporate 0.9 0.6 2.5 1.8
-------- ----- ------ ------
Total Depreciation
& Amortization $ 3.6 $3.2 $10.4 $9.3
======== ===== ====== =======
18
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
ITEM 2. MANAGEMENT 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 of the United
States Bankruptcy Code. Under an order dated September 24,1999 the Bankruptcy
Court confirmed the Company's amended Joint Plan of Reorganization (the "Joint
Plan of Reorganization") which becomes effective upon consummation. The
Company's ability to continue as a going concern is contingent upon its ability
to comply with its debtor-in-possession financing facility and its ability to
consummate the Joint Plan of Reorganization. Consummation of the Joint Plan of
Reorganization will require the Company, among other things, to complete
negotiations regarding the terms of the indenture governing the new $87.0
million secured note called for under the plan and completing arrangements to
obtain exit financing. If the Company's Joint Plan of Reorganization is
consummated, continuation of the Company's business thereafter is dependent,
among other things, on the Company's ability to maintain lower operating costs,
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
September 25, 1999 and for the three and nine month periods ended September 25,
1999 and September 26, 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, Revolving Credit Facility, and other obligations.
The Company engaged in extensive negotiations with committees representing
creditor groups 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 and subsequently the
filing, amendment and, under an order dated September 24, 1999, the confirmation
by the Bankruptcy Court of the Company's Joint Plan of Reorganization. The Joint
Plan of Reorganization only becomes effective upon its consummation.
The condensed consolidated financial statements at September 25,1999 and for the
three and nine month periods ended September 25,1999 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 Chapter 11 filings, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. Until
consummation of the Joint Plan of Reorganization, there remains uncertainty
regarding the Company's ability to continue as a going concern. These unaudited
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. If the Company's Joint Plan
of Reorganization is consummated, continuation of the Company as a going concern
is dependent, among other things, on the Company's ability to maintain lower
operating costs, return to profitability and generate sufficient cash flow to
meet its operational and financing requirements.
19
<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, 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
10.75%, if paid in cash, or, at the Company's option for the first three
years, 14.25% 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, upon consummation 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 confirmed by
the Bankruptcy Court will be consummated. If the Company is unable to consummate
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) and the completion of
negotiations regarding the terms of the indenture governing the new $87.0
million secured note.
The Bankruptcy Court 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.
20
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Continuation of the Company as a going concern is contingent upon, among other
things, the ability of the Company to consummate the final Joint Plan of
Reorganization and the ability to comply with the DIP Loan. Consummation of the
Joint Plan of Reorganization will require the Company to complete arrangements
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's Sturtevant, WI printing facility's capacity exceeds the Company's
current needs. Because of the Company's inability to utilize the full capacity
of the facility, among other reasons, the facility is burdened by high operating
costs. The Company is negotiating the terms of agreements under which the
Company would sell the principal assets associated with the Sturtevant, WI
facility and the buyer would continue to manufacture certain of the Company's
publishing products at the facility. In connection with the pending sale, the
Company would be released from certain obligations relating to the operation of
the facility. The agreements are subject to, among other things, the approval of
the Bankruptcy Court, for which a hearing is scheduled on November 10, 1999. The
closing of the sale is expected to result in substantial additional
reorganization costs. The Company believes that following the closing of the
sale of the Sturtevant facility future cash flows will be improved. It is
anticipated that the closing of the sale of the Sturtevant facility will occur
before consummation of the Joint Plan of Reorganization. If the sale of the
Sturtevant Facility is not closed, the Company will continue to experience high
manufacturing costs.
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 nine months ended
September 25, 1999.
Assuming the Joint Plan of Reorganization is 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 September 25, 1999, working capital was approximately $6.4 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
September 25, 1999 in accordance with the requirements of SOP 90-7.
Cash Flow for the nine months ended September 25, 1999 utilized cash of
approximately $10.7 million compared to cash utilized of approximately $42.4
million for the nine months ended September 26, 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 $11.5 million, a decrease in
inventory and an increase in accounts payable. Additionally, the nine months
ended September 25, 1999 included proceeds from the DIP loan of $18.9 million.
Reorganization costs were $11.3 million for the nine months ended September 25,
1999. Acquisitions of property, plant and equipment were approximately $1.7
million during the nine months ended September 25, 1999, as compared to
approximately $11.8 million during the nine months ended September 26, 1998.
Additions to the Company's film library were approximately $0.9 million during
the nine months ended September 25, 1999 as compared to approximately $3.8
million during the nine months ended September 26, 1998.
21
<PAGE>
GOLDEN BOOKDS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Three months ended September 25, 1999 compared to three months ended September
26, 1998
The Company reports results under three operating segments; the (i) Consumer
Products; (ii) Entertainment; and (iii) Commercial 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 segment makes use of excess capacity in the Consumer manufacturing
facility by providing printing and other services to third parties pending the
sale of the Sturtevant printing facility. The Commercial segment is not
considered to be a core business of the Company.
Revenues
Total revenues for the three months ended September 25, 1999 decreased $9.6
million (19%) to $42.5 million compared to $52.1 million for the three months
ended September 26, 1998. The Company believes that the revenue decline is
partially attributable to the continuing impact of the February 26, 1999
Bankruptcy filing.
Consumer Products revenues decreased $3.5 million (9%) to $37.5 million for the
three months ended September 25, 1999 compared to $41.0 million for the three
months ended September 26, 1998. Children's Publishing revenues decreased $0.6
million to $37.5 million for the three months ended September 25, 1999 compared
to $38.1 million for the three months ended September 26, 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, Toys R Us, and Caldor)
and an overall decrease in the bookclub business. Additionally, in 1998 the
Company recorded 7.7 million in gross sales due primarily to sales related to
major promotions based on Disney's motion picture "A Bug's Life" and video
feature "Simba's Pride". The majority of these decreases were offset by
increased revenues generated from the initial September 1999 launch of the
"Pokemon" license which generated gross revenues of $15.4 million for the three
months ended September 25, 1999, a price increase on certain product lines in
January 1999 and the launch of a new novelty product line in 1999. The three
months ended September 26, 1998 included revenues from the Adult Publishing
business totaling approximately $2.9 million. The Adult Publishing business was
sold in April 1999. Accordingly, the three months ended September 25, 1999 do
not include any revenue generated from the Adult Publishing business.
Entertainment revenues decreased $3.5 million (46%) to $4.2 million for the
three months ended September 25, 1999 compared to $7.7 million for the three
months ended September 26, 1998. The decrease is primarily attributable to fewer
new releases in 1999 as compared to 1998, which saw greater revenue generated
from the sale of new "Madeline" videos. The decrease was partially offset by a
$0.1 increase in merchandising revenue for the period.
Commercial Products revenues decreased $2.6 million (77%) to $0.8 million for
the three months ended September 25, 1999 compared to $3.4 million for the three
months ended September 26, 1998.
Gross Profit
Total gross profit increased $8.6 million to $15.3 million for the three months
ended September 25, 1999 from $6.7 million for the three months ended September
26, 1998. As a percentage of revenues, total gross profit margin increased to
36% for the three months ended September 25, 1999 from 13% for the three months
ended September 26, 1998. The increase was primarily attributable to improved
gross profit margins in the Consumer Products Segment offset by decreased gross
profit in the Entertainment Segment as described below.
22
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Consumer Products gross profit increased $10.1 million to $14.0 million for the
three months ended September 25, 1999, compared to $3.9 million for the three
months ended September 26, 1998. As a percentage of revenues, Consumer Products
gross profit margin increased to 38% for the three months ended September 26,
1999 from 10% for the three months ended September 26, 1998. The improvement in
gross profit margin was primarily attributable to a change in the product mix
toward more profitable formats including the new "Pokemon" 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 decreased $1.5 million to $1.3 million for the three
months ended September 25, 1999 compared to $2.8 million for the three months
ended September 26, 1998. As a percentage of revenues, the gross profit margin
decreased to 31% for the three months ended September 25, 1999 compared to 37%
for the three months ended September 26, 1998. The decrease resulted primarily
from decreased home video 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 $1.6 million to $18.2
million for the three months ended September 25, 1999 compared to $19.8 million
for the three months ended September 26, 1998. This decrease is primarily a
result of various management initiatives that have streamlined operations and
reduced overhead costs.
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $6.0 million
includes $3.8 million in professional fees and $1.3 million related to the
settlement of a lawsuit as described in Note H, among other costs, partially
offset by interest income.
Interest Expense, Net
Interest income for the three months ended September 25, 1999 decreased
approximately $0.2 million to $10,000 from $0.2 million for the three months
ended September 26, 1998. The decrease in interest income was attributable to
lower cash and cash equivalent balances throughout the period.
Interest expense for the three months September 25, 1999 decreased by $5.6
million to $0.4 million, as compared to $6.0 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
September 26, 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 $0.1 for the three months ended September 25,
1999 compared to a benefit of $(0.2 million) for the three months ended
September 26, 1998.
Net Loss
The net loss for the three months ended September 25, 1999 was $(9.4) million,
or $(0.33) per basic common share, compared to a net loss of $(18.9) million, or
$(0.77) per basic common share, for the three months ended September 26, 1998.
The decrease in net loss is attributable to the factors described above.
23
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Nine months ended September 25, 1999 compared to nine months ended September 26,
1998
Revenues
Total revenues for the nine months ended September 25, 1999 decreased $32.6
million (23%) to $109.1 million compared to $141.7 million for the nine months
ended September 26, 1998. The Company believes that the revenue decline is
partially attributable to the continuing impact of the February 26, 1999
Bankruptcy filing.
Consumer Products revenues decreased $23.6 million (29%) to $88.3 million for
the nine months ended September 25, 1999 compared to $111.9 million for the nine
months ended September 26, 1998. Children's Publishing revenues decreased $20.2
million to $84.9 million for the nine months ended September 25, 1999 compared
to $105.1 million for the nine months ended September 26, 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, Toys R Us, and
Caldor), an overall decrease in the bookclub business and reduced international
sales. These decreases were partially offset by increased revenues generated
from the initial September 1999 launch of the "Pokemon" license, 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 $3.6 million to $3.2 million for the nine months ended September 25,
1999 compared to $6.8 million for the nine months ended September 26, 1998. The
Company sold the Adult Publishing business in April 1999. Accordingly, the nine
months ended September 25, 1999 do not include any revenue generated from the
Adult Publishing business after the sale.
Entertainment revenues decreased $2.9 million (15%) to $16.4 million for the
nine months ended September 25, 1999 compared to $19.3 million for the nine
months ended September 26, 1998. The decrease is primarily attributable to fewer
new home video releases in 1999 as compared to 1998, which saw greater revenue
generated from the sale of new "Madeline" videos. The decrease is partially
offset by 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 and increased merchandising revenues.
Commercial Products revenues decreased $6.1 million (59%) to $4.4 million for
the nine months ended September 25, 1999 compared to $10.5 million for the nine
months ended September 26, 1998.
Gross Profit
Total gross profit increased $18.0 million (103%) to $35.5 million for the nine
months ended September 25, 1999, from $17.5 million for the nine months ended
September 26, 1998. As a percentage of revenues, total gross profit margin
increased to 33% for the nine months ended September 25, 1999 from 13% for the
nine months ended September 26, 1998. The increase was attributable to improved
gross profit margins in the Consumer Products Segment offset by decreased gross
profit margins in the Entertainment Segment as more fully described below.
Consumer Products gross profit increased $18.3 million to $26.7 million for the
nine months ended September 25, 1999, compared to $8.4 million for the nine
months ended September 26, 1998. As a percentage of revenues, Consumer Products
gross profit margin increased to 31% for the nine months ended September 25,
1999 from 8% for the nine months ended September 26, 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 decreased $0.3 million (4%) to $8.8 million for the
nine months ended September 25, 1999 compared to $9.1 million for the nine
months ended September 26, 1998. As a percentage of revenues, the gross profit
margin increased to 54% for the nine months ended September 25, 1999 compared to
48% for the nine months ended September 26, 1998. The decrease resulted
primarily from the decreased home video revenue.
24
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 $19.5 million to $53.0
million for the nine months ended September 25, 1999 compared to $72.5 million
(including one-time transition costs of $9.0 million) for the nine months ended
September 26, 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 $11.3 million
includes $7.7 million in professional fees, $1.8 million in financing costs
primarily related to the DIP Loan and $1.3 million related to the settlement of
a lawsuit as described in Note H, among other costs, partially offset by
interest income.
Interest Expense, Net
Interest income for the nine months ended September 25, 1999 decreased $1.0
million to $0.2 million from $1.2 million for the nine months ended September
26, 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 nine months ended September 25, 1999 decreased by $11.6
million to $5.4 million, as compared to $17.0 million for the nine months ended
September 26, 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 $0.7 million for the nine months ended
September 25, 1999 compared to a benefit of $(0.5 million) for the nine months
ended September 26, 1998. The increase in the provision for income taxes for the
nine months ended September 25, 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 nine months ended September 25, 1999 was $(29.3) million,
or $(1.08) per basic common share, compared to a net loss of $(70.7) million, or
$(2.77) per basic common share, for the nine months ended September 26, 1998.
The decrease in net loss is attributable to the factors described above.
25
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Year 2000 Compliance
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 replacement phase related to Order Processing, Purchasing,
Manufacturing and Distribution. A significant majority of the financial systems
have been replaced. Remediation and testing continue a smaller portion of the
remaining applications Contingency Planning is complete with regard to all
systems and Implementation phases should be substantially completed by the end
of 1999. In addition, the Company has implemented the remainder of Year 2000
remediated IT systems and applications based on assessments as of September 30,
1999.
Excluding normal system upgrades, the Company estimates that total costs for
conversion and testing of new or modified IT systems and applications will
aggregate approximately $2.0 million to $2.4 million of which an aggregate of
$1.6 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. Remediation, where applicable has
been completed. The Company has incurred nominal costs 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 substantially complete. 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 has sought further 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 has developed contingency plans, to the extent
necessary, with respect to its principal third party suppliers. 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 $2.1 million to $2.5
million, of which total program costs to date have been $1.7 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 December 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
27
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
transportation systems) necessary for the ordinary conduct of business.
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.
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 Modification of Debtors' Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code, dated September 1, 1999 (Incorporated
by reference to Exhibit 2.2 of the Company's 8-K date of earliest event
reported September 24, 1999).
2.2 Order Confirming Debtors' Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code, dated September 24, 1999 (Incorporated
by reference to Exhibit 2.1 of the Company's 8-K date of earliest event
reported September 24, 1999).
2.3 Order and Final Judgement, Dated October 12, 1999 (Incorporated by
reference to Exhibit 2.4 of the Company's 8-K date of earliest event
reported September 24, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Report date of earliest event reported September 24, 1999
27
<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.
November 9, 1999 /s/ Richard E. Snyder
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
November 9, 1999 /s/ Colin Finkelstein
Colin Finkelstein
Chief Financial Officer
[Principal financial and accounting officer]
28
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000790706
<NAME> GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> SEP-25-1999
<CASH> 4,634
<SECURITIES> 0
<RECEIVABLES> 42,607
<ALLOWANCES> 0
<INVENTORY> 29,981
<CURRENT-ASSETS> 102,681
<PP&E> 67,856
<DEPRECIATION> 40,816
<TOTAL-ASSETS> 224,224
<CURRENT-LIABILITIES> 96,322
<BONDS> 0
0
65,000
<COMMON> 283
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 224,224
<SALES> 109,069
<TOTAL-REVENUES> 109,069
<CGS> 73,589
<TOTAL-COSTS> 121,170
<OTHER-EXPENSES> 11,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,410
<INCOME-PRETAX> (28,595)
<INCOME-TAX> 697
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,292)
<EPS-BASIC> (1.08)
<EPS-DILUTED> 0<F1>
<FN>
<F1>For the attached financials, the value EPS-DILUTED is not applicable.
</FN>
</TABLE>
