UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 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 May
5, 1999.
1
<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
March 27, 1999 (Unaudited) and December 26, 1998
Condensed Consolidated Statements of Operations and 5
Comprehensive Loss-- for the three
months ended March 27, 1999 and March 28, 1998
(Unaudited)
Condensed Consolidated Statements of Cash Flows-- 6
for the three months ended March 27, 1999 and
March 28, 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of 20
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 3. Default Upon Senior Securities 26
Item 6. Exhibits and reports on Form 8-K 26
SIGNATURES 27
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
<TABLE>
<CAPTION>
March 27, December 26,
1999 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,762 $ 15,330
Accounts receivable, net 26,239 41,411
Inventories 29,443 33,068
Royalty advances 19,896 17,198
Other current assets 16,979 17,946
--------------------- ---------------------
Total current assets 101,319 124,953
--------------------- ---------------------
OTHER ASSETS
Accounts receivable - long term 3,617 4,127
Other noncurrent assets 9,347 10,667
--------------------- ---------------------
Total other assets 12,964 14,794
--------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation and amortization
of $37,710 as of March 27, 1999 and $37,946 28,889 29,955
as of December 26, 1998
FILM LIBRARY, net of accumulated amortization of
$8,721 as of March 27, 1999 and $7,849 as of 55,373 55,858
December 26, 1998
GOODWILL, net of accumulated amortization of
$3,105 as of March 27, 1999 and $2,805 as of 29,091 29,391
December 26, 1998 --------------------- ---------------------
TOTAL ASSETS $ 227,636 $ 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)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
March 27, December 26,
1999 1998
---------------- -----------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 24,479 $ 26,002
Accrued compensation and fringe benefits 4,077 4,977
Revolving credit facility -- 21,637
DIP loan 10,000 --
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 38,906 61,634
---------------- -----------------
Total current liabilities 77,462 389,250
---------------- -----------------
NONCURRENT LIABILITIES
Accumulated post-retirement benefit obligation 29,791 29,609
Deferred compensation and other deferred liabilities 28,830 25,173
Liabilities subject to compromise 288,706 ---
---------------- -----------------
Total noncurrent liabilities 347,327 54,782
---------------- -----------------
STOCKHOLDERS' DEFICIT:
Convertible Preferred Stock - Series B, 13,000 shares
authorized, no par value, 13,000 shares issued and outstanding; 65,000 65,000
Common Stock, $.01 par value, 60,000,000 shares authorized,
28,299,434 and 27,899,047 shares issued as of March 27, 1999
and December 26, 1998, respectively 283 279
Additional paid in capital 132,034 128,956
Accumulated deficit (390,686) (379,390)
Accumulated other comprehensive loss (962) (1,104)
---------------- -----------------
(194,331) (186,259)
Less cost of common stock in treasury - 208,800 shares 2,822 2,822
---------------- -----------------
Total common stockholders' deficit (197,153) (189,081)
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 227,636 $ 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>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
---------------- ---------------
(unaudited)
<S> <C> <C>
REVENUES $ 34,769 $ 46,534
---------------- ---------------
COSTS AND EXPENSES:
Cost of sales 24,507 36,975
Selling, general and administrative 16,756 25,696
Gain on sale of assets (3,365) --
---------------- ---------------
Total costs and expenses 37,898 62,671
---------------- ---------------
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 (3,129) (16,137)
REORGANIZATION ITEMS 3,146 --
DISTRIBUTIONS ON GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN
BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE
DEBENTURES (Contractual distributions of $2,461 for the
three months ended March 27, 1999) 1,628 2,516
INTEREST INCOME (149) (700)
INTEREST EXPENSE (Contractual interest expense of $4,040 for
the three months ended March 27, 1999) 3,020 2,969
---------------- ---------------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (10,774) (20,922)
PROVISION (BENEFIT) FOR INCOME TAXES 522 (50)
---------------- ----------------
NET LOSS (11,296) (20,872)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION 142 74
---------------- ---------------
COMPREHENSIVE LOSS $ (11,154) $ (20,798)
================ ===============
NET LOSS PER BASIC COMMON SHARE $ (0.45) $ (0.85)
================ ===============
</TABLE>
See Notes to Condensed Consolidated
Financial Statements
5
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,296) $ (20,872)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,520 3,204
Non-cash interest expense 300 100
Reorganization items 3,146 --
Gains on sales of assets (3,365) --
Provision for losses on accounts receivable -- 155
Other non-cash -- 395
Changes in assets and liabilities:
Decrease in accounts receivable 15,682 6,682
Decrease in inventories 3,625 1,476
Increase in royalty advances (2,698) (1,318)
Decrease (increase) in other current assets (771) (328)
Decrease in accounts payable (1,523) (1,822)
Decrease in accrued compensation and fringe benefits (900) (108)
Other assets and liabilities (2,692) (8,480)
----------------- -----------------
Net cash provided by (used in) operating activities before
reorganization items 3,028 (20,916)
Reorganization items (3,146) --
------------------ -----------------
Net cash used in operating activities (118) (20,916)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (496) (6,392)
Additions to film library (387) (235)
Proceeds from sales of assets 4,191 --
Deposits and other 1,737 --
------------------ -----------------
Net cash provided by (used in) investing activities 5,045 (6,627)
</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 (Continued)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions -- 183
Repayment of Revolving Credit Facility (21,637) --
Net borrowings under DIP loan (post petition) 10,000 --
----------------- -----------------
Net cash (used in) provided by financing activities (11,637) 183
EFFECT OF EXCHANGE RATE CHANGES ON CASH 142 74
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,568) (27,286)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,330 57,411
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,762 $ 30,125
================= =================
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 $ 850 $ 8,253
================= ==================
Income taxes, net of refunds received $ (37) $ (10)
================= ==================
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
7
<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 March 27, 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 months ended March 27, 1999.
The accompanying 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. An event or 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 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 March 27, 1999 and the results of operations and cash
flows for the three month periods ended March 27, 1999 and March 28, 1998. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements of the Company contained in the Company's
Form 10-K for the year ended December 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.
NOTE B - Liquidity and Business Outlook
The Company has experienced liquidity difficulties as a result of operating
losses, working capital deficiencies and negative operating cash flows. These
difficulties have hampered the Company's ability to fund day-to-day operations.
As a result of the aforementioned and as more fully described below, 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.
8
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE B - Liquidity and Business Outlook (continued)
-----------------------------------------
On September 15, 1998, the Company announced that it was deferring a $5.7
million interest payment on the Senior Notes (as defined) due on such date for a
30-day grace period in accordance with the Indenture ("Indenture") governing the
Senior Notes. Subsequently, on October 15, 1998, the Company announced that it
would not pay the September 15th interest payment. Accordingly, at October 15th
the Company was in default under the Indenture and the holders of the Senior
Notes, at their option, have the right (i) to demand the redemption of the
entire $150.0 million principal amount of the Senior Notes due and (ii)
foreclose on the collateral securing the Senior Notes. The Company does not have
sufficient resources to repay this obligation. The Company has not been informed
of any such acceleration of payment. Additionally, on March 15, 1999, the
Company failed to pay a $5.7 million interest payment on the Senior Notes due on
such date. As a result of the defaults, at December 26, 1998 the Senior Notes
are classified as a current liability on the accompanying consolidated balance
sheet. As a result of the Bankruptcy filing, at March 27, 1999 the Senior Notes
are classified as a liability subject to compromise on the accompanying
condensed consolidated balance sheet.
Due to the October 15, 1998 default under the Senior Notes, cross-default
provisions regarding the Company's then existing $30.0 million Revolving Credit
Facility (as defined) with NationsCredit (see Note E) resulted in a default
under the agreement. Accordingly, NationsCredit had the right, at its option, to
demand the acceleration of all amounts due thereunder. The Company did not
maintain sufficient resources to repay this obligation. As a result of the
default, at December 26, 1998 the Revolving Credit Facility is classified as a
current liability 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).
Due to the October 15, 1998 default under the Senior Notes, cross-default
provisions regarding the Company's $25.0 million Loan Facility (as defined) with
Golden Press Holdings, LLC, of which $10.0 million was outstanding at March 27,
1999, (see Note E) resulted in a default under the agreement. Accordingly,
Golden Press Holdings, LLC has the right, at its option, to demand the
acceleration of all amounts due thereunder. 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, 1998
the Loan Facility is classified as a current liability on the accompanying
condensed consolidated balance sheet. As a result of the Bankruptcy filing, at
March 27, 1999 the Loan Facility is classified as a liability subject to
compromise in the accompanying condensed consolidated balance sheet.
The Company also decided on November 1, 1998 that the dividend consisting of
195,000 shares of common stock and $292,500 in cash due on the Series B
Preferred Stock would not be declared or paid in accordance with the consent of
the holders of its Series B Preferred Stock. Additionally, on February 1, 1999
the Company again decided that it would not declare the dividend consisting of
195,000 shares of common stock or pay a cash dividend on the Series B Preferred
Stock in accordance with the consent of the holders of the Series B Preferred
Stock.
The Company also decided in November 1998 that it would defer a $2.5 million
interest payment on the TOPrS, due in accordance with the indenture underlying
the TOPrS. Additionally, in February 1999, the Company decided to defer the next
scheduled $2.5 million interest payment due on the TOPrS in accordance with the
indenture governing the TOPrS.
As a result of the Bankruptcy filing, default provisions in the indenture
underlying the TOPrS have been violated which have resulted in the holders of
the TOPrS having the right, at their option, to demand acceleration of the
$109.8 million due under the TOPrS 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,
1998 the TOPrS are classified as a current liability on the accompanying
condensed consolidated balance sheet. As a result of the bankruptcy filing, at
March 27, 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 the 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.
9
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE B - Liquidity and Business Outlook (continued)
-----------------------------------------
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
(the "Joint Plan of Reorganization") and the Disclosure Statement related to
such Joint Plan of Reorganization with the Bankruptcy Court. A hearing for
approval of the Joint Plan of Reorganization and the Disclosure Statement has
been set for May 10, 1999. If and when approval is obtained, ballots with
respect to the Joint Plan of Reorganization in the form approved by the
Bankruptcy Court will be circulated to those parties entitled to vote on it, and
a confirmation hearing will be scheduled. 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 as filed with the Bankruptcy Court (which is subject to
approval), 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 filed with
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 which 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
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)
-----------------------------------------
under the then existing 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.
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 its debtor-in-possession financing facility (the DIP Loan),
resolution of various litigation against the Company and the Company's ability
to return to profitability, generate sufficient cash from operations and obtain
financing sources to meet its future obligations. In addition, 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 business thereafter is dependent
on the Company's near-term ability to obtain adequate exit financing to meet
cash flow obligations and medium-term ability to generate sufficient cash flow
to meet its operational and financing requirements. Under the Joint Plan of
Reorganization, the Company's ability to obtain 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.
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 in gain on sale of assets
in the accompanying condensed consolidated statement of operations for the three
months ended March 27, 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 not been recorded in the Company's condensed consolidated statement of
operations for the three months ended March 27, 1999. The Company has also
announced its intention to sell the Sturtevant, WI facility.
The Company has filed its schedule of assets and liabilities and statements of
financial affairs with the Bankruptcy Court and the Court has fixed May 26, 1999
as the deadline for certain creditors to file proofs of claim relating to claims
arising prior to the commencement of the Bankruptcy filing.
11
<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 March 27, 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 months
ended March 27, 1999 (in thousands):
Professional fees $ 2,007
Interest income (28)
Financing costs 1,167
--------------------
$ 3,146
====================
In accordance with SOP 90-7, the accompanying condensed consolidated balance
sheet includes approximately: (i) $15.4 million classified as accounts payable,
(ii) $.08 million classified as accrued compensation and fringe benefits, (iii)
$12.2 million classified as other annual liabilities, (iv) $29.8 million
classified as accumulated post-retirement benefit obligation and (v) $12.9
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.
NOTE D - Inventories
-----------
Inventories consisted of the following (in thousands)
March 27, December 26,
1999 1998
(unaudited)
---------------- ----------------
Raw materials $ 1,557 $ 1,911
Work-in-process 2,421 2,914
Finished goods 22,215 24,993
Film library 3,250 3,250
---------------- ----------------
$ 29,443 $ 33,068
================ ================
12
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 March 27, 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 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. The
Company currently has $10.0 million outstanding under the DIP Loan.
Loan Facility: On September 4, 1998, the Company entered into a $25.0 million
loan facility with GP Holdings (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 March 27,
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
13
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE E - Debt (continued)
---------------
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 March 27, 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), had 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 March 27, 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
anytime after the occurrence of a Tax Event or on an Investment Company Event.
Effective January 10, 1997, the Company registered the resale of the Preferred
Securities with the Securities and Exchange Commission.
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 March 27, 1999
and for the three months ended March 27, 1999 and March 28, 1998 are as follows
(in thousands):
14
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE F - Preferred Securities (continued)
-------------------------------
March 27, 1999
---------------
Current assets $ 95,066
Noncurrent assets 123,400
---------------
Total assets $ 218,466
===============
Current liabilities $ 199,639
Noncurrent liabilities 47,964
Liabilities subject to compromise 288,706
---------------
Total liabilities 536,309
Stockholders' deficit (317,843)
---------------
Total Liabilities and Stockholders' Deficit $ 218,466
===============
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues $ 34,769 $ 46,534
Gross profit 10,262 11,481
Reorganizational items 3,146 --
Loss before interest expense income, reorganizational
items and (benefit) provision for income taxes (6,237) (16,897)
Net loss $ (13,917) $ (19,881)
</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.
On February 26, 1999, the Company filed petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code. As a result, the holders of the
Preferred Securities, at their option, can demand acceleration of the $115.0
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
March 27, 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.
15
<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
March 27, March 28,
1999 1998
------------------- -------------------
(In thousands except for per share data)
<S> <C> <C>
Net Loss $ (11,296) $ (20,872)
Preferred dividend requirements (1,252) (2,194)
------------------- -------------------
Loss applicable to basic common stock $ (12,548) $ (23,066)
=================== ===================
Weighted average basic common shares outstanding 28,167 27,077
=================== ===================
Loss per basic common share $ (0.45) $ (0.85)
=================== ===================
</TABLE>
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 the
case cannot be predicted with any certainty, the Company believes that it has
meritorious defenses to the claims, and that the claim against the Company will
be relieved or discharged during the pendency of the Chapter 11 proceedings.
Golden Books Publishing and Penn Corporation have been informed by the
Environmental Protection Agency (the "EPA") and/or state regulatory agencies
that they may be potentially responsible parties ("PRPs") and face liabilities
under the Comprehensive Environmental Response, Compensation, and Liability Act
(commonly know as "CERCLA" or "Superfund") or similar state laws. In all cases
except those described below, the Company has resolved its liability or is in
the process of resolving its liability for amounts not material. Although the
Company divested Penn in December 1996, the Company has agreed to indemnify
Peacock Papers, Inc. against certain of Penn's environmental liabilities,
including the Cork Street Landfill and Fulford Street Property discussed herein.
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
16
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Contingencies (continued)
------------------------
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 that $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 located in the
city which commitments and contingencies 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.
It is uncertain whether the claims against the Company in the foregoing
environmental matters will be resolved during the pendency of the Chapter 11
proceedings.
In addition to these environmental matters, Golden Books Publishing filed an
action in 1994 in the United States District Court, Eastern District of
Wisconsin captioned as Western Publishing Company, Inc. v. MindGames, Inc.
seeking a declaration of rights in regard to Golden Books Publishing's alleged
breach of various of its obligations under its licensing agreement with the
defendant for distribution through 1994 of the adult board game known as "Clever
Endeavor." This case involves the Company's now-discontinued adult and
children's game division. The defendant, believing its board game had the
potential to become one of the most popular of all time, has maintained that
certain of the alleged breaches entitle it to damages of as much as $40 million
resulting from lost profits and unpaid royalties. The Court recently granted
Golden Books Publishing's partial motion for summary judgment and held that the
defendant is precluded from recovering lost profits. Accordingly, the
defendant's damage claim is now limited to its unpaid royalties of $1.2 million.
Golden Books Publishing denies that it has any liability to defendant.
In consideration of the aforementioned matters, the Company has recorded
accruals in the "deferred compensation and other deferred liabilities" account
of approximately $5.7 million in the condensed consolidated balance sheet.
While it is not feasible to predict or determine the outcomes of these
aforementioned proceedings, it is the opinion of management that they maintain
adequate reserves in the consolidated balance sheet.
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.
17
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Contingencies (continued)
------------------------
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").
Information by industry segment is set forth below:
Three Months Ended
March 27, 1999 March 28, 1998
---------------------- --------------------
(In millions)
Revenues:
Consumer Products $ 29.0 $ 36.2
Entertainment 3.8 7.0
Commercial 2.0 3.3
---------------------- --------------------
Total Revenues $ 34.8 $ 46.5
====================== ====================
Gross Profit:
Consumer Products $ 8.3 $ 5.5
Entertainment 2.0 4.0
Commercial -- --
---------------------- --------------------
Total Gross Profit $ 10.3 $ 9.5
====================== ====================
SG&A
SG&A before transition costs $ 16.8 $ 21.5
Transition costs -- 4.2
---------------------- --------------------
Total SG&A $ 16.8 $ 25.7
====================== ====================
18
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE I - Industry Segments (continued)
----------------------------
Three Months Ended
March 27, 1999 March 28, 1998
------------------ -----------------
(In millions)
EBITDA
Gross profit $ 10.3 $ 9.5
SG&A (16.8) (25.7)
Gain on sale of assets 3.4 --
Reorganization items (3.1) --
------------------ -----------------
Operating loss (6.2) (16.2)
Depreciation & amortization 3.5 3.2
------------------ -----------------
EBITDA $ (2.7) $ (13.0)
================== =================
Depreciation and Amortization:
Consumer Products $ 1.4 $ 1.3
Entertainment 1.2 1.2
Commercial 0.1 0.1
Corporate 0.8 0.6
------------------ -----------------
Total Depreciation & Amortization $ 3.5 $ 3.2
================== =================
19
<PAGE>
ITEM 2. MANAGEMENT'S 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
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, resolution of various litigations against the Company, the
Company's ability to generate sufficient cash from operations and to obtain
financing sources to meet its future obligations. 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 near-term
ability to obtain adequate financing to meet cash flow obligations and
medium-term ability to 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") as
of March 27, 1999 and for the three months ended March 27, 1999 and March 28,
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 March
25, 1999, the Debtors filed a Joint Plan of Reorganization and a Disclosure
Statement pursuant to Section 1125 of the Bankruptcy Code. A hearing for
approval of the Joint Plan of Reorganization and the Disclosure Statement has
been set for May 10, 1999. If and when approval is obtained, ballots with
respect to the Joint Plan of Reorganization in the form approved by the
Bankruptcy Court will be circulated to those parties entitled to vote on it and
a confirmation hearing will be scheduled.
The Company's condensed consolidated financial statements as of and for the
three months ended March 27, 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. An event or sale of the Company or parts thereof may necessitate
a material write-down of assets, including goodwill associated with the
Company's business.
20
<PAGE>
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 as filed with the Bankruptcy
Court on March 25, 1999 (and which is subject to approval), 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. 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.
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, resolution of
various litigation against the Company and the Company's ability to return to
profitability, generate sufficient cash from operations and obtain financing
sources to meet its future obligations. Assuming the Joint Plan of
Reorganization is confirmed and consummated, continuation of the business
thereafter is dependent on the Company's near-term ability to obtain adequate
exit financing to meet cash flow obligations and medium-term ability to generate
sufficient cash flow to meet its operational and financing requirements. Under
the Joint Plan of Reorganization, the Company's ability to obtain exit financing
is limited to $60 million as long as the new $87 million secured note is
outstanding, and initially to $45 million.
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 March 27, 1999, working capital was approximately $23.9 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
21
<PAGE>
reclassification of the Company's debt facilities and accrued interest from
current liabilities at December 26, 1998 to liabilities subject to compromise at
March 27, 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. Such gains of approximately $3.4
million were recorded in gain on sale of assets in the Company's condensed
consolidated statement of operations and comprehensive loss for the three months
ended March 27, 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 not been recorded in the Company's condensed consolidated statement of
operations for the three months ended March 27, 1999. The Company also announced
its intention to sell the Sturtevant, WI facility.
Cash Flow for the three months ended March 27, 1999 utilized cash of
approximately $6.6 million compared to cash utilized of approximately $27.3
million for the three months ended March 28, 1998. The increase in cash flow is
attributable to the Company's improved operating results and the proceeds from
the sale of assets, which was partially offset by the repayment of outstanding
amounts under the Revolving Credit Facility. Additionally, the three months
ended March 28, 1998 included payments of approximately $6.4 million for
property, plant and equipment attributable to the Sturtevant facility.
Acquisitions of property, plant and equipment were approximately $0.5 million
during the three months ended March 27, 1999. Additions to the Company's film
library were approximately $0.4 million during the three months ended March 27,
1999 as compared to approximately $0.2 million during the three months ended
March 28, 1998.
Three months ended March 27, 1999 compared to three months ended March 28, 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 view.
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 March 27, 1999 decreased $11.7 million
(25.2%) to $34.8 million compared to $46.5 million for the three months ended
March 28, 1998. Revenues decreased in all three of the Company's operating
segments due to the factors described below. The Company believes that the
overall revenue decline is partially attributable to the impact of the February
26, 1999 Bankruptcy filing.
Consumer Products revenues decreased $7.2 million (19.9%) to $29.0 million for
the three months ended March 27, 1999 compared to $36.2 million for the three
months ended March 28, 1998. Children's Publishing revenues decreased $8.3
million to $25.6 million for the three months ended March 27, 1999 compared to
$33.9 million for the three months ended March 28, 1998. This decrease was
partially offset by a $1 million improvement in Adult Publishing revenues for
the same time period (the Adult Publishing business was sold in April 1999). 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 (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.
Entertainment revenues decreased $3.2 million (45.7%) to $3.8 million for the
three months ended March 27, 1999 compared to $7.0 million for the three months
ended March 28, 1998. The decline is mainly attributable to a: (i) $2.2 million
decrease in television related revenues as the three months ended March 28, 1998
included significant revenues for a multi-year contract for the USA broadcasting
rights for Lassie; and (ii) $1.7 million decline in Home
22
<PAGE>
Video revenues resulting from the timing of the recognition of revenues on the
sale of Christmas Classic videos. These declines were partially offset by
improved merchandising sales.
Commercial Products revenues decreased $1.3 million (39.4%) to $2.0 million for
the three months ended March 27, 1999 compared to $3.3 million for the three
months ended March 28, 1998.
Gross Profit
Total gross profit increased $0.8 million (8.4%) to $10.3 million for the three
months ended March 27, 1999, from $9.5 million for the three months ended March
28, 1998. As a percentage of revenues, total gross profit margin increased to
29.6% for the three months ended March 27, 1999 from 20.4% for the three months
ended March 28, 1998. The increase was primarily attributable to improved gross
profit margins in the Consumer Products Segment, partially offset by gross
profit margins in the Entertainment Segment as more fully described below.
Consumer Products gross profit increased $2.8 million (50.9%) to $8.3 million
for the three months ended March 27, 1999, compared to $5.5 million for the
three months ended March 28, 1998. As a percentage of revenues, Consumer
Products gross profit margin increased to 28.6% for the three months ended March
27, 1999 from 15.2% for the three months ended March 28, 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 $2.0 million (50%) to $2.0 million for the
three months ended March 27, 1999 compared to $4.0 million for the three months
ended March 28, 1998. As a percentage of revenues, the gross profit margin
decreased to 52.6% for the three months ended March 27, 1999 compared to 57.1%
for the three months ended March 28, 1998. This decrease resulted primarily from
reduced sales (see above) and lower margins on select video products sold during
the three months ended March 27, 1999.
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 $8.9 million to $16.8
million for the three months ended March 27, 1999 compared to $25.7 million
(including one-time transition costs of $4.2 million) for the three months ended
March 28, 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 $3.4 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, and 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.
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $3.1 million
includes $2.0 million in professional fees and $1.2 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 March 27, 1999 decreased $0.6 million
to $0.1 million from $0.7 million for the three months ended March 28, 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 three months ended March 27, 1999 decreased by $0.9 million
to $4.6 million, as compared to $5.5 million for the three months ended March
28, 1998. The Company stopped recording interest expense relating to its debt
facilities effective February 26, 1999 in accordance with the requirements of
23
<PAGE>
SOP 90-7. Total average outstanding debt (including the Preferred Securities)
was $194.5 million for the three months ended March 27, 1999.
Income Tax
The provision for income taxes was $0.5 million for the three months ended March
27, 1999 compared to a benefit of $(.05 million) for the three months ended
March 28, 1998. The increase in the provision for income taxes for the three
months ended March 27, 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 three months ended March 27, 1999 was $(11.3) million, or
$(0.43) per basic common share, compared to a net loss of $(20.9) million, or
$(0.85) per basic common share, for the three months ended March 28, 1998. The
decrease in net loss is attributable to the facts 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 July 1999 and that the Testing, Contingency Planning and
Implementation phases should be substantially completed by the end of August
1999. In addition, the Company expects to implement the remainder of Year 2000
remediated IT systems and applications based on current assessments prior to
September 30, 1999.
Excluding normal system upgrades, the Company estimates that total costs for
conversion and testing of new or modified IT systems and applications will
aggregate approximately $2.0 million to $2.4 million of which an aggregate of
$0.5 million had been incurred to date. Total conversion and testing costs
through fiscal 1999 are estimated at $1.9 million.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company which utilizes embedded technology affected by Y2K issues include:
security systems, elevator systems, HVAC, phone systems, business machines,
printing press equipment and distribution systems. The Company has completed the
Assessment of its principal non-IT equipment and has begun remediation. The
Company anticipates the Remediation phase related to these principal systems
should be substantially completed by the end of May 1999 and that the Testing,
Contingency Planning and Implementation phases should be substantially completed
by the end of June, 1999. The Company estimates that total costs for modifying
or replacing new systems and equipment in this area will be approximately $0.5
million. Total modification and replacement costs through fiscal 1999 are
estimated at $.45 million.
24
<PAGE>
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 expects to have completed these updates by May 1999. The
Company anticipates that it will develop contingency plans with respect to its
principal third party suppliers by the end of July 1999. Costs to the Company in
this area, excluding costs due to unanticipated third party Year 2000 problems,
will principally consist of internal staff costs, which are not expected to be
material.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program will be $2.5 million to $2.9
million, of which total program costs to date have been $0.6 million. Total
program costs through fiscal 1999 are estimated at $2.2 million to $2.4 million.
These costs include costs related to the matters above, as well as consulting
and other expenses related to infrastructure and facilities enhancements
necessary to prepare the Company for the Year 2000. The costs do not include
internal staff costs incurred or to be incurred in connection with the
implementation of the program. Costs are expected to be expensed as incurred,
and cash generated from the Company's operations or borrowings under its credit
agreements will fund such costs. The above-stated amounts have been budgeted for
the appropriate fiscal years. Projected Year 2000 costs for fiscal 1999 comprise
approximately 15% to 20% of the Company's IT budget for that period. Based on
the current progress of the Company's Year 2000 program, the Company anticipates
its Year 2000 program to be substantially completed by September 30, 1999. As a
result of the Company's Year 2000 program, it is anticipated that there may be
delays in other new and continuing IT projects, although diligence is being put
forth to allow for concurrent development where possible. However, no material
adverse affect is expected from any delays, as the Company has procedures in
place to ensure that critical projects will be handled in a timely manner. The
cost of the Company's Year 2000 program and the dates provided herein are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, many of which are beyond the Company's control.
The failure to correct a material Year 2000 problem could result in an
interruption in certain normal business activities or operations of the Company.
Such interruptions could materially and adversely affect the Company's financial
condition, results of operations and cash flows. Based on current plans and
assumptions, the Company does not expect that the Year 2000 issue will have an
adverse impact on the Company as a whole. Due to the general uncertainty
inherent in the Year 2000 problem, however, there can be no assurance that all
Year 2000 problems will be foreseen and corrected, or if foreseen, corrected on
a timely basis, or that no material disruption to the Company's business or
operations will occur. Further, the Company's expectations are based on the
assumption that there will be no general failure of external local, national or
international systems (including power, communication, postal or other
transportation systems) necessary for the ordinary conduct of business. The
Company is currently assessing those scenarios in which unexpected failures
would have a material adverse effect on the Company and will attempt to develop
contingency plans designed to deal with such scenarios. There can be no
assurance, however, that successful contingency plans can, in fact, be developed
or implemented.
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.
25
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note I
ITEM 3. DEFAULT UPON SENIOR NOTES
See Note B
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K [to be updated]
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
2.1 Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated
March 25, 1999 (Incorporated by reference to Exhibit 2.1 of the Company's
10-K for the period ending December 26, 1998).
2.2 Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code for
the Joint Plan of Reorganization of the Debtors, dated March 25, 1999.
(Incorporated by reference to Exhibit 2.2 of the Company's 10-K for the
period ending December 26, 1998).
10.2 Revolving Credit and Term Loan Agreement, dated March 11, 1999
(Incorporated by reference to Exhibit 10.1 of the Company's 8-K dated March
2, 1999). Asset Purchase Agreement for Sale of Adult Division (Incorporated
by reference to Exhibit 10.2 of the Company's 8-K dated March 2, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Report dated February 24, 1999
Report dated March 2, 1999
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
May 10, 1999 /s/ Richard E. Snyder
-------------------------------------------------
Richard E. Snyder
Chairman of the Board, President and
Chief Executive Officer
May 10, 1999 /s/ Colin Finkelstein
-------------------------------------------------
Colin Finkelstein
Chief Financial Officer
[principal financial and accounting officer]
27
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000790706
<NAME> GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> MAR-27-1999
<CASH> 8,762
<SECURITIES> 0
<RECEIVABLES> 55,257
<ALLOWANCES> 25,401
<INVENTORY> 29,443
<CURRENT-ASSETS> 101,319
<PP&E> 66,599
<DEPRECIATION> 37,710
<TOTAL-ASSETS> 227,636
<CURRENT-LIABILITIES> 77,462
<BONDS> 0
0
65,000
<COMMON> 283
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 227,636
<SALES> 34,624
<TOTAL-REVENUES> 34,769
<CGS> 24,507
<TOTAL-COSTS> 37,898
<OTHER-EXPENSES> 3,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,648
<INCOME-PRETAX> (10,774)
<INCOME-TAX> 522
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,296)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0<F1>
<FN>
<F1>For the attached financials, the value EPS-DILUTED is not applicable.
</FN>
</TABLE>
