UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 24, 2000
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: 10,233,889 shares outstanding as of
August 4, 2000.
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--June 24, 2000 (Unaudited)
and December 25, 1999 3
Consolidated Statements of Operations and Comprehensive
Loss (Unaudited)--for the three months ended June 24, 2000
(Successor Company) and June 26, 1999 (Predecessor Company) 5
Consolidated Statements of Operations and Comprehensive
Loss (Unaudited)--for the six months ended June 24, 2000
(Successor Company) and June 26, 1999 (Predecessor Company) 6
Consolidated Statements of Cash Flows (Unaudited)-- for the
six months ended June 24, 2000 (Successor Company) and
June 26, 1999 (Predecessor Company) 7
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and reports on Form 8-K 23
SIGNATURES 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
ASSETS
December
June 24, 25,
2000 1999
----------- --------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,770 $ 6,544
Accounts receivable, net 21,406 54,089
Inventories 27,239 26,169
Royalty advances 3,916 3,264
Other current assets 4,780 6,859
-------- --------
Total current assets 60,111 96,925
-------- --------
OTHER ASSETS
Accounts receivable-- long term 6,318 3,346
Other noncurrent assets 12,976 14,822
-------- --------
Total other assets 19,294 18,168
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $1,846 at June 24, 2000 16,166 17,522
EXCESS REORGANIZATION VALUE, net of accumulated
amortization of $1,743 at June 24, 2000 33,120 34,863
OTHER INTANIGBLE ASSETS, net of accumulated amortization
of $3,271 at June 24, 2000 119,249 122,520
-------- --------
TOTAL ASSETS $247,940 $289,998
======== ========
See Notes to Consolidated
Financial Statements
3
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 24, December 25,
2000 1999
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 14,074 $ 28,591
Accrued compensation and fringe benefits 4,897 6,790
Revolving credit and term loan agreement 10,897 15,384
Other current liabilities 34,678 49,345
------------ ------------
Total current liabilities 64,546 100,110
------------ ------------
NONCURRENT LIABILITIES
Revolving credit and term loan agreement 6,750 6,750
Senior secured notes 92,961 87,000
Accumulated post-retirement benefit obligation 29,830 30,806
Deferred compensation and other deferred liabilities 16,031 15,582
------------ ------------
Total noncurrent liabilities 145,572 140,138
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares authorized, 102 102
10,233,889 shares issued and outstanding as of
June 24, 2000 and December 25, 1999
Additional paid in capital 50,131 50,131
Accumulated deficit (11,974) --
Accumulated other comprehensive income (34) --
------------ ------------
38,225 50,233
Less: Unearned compensation on restricted stock 403 483
------------ ------------
Total common stockholders' equity 37,822 49,750
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 247,940 $ 289,998
============ ============
</TABLE>
See Notes to Consolidated
Financial Statements
4
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Three Months | Three Months
Ended | Ended
June 24, 2000 | June 26, 1999
------------- | -------------
(unaudited) | (unaudited)
<S> <C> | <C>
REVENUES $ 32,697 | $ 31,855
-------- | --------
COSTS AND EXPENSES: |
Cost of sales 17,126 | 21,939
Selling, general and administrative 19,524 | 17,996
Gains on sales of assets -- | (2,026)
-------- | --------
|
Total costs and expenses 36,650 | 37,909
-------- | --------
|
|
LOSS BEFORE REORGANIZATION ITEMS, DISTRIBUTIONS ON GUARANTEED PREFERRED |
BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING |
COMPANY, INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, NET AND |
PROVISION FOR INCOME TAXES (3,953) | (6,054)
|
REORGANIZATION ITEMS -- | 2,205
|
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S |
AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES |
(Contractual distributions of $2,402 for the three months ended June |
26, 1999) -- | --
|
INTEREST EXPENSE, NET (Contractual interest expense of $3,415 for the three 3,738 | 306
months ended June 26, 1999) -------- | --------
|
LOSS BEFORE PROVISION FOR INCOME TAXES (7,691) | (8,565)
PROVISION FOR INCOME TAXES -- | 35
-------- | --------
|
NET LOSS (7,691) | (8,600)
|
OTHER COMPREHENSIVE INCOME: |
FOREIGN CURRENCY TRANSLATION 63 | --
-------- | --------
|
COMPREHENSIVE LOSS $ (7,754) | $ (8,600)
======== | ========
NET LOSS PER BASIC AND DILUTIVE COMMON SHARE $ (0.75) | $ (0.30)
======== | ========
</TABLE>
See Notes to Consolidated
Financial Statement
5
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Six Months | Six Months
Ended | Ended
June 24, 2000 | June 26, 1999
------------- | -------------
(unaudited) | (unaudited)
<S> <C> | <C>
|
REVENUES $ 68,957 | $ 66,624
-------- | --------
|
COSTS AND EXPENSES: |
Cost of sales 37,159 | 46,446
Selling, general and administrative 37,180 | 34,752
Gains on sales of assets -- | (5,391)
-------- | --------
|
Total costs and expenses 74,339 | 75,807
-------- | --------
|
LOSS BEFORE REORGANIZATION ITEMS, DISTRIBUTIONS ON |
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN |
THE COMPANY'S AND GOLDEN BOOKS PUBLISHING |
COMPANY, INC.'S CONVERTIBLE DEBENTURES, |
INTEREST EXPENSE, NET AND PROVISION FOR INCOME |
TAXES (5,382) | (9,183)
|
REORGANIZATION ITEMS -- | 5,351
|
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL |
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS |
PUBLISHING COMPANY, INC.'S CONVERTIBLE |
DEBENTURES (Contractual distributions of $4,863 for |
the six months ended June 26, 1999) -- | 1,628
|
INTEREST EXPENSE, NET (Contractual interest expense of |
$7,455 for the six months ended June 26, 1999) 6,592 | 3,177
-------- | --------
|
LOSS BEFORE PROVISION FOR INCOME TAXES (11,974) | (19,339)
|
PROVISION FOR INCOME TAXES -- | 557
-------- | --------
|
NET LOSS (11,974) | (19,896)
|
OTHER COMPREHENSIVE (LOSS) INCOME: |
FOREIGN CURRENCY TRANSLATION (34) | 142
-------- | --------
|
COMPREHENSIVE LOSS $(12,008) | $(19,754)
======== | ========
NET LOSS PER BASIC AND DILUTIVE COMMON SHARE $ (1.17) | $ (0.75)
======== | ========
</TABLE>
See Notes to Consolidated
Financial Statement
6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Six Months | Six Months
Ended | Ended
June 24, 2000 | June 26, 1999
------------- | -------------
(unaudited) | (unaudited)
<S> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Net loss $(11,974) | $(19,896)
Adjustments to reconcile net loss to net cash provided by (used in) |
operating activities: |
Depreciation and amortization 7,003 | 6,776
Non-cash interest expense 6,061 | 337
Reorganization items -- | 5,351
Gains on sales of assets -- | (5,391)
Changes in assets and liabilities, net of disposal: |
Decrease in accounts receivable 29,711 | 15,586
(Increase) decrease in inventories (1,070) | 2,916
Increase in royalty advances (2,852) | (2,296)
Decrease (increase) in other current assets 2,128 | (2,519)
Decrease in accounts payable (14,517) | (1,023)
Decrease (increase) in accrued compensation and fringe benefits (1,893) | 74
Other assets and liabilities (11,149) | 842
-------- | --------
Net cash provided by operating activities before |
Reorganization items 1,448 | 757
Reorganization items -- | (5,351)
-------- | --------
Net cash provided by (used in) operating activities 1,448 | (4,594)
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisitions of property, plant and equipment (701) | (1,207)
Additions to film library -- | (575)
Proceeds from sales of assets -- | 11,462
Deposits and other -- | 1,737
-------- | --------
Net cash (used in) provided by investing activities (701) | 11,417
</TABLE>
See Notes to Consolidated
Financial Statements
7
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Six Months | Six Months
Ended | Ended
June 24, 2000 | June 26, 1999
------------- | -------------
(unaudited) | (unaudited)
<S> <C> | <C>
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
Net Repayments under Revolving Credit and Term Loan Agreement (4,487) | --
Repayment of Revolving Credit Facility -- | (21,637)
Borrowings under DIP loan -- | 10,000
Repayments under DIP loan -- | (2,500)
-------- | --------
Net cash used in financing activities (4,487) | (14,137)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH (34) | 142
-------- | --------
|
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,774) | (7,172)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,544 | 15,330
-------- | --------
|
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,770 | $ 8,158
======== | ========
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
Cash paid during the period for: |
|
Interest expense $ 1,354 | $ 1,020
======== | ========
Income taxes, net of refunds received $ 10 | $ 459
======== | ========
|
Non-cash activity: |
Stock conversion on Guaranteed Preferred Beneficial Interests in the |
Company's and Golden Books Publishing Company, Inc.'s Convertible -- | $ 5,205
Debentures ======== | ========
</TABLE>
See Notes to Consolidated
Financial Statements
8
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Nature of Business, Organization and Basis of Presentation
Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company" or the
"Registrant") is a publisher of children's books and family related
entertainment products primarily in the North American retail market. The
Company, through its Consumer Products division creates, publishes and markets
an extensive range of children's entertainment products, including "Little
Golden Books" and other storybooks, coloring / activity books, electronic
storybooks, puzzles, educational workbooks, reference books and novelty book
formats. The Company has published its flagship product line, "Little Golden
Books," for over 50 years.
The Company's Golden Books Entertainment Group ("Golden Books Entertainment")
consists of an extensive library of character-based family entertainment
properties. The Golden Books Entertainment division's library is comprised of
copyrights, distribution rights, trademarks and licenses relating to characters,
television programs and motion pictures, both animation and live action, and
includes individual specials and multiple episode series.
In February 1999, the Company reached an agreement with its major creditors
pursuant to which its then existing long-term debt would be significantly
reduced and its then existing trade obligations would be paid in full. In
accordance with that agreement, the Registrant, as well as Golden Books
Publishing, Inc and Golden Books Home Video, Inc. filed petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code"). Significant components of the Company's amended joint plan
of reorganization (the "Amended Joint Plan of Reorganization") were approved by
the Bankruptcy Court on December 22, 1999. On January 27, 2000, the Company
formally emerged from protection under the Bankruptcy Code upon the consummation
of the Amended Joint Plan of Reorganization. Because significant components of
the Amended Joint Plan of Reorganization were approved by the Bankruptcy Court
on December 22, 1999, the Company has applied the reorganization and fresh-start
reporting adjustments as required by American Institute of Certified Public
Accountants' Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") to the consolidated
balance sheet as of December 25, 1999 (the "Effective Date"). As used herein,
Successor Company refers to Golden Books Family Entertainment, Inc. and
subsidiaries from the Effective Date and Predecessor Company refers to Golden
Books Family Entertainment, Inc. and subsidiaries prior to the Effective Date. A
vertical black line has been drawn to separate the Successor Company's
consolidated statements of operations and comprehensive loss and consolidated
statements of cash flows from those of the Predecessor Company to signify that
they are different reporting entities and have not been prepared on the same
basis.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of June 24, 2000 (Successor Company) and the results
of operations and cash flows for the three and six month periods ended June 24,
2000 (Successor Company) and June 26, 1999 (Predecessor Company). These
unaudited 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 25, 1999.
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.
Certain amounts in 1999 have been reclassified to conform with the 2000
presentation.
9
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE A - Nature of Business, Organization and Basis of Presentation (continued)
The results of Golden Books Financing Trust (the "Trust") are included in the
Company's consolidated financial statements for the three and six month periods
ended June 26, 1999 (Predecessor Company). The Trust, which was the issuer of 8
3/4% Convertible Trust Originated Preferred Securities, referred to in the
Company's 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"), was owned by
the Company, had no independent operations and its assets consisted 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 D). On the Effective Date of the Amended
Joint Plan of Reorganization, The TOPrS obligations were discharged and,
accordingly, the results of the Trust are not required to be presented in the
Successor Company's financial statements.
NOTE B-Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is required to be adopted in fiscal years beginning after June 15, 2000.
This statement is not expected to affect the Company as the Company currently
does not engage or plan to engage in derivative instruments or hedging
activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Regognition In Financial Statements" ("SAB No. 101") which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will be
required to adopt the accounting provisions of SAB No. 101, no later than the
fourth quarter of 2000. The Company is currently evaluating the impact of
adopting SAB 101 but the Company does not believe that the implementation of SAB
No. 101 will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For
Certain Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No. 25. "Accounting For Stock Issued to
Employees." With certain exceptions, FIN No. 44 applies prospectively to new
awards, exchanges of awards in a business combination, modifications to
outstanding awards and changes in grantee status on or after July 1, 2000. The
Company does not believe that the implementation of FIN No. 44 will have a
significant effect on its results of operations.
NOTE C - Inventories
Inventories consisted of the following (in thousands)
June 24, December 25,
2000 1999
---- ----
(unaudited)
Raw materials $ 762 $ 250
Work-in-progress 504 819
Finished goods 23,793 22,920
Film library 2,180 2,180
------- -------
$27,239 $26,169
======= =======
10
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE D - Preferred Securities
The Predecessor 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 "Preferred Securities"). The Preferred Securities were
issued by the Trust, a Delaware business trust financing vehicle. The
Predecessor Company owned all of the common securities of the Trust. The
Preferred Securities paid quarterly distributions at an annual distribution rate
of 8 3/4% (subject to deferral of interest payments on the Preferred Securities
by the Predecessor Company and Golden Books Publishing), and were convertible at
the option of their holders into Convertible Debentures, which were immediately
convertible into Predecessor Company common stock 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 Predecessor Company's common stock. The Convertible Debentures
were due to mature on August 20, 2016.
The Predecessor Company and its subsidiary, Golden Books Publishing, were joint
and several obligor's of the Preferred Securities and they fully and
unconditionally guaranteed the Trust's obligations under the Preferred
Securities. Separate financial statements of Golden Books Publishing were not
presented in their entirety as the separate financial statements would not be
materially different from the consolidated financial statements of the
Predecessor Company. Summarized financial statements of Golden Books Publishing
were as follows (in thousands):
Predecessor
Company
June 26, 1999
-------------
(unaudited)
Current $ 89,244
Noncurrent assets 121,243
--------
Total assets $210,487
========
Predecessor
Company
June 26, 1999
-------------
(unaudited)
Current liabilities $ 197,394
Noncurrent liabilities 51,336
Liabilities subject to compromise 288,706
---------
Total liabilities 537,436
Stockholders' deficit (326,949)
---------
Total Liabilities and Stockholders' Deficit $ 210,487
=========
Three Months Six Months
Ended Ended
June 26, 1999 June 26, 1999
------------- -------------
(unaudited) (unaudited)
Revenues $ 31,855 $ 66,624
Gross profit 9,916 20,178
Loss before interest expense, interest income,
reorganization items and provision
for income taxes (6,001) (9,092)
Reorganization items (2,205) (5,351)
-----------------------
Net loss $(11,230) $(25,147)
======== ========
11
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE D - Preferred Securities (continued)
On the Effective Date of the Amended Joint Plan of Reorganization, the TOPrS
were converted into 50% of the Successor Company's common stock issued post
recapitalization, prior to dilution (5,000,000 shares).
NOTE E - Loss Per Basic and Dilutive Common Share
Loss per basic and dilutive common share was computed as follows (in thousands
except for per share data):
<TABLE>
<CAPTION>
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
Three Months | Three Months Six Months | Six Months
Ended | Ended Ended | Ended
June 24, | June 26, June 24, | June 26,
2000 | 1999 2000 | 1999
---- | ---- ---- | ----
| |
<S> <C> | <C> <C> | <C>
Net loss $ (7,691) | $ (8,600) $(11,974) | $(19,896)
Preferred dividend requirements -- | -- -- | (1,252)
-------- | -------- -------- | --------
Loss applicable to basic and dilutive | |
common stock $ (7,691) | $ (8,600) $(11,974) | $(21,148)
======== | ======== ======== | ========
Weighted average basic and dilutive | |
common shares outstanding 10,234 | 28,299 10,234 | 28,233
-------- | -------- -------- | --------
Loss per basic and dilutive common | |
share $ (0.75) | $ (0.30) $ (1.17) | $ (0.75)
======== | ======== ======== | ========
</TABLE>
NOTE F - Contingencies
On February 26, 1999, the Predecessor Company and certain of its subsidiaries
filed petitions for reorganization under the Bankruptcy Code, and emerged
therefrom on January 27, 2000. In accordance with the Amended Joint Plan of
Reorganization, the Successor Company is in the process of paying all
pre-petition trade creditors with undisputed claims all amounts due with
interest, and is working to resolve all disputed claims of pre-petition trade
creditors in the Bankruptcy Court.
The Company and Penn Corporation ("Penn") have been informed by the United
States 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 known as "CERCLA" or "Superfund") and/or similar state
laws. 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
sites discussed herein. In all cases except those described below, the Company
has resolved its liability or is in the process of resolving its liability for
amounts that are not material.
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
Kalamazoo which was allegedly used by Beach Products. In April 2000, the Company
settled with the City of Kalamazoo and other plaintiffs wherein the Company paid
approximately $58,000 in return for a full release of claims, except for natural
resource damage claims and certain other claims. Currently, no such claims have
been made.
On November 14, 1996, the Michigan Department of Environmental Quality requested
that corrective actions be taken at the Company's former Fulford Street Property
site located in Kalamazoo, Michigan as a result of the discovery on November 8,
12
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE F Contingencies (continued)
1996 of a leaking underground storage tank system. Recent sampling results taken
pursuant to the corrective action plan for this site indicated the presence of
groundwater contamination at levels exceeding the Michigan Department of
Environmental Quality standards in one of six groundwater samples. Additional
sampling will be undertaken to determine the source of the contamination.
Current estimates indicate that future costs associated with this release are
not expected to exceed $200,000. However, in the event that the contamination
has migrated off the site, these costs could increase.
At the Hunt's Landfill site in Racine County, Wisconsin, the Company'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 remediation activities was
completed in 1996, the Company and the other PRPs 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 approximately
$5.0 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 Company and the other PRPs to
perform a remedial design and remedial action at the Hertel Landfill Superfund
Site in Plattekill, New York. The Company did not agree to comply with the
Order. The EPA subsequently sued the Company and other PRPs seeking recovery of
its costs at this 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 1991 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 consent 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. The Company's share of the government's future costs is
expected to be $170,000.
The Company also has been identified as a PRP at a site located in Poughkeepsie,
New York. The Company and eight other PRPs received a notice letter in 1995 from
the State of New York regarding this site. The State of New York sought recovery
of its past oversight costs of more than $600,000 plus future oversight and
maintenance costs associated with this site, estimated by the State of New York
to be $830,000. The Company has received no further communications from the
State of New York with respect to this site but believes that the construction
phase of the remedy has been completed.
In addition to these environmental matters, the Company is party to the
following legal proceedings.
Live Entertainment, Inc. (Artisan Entertainment, Inc.) filed an action in
December 1998 in the California Superior Court against the Company to recover
damages in excess of $2.3 million as a result of the Company allegedly breaching
certain of its obligations under a licensing agreement. The Company reached a
settlement with Live Entertainment, Inc. pursuant to which it paid approximately
$1.5 million in settlement and dismissal of the action.
The Company 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 the Company'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." The District Court has granted the Company's motion for
summary judgment with respect to MindGames, Inc.'s claims to recover
approximately $2.4 million in lost profits and other losses. MindGames, Inc. has
agreed to dismiss its remaining claim to recover approximately $120,000 of
unpaid royalties in order to appeal the District Court's ruling.
In consideration of the aforementioned matters, the Successor Company has
recorded accruals in the "deferred compensation and other deferred liabilities"
account of approximately $7.0 million in the consolidated balance sheet at June
24, 2000.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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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 at June 24, 2000.
The Successor Company and its subsidiaries are parties to certain other legal
proceedings which are incidental to their ordinary business, none of which the
Successor Company believes are material to the Successor Company and its
subsidiaries taken together as a whole.
NOTE G - Industry Segments
The Company currently has two operating segments which it operates primarily
through its principle operating subsidiary Golden Books Publishing Company,
Inc.: Consumer Products and Entertainment. The Company previously maintained a
third segment (Commercial Products) until its sale in November 1999. The
Company's Consumer Products segment is engaged in the creation, publication,
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 included 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 included the Company's adult publishing division until
its sale in April 1999.
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 Products segment provided printing and other services to third
parties until the sale of the Company's manufacturing facility in November 1999.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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NOTE G - Industry Segments (continued)
The Company evaluates performance based on several factors, of which the primary
measure is operating segment earnings before interest expense net, taxes,
depreciation and amortization ("EBITDA").
Information by industry segment is set forth below (in millions):
<TABLE>
<CAPTION>
Successor | Predecessor Successor | Predecessor
Company | Company Company | Company
Three Months | Three Months Six Months | Six Months
Ended | Ended Ended | Ended
June 24, | June 26, June 24, | June 26,
2000 | 1999 2000 | 1999
---- | ---- ---- | ----
<S> <C> | <C> <C> | <C>
Revenues: | |
Consumer Products $28.9 | $21.8 $60.9 | $50.7
Entertainment 3.8 | 8.4 8.1 | 12.3
Commercial Products -- | 1.6 -- | 3.6
----- | ----- ----- | -----
Total Revenues $32.7 | $31.8 $69.0 | $66.6
===== | ===== ===== | =====
Gross Profit: | |
Consumer Products $12.2 | $ 4.4 $26.3 | $12.7
Entertainment 3.4 | 5.5 5.5 | 7.5
----- | ----- ----- | -----
Total Gross Profit $15.6 | $ 9.9 $31.8 | $20.2
===== | ===== ===== | =====
| |
EBITDA | |
Gross profit $15.6 | $ 9.9 $31.8 | $20.2
SG&A (19.5) | (18.0) (37.2) | (34.8)
Gains on sales of assets -- | 2.0 -- | 5.4
Reorganization items -- | (2.2) -- | (5.3)
----- | ----- ----- | -----
Operating loss (3.9) | (8.3) (5.4) | (14.5)
Depreciation and amortization 3.4 | 3.3 7.0 | 6.8
----- | ----- ----- | -----
Total EBITDA $(0.5) | $(5.0) $ 1.6 | $(7.7)
===== | ===== ===== | =====
| |
Depreciation and Amortization: | |
Consumer Products $ 2.5 | $ 2.1 $ 5.3 | $ 4.2
Entertainment 0.9 | 1.1 1.7 | 2.4
Commercial Products -- | 0.1 -- | 0.2
----- | ----- ----- | -----
Total Depreciation and | |
Amortization $ 3.4 | $ 3.3 $ 7.0 | $ 6.8
===== | ===== ===== | =====
</TABLE>
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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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 contains
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. On January 27, 2000, the
Company formally emerged from proceedings under Chapter 11 of the Bankruptcy
Code. Future success of the Company depends 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 including servicing its
reduced indebtedness and Revolving Credit and Term Loan Agreement. 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 operating performance of entertainment companies, such as the Company, is
measured, in part, by their ability to generate EBITDA. Further, the Company
uses EBITDA as the primary indicator of its operating performance and
secondarily as a measure of liquidity. The Company defines "EBITDA" as earnings
before interest expense net, taxes and depreciation and amortization. Although
EBITDA is not a measure of performance calculated in accordance with generally
accepted accounting principals ("GAAP"), the Company believes that the
entertainment industry accepts EBITDA as a generally recognized measure of
performance and analysts who report publicly on the performance of entertainment
companies use EBITDA. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash provided
by operating activities or any other measure for determining operating
performance or liquidity that is calculated in accordance with GAAP. EBITDA, as
the Company calculates it, may not be comparable to calculations of similarly
titled measure presented by other companies.
The Company's financial results in Fiscal 1999 were impacted as a result of its
filing for reorganization under Chapter 11 of the Bankruptcy code on February
26, 1999, from which the Company did not formally emerge until January 27, 2000.
Because significant components of the Amended Joint Plan of Reorganization were
approved by the Bankruptcy Court on December 22, 1999, pursuant to guidance
provided by SOP 90-7, the Company adopted Fresh-Start accounting as of December
25, 1999. As used herein, Successor Company refers to Golden Books Family
Entertainment, Inc. and Subsidiaries from the Effective Date and Predecessor
Company refers to Golden Books Family Entertainment, Inc. and Subsidiaries prior
to the Effective Date. Accordingly, the Successor Company's financial statements
are not prepared on the same basis as the Predecessor Company's financial
statements.
The Company currently has two business segments, which it operates primarily
through its principal operating subsidiary, Golden Books Publishing Company,
Inc. ("Golden Books Publishing"): (1) Consumer Products, which includes its
Children's Publishing and, until its sale in April 1999, Adult Publishing
divisions, and (2) Entertainment, which operates as the Golden Books
Entertainment Group ("GBEG") division. The Company previously maintained a third
business segment (Commercial Products) until the sale of its Manufacturing
facility in November 1999 which provided printing, graphic, creative and
distribution services to third parties.
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The following discussion should be read in conjunction with the unaudited
consolidated financial statements of the Company at June 24, 2000 (Successor
Company) and for the three and six month periods ended June 24, 2000 (Successor
Company) and June 26, 1999 (Predecessor Company) and the related notes thereto.
Three months ended June 24, 2000 (Successor Company) compared to three months
ended June 26, 1999 (Predecessor Company)
Revenues
Total revenues for the three months ended June 24, 2000 increased $0.9 million
(3%) to $32.7 million compared to $31.8 million for the three months ended June
26, 1999.
Consumer Products revenues increased $7.1 million (33%) to $28.9 million for the
three months ended June 24, 2000 compared to $21.8 million for the three months
ended June 26, 1999. The increased revenue is due to increased revenues
generated primarily by sales of Pokemon, Powerpuff Girls, Disney and Barbie
licensed product through mass market retailers (Walmart, Target), other
retailers (Barnes and Noble, Eckerd Drug) and international sales.
Entertainment revenues decreased $4.6 million (55%) to $3.8 million for the
three months ended June 24, 2000 compared to $8.4 million for the three months
ended June 26, 1999 due primarily to the timing of the execution of multi-year
television licensing contracts. For the three months ended June 24, 2000, the
Company recorded $2.3 million in television related revenues from a multi-year
license agreement for the cable television rights for Frosty the Snowman and
Rudolph the Red Nosed Reindeer as compared to $6.0 million in television related
revenues for the three months ended June 26, 1999 generated by a multi-year
license agreement for the more lucrative broadcast television rights. The
decrease in television revenues were partially offset by increased merchandise
licensing revenue.
Commercial Products revenues were $1.6 million for the three months ended June
26, 1999. The Company ceased operations of its Commercial Products segment after
the sale of its manufacturing facility in November 1999.
Gross Profit
Total gross profit increased $5.7 million to $15.6 million for the three months
ended June 24, 2000 from $9.9 million for the three months ended June 26, 1999.
As a percentage of revenues, total gross profit margin increased to 48% for the
three months ended June 24, 2000 from 31% for the three months ended June 26,
1999. The increase was attributable to improved gross profit margins in the
Consumer Products Segment offset by decreased gross profit in the Entertainment
Segment as described below.
Consumer Products gross profit increased $7.8 million to $12.2 million for the
three months ended June 24, 2000, compared to $4.4 million for the three months
ended June 26, 1999. As a percentage of revenues, Consumer Products gross profit
margin increased to 42% for the three months ended June 24, 2000 from 20% for
the three months ended June 26, 1999. The improvement in gross profit margin was
primarily attributable to increased revenues and a change in the product mix
toward more profitable formats including the new Pokemon formats and reduced
manufacturing costs (primarily as a result of the sale of the manufacturing
facility in November 1999), distribution costs and pre-production costs.
Entertainment gross profit decreased $2.1 million to $3.4 million for the three
months ended June 24, 2000 compared to $5.5 million for the three months ended
June 26, 1999. The decrease in gross profit is related to lower revenues, as
discussed above, partially offset by lower royalty costs related to television
licensing and lower direct costs related to the Home Video business due in part
to the favorable settlement of a distributor dispute.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.5 million to $19.5
million for the three months ended June 24, 2000 compared to $18.0 million for
the three months ended June 26, 1999. The increase is due primarily to increased
amortization expense related to new intangible assets and excess
reorganizational value established upon the Company's consummation of its
Amended Joint Plan of Reorganization and under the requirements of SOP 90-7.
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $2.2 million
during the three months ended June 26, 1999 includes $1.8 million in
professional fees and $0.4 million in financing costs primarily related to the
Predeccessor Company's DIP Loan.
Interest Expense, Net
Interest expense, net for the three months June 24, 2000 was $3.7 million.
Interest expense recorded during the three months ended June 24, 2000 related to
the Company's Revolving Credit and Term Loan Agreement and Senior Secured Notes.
Interest expense, net for the three months ended June 26, 1999 was $0.3 million.
During the three months ended June 26, 1999 the Predecessor Company stopped
recording interest expense relating to its then outstanding debt facilities
effective February 27, 1999 in accordance with the requirements of SOP 90-7.
Income Tax
At December 25, 1999, the Company had approximately $203.0 million of net
operating loss carryforwards for Federal income tax purposes which are subject
to certain limitation-on-utilization rules (as defined in Internal Revenue Code
Section 382). The Company incurred an additional taxable loss of approximately
$7.7 million for the three months ended June 24, 2000. Due to the uncertainty of
generating future taxable income, management believes it is appropriate to
reserve the deferred tax asset. Accordingly, there is no provision for income
taxes for the three months ended June 24, 2000.
The provision for income taxes was $35,000 for the three months ended June 26,
1999.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA increased $4.5 million to $(0.5) million for the three months ended June
24, 2000, compared to $(5.0) for the three months ended June 26, 1999. The
increase is due primarily to improved gross profit resulting from increased
revenues and lower cost of sales attributable to a change in product mix toward
more profitable products and reduced manufacturing costs (primarily as a result
of the sale of the manufacturing facility in November 1999), distribution costs
and pre-production costs.
Net Loss
The net loss for the three months ended June 24, 2000 was $(7.7) million, or
$(0.75) per basic and dilutive common share, compared to a net loss of $(8.6)
million, or $(0.30) per basic and dilutive common share, for the three months
ended June 26, 1999. The decrease in net loss is attributable to the factors
described above.
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Six months ended June 24, 2000 (Successor Company) compared to six months ended
June 26, 1999 (Predecessor Company)
Revenues
Total revenues for the six months ended June 24, 2000 increased $2.4 million
(4%) to $69.0 million compared to $66.6 million for the three months ended June
26, 1999. Revenues from ongoing operations for the six months ended June 24,
2000 increased $9.2 million (15%) to $69.0 million compared to $59.8 million for
the six months ended June 26, 1999. The six months ended June 26, 1999 also
included combined revenues of $6.8 million from the Adult publishing business
and the Commercial Products segment, such businesses were sold in 1999.
Consumer Products revenues increased $10.2 million (20%) to $60.9 million for
the six months ended June 24, 2000 compared to $50.7 million for the six months
ended June 26, 1999. The increase in revenue was due to a $13.4 million increase
primarily related to sales of Pokemon, Powerpuff Girls, Disney and Barbie
licensed product through mass market retailers (Walmart, Target, K-Mart), other
retailers (Eckerd Drug, Barnes and Noble) and international sales which was
partially offset by a $3.2 million decline in revenue related to the Adult
Publishing business which was sold in April 1999.
Entertainment revenues decreased $4.2 million (34%) to $8.1 million for the six
months ended June 24, 2000 compared to $12.3 million for the six months ended
June 26, 1999 due primarily to the timing of the execution of multi-year
television licensing contracts. For the six months ended June 24, 2000, the
Company recorded $2.3 million in television related revenues from a multi-year
license agreement for the cable television rights for Frosty the Snowman and
Rudolph the Red Nosed Reindeer as compared to $6.0 million in television related
revenues for the six months ended June 26, 1999 generated by a multi-year
license agreement for the more lucrative broadcast television rights. The
decrease in television revenues were partially offset by increased merchandise
licensing revenue.
Commercial Products revenues were $3.6 million for the six months ended June 26,
1999. The Company ceased operations of its Commercial Products segment after the
sale of its manufacturing facility in November 1999.
Gross Profit
Total gross profit increased $11.6 million to $31.8 million for the six months
ended June 24, 2000 from $20.2 million for the six months ended June 26, 1999.
As a percentage of revenues, total gross profit margin increased to 46% for the
six months ended June 24, 2000 from 30% for the six months ended June 26, 1999.
The increase was attributable to improved gross profit margins in the Consumer
Products Segment offset by decreased gross profit in the Entertainment Segment
as described below.
Consumer Products gross profit increased $13.6 million to $26.3 million for the
six months ended June 24, 2000, compared to $12.7 million for the six months
ended June 26, 1999. As a percentage of revenues, Consumer Products gross profit
margin increased to 43% for the six months ended June 24, 2000 from 25% for the
six months ended June 26, 1999. 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 and reduced manufacturing costs
(primarily as a result of the sale of the manufacturing facility in November
1999), distribution costs and pre-production costs.
Entertainment gross profit decreased $2.0 million to $5.5 million for the six
months ended June 24, 2000 compared to $7.5 million for the six months ended
June 26, 1999. The decrease in gross profit is related to lower revenues, as
discussed above, partially offset by lower royalty costs related to television
licensing and lower direct costs related to the Home Video business due in part
to the favorable settlement of a distributor dispute.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.4 million to $37.2
million for the six months ended June 24, 2000 compared to $34.8 million for the
six months ended June 26, 1999 The increase is due primarily to increased
amortization expense related to new intangible assets and excess
reorganizational value established upon the Company's consummation of its
Amended Joint Plan of Reorganization and under the requirements of SOP 90-7.
Reorganization Items
Reorganization items related to the Chapter 11 proceedings of $5.4 million
during the six months ended June 26, 1999 includes $3.8 million in professional
fees and $1.6 million in financing costs primarily related to the Predecessor
Company's DIP Loan.
Interest Expense, Net
Interest expense, net for the six months June 24, 2000 was $6.6 million.
Interest expense, net recorded during the six months ended June 24, 2000 related
to the Company's Revolving Credit and Term Loan Agreement and Senior Secured
Notes. Interest expense, net for the six months ended June 26, 1999 was $3.2
million (including the distributions on the guaranteed preferred beneficial
interest in the Company's and Golden Books Publishing's Convertible Debentures).
During the six months ended June 26, 1999 the Predecessor Company stopped
recording interest expense relating to its then outstanding debt facilities
effective February 27, 1999 in accordance with the requirements of SOP 90-7.
Income Tax
At December 25, 1999, the Company had approximately $203.0 million of net
operating loss carryforwards for Federal income tax purposes which are subject
to certain limitation-on-utilization rules (as defined in Internal Revenue Code
Section 382). The Company incurred an additional taxable loss of approximately
$12.0 million for the six months ended June 24, 2000. Due to the uncertainty of
generating future taxable income, management believes it is appropriate to
reserve the deferred tax asset. Accordingly, there is no provision for income
taxes for the six months ended June 24, 2000.
The provision for income taxes was $0.6 million for the six months ended June
26, 1999 and related primarily to gains recognized on certain asset dispositions
in Canada, where the Company files separate tax returns.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA increased $9.3 million to $1.6 million for the six months ended June 24,
2000, compared to $(7.7) for the six months ended June 26, 1999. The increase is
due primarily to improved gross profit resulting from increased revenues and
lower cost of sales attributable to a change in product mix toward more
profitable products and reduced manufacturing costs (primarily as a result of
the sale of the manufacturing facility in November 1999), distribution costs and
pre-production costs.
Net Loss
The net loss for the six months ended June 24, 2000 was $(12.0) million, or
$(1.17) per basic and dilutive common share, compared to a net loss of $(19.9)
million, or $(0.75) per basic and dilutive common share, for the six months
ended June 26, 1999. The decrease in net loss is attributable to the factors
described above.
Financial Condition, Liquidity and Capital Resources
In February 1999, the Company reached an agreement with its major creditors
pursuant to which its then existing long-term debt would be significantly
reduced and its existing trade obligations would be paid in full. In accordance
with that agreement, the Company, as well as Golden Books Publishing and Golden
Books Home Video, Inc. filed petitions for
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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reorganization under Chapter 11 of the United States Bankruptcy Code on February
26, 1999. Under an order dated September 24, 1999, the Bankruptcy Court
confirmed the Company's Amended Joint Plan of Reorganization (the "Amended Joint
Plan of Reorganization"). Significant components of the Amended Joint Plan of
Reorganization were approved by the Bankruptcy Court on December 22, 1999. On
January 27, 2000, the Company formally emerged from protection under the
Bankruptcy Code upon the consummation of the Amended Joint Plan of
Reorganization. The Company applied the reorganization and fresh-start
accounting adjustments as required by SOP 90-7 to the consolidated balance sheet
as of December 25, 1999.
Upon the consummation of the Amended Joint Plan of Reorganization, the Successor
Company entered into a revolving credit and term loan agreement consisting of a
revolving credit facility of up to $50.0 million and a term loan in the amount
of $10.0 million (the "Revolving Credit and Term Loan Agreement"). The revolving
portion of the Revolving Credit and Term Loan Agreement in the amount of $50.0
million matures on December 31, 2002 together with all accrued and unpaid
interest thereon. The term loan portion of the Revolving Credit and Term Loan
Agreement in the amount of $10.0 million is payable in installments by the
Successor Company over its three year term with all remaining principal together
with all accrued and unpaid interest thereon due in full on December 31, 2002.
Interest on the Revolving Credit and Term Loan Agreement is recorded a rate
equal to Prime rate plus 1.25% for the revolving credit portion and at a rate
equal to Prime rate plus 1.75% for the term loan portion and is payable monthly
in arrears on the first day of each month.
The Revolving Credit and Term Loan Agreement requires the Successor Company to
maintain compliance with certain financial and non-financial covenants,
including minimum EBITDA and limitations on: (i) dividends, distributions and
prepayment, (ii) incurences of additional indebtedness and (iii) capital
expenditures (all as defined in the Revolving Credit and Term Loan Agreement),
among others. The minimum EBITDA covenant requires the achievement of
approximately $1.0 million in EBITDA for Fiscal 2000. While the Company's budget
projects EBITDA in excess of this amount, the Company has not achieved this
level of EBITDA in recent years. The Successor Company has approximately $10.9
million of the revolving credit portion and $6.8 million of the term loan
portion outstanding, respectively, under the Revolving Credit and Term Loan
Agreement as of June 24, 2000. At July 29, 2000, the Successor Company had
available additional borrowings of $12.4 million under the revolving credit
portion of the Revolving Credit and Term Loan Agreement.
Upon consummation of the Amended Joint Plan of Reorganization, the Successor
Company entered into an indenture agreement (the "Indenture") governing the
terms of the senior secured notes in the principal amount of $87.0 million (the
"Senior Secured Notes") due in full on December 31, 2004 together with all
accrued and unpaid interest thereon. Interest at the rate of 10.75% per annum
commencing January 1, 2000 is payable semi-annually on June 30th and December
31st of each year of the term of the Senior Secured Notes. Interest may be paid
in the form of additional Senior Secured Notes at a rate of 14.25% per annum in
lieu of cash at the Successor Company's option for all interest payments due on
or prior to December 31, 2002, with interest due thereafter payable only in
cash. Prior to maturity, the Senior Notes shall be mandatorily redeemed in part
in a principal amount equal to $8.3 million on each of June 30, 2003, December
31, 2003 and June 30, 2004. The Senior Secured Notes are secured by the existing
collateral which had been granted to the holders of the Predecessor Company's
senior notes as well as certain additional collateral. The Indenture requires
the Successor Company to maintain compliance with certain financial and
non-financial covenants, including minimum EBITDA and limitations on: (i)
restricted payments, (ii) incurences of additional indebtedness and (iii)
capital expenditures (all as defined in the Indenture), among others. The
Successor Company has outstanding $93.0 million in Senior Secured Notes as of
June 24, 2000, including approximately $6.0 million in interest expense paid in
the form of additional Senior Secured Notes.
At June 24, 2000, the Company was in compliance with all covenants related to
the Revolving Credit and Term Loan Agreement and the Senior Secured Notes.
In accordance with the Amended Joint Plan of Reorganization, the Company is in
the process of paying remaining pre-petition trade creditors with undisputed
claims all amounts due with interest at 4.25% and working to resolve all
disputed claims of pre-petition trade creditors in the Bankruptcy Court.
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Cash flow for the six months ended June 24, 2000 utilized cash of approximately
$3.8 million compared to cash utilized of approximately $7.2 million for the six
months ended June 24, 1999.
The Company had cash provided by operations of $1.5 million for the six months
ended June 24, 2000, compared to cash used in operations of $4.6 million for the
six months ended June 26, 1999. The improvement in cash flow from operations is
primarily attributable to the Company's reduction in operating loss and an
increase in accounts receivable collections, offset by increased inventory
balances and decreased accounts payable, accrued royalties and accrued liability
balances related to payments made to vendors.
Cash used in investing activities for the six months ended June 24, 2000 was
$0.7 million compared to cash provided by investing activities of $11.4 million
for the six months ended June 26, 1999. Acquisitions of property, plant and
equipment were approximately $0.7 million during the six months ended June 24,
2000, as compared to approximately $1.2 million during the six months ended June
26, 1999. Additions to the Company's film library were approximately $0.6
million during the six months ended June 26, 1999. During the six months ended
June 26, 1999, the Company received proceeds from the sale of assets of
approximately $11.5 million.
Cash used in financing activities was $4.5 million for the six months ended June
24, 2000, as compared to $14.1 million for the six months ended June 26, 1999.
The Company used cash in financing activities of $4.5 million, net of additional
borrowings, for the six months ended June 24, 2000 to repay amounts outstanding
under its Revolving Credit and Term Loan Agreement. The Company used cash in
financing activities of $21.6 million to repay its then outstanding
pre-bankruptcy credit facility, had cash provided by financing activities of
$10.0 million from borrowings under its DIP loan facility and repaid $2.5
million of its borrowings under its DIP loan facility.
Working capital deficiency of the Company at June 24, 2000 was approximately
$(4.4) million compared to working capital deficiency of approximately $(3.2)
million at December 25, 1999. The increase in working capital deficiency is
primarily attributable lower accounts receivable balances due to cash
collections and lower cash balances due to payments made to vendors offset by
lower accounts payable balances and accrued expense balances due to payments
made to vendors and lower borrowings under the Revolving and Term Loan
Agreement.
On December 12, 1998, the Company signed an amended license agreement with
Disney (the "Amended Disney License Agreement"). The Amended Disney License
Agreement superseded a prior agreement signed on September 26, 1997 that ran
through December 31, 2001. The Amended Disney License Agreement commenced on
December 12, 1998 and ends December 31, 2000 with a possible extension through
September 30, 2001 under certain conditions. Royalty rates under the Amended
Disney License Agreement vary by product. The Amended Disney License Agreement
contains minimum royalty guarantees.
On March 21, 2000, the Company announced that the Amended Disney License
Agreement would not be renewed and will thus expire on December 31, 2000 (the
"Expiration Date"). In accordance with the rights and obligations of the Company
under the Amended Disney License Agreement, commencing on the Expiration Date,
the Company will have a 13 month period, expiring on January 31, 2002 (the
"Sell-off Period") in which it can continue to sell Disney licensed product
manufactured by the Company until the Expiration Date. Until the Amended Disney
License Agreement expires, all rights and obligations of the Company are to
remain in effect and the Company is obligated to continue to honor all terms of
the Amended Disney License Agreement through the Sell-off Period. In Fiscal
1999, the sales of Disney licensed product accounted for slightly less than 20%
of the Company's net sales. While Disney revenue represents a significant
portion of overall revenues, the Company believes the termination of the Amended
Disney License Agreement will enable it to continue its change toward more
profitable product. To date, the Company has not and does not expect to
experience a negative impact in Fiscal 2000 as a result of the expiration of the
Amended Disney License Agreement. While the Company is currently evaluating the
long-term impact of the expiration of the Amended Disney License Agreement, the
Company believes that anticipated lost revenues due to the expiration of this
agreement can be mitigated over time from increased revenues generated from
other licensed products as well as increased sales of proprietary product.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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The Company maintains a printing services agreement which it entered into upon
the sale of its manufacturing facility which terminates at the end of December
2004. Under the printing services agreement, the Company is obligated to
purchase a substantial portion of the Company's existing product from the buyer
and maintain certain minimum purchase levels.
The Company is required to meet minimum contractual payments in effect at June
24, 2000 of approximately $40.0 million in Fiscal 2000 and $28.8 million in
Fiscal 2001. Of the payments due in Fiscal 2000 and Fiscal 2001, a significant
portion is comprised of two obligations (i) the minimum purchase levels under
the printing services agreement and (ii) the minimum royalty guarantees under
the Amended Disney License Agreement. The Company believes that its cash on
hand, cashflows from operations and borrowing availability under the revolving
portion of the Company's Revolving and Term Loan Agreement will be sufficient to
satisfy existing commitments and plans, including those described above.
However, there can be no assurance that the Company will be able to make planned
borrowings, that the Company's business will generate sufficient cash from
operations, or that future borrowings will be available in an amount to enable
the Company to service its debt and to make necessary capital or other
expenditures.
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 and fourth 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 F
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
August 8, 2000 /s/ Richard E. Snyder
----------------------------------------
Richard E. Snyder
Chairman of the Board and
Chief Executive Officer
August 8, 2000 /s/ Colin Finkelstein
----------------------------------------
Colin Finkelstein
Chief Financial Officer
Principal financial and accounting
officer
24
