UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 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 by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
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
November 3, 2000.
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--September 23, 2000 (Unaudited)
and December 25, 1999 3
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)-- for the three months ended September 23, 2000
(Successor Company) and September 25, 1999
(Predecessor Company) 5
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)-- for the nine months ended September 23, 2000
(Successor Company) and September 25, 1999
(Predecessor Company) 6
Consolidated Statements of Cash Flows (Unaudited)-- for the
nine months ended September 23, 2000 (Successor Company)
and September 25, 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 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
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
<TABLE>
<CAPTION>
September 23, December 25,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,365 $ 6,544
Accounts receivable, net 25,710 54,089
Inventories 25,656 26,169
Royalty advances 3,149 3,264
Other current assets 4,304 6,859
-------- --------
Total current assets 62,184 96,925
-------- --------
OTHER ASSETS
Accounts receivable -- long term 6,287 3,346
Other noncurrent assets 12,987 14,822
-------- --------
Total other assets 19,274 18,168
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $2,959 at September 23, 2000 16,151 17,522
EXCESS REORGANIZATION VALUE, net of accumulated
amortization of $2,615 at September 23, 2000 32,248 34,863
OTHER INTANIGBLE ASSETS, net of accumulated amortization
of $4,906 at September 23, 2000 117,614 122,520
-------- --------
TOTAL ASSETS
$247,471 $289,998
======== ========
</TABLE>
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>
September 23, December 25,
2000 1999
--------- --------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 13,377 $ 28,591
Accrued compensation and fringe benefits 6,572 6,790
Revolving credit and term loan agreement 20,691 15,384
Other current liabilities 28,920 49,345
--------- --------
Total current liabilities 69,560 100,110
--------- --------
NONCURRENT LIABILITIES
Revolving credit and term loan agreement 6,750 6,750
Senior secured notes 96,264 87,000
Accumulated post-retirement benefit obligation 29,475 30,806
Deferred compensation and other deferred liabilities 13,421 15,582
--------- --------
Total noncurrent liabilities 145,910 140,138
--------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares authorized, 102 102
10,233,889 shares issued and outstanding as of
September 23, 2000 and December 25, 1999
Additional paid in capital 50,131 50,131
Accumulated deficit (17,807) --
Accumulated other comprehensive loss (62) --
--------- --------
32,364 50,233
Less: Unearned compensation on restricted stock 363 483
--------- --------
Total common stockholders' equity 32,001 49,750
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 247,471 $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
September 23, | September 25,
2000 | 1999
----------- | -----------
(unaudited) | (unaudited)
<S> <C> | <C>
REVENUES $ 34,105 | $ 42,445
-------- | --------
COSTS AND EXPENSES: |
Cost of sales 18,840 | 27,143
Selling, general and administrative 17,246 | 18,220
-------- | --------
Total costs and expenses 36,086 | 45,363
-------- | --------
|
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 (1,981) | (2,918)
|
REORGANIZATION ITEMS -- | 5,922
|
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL |
INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS |
PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES |
(Contractual distributions of $2,402 for the |
three months ended September 25, 1999) -- | --
|
INTEREST EXPENSE, NET (Contractual interest expense |
of $3,509 for the three months ended September 25, 1999) 3,852 | 416
-------- | --------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,833) | (9,256)
|
PROVISION FOR INCOME TAXES -- | 140
-------- | --------
NET LOSS (5,833) | (9,396)
|
OTHER COMPREHENSIVE (LOSS) INCOME: |
FOREIGN CURRENCY TRANSLATION (28) | 33
-------- | --------
COMPREHENSIVE LOSS $ (5,861) | $ (9,363)
======== | ========
|
NET LOSS PER BASIC AND DILUTIVE COMMON SHARE $ (0.57) | $ (0.33)
======== | ========
</TABLE>
See Notes to Consolidated
Financial Statements
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
Nine Months | Nine Months
Ended | Ended
September 23, | September 25,
2000 | 1999
----------- | -----------
(unaudited) | (unaudited)
<S> <C> | <C>
REVENUES $ 103,062 | $ 109,069
--------- | ---------
COSTS AND EXPENSES: |
Cost of sales 55,999 | 73,589
Selling, general and administrative 54,426 | 52,972
Gains on sales of assets -- | (5,391)
--------- | ---------
Total costs and expenses 110,425 | 121,170
--------- | ---------
|
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 (7,363) | (12,101)
|
REORGANIZATION ITEMS -- | 11,273
|
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S |
AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES |
(Contractual distributions of $7,265 for the nine months ended -- | 1,628
September 25, 1999) |
|
INTEREST EXPENSE, NET (Contractual interest expense of $10,964 for |
the nine months ended September 25, 1999) 10,444 | 3,593
--------- | ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (17,807) | (28,595)
|
PROVISION FOR INCOME TAXES -- | 697
--------- | ---------
NET LOSS (17,807) | (29,292)
|
OTHER COMPREHENSIVE (LOSS) INCOME: |
FOREIGN CURRENCY TRANSLATION (62) | 175
--------- | ---------
COMPREHENSIVE LOSS $ (17,869) | $ (29,117)
========= | =========
|
NET LOSS PER BASIC AND DILUTIVE COMMON SHARE $ (1.74) | $ (1.08)
========= | =========
</TABLE>
See Notes to Consolidated
Financial Statements
6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Nine Months | Nine Months
Ended | Ended
September 23, | September 25,
2000 | 1999
----------- | -----------
(unaudited) | (unaudited)
<S> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Net loss $(17,807) | $(29,292)
Adjustments to reconcile net loss to net cash used in operating activities: |
Depreciation and amortization 10,445 | 10,363
Non-cash interest expense 9,414 | 337
Reorganization items -- | 11,273
Gains on sales of assets -- | (5,391)
Changes in assets and liabilities, net of disposals: |
Decrease (increase) in accounts receivable 25,438 | (2,521)
Decrease in inventories 513 | 1,877
Increase in royalty advances (4,652) | (4,051)
Decrease (increase) in other current assets 2,604 | (990)
(Decrease) increase in accounts payable (15,214) | 4,512
(Decrease) increase in accrued compensation and fringe benefits (218) | 945
Other assets and liabilities (17,435) | 5,431
-------- | --------
|
Net cash used in operating activities before |
Reorganization items (6,912) | (7,507)
|
Reorganization items -- | (11,273)
-------- | --------
Net cash used in operating activities (6,912) | (18,780)
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisitions of property, plant and equipment (1,512) | (1,790)
Additions to film library -- | (865)
Proceeds from sales of assets -- | 11,462
Deposits and other -- | 1,876
-------- | --------
Net cash (used in) provided by investing activities (1,512) | 10,683
</TABLE>
7
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor | Predecessor
Company | Company
Nine | Nine
Months | Months
Ended | Ended
September 23, | September 25,
2000 | 1999
----------- | -----------
(unaudited) | (unaudited)
<S> <C> | <C>
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
Net borrowings under Revolving Credit and Term Loan Agreement 5,307 | --
|
Repayment of Revolving Credit Facility -- | (21,637)
Borrowings under DIP loan -- | 21,363
Repayments under DIP loan -- | (2,500)
------- | --------
Net cash provided by (used in) financing activities 5,307 | (2,774)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH (62) | 175
------- | --------
|
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,179) | (10,696)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,544 | 15,330
------- | --------
|
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,365 | $ 4,634
======= | ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
Cash paid during the period for: |
|
Interest expense $ 1,995 | $ 1,330
======= | ========
Income taxes, net of refunds received $ 22 | $ (55)
======= | ========
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 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 consists 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 September 23, 2000 (Successor Company) and the
results of operations and cash flows for the three and nine month periods ended
September 23, 2000 (Successor Company) and September 25, 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 nine month periods
ended September 25, 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
("Golden Books Publishing") 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. (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 Recognition 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 No. 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
implementation of FIN No. 44 did not have a significant effect on the Company's
results of operations.
NOTE C - Inventories
Inventories consisted of the following (in thousands)
September 23, December 25,
2000 1999
------- -------
(unaudited)
Raw materials $ 1,163 $ 250
Work-in-progress 660 819
Finished goods 21,653 22,920
Film library 2,180 2,180
------- -------
$25,656 $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.
On the Effective Date of the Amended Joint Plan of Reorganization, the Preferred
Securities 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 Nine Months | Nine Months
Ended | Ended Ended | Ended
September 23, | September 25, September 23, | September 25,
2000 | 1999 2000 | 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Net loss $ (5,833) | $ (9,396) $(17,807) | $(29,292)
Preferred dividend requirements -- | -- -- | (1,252)
-------- | -------- -------- | --------
Loss applicable to basic and dilutive | |
common stock $ (5,833) | $ (9,396) $(17,807) | $(30,544)
======== | ======== ======== | ========
Weighted average basic and dilutive | |
common shares outstanding 10,234 | 28,299 10,234 | 28,255
-------- | -------- -------- | --------
Loss per basic and dilutive common | |
share $ (0.57) | $ (0.33) $ (1.74) | $ (1.08)
======== | ======== ======== | ========
</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 Fulford Street Property site 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.
11
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE F Contingencies (continued)
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,
1996 of a leaking underground storage tank system. 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 approximately $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 approximately $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. In connection with the
settlement, the dispute between the Company and Live Entertainment, Inc.
concerning royalties due under the licensing agreement will be arbitrated. The
Company has established a reserve in the event of an adverse arbitration ruling.
12
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTE F Contingencies (continued)
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 granted the Company's two motions for
partial summary judgment, dismissing MindGames', Inc.'s claims to recover lost
profits and unpaid renewal fees. MindGames, Inc. dismissed its remaining claims,
which the Company estimated to be approximately $120,000, without prejudice
pending appeal on the summary judgment rulings. The Seventh Court affirmed these
rulings on June22, 2000. In connection with these rulings, the Company reversed
an accrual of $1.0 million during the three months ended September 23, 2000,
which is shown as a reduction of selling, general and administrative expenses.
On August 8, 2000, MindGames, Inc. filed a new action in the United States
District Court for the Eastern District of Wisconsin, seeking $5 million for
claims it contends remain, despite the summary judgment rulings. On October 16,
2000, the Company filed a motion to dismiss this new action. Based upon the
summary judgment rulings, the Company believes that MindGames new action is
meritless, and that this new action will not have a significant effect on the
Company's results of operations.
In consideration of the aforementioned matters, the Successor Company has
recorded accruals in the "deferred compensation and other deferred liabilities"
account of approximately $4.7 million in the consolidated balance sheet at
September 23, 2000.
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 September 23, 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 principal 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 business 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.
13
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 Nine Months | Nine Months
Ended | Ended Ended | Ended
September 23, | September 25, September 23, | September 25,
2000 | 1999 2000 | 1999
------ | ------ ------ | ------
<S> <C> | <C> <C> | <C>
Revenues: | |
Consumer Products $ 30.6 | $ 37.5 $ 91.4 | $ 88.3
Entertainment 3.5 | 4.2 11.7 | 16.4
Commercial Products -- | 0.8 -- | 4.4
------ | ------ ------ | ------
Total Revenues $ 34.1 | $ 42.5 $103.1 | $109.1
====== | ====== ====== | ======
Gross Profit: | |
Consumer Products $ 13.8 | $ 14.0 $ 40.0 | $ 26.7
Entertainment 1.5 | 1.3 7.0 | 8.8
------ | ------ ------ | ------
Total Gross Profit $ 15.3 | $ 15.3 $ 47.0 | $ 35.5
====== | ====== ====== | ======
EBITDA | |
Gross profit $ 15.3 | $ 15.3 $ 47.0 | $ 35.5
SG&A (17.3) | (18.2) (54.4) | (53.0)
Gains on sales of assets -- | -- -- | 5.4
Reorganization items -- | (6.0) -- | (11.3)
------ | ------ ------ | ------
Operating loss (2.0) | (8.9) (7.4) | (23.4)
Depreciation and amortization 3.5 | 3.6 10.5 | 10.4
------ | ------ ------ | ------
Total EBITDA $ 1.5 | $ (5.3) $ 3.1 | $(13.0)
====== | ====== ====== | ======
Depreciation and Amortization: | |
Consumer Products $ 2.6 | $ 1.8 $ 7.9 | $ 5.9
Entertainment 0.9 | 1.5 2.6 | 4.0
Commercial Products -- | 0.3 -- | 0.5
------ | ------ ------ | ------
Total Depreciation and Amortization $ 3.5 | $ 3.6 $ 10.5 | $ 10.4
====== | ====== ====== | ======
</TABLE>
14
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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, 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
measures presented by other companies.
The Company's financial results in Fiscal 1999 were impacted as a result of its
filing for reorganization under 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.
15
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the unaudited
consolidated financial statements of the Company at September 23, 2000
(Successor Company) and for the three and nine month periods ended September 23,
2000 (Successor Company) and September 25, 1999 (Predecessor Company) and the
related notes thereto.
Three months ended September 23, 2000 (Successor Company) compared to three
months ended September 25, 1999 (Predecessor Company)
Revenues
Total revenues for the three months ended September 23, 2000 decreased $8.4
million (20%) to $34.1 million, compared to $42.5 million for the three months
ended September 25, 1999.
Consumer Products revenues decreased $6.9 million (18%) to $30.6 million for the
three months ended September 23, 2000, compared to $37.5 million for the three
months ended September 25, 1999. The decrease in revenue was primarily due to
lower sales of Pokemon licensed product as the third quarter of 1999 had higher
revenues due to the initial release of that product. Partially offsetting the
decline in Pokemon revenues were revenues generated primarily by sales of Scooby
Doo and Powerpuff Girls licensed product through mass market retailers
(Wal-Mart), other retailers (Barnes and Noble) and international sales. Also
included in revenues during the three months ended September 23, 2000, was $1.3
million which represented the settlement and subsequent collection of cash
related to a customers minimum purchase commitment.
Entertainment revenues decreased $0.7 million (17%) to $3.5 million for the
three months ended September 23, 2000, compared to $4.2 million for the three
months ended September 25, 1999. The decrease was due primarily to lower home
video sales, in particular Madeline licensed product, and the elimination of
music publishing revenue due to the sale of the Company's music publishing
business in December 1999.
Commercial Products revenues were $0.8 million for the three months ended
September 25, 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 was $15.3 million for both the three months ended September
23, 2000 and three months ended September 25, 1999. As a percentage of revenues,
total gross profit margin increased to 45% for the three months ended September
23, 2000 from 36% for the three months ended September 25, 1999. The increase
was attributable to improved gross profit margins as described below.
Consumer Products gross profit decreased $0.2 million to $13.8 million for the
three months ended September 23, 2000, compared to $14.0 million for the three
months ended September 25, 1999. As a percentage of revenues, Consumer Products
gross profit margin increased to 45% for the three months ended September 23,
2000 from 37% for the three months ended September 25, 1999. The improvement in
gross profit margin was primarily attributable to a change in the product mix
toward more profitable formats, and reduced royalty costs and manufacturing
costs (primarily as a result of the sale of the manufacturing facility in
November 1999).
Entertainment gross profit increased $0.2 million to $1.5 million for the three
months ended September 23, 2000, compared to $1.3 million for the three months
ended September 25, 1999. The increase in gross profit was due primarily to
lower film amortization costs resulting from the revaluation of the Company's
film library following the Company's emergence from Bankruptcy proceedings and
lower direct costs related to the Company's home video business, offset lower
revenues, as discussed above.
16
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.9 million to $17.3
million for the three months ended September 23, 2000, compared to $18.2 million
for the three months ended September 25, 1999. The decrease was due primarily to
the reversal of accruals totaling approximately $1.7 million related to
favorable settlements of a lawsuit and an outstanding franchise and rent tax
audit, offset by increased spending related to the development of the Company's
e-commerce strategy including www.goldenbooks.com, and 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 Bankruptcy proceedings of $6.0 million
during the three months ended September 25, 1999 includes $3.8 million in
professional fees and $1.3 million related to the settlement of a lawsuit, among
other costs, partially offset by interest income.
Interest Expense, Net
Interest expense, net for the three months September 23, 2000 was $3.9 million.
Interest expense recorded during the three months ended September 23, 2000
related to the Company's Revolving Credit and Term Loan Agreement and Senior
Secured Notes. Interest expense, net for the three months ended September 25,
1999 was $0.4 million. The Predecessor Company stopped recording interest
expense relating to its then outstanding debt facilities effective February 26,
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
$5.8 million for the three months ended September 23, 2000, making the taxable
loss for the nine months ended September 23, 2000 $17.8 million. 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 September 23, 2000.
The provision for income taxes was $0.1 million for the three months ended
September 25, 1999.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA increased $6.8 million to $1.5 million for the three months ended
September 23, 2000, compared to $(5.3) for the three months ended September 25,
1999. The increase is due primarily to the impact of $6.0 million in
reorganizational costs in 1999 and a decrease in selling, general and
administrative expenses as discussed above.
Net Loss
The net loss for the three months ended September 23, 2000 was $(5.8) million,
or $(0.57) per basic and dilutive common share, compared to a net loss of $(9.4)
million, or $(0.33) per basic and dilutive common share, for the three months
ended September 25, 1999. The decrease in net loss is attributable to the
factors described above.
17
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Nine months ended September 23, 2000 (Successor Company) compared to nine months
ended September 25, 1999 (Predecessor Company)
Revenues
Total revenues for the nine months ended September 23, 2000 decreased $6.0
million (5%) to $103.1 million, compared to $109.1 million for the nine months
ended September 25, 1999. Revenues from ongoing operations for the nine months
ended September 23, 2000 increased $1.7 million (2%) to $103.1 million, compared
to $101.4 million for the nine months ended September 25, 1999. The nine months
ended September 25, 1999 also included combined revenues of $7.7 million from
the adult publishing business and the Commercial Products segment, which were
sold in 1999.
Consumer Products revenues increased $3.1 million (4%) to $91.4 million for the
nine months ended September 23, 2000, compared to $88.3 million for the six
months ended September 25, 1999. The increase in revenue was due to a $13.4
million increase primarily related to sales of Powerpuff Girls, Scooby Doo,
Disney and Barbie licensed product through mass market retailers (Wal-Mart,
Target), other retailers (Eckerd Drug, Barnes and Noble) and international sales
as well as the collection of $1.3 million related to the settlement of a minimum
customer purchase commitment, which was partially offset by decreases in sales
of Pokemon licensed product. Additionally, the increase in revenue was offset by
a $3.3 million decline in revenue related to the adult publishing business which
was sold in April 1999.
Entertainment revenues decreased $4.7 million (29%) to $11.7 million for the
nine months ended September 23, 2000 compared to $16.4 million for the nine
months ended September 25, 1999 due primarily to the timing of the execution of
multi-year television licensing contracts. For the nine months ended September
23, 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 nine months ended September 25, 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 $4.4 million for the nine months ended
September 25, 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 $11.5 million to $47.0 million for the nine months
ended September 23, 2000 from $35.5 million for the nine months ended September
25, 1999. As a percentage of revenues, total gross profit margin increased to
46% for the nine months ended September 23, 2000 from 33% for the nine months
ended September 25, 1999. The increase was attributable primarily to improved
gross profit margins in the Consumer Products segment.
Consumer Products gross profit increased $13.3 million to $40.0 million for the
nine months ended September 23, 2000, compared to $26.7 million for the nine
months ended September 25, 1999. As a percentage of revenues, Consumer Products
gross profit margin increased to 44% for the nine months ended September 23,
2000 from 30% for the nine months ended September 25, 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), royalty costs, distribution costs and pre-production
costs.
Entertainment gross profit decreased $1.8 million to $7.0 million for the nine
months ended September 23, 2000 compared to $8.8 million for the nine months
ended September 25, 1999. The decrease in gross profit is related to lower
revenues, as discussed above, partially offset by lower royalty costs related to
television licensing, lower film amortization costs resulting from the
revaluation of the Company's film library following the Company's emergence from
Bankruptcy proceedings and lower direct costs related to the Company's home
video business due in part to the favorable settlement of a distributor dispute.
18
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.4 million to $54.4
million for the nine months ended September 23, 2000 compared to $53.0 million
for the nine months ended September 25, 1999. The increase was 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, and
by increase spending related to the development of the Company's e-commerce
strategy including www.goldenbooks.com. These increases were partially offset by
reversals of accruals totaling approximately $1.7 million related to the
favorable settlements of a lawsuit and an outstanding franchise and rent tax
audit.
Reorganization Items
Reorganization items related to the Bankruptcy proceedings of $11.3 million
during the nine months ended September 25, 1999 includes $7.7 million in
professional fees, $1.8 million in financing costs primarily related to the DIP
Loan and $1.3 million related to the settlement of a lawsuit, among other costs,
partially offset by interest income.
Interest Expense, Net
Interest expense, net for the nine months September 23, 2000 was $10.4 million.
Interest expense, net recorded during the nine months ended September 23, 2000
related to the Company's Revolving Credit and Term Loan Agreement and Senior
Secured Notes. Interest expense, net for the nine months ended September 25,
1999 was $3.6 million (including the distributions on the guaranteed preferred
beneficial interest in the Company's and Golden Books Publishing's Convertible
Debentures). The Predecessor Company stopped recording interest expense relating
to its then outstanding debt facilities effective February 26, 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
$17.9 million for the nine months ended September 23, 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 nine months ended September 23, 2000.
The provision for income taxes was $0.7 million for the nine months ended
September 25, 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 $16.1 million to $3.1 million for the nine months ended
September 23, 2000, compared to $(13.0) for the nine months ended September 25,
1999. The increase was due primarily to improved gross profit resulting from
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, and lower selling, general and administrative expenses.
Also affecting EBITDA was the impact of $5.9 million in reorganizational costs
(net of gains on sales of assets) in 1999.
Net Loss
The net loss for the nine months ended September 23, 2000 was $(17.8) million,
or $(1.74) per basic and dilutive common share, compared to a net loss of
$(29.3) million, or $(1.08) per basic and dilutive common share, for the nine
months ended September 25, 1999. The decrease in net loss is attributable to the
factors described above.
19
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 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 $20.7
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 September 23, 2000. At September 23, 2000, the Successor Company
had available additional borrowings of $9.6 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 Secured 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 $96.3 million in Senior Secured Notes as of
September 23, 2000, including approximately $9.3 million in interest expense
paid in the form of additional Senior Secured Notes. Cashflow provided by
continuing operations alone may not be sufficient to pay the Senior Secured
Notes, at maturity or otherwise, and related cash interest as it becomes due.
The Company may need to explore other repayment options, such as refinancing
among other things.
At September 23, 2000, the Company was in compliance with all covenants related
to the Revolving Credit and Term Loan Agreement and the Senior Secured Notes.
20
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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.
Cash flow for the nine months ended September 23, 2000 utilized cash of
approximately $3.2 million, compared to cash utilized of approximately $10.7
million for the nine months ended September 25, 1999.
The Company had cash used in operations of $6.9 million for the nine months
ended September 23, 2000, compared to cash used in operations of $18.8 million
for the nine months ended September 25, 1999. The improvement in cash flow from
operations is primarily attributable to the Company's reduction in operating
loss and a decrease in accounts receivable, partially offset by decreases in
accounts payable, accrued royalties and accrued liability balances due to the
payment of pre-bankruptcy liabilities including expenses incurred as a result of
Bankruptcy proceedings and payments made to vendors.
Cash used in investing activities for the nine months ended September 23, 2000
was $1.5 million compared to cash provided by investing activities of $10.7
million for the nine months ended September 25, 1999. Acquisitions of property,
plant and equipment were approximately $1.5 million during the nine months ended
September 23, 2000, as compared to approximately $1.8 million during the nine
months ended September 25, 1999. Additions to the Company's film library were
approximately $0.9 million during the nine months ended September 25, 1999.
During the nine months ended September 25, 1999, the Company received proceeds
from the sale of assets of approximately $11.5 million.
Cash provided by financing activities was $5.3 million for the nine months ended
September 23, 2000, as compared to $2.8 million used in financing activities for
the nine months ended September 25, 1999. The Company had cash provided by
financing activities of $5.3 million in the form of additional borrowings, net
of repayments, for the nine months ended September 23, 2000 under its Revolving
Credit and Term Loan Agreement which it used to fund operations going into its
Christmas selling season. In the nine months ended September 25, 1999, 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 $21.4 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 September 23, 2000 was
approximately $(7.4) 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,
increased borrowings under the Revolving and Term Loan Agreement and lower cash
balances due to payments made to vendors (primarily for pre-Bankruptcy claims)
partially offset by lower accounts payable balances and accrued expense balances
due to payments made to vendors.
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. For the nine months ended September 23, 2000, the
sales of
21
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Disney licensed product accounted for approximately 25% 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. The Company is taking steps, including acquiring other licensed
products and focusing on sales of proprietary product, to reduce 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 such other
licensed products as well as increased sales of propriety product. However,
there can be no assurances that such revenues will mitigate the long-term impact
of the expiration of the Amended Disney License Agreement.
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
September 23, 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. At September 23, 2000,
approximately $10.6 million remains outstanding with regard to the printing
services agreement and $2.2 million remains outstanding with regard to the
guarantees under the Amended Disney License agreement. With regard to the
minimum purchase levels under the printing services agreement, 15% of any
shortfall below the minimum purchase levels will result in a decrease in the
value of the preferred stock of the printer, received by the Company in
connection with the sale of the manufacturing facility in November, 1999. Any
reduction in value of the preferred stock will be determined and recorded at
December 30, 2000, if necessary.
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 Company's 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in Canada and the United Kingdom. In the normal
course of business, these operations are exposed to fluctuations in currency
values. Management does not consider the impact of currency fluctuations to
represent a significant risk. The Company does not generally enter into
derivative financial instruments in the normal course of business, nor are such
instruments used for speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company's Senior Note bears interest at a fixed rate.
However, the fair market value of the fixed rate debt is sensitive to change in
interest rates. The Company is subject to the risk that market interest rates
will decline and the interest rates under the fixed rate debt
22
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
will exceed the then prevailing market rates. Under current policies, the
Company does not utilize any interest rate derivative instruments to manage its
exposure to interest rate changes.
The Company's Revolving Credit and Term Loan facility with $27.5 million
outstanding at September 23, 2000, bears interest at a variable rate. A 15%
increase or decrease in the average cost of the Company's variable rate debt
under the facility would not have a significant impact on the Company's results
of operations.
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
23
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
November 7, 2000 /s/ Richard E. Snyder
----------------------------------
Richard E. Snyder
Chairman of the Board and
Chief Executive Officer
November 7, 2000 /s/ Colin Finkelstein
-----------------------------------
Colin Finkelstein
Chief Financial Officer
Principal financial and accounting officer
24
