-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GqjGDKGVAinKPdnCH7HpNo/VahyRiSqOkxc36izU1RKlaHdM5YX1jkK2XolSLK92 O4BbW6SaSyPW8wEnqCTlBg== 0000950136-97-001569.txt : 19971114 0000950136-97-001569.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950136-97-001569 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN BOOKS FAMILY ENTERTAINMENT INC CENTRAL INDEX KEY: 0000790706 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 061104930 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14399 FILM NUMBER: 97712701 BUSINESS ADDRESS: STREET 1: 850 THIRD AVE STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2127538500 MAIL ADDRESS: STREET 1: 850 THIRD AVENUE STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN PUBLISHING GROUP INC DATE OF NAME CHANGE: 19920703 10-Q 1 QUARTERLY REPORT 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 27, 1997 ------------------------- 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 0-14399 ----------- 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) 850 Third Avenue, New York, NY 10022 ------------------------------------ (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: 26,887,313 shares outstanding as of November 7, 1997. 1 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. TABLE OF CONTENTS Page Number ------ PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets-- 3 September 27, 1997 (Unaudited) and December 28, 1996 Condensed Consolidated Statements of Operations-- 5 Three months ended September 27, 1997 and September 28, 1996 (Unaudited) Condensed Consolidated Statements of Operations-- 6 Nine months ended September 27, 1997 and September 28, 1996 (Unaudited) Condensed Consolidated Statements of Cash Flows-- 7 Nine months ended September 27, 1997 and September 28, 1996 (Unaudited) Notes to Condensed Consolidated Financial 9 Statements (Unaudited) Item 2. Management's Discussion and Analysis of 13 Financial Condition and Results of Operations PART II OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K 19 SIGNATURES 20 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) - ------------------------------------------------------------------------------- ASSETS SEPTEMBER DECEMBER 27, 28, 1997 1996 ---- ---- (unaudited) CURRENT ASSETS Cash and cash equivalents $ 48,825 $139,686 Accounts receivable, net 42,774 41,415 Inventories 41,861 27,608 Net assets held for sale 17,324 19,779 Other current assets 17,843 12,385 --------- --------- Total current assets 168,627 240,873 --------- --------- OTHER ASSETS Accounts receivable - long term 3,638 1,001 Other noncurrent assets 16,440 8,102 --------- --------- Total other assets 20,078 9,103 --------- --------- PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $42,632 as of September 27, 1997 and $40,672 as of December 28, 1996 35,196 27,504 FILM LIBRARY, net of accumulated amortization of $3,519 as of September 27, 1997 and $1,082 as of December 28, 1996 63,438 60,668 GOODWILL, net of accumulated amortization of $1,305 as of September 27, 1997 and $405 as of December 28, 1996 30,787 29,087 --------- --------- TOTAL ASSETS $318,126 $367,235 ========= ========= See Notes to Condensed Consolidated Financial Statements 3 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' DEFICIT SEPTEMBER DECEMBER 27, 28, 1997 1996 ---- ---- (unaudited) CURRENT LIABILITIES Accounts payable $ 24,723 $ 21,638 Accrued compensation and fringe benefits 6,326 5,787 Other current liabilities 31,830 45,238 ---------- ----------- Total current liabilities 62,879 72,663 ---------- ----------- NONCURRENT LIABILITIES Long term debt 149,876 149,862 Accumulated postretirement benefit obligation 29,394 28,787 Deferred compensation and other deferred liabilities 21,627 25,072 ---------- ----------- Total noncurrent liabilities 200,897 203,721 ---------- ----------- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 110,650 110,488 STOCKHOLDERS' DEFICIT: Convertible Preferred Stock - Series B, 13,000 shares authorized, no par value, 13,000 shares issued and outstanding; 65,000 65,000 Common Stock, $.01 par value, 60,000,000 shares authorized, and 26,692,313 and 25,964,711 shares issued as of September 27, 1997 and December 28, 1996, respectively 267 259 Additional paid in capital 121,923 120,376 Accumulated deficit (239,174) (201,111) Cumulative translation adjustments (1,494) (1,339) ---------- ----------- (53,478) (16,815) Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822 ---------- ----------- Total stockholders' deficit (56,300) (19,637) ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 318,126 $ 367,235 ========== =========== See Notes to Condensed Consolidated Financial Statements 4 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except for Per Share Data) - ------------------------------------------------------------------------------- THREE MONTHS ENDED --------------------------- SEPTEMBER SEPTEMBER 27, 28, 1997 1996 ---- ---- (unaudited) REVENUES: Net sales $ 52,805 $ 67,308 Royalties and other income 536 150 ------------ ------------ Total revenues 53,341 67,458 ------------ ------------ COSTS AND EXPENSES: Cost of sales 37,742 78,799 Selling, general and administrative 29,421 41,670 Restructuring charges - 40,680 ------------ ------------ Total costs and expenses 67,163 161,149 ------------ ------------ LOSS BEFORE DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, AND (BENEFIT) PROVISION FOR INCOME TAXES (13,822) (93,691) DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 2,516 1,048 INTEREST EXPENSE, NET OF INTEREST INCOME OF $1,325 AND $1,423, RESPECTIVELY 1,637 1,526 ------------ ------------ LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (17,975) (96,265) (BENEFIT) PROVISION FOR INCOME TAXES (76) 550 ------------ ------------ NET LOSS $ (17,899) $(96,815) ============ ============ NET LOSS PER COMMON SHARE $(0.76) $(4.29) ============ ============ See Notes to Condensed Consolidated Financial Statements 5 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except for Per Share Data) - ------------------------------------------------------------------------------- NINE MONTHS ENDED --------------------------- SEPTEMBER SEPTEMBER 27, 28, 1997 1996 ---- ---- (unaudited) REVENUES: Net sales $ 168,874 $ 206,939 Royalties and other income 914 819 ------------ ------------ Total revenues 169,788 207,758 ------------ ------------ COSTS AND EXPENSES: Cost of sales 118,239 179,876 Selling, general and administrative 78,193 109,579 Restructuring charges - 40,680 ------------ ------------ Total costs and expenses 196,432 330,135 ------------ ------------ LOSS BEFORE DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, AND (BENEFIT) PROVISION FOR INCOME TAXES (26,644) (122,377) DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 7,548 1,048 INTEREST EXPENSE, NET OF INTEREST INCOME OF $4,903 AND $2,545, RESPECTIVELY 3,970 6,546 ------------ ------------ LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (38,162) (129,971) (BENEFIT) PROVISION FOR INCOME TAXES (99) 2,008 ------------ ------------ NET LOSS $ (38,063) $(131,979) ============ ============ NET LOSS PER COMMON SHARE $(1.69) $(6.11) ============ ============ See Notes to Condensed Consolidated Financial Statements 6 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) - ------------------------------------------------------------------------------- NINE MONTHS ENDED ------------------------ SEPTEMBER SEPTEMBER 27, 28, 1997 1996 ---- ---- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (38,063) $ (131,979) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,016 11,912 Provision for losses on accounts receivable 1,460 3,507 Restructuring charges - 40,680 Other non-cash charges associated with strategic redirection of the Company - 39,450 Non cash compensation - 12,801 Other-non-cash items (84) - Changes in assets and liabilities: (Increase) decrease in accounts receivable (5,456) 5,498 (Increase) decrease in inventories (14,253) 18,348 (Increase) decrease in other current assets (5,458) 1,055 Increase (decrease) in accounts payable 485 (8,464) Increase (decrease) in accrued compensation and fringe benefits 539 (2,482) Other assets and liabilities (15,233) (488) ----------- ------------ Net cash used in operating activities (68,047) (10,162) CASH FLOWS FROM INVESTING ACTIVITIES: Broadway Video acquisition - (81,000) Investment in joint venture - (2,250) Acquisitions of property, plant and equipment (11,898) (6,977) Proceeds from streamlining plan - 1,382 Additions to film library (5,207) - Collateral for letters of credit and performance bonds (7,186) - ----------- ------------ Net cash used in investing activities (24,291) (88,845) See Notes to Condensed Consolidated Financial Statements 7 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) - ------------------------------------------------------------------------------
NINE MONTHS ENDED --------------------------- SEPTEMBER SEPTEMBER 27, 28, 1997 1996 ---- ---- (unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures - 115,000 Issuance costs of Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures - (4,579) Proceeds of issuance of Preferred Stock - Series B - 65,000 Issuance costs of Preferred Stock - Series B - (6,248) Redemption of Preferred Stock - Series A - (9,985) Proceeds from exercise of stock options and sale of Common Stock, including the Hallmark transaction 1,555 27,702 Dividends paid on Preferred Stock - Series A - (646) ---------- ------------ Net cash provided by financing activities 1,555 186,244 EFFECT OF EXCHANGE RATE CHANGES ON CASH (78) 3 ---------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (90,861) 87,240 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 139,686 33,840 ---------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 48,825 $ 121,080 ========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest and distribution on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures $ 19,021 $ 11,583 ========== ============ Income taxes, net of refunds received $ (276) $ (372) ========== ============
See Notes to Condensed Consolidated Financial Statements 8 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company") as of September 27, 1997, and its results of operations for the three month and nine month periods ended September 27, 1997 and September 28, 1996 and cash flows for the nine month periods ended September 27, 1997 and September 28, 1996. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company contained in the Company's Form 10-K for the eleven month period ended December 28, 1996. On November 30, 1996, the Company changed its fiscal year so as to end on the last Saturday of December in each year. As a result of the foregoing, the third quarter of fiscal 1997 ended on September 27, 1997 and the comparable period of the prior year ended on September 28, 1996. Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform with current year presentation. 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 fourth fiscal quarter. The results of Golden Books Financing Trust (the "Trust") are included in the Company's condensed consolidated financial statements since its inception on August 20, 1996. The Trust, which is the issuer of 8 3/4% Convertible Trust Originated Preferred Securities, referred to in the Company's financial statements as "the 8 3/4% Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company Inc.'s Convertible Debentures" (the "Preferred Securities"), is wholly owned by the Company, has no independent operations and its assets consist solely of the $118.6 million in aggregate principle amount of 8 3/4% Convertible Debentures due 2016 ("Convertible Debentures") of the Company and Golden Books Publishing Company, Inc. ("Golden Books Publishing") (see Note D). The obligations of the Trust, which consist of the Preferred Securities, are fully and unconditionally guaranteed by the Company. NOTE B - Inventories Inventories consisted of the following: September 27, December 28, 1997 1996 ---- ---- (In thousands) Raw materials $ 3,576 $ 2,810 Work-in-process 9,119 1,829 Finished goods 25,916 19,719 Film library 3,250 3,250 --------- --------- $41,861 $27,608 ========= ========= NOTE C - Net Assets Held for Sale As of September 27, 1997, net assets held for sale totaling approximately $17.3 million included, (i) the Fayetteville facility, which is currently being leased to a third party as a result of the sale of the company's game and puzzle operations, (ii) the Cambridge facility, which is a part of the Commercial Printing Division, (iii) the Fulford Street facility and (iv) the Creative Center, a facility of Golden Books Publishing. On September 29, 1997, the Company entered into a definitive agreement to sell the Cambridge facility (see Note. G). 9 NOTE D - Preferred Securities During the eleven months ended December 28, 1996, the Company raised a total of $115.0 million through a private placement of the Preferred Securities under Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Preferred Securities were issued by the Trust, a Delaware business trust financing vehicle. The Company owns all of the common securities of the Trust. The net proceeds of such offering, after commissions and expenses, were approximately $110.4 million. The Preferred Securities pay quarterly distributions at an annual distribution rate of 8 3/4% (subject to any deferral of interest payments on the Preferred Securities by the Company and Golden Books Publishing), have an aggregate liquidation preference of $115.0 million and are exchangeable at the option of their holders for Convertible Debentures, which are immediately convertible into Common Stock of the Company at an initial conversion price of $13.00 per share. The Convertible Debentures will mature on August 20, 2016, and may be redeemed, in whole or in part, at any time after August 20, 1999 or at any time in certain circumstances upon occurrence of a Tax Event or an Investment Company Event (both as defined). Effective January 10, 1997, the Company registered the resale of the Preferred Securities with the Securities and Exchange Commission. The Company and its subsidiary, Golden Books Publishing, are joint and several obligors of the Preferred Securities and they have fully and unconditionally guaranteed the Trust's obligations under the Preferred Securities. Separate financial statements of Golden Books Publishing are not presented in their entirety as the separate financial statements would not be materially different from the consolidated financial statements of the Company. Summarized financial statements of Golden Books Publishing as of and for the three and nine months ended September 27, 1997 are as follows (in thousands): September 27, 1997 -------- Current assets $ 150,304 Noncurrent assets 135,659 ------------ Total Assets $ 285,963 ============ Current liabilities $ 127,839 Noncurrent liabilities 192,849 ------------ Total Liabilities 320,688 Preferred Securities 110,650 Stockholders' Deficit (145,375) ------------ Total Liabilities and Stockholders' Deficit $ 285,963 ============ Three Months Nine Months ------------ ----------- Ended September 27, 1997 ------------------------ Revenues $ 53,341 $ 169,788 Gross profit 15,599 51,549 Loss before interest expense and benefit (12,097) (26,167) for income taxes Net loss (16,730) (39,472) The Indenture covering the Company's 7.65% Senior Notes due 2002 restricts the ability of Golden Books Publishing to pay cash dividends or make other cash distributions to Golden Books Family Entertainment, Inc. NOTE E - Loss Per Common Share Loss per common share was computed as follows: Three Months Ended Nine Months Ended -------------------- -------------------- September September September September 27, 28, 27, 28, 1997 1996 1997 1996 (In thousands except for per share data) Net loss $(17,899) $(96,815) $ (38,063) $(131,979) Preferred dividend requirements (2,169) (2,210) (6,252) (4,053) --------- --------- ---------- ---------- Loss applicable to common stock (20,068) (99,025) (44,315) (136,032) ========= ========= ========== ========== Weighted average common shares 26,489 23,098 26,204 22,249 outstanding Loss per common share $ (0.76) $ (4.29) $ (1.69) $ (6.11) ========= ========= ========== ========== 10 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing and presenting earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share" ("Opinion 15"). FAS 128 replaces the presentation of primary EPS with a presentation of basic EPS which excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The statement also requires dual presentation of basic EPS and diluted EPS on the face of the income statement of all periods presented. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15, with some modifications. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early adoption is not permitted and the statement requires restatement of all prior-period EPS data presented after the effective date. The Company has not yet determined the impact which the implementation of FAS 128 will have on the Company's per share amounts. NOTE F - Contingencies Golden Books Publishing and Penn Corporation ("Penn") have been informed by the Environmental Protection Agency (the "EPA") and/or state regulatory agencies that they may be potentially responsible parties ("PRPs") and face liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act (commonly known as "CERCLA" or "Superfund") or similar state laws. In all cases except those described below, the Company has resolved its liability or is in the process of resolving its liability for amounts deemed not material. Although the Company divested Penn in December 1996, the Company has agreed to indemnify Peacock Papers, Inc., the purchaser of Penn, against certain of Penn's environmental liabilities, including the Cork Street Landfill and Fulford Street Property, as discussed below. The Wisconsin Department of Natural Resources (the "WDNR") alleges that the Company is a responsible party for drums found at a site located in unincorporated Racine County. The WDNR and the Company have entered into an agreement which requires the Company to remove drums and soil from the site. The disposal of these drums dates back almost 30 years. Golden Books Publishing did not authorize disposal of its waste drums at the site. The Company has completed the removal of drums and soil from the site. On April 16, 1987, the EPA notified the Company that it may be a PRP at the Hunt's Landfill site in Racine County, Wisconsin. Golden Books Publishing's liability pursuant to the terms of a consent decree is limited to approximately 4% of the total remedial costs. The current estimate of the total costs is in the range of $18.0 million. In accordance with the consent decree, the Company has provided for its share of the probable clean-up costs. On August 14, 1991, the EPA notified the Company that it may be a PRP at the Hertel Landfill in Plattekill, New York. Golden Books Publishing is one of five PRPs sued by the EPA in 1994 for recovery of past EPA response costs of approximately $2.5 million. In September 1991, the EPA approved a remedial action for the Hertel Landfill site that currently is estimated to cost $4.1 million other than groundwater remediation costs, if any are required. One of the site's non-defendant PRPs has been complying with an EPA unilateral administrative order requiring investigation and clean-up of the site and is now seeking contribution towards its cost from Golden Books Publishing and more than 20 other PRPs. At the time the 1991 order was issued, Golden Books Publishing did not comply. As of June 26, 1996, representatives of Golden Books Publishing reached agreement with the EPA to come into compliance with the order and pay a penalty of $625,000 for previous non-compliance. Additionally, during the fiscal year ending December 27, 1997, to date, Golden Books Publishing has paid a total of $1,701,000 for the remediation of the Hertel site, including settlement payments to other PRPs. The Company, other PRPs and the government have reached a tentative allocation and are in the process of negotiating a consent decree which will establish the Company's future responsibilities at the site. Golden Books Publishing also has been identified as a PRP at another site located in Poughkeepsie, New York. Golden Books Publishing and eight other PRPs received a notice letter in 1995 from the State of New York regarding this site. New York State will be seeking recovery of its past oversight costs of more than $600,000 plus future oversight and maintenance costs associated with this site, currently estimated by the State at $830,000. There has been no attempt made to develop an allocation or to identify all PRPs to date, but the construction phase of the remedy has been completed by other parties without Company involvement. On October 2, 1996, the Company received notice from the City Attorney of Kalamazoo, Michigan, that Beach Products, a division of Penn, will be asked to participate in the remediation of the Cork Street Landfill site located in the city, which was 11 allegedly used by Beach Products in the past. Current cost estimates for the remediation required at the site are as high as $24 million. More that 70 entities will be requested to provide financial contribution to the remediation. On November 14, 1996, the Michigan Department of Environmental Quality requested that corrective actions be taken as a result of the discovery of a leaking underground storage tank system at the Fulford Street Property of the Company on November 8, 1996. An initial site assessment has been completed by the Company's outside consultant. Preliminary estimates indicate that the costs associated with this release should not exceed $300,000. In addition to these environmental matters, Golden Books Publishing filed an action in 1994 in the United States District Court, Eastern District of Wisconsin captioned as Western Publishing Company Inc. v. MindGames, Inc. seeking a declaration of rights in regard to Golden Books Publishing's alleged breach of various of its obligations under its licensing agreement with the defendant for distribution through 1994 of the adult board game known as "Clever Endeavor." This case involves the Company's now-discontinued adult and children's game division. The defendant, believing its board game had the potential to become one of the most popular of all time, has maintained that certain of the alleged breaches entitle it to damages of as much as $40 million resulting from lost profits and unpaid royalties. The Court recently granted Golden Books Publishing's partial motion for summary judgment and held that the defendant is precluded from recovering lost profits. Accordingly, the defendant's damage claim is now limited to its unpaid royalties of $1.2 million. Golden Books Publishing denies that it has any liability to the defendant. In consideration of the aforementioned matters, the Company has recorded accruals in the deferred compensation and other deferred liabilities account in its condensed consolidated balance sheet on September 27, 1997. The Company and its subsidiaries are parties to certain other legal proceedings which are incidental to their ordinary business, none of which the Company believes are material to the Company and its subsidiaries taken together as a whole. The Company is actively pursuing resolution of the aforementioned matters or is awaiting further government response. While it is not feasible to predict or determine the outcomes of these proceedings, it is the opinion of management that their outcomes have been adequately reserved for and will not have a materially adverse effect on the Company's financial position or future results of operations. Note G - Subsequent Events As more fully described in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company signed a new license agreement with Disney Book Publishing, Inc. (the "New Disney License Agreement"). The New Disney License Agreement commenced on October 1, 1997 and runs through December 31, 2001 and may be extended under certain conditions for an additional year through December 31, 2002. Royalty rates under the New Disney License Agreement vary by product covered. The New Disney License Agreement contains minimum royalty guarantees of $7,370,000 for the nine-month period commencing January 1, 1998 and ending September 30, 1998, $11,670,000 for the second year of the term, $13,340,000 for the third year of the term, $15,340,000 for the fourth year of the term and $5,280,000 for the period commencing October 1, 2001 and ending December 31, 2001; provided that if the New Disney License Agreement is extended for an additional year, the minimum royalty guaranty for the year commencing October 1, 2001 shall be $16,670,000, and for the period commencing October 1, 2002 and ending December 31, 2002 shall be $5,610,000. In addition, upon the execution and delivery of the agreement, Disney Enterprises, Inc. ("Disney") received warrants to purchase 1.1 million shares of the Company's common stock at a per share price of $11.375 (subject to certain adjustments), exercisable beginning on the earlier of i) 90 days after the expiration of the agreement or ii) 30 days after the announcement by either Disney or the Company that they will a) be entering into a new license agreement or b) that they will not be entering into a new licensing agreement, and expiring on March 31, 2008. On October 29, 1997, the Company entered into a definitive agreement with Mail-Well Inc. to sell the Company's commercial printing operations in Cambridge, Maryland. On October 31, 1997, the Company sold the building which houses the main manufacturing facility in Racine, Wisconsin. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL AND ADOPTION OF NEW BUSINESS STRATEGY CERTAIN OF THE MATTERS DISCUSSED IN THIS ITEM MAY CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND, AS SUCH, MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE OPERATIONS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements of Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company") for the three and nine months ended September 27, 1997 and September 28, 1996 and the related notes thereto. The Company is the largest publisher of children's books in the North American retail market. The Company 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. On May 8, 1996, Golden Press Holding, LLC ("Golden Press Holding"), an investment vehicle formed by Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested $65.0 million in the Company. At that time, the Company's name was changed from Western Publishing Group, Inc. to Golden Books Family Entertainment, Inc. and Mr. Snyder, the former Chairman and Chief Executive Officer of Simon & Schuster, was appointed Chairman and Chief Executive Officer of the Company. Since May 8, 1996, Mr. Snyder has assembled a new management team. Mr. Snyder and his management team are implementing a new business strategy to build a leading family entertainment company that creates, publishes and licenses family entertainment products. The Company intends to build on its position as a leader in the children's publishing market, utilizing the strength of the Golden Books brand name to provide family-oriented content through multiple media. As part of management's plan to return the Company's core publishing business to profitability and to redeploy assets, new management has taken a number of strategic actions and, accordingly, made decisions with respect to certain of the Company's assets as described in prior periodic reports of the Company. The Company's return to profitability is dependent in part on the successful implementation of management's new strategy. If the new strategy is successful, the Company still does not expect to generate positive net income until 1999 at the earliest. THREE AND NINE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 28, 1996 Historically, the Company has reported operating results under two segments: (i) the Consumer Products Segment; and (ii) the Commercial Products Segment. In addition, for the three and nine months ended September 27, 1997 and September 28, 1996, the operating results of the Entertainment Group (acquired on August 20, 1996) are reported separately as the Entertainment Segment. The Consumer Products Segment includes publishing operations ("Publishing") and, during the three and nine months ended September 28, 1996, Penn Corporation ("Penn"), which was sold on December 23, 1996. The Commercial Products Segment includes the Commercial Printing Division. The Entertainment Segment includes home video, television program licensing, merchandising and other character licensing. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 significantly changes the way companies report segment information in financial statements. The Company has not yet determined the impact of the implementation of FAS 131 on the Company's segment reporting. Revenues Revenues for the three months ended September 27, 1997 decreased $17.6 million (24.8%) to $53.3 million, compared to $70.9 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers), for the three months ended September 28, 1996, and decreased $41.4 million (19.6%) to $169.8 million from 13 $211.2 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers) for the nine months ended September 27, 1997 compared to the nine months ended September 28, 1996. Consumer Products Segment revenues decreased $16.9 million (29.3%) to $40.7 million for the three months ended September 27, 1997, compared to $57.6 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers) for the three months ended September 28, 1996, and decreased $52.9 million (31.0%) to $117.6 million from $170.5 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers) for the nine months ended September 27, 1997 compared to the nine months ended September 28, 1996. The decrease in revenue for the Consumer Products Segment for the three months ended September 27, 1997 resulted principally from the sale of Penn, which was sold in December of 1996 (revenues of $10.2 million) along with sales declines across most of the Children's publishing categories, in particular, Electronic Storybooks. These declines were caused in part by delays in the timing of sales shipments although these declines were partially offset by strong sales of Stephen Covey's "The Seven Habits of Highly Effective Families". The decline for the nine months ended September 27, 1997 is principally the result of the sale of Penn (revenues of $35.0 million) and revenue declines in the Electronic Storybooks and Premium Sales categories. Commercial Products Segment revenues decreased $4.0 million (33.3%) to $8.0 million for the three months ended September 27, 1997, compared to $12.0 million for the three months ended September 28, 1996, and decreased $5.3 million (13.5%) to $34.1 million from $39.4 million for the nine months ended September 27, 1997, compared to the nine months ended September 28, 1996. The revenue declines for the three and nine months ended September 27, 1997 compared to the three and nine months ended September 28, 1996 have largely been due to internal production requirements as the Company builds inventory levels in preparation for the move of the manufacturing facility early in 1998. Entertainment Segment revenues increased $3.3 million to $4.6 million for the three months ended September 27, 1997 compared to $1.3 million for the three months ended September 28, 1996 and increased $16.8 million to $18.1 million for the nine months ended September 27, 1997 compared to $1.3 million for the nine months ended September 28, 1996. The increase in revenues for the three and nine months ended September 27, 1997 compared to the three and nine months ended September 28, 1996 was due to the fact that the Entertainment Segment was active for only one month during these periods in 1996 compared to complete periods of activity during 1997. Gross Profit Gross profit decreased $1.4 million (8.2%) for the three months ended September 27, 1997 to $15.6 million, compared to $17.0 million (before consideration of $28.4 million in one-time revenue and cost of sales charges associated with the strategic redirection of the Company comprised $3.4 million in revenue reserves established to resolve differences with customers, $17.6 million relating to the discontinuance or replacement of certain product lines and $7.4 million of other inventory related costs) for the three months ended September 28, 1996, and decreased $4.7 million (8.4%) to $51.5 million for the nine months ended September 27, 1997, from $56.2 million (before consideration of one time charges of $28.4 comprising $3.4 million in revenue reserves established to resolve differences with customers, $17.6 million relating to the discontinuance or replacement of certain product lines and $7.4 million of other inventory related costs) for the nine months ended September 28, 1996. Gross profit for the nine months ended September 28, 1996 was positively impacted by an inventory valuation adjustment of $2.7 million which reduced cost of goods sold. As a percentage of revenues, the gross profit margin increased to 29.2% for the three months ended September 27, 1997 from 24.0% for the three months ended September 28, 1996 (before consideration of one time charges associated with the strategic redirection of the Company) and increased to 30.4% from 26.6% (before consideration of one time charges associated with the strategic redirection of the Company) for the nine months ended September 27, 1997, compared to the nine months ended September 28, 1996. In the Consumer Products Segment, gross profit decreased $2.7 million (17.9%) to $12.4 million for the three months ended September 27, 1997, compared to $15.1 million for the three months ended September 28, 1996 (before consideration of one time charges of $28.4 million described above), and decreased $13.9 million (26.8%) to $37.9 million from $51.8 million for the nine months ended September 27, 1997 (before consideration of one time charges of $28.4 million described above), compared to the nine months ended September 28, 1996. As a percentage of revenues, the gross profit margin for the Consumer Products Segment increased to 30.5% for the three months ended September 27, 1997 from 26.2% for the three months ended September 28, 1996 and increased to 32.3% from 30.4% for the nine months ended September 27, 1997, compared to nine months ended September 28, 1996. The decrease in Consumer Products Segment gross profit for the three months ended September 27, 1997, compared to the three months ended September 28, 1996, resulted from the exclusion of gross profit associated with Penn ($1.9 million) and lower levels of sales which were offset, in part, by lower manufacturing costs. The decrease in the 14 Consumer Products Segment gross profit for the nine months ended September 27, 1997, compared to the nine months ended September 28, 1996, resulted from the exclusion of the gross profit associated with Penn ($8.5 million), the impact of the $2.7 million inventory valuation adjustment described above and lower sales levels offset, in part, by manufacturing cost reductions. The increase in the Consumer Products Segment gross profit margin was due primarily to manufacturing cost savings achieved during the three months and nine months ended September 27, 1997, offset by the inventory valuation adjustment in the nine months ended September 28, 1996. Commercial Products Segment gross profit decreased $0.1 million (9.1%) to $1.0 million for the three months ended September 27, 1997, compared to $1.1 million for the three months ended September 28, 1996, and increased $0.4 million (11.1%) to $4.0 million from $3.6 million for the nine months ended September 27, 1997, compared to the nine months ended September 28, 1996. As a percentage of revenues, the gross profit margin for the Commercial Products Segment increased to 11.8% for the three months ended September 27, 1997, compared to 9.3% for the three months ended September 28, 1996, and increased to 11.6% for the nine months ended September 27, 1997, compared to 9.2% for the nine months ended September 28, 1996. The increase in Commercial Products Segment gross profit margin was primarily due to cost savings achieved in the Racine and Cambridge plants in the three and nine month ended September 27, 1997 compared to the three and nine months ended September 28, 1996. The Entertainment Segment gross profit increased $1.4 million to $2.2 million for the three months ended September 27, 1997 compared to $0.8 million for the three months ended September 28, 1996 and increased $8.8 million to $9.6 million for the nine months ended September 27, 1997, compared to $0.8 million for the nine months ended September 28, 1996. As a percentage of revenues, the gross profit margin was 48.5% for the three months ended September 27, 1997 compared to 64.9% for the three months ended September 28, 1996 and was 53.4% for the nine months ended September 27, 1997, compared to 64.9% for the nine months ended September 28, 1996. The decrease in the Entertainment gross profit margin was primarily due to higher levels of home video sales activity with lower gross margins in both the three and nine months ended September 27, 1997,compared to the three and nine months ended September 28, 1996. Selling, General and Administrative Expenses Selling, general and administrative expenses, before consideration of $3.3 million of one time transition costs associated with the redirection of the Company (comprised of consulting costs of $1.0 million, information systems changeover costs of $1.7 million and costs associated with the move of the Company's Racine, Wisconsin manufacturing facility of $0.6 million), were $26.1 million for the three months ended September 27, 1997, a decrease of $4.5 million from $30.6 million, before consideration of one time charges of $11.0 million (to resolve certain legal and contractual matters) incurred during the three months ended September 28, 1996. Before consideration of $8.4 million of one time transition costs associated with the redirection of the Company (comprised of consulting costs of $3.5 million, information systems changeover costs of $4.0 million and costs associated with the move of the Company's Racine, Wisconsin manufacturing facility of $0.9 million) selling, general and administrative expenses decreased $12.5 million to $69.8 million for the nine months ended September 27, 1997 compared to $82.3 million, before consideration of $27.2 million (comprising $16.2 million of charges relating to an equity investment in the Company by Golden Press Holding and $11.0 million in charges to resolve certain legal and contractual matters), for the nine months ended September 28, 1996. The decreases for the three and nine months ended September 27, 1997, compared to the three and nine months ended September 28, 1996, were primarily due to headcount reductions, lower selling and marketing costs and the impact of the disposal of Penn partly offset by the acquisition of the Entertainment Segment. Interest Expense, net Interest income for the three months ended September 27, 1997 decreased $0.1 million to $1.3 million from $1.4 million for the three months ended September 28, 1996 and increased $2.4 million to $4.9 million from $2.5 million for the nine months ended September 27, 1997 compared to the nine months ended September 28, 1996. The decrease for the three months ended September 27, 1997, compared with the three months ended September 28, 1996, was due to lower average cash balances during the three months ended September 27, 1997. The increase for the nine months ended September 27, 1997 compared to the nine months ended September 28, 1996 results from higher average cash balances during 1997 due to cash generated towards the end of 1996 which has subsequently been reduced during 1997 to fund operations, previous period restructure expenses and one time transition costs necessary to implement management's plans to change the strategic direction of the Company. The cash increases during 1996 were generated as follows (1) the sale of the Company's Series B Convertible Preferred Stock to Golden Press Holding for an aggregate purchase price of $65.0 million in May 1996, (2) the issuance of 15 Preferred Securities for $115.0 million in August 1996, (3) the sale of the Company's common stock for $25.0 million to HC Crown Corporation, an affiliate of Hallmark Cards, Incorporated, in September 1996 and (4) the sale of Penn Corporation for consideration including approximately $14.0 million in cash, partially offset by the purchase of substantially all the assets of Broadway Video Entertainment, L.P. in part for $81.0 million in cash in August 1996 and the redemption of the Company's Series A Preferred Stock for $10.0 million in May 1996. Net interest expense (including the distributions on the guaranteed preferred beneficial interest in the Company's and Golden Books Publishing's Convertible Debentures (i.e., the Preferred Securities)), for the three months ended September 27, 1997 increased by $1.6 million to $4.2 million, as compared to $2.6 million for the three months ended September 28, 1996, and increased $3.9 million to $11.5 million from $7.6 million for the nine months ended September 27, 1997, compared to the nine months ended September 28, 1996. The increase in net interest expense was primarily due to higher average debt outstanding resulting from the issuance of the Preferred Securities in August 1996, offset in part by higher levels of interest income as described above. Total average outstanding debt (including the Preferred Securities) increased to $265.0 million for the three and nine months ended September 27, 1997, compared to $212.7 million for the three months ended September 28, 1997 and to $170.9 million for the nine months ended September 28, 1996, due to the issuance of the Preferred Securities during August and September of 1996. Income Taxes The Company does not anticipate any significant provision or benefit for income taxes in the fiscal period ending December 27, 1997. As such, operations for the three and nine months ended September 27, 1997 do not include an income tax benefit from domestic operations as no tax benefit was provided on operating losses. Profitable operating results in subsequent periods will benefit from an income tax rate which will be lower than the statutory rate due to the reinstatement of deferred tax assets for which a valuation allowance was established. The provision for the nine months ended September 28, 1996 pertained principally to anticipated resolution of outstanding issues from prior years. Net Loss The net loss for the three months ended September 27, 1997 was $(17.9) million, or $(0.76) per common share, compared to a net loss of $(96.8) million, or $(4.29) per common share, for the three months ended September 28, 1996. For the nine months ended September 27, 1997, the net loss was $(38.1) million or $(1.69) per common share, compared to a net loss of $(132.0) million, or $(6.11) per common share, for the nine months ended September 28, 1996. Results for the nine months ended September 27, 1997 included one time transition costs of $8.4 million, as previously discussed, and the results for the nine months ended September 28, 1996 included the $96.3 million in one time charges associated with the strategic redirection of the Company ((i) $16.2 million in connection with the sale of a significant equity interest to Golden Press Holding; (ii) a restructuring charge totaling $40.7 million pertaining to a $30.1 million writedown of the net assets of Penn to net realizable value, a $3.0 million reduction in the net realizable value of the Company's Fayetteville facility and $7.6 million in costs associated with the termination of certain customer program initiatives; (iii) a cost of sales adjustment of $25.0 million comprised of $17.6 million of costs pertaining to the Company's decision to discontinue or replace certain product lines and expeditiously liquidate related inventory and slow moving product and $7.4 million of other inventory related costs, consisting primarily of licensor and prepublication costs; (iv) a selling, general and administrative charge of $11.0 million relating to costs associated with management's revised plans to resolve certain legal and contractual matters; and (v) adjustments to revenue totaling $3.4 million to establish reserves in connection with the Company's plans to resolve differences with customers with a view toward mending and improving the Company's relationships with its customers). Financial Condition, Liquidity and Capital Resources Operations for the nine months ended September 27, 1997, including one time transition costs of $8.4 million associated with the strategic redirection of the Company and payments of restructuring costs accrued during the period ended December 28, 1996 of $3.9 million, utilized cash of approximately $90.9 million compared to cash provided of $87.2 million for the nine months ended September 28, 1996. The major source of cash flow in the nine months ended September 28, 1996 was from the sale of the Company's Series B Convertible Preferred Securities offset in part by the redemption of the Series A Preferred Stock, the issuance of Preferred Securities for $115.0 million in August 1996, the sale of the Company's common stock for $25.0 million to HC Crown Corporation, an affiliate of Hallmark Cards, Incorporated, in September 1996 offset by the purchase of substantially all the assets of Broadway Video Entertainment, L.P. in part for $81.0 million in cash in August 1996. 16 Acquisitions of property, plant and equipment were $11.9 million during the nine months ended September 27, 1997, as compared to $7.0 million during the nine months ended September 28, 1996. Working capital at September 27, 1997 was $105.7 million, as compared to $168.2 million at December 28, 1996. The decrease resulted primarily from cash reductions associated with investment in property, plant and equipment, funding the loss from operations and transition costs associated with the strategic redirection of the Company during the nine months ended September 27, 1997. The Company expects to spend approximately $14.0 million attributable to transition costs to be incurred in connection with the strategic redirection of the Company during 1997. The Company's plan to change it's strategic direction in order to return the core publishing business to profitability originally anticipated incurring $20.5 million in one time transition costs during 1997. Since this announcement the Company has made additional decisions (as described below) which make it impractical for all of these transition costs to be incurred during 1997. As a result, the Company expects that approximately $7.0 million of one time transition costs will be incurred during 1998. The major factor impacting this change in timing is management's decision to delay the construction and move of the Company's main operating facility in Racine, Wisconsin, until after the end of the year to allow the heavy Christmas period demand to be fulfilled, to the extent possible, by internal production capacity. As of September 27, 1997, the Company maintained sufficient accruals for restructuring costs which are expected to be paid out during the remainder of 1997 and 1998. The Company believes that, based on the carrying value of both certain assets held for sale and inventory to be discontinued or replaced in connection with the Company's strategic actions, it will realize cash proceeds in excess of $20.0 million on the sale of such assets. Such proceeds and cash attributable to the Company's cost savings will be used in connection with the Company's change in strategic focus and other strategic measures. Additionally, on October 31, the Company sold the building which houses its existing manufacturing facility in Racine, Wisconsin, and is in the process of building a new facility to manufacture the core products of the Company. The capital expenditures relating to such a facility will be funded in part through low-cost financing. In connection with the establishment of the new facility, the Company will also receive wage and benefit reductions and work rule changes from each of the labor unions. All of the foregoing financial incentives aggregate approximately $5.0 million, including $3.4 million that will be received before the end of 1997. On September 26, 1997, the Company signed a new license agreement with Disney Book Publishing, Inc. ("Disney") (the "New Disney License Agreement") (the Company's previous main license agreement with Disney was to have expired on December 31, 1997). The New Disney License Agreement commenced on October 1, 1997 and runs through December 31, 2001, and can be extended under certain conditions for an additional year through December 31, 2002. The book formats covered under the New Disney License Agreement include: coloring books, activity books, Little Golden Books, First Little Golden Books, Look/Look Books, Super Shape Books and Sturdy Shape Books. New formats approved by Disney also may be covered under the New Disney License Agreement. Properties covered under the New Disney License Agreement include Disney classic characters as well as characters from major new Disney branded films released during the term thereof. Royalty rates under the New Disney License Agreement vary by product covered. The New Disney License Agreement contains minimum royalty guarantees of $7,370,000 for the nine-month period commencing January 1, 1998 and ending September 30, 1998, $11,670,000 for the second year of the term, $13,340,000 for the third year of the term, $15,340,000 for the fourth year of the term and $16,670,000 for the additional year (if applicable). In addition, upon the execution and delivery thereof, Disney received warrants to purchase 1.1 million shares of the Company's common stock at a per share price of $11.375 (subject to certain adjustments), exercisable beginning on the earlier of i) 90 days after the expiration of the New Disney License Agreement or ii) 30 days after the announcement by either Disney or the Company that they will a) be entering into a new license agreement or b) that they will not be entering into a new licensing agreement, and expiring on March 31, 2008. As of September 27, 1997, the Company had approximately $48.8 million in cash and cash equivalents. The Company believes that such amounts will be sufficient to fund working capital needed for the foreseeable future. It is not possible to ascertain the effect on the Company's liquidity that would result from potential future acquisitions, dispositions or debt repurchases. The Company expects to evaluate all viable forms of financing when examining potential future acquisitions or its capital structure. This could take the form of, among other things, additional sales of stock or notes, bank and/or institutional borrowings, or seller financing, as well as internally generated funds. There can be no assurance that events in 17 the future will not require the Company to seek additional capital or, if so required, that adequate capital will be available on terms acceptable to the Company. The Indenture covering the Company's 7.65% Senior Notes due 2002 restricts the ability of Golden Books Publishing to pay cash dividends or make other cash distributions to Golden Books Family Entertainment, Inc. 18 PART II OTHER INFORMATION 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: Current Report on Form 8-K dated October 1, 1997. 19 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 thereunto duly authorized. GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. November 11, 1997 /s/ Richard E. Snyder ------------------------ Richard E. Snyder Chairman of the Board, President and Chief Executive Officer November 11, 1997 /s/ Philip E. Rowley ----------------------- Philip E. Rowley Executive Vice President and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 For the attached financials, the value EPS-DILUTED is not applicable. 0000790706 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. 1000 9-MOS DEC-27-1997 SEP-27-1997 48,825 0 64,206 21,432 41,861 168,627 77,828 42,632 315,526 60,279 149,876 267 0 65,000 0 315,526 168,874 169,788 118,239 129,269 0 0 3,970 (38,162) (99) (38,063) 0 0 0 (38,063) (1.69) 0
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