-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, mxSNqpmWepexI/WbFYxWDpPFB0mmaWwqgT3PDS1/d9ycuHFqy8MUIVeg/bxJkFeR fpZ/11/SFzb3gTD3PXUqyg== 0000889812-95-000225.txt : 19950516 0000889812-95-000225.hdr.sgml : 19950516 ACCESSION NUMBER: 0000889812-95-000225 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN PUBLISHING GROUP 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: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14399 FILM NUMBER: 95539826 BUSINESS ADDRESS: STREET 1: 444 MADISON AVE STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126884500 MAIL ADDRESS: STREET 1: 444 MADISON AVE STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10022 10-K405 1 ANNUAL REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal year ended January 28, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ...... to ...... Commission file number 0-14399 Western Publishing Group, Inc. (Exact name of registrant as specified in its charter) Delaware 06-1104930 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 444 Madison Avenue, New York, New York 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-688-4500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Common Stock, par value $ .01 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X or No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, is definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant, computed by reference to the closing sales price as quoted on NASDAQ on April 13, 1995, was approximately $190,525,000. As of April 13, 1995, 21,023,274 shares of the Registrant's $.01 par value common stock were outstanding. PART I ITEM 1. BUSINESS BACKGROUND Western Publishing Group, Inc., through its two operating subsidiaries, Western Publishing Company, Inc., a Delaware corporation, and Penn Corporation, a Delaware corporation, is engaged in two business segments. The Consumer Products segment creates, produces and markets a variety of consumer products including children's story and picture books, interactive electronic books and games, computer and multi-media "edutainment" products, coloring books and other activity books, educational workbooks sold at retail, craft products, children's pre-recorded audio cassettes, book and audio cassette sets, pre-recorded video cassettes, FRAME-TRAY(Copyright) puzzles, special interest books for adults, decorated paper tableware, paper party accessories, gift wrap products, invitations, stationery and gift items. The Commercial Products segment provides the following printing and manufacturing services: (1) graphic services and commercial printing, such as the printing of books, catalogs, labels, tax forms, magazines and trading cards; (2) educational kit manufacturing, including printing, sourcing, packaging, development and assembly of educational kits; and (3) Custom Publishing(Copyright) services, such as the creation, production, assembly and distribution for consumer product and fast food companies of customized products for their marketing and promotional programs. Western Publishing Group, Inc.'s principal offices are located at 444 Madison Avenue, New York, New York 10022, and its telephone number is (212) 688-4500. Sale and Phase Out of Operations On April 7, 1994, the Company adopted a plan (the "Plan") designed to improve its competitive position and reduce its cost structure through the sale, divestiture, consolidation or phase out of certain operations, properties and products, and a workforce reduction. The Plan included the following major components: o An agreement to sell its game and puzzle operation (including certain inventories) to Hasbro, Inc. ("Hasbro"). This transaction was completed in August 1994 for cash proceeds of approximately $101,400,000. o The decision to exit the Direct Marketing Continuity Clubs and School Book Club businesses. These businesses were sold during the second and third quarters of Fiscal 1995 for aggregate cash proceeds of approximately $14,500,000. o The closedown and sale of the Company's Fayetteville, North Carolina manufacturing and distribution facility, which was primarily dedicated to the game and puzzle operation but was not included in the sale to Hasbro. This property, which is comprised of 702,000 square feet of office, warehousing and distribution space, has been closed and is currently being marketed for sale. o The decision to streamline the Company's publishing business so as to focus on its core competencies. This included a reduction in the management, administrative and direct labor workforces. The Company used the net cash proceeds arising from the Plan to repay outstanding debt under its Revolving Credit Agreement. The Plan, which was announced in the first quarter of Fiscal 1995, resulted in a pre-tax gain of approximately $20,000,000, inclusive of operating losses of the game, puzzle, direct marketing and school book club operations from January 30, 1994 through their respective disposition dates. 2 Provision for Write-down of Division During Fiscal 1994, the Company established a provision, including operating losses through the expected disposition date, to write-down the assets of the Advertising Specialty Division of its Penn Corporation subsidiary to net realizable value. On August 5, 1994, the sale of the Ritepoint/Chromatic and Adtrend businesses of the Division was completed for cash proceeds of approximately $5,650,000. On November 7, 1994, the sale of the Vitronic and K-Studio businesses of the Division was completed for cash proceeds of approximately $8,350,000. As the proceeds from the sale of this Division exceeded management's estimate, the Company adjusted its previously recorded provision for write-down of Division by recognizing a pre-tax gain of $1,100,000 in the fourth quarter of Fiscal 1995. The net cash proceeds from the sale of this Division were utilized to repay outstanding debt under the Revolving Credit Agreement. BUSINESS SEGMENT INFORMATION For certain information with respect to net sales, operating profits and identifiable assets attributable to Western Publishing Group, Inc.'s Consumer Products and Commercial Products business segments, see Note 14 of the Notes to the Western Publishing Group, Inc. Consolidated Financial Statements, said Note being set forth on pages F-23 to F-24 herein. CONSUMER PRODUCTS SEGMENT Products Western Publishing Company, Inc. is the largest creator, publisher, manufacturer, printer and marketer of children's books in the United States. Children's books, including story and picture books for children aged two through eight, are principally marketed under the GOLDEN BOOKS(Registered), LITTLE GOLDEN BOOKS(Registered), GOLDEN BOOKS(Registered) WITH SOUND, GOLDEN SIGHT & SOUND(Registered), GOLDEN SING-A-LONG(Registered), MY FIRST GOLDEN BOOK(Registered) with SOUND, GOLDEN TALKING TALES(Registered), GOLDEN SEEK 'N' SOUND(Registered), GOLDEN SOUND STORY(Registered) and SOUND STORY(Trademark) trademarks. Activity books and products and educational workbooks for children are marketed under the GOLDEN BOOK(Registered), MERRIGOLD PRESS(Registered) and GOLDEN BOOK(Registered)/STEP AHEAD(Registered) trademarks. Activity books and products include coloring books, PAINT WITH WATER(Registered) books, STICKER FUN(Registered) books, paper doll books, pop-up books, board books, shape books, MAGIC SLATE(Registered) PADS, crayons and boxed activity products. Western Publishing Company, Inc. also produces and markets pre-recorded video and audio cassettes for children under its GOLDEN BOOK VIDEO(Registered) and GOLDEN MUSIC(Registered) trademarks. Coin collecting products are marketed under its WHITMAN(Registered) trademark. Western Publishing Company, Inc. also sells arts and crafts products under its MERRIGOLD(Registered), GOLDEN(Registered), and COLOR EXPRESS(Registered) trademarks, pre-recorded audio cassette tapes packaged with books under its GOLDEN BOOK 'N' TAPE(Registered) trademark and other products that complement its lines of books, activity products and puzzles. Western Publishing Company, Inc. believes that its GOLDEN BOOK(Registered) brand name has strong consumer awareness and recognition and a reputation among consumers for creativity, quality, entertainment and educational value and customer satisfaction. Among the best known GOLDEN BOOK(Registered) titles are "Richard Scarry's Best Word Book Ever", "Pat the Bunny", "The Poky Little Puppy(Copyright)" and the "Golden Treasury of Children's Literature." GOLDEN BOOK(Registered) products are believed by Western Publishing Company, Inc., as a result of market research, to be recognized by virtually all American mothers with children under the age of ten. Western Publishing Company, Inc.'s hard cover trade imprint, ARTIST & WRITERS GUILD(Registered), has met with critical success. Publishing twenty titles a year, the imprint appeals to children and their parents and has garnered a large number of awards from the publishing, parenting and library media. 3 Through August, 1994, Western Publishing Company, Inc. was one of the nation's largest manufacturers and marketers of children's and adult jigsaw puzzles and one of the largest producers and marketers of children's games, card games, classic family board games and adult board games. As set forth in the section entitled "Sale and Phase Out of Operations," the Company sold its games and puzzles business to Hasbro, Inc. The Company continues to manufacture and market children's FRAME-TRAY(Registered) puzzles as well as electronic sound games. Many of Western Publishing Company, Inc.'s products are published or produced under license from authors, inventors and other owners of intellectual properties. Products often feature popular characters licensed from other companies, including The Walt Disney Company, Children's Television Workshop (Sesame Street(Registered)), Mattel, Inc., Jim Henson Productions, Inc. DC Comics Inc., Marvel Entertainment Group, Inc., MCA/Universal Merchandising, Inc., Saban Entertainment, Inc., Time-Warner, Inc., Paramount Pictures Corporation and Twentieth Century Fox Film Corporation. Western Publishing Company, Inc.'s adult non-fiction book line is designed to inform the family on subjects of special interest and includes the GOLDEN GUIDES(Registered) line of books on subjects such as science, birds and astronomy and WHITMAN(Registered) coin collector products and other special interest adult books. However, Western Publishing Company, Inc. does not have significant market share in the adult book category. Penn Corporation believes that it is a recognized leader in the design and production of quality decorated paper tableware, party accessories, invitations, gift wrap products, stationery and giftware. Under its BEACH(Registered) and CONTEMPO(Registered) trademarks, Penn Corporation produces and markets to retailers an extensive line of decorated paper tableware consisting of plates, cups, napkins, table covers and guest towels, in a variety of coordinated designs, themes and colors. Penn Corporation works directly with leading design studios such as Gloria Vanderbilt, Gear, Giordano, Nick & Nora, Merrimekko, Laurette, Bob Van Allen, and J.G. Hook to offer tableware patterns that it believes are representative of the most current international design trends. Penn Corporation also produces and markets an extensive line of children's party tableware, party favors and accessories (such as games, horns, hats and blowouts), many of which feature characters licensed from The Walt Disney Company, Western Publishing Company, Inc., Children's Television Workshop (Sesame Street(Registered)), Time-Warner, Inc. and Marvel Entertainment Group, Inc. Penn Corporation also produces under its CONTEMPO(Registered) trademark a complete line of gift wrap products, including gift wrap paper, ribbons, bows, gift enclosure cards, tissue paper and tote bags. Penn Corporation's gift wrap products are produced in a wide variety of colors and designs, including the designs of many of the same leading fashion designers who design Penn Corporation's tableware products. Penn Corporation's gift wrap paper also comes in a variety of materials, including metallic and high gloss paper. Under the RENNER DAVIS BY CONTEMPO(Trademark) trademark, Penn Corporation produces and markets hand-crafted stationery and giftware. RENNER DAVIS(Registered) stationery items include correspondence cards, invitations, writing papers and envelopes. Penn Corporation's writing papers are crafted by hand from fine quality watermarked papers with a high cotton fiber content. All sheets and notes are individually hand-edged and all envelopes are either lined or hand-bordered. The RENNER DAVIS BY CONTEMPO(Trademark) giftware line includes hand-crafted keepsake boxes, desk accessories and decorative kitchen accessories, such as address books, memo holders, picture frames and pencil holders, which are constructed from quality materials coordinated for color, finish, texture, pattern and style. Imaginative gift books featuring The Walt Disney Company and Jim Henson's Muppet Babies(Trademark) characters are also marketed to gift and department stores under the RENNER DAVIS BY CONTEMPO(Trademark) brand. Licensing Licensing agreements are important factors in the differentiation of Western Publishing Group, Inc. products from those of its competitors. In the year ended January 28, 1995 ("Fiscal 1995"), approximately 61% of Western Publishing Group, Inc.'s Consumer Products segment sales were generated by books, games, FRAME-TRAY(Registered) puzzles, activity products, paper party goods and party favors featuring popular juvenile characters and 4 properties licensed by Western Publishing Company, Inc. and Penn Corporation from authors, illustrators, inventors and other companies. Most of Western Publishing Group, Inc.'s character licenses have terms of one to three years. Despite the relatively short period of each license, Western Publishing Group, Inc. has longstanding relationships with virtually all of its licensors. Licenses from authors and inventors are generally longer in duration, often for the term of the copyright. Approximately 39% of the Consumer Products segment sales in Fiscal 1995 were attributable to juvenile products incorporating characters and properties licensed from its five largest licensors: The Walt Disney Company, Children's Television Workshop (Sesame Street(Registered)), DC Comics Inc., Saban Entertainment, Inc. and Mattel, Inc. Royalty rates paid by Western Publishing Company, Inc. generally range from 6% to 10% of the invoiced price of the product featuring the licensed characters and properties. Many license agreements require advance royalty payments and minimum royalty guarantees, contain editorial standards that govern Western Publishing Company, Inc.'s use of the characters and properties and can be cancelled for failure to meet these standards or certain other contractual obligations. None of Western Publishing Company, Inc.'s licenses has been cancelled by the licensor for failure to meet these standards or obligations. Western Publishing Company, Inc. selects the characters and properties to be licensed primarily on such factors as adaptability to its markets, compatibility with its product lines, the identity of the licensor and other licensees of the character, the amount of licensor advertising and marketing support for the character, the timing of any scheduled promotion of the character and the terms offered by the licensor. Western Publishing Company, Inc. believes that the large breadth of its product categories and its vast distribution network, as well as the breadth and effectiveness of its sales and in-store retail merchandising forces, gives it an advantage over its competitors in obtaining licensing rights in part because of the large number of consumer impressions it creates and the royalties it generates. However, competition to obtain licenses is intense and Western Publishing Company, Inc. sometimes does not obtain a license that it seeks, or only obtains a non-exclusive license, and other times does not obtain a license for all of its desired product categories. In Fiscal 1995, Western Publishing Company, Inc. entered into many new licensing agreements, including Animaniacs(Trademark) with Time-Warner, Inc., Toontown(Registered) with The Walt Disney Company, Spot(Trademark) the Dog with Copyrights Group Limited, Mighty Morphin Power Rangers(Registered) with Saban Entertainment, Inc., and a new multi-year agreement with Marvel Entertainment Group, Inc. for Spiderman(Registered), X-Men(Registered), Fantastic Four(Registered) and Iron Man(Registered). In addition, licenses were obtained and product lines were produced in conjunction with Disney's release of the movie, "The Lion King", and re-release of "Snow White" on home video. Further, a licensing agreement was entered into with The Walt Disney Company for "A Goofy Movie" (an early 1995 spring theatrical release), "Pocahantas" (a summer 1995 theatrical release) and "The Toy Story" (a Thanksgiving release). A licensing agreement was also entered into with Universal City Studios, Inc. and Amblin Entertainment, Inc. for products related to their upcoming theatrical release of Casper(Trademark) and with DC Comics Inc. for their upcoming release of Batman Forever(Trademark). Upon obtaining a license, Western Publishing Company, Inc. develops story and activity books and other products featuring the licensed character or property to incorporate into its GOLDEN BOOK(Registered) lines and associated products. To develop those products, Western Publishing Company, Inc. utilizes its internal creative staff of over 100 editors, artists and designers and an extensive network of authors, artists and inventors who work on a regular, but free-lance basis, with Western Publishing Company, Inc. Penn Corporation's Beach/Contempo Division produces a line of children's party tableware and accessories featuring characters licensed from, among others, The Walt Disney Company, Western Publishing Company, Inc., Children's Television Workshop (Sesame Street(Registered)), Time-Warner, Inc. and Marvel Entertainment Group, Inc. Royalty rates paid by Penn Corporation generally range from 5% to 10% of the invoiced price of the product featuring the licensed characters and properties. 5 New Product Lines Western Publishing Group, Inc., through market research activities, has intensified its efforts to identify opportunities for either the development or acquisition of new product lines that consumers will recognize as offering value at a popular price and has allocated substantial resources to its new product acquisition and development efforts. In calendar 1992, it introduced new SOUND STORY(Registered) products including LITTLE GOLDEN BOOKS(Registered) SOUND STORY(Registered) Books, GOLDEN SING-A-LONG(Registered) Books and BIG BIRD'S TALKING BINGO(Trademark). In calendar 1993, it introduced new SOUND STORY(Registered) products including MY FIRST GOLDEN SOUND STORY(Registered) and GOLDEN TALKING TALES(Registered) books as well as GOLDEN SEEK 'N' SOUND(Registered) games. In calendar 1994, it introduced a number of items to its growing boxed arts & crafts category, including BARBIE(Trademark) party pins and keepsakes, a button and magnet maker kit that features easy to make plaster designs; and JIM HENSON'S MUPPET WORKSHOP(Trademark), a series of paper based, make your own Muppet(Trademark) craft kits. The GOLDEN BOOKS(Registered) WITH SOUND product line introductions included MAGIC CORNER(Registered) books, a one sound board book series and SOUNDS BY ME(Trademark), a story book that includes sounds and a recording feature. As of calendar 1994, all of these products are marketed utilizing the GOLDEN BOOKS(Registered) brand as their primary brand. The Company, since acquiring Sight & Sound, Inc. in July 1990, has expanded its GOLDEN BOOKS(Registered) WITH SOUND product line to over 113 titles, including GOLDEN SOUND STORY(Registered) BOOKS DELUXE EDITION with 10 sounds, MY FIRST GOLDEN SOUND STORY(Registered) BOOKS with 5 sounds, the RANDOMIZER(Trademark) BOOKS electronic book adventures, GOLDEN TALKING TALES(Registered) with prerecorded conversations and 9 sounds, LITTLE GOLDEN BOOKS(Registered) SOUND STORY(Registered) BOOKS with 4 sounds, GOLDEN SOUND STORY(Registered) FAVORITES with 7 sounds; MAGIC CORNER(Registered) BOOKS, a board book with random sounds, GOLDEN SEEK 'N' SOUND(Registered), a sound based activity board, GOLDEN SING-A-LONG(Registered) with 5 sound effects and 8 songs, and SOUNDS BY ME(Trademark) which features pre-programmed sounds and a recording capability to create sounds. The Company sources sound pad components and finished goods abroad and as a result, scheduling is an important prerequisite to producing and distributing particular licensed product in a timely fashion. In fiscal 1996, the above products will be re-branded as GOLDEN BOOKS(Registered) WITH SOUND for consistency and to take advantage of the strong brand loyalty that customers have shown towards the GOLDEN BOOK(Registered) brand (See "Management's Discussion and Analysis of Financial Condition and Results of Operations"). In calendar 1992, Penn Corporation's Beach/Contempo Division introduced the Pretty Florals collection of decorated paper tableware which represented one of the top selling designs for the year. In addition, the Garden Variety and Hot 'n Spicy collections were introduced. In calendar 1993, it introduced its first shape and die cut paper plates and its first all over spring designs for napkins and table covers. It also introduced The Disney Gift Book program of social expression books in 8 innovative formats. In calendar 1994, the Company introduced its European designs giftwrap selections with dozens of floral and artistic designs on premium paper. The year also saw the introduction of a full line of party favors, accessories and decorations. The success of the expanded favors and decorations was most evident in the broad line of products successfully launched featuring Disney's Lion King characters. Toward the end of Fiscal 1995, Beach introduced new products including (a) paper plates with special shapes such as octagon and flower/petal scallops (b) napkins featuring the works of noted artists with edge to edge printing (c) a new selection of stationery, keepsake gifts and tableware products featuring the Vatican Library Collection and (e) the Gale and Ardie Sayers Celebration Collection of tableware designs. Marketing and Distribution Western Publishing Company, Inc.'s marketing strategy for its consumer products is to create consumer demand through advertising, promotion and attractive point-of-purchase presentations in order to sell a high volume of popularly priced products through mass merchandising chains such as Wal-Mart Stores, Inc., K-Mart Corp., Fred Meyer Inc., Caldor, Inc. and Target Stores Incorporated; national book chains such as B. Dalton Book Seller and Walden Book Co., Inc.; toy stores such as Toys 'R' Us, Inc. and Kay-Bee Toys, Inc.; supermarkets such as Winn Dixie Stores, Inc., H.E. Butt Grocery Co. and Smith's Food and Drug Centers, Inc.; drug chains such as Walgreen Co., Revco D.S., Inc., Long's Drug Stores Corporation and Eckerd Drug Co.; warehouse clubs such as 6 Price/Costco and Sam's Clubs (Wal-Mart Stores, Inc.); deep discount drug stores such as Drug Emporium, Inc., Marc Glassman, Inc. (Marc's) and Phar-Mor, Inc.; trade bookstores; independent toy stores and other retail outlets. A majority of Western Publishing Company, Inc.'s consumer products sales are made directly to retailers through its 146 employee direct sales force, which it believes is larger than any of its competitors. The sales force was reorganized in Fiscal 1995 to ensure the retention of top sales people from the Company's business units that were sold. Western Publishing Company, Inc. also sells through wholesalers, distributors, sales representative organizations and food brokers. Western Publishing Company, Inc. generally provides retailers with wood racks, spinners, plan-o-gramming and its computerized space management planning service, all of which it believes provides a competitive advantage in obtaining favorable shelf space for its products. To promote sales, Western Publishing Company, Inc. uses print media, television, cooperative advertising programs, point-of-sale displays and a variety of consumer promotions (See "Retail Businesses"). Beach Products markets its products to retailers through a combination of independent sales representatives and its own sales force. Beach Products provides retailers with display units and racks for its party goods and gift wrap products and conducts various sales incentive programs for its representatives and retailers. Beach Products also markets its decorated paper tableware directly to food service organizations and other institutional customers under the CUSTOMPRINTS(Registered) trademark. These items are imprinted with names, logos or messages for business and promotional use. In the mass market and chain store channels, Beach Products utilizes Western Publishing Company, Inc. and third party in-store retail merchandising forces. Brand Equity The Company renewed its emphasis on its core publishing businesses in Fiscal 1995, and its GOLDEN BOOKS(Registered) brand name in the juvenile publishing, arts & crafts, color/activity, educational, audio and video categories. A GOLDEN BOOKS(Registered) Brand Equity plan was developed to capitalize on the brand's high level of awareness among consumers. The plan includes a packaging "line look" that incorporates a new GOLDEN BOOKS(Registered) logo and consumer advertising. All products previously marketed under the GOLDEN(Registered) brand will now carry the GOLDEN BOOKS(Registered) brand. In-Store Merchandising In Fiscal 1995, Western Publishing Group, Inc. made significant use of its in-store retail merchandising service unit. This unit was reorganized as a result of the disposition of several business units. The merchandising unit is responsible for providing in-store merchandising services in support of all Western Publishing Group, Inc.'s product lines. This unit is focused on mass market, discount, toy and chain drug classes of trade and supports Western's expansion into other retail channels. By setting plan-o-grams, moving merchandise out of stock rooms, building displays, managing racks and product presentation and performing store level ordering services, product take away has increased and additional retail space has been captured. Sales increases have been experienced in all major retail chains where Western's merchandising services have been initiated. The Company believes it is providing vital services to the retailer which will enhance the long-term relationship between Western and the retailer. Retail Businesses o Category Management Western Publishing Company, Inc.'s Total Category Management(Service Mark) program provides retailers with Western's management of all operational and supply chain management functions to operate children's book departments. 7 In Fiscal 1995, Western's innovative "shop-within-a-store" Books 'R' Us(Trademark) concept at Toys 'R' Us was expanded to approximately 330 stores as Toys 'R' Us assumed the day-to-day management of these "shops-within-a-store" as of February 1, 1994. Western has been advised that Toys 'R' Us intends to open approximately 100 additional Books 'R' Us locations in calendar 1995; all of which will feature a full array of GOLDEN BOOKS(Registered) products. Western's GOLDEN BOOKS STORYLAND FOR KIDS(Service Mark) "store-within-an- aisle" program features a greatly expanded book department at mass market retailers, with a bookstore atmosphere including special racks, signage and full face presentation of children's books. The STORYLAND(Trademark) program is managed and serviced by Western. Wal-Mart Stores, Inc., Caldor Inc., Fred Meyer Inc. and other national chains embraced this program with approximately 650 participating retail outlets in operation at year end. The number of chains and stores adapting the STORYLAND(Trademark) program is growing and Western plans to open 550 additional locations in calendar 1995. In each case where a STORYLAND(Trademark) program has been installed, sales of children's books in general and Western's books in particular have significantly increased. To date, Wal-Mart Stores, Inc. has been the largest user of this program. During fiscal 1995, Western placed its GOLDEN BOOKS(Registered) kiosk units, a part of its retail management services efforts, in 190 Kids 'R' Us stores. The kiosk unit, which is a four-sided display unit specifically designed to showcase a variety of products in the least amount of floor space, features a full product assortment mix of the top selling GOLDEN BOOKS(Registered), storybooks and activity/entertainment products. The Kids 'R' Us GOLDEN BOOKS(Registered) kiosk features seasonal products as well as everyday favorites. o GOLDEN BOOKS(Registered) Showcase Stores The Company has three GOLDEN BOOKS(Registered) Showcase Store locations. Its first GOLDEN BOOKS(Registered) Showcase store was opened in Schaumburg, IL in November 1992; the second store was opened in the CityWalk Center at Universal City in Burbank, CA in June 1993; and the third store was opened in Rockefeller Center in New York City in April 1994. Each of the stores features only Western Publishing Group, Inc. consumer products. Each store is located in a different environment. The Schaumburg, IL store is located in the Woodfield Mall, an upscale suburban mall. The CityWalk store is located adjacent to the Universal City theme park in Burbank, CA. The New York City store is located in a midtown, high-trafficked urban area. All three GOLDEN BOOKS(Registered) Showcase stores permit the Company to support and expand its GOLDEN BOOK(Registered) brand recognition as well as test product and survey consumers in different environments. o GOLDEN BOOKS(Registered) Factory Outlet Program The Company set up its first GOLDEN BOOKS(Registered) Mini Factory Outlet Kiosk in August 1994 in the Gurnee Mills Mall in Gurnee, IL to provide an outlet for effective liquidation of corporate overstocks and discontinued products. The kiosk features an array of GOLDEN BOOK(Registered) storybooks and products, and will be used as a model for similar factory outlet kiosks in other locations. The Company is currently scheduled to open a kiosk in the Franklin Mills Mall in Philadelphia, PA in calendar 1995. International Sales Western Publishing Group, Inc.'s international sales in Fiscal 1995 were approximately 6% of net sales, the majority of which were derived through a Canadian subsidiary of Western Publishing Company, Inc., Western Publishing (Canada) Inc., and a sales, distribution and licensing division of Western Publishing Company, Inc. in the United Kingdom. The Canadian subsidiary serves the Canadian market and distributes Western Publishing Company, Inc. consumer products, as well as distributing toy and hobby products for other manufacturers. The operation located in London, England serves the United Kingdom and other European markets. Additionally, the Company has been expanding its export sales to its distributor in Australia as well as to customers in Spanish speaking countries including Mexico and South America. 8 Competition Although Western Publishing Company, Inc. has one of the largest shares of the market for children's story books and activity books, there are other major competitors in the industry, such as Random House, Inc., Simon & Schuster, Inc. and G.P. Putnam & Sons, a division of The Putnam Berkley Publishing Group, as well as many other publishers. There also are numerous competitors in the markets for FRAME-TRAY(Registered) puzzles and adult books marketed by Western Publishing Company, Inc. Competition is intense and is based primarily on price, quality, distribution, advertising and licenses. In addition, Western Publishing Company, Inc. competes for a share of consumer spending on juvenile entertainment and educational products against companies that market a broad range of other products for children. Western Publishing Company, Inc. believes that its specialized manufacturing equipment for many of its products results in lower production costs and its integrated production facilities provide it with greater flexibility in the timing and volume of its production of inventory. Its large market share in most of the product lines in which it competes gives it greater economies of scale in producing, marketing, selling and distributing those products. Penn Corporation has many major competitors in the paper tableware, gift wrap and stationery industries, including Hallmark Cards, Inc., American Greetings Corp., James River Corp., Unique Industries, Inc., and Amscan, Inc. Trademarks Western Publishing Company, Inc. has numerous registered trademarks and service marks in the United States and other countries, including for various uses LITTLE GOLDEN BOOKS(Registered), GOLDEN BOOKS(Registered), GOLDEN PRESS(Registered), SIGHT & SOUND(Registered), GOLDEN SOUND STORY(Registered), ARTISTS & WRITERS GUILD(Registered), STEP AHEAD(Registered), MERRIGOLD(Registered), GOLDEN SEEK 'N' SOUND(Registered), GOLDEN TALKING TALES(Registered), GOLDEN SING-A-LONG(Registered), GOLDEN BOOK 'N' TAPE(Registered), PAINT WITH WATER(Registered) and WHITMAN(Registered). Western Publishing Company, Inc. believes that the GOLDEN BOOK(Registered) trademark is material to the conduct of its business. Western Publishing Company, Inc. also has registered trademarks for MAGIC SLATE(Registered), its well-known children's activity product, STICKER FUN(Registered), its children's activity books, FRAME-TRAY(Registered), its popular children's puzzles and WHITMAN(Registered), its line of products for coin collecting enthusiasts. Western Publishing Company, Inc. has certain patents, some of which are material to the conduct of its business. Penn Corporation has several registered trademarks in the United States, including BEACH(Registered), CONTEMPO(Registered) and RENNER DAVIS(Registered). Inventory; Returns; Backlog Both Western Publishing Company, Inc. and Penn Corporation have their own production capabilities and do not rely to any material extent on suppliers for their finished product inventory needs, except for a limited number of products that they do not self-manufacture. Western Publishing Company, Inc. continues to maintain a high level of finished goods inventory to support the just-in-time nature of its business and fulfill its customer service requirements (see Management's Discussion and Analysis on page 19 for a discussion of inventory). Under certain circumstances, when Company approval is secured in advance, a customer may return saleable merchandise. Both companies provide payment terms standard in their respective industries. Backlog is not meaningful to either company's business. 9 Regulation Some of Western Publishing Company, Inc.'s products must comply with the child safety laws which, in general, prohibit the use of materials that might be hazardous to children. Western Publishing Company, Inc. maintains its own materials testing laboratory to assure the quality and safety of its products. Western Publishing Company, Inc. has experienced no difficulty and incurred no material costs in complying with these laws. Certain of Penn Corporation's tableware products are subject to regulations of the Food and Drug Administration and the Company has experienced no difficulty and has incurred no material costs in complying with these regulations. COMMERCIAL PRODUCTS SEGMENT Western Publishing Company, Inc., through its Diversified Products Division, provides creative, printing and publishing services to others. Western Publishing Company, Inc. groups these activities into three business categories: graphic art services and commercial printing; educational kit manufacturing and custom publishing services. During calendar 1994, the Diversified Products Division refocused its business emphasis to better utilize its core manufacturing competencies and creative resources. Graphic Art Services and Commercial Printing A substantial portion of Western Publishing Company's graphic services and commercial printing business is concentrated in the printing of books, industrial manuals, catalogs, maps and promotional materials. Western Publishing Company, Inc. also engages in commodity printing (such as tax instruction booklets and tax forms), which business usually is obtained on a competitive bid basis and is generally produced when the Company has production capacity available. Customers include Parachute Press, Inc., Bantam Doubleday Dell Publishing Group, Grass Roots Publishing, Inc., International Bible Society, American Bible Society, Random House, Inc., World Pog Federation, Ralston Purina Company, General Motors Corp., American Greetings Corp. and The Walt Disney Company. Educational Kit Manufacturing Educational kit manufacturing includes the development, printing, sourcing, packaging and assembly of as many as 200 different components for one kit. Western Publishing Company, Inc. has produced educational kits for the nation's foremost educational publishers, including Scott Foresman & Company, World Book, Inc., Houghton Mifflin Company, Harcourt Brace & Co., Macmillan/McGraw-Hill School Publishing Company, Grolier, Inc. and IBM Corp. Custom Publishing Custom Publishing(Registered) includes the creation, design, production, assembly and distribution for major consumer products and fast food companies of customized products for their marketing and promotional programs. Recent Custom Publishing(Registered) customers include Long John Silver's, Inc., Planters Lifesavers Co., Mars Inc., Wendy's International, Inc., Mattel, Inc., Toys 'R' Us, Inc., Pizza Hut Inc., Continental Airlines Corp., American Airlines, Inc. and Payless Shoe Source. Custom Publishing(Registered) utilizes the complete creative capabilities of Western Publishing Company, Inc., as well as its marketing, art, editorial, rights and royalty and product engineering groups. 10 Marketing and Competition Western Publishing Company, Inc.'s Diversified Products services are sold by approximately 40 employee sales representatives located in field sales offices throughout the United States. Western Publishing Company, Inc. utilizes its Consumer Products resources and relationships to assist in the marketing of its Diversified Products services. Competition, which is based upon formats, price, quality and delivery, is intense, particularly in the graphic art and commercial printing businesses. Western Publishing Company, Inc. has several unique manufacturing processes and creative resources which enhance its competitive position in the marketplace. Western Publishing Company, Inc. competes in this area with numerous companies, the largest of which is R.R. Donnelly & Sons Company. GENERAL INFORMATION Seasonality Western Publishing Group, Inc. experiences seasonality, particularly in its Consumer Products segment, with highest revenues in the third fiscal quarter. Western Publishing Company, Inc. generally uses certain of its production facilities that are not being fully utilized by its Consumer Products segment for its graphic art and commercial printing activities, thereby somewhat reducing the seasonality of Western Publishing Company, Inc.'s overall business. However, revenues in the second half of the Company's fiscal year were approximately 57% of Fiscal 1995 revenues. Raw Materials Both Western Publishing Company, Inc. and Penn Corporation use a wide variety of paper, plastic, inks and other raw materials in the manufacture of their products. Neither Western Publishing Company, Inc. nor Penn Corporation is dependent on any one supplier for any raw material. However, due to increased industry-wide demand, Western is experiencing price increases and has experienced some difficulty in obtaining certain grades of paper from time to time. Western does not anticipate any interruption in its business because of current conditions. Employees Western Publishing Group, Inc. employs in the aggregate approximately 2,800 full-time employees and 550 part-time employees. Approximately 900 employees are represented by labor unions. In Fiscal 1995, Western Publishing (Canada), Inc. negotiated a new three-year contract with the International Automobile Workers Union on terms it considers satisfactory. Western Publishing Company, Inc. and Penn Corporation believe that their relations with their employees are generally good. ITEM 2. PROPERTIES Western Publishing Company, Inc.'s facilities are designed principally for the manufacture of products of its Consumer Products and Diversified Products Divisions. Western Publishing Company, Inc. devotes substantial resources to maintain its facilities in good operating condition and, where appropriate, to improve facilities so that they are cost efficient and competitive in the principal markets in which it competes. Western Publishing Company, Inc. has substantial sheetfed and web press manufacturing capacity in its Cambridge, MD and Racine, WI plants. Capacity utilization in these facilities, based on operating three shifts a day, five days a week, averaged approximately 58% in Fiscal 1995. 11 Penn Corporation's manufacturing facilities are designed solely for the manufacture of its products. These facilities are maintained in good operating condition and, where necessary, upgraded in line with business needs. Penn Corporation employs certain sophisticated machinery in its manufacturing facilities including napkin, table cover, paper plate and cup making machinery, color presses, a narrow web press, plate formers, table cover embosser/folders and Senning wrap-over machines at its BEACH(Registered)/CONTEMPO(Registered) Division; and paper cutting, scoring, box erecting and envelope making machinery at its RENNER DAVIS(Registered) Division. Certain information as to the significant properties used by Western Publishing Company, Inc. and Penn Corporation in the conduct of their businesses is set forth in the following table: Location Square Feet Type of Use - -------- ----------- ----------- Racine, WI 960,000 Corporate, creative and marketing offices; printing and warehousing facilities Coffeyville, KS 672,000 Warehousing and distribution Crawfordsville, IN 403,000 Warehousing and distribution Cambridge, MD 200,000 Printing; warehousing Cambridge, 148,000 Canadian corporate offices; sales offices; Ontario, Canada warehousing and distribution Kalamazoo, MI 458,000 Corporate offices; manufacturing; warehousing and distribution W. Springfield, MA 41,000 Manufacturing; warehousing New York, NY 35,000 Publishing offices; sales offices All of these properties are owned by either Western Publishing Company, Inc. or Penn Corporation, except for two leases covering 438,000 square feet of the Wisconsin properties (leases expire August 31, 1995 and January 31, 1996 with Western Publishing Company, Inc. having options to renew with respect to these leases); two leases covering 90,000 square feet in Cambridge, MD, the first of which expires on September 30, 1995 and the second of which is on a month to month basis; two leases covering 60,000 square feet in Coffeyville, KS which expired April 30, 1994, and are leased on a month to month basis; one lease covering the Massachusetts property (lease expires May 31, 1995 with Penn Corporation having an option to renew); and a lease covering a New York property (lease expires December 31, 2003). All of these properties, except for West Springfield, MA; Kalamazoo, MI and Canadian locations are employed in both the Consumer Products and Commercial Business segments; the West Springfield, MA; Kalamazoo, MI and Canadian properties are used solely in the Consumer Products business segment. In addition to the properties described above, Western Publishing Company, Inc. and Penn Corporation own or rent various other properties that are used for administration, sales offices and warehousing. Western Publishing Group, Inc. believes that, in general, its plants and equipment are well maintained, in good operating condition and adequate for its present needs. Western Publishing Group, Inc. regularly upgrades and modernizes its facilities and equipment. Capital additions were approximately $19,300,000 in Fiscal 1995. 12 ITEM 3. LEGAL PROCEEDINGS Western Publishing Group, Inc. and its subsidiaries are parties to certain legal proceedings which are incidental to their ordinary business and none of which the Company believes will be material to Western Publishing Group, Inc. or its subsidiaries. Two subsidiaries of Western Publishing Group, Inc., Western Publishing Company, Inc. ("Western") and Penn Corporation ("Penn"), have been informed by the United States Environmental Protection Agency ("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 at seven sites that are currently undergoing investigation and/or remediation of environmental contamination. In all but one instance, the relevant subsidiary of Western Publishing Group, Inc. is one of a number of PRPs that have been identified by EPA or the relevant state agency with respect to the site. Western is investigating its alleged connection to three sites identified in the past year. With respect to one of those sites, Western has not yet discovered any information demonstrating that it shipped any material to this site. The state has identified approximately 100 PRPs at the site. With respect to the second recently identified site, the evidence of Western's involvement as set forth by Federal EPA in support of its claim is conflicting. At most, Western would have used the disposal site for only four of the 30 years that the site was in operation. The estimated cost of the selected remedy for the site is $7.4 million and the owner/operator has agreed to accept a 70% allocable share, leaving the approximately 60 generator PRPs (including Western) with the remaining 30% share. At the third recently identified site, the PRP is in the process of negotiating with the Wisconsin Department of Natural Resources ("WDNR") to resolve its liability at the site. Based on current information, the drum removal action proposed by WDNR, if accepted by Western will cost in the range of $100,000 to $200,000. At another site, Western's liability pursuant to the terms of a consent decree is limited to approximately 4% of the total costs at the site. The current estimate of total costs is in the range of $22 million. In accordance with the consent decree, Western has provided for its share of the probable cleanup costs. A division of Penn Corporation has been identified as a PRP at a Michigan site. In September 1990, EPA approved a remedial action for this site that EPA estimated would cost $16.2 million. The PRP identified as the largest contributor to the site is conducting the cleanup, and has entered into settlements with approximately 225 other PRPs. This PRP filed a private cost recovery action against Penn Corporation and approximately 40 other PRPs in the U.S. District Court for the Western District of Michigan. The percentage of waste at the site attributed to Penn Corporation is approximately 1% or less of the total volume of waste shipped to the site, but Penn Corporation has not been able to reach a settlement with the plaintiff PRP. The litigation is currently in discovery. At the Hertel Landfill in Plattekill, New York, Western is one of five PRPs sued by EPA in 1994 for recovery of past EPA response costs. United States v. Western Publishing Company, Civil Action No. 94-CV-1247 (CGC\DNH) (N.D.N.Y.). In September 1991, EPA approved a remedial action for the Hertel Landfill site that had a present value cost of approximately $8 million. Currently, one of the PRPs is complying with an EPA unilateral administrative order requiring investigation and cleanup of the Site and is seeking contribution towards its cost from approximately 25 PRPs, including Western. At the time that order was issued, Western, as one of the recipients of the order, chose not to comply with the order, believing that it had sufficient cause not to comply. The 1994 action filed by the United States does not seek penalties or damages related to Western's decision not to comply with the EPA unilateral administrative order. At the current time, the PRPs have not allocated responsibility at this site. 13 Western also has been identified as a PRP at another site in New York State. Western and nine other PRPs received a notice letter from the State of New York regarding this site and is in the process of investigating that alleged use of this site for disposal. The State has incurred past oversight costs of at least $500,000 in connection with this site and has sought to recover a portion of those costs from Western. In addition, there may be future monitoring costs associated with this site, but the amount of these costs is presently not known. Western and Penn are actively pursuing resolution of the aforementioned matters. Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, the cost can be reasonably estimated and the Company's responsibility is established. While it is not feasible to predict or determine the outcome of these proceedings, it is the opinion of management that their outcome, to the extent not provided for through insurance or otherwise, will not have a materially adverse effect on the Company's financial position or future results of operations. Western Publishing Group, Inc. believes that certain of its insurance policies may cover these claims and is currently litigating against its insurers for coverage. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT NAME AGE POSITION(S) - ---- --- ----------- Glenn R. Albrecht 58 Senior Vice President-Logistics and Distribution of Western Publishing Company, Inc. Bruce A. Bernberg 51 Senior Vice President-Finance and Administration of Western Publishing Company, Inc. Richard A. Bernstein 48 Director, Chairman and Chief Executive Officer of Western Publishing Group, Inc.; Chairman of Western Publishing Company, Inc.; Chairman, President and Chief Executive Officer of Penn Corporation James A. Cohen 49 Senior Vice President-Legal Affairs and Secretary of Western Publishing Group, Inc.; Senior Vice President-Legal Affairs and Secretary of Western Publishing Company, Inc. and Vice President-Legal Affairs and Secretary of Penn Corporation. Ira A. Gomberg 51 Vice President-Business Development and Corporate Communications of Western Publishing Group, Inc.; Vice President of Western Publishing Company, Inc.; Vice President of Penn Corporation Dale Gordon 47 Vice President and General Counsel of Western Publishing Group, Inc.; Western Publishing Company, Inc. and Penn Corporation 14 Steven M. Grossman 34 Executive Vice President, Treasurer and Chief Financial Officer of Western Publishing Group, Inc.; Executive Vice President and Treasurer of Western Publishing Company, Inc.; Executive Vice President, Treasurer and Chief Financial Officer of Penn Corporation. Ilan Reich 40 Vice President-Special Projects of Western Publishing Group, Inc. Laurence Usdin 52 Vice President and Corporate Controller of Western Publishing Group, Inc.; Vice President and Assistant Secretary of Western Publishing Company, Inc. Hal B. Weiss 38 Vice President and Assistant Treasurer of Western Publishing Group, Inc. Mr. Albrecht has been Senior Vice President-Logistics and Distribution of Western Publishing Company, Inc. since March 24, 1994. Prior to that, Mr. Albrecht had been Senior Vice President - Manufacturing & Distribution from May 24, 1991 to March 23, 1994. From August 1986 to May 1991, Mr. Albrecht had been Vice President of Manufacturing. Mr. Albrecht joined Western Publishing Company, Inc. in a manufacturing management capacity in 1973. Prior to being appointed Vice President, Mr. Albrecht held a succession of manufacturing management positions. Mr. Albrecht is a board member of the Racine United Way, a director of Printing Industries of Wisconsin and a director of the Racine Area Manufacturers Association. Mr. Bernberg has been Senior Vice President-Finance and Administration of Western Publishing Company, Inc. since May 1987. Mr. Bernberg joined Western Publishing Company, Inc. as Vice President, Finance in 1982 and was elected Chief Financial Officer in 1984. Mr. Bernberg is a director of St. Mary's Medical Center and St. Luke's Hospital in Racine, Wisconsin. Mr. Bernstein has been Chairman and Chief Executive Officer of Western Publishing Group, Inc. and Chairman of Western Publishing Company, Inc. since February 1984. From 1984 to August 1989, Mr. Bernstein was also President of Western Publishing Group, Inc. In November 1986, Mr. Bernstein became Chairman, President and Chief Executive Officer of Penn Corporation. He is President of P&E Properties, Inc., a private commercial real estate ownership/management company, and has been for more than five years. Mr. Bernstein is the sole shareholder of P&E Properties, Inc. He is a member of the Regional Advisory Board of Chemical Bank, a member of the Board of Trustees of New York University, a member of the Board of Overseers of the New York University Stern School of Business, a Director and Vice President of the Police Athletic League, Inc., a member of the Board of Trustees of New York University's Hospital for Joint Diseases/Orthopaedic Institute, a member of the Board of Directors of The Big Apple Circus, Inc., and a member of The Economic Club of New York. Mr. Cohen has been Senior Vice President-Legal Affairs and Secretary of Western Publishing Group, Inc. since December 1991 and a senior executive of P&E Properties, Inc. since February 1984. He became Senior Vice President-Legal Affairs & Secretary of Western Publishing Company, Inc. in January 1995. From February 1984 until December 1991 he was Vice President, General Counsel and Secretary of Western Publishing Group, Inc. In March 1987, Mr. Cohen became Secretary of Western Publishing Company, Inc. and in January 1993, Vice President-Legal Affairs of that company. In November 1986, Mr. Cohen became Secretary of Penn Corporation, in April 1987, Vice President and General Counsel, and in May 1991, Vice President-Legal Affairs and Secretary of that corporation. 15 Mr. Gomberg has been Vice President-Business Development and Corporate Communications of Western Publishing Group, Inc. since February 1986. In April 1987, Mr. Gomberg became a Vice President of Penn Corporation. In addition, he is a Vice President and Assistant Secretary of Western Publishing Company, Inc. Since February 1986, he has also been a senior executive of P&E Properties, Inc. From 1976 through January 1986, Mr. Gomberg was employed by Sony Corporation of America, a manufacturer and distributor of consumer electronic products, first as General Counsel and after November 1983 as Vice President-Government Affairs. Mr. Gordon joined Western Publishing Company, Inc. in August 1993 as Vice President and General Counsel. He became Vice President and General Counsel of Western Publishing Group, Inc. and Penn Corporation in January, 1994. From 1980 through July 1993 he was with Playboy Enterprises, Inc. in various legal/management positions, most recently as Vice President, Secretary and Associate General Counsel. Mr. Grossman has been Executive Vice President, Treasurer and Chief Financial Officer of Western Publishing Group, Inc. since June 1994. Prior to that, Mr. Grossman was Vice President-Financial Planning. Since July, 1992, he has also been an employee of P & E Properties, Inc. From August 1983 to July 1992 Mr. Grossman was with the public accounting firm of Deloitte & Touche. He is a Certified Public Accountant licensed in the State of New York. Mr. Reich has been Vice President-Special Projects of Western Publishing Group, Inc. since October 1992. Since December, 1987 he has also been an employee of P&E Properties, Inc. Mr. Usdin has been Vice President, Corporate Controller of Western Publishing Group, Inc. since August 1990. Mr. Usdin joined Western Publishing Group, Inc. in 1989 as Corporate Controller. From 1988 to 1989, Mr. Usdin was Vice President-Finance of New American Shoe Company, Inc. and from 1982 to 1988 he was Vice President-Finance and Corporate Controller of Ziff Communications Company. From 1973 to 1982 he was associated with Mego International, Inc. in several financial positions, including Senior Vice President-Finance. Mr. Usdin is a Certified Public Accountant. He serves on the Advisory Board to Pace University's Masters of Science in Publishing program. Mr. Weiss has been Vice President and Assistant Treasurer of Western Publishing Group, Inc. since August 1990. From April 1986 until July 1990, Mr. Weiss was Controller and Assistant Treasurer of Western Publishing Group, Inc. and from November 1986 until July 1989 he was Controller of Penn Corporation. In addition, Mr. Weiss has been Controller of P&E Properties, Inc. since 1985. Mr. Weiss is a Certified Public Accountant. Prior to joining Western Publishing Group, Inc. in 1985, Mr. Weiss practiced public accounting at the firm of Turner, Imowitz and Company. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCKHOLDERS' INFORMATION COMMON STOCK PRICES Western Publishing Group, Inc. completed an initial public offering of its Common Stock on April 22, 1986. The Common Stock is traded over-the-counter and is quoted on the NASDAQ National Market System (symbol WPGI). The following table sets forth the range of prices (which represent actual transactions) by quarter as provided by the National Association of Securities Dealers, Inc. Fiscal Year Ended January 28, 1995 - -------------------------------------------- High Low First Quarter 20 1/4 11 Second Quarter 12 7/8 9 5/8 Third Quarter 14 1/8 10 Fourth Quarter 12 5/8 9 1/4 Fiscal Year Ended January 29, 1994 - -------------------------------------------- High Low First Quarter 18 1/2 13 1/4 Second Quarter 17 3/8 13 3/8 Third Quarter 16 3/4 13 3/8 Fourth Quarter 20 1/4 12 1/4 DIVIDEND POLICY Since its organization in 1984, Western Publishing Group, Inc. has not paid any cash dividends on its Common Stock. Management does not anticipate the payment of cash dividends on Common Stock in the foreseeable future (see Note 6 to the Company's Consolidated Financial Statements). 17 ITEM 6. SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991 (In Thousands Except For Per Share Data) INCOME STATEMENT DATA: REVENUES: Net sales $ 398,354 $ 613,464 $ 649,089 $ 552,360 $ 491,089 Royalties and other income 4,201 3,211 3,062 2,141 2,486 --------- --------- --------- --------- --------- Total revenues 402,555 616,675 652,151 554,501 493,575 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales 297,421 432,503 425,274 365,913 324,082 Selling, general and administrative 124,128 203,042 188,161 160,059 148,293 Gain on streamlining plan (20,352) Provision for write-down of Division (1,100) 28,180 --------- --------- --------- --------- --------- Total costs and expenses 400,097 663,725 613,435 525,972 472,375 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,458 (47,050) 38,716 28,529 21,200 INTEREST EXPENSE 17,567 16,270 10,358 6,255 7,533 --------- --------- --------- --------- --------- (LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (15,109) (63,320) 28,358 22,274 13,667 PROVISION (BENEFIT) FOR INCOME TAXES 2,470 (22,295) 10,860 8,580 5,650 --------- --------- --------- --------- --------- (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (17,579) (41,025) 17,498 13,694 8,017 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (14,800) --------- --------- --------- --------- --------- NET (LOSS) INCOME $ (17,579) $ (55,825) $ 17,498 $ 13,694 $ 8,017 ========= ========= ========= ========= ========= (LOSS) INCOME PER COMMON SHARE: Before cumulative effect of change in accounting principle $ (.88) $ (1.99) $ .80 $ .62 $ .34 Cumulative effect of change in accounting principle (.71) --------- --------- --------- --------- --------- NET (LOSS) INCOME $ (.88) $ (2.70) $ .80 $ .62 $ .34 ========= ========= ========= ========= ========= BALANCE SHEET DATA (AT PERIOD END): Working capital $ 227,990 $ 332,979 $ 283,101 $ 106,556 $ 95,474 Total assets 428,806 505,116 508,585 390,965 331,740 Long-term debt 149,828 229,812 179,797 Convertible preferred stock 9,985 9,985 9,985 9,985 9,985 Common stockholders' equity 140,794 158,673 215,246 199,393 186,857
The selected financial data should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere herein. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fiscal Year Ended January 28, 1995 (Fiscal 1995) Compared to Fiscal Year Ended January 29, 1994 (Fiscal 1994) On May 12, 1993, the Company established a provision, including operating losses through the expected disposition date, to write-down the assets of the Advertising Specialty Division of its Penn Corporation subsidiary to net realizable value. Further, on April 7, 1994, the Company announced the adoption of a plan (the "Plan" or "streamlining plan") designed to improve its competitive position and reduce its operating cost structure through the sale, divestiture, consolidation or phase out of certain operations, properties and products, and a reduction in its management, administrative and direct labor workforces. The Plan included the sale of the game and puzzle operation, the exit from direct marketing continuity clubs and school book club businesses, the closure and sale of the Company's Fayetteville, North Carolina manufacturing and distribution facility and streamlining the Company's publishing business so as to focus on its core competencies. Therefore, subsequent to the Company's quarter ended May 1, 1993, the results of operations do not include the results of the Advertising Specialty Division and subsequent to January 29, 1994, the results of operations do not include the results of those businesses and facilities sold or closed as part of the Plan. During the year ended January 28, 1995, the game and puzzle operation was sold to Hasbro, Inc. for cash proceeds of $101.4 million; the sale of the Advertising Specialty Division was completed for cash proceeds of $14.0 million; the Direct Marketing Continuity Clubs business was sold for cash proceeds of $10.2 million and the Company completed the sale of its School Book Club business for cash proceeds of $4.3 million. Revenues for the year ended January 28, 1995 decreased $214.1 million (34.7%) to $402.6 million as compared to $616.7 million for the year ended January 29, 1994. Excluding revenues of the operations disposed of under the Plan, revenues decreased $76.3 million (15.9%) for the year ended January 28, 1995, as compared to the prior year. Consumer Products Segment revenues from ongoing operations decreased $68.7 million (16.6%) for the year ended January 28, 1995. The decline for the year resulted from lower sales of non-Western products after the management of the Books 'R' Us program at Toys 'R' Us was assumed by Toys 'R' Us at the beginning of fiscal 1995; lower sales of interactive electronic storybooks as the growth in new electronic storybook formats was offset by original formats approaching maturity; and the continued reductions in retailers' on-hand inventories, resulting in a slower order rate for restocking and future orders. Additionally, the decrease for the year was further impacted by the decline in domestic consumer product sales caused by distractions resulting from the previously contemplated sale of the Company; market uncertainties and employee concerns associated with announced and implemented overhead reduction measures and the sales of certain of the Company's businesses as outlined in the Plan. Commercial product segment revenues (other than revenues of the Advertising Specialty Division), which are comprised of printing services, decreased $7.6 million (11.7%) for the year ended January 28, 1995. The decline for the year was due to decreases in sales of kits, services to third party software developers and custom publishing. Price increases in the Consumer Products Segment were approximately 3%. Sales of printing services are the result of individual agreements entered into with customers as to price and services performed. Accordingly, the effects on inflation cannot be determined on the sales of printing services. Income before interest expense and income taxes for the year ended January 28, 1995 was $2.5 million as compared to a loss of $47.1 million for the year ended January 29, 1994. This improvement of $49.6 million was the result of a $20.4 million gain on streamlining plan, a $1.1 million reduction to the Company's previously recorded provision for write-down of the Advertising Specialty Division, a $78.9 million decrease in selling, general and administrative expenses and a $79.0 million decrease in gross profit. In addition, operations for the year ended January 29, 1994 included a $28.2 million provision to write-down the carrying value of the assets of the Advertising Specialty Division to their estimated net realizable value. 19 Gross profit for the year ended January 28, 1995 was $105.1 million, as compared to $184.2 million for the year ended January 29, 1994, a decrease of 42.9%. As a percentage of revenues, the gross profit margin decreased to 26.1% for fiscal 1995 as compared to 29.9% for fiscal 1994. For ongoing operations, gross profit for fiscal 1995 decreased $32.3 million (23.5%) to $105.1 million, compared to $137.5 million in fiscal 1994. As a percentage of revenues, the gross profit margin decreased to 26.1% for fiscal 1995 as compared to 28.7% for fiscal 1994. In the Consumer Products Segment, gross profit of on-going operations decreased $32.3 million (24.7%) to $98.3 million for the year ended January 28, 1995, as compared to the year ended January 29, 1994. As a percentage of revenues, the Consumer Products Segment gross profit margin decreased to 28.5% for fiscal 1995 as compared to 31.5% for fiscal 1994. A substantial portion of the decrease in gross profit margin for the year arose from negative manufacturing variances due to lower production in response to the Company's continuing efforts to reduce inventories. Additionally, the decrease in gross profit margin was attributable to a change in product mix, which caused an increase in royalty costs and increased freight costs associated with category management and direct store shipment programs. In the Commercial Products Segment, the gross profit margin of printing services increased to 12.0% in fiscal 1995 from 10.7% in fiscal 1994. The increase for the year was due to a more favorable product mix. Selling, general and administrative expenses for the year ended January 28, 1995 decreased $78.9 million (38.9%) to $124.1 million as compared to $203.0 million for the year ended January 29, 1994. For ongoing operations, selling, general and administrative expenses for the year ended January 28, 1995 decreased $19.6 million (13.6%) to $124.1 million as compared to $143.7 million for the year ended January 29, 1994. The decrease was primarily attributable to decreased sales promotion costs, including the costs of corrugated displays and co-op advertising, and reduced personnel and other costs resulting from the implementation of the Plan. Interest expense for the year increased $1.3 million to $17.6 million as compared to $16.3 million in fiscal 1994. While the increase was due to higher interest rates, it was substantially offset by increased earnings from invested cash balances of $1.2 million. Total average outstanding debt decreased to $221.3 million for the year from $248.7 million for the previous year (see Financial Condition, Liquidity and Capital Resources), while average interest rates increased from 6.6% to 7.9%. The increase in average interest rates resulted primarily from the increase in short term rates. The Company's income tax provision for fiscal 1995 includes income taxes resulting from the streamlining plan gain, the adjustment of the provision for write-down of Division and an effective income tax benefit rate of 16.0% from operations. The effective income tax benefit rate from operations is significantly below the federal statutory rate due to losses incurred during the year for which no tax benefit has been recognized, partially offset by permanent differences relating to the sale of the Advertising Specialty Division. Profitable operating results in subsequent years will benefit from an income tax provision rate which will be lower than the statutory rate due to the reinstatement of deferred tax assets for which a valuation allowance was establishing in fiscal 1995. For the year ended January 29, 1994, the income tax benefit rate was 35.2%. The loss for the year ended January 28, 1995, before the streamlining plan gain and the adjustment of the provision for write-down of Division was $30.7 million or $1.50 per share, compared to a loss of $21.7 million or $1.07 per share, before the provision for write-down of Division and the cumulative effect of a change in accounting principle (postretirement benefits other than pensions), for the year ended January 29, 1994. During the year, the Company recorded a streamlining plan gain of $20.4 million ($12.4 million, net of income taxes) or $.59 per share and adjusted its provision for write-down of Division by $1.1 million ($.8 million, net of income taxes) or $.03 per share. Therefore, the net loss for the year ended January 28, 1995 was $17.6 million or $.88 per share. During the year ended January 29, 1994, the Company adopted Statement of Financial Accounting Standards ("FASB") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", using the immediate recognition method. As a result, the Company recorded a non-cash charge of $24.3 million ($14.8 million, net of income taxes) or $.71 per share as a cumulative effect of a change in accounting principle in the statement of operations. Further, the Company's provision for write-down of Division was $28.2 million ($19.3 million, net of income taxes) or $.92 per share. Therefore, the net loss for the year ended January 29, 1994 was $55.8 million or $2.70 per share. 20 Fiscal Year Ended January 29, 1994 (Fiscal 1994) Compared to Fiscal Year Ended January 30, 1993 (Fiscal 1993) Revenues for the year ended January 29, 1994 decreased $35.5 million (5.4%) to $616.7 million as compared to $652.2 million for the year ended January 30, 1993. On May 12, 1993, the Board of Directors of the Company directed management to review the operations of the Advertising Specialty Division of the Company's Penn Corporation subsidiary and evaluate various strategic alternatives, including its disposition. Therefore, subsequent to the Company's first quarter ended May 1, 1993, the results of operations do not include the results of this Division. Excluding revenues of the Advertising Specialty Division for both periods, revenues decreased $7.6 million (1.2%) for the year ended January 29, 1994, as compared to the prior year. Consumer Products Segment revenues decreased $7.4 million (1.4%) for the year ended January 29, 1994. The decrease was primarily due to decreases in domestic consumer product sales and the negative effect of foreign currency rates with respect to the Company's international sales during the year. The decline in domestic consumer product sales was primarily the result of out-of-stock conditions of fast moving titles and late availability of new product introductions, partially offset by increased sales from category management programs. Commercial product segment revenues, other than revenues of the Advertising Specialty Division, is comprised of printing services which decreased $.3 million (.4%) for the year ended January 29, 1994. The decline for the year was due to a decrease in sales of graphic products, offset by increases in the sale of kits and custom publishing. Price increases in the Consumer Products Segment were approximately 5%. Sales of printing services are the result of individual agreements entered into with customers as to price and services performed. Accordingly, the effects on inflation cannot be determined on the sales of printing services. The loss before the provision for write-down of Division, interest expense, income taxes and the cumulative effect of a change in accounting principle for the year ended January 29, 1994 was $18.9 million as compared to income of $38.7 million for the year ended January 30, 1993. This decrease of $57.6 million was the result of a $42.7 million decrease in gross profit and a $14.9 million increase in selling, general and administrative expenses. In addition, the Company recorded a $28.2 million provision to write-down the carrying value of the assets of the Advertising Specialty Division to their estimated net realizable value. Gross profit for the year ended January 29, 1994 was $184.2 million, as compared to $226.9 million for the year ended January 30, 1993, a decrease of 18.8%. As a percentage of revenues, the gross profit margin decreased to 29.9% for fiscal 1994 as compared to 34.8% for fiscal 1993. In the Consumer Products Segment, gross profit decreased $33.5 million (16.0%) to $176.4 million for the year ended January 29, 1994, as compared to the year ended January 30, 1993. As a percentage of revenues, the Consumer Products Segment gross profit margin decreased to 32.0% for fiscal 1994 as compared to 38.5% for fiscal 1993. A substantial portion of the decrease in gross profit margin was due to lower production in response to higher average inventories, resulting in negative manufacturing variances. Additionally, the decrease in gross profit was attributable to an unfavorable change in product mix, increased inventory obsolescence, increased freight costs associated with category management programs and increased storage costs incurred in conjunction with higher average inventories. In the Commercial Products Segment, the gross profit margin of printing services decreased to 11.3% in fiscal 1994 from 11.9% in fiscal 1993. The decrease was primarily due to the change in sales mix to lower margin services, partially offset by a reduction in unfavorable manufacturing variances. Selling, general and administrative expenses for the year ended January 29, 1994 increased $14.9 million (7.9%) to $203.0 million as compared to $188.2 million for the year ended January 30, 1993. Consumer Products Segment increases were primarily attributable to increased costs for the expansion of the in-store retail merchandising force and category management programs of $11.4 million, increased creative costs and increased general and administrative expenses (including the annual costs of postretirement benefits, other than pension costs), offset by a decrease in consumer advertising. Interest expense for the year increased $5.9 million to $16.3 million as compared to $10.4 million in fiscal 1993. The increase was due to higher average debt outstanding and higher interest rates. Total average outstanding debt increased to $248.7 million in fiscal 1994 from $168.4 million in fiscal 1993 (see Financial Condition, Liquidity and Capital Resources), while average interest rates increased to 6.6% for fiscal 1994 as compared 21 to 6.1% for fiscal 1993. The increase in average interest rates resulted primarily from the issuance of $150 million, 10 year maturity, 7.65% Senior Notes in September, 1992. The effective income tax benefit rate was 35.2% in fiscal 1994, as compared to an income tax rate of 38.3% in fiscal 1993. The change in effective tax rate is primarily the result of the inability to utilize loss carrybacks against state taxes, resulting in a lower state income tax benefit in fiscal 1994. This was offset by the 1% increase in the Federal statutory rate. The loss for the year ended January 29, 1994, before the provision to write-down of Division and the cumulative effect of a change in accounting principle (postretirement benefits other than pensions) was $21.7 million or $1.07 per share, compared to income of $17.5 million or $.80 per share for the year ended January 30, 1993. During the first quarter of fiscal 1994, the Company adopted FASB No. 106, using the immediate recognition method. As a result, the Company recorded a non-cash charge of $24.3 million ($14.8 million, net of income taxes) or $.71 per share as a cumulative effect of a change in accounting principle in the statement of operations. The Company's provision for write-down of Division was $28.2 million ($19.3 million, net of income taxes) or $.92 per share. Therefore, the net loss for the year was $55.8 million or $2.70 per share. Effects of Inflation For fiscal 1993, fiscal 1994 and the first three quarters of fiscal 1995, the Company's raw material costs, principally paper, remained relatively stable. During the fourth quarter of fiscal 1995, the Company experienced paper price increases due to increased demand, decreases in imported paper and an overall reduction in industry capacity. Management believes that paper price increases will continue to impact on its production throughout fiscal 1996, a portion of which will be recouped through price increases and product specification changes. Financial Condition, Liquidity and Capital Resources Operations for the year ended January 28, 1995, excluding the streamlining plan gain, the adjustment of the provision for write-down of Division, and non-cash charges for depreciation, amortization and the provision for losses on accounts receivable utilized cash of approximately $26.0 million. The operations for the year ended January 29, 1994, excluding non-cash charges for depreciation, amortization, provision for losses on accounts receivable, the adoption of FASB No. 106 and the provision for the write-down of Division, provided cash of approximately $17.5 million. During the years ended January 28, 1995 and January 29, 1994, other changes in assets and liabilities, resulting from operating activities provided $39.7 million and used $32.0 million of cash, respectively, resulting in fiscal 1995 net cash provided by operating activities of $13.6 million and fiscal 1994 cash used in operating activities of $14.5 million. Acquisitions of property, plant and equipment were $19.3 million during the year ended January 28, 1995 as compared to $37.4 million during the year ended January 29, 1994. Fiscal 1995 capital expenditures include costs associated with the Company's new order processing, customer service and inventory management system, retail fixtures utilized in its category management programs and the completion of its third Golden Books Showcase store which opened in New York City in April 1994. The Company is currently finalizing its previously announced plans to undertake a facility expansion of its paper tableware and party goods operations in Kalamazoo, Michigan in conjunction with the Company's Plan to improve its competitive position and reduce its overall operating cost structure. Although the Company is committed to an expansion, no material contracts for this facility expansion have been executed. During the year ended January 28, 1995, the Company utilized cash for financing activities by repaying $48.0 million of outstanding borrowings under its Revolving Credit Agreement. Cash provided by financing activities during the year ended January 29, 1994 was primarily from borrowings of $50.0 million under the Company's Revolving Credit Agreement. 22 Working capital decreased to $228.0 million from $333.2 million at January 29, 1994. The decrease in working capital is due in part to the reclassification of the loans outstanding under the Revolving Credit Agreement at January 28, 1995 of $32.0 million as the Company's Revolving Credit Agreement expires on May 31, 1995. The balance of the decline is attributable to the repayment of borrowings under the Revolving Credit Agreement as a result of the completion of the Plan; lower accounts receivable resulting from asset sales, lower sales from ongoing operations and the planned reduction in inventories. Further, the completion of the Plan has had and will have a favorable effect on the Company's financial position, results of operations and future capital requirements. Annual operating cost savings associated with the Plan, exclusive of the impact of the sale of the game, puzzle, direct marketing and school book club operations, began to be realized in the second quarter of fiscal 1995. While the Company will continue to evaluate opportunities for additional cost savings, the Plan has been completed. As discussed in Note 6 to the Consolidated Financial Statements, in the first quarter of fiscal 1996 the Company repaid all outstanding notes under its Revolving Credit Agreement and the Agreement was terminated. The Company is currently in the process of negotiating with a number of financial institutions to arrange financing for its seasonal borrowing requirements, which are projected to be significantly reduced from historical levels. In the opinion of management, the Company will be able to negotiate an acceptable financing arrangement to meet these requirements. However, if the Company is unable to successfully negotiate an acceptable financing arrangement, management has developed alternative plans which could include the deferral of capital expenditures, the implementation of working capital management programs, and/or the sale of assets, resulting in a reduction in its peak seasonal needs. At January 28, 1995, the Company had available cash balances of approximately $85.4 million and outstanding notes under its Revolving Credit Agreement of $32.0 million. Accordingly, in the opinion of management, the implementation of the alternative plans, if necessary, will not materially impact planned operating levels. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedules on Page F-1. 24 CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter (In Thousands Except For Per Share Data) 1995 Net sales $ 67,308 $ 104,410 $ 129,269 $ 97,367 Gross profit 10,629 28,370 39,282 22,652 Net (loss) income (1) (14,017) (2,932) 5,383 (6,013) Net (loss) income per common share $ (.68) $ (.15) $ .25 $ (.30) Weighted average number of common shares 20,959 20,985 21,020 21,023 1994 Net sales $ 110,325 $ 130,988 $ 200,573 $ 171,578 Gross profit 33,765 40,785 63,999 42,412 (Loss) income before cumulative effect of change in accounting principle (2) (30,312) (3,966) 2,426 (9,173) Net (loss) income (2) (45,112) (3,966) 2,426 (9,173) (Loss) income per common share: Before cumulative effect of change in accounting principle $ (1.45) $ (.20) $ .11 $ (.45) Net (loss) income (2.16) (.20) .11 (.45) Weighted average number of common shares 20,950 20,957 20,959 20,959
(1) Includes gain on streamlining plan of $20,352 ($12,396, net of income taxes) which was recognized in the third quarter, as well as a reduction to the Company's previoulsy recorded provision for write-down of Division of $1,100 ($753, net of income taxes) which was recognized in the fourth quarter. (2) Includes provision for write-down of Division of $28,180 ($19,280, net of income taxes). The income tax impact of $8,900 was recorded as follows: $6,400 in the first quarter and $2,500 in the fourth quarter. 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for with respect to directors will be incorporated by reference to the information under "Business Experience of Nominees for Election as Directors" in the Registrant's Proxy Statement or Form 10-K-A to be filed on or prior to May 30, 1995. ITEM 11. EXECUTIVE COMPENSATION The information called for will be incorporated by reference to the information under "Executive Compensation" in the Registrant's Proxy Statement or Form 10-K-A to be filed on or prior to May 30, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for will be incorporated by reference to the information under "Stock Ownership of Principal Stockholders" and "Stock Ownership of Directors and Officers", respectively in the Registrant's Proxy Statement or Form 10-K-A to be filed on or prior to May 30, 1995. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for will be incorporated by reference to the information under "Certain Transactions" in the Registrant's Proxy Statement or Form 10-K-A to be filed on or prior to May 30, 1995. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) See Index to Consolidated Financial Statements and Schedules on Page F-1. 26 EXHIBITS 3.1 Restated Certificate of Incorporation of the Registrant dated March 11, 1986 (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement No 33-4127 on Form S-1 (the "Registration Statement")). 3.2 Certificate of Correction of the Certificate of Incorporation of the Registrant dated January 13, 1987 (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for fiscal year 1988 (the "1988 Form 10-K")). 3.3 Amendment to Certificate of Incorporation of Registrant as approved by a majority of the stockholders at the Annual Meeting of Stockholders held May 14, 1987 (incorporated by reference to Exhibit 3.3 to the 1988 Form 10-K). 3.4 Amendment to Certificate of Incorporation of Registrant as approved by a majority of the stockholders at the Annual Meeting of Stockholders held May 17, 1990 (incorporated by reference to Exhibit 3.4 to Registrant's Annual Report on From 10-K for fiscal year 1991 (the "1991 Form 10-K")). 3.5 By-laws of the Registrant (incorporated by reference to Exhibit 3.4 to the 1988 Form 10-K). 4.1 Form of certificate for shares of the Registrant's Common Stock (incorporated by reference to Exhibit 4.4 to the Registration Statement). 10.27 Lease dated January 15, 1985, between PG Investments and Western Publishing Company, Inc. with amendment dated January 22, 1986 (incorporated by reference to Exhibit 10.9 to the Registration Statement). 10.28 Amendment dated December 29, 1986, between PG Investments and Western Publishing Company, Inc. to the lease dated January 15, 1985, as amended (incorporated by reference to Exhibit 10.9 to the 1988 Form 10-K). 10.29 Amendment dated January 18, 1988, between PG Investments and Western Publishing Company, Inc. to the Lease dated January 15, 1985, as amended (incorporated by reference to Exhibit 10.10 to the 1988 Form 10-K). 10.30 Amendment dated August 25, 1988, between PG Investments and Western Publishing Company, Inc. to the Lease dated January 15, 1985, as amended (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for fiscal year 1989 (the "1989 Form 10-K")). 10.31 Amendment dated December 21, 1989, between PG Investments and Western Publishing Company, Inc. to the Lease dated January 15, 1985, as amended (incorporated by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year 1990 (the "1990 Form 10-K")). 10.33 Lease dated February 1, 1989, between Golden Press, Inc. and 850 Third Avenue LP (incorporated by reference to Exhibit 10.33 to the 1990 Form 10-K). 10.33a First Amendment Agreement dated as of February 3, 1993 (to lease dated February 1, 1989) between 850 Third Avenue LP and Golden Press, Inc., as modified by Letter Agreement dated February 3, 1993 (incorporated by reference to Exhibit 10.33a to the 1990 Form 10-K). 10.34 Lease dated November 9, 1992 between 200 Fifth Avenue Associates and Western Publishing Company Inc. 10.35 Warehouse Lease Agreement - Indenture dated as of April 15, 1987, between Cambridge Terminal Warehouse and Western Publishing Company, Inc. (incorporated by reference to Exhibit 10.21 to the 1988 Form 10-K). 27 10.36 Lease Amendment dated March 17, 1989, between Cambridge Terminal Warehouse and Western Publishing Company, Inc. to the Warehouse Lease Agreement - Indenture dated as of April 15, 1987 (incorporated by reference to Exhibit 10.36 to the 1990 Form 10-K). 10.37 Lease dated May 1, 1987, between West Springfield Industrial Center, Inc. and Penn Corporation (incorporated by reference to Exhibit 10.23 to the 1988 Form 10-K). 10.40 Golden Comprehensive Security Program, as amended and restated, effective January 1, 1993 (incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year 1993 (the "1993 Form 10-K")). 10.41 First Amendment of Golden Comprehensive Security Program, as amended and restated, effective as of January 1, 1994. 10.53 Golden Retirement Savings Program, as amended and restated, effective as of January 1, 1993 (incorporated by reference to Exhibit 10.53 to the 1993 Form 10-K). 10.54 First Amendment of Golden Retirement Savings Program, as amended and restated, effective as of January 1, 1994. 10.63 Penn Corporation Comprehensive Security Program, effective January 1, 1987 (incorporated by reference to Appendix A to the Registrant's Registration Statement 33-18430 on Form S-8 (the "Penn Comprehensive Registration Statement")). 10.64 First Amendment of Penn Corporation Comprehensive Security Program, effective November 2, 1987 (incorporated by reference to Appendix A to the Penn Comprehensive Registration Statement). 10.65 Second Amendment of Penn Corporation Comprehensive Security Program, effective January 1, 1987 (incorporated by reference to Exhibit 10.36 to the 1988 Form 10-K). 10.66 Third Amendment of Penn Corporation Comprehensive Security Program, effective November 2, 1987 (incorporated by reference to Exhibit 10.37 to the 1988 Form 10-K). 10.67 Fourth Amendment of Penn Corporation Comprehensive Security Program, effective January 1, 1988 (incorporated by reference to Exhibit 10.48 to the 1989 Form 10-K). 10.68 Fifth Amendment of Penn Corporation Comprehensive Security Program, effective January 1, 1988 (incorporated by reference to Exhibit 10.49 to the 1989 Form 10-K). 10.69 Sixth Amendment of Penn Corporation Comprehensive Security Program, effective January 1, 1988 (incorporated by reference to Exhibit 10.50 to the 1989 Form 10-K). 10.70 Seventh Amendment of Penn Corporation Comprehensive Security Program, effective January 1, 1987, 1988 or 1989 as applicable (incorporated by reference to Exhibit 10.52 to the 1990 Form 10-K). 10.71 Eighth Amendment of Penn Corporation Comprehensive Security Program, effective October 18, 1989 (incorporated by reference to Exhibit 10.67 to the 1990 Form 10-K). 10.71a Ninth Amendment of Penn Corporation Comprehensive Security Program, effective July 1, 1991 (incorporated by reference to Exhibit 10.67 to the Registrant's Annual Report on Form 10-K for the fiscal year 1992 (the "1992 Form 10-K")). 10.71b Tenth Amendment of Penn Corporation Comprehensive Security Program effective April 1, 1993 (incorporated by reference to Exhibit 10.67 to the registrant's Annual Report on Form 10-K for fiscal year 1994 (the "1994 Form 10-K")). 10.71c Eleventh Amendment of Penn Corporation Comprehensive Security Program effective as of January 1, 1994. 28 10.72 Beach Products (Division of Penn Corporation) Retirement Savings Program, effective May 2, 1989 (incorporated by reference to Exhibit 10.72 to the 1992 Form 10-K). 10.73 First Amendment of Beach Products (Division of Penn Corporation) Retirement Savings Program, effective October 1, 1990 (incorporated by reference to Exhibit 10.73 to the 1992 Form 10-K). 10.74 Second Amendment of Beach Products (Division of Penn Corporation) Retirement Savings Program, effective October 17, 1991 (incorporated by reference to Exhibit 10.74 to the 1992 Form 10-K). 10.74a Third Amendment of Beach Products (Division of Penn Corporation) Retirement Savings Program, effective July 1, 1991 (incorporated by reference to Exhibit 10.73 to the 1993 Form 10-K). 10.74b Fourth Amendment of Beach Products (Division of Penn Corporation) Retirement Savings Program, effective April 1, 1993 (incorporated by reference to Exhibit 10.73 to the 1994 Form 10-K). 10.74c Fifth Amendment of Beach Products (Division of Penn Corporation) Retirement Savings Program, effective as of January 1, 1994. 10.75 Master Trust Agreement between the Registrant, Western Publishing Company, Inc., Penn Corporation and Bankers Trust Company, effective November 19, 1987 (incorporated by reference to Exhibit 10.38 to the 1988 Form 10-K). 10.76 Form of Agreement between the Registrant, Penn Corporation and certain employees of Penn Corporation relating to the award of shares of common stock of the Registrant, as adopted by the Board of Directors of the Registrant on May 1, 1987 (incorporated by reference to Exhibit 10.39 to the 1988 Form 10-K). 10.77 Amended and Restated 1986 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.40 to the 1988 Form 10-K). 10.78 Amendment dated April 11, 1989 to the Amended and Restated 1986 Employee Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.56 to the 1990 Form 10-K). 10.79 Employment Agreement dated the 24th day of April, 1990 between Western Publishing Group, Inc. and Frank P. DiPrima (incorporated by reference to Exhibit 10.72 to the 1991 Form 10-K). 10.80 Western Publishing Company, Inc.'s Executive Medical Reimbursement Plan dated January 1, 1991 (incorporated by reference to Exhibit 10.73 to the 1991 Form 10-K). 10.88 Credit Agreement dated as of November 12, 1992, providing up to $200 million, among the Registrant, Western Publishing Group, Inc. and a group of commercial banks (incorporated by reference to Exhibit 10.88 to the Form 10-Q for the quarter ended October 31, 1992). 10.89 Amendment No. 1 dated as of July 31, 1993, to the Credit Agreement dated as of November 12, 1992 (incorporated by reference to Exhibit 10.89 to the 1994 Form 10-K). 10.90 Amendment No. 2 dated as of October 30, 1993, to the Credit Agreement dated as of November 12, 1992 (incorporated by reference to Exhibit 10.90 to the 1994 Form 10-K). 10.91 Guarantee Agreement dated as of December 13, 1993, to the Credit Agreement dated as of November 12, 1992 (incorporated by reference to Exhibit 10.91 to the 1994 Form 10-K). 10.92 Amendment No. 3 dated as of May 13, 1994, to the Credit Agreement dated as of November 12, 1992 (incorporated by reference to Exhibit 10.92 to the 1994 Form 10-K). 29 10.93 Amended and Restated Credit Agreement dated as of May 31, 1994, providing up to $140 million, among the Registrant, Western Publishing Group, Inc. and a group of commercial banks. 10.94 Amendment No. 1 dated as of August 4, 1994, to the Amended and Restated Credit Agreement dated as of May 31, 1994. 10.95 Amendment No. 2 dated as of February 21, 1995, to the Amended and Restated Credit Agreement dated as of May 31, 1994. 10.96 Asset Purchase and Supply Agreement dated as of August 4, 1994 among Western Publishing Company, Inc., Western Publishing (Canada), Ltd., and Hasbro, Inc. 10.97 Agreement dated as of September 23, 1994 between Western Publishing Group, Inc. and George P. Oess. 21.1 List of Subsidiaries. 99.1 Financial Statements for the Golden Comprehensive Security Program. 99.2 Financial Statements for the Golden Retirement Savings Program. 99.3 Financial Statements for the Penn Corporation Comprehensive Security Program. 99.4 Undertaking incorporated by reference into Part II of certain registration statements on Form S-8 of the Registrant. b) Reports on Form 8-K. None. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: May 15, 1995 Western Publishing Group, Inc. By: /s/ Richard A. Bernstein ------------------------------------ Richard A. Bernstein, Chairman and Chief Executive Officer 31 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /S/ Richard A. Bernstein Chairman, Chief Executive May 15, 1995 - ------------------------------ Officer and Director Richard A. Bernstein (Principal Executive Officer) /S/ Steven M. Grossman Executive Vice President, May 15, 1995 - ------------------------------ Treasurer and Steven M. Grossman Chief Financial Officer (Principal Financial and Accounting Officer) /S/ Allan S. Gordon Director May 15, 1995 - ------------------------------ Allan S. Gordon /S/ Robert A. Bernhard Director May 15, 1995 - ------------------------------ Robert A. Bernhard /S/ Samuel B. Fortenbaugh, III Director May 15, 1995 - ------------------------------ Samuel B. Fortenbaugh, III /S/ Michael A. Pietrangelo Director May 15, 1995 - ------------------------------ Michael A. Pietrangelo /S/ Jenny Morgenthau Director May 15, 1995 - ------------------------------ Jenny Morgenthau 32 WESTERN PUBLISHING GROUP, INC AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements PAGE - -------------------- ---- Independent Auditors' Report F-2 Consolidated Balance Sheets as of January 28, 1995 and January 29, 1994. F-3 Consolidated Statements of Operations for the Years ended January 28, 1995, January 29, 1994 F-4 and January 30, 1993. Consolidated Statements of Common Stockholders' Equity for the Years Ended January 28, 1995, January 29, 1994 and January 30, 1993. F-5 Consolidated Statements of Cash Flows for the Years Ended January 28, 1995, January 29, 1994 and January 30, 1993. F-6 Notes to Consolidated Financial Statements. F-7 Schedule - -------- II - Valuation and Qualifying Accounts S-1 Schedules which are not included have been omitted because either they are not required or are not applicable or because the required information has been included elsewhere in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Western Publishing Group, Inc.: We have audited the accompanying consolidated balance sheets of Western Publishing Group, Inc. and subsidiaries as of January 28, 1995 and January 29, 1994, and the related consolidated statements of operations, common stockholders' equity and cash flows for each of the three years in the period ended January 28, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 28, 1995 and January 29, 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 13 to the consolidated financial statements, in fiscal 1994 the Company changed their method of accounting for postretirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin April 21, 1995 (May 6, 1995 as to Note 6) F-2 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 28, 1995 AND JANUARY 29, 1994 (In Thousands Except for Share and Per Share Data) ASSETS 1995 1994 CURRENT ASSETS: Cash and cash equivalents $ 85,406 $ 9,513 Accounts receivable 83,251 137,921 Inventories 108,738 121,178 Prepublication and prepaid advertising costs 7,3147,720 Royalty advances 2,221 2,970 Refundable income taxes 5,940 12,830 Deferred income taxes 10,676 20,823 Net assets held for sale 17,681 88,523 Other current assets 6,397 10,361 -------- -------- Total current assets 327,624 411,839 -------- -------- OTHER ASSETS: Deferred income taxes 3,210 1,439 Other noncurrent assets 10,834 11,008 -------- -------- Total other assets 14,044 12,447 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Cost: Land 1,022 1,013 Buildings and improvements 21,463 21,472 Machinery and equipment 96,317 76,874 Machinery and equipment in process of installation 4,188 9,242 -------- -------- 122,990 108,601 Less accumulated depreciation 47,325 41,351 -------- -------- Total property, plant and equipment 75,665 67,250 IDENTIFIED INTANGIBLES AND COST IN EXCESS OF NET ASSETS ACQUIRED (GOODWILL), less accumulated amortization of $19,173 and $17,066 11,473 13,580 -------- -------- TOTAL $428,806 $505,116 ======== ======== See notes to consolidated financial statements. LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 CURRENT LIABILITIES: Accounts payable $ 18,461 $ 40,532 Accrued compensation and fringe benefits 9,812 10,644 Notes payable to banks 32,000 Other current liabilities 39,111 27,684 -------- -------- Total current liabilities 99,384 78,860 NONCURRENT LIABILITIES: Long-term debt 149,828 229,812 Accumulated postretirement benefit obligation 26,894 25,949 Other 1,921 1,837 -------- -------- Total noncurrent liabilities 178,643 257,598 -------- -------- CONVERTIBLE PREFERRED STOCK - Series A, 20,000 shares authorized, no par value, 19,970 shares issued and outstanding; at mandatory redemption amount 9,985 9,985 -------- -------- COMMON STOCKHOLDERS' EQUITY: Common Stock, $.01 par value, 30,000,000 shares authorized, 21,232,074 and 21,167,324 shares issued 212 212 Additional paid-in capital 80,914 80,213 Retained earnings 64,287 82,714 Cumulative translation adjustments (1,797) (1,644) -------- -------- 143,616 161,495 Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822 -------- -------- Total common stockholders' equity 140,794 158,673 -------- -------- TOTAL $428,806 $505,116 ======== ======== F-3 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE YEARS ENDED JANUARY 28, 1995 (In Thousands Except for Per Share Data) 1995 1994 1993 REVENUES: Net sales $398,354 $613,464 $649,089 Royalties and other income 4,201 3,211 3,062 -------- -------- -------- Total revenues 402,555 616,675 652,151 -------- -------- -------- COSTS AND EXPENSES: Cost of sales 297,421 432,503 425,274 Selling, general and administrative 124,128 203,042 188,161 Gain on streamlining plan (20,352) Provision for write-down of Division (1,100) 28,180 -------- -------- -------- Total costs and expenses 400,097 663,725 613,435 -------- -------- -------- INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,458 (47,050) 38,716 INTEREST EXPENSE 17,567 16,270 10,358 -------- -------- -------- (LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (15,109) (63,320) 28,358 PROVISION (BENEFIT) FOR INCOME TAXES 2,470 (22,295) 10,860 -------- -------- -------- (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (17,579) (41,025) 17,498 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (14,800) -------- -------- -------- NET (LOSS) INCOME $(17,579) $(55,825) $ 17,498 ======== ======== ======== (LOSS) INCOME PER COMMON SHARE: Before cumulative effect of change in accounting principle $ (.88) $ (1.99) $ .80 Cumulative effect of change in accounting principle (.71) -------- -------- -------- Net (loss) income $ (.88) $ (2.70) $ .80 ======== ======== ======== See notes to consolidated financial statements. F-4 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY THREE YEARS ENDED JANUARY 28, 1995 (In Thousands Except for Share and Per Share Data)
Common Stock Additional Cumulative Treasury Stock ------------------- Paid-In Retained Translation ----------------- Shares Amount Capital Earnings Adjustments Shares Amount BALANCES, FEBRUARY 2, 1992 21,075,424 $211 $78,729 $122,737 $538 208,800 $2,822 Net income 17,498 Dividends on Preferred Stock - $42.50 per share (848) Exercise of stock options, including related income tax benefits 73,000 1,185 Translation adjustments (1,982) ------------ -------- -------- ---------- --------- --------- ------- BALANCES, JANUARY 30, 1993 21,148,424 211 79,914 139,387 (1,444) 208,800 2,822 Net loss (55,825) Dividends on Preferred Stock - $42.50 per share (848) Excercise of stock options, including related income tax benefits 18,900 1 299 Translation adjustments (200) ------------ -------- -------- ---------- --------- --------- ------- BALANCES, JANUARY 29, 1994 21,167,324 212 80,213 82,714 (1,644) 208,800 2,822 Net loss (17,579) Dividends on Preferred Stock - $42.50 per share (848) Exercise of stock options, including related income tax benefits 64,750 701 Translation adjustments (153) ------------ -------- -------- ---------- --------- --------- ------- BALANCES, JANUARY 28, 1995 21,232,074 $212 $80,914 $64,287 $(1,797) 208,800 $2,822 ============ ======== ======== ========== ========= ========= =======
See notes to consolidated financial statements. F-5 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED JANUARY 28, 1995 (In Thousands)
1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(17,579) $(55,825) $17,498 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 10,419 12,108 8,506 Amortization of intangibles arising from acquisition 3,457 4,888 4,798 Provision for losses on accounts receivable 472 5,662 5,855 Provision for write-down of Division (2,450) 26,405 Cumulative effect of change in accounting principle (before income tax benefit) 24,300 Gain on streamlining plan (20,352) (Gains) losses on sale of equipment (187) (26) 109 Other 2,001 1,330 720 Changes in assets and liabilities: Accounts receivable 54,174 (9,222) (29,669) Inventories 12,504 17,959 (62,088) Prepublication, prepaid advertising costs and royalty advances 1,189 1,229 (2,947) Net assets held for sale (37,719) Refundable income taxes 6,890 (12,830) Other current assets 3,954 (2,280) (4,041) Accounts payable (22,226) (1,087) (6,301) Accrued compensation and fringe benefits (1,122) (1,021) (625) Other current liabilities 11,839 (5,708) (2,827) Deferred income taxes 8,376 (20,340) 210 -------- -------- -------- Net cash provided by (used in) operating activities 13,640 (14,458) (70,802) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property, plant and equipment (19,307) (37,359) (23,704) Proceeds from streamlining plan 115,971 Proceeds from sale of Division 14,001 Proceeds from sale of equipment 225 119 281 Acquisition of rights to market games (1,125) Return of (investment in) joint venture 500 1,900 (1,600) -------- -------- -------- Net cash provided by (used in) 111,390 (35,340) (26,148) investing activities -------- -------- --------
See notes to consolidated financial statements. WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED JANUARY 28, 1995 (In Thousands)
1995 1994 1993 CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments) borrowings under Credit Agreement $(48,000) $50,000 $ 30,000 Proceeds from issuance of senior notes 149,792 Costs in connection with issuance of senior notes (1,440) Decrease in notes payable under bridge credit agreement (79,000) Proceeds from sale of Common stock (exercise of options) 656 300 1,049 Dividends paid on Preferred Stock (848) (848) (848) Other (941) (562) (870) -------- -------- -------- Net cash (used in) provided by financing activities (49,133) 48,890 98,683 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (20) (66) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 75,893 (928) 1,667 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,513 10,441 8,774 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 85,406 $ 9,513 $ 10,441 ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 16,663 $15,738 $ 6,590 Income taxes, net of refunds received (12,829) 6,124 13,556
F-6 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JANUARY 28, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Western Publishing Group, Inc., and its wholly-owned subsidiaries (the "Company"). Certain reclassifications have been made in the prior year financial statements to conform with the current year presentation. All significant intercompany transactions and balances are eliminated in consolidation. Fiscal Year - The fiscal year of the Company ends on the Saturday nearest January 31. Accordingly, fiscal 1995, 1994, and 1993 each contained 52 weeks. Cash and Cash Equivalents - The Company considers all highly liquid debt investments purchased with maturities of three months or less to be cash equivalents. Cash equivalents consist of investments in high grade commercial paper. Accordingly, these investments are subject to minimal credit and market risk. As of January 30, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this statement, the Company is required to classify cash equivalents into one or more of the following categories: held to maturity, trading, or available for sale. The adoption of this statement had no effect on the consolidated financial statements. At January 28, 1995, all of the Company's cash equivalents are classified as held to maturity and their carrying amounts approximate fair value. Inventories - Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out ("LIFO") method for substantially all domestic inventories. Inventories of international operations are valued using the first-in, first-out ("FIFO") method. At January 28, 1995 and January 29, 1994, approximately 93% of total inventories were valued under the LIFO method. Prepublication and Prepaid Advertising Costs - Prepublication costs (comprised principally of externally developed art, manuscript and editorial costs and internally or externally developed plate costs) are deferred. Such costs are amortized from the date of initial product sale, generally over a period of one year. Properties and Depreciation - Property, plant and equipment are stated at cost and depreciated on the straight-line method over the following estimated useful lives for financial statement purposes: Buildings and improvements 10-40 years Machinery and equipment 3-10 years F-7 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Expenditures which significantly increase value or extend useful lives are capitalized, while maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets replaced, retired or disposed of are eliminated from the property accounts, and any gain or loss is reflected in operations. Costs related to the development of information systems that are expected to benefit future periods are capitalized and amortized over the estimated useful lives of the systems. Identified Intangibles - Identified intangibles arising from the acquisition of Penn Corporation in fiscal 1987 are being amortized generally by accelerated methods over 15 years. Cost in Excess of Net Assets Acquired - The cost in excess of net assets acquired ("goodwill") arising from the acquisition of Penn Corporation is being amortized on the straight-line method over a 40-year period. Foreign Currency Translation - Foreign currency assets and liabilities are translated into United States dollars at end of period rates of exchange, and income and expense accounts are translated at the weighted average rates of exchange for the period. The gains and losses resulting from the translation adjustments have been accumulated as a separate component of common stockholders' equity. 2. SALE AND PHASE OUT OF OPERATIONS; PROVISION FOR WRITE-DOWN OF DIVISION; NET ASSETS HELD FOR SALE Sale and Phase Out of Operations On April 7, 1994, the Company adopted a plan (the "Plan") designed to improve its competitive position and reduce its cost structure through the sale, divestiture, consolidation or phase out of certain operations, properties and products, and a workforce reduction. The Plan included the following major components: o An agreement to sell the game and puzzle operation (including certain inventories) to Hasbro, Inc. ("Hasbro"). This transaction was completed on August 4, 1994 for cash proceeds of approximately $101,400,000. F-8 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) o The decision to exit the Direct Marketing Continuity Clubs and School Book Club businesses. The sale of the School Book Club business was consummated on July 1, 1994 for cash proceeds of approximately $4,300,000 and the sale of the Direct Marketing Continuity Club business was completed on October 7, 1994 for cash proceeds of approximately $10,200,000. o The closedown and sale of the Company's Fayetteville, North Carolina manufacturing and distribution facility, which was primarily dedicated to the game and puzzle operation but was not included in the sale to Hasbro. This facility is closed and is for sale. o The decision to streamline the Company's publishing business so as to focus on its core competencies. This included a reduction in the management, administrative and direct labor workforces. The net assets of the game, puzzle, direct marketing and school book club operations and the Fayetteville facility have been classified as net assets held for sale. The net cash proceeds arising from the Plan were utilized to repay outstanding debt under the Company's Revolving Credit Agreement. During the third quarter ended October 29, 1994, the Company recorded a net gain from the Plan of $20,352,000 ($12,396,000, net of income taxes), inclusive of operating losses of the game, puzzle, direct marketing and school book club operations from January 30, 1994 through their respective disposition dates. For fiscal 1994 and 1993 the game, puzzle, direct marketing and school book club operations had revenues of approximately $125,000,000, and $142,000,000, respectively. Provision for Write-Down of Division During fiscal 1994, the Company established a provision, including operating losses through the expected disposition date, of $28,180,000 ($19,280,000, net of income taxes) to write-down the assets of the Advertising Specialty Division of its Penn Corporation subsidiary to net realizable value. On August 5, 1994, the sale of the Ritepoint and Adtrend businesses of the Division was completed for cash proceeds of approximately $5,650,000. The sale of the Vitronic and K-Studio businesses of the Division was completed on November 7, 1994 for cash proceeds of approximately $8,350,000. As the proceeds from the sale of this Division exceeded management's estimate, the Company adjusted its previously recorded provision for write-down of Division by recognizing a gain of $1,100,000 ($753,000, net of income taxes) in the fourth quarter of fiscal 1995. The net cash proceeds from the sale of this Division were utilized to repay outstanding debt under the Revolving Credit Agreement. F-9 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revenues and losses before interest expense and income taxes of the Division, included in the accompanying consolidated statements of operations, exclusive of the provision for write-down, are as follows (subsequent to May 1, 1993, the consolidated statements of operations do not include the results of the Division): 1994 1993 (In thousands) Revenues $ 7,202 $ 35,037 ======= ======== Loss before interest expense and income taxes, exclusive of the provision for write-down $ 2,083 $ 4,635 ======= ======== Net Assets Held for Sale Net assets held for sale consisted of the following: 1995 1994 (In thousands) Current assets $ 2,181 $ 60,020 Property, plant and equipment, net 17,500 32,655 Other assets (primarily identified intangibles and goodwill), net 27,933 ------- -------- 19,681 120,608 Less: Current liabilities (2,000) (5,680) Provision for write-down, net of Division operations subsequent to May 1, 1993 (26,405) ------- -------- Net assets held for sale $17,681 $ 88,523 ======= ======== 3. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following: 1995 1994 (In thousands) Accounts receivable $94,790 $154,090 Allowance for doubtful accounts (4,067) (4,491) Allowance for returns (7,472) (11,678) ------- -------- $83,251 $137,921 ======= ======== F-10 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES Inventories consisted of the following: 1995 1994 (In thousands) Raw materials $ 9,934 $ 14,913 Work-in-process 19,900 28,783 Finished goods 78,904 77,482 -------- -------- $108,738 $121,178 ======== ======== At January 28, 1995 and January 29, 1994, the replacement cost of inventories valued using the LIFO method exceeded the net carrying amount of such inventories by approximately $9,200,000 and $8,890,000, respectively. 5. IDENTIFIED INTANGIBLES AND GOODWILL Identified intangibles and goodwill, all of which result from the acquisition of Penn Corporation in fiscal 1987, net of amortization, included in the accompanying consolidated balance sheets, were as follows: 1995 1994 (In thousands) Goodwill $ 5,928 $ 6,114 Identified intangibles: Customer lists 4,832 6,730 Other 713 736 ------- ------- $11,473 $13,580 ======= ======= 6. LONG-TERM DEBT Long-term debt consisted of the following: 1995 1994 (In thousands) Notes payable to banks $ 32,000 $ 80,000 7.65% Senior Notes ($150,000,000 face amount) due in 2002 149,828 149,812 -------- -------- 181,828 229,812 Less current portion 32,000 -------- -------- $149,828 $229,812 ======== ======== F-11 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company maintained an amended and restated revolving credit agreement dated May 31, 1994 as amended (the "Agreement"), with a group of commercial banks, which expires on May 31, 1995. On January 28, 1995, notes totalling $32,000,000 at a weighted average interest rate of 9.3% and letters of credit for inventory purchase commitments of approximately $920,000 were outstanding. During the first quarter of fiscal 1996, all outstanding notes were repaid and the Agreement was terminated. The Company is currently in the process of negotiating with a number of financial institutions to arrange financing for its seasonal borrowing requirements. In the opinion of management, the Company will be able to negotiate an acceptable financing arrangement to meet these requirements. However, if the Company is unable to obtain such financing, management has developed alternative plans which could include the deferral of capital expenditures, the implementation of working capital management programs, and/or the sale of assets, resulting in a reduction in its peak seasonal needs. On September 17, 1992, the Company completed an offering of $150,000,000 of 7.65% Senior Notes due September 15, 2002. Interest is payable semiannually on March 15 and September 15. There is no obligation to redeem, purchase or repay the Senior Notes prior to maturity. The Indenture covering the Senior Notes contains certain provisions limiting additional indebtedness, guarantees, liens and the payment of cash dividends on Common Stock. At January 28, 1995, there were no retained earnings available to pay dividends on Common Stock. Notes payable to banks at January 28, 1995 and January 29, 1994 under the Company's Revolving Credit Agreement approximate fair value, as the short-term interest rates on the then outstanding balances were reset in December 1994 and 1993, respectively. Western Publishing Group, Inc.'s 7.65% Senior Notes had a fair value of approximately $111,000,000 on January 28, 1995 and $142,000,000 on January 29, 1994, respectively, based on market interest rates. 7. OTHER CURRENT LIABILITIES Other current liabilities consisted of the following: 1995 1994 (In thousands) Royalties payable $ 6,320 $ 4,757 Advertising and promotion 3,828 8,507 Costs associated with streamlining plan 7,690 Other 21,273 14,420 ------- ------- $39,111 $27,684 ======= ======= F-12 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PREFERRED STOCK The Company has 100,000 authorized preferred shares, no par value, including 20,000 shares of Convertible Preferred Stock, Series A. The Convertible Preferred Stock has a dividend rate of 8.5% per annum. The conversion price is $24 per share. The stock is redeemable at the option of the Company at any time for $500 a share plus all dividends (whether or not earned or declared) accrued and unpaid to the date fixed for redemption. Western Publishing Group, Inc. is obligated to redeem the stock no later than March 31, 1996. There is no significant difference between the carrying amount and approximate fair value of the Convertible Preferred Stock. 9. EMPLOYEE STOCK OPTIONS In March 1986, the Company adopted a stock option plan, which as amended, provides for the granting of options to purchase up to 2,100,000 shares of Common Stock through 1996 to employees of the Company and its subsidiaries. Options granted through February 3, 1990 become exercisable two years after the date of grant (50%) and three years after the date of grant (50%). Options granted after February 3, 1990 but prior to June 21, 1994 become exercisable in their entirety five years after the date of grant. Options granted subsequent to June 21, 1994 (except as noted below) become exercisable on the date of grant (33 1/3%), one year after the date of grant (33 1/3%) and two years after the date of grant (33 1/3%). The following table includes options to purchase 55,000 shares of Common Stock which became exercisable on the date of grant and expire in 1997. Additionally, the table includes options to purchase 9,500 shares of Common Stock which become exercisable one year after the date of grant (33 1/3%), two years after the date of grant (33 1/3%), and three years after date of grant (33 1/3%) and expire in 2004. F-13 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following data is presented in connection with the stock option plan: Shares ------------------------------------ Outstanding Reserved Options Available -------- ------- --------- Balances, February 2, 1992 - $10.00 to $20.00 1,430,950 944,350 486,600 Granted - $15.50 to $17.25 207,000 (207,000) Cancelled - $10.00 to $20.00 (39,700) 39,700 Exercised - $10.00 to $16.75 (73,000) (73,000) ---------- --------- -------- Balances, January 30, 1993 - $10.00 to $20.00 1,357,950 1,038,650 319,300 Increase in authorization 600,000 600,000 Granted - $12.50 70,000 (70,000) Cancelled -$10.00 to $20.00 (91,000) 91,000 Exercised - $11.75 to $16.75 (18,900) (18,900) ---------- --------- -------- Balances, January 29, 1994 - $10.00 to $20.00 1,939,050 998,750 940,300 Granted - $11.50 to $12.75 871,650 (871,650) Cancelled - $10.00 to $20.00 (428,950) 428,950 Exercised - $10.00 to $12.00 (64,750) (64,750) ---------- --------- -------- Balances, January 28, 1995 1,874,300 1,376,700 497,600 ========== ========= ======== F-14 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options outstanding and exercisable at January 28, 1995 are as follows: Expiration Exercise Number of Options Date Price Outstanding Exercisable April 23, 1996 $20.00 33,000 33,000 April 22, 1997 12.00 20,500 20,500 September 23, 1997 12.75 55,000 55,000 April 23, 1998 14.50 21,000 21,000 March 2, 1999 16.75 52,500 52,500 February 2, 2001 11.75 101,000 September 17, 2001 10.00 110,000 January 3, 2002 15.00 30,000 July 1, 2002 15.50 148,000 October 27, 2002 17.25 7,500 June 22, 2004 11.75 621,700 207,067 August 23, 2004 11.50 167,000 55,666 December 1, 2004 11.50 9,500 --------- ------- 1,376,700 444,733 ========= ======= In addition to the shares reserved for the exercise of stock options, the Company has reserved 416,042 shares of Common Stock for the conversion of its Preferred Stock (see Note 8). 10. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain facilities, machinery and vehicles under various noncancellable operating lease agreements over periods of one to 10 years. Future minimum lease payments required under such leases in effect at January 28, 1995 were as follows (by fiscal year): (In thousands) 1996 $ 3,905 1997 3,258 1998 2,870 1999 2,488 2000 2,057 2001 through 2005 6,328 ------- $20,906 ======= F-15 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total rental expense charged to operations was $6,914,000, $8,330,000 and $7,732,000 for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, respectively. Contingencies The Company has been named in various legal proceedings in the normal course of its business. Additionally, the Company, along with other parties, is involved in a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, as well as under other Federal and state statues. Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, the cost can be reasonably estimated and the Company's responsibility is established. While it is not feasible to predict or determine the outcome of these proceedings, it is the opinion of management that their outcome, to the extent not provided for through insurance or otherwise, will not have a materially adverse effect on the Company's financial position or results of future operations. 11. ROYALTIES AND OTHER INCOME Royalties and other income consisted of the following: 1995 1994 1993 (In thousands) Royalties $1,948 $2,043 $1,771 Interest income 1,994 807 836 Other 259 361 455 ------ ------ ------ $4,201 $3,211 $3,062 ====== ====== ====== F-16 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES Income tax expense (benefit) (calculated in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes") consisted of the following: 1995 1994 1993 (In thousands) Currently (refundable) payable: Federal $ (6,656) $(11,185) $ 7,700 State 380 (240) 2,240 Foreign 370 (30) 710 -------- -------- -------- (5,906) (11,455) 10,650 -------- -------- -------- Deferred: Federal 8,239 (9,520) 230 State 222 (1,300) 80 Foreign (85) (20) (100) -------- -------- -------- 8,376 (10,840) 210 -------- -------- -------- $ 2,470 $(22,295) $10,860 ======== ======== ======= Income (loss) before income tax expense (benefit) of Western Publishing Company, Inc.'s Canadian subsidiary was $1,461,000, $(82,000) and $1,122,000 for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, respectively. A reconciliation of the statutory United States Federal income tax rate to the Company's effective income tax rate follows: 1995 1994 1993 Statutory rate 35.0% 35.0% 34.0% State income taxes, net of Federal benefit (2.6) 1.6 5.5 Valuation allowance (82.4) Permanent differences relating to the sale of the Advertising Specialty Division 35.9 Other - net (2.2) (1.4) (1.2) ---- ---- ---- (16.3)% 35.2% 38.3% ===== ==== ===== F-17 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 28, 1995 and January 29, 1994 were as follows:
1995 1994 Assets Liabilities Assets Liabilities (In thousands) Allowances for doubtful accounts and returns not currently deductible $ 4,035 $ 5,222 Inventories: Excess of book basis over tax basis due to purchase accounting $ (6,108) $ (6,121) Other 9,803 8,580 Advertising costs (1,259) Provision for write-down of division 8,197 Property, plant and equipment: Excess of tax basis over acquisition accounting basis 3,746 3,934 Excess of tax over book depreciation (6,555) (8,294) Identified intangibles (1,096) (4,486) Deferred gain on sale of plant (738) (693) Accrued expenses not currently deductible 9,714 5,800 Deductible pension contributions in excess of pension expense (1,768) (1,760) Postretirement benefits 10,758 10,379 AMT and State NOL carryforwards 4,026 1,185 Other - net 514 1,578 Valuation Allowance (12,445) ------- -------- ------- -------- Total $30,151 $(16,265) $44,875 $(22,613) ======= ======== ======= ========
F-18 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes are classified as follows:
1995 1994 Assets Assets Current Noncurrent Current Noncurrent (In thousands) Deferred income taxes $17,536 $8,795 $20,823 $1,439 Valuation allowance (6,860) (5,585) ------- ------ ------- ------ $10,676 $3,210 $20,823 $1,439 ======= ====== ======= ======
The valuation allowance of $12,445,000, which was recorded in 1995, relates to the uncertainty of realizing certain Federal and state deferred tax assets. 13. PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Pension Benefits Western Publishing Company, Inc. and its Canadian subsidiary have noncontributory defined benefit retirement plans covering substantially all domestic hourly and Canadian salaried and hourly employees. The benefits are generally based on a unit amount at the date of termination multiplied by the participant's credited service. The Company's funding policy is to contribute amounts within the limits which can be deducted for income tax purposes. The following tables set forth the plans' funded status and amounts recognized in the consolidated financial statements at January 28, 1995 and January 29, 1994, and for each of the three years ended January 28, 1995: 1995 1994 (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $11,897,000 and $14,177,000 $12,052 $14,458 ======= ======= Projected benefit obligations for service rendered $12,472 $15,026 Plan assets at fair value (primarily U.S. government securities, corporate bonds and equity mutual funds) 15,051 17,314 ------- ------- Projected benefit obligations less than plan assets 2,579 2,288 Unrecognized net (gain) loss (181) 10 Unrecognized prior service cost 2,272 2,516 Unamortized portion of unrecognized net asset at January 31, 1987 (249) (414) ------- ------- Prepaid pension costs recognized in accompanying balance sheets $ 4,421 $ 4,400 ======= ======= F-19 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1995 1994 1993 (In thousands) Net pension (income) expense, included the following components: Service cost - benefits earned during the period $ 509 $ 573 $ 530 Interest cost on projected benefit obligations 1,105 1,104 1,078 Actual return on plan assets 415 (1,836) (1,814) Net amortization and deferral (1,995) 211 33 Net settlement gain (50) ------- ------- ------- Net pension (income) expense for the year $ (16) $ 52 $ (173) ======= ======= ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.5% in 1995 and 1994. The expected long-term rate of return on assets was 10.0%. Pension expense charged to operations for these plans and for other multi-employer plans in which certain union employees of the Company's subsidiaries participate was $376,000, $598,000 and $314,000 for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, respectively. Subsidiaries of the Company also maintain defined contribution contributory retirement plans for substantially all domestic employee groups. Under the plans, the subsidiaries make contributions based on employee compensation and in certain cases based on specified levels of voluntary employee contributions. Western Publishing Company, Inc.'s Canadian subsidiary also maintains a profit sharing plan for certain salaried employees. Expense for these plans was $3,723,000, $4,157,000 and $3,819,000 for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, respectively. Postretirement Benefits Western Publishing Company, Inc. provides certain health care and life insurance benefits for substantially all of its retired employees. Effective January 31, 1993, the Company adopted Statement of Financial Accounting Standards (FASB) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." FASB No. 106 requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care, as claims were incurred. FASB No. 106 allows recognition of the cumulative effect of the liability in the year of adoption or the amortization of the obligation over a period of up to twenty years. The Company elected to recognize the cumulative effect of this obligation on the immediate recognition basis. As of January 31, 1993, the Company recognized the accumulated liability for such benefits (transition obligation). The cumulative effect of this change in accounting principle reduced earnings by $24,300,000 ($14,800,000, net of income taxes). F-20 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the year ended January 29, 1994, the incremental effect of adopting FASB No. 106 was to increase the loss before cumulative effect of change in accounting principle by approximately $990,000 ($.05 per share). The postretirement benefit obligation recorded in the consolidated balance sheets consisted of the following components: 1995 1994 (In thousands) Retirees currently receiving benefits $12,594 $12,549 Current employees eligible to receive benefits 5,600 6,600 Current employees not yet eligible to receive benefits 6,600 8,500 Unrecognized net loss (gain) from past experience 1,800 (1,700) Unrecognized prior service cost 300 ------- ------- $26,894 $25,949 ======= ======= The net postretirement benefit cost, which is not currently funded, consisted of the following components: 1995 1994 (In thousands) Service cost - benefits earned during the year $ 600 $ 700 Interest cost on accumulated postretirement benefit obligation 2,000 1,900 Recognition of transition obligation 24,300 ------ ------- $2,600 $26,900 ====== ======= The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of January 1, 1995 was 8% for 1995 decreasing linearly to 5% in 2010; and remaining level thereafter. If the health care cost trend rate were increased one percentage point in each year, the accumulated postretirement benefit obligation as of January 1, 1995 and the net postretirement cost would have increased by approximately 15% and 19%, respectively. The weighted average discount rate used in determining the accumulated postretirement benefit obligation as of January 1, 1995 and January 1, 1994 was 8.5% and 7.5%, respectively. F-21 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Prior to fiscal 1994, the Company recognized postretirement health care and life insurance benefits as an expense as claims were paid. On that basis, the costs of such benefits were $926,000 for the year ended January 30, 1993. Postemployment Benefits During November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits", which requires the cost of such benefits be accrued over the employee service period. The adoption of this statement in Fiscal 1995 did not have a material effect on the Company's financial statements. 14. INDUSTRY SEGMENT INFORMATION The Company has two industry segments, Consumer Products and Commercial Products. The Company is engaged in the creation, publication, manufacturing, printing and marketing of story and picture books, interactive electronic books and games, coloring books and other activity books and products for children as well as multimedia "edutainment" products. The Company is also engaged in the manufacture and sale of decorated paper tableware, party goods, stationery and gift products. The Company's foreign operations within the Consumer Products Segment consist of a marketing subsidiary in Canada and a marketing branch in the United Kingdom. The Company's Commercial Products Segment provides printing, graphic, creative and distribution services and was engaged in the manufacture of advertising specialties including imprinted writing instruments, wearable and simulated leather items, such as wallets, folders and other promotional business products (see Note 2). Operating profit represents income before income taxes, interest expense and general corporate income and expense. Identifiable assets are those assets used specifically in the operations of each industry segment or which are allocated when used jointly. Corporate assets are principally comprised of cash and cash equivalents, net assets held for sale, refundable income taxes, deferred income taxes, prepaid pension costs and certain other assets. Domestic sales to foreign markets were less than 10% of total consolidated sales for the years ended January 28, 1995, January 29, 1994 and January 30, 1993. F-22 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information by industry segment is set forth below: 1995 1994 1993 (In thousands) Net sales: Consumer Products $340,970 $535,603 $543,154 Commercial Products 57,384 77,86 105,935 -------- -------- -------- $398,354 $613,464 $649,089 ======== ======== ======== Operating (loss) profit: Consumer Products $ (7,737) $ 192 $ 53,625 Commercial Products (112) (2,558) (3,609) -------- -------- -------- (7,849) (2,366) 50,016 Other income 2,253 1,168 1,291 General corporate expense (13,398) (17,672) (12,591) Gain on streamlining plan 20,352 Provision for write-down of division 1,100 (28,180) Interest expense (17,567) (16,270) (10,358) -------- -------- -------- (Loss) income before income taxes and cumulative effect of change in accounting principle $(15,109) $(63,320) $ 28,358 ======== ======== ======== Consumer Commercial Products Products Corporate Total (In thousands) Identifiable assets: 1995 $268,517 $23,201 $137,088 $428,806 1994 331,502 27,974 145,640 505,116 1993 396,277 74,197 38,111 508,585 Depreciation and amortization: 1995 10,852 2,236 788 13,876 1994 11,155 5,153 688 16,996 1993 7,851 5,059 394 13,304 Capital expenditures: 1995 18,805 372 130 19,307 1994 33,524 2,443 1,392 37,359 1993 19,374 3,446 884 23,704 F-23 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other Information For the year ended January 28, 1995, net sales from the Company's two major customers, Wal-Mart Stores, Inc. and Toys R Us, Inc. totaled approximately $91,700,000, or 23% of net sales. For the year ended January 29, 1994, revenues from these customers totaled approximately $133,400,000 or 22% of net sales. 15. NET (LOSS) INCOME PER COMMON SHARE Net (loss) income per common share was computed as follows: 1995 1994 1993 (In thousands except for per share data) Net (loss) income $(17,579) $(55,825) $17,498 Preferred dividend requirements (848) (848) (848) -------- -------- ------- (Loss) income applicable to Common Stock $(18,427) $(56,673) $16,650 ======== ======== ======= Weighted average common shares outstanding 20,997 20,956 20,899 ======== ======== ======= Net (loss) income per common share $ (.88) $ (2.70) $ .80 ======== ======== ======= * * * * * F-24 WESTERN PUBLISHING GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED JANUARY 28, 1995 (IN THOUSANDS) Allowance for Allowance Doubtful for Accounts Returns Total BALANCES, FEBRUARY 1, 1992 $ 8,187 $ 8,917 $ 17,104 Additions charged to costs and expenses 5,855 27,509 33,364 Deductions - amounts written off (7,041) (28,131) (35,172) Foreign currency conversion (72) (52) (124) -------- -------- -------- BALANCES, JANUARY 30, 1993 6,929 8,243 15,172 Additions charged to costs and expenses 5,577 40,951 46,528 Deductions - amounts written off (5,686) (40,268) (45,954) Other changes - net (2,318) 2,767 449 Foreign currency conversion (11) (15) (26) -------- -------- -------- BALANCES, JANUARY 29, 1994 4,491 11,678 16,169 Additions charged to costs and expenses 472 26,248 26,720 Deductions - amounts written off (885) (30,442) (31,327) Foreign currency conversion (11) (12) (23) -------- -------- -------- BALANCES, JANUARY 28, 1995 $ 4,067 $ 7,472 $ 11,539 ======== ======== ======== S-1 EX-10.41 2 FIRST AMENDMENT OF GOLDEN COMPREHENSIVE SECURITY PROGRAM FIRST AMENDMENT OF GOLDEN COMPREHENSIVE SECURITY PROGRAM (As Amended and Restated Effective January 1, 1993) WHEREAS, this corporation maintains the Golden Comprehensive Security Program (the "plan"); and WHEREAS, the plan was completely amended and restated effective January 1, 1993, and further amendment of the plan is now considered desirable; NOW, THEREFORE, IT IS RESOLVED that, by virtue and in exercise of the power reserved to this corporation under subsection 11.1 of the plan, the plan, as previously amended, be and it hereby is further amended, effective as of January 1, 1994, by adding the following sentence at the end of subsection 3.3 of the plan: "Beginning with the plan year commencing January 1, 1994, in no event shall compensation in excess of $150,000 (or such greater amount as may be permitted under Section 401(a)(17)(B) of the Code) be included in a participant's compensation for any plan year." * * * I, James A. Cohen, Secretary of Western Publishing Company, Inc. hereby certify that the foregoing is a correct copy of a resolution duly adopted by the Board of Directors of said corporation on December 23, 1994 and that said resolution has not been changed or repealed. Dated this 23 day of December, 1994. /s/ James A. Cohen -------------------------------- Secretary as Aforesaid (Corporate Seal) * * * The undersigned, as committee members under the Golden Comprehensive Security Program, hereby acknowledge receipt of a certified copy of the foregoing amendment and hereby consent thereto this 23 day of December, 1994. /s/ James A. Cohen --------------------------------- /s/ Hal B. Weiss --------------------------------- /s/ Steven M. Grossman --------------------------------- --------------------------------- As Committee Members As Aforesaid EX-10.54 3 FIRST AMENDMENT OF GOLDEN RETIREMENT SAVINGS PROGRAM FIRST AMENDMENT OF GOLDEN RETIREMENT SAVINGS PROGRAM (As Amended and Restated Effective January 1, 1993) WHEREAS, this corporation maintains the Golden Retirement Savings Program (the "plan"); and WHEREAS, the plan was completely amended and restated effective January 1, 1993, and further amendment of the plan is now considered desirable; NOW, THEREFORE, IT IS RESOLVED that, by virtue and in exercise of the power reserved to this corporation under subsection 11.1 of the plan, the plan, as previously amended, be and it hereby is further amended, effective as of January 1, 1994, by adding the following sentence at the end of subsection 3.2 of the plan: "Beginning with the plan year commencing January 1, 1994, in no event shall compensation in excess of $150,000 (or such greater amount as may be permitted under Section 401(a)(17)(B) of the Code) be included in a participant's compensation for any plan year." * * * I, James A. Cohen, Secretary of Western Publishing Company, Inc. hereby certify that the foregoing is a correct copy of a resolution duly adopted by the Board of Directors of said corporation on December 23, 1994 and that said resolution has not been changed or repealed. Dated this 23 day of December, 1994. /s/ James A. Cohen -------------------------------- Secretary as Aforesaid (Corporate Seal) * * * The undersigned, as committee members under the Golden Retirement Savings Program, hereby acknowledge receipt of a certified copy of the foregoing amendment and hereby consent thereto this 23 day of December, 1994. /s/ James A. Cohen --------------------------------- /s/ Steven M. Grossman --------------------------------- /s/ Hal B. Weiss --------------------------------- --------------------------------- As Committee Members As Aforesaid EX-10.71C 4 ELEVENTH AMENDMENT OF PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM ELEVENTH AMENDMENT OF PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM WHEREAS, this corporation maintains the Penn Corporation Comprehensive Security Program (the "plan"); and WHEREAS, further amendment of the plan now is considered desirable; NOW, THEREFORE, IT IS RESOLVED that by virtue and in exercise of the power reserved to this corporation under subsection 10.1 of the plan, the plan, as previously amended, be and it hereby is further amended, effective as of January 1, 1994, by adding the following sentence at the end of subsection 3.3 of the plan: "Beginning with the plan year commencing January 1, 1994, in no event shall compensation in excess of $150,000 (or such greater amount as may be permitted under Section 401(a)(17)(B) of the Code) be included in a participant's compensation for any plan year." * * * I, James A. Cohen, Secretary of Penn Corporation, hereby certify that the foregoing is a correct copy of a resolution duly adopted by the Board of Directors of said corporation on December 23, 1994, and that said resolution has not been changed or repealed. Dated this 23 day of December, 1994. /s/ James A. Cohen -------------------------------- Secretary as Aforesaid (Corporate Seal) * * * The undersigned, as committee members under the Penn Corporation Comprehensive Security Program, hereby acknowledge receipt of a certified copy of the foregoing amendment and hereby consent thereto, this 23 day of December, 1994. /s/ James A. Cohen --------------------------------- /s/ Steven M. Grossman --------------------------------- /s/ Hal B. Weiss --------------------------------- --------------------------------- As Committee Members As Aforesaid EX-10.74C 5 FIFTH AMENDMENT OF BEACH PRODUCTS RETIREMENT SAVINGS PROGRAM FIFTH AMENDMENT OF BEACH PRODUCTS (DIVISION OF PENN CORPORATION) RETIREMENT SAVINGS PROGRAM WHEREAS, this corporation maintains the Beach Products (Division of Penn Corporation) Retirement Savings Program (the "plan"); and WHEREAS, further amendment of the plan now is considered desirable; NOW, THEREFORE, IT IS RESOLVED that by virtue and in exercise of the power reserved to this corporation under subsection 10.1 of the plan, the plan, as previously amended, be and it hereby is further amended, effective as of January 1, 1994, by adding the following sentence at the end of subsection 3.3 of the plan: "Beginning with the plan year commencing January 1, 1994, in no event shall compensation in excess of $150,000 (or such greater amount as may be permitted under Section 401(a)(17)(B) of the Code) be included in a participant's compensation for any plan year." * * * I, /s/ James A. Cohen, Esq., Secretary of Penn Corporation, hereby certify that the foregoing is a correct copy of a resolution duly adopted by the Board of Directors of said corporation on December 23, 1994, and that said resolution has not been changed or repealed. Dated this 23 day of December, 1994. /s/ James A. Cohen -------------------------------- Secretary as Aforesaid (Corporate Seal) * * * The undersigned, as committee members under the Beach Products (Division of Penn Corporation) Retirement Savings Program, hereby acknowledge receipt of a certified copy of the foregoing amendment and hereby consent thereto, this 23 day of December, 1994. /s/ James A. Cohen --------------------------------- /s/ Steven M. Grossman --------------------------------- /s/ Hal. B. Weiss --------------------------------- --------------------------------- As Committee Members As Aforesaid EX-10.93 6 AMENDED AND RESTATED CREDIT AGREEMENT ************************************************************************** WESTERN PUBLISHING GROUP, INC. -------------------- AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 31, 1994 -------------------- FLEET BANK, as Agent -------------------- THE BANK OF NEW YORK, as Co-Agent ************************************************************************** TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience only. Page ---- Section 1. Definitions and Accounting Matters . . . . . . . . . . . 1 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . 1 1.02. Accounting Terms and Determinations . . . . . . . . . . 14 1.03. Types of Loans and Commitments. . . . . . . . . . . . . 15 Section 2. Commitments. . . . . . . . . . . . . . . . . . . . . . . 15 2.01. Loans . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.02. Borrowings. . . . . . . . . . . . . . . . . . . . . . . 16 2.03. Letters of Credit . . . . . . . . . . . . . . . . . . . 16 2.04. Changes of Commitments; Mandatory Prepayments . . . . . 21 2.05. Commitment Fees.. . . . . . . . . . . . . . . . . . . . 22 2.06. Lending Offices . . . . . . . . . . . . . . . . . . . . 22 2.07. Several Obligations; Remedies Independent . . . . . . . 22 2.08. Notes . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.09. Prepayments of Loans. . . . . . . . . . . . . . . . . . 23 Section 3. Payments of Principal and Interest . . . . . . . . . . . 24 3.01. Repayment of Loans. . . . . . . . . . . . . . . . . . . 24 3.02. Interest. . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4. Payments; Pro Rata Treatment; Computations; Etc. . . . . 24 4.01. Payments. . . . . . . . . . . . . . . . . . . . . . . . 24 4.02. Pro Rata Treatment. . . . . . . . . . . . . . . . . . . 25 4.03. Computations. . . . . . . . . . . . . . . . . . . . . . 26 4.04. Minimum Amounts . . . . . . . . . . . . . . . . . . . . 26 4.05. Certain Notices . . . . . . . . . . . . . . . . . . . . 26 4.06. Non-Receipt of Funds by the Agent . . . . . . . . . . . 27 4.07. Sharing of Payments, Etc. . . . . . . . . . . . . . . . 27 Section 5. Yield Protection, Etc. . . . . . . . . . . . . . . . . . 28 5.01. Additional Costs. . . . . . . . . . . . . . . . . . . . 28 5.02. Additional Costs in Respect of Letters of Credit. . . . 30 5.03. Option to Replace Banks . . . . . . . . . . . . . . . . 30 Section 6. Conditions Precedent . . . . . . . . . . . . . . . . . . 32 6.01. Effectiveness . . . . . . . . . . . . . . . . . . . . . 32 6.02. Additional Conditions.. . . . . . . . . . . . . . . . . 34 Section 7. Representations and Warranties . . . . . . . . . . . . . 35 7.01. Corporate Existence . . . . . . . . . . . . . . . . . . 35 7.02. Financial Condition . . . . . . . . . . . . . . . . . . 35 7.03. Litigation. . . . . . . . . . . . . . . . . . . . . . . 35 7.04. No Breach. . . . . . . . . . . . . . . . . . . . . . . 36 7.05. Action. . . . . . . . . . . . . . . . . . . . . . . . 36 7.06. Approvals. . . . . . . . . . . . . . . . . . . . . . . 36 7.07. Use of Loans. . . . . . . . . . . . . . . . . . . . . 36 7.08. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 36 7.09. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 37 7.10. Investment Company Act. . . . . . . . . . . . . . . . 37 7.11. Public Utility Holding Company Act. . . . . . . . . . 37 7.12. Credit Agreements. . . . . . . . . . . . . . . . . . . 37 7.13. Hazardous Materials. . . . . . . . . . . . . . . . . . 37 7.14. Subsidiaries, Etc. . . . . . . . . . . . . . . . . . . 40 7.15. No Offsets, Etc. . . . . . . . . . . . . . . . . . . . 41 Section 8. Covenants of the Company. . . . . . . . . . . . . . . . 41 8.01. Financial Statements. . . . . . . . . . . . . . . . . 41 8.02. Litigation. . . . . . . . . . . . . . . . . . . . . . 44 8.03. Existence, Access, Etc. . . . . . . . . . . . . . . . 44 8.04. Insurance. . . . . . . . . . . . . . . . . . . . . . . 45 8.05. Prohibition of Fundamental Changes. . . . . . . . . . 45 8.06. Limitation on Liens. . . . . . . . . . . . . . . . . . 46 8.07. Indebtedness. . . . . . . . . . . . . . . . . . . . . 48 8.08. Investments. . . . . . . . . . . . . . . . . . . . . . 48 8.09. Dividend Payments. . . . . . . . . . . . . . . . . . . 49 8.10. Leverage Ratio. . . . . . . . . . . . . . . . . . . . 50 8.11. Tangible Net Worth. . . . . . . . . . . . . . . . . . 50 8.12. Interest Coverage Ratio. . . . . . . . . . . . . . . . 50 8.13. Lines of Business. . . . . . . . . . . . . . . . . . . 50 8.14. Transactions with Affiliates. . . . . . . . . . . . . 51 8.15. Use of Proceeds. . . . . . . . . . . . . . . . . . . . 51 8.16. Limitation on Payment Restrictions Affecting Subsidiaries. . . . . . . . . . . . . . . . . . . . . 51 8.17. Clean-Down. . . . . . . . . . . . . . . . . . . . . . . 52 8.18. Cash Flow . . . . . . . . . . . . . . . . . . . . . . . 52 8.19. Loans Outstanding . . . . . . . . . . . . . . . . . . . 52 8.20. Capital Expenditures. . . . . . . . . . . . . . . . . . 54 8.21. Guarantee and Pledge. . . . . . . . . . . . . . . . . . 54 Section 9. Events of Default. . . . . . . . . . . . . . . . . . . 54 Section 10. The Agent and Co-Agent. . . . . . . . . . . . . . . . . 58 10.01. Appointment, Powers and Immunities. . . . . . . . . . 58 10.02. Reliance by Agent and Co-Agent. . . . . . . . . . . . 59 10.03. Defaults. . . . . . . . . . . . . . . . . . . . . . . 59 10.04. Rights as a Bank. . . . . . . . . . . . . . . . . . . 59 10.05. Indemnification. . . . . . . . . . . . . . . . . . . 60 10.06. Non-Reliance on Agent, Co-Agent and Other Banks. . . 60 10.07. Failure to Act. . . . . . . . . . . . . . . . . . . . 61 10.08. Resignation or Removal of Agent or Co-Agent. . . . . . 61 Section 11. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . 62 11.01. Waiver. . . . . . . . . . . . . . . . . . . . . . . . 62 11.02. Notices. . . . . . . . . . . . . . . . . . . . . . . 62 11.03. Expenses, Etc. . . . . . . . . . . . . . . . . . . . 62 11.04. Amendments, Etc. . . . . . . . . . . . . . . . . . . 63 11.05. Successors and Assigns. . . . . . . . . . . . . . . . 64 11.06. Assignments and Participations.. . . . . . . . . . . . 64 11.07. Survival. . . . . . . . . . . . . . . . . . . . . . . 66 11.08. Captions. . . . . . . . . . . . . . . . . . . . . . . 66 11.09. Counterparts. . . . . . . . . . . . . . . . . . . . . 66 11.10. Governing Law; Submission to Jurisdiction. . . . . . 66 11.11. Waiver of Jury Trial. . . . . . . . . . . . . . . . . 67 11.12. Confidentiality. . . . . . . . . . . . . . . . . . . 67 AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 31, 1994, among: WESTERN PUBLISHING GROUP, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the banks that is a signatory hereto or which, pursuant to Section 11.06(b) hereof, shall become a "Bank" hereunder (individually, a "Bank" and, collectively, the "Banks"); FLEET BANK, a New York bank, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"); and THE BANK OF NEW YORK, a New York bank, as co-agent for the Banks (in such capacity, together with its successors in such capacity, the "Co-Agent"). The Banks have extended credit to the Company by making loans and by issuing (or acquiring participations in) letters of credit under the Credit Agreement dated as of November 12, 1992, among the Company, the Banks, the Agent and the Co-Agent, as amended (the "Old Credit Agreement"). The Company, the Banks, the Agent and the Co-Agent desire to amend and restate in its entirety the Old Credit Agreement pursuant to this Agreement. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. 1.01. Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Affiliate" shall mean any Person which directly or indirectly controls, or is under common control with, or is controlled by, the Company. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person which owns directly or indirectly 5% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate solely by reason of his or her being a director, officer or employee of the Company or any of its Subsidiaries and the Company and its Subsidiaries shall not be deemed to be Affiliates of each other. "Applicable Margin" shall mean a rate per annum equal to 1.00%; provided, however, that if the aggregate principal amount of outstanding Facility B Loans at any time exceeds $100,000,000, the Applicable Margin shall be increased to 2.00% per annum with respect to Facility B Loans in principal amount equal to the amount by which such aggregate principal amount of Facility B Loans outstanding exceeds $100,000,000. The Applicable Margin shall be increased by 0.50% per annum above the margins specified above for the period (if any) from the earlier of (a) the thirtieth day after the Disposition of the assets of the Games and Puzzles division of Western, and (b) September 30, 1994, until the date on which (i) Western issues a guarantee of all of the Company's obligations to the Banks, the Agent and the Co-Agent hereunder, in substantially the form set forth as Exhibit B to this Credit Agreement and (ii) the Company shall have pledged for the ratable benefit of the Banks and the holders (the "Holders") of the Company's 7.65% Debentures due 2002 (the "Debentures"), all of the issued and outstanding capital stock of Western. "Base Rate" shall mean, for any day, the higher of (a) the Federal Funds Rate for such day plus 0.50% per annum and (b) the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect on the Business Day on which such change in the Base Rate is effective. "Business Day" shall mean any day on which commercial banks are not authorized or required to close in New York City. "Capital Expenditures" shall mean all payments for or Indebtedness incurred in connection with fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and which are required to be capitalized under GAAP. "Capital Lease Obligations" shall mean, for any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash Flow" shall mean, for any period, the sum, for the Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) net operating income (calculated before income taxes, Interest Expense and extraordinary and unusual items and without deducting any commitment fees payable pursuant to Section 2.05(b) hereof, the amendment fee payable pursuant to Section 6.01(h) hereof or the fees and expenses payable pursuant to 6.01(i) or Section 11.03 hereof) for such period plus (b) depreciation and amortization (to the extent deducted in determining net operating income) for such period. "Closing Date" shall mean the date upon which the conditions precedent to the effectiveness hereof set forth in Section 6 hereof have been satisfied. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute of the United States. "Commitment" shall mean as to each Bank, the Facility A Commitment, Facility B Commitment or Letter of Credit Commitment of suchBank, all of which for each Bank are collectively referred to herein as the "Commitments". "Commitment Percentage" shall mean, with respect to any Bank, the ratio of (a) the amount of the Commitments of such Bank to (b) the aggregate amount of the Commitments of all of the Banks. "Commitment Termination Date" shall mean the last Business Day of May, 1995. "Consolidated Subsidiary" shall mean, for any Person, each Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of such Person in accordance with GAAP. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Disposition" shall mean, with respect to any Person, any sale, assignment, transfer or other disposition by such Person of any tangible or intangible assets (but excluding any inventory or Permitted Investments or other assets, including obsolete or worn-out equipment, sold or disposed of in the ordinary course of business), whether now owned or hereafter acquired. "Dividend Payment" shall mean dividends (in cash, property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of the Company, but excluding (i) dividends payable solely in shares of common stock of the Company (or in warrants, options or similar rights to acquire shares of common stock of the Company), (ii) dividends on and mandatory redemptions of the Company's presently outstanding Series A Preferred Stock, (iii) any dividends (in cash, property or obligations) on or other payments or distributions on account of any class of stock of any Subsidiary of the Company and (iv) the purchase, redemption or retirement of any shares of any class of capital stock of the Company made with the proceeds of a concurrent or substantially concurrent sale of other shares of the capital stock of the Company. "Dollars" and "$" shall mean lawful money of the United States of America. "Environmental Claim" shall mean any written notice, claim, demand or other communication, or any oral notice, claim, demand or other communication of which the Company has knowledge, alleging or asserting liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other property, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, or Release into the environment of any Hazardous Material at any location or (b) any violation or alleged violation of any Environmental Law. "Environmental Laws" shall mean any and all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, licenses, codes, injunctions or other governmental restrictions, requirements or prohibitions relating to the environment or to emissions, discharges, Releases or threatened Releases of Hazardous Materials, pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Materials, pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. Environmental Laws does not include the Occupational Safety and Health Act of 1970 or similar state statutes. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company. "Event of Default" shall have the meaning assigned to such term in Section 9 hereof. "Facility A Commitment" shall mean, as to each Bank, the obligation of such Bank to make Facility A Loans in an aggregate amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on the signature pages hereof under the caption "Facility A Commitment" (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). On the date hereof, the aggregate amount of the Facility A Commitments is $15,000,000. "Facility A Loans" shall mean loans provided for by Section 2.01 hereof which are specified by the Company pursuant to Section 4.05 to be Facility A Loans, subject to the provisions of Sections 2.01 and 2.09 hereof. "Facility A Notes" shall mean the promissory notes evidencing the Facility A Loans as provided for in Section 2.08 hereof. "Facility B Commitment" shall mean, as to each Bank, the obligation of such Bank to make Facility B Loans in an aggregate amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on the signature pages hereof under the caption "Facility B Commitment" (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). On the date hereof, the aggregate amount of the Facility B Commitments is $115,000,000 (subject to the limitations on the availability thereof set forth in Section 2.01). "Facility B Loans" shall mean loans provided for by Section 2.01 hereof which are specified by the Company pursuant to Section 4.05 to be Facility B Loans, subject to the provisions of Sections 2.01 and 2.09 hereof. "Facility B Notes" shall mean the promissory notes evidencing the Facility B Loans as provided for in Section 2.08 hereof. "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Agent on such day on such transactions as reasonably determined by the Agent. "Fleet" shall mean Fleet Bank. "GAAP" shall mean generally accepted accounting principles applied in the manner set forth in Section 1.02 hereof. "Guarantee" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any other Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any other Person, or an agreement on other than ordinary commercial terms to purchase, sell or lease (as lessee or lessor) property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of his, her or its obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business and obligations in connection with the relocation of employees. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Hazardous Material" shall mean, collectively, any pollutant, contaminant, toxic substance, hazardous waste, hazardous material or hazardous substance, including without limitation, petroleum, crude oil or fractions thereof, as those terms are defined in (i) the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., (ii) the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, 42 U.S.C. Section 9601 et seq., or (iii) any other applicable federal or state Environmental Law. "Indebtedness" shall mean, for any Person: (a) indebtedness created, issued or incurred by such Person for borrowed money (whether by loan or the issuance and sale of debt securities or the sale of property (other than inventory or intellectual property sold in the ordinary course of business and consistent with such Person's customary trade practices) to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of property or services, other than trade accounts payable arising, and accrued expenses incurred in the ordinary course of business and consistent with such Person's customary trade practices; (c) Indebtedness of another Person secured by a Lien on the property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) payment obligations of such Person in respect of letters of credit, bankers' acceptances or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person. "Interest Coverage Ratio" shall mean, for any period, the ratio of (a) Cash Flow for such period to (b) Interest Expense for such period. "Interest Expense" shall mean, for any period, the sum, for the Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all interest in respect of Indebtedness accrued or capitalized during such period (whether or not actually paid during such period) plus (b) all commissions, fees, discounts and other expenses accrued during such period (whether or not actually paid during such period) in respect of standby letters of credit (but not commercial letters of credit) and bankers' acceptances plus (c) the net amounts payable (or minus the net amounts receivable) under Interest Rate Protection Agreements accrued during such period (whether or not actually paid or received during such period). "Interest Rate Protection Agreement" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement providing for the transfer or mitigation of interest rate risks either generally or under specific contingencies. "Investment" shall mean, for any Person: (a) the acquisition (whether for cash, property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person, but excluding any such purchase of property made in the ordinary course of business which is consistent with such Person's customary trade practices), excluding real estate security deposits made in the ordinary course of business, advances to employees, obligations in connection with relocating employees and advances to vendors of such Person in the ordinary course of business; (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement. "Issuing Bank" shall mean the Agentor any other Bank (or, with the reasonable consent of the Agent and the consent of the Company, a bank affiliate of a Bank) that has agreed with the Company to act as an issuer of Letters of Credit under Section 2.03 hereof, together with their respective successors and assigns in such capacity. "Knowledge" shall mean only matters as to which any officer of the Company has actual knowledge, and shall not include matters which are not actually known by any officer. "Lending Office" shall mean, for each Bank, the "Lending Office" of such Bank designated on the signature pages hereof or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Loans are to be made and maintained. "Letter of Credit" shall have the meaning assigned to such term in Section 2.03 hereof. "Letter of Credit Commitment" shall mean, as to each Bank, the obligation of such Bank to issue (or acquire participations in) Letters of Credit in an aggregate amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on the signature pages hereof under the caption "Letter of Credit Commitment" (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). On the date hereof, the aggregate amount of the Letter of Credit Commitments is $10,000,000. "Letter of Credit Documents" shall mean, with respect to any Letter of Credit, collectively, such Letter of Credit, any amendments thereto, any documents delivered thereunder, any application therefor and any other agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk or (b) any collateral security for any of such obligations, each as the same may be modified and supplemented and in effect from time to time. "Letter of Credit Interest" shall mean, for each Bank, such Bank's participation interest (or, in the case of the Issuing Bank, the Issuing Bank's retained interest) in the Issuing Bank's liability under a Letter of Credit and such Bank's rights and interests in the related Reimbursement Obligations and fees, interest and other amounts payable in connection with such Letter of Credit and such Reimbursement Obligations. "Letter of Credit Liability" shall mean, without duplication, at any time and in respect of any Letter of Credit, the sum of (a) the undrawn face amount of such Letter of Credit plus (b) the aggregate unpaid principal amount of all Reimbursement Obligations of the Company at such time due and payable in respect of all drawings made under such Letter of Credit. For purposes of this Agreement, a Bank (other than the Issuing Bank for such Letter of Credit) shall be deemed to hold a Letter of Credit Liability in an amount equal to its participation interest in the related Letter of Credit under Section 2.03 hereof, and the Issuing Bank shall be deemed to hold a Letter of Credit Liability in an amount equal to its retained interest in the related Letter of Credit after giving effect to the acquisition by the Banks other than the Issuing Bank of their participation interests under said Section 2.03. "Leverage Ratio" shall mean, at any time, the ratio of Total Indebtedness to Tangible Net Worth at such time. "Lien" shall mean, with respect to any property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such property. For purposes of this Agreement, the Company or any of its Subsidiaries shall be deemed to own subject to a Lien any property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such property. "Loan Documents" shall mean this Agreement, the Pledge Agreement, the Subsidiary Guarantee, the Subsidiary Note, the Subsidiary Security Agreement and all other agreements, instruments and documents, including, without limitation, security agreements, notes, guaranties, releases, mortgages, deeds of trust, pledges, powers of attorney, consents, assignments, collateral assignments, letter agreements, contracts, notices, leases, amendments, financing statements, letter of credit applications and reimbursement agreements, and all other writings, now or hereafter executed by or on behalf of the Company or any Subsidiary of the Company and delivered to Agent or the Banks pursuant to this Agreement, together with all agreements, instruments and documents referred to therein or contemplated thereby. "Loans" shall mean, collectively, the Facility A Loans and the Facility B Loans. "Majority Banks" shall mean Banks holding more than 66-2/3% of the aggregate unpaid principal amount of the outstanding Loans and Letter of Credit Liabilities, or, if no Loans or Letter of Credit Liabilities are outstanding, Banks having more than 66-2/3% of the aggregate amount of the Commitments; provided that for such purpose there shall be excluded any Commitments, Loans and Letter of Credit Liabilities directly or indirectly held by the Company or any of its Affiliates (other than a financial institution not a Subsidiary of the Company) following an assignment or participation as contemplated by Section 11.06 hereof. "Margin Stock" shall mean margin stock within the meaning of Regulations U and X. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations or financial condition of the Company and its Subsidiaries, taken as a whole, (b) the validity or enforceability against the Company of this Agreement or the Notes, (c) the timely payment of the principal of or interest on the Loans or the Reimbursement Obligations or (d) the Company's ability to pay when due other amounts payable in connection therewith. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and which is covered by Title IV of ERISA. "Notes" shall mean, collectively, the Facility A Notes and the Facility B Notes. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Investments" shall mean, for any Person: (a) direct obligations of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States of America, or of any agency thereof, in either case maturing not more than one year from the date of acquisition thereof by such Person; (b) time deposits with, or certificates of deposit issued by, or bankers' acceptances of, any bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $100,000,000 or of any bank of recognized international standing having capital, surplus and undivided profits of at least $500,000,000, maturing not more than 90 days from the date of acquisition thereof by such Person; (c) commercial paper having the highest credit rating from Standard & Poor's Corporation or Moody's Investors Service, Inc. and maturing not more than 270 days from the date of acquisition thereof by such Person; (d) investments in shares of money market mutual funds having assets in excess of $2,000,000,000 and which invest solely in obligations of the type described in clauses (a), (b) and (c) above; (e) repurchase obligations fully secured by investments of the type described in clauses (a), (b), (c) or (d) above; and (f) securities secured by standby letters of credit issued by banks or trust companies referred to in clause (b) of this definition and having a maturity of not more than one year. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee pension plan as defined in Section 3(2) of ERISA established or maintained by the Company or any ERISA Affiliate and which is covered by ERISA. "Pledge Agreement" shall mean that certain Pledge Agreement dated as of even date herewith, by the Company in favor of the Agent, in substantially the form attached hereto as Exhibit C. "Post-Default Rate" shall mean (x) in respect of any principal of or interest on any Loan or any Reimbursement Obligation or any commitment fee or Letter of Credit issuance fee that is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2.00% above the Base Rate plus the Applicable Margin, each as in effect from time to time, and (y) in respect of any other amount payable under this Agreement or any Note that is not paid when due, a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to the Base Rate plus the Applicable Margin, each as in effect from time to time. "Prime Rate" shall mean the rate of interest from time to time announced by Fleet at the Principal Office, or any successor Agent at its principal office, as its prime commercial lending rate. "Principal Office" shall mean the principal office of the Agent and Fleet, presently located at 56 East 42nd Street, New York, New York 10017 or the principal office of any successor Agent. "Quarterly Dates" shall mean the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the date of this Agreement. "Regulations D, U and X" shall mean, respectively, Regulations D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean, with respect to any Bank, any change after the date of this Agreement in United States Federal, state or foreign law or regulations (including, without limitation, Regulation D) applying generally to a class of banks including such Bank, or the adoption or making after such date of any interpretation, directive or request applying generally to a class of banks including such Bank of or under any United States Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reimbursement Obligations" shall mean, at any time, the obligations of the Company then outstanding, or which may thereafter arise in respect of all Letters of Credit then outstanding, to reimburse amounts paid by the relevant Issuing Bank in respect of any drawings under a Letter of Credit. "Release" shall mean any "release" as such term is defined in 42 U.S.C. Section 9601(22). "Significant Subsidiary" shall mean, at any time, a Subsidiary whose assets at such time exceed 10% of the assets of the Company and its Subsidiaries (on a consolidated basis). "Subsidiary" shall mean, for any Person, any corporation, partnership or other entity of which more than 50% of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Wholly-Owned Subsidiary" shall mean any such corporation, partnership or other entity of which all of such securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are so owned or controlled. "Subsidiary Guarantee" shall mean the Guarantee Agreement dated as of December 13, 1993, made by Western in favor of the Banks and the Agent. "Subsidiary Note" shall mean that certain promissory note in substantially the form attached hereto as Exhibit D, dated of even date herewith, issued by Western to the Company and pledged to the Agent pursuant to the Pledge Agreement, which evidences the advances by the Company to Western from time to time of all of the proceeds of Facility A Loans made hereunder, as required by Section 2.01 hereof. "Subsidiary Security Agreement" shall mean that certain Security Agreement in substantially the form attached hereto as Exhibit E, dated as of even date herewith, between Western and the Company, pursuant to which Western has granted to the Company a security interest in all of its accounts receivable and inventory to secure its obligations under the Subsidiary Note. "Tangible Net Worth" shall mean, as at any date, the sum for the Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) the amount of capital stock (whether preferred or common), plus (b) the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, minus the amount of such deficit), plus (c) the amount of negative goodwill, minus (d) the sum of the following: cost of treasury shares and the book value of all assets which should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) but in any event including goodwill, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense and any write-up in the book value of assets resulting from a revaluation thereof subsequent to February 1, 1992. "Total Indebtedness" shall mean, as at any date, the aggregate amount of Indebtedness of the Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP). "Type" shall have the meaning assigned that term in Section 1.03 hereof. "Western" shall mean Western Publishing Company, Inc., a Delaware corporation and a Subsidiary of the Company. 1.02. Accounting Terms and Determinations. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (subject to compliance with paragraph (b) of this Section 1.02) be prepared, in accordance with generally accepted accounting principles as from time to time in effect. All calculations made for the purposes of determining compliance with the terms of Sections 8.10, 8.11, 8.12, 8.18, 8.19 and 8.20 hereof shall be made by application of generally accepted accounting principles applied on a basis consistent with that used in the preparation of the annual financial statements referred to in Section 7.02 hereof unless the Company and the Majority Banks shall have otherwise agreed in writing. Notwithstanding the foregoing, for purposes of this Agreement, generally accepted accounting principles shall not give effect to FASB Statement No. 106. (b) The Company shall deliver to the Banks at the same time as the delivery of any annual, quarterly or monthly financial statements under Section 8.01 hereof a description in reasonable detail of the effect of any change in accounting principle employed in the preparation of such statement from those employed in the preparation of the most recent financial statements previously furnished to the Banks and a reconciliation of the effects thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in Section 8 hereof, the Company will not, without the prior written consent of the Majority Banks (which consent shall not be unreasonably withheld), change the last day of its fiscal year from the Saturday nearest to January 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from the Saturday nearest to each April 30, July 31 and October 31 of each year, respectively, unless the Majority Banks and the Company shall have agreed to amend the covenants set forth in Section 8 hereof to take account of such change. Each of the Banks agrees that if the Company proposes to change the last day of its fiscal year or any of its fiscal quarters, such Bank will negotiate in good faith to amend the covenants set forth in Section 8 hereof so as to preserve, as nearly as practicable, the economic effect of such covenants as in effect immediately prior to such proposed change. 1.03. Types of Loans and Commitments. Loans and Commitments hereunder are distinguished by "Type". The "Type" of a Loan or Commitment refers to whether such Loan is a Facility A Loan or a Facility B Loan, or whether such Commitment is a Facility A Commitment, a Facility B Commitment or a Letter of Credit Commitment, each of which constitutes a Type. Section 2. Commitments. 2.01. Loans. Each Bank severally agrees, onthe terms of this Agreement, to make Loans to the Company in Dollars during the period from and including the Closing Date to but not including the Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding (i) in the case of Facility A Loans, the amount of the Facility A Commitment of such Bank as in effect from time to time, and (ii) in the case of Facility B Loans, the amount of the Facility B Commitment of such Bank in effect from time to time. In no event shall the aggregate principal amount of all Facility A Loans or Facility B Loans exceed the aggregate amount of the respective Facility A Commitments or Facility B Commitments, as the case may be, as in effect from time to time. Subject to the terms of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Facility A Commitments by means of Facility A Loans and the Facility B Commitments by means of Facility B Loans; provided that no Facility B Loans shall be made unless the entire aggregate amount of the Facility A Commitments has been borrowed, and no Facility A Loans shall be repaid unless there are no Facility B Loans then outstanding. Notwithstanding the foregoing, at all times prior to the delivery by the Company to the Agent of the compliance certificate described in Section 8.01 hereof required to be delivered at the time the Company delivers to the Agent financial statements for the Company's fiscal quarter ending on or about July 31, 1994, the aggregate amount of Facility B Loans outstanding shall not at any time exceed $100,000,000 (less the aggregate amount of any reductions in the Commitments pursuant to Section 2.04 hereof), and in any event subject to the provisions of Section 8.19 hereof. The Company shall immediately advance all proceeds of Facility A Loans made hereunder to Western, to fund the working capital needs of such Subsidiary. All Loans outstanding under the Old Credit Agreement shall be Facility B Loans hereunder from and after the Closing Date, in principal amount equal to the principal amount thereof outstanding under the Old Credit Agreement. 2.02. Borrowings. The Company shall give the Agent (which shall promptly notify the Banks) notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 12:00 noon New York time on the date specified for each borrowing hereunder, each Bank shall make available the amount of the Loan to be made by it on such date to the Agent, in immediately available funds, for account of the Company. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained with the Agent designated by the Company. 2.03. Letters of Credit. Subject to the terms and conditions hereof, the Commitments may be utilized, upon the request of the Company, in addition to the Loans provided for by Section 2.01 hereof, by the issuance by any Issuing Bank of letters of credit (herein collectively called "Letters of Credit") for account of the Company or any of its Subsidiaries (as specified by the Company), provided that in no event shall (i) the aggregate amount of all Letter of Credit Liabilities exceed at any time the aggregate amount of the Letter of Credit Commitments as in effect at such time and (ii) the expiration date of any Letter of Credit extend beyond the earlier of (A) the date occurring one year following the issuance of such Letter of Credit or the final expiry date of such Letter of Credit as renewed if such Letter of Credit provides for renewal terms of not more than one year each and permits the Issuing Bank (at the direction of the Majority Banks) to elect prior to the date on which such renewal term would otherwise commence that such Letter of Credit shall not be renewed and (B) the date which is three Business Days prior to the Commitment Termination Date. The following additional provisions shall apply to Letters of Credit: (a) The Company shall give the Agent and the relevant Issuing Bank at least one Business Day's irrevocable prior notice (effective upon receipt) specifying the date (which shall be no later than thirty days preceding the Commitment Termination Date) each Letter of Credit is to be issued, the Issuing Bank for such Letter of Credit and the account party or parties therefor and describing in reasonable detail the proposed terms of such Letter of Credit (including the beneficiary thereof) and the nature of the transactions or obligations proposed to be supported thereby. (b) On each day during the period commencing with the issuance by any Issuing Bank of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the then undrawn portion of the face amount of such Letter of Credit. Each Bank (other than the Issuing Bank for such Letter of Credit) agrees that, upon the issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in such Issuing Bank's liability under such Letter of Credit in an amount equal to such Bank's Commitment Percentage of such liability, and each Bank (other than the Issuing Bank) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to such Issuing Bank to pay and discharge when due, its Commitment Percentage of the Issuing Bank's liability under such Letter of Credit. (c) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit which the Issuing Bank has determined to honor (without consulting the Company, the Agent or any other Person), the Issuing Bank for such Letter of Credit shall promptly notify the Company and the Agent of the amount to be paid by the Issuing Bank as a result of such demand and the date on which payment is to be made by the Issuing Bank to such beneficiary in respect of such demand. Notwithstanding the identity of the account party of any Letter of Credit, the Company hereby unconditionally agrees to pay and reimburse the Issuing Bank for the amount of each demand for payment under such Letter of Credit at or prior to the date on which payment is to be made by the Issuing Bank to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. (d) The Company agrees that neither the Issuing Bank for any Letter of Credit, nor any of its officers or directors (unless otherwise provided in the relevant Letter of Credit Documents), shall be liable or responsible for, and the obligations of the Company to the Issuing Bank and the Banks hereunder shall not in any manner be affected by: (i) the use which may be made of such Letter of Credit or the proceeds thereof by the beneficiary or any other Person; (ii) the validity, sufficiency or genuineness of documents other than such Letter of Credit, or of any endorsements thereon, even if such documents should, in fact, prove to be in any or all respects, invalid, insufficient, fraudulent or forged; or (iii) any other circumstances whatsoever in making or failing to make payment under such Letter of Credit, except that (unless otherwise provided in the relevant Letter of Credit Documents) the Company shall have a claim against the Issuing Bank (and not against any other Bank), and the Issuing Bank shall be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Company which the Company proves are caused by the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under such Letter of Credit substantially complied with the terms of such Letter of Credit or the Bank's willful failure to pay under such Letter of Credit after the presentation to it of documents strictly complying with the terms and conditions of such Letters of Credit. In furtherance of and not in limitation of the foregoing (unless otherwise provided in the relevant Letter of Credit Documents), the Issuing Bank may accept documents that appear on their face to be in order without responsibility for further investigation, regardless of any notice or information to the contrary. (e) Forthwith upon its receipt of a notice referred to in paragraph (c) of this Section 2.03, the Company shall advise the Agent whether or not the Company intends to borrow hereunder to finance its obligation to reimburse the relevant Issuing Bank for the amount of the related demand for payment and, if it does, submit a notice of such borrowing as provided in Section 4.05 hereof. In the event that the Company fails to so advise the Agent, or if the Company fails to reimburse such Issuing Bank for a demand for payment under a Letter of Credit by the date of such payment, the Agent shall give each Bank prompt notice of the amount of the demand for payment, specifying such Bank's Commitment Percentage of the amount of the related demand for payment. (f) Each Bank (other than the Issuing Bank) shall pay to the Agent for account of the Issuing Bank at the Principal Office in Dollars and in immediately available funds, the amount of such Bank's Commitment Percentage of any payment under a Letter of Credit upon notice by the Issuing Bank for such Letter of Credit (through the Agent) to such Bank requesting such payment and specifying such amount. Each such Bank's obligation to make such payments to the Agent for account of the Issuing Bank under this paragraph (f), and the Issuing Banks's right to receive the same, shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limiting the effect of the foregoing, (i) the failure of any other Bank to make its payment under this paragraph (f), the financial condition of the Company (or any other account party), the existence of any Default or (ii) the termination of the Letter of Credit Commitments. Each such payment to the Issuing Bank shall be made without any offset, abatement, withholding or reduction whatsoever. (g) Upon the making of each payment by a Bank to the Issuing Bank pursuant to paragraph (f) above in respect of any Letter of Credit, such Bank shall, automatically and without any further action on the part of the Agent, the Issuing Bank or such Bank, acquire (i) a participation in an amount equal to such payment in the Reimbursement Obligation owing to the Issuing Bank by the Company hereunder and under the Letter of Credit Documents relating to such Letter of Credit and (ii) a participation in a percentage equal to such Bank's Commitment Percentage in any interest or other amounts payable by the Company hereunder and under such Letter of Credit Documents in respect of such Reimbursement Obligation. Upon receipt by the Issuing Bank from or for account of the Company of any payment in respect of any Reimbursement Obligation or any such interest or other amount (including by way of setoff or application of proceeds of any collateral security) the Issuing Bank shall promptly pay to the Agent for account of each Bank entitled thereto, such Bank's Commitment Percentage of such payment, each such payment by the Issuing Bank to be made in the same money and funds in which received by the Issuing Bank. In the event any payment received by the Issuing Bank and so paid to the Banks hereunder is rescinded or must otherwise be returned by the Issuing Bank (including any interest thereon which is required to be paid by the Issuing Bank), each Bank shall, upon the request of the Issuing Bank (through the Agent), repay to the Issuing Bank (through the Agent) the amount of such payment paid to such Bank (and any such required interest), with interest thereon at the rate specified in paragraph (k) of this Section 2.03. (h) The Company shall pay to the Agent for account of the Issuing Bank in respect of each Letter of Credit an issuance fee in an amount equal to 1.50% per annum of the daily average undrawn face amount of such Letter of Credit for the period from and including the date of issuance of such Letter of Credit to but excluding the date such Letter of Credit is drawn in full, expires or is terminated, such fee to be non-refundable and to be paid in arrears quarterly, on each Quarterly Date, and on the Commitment Termination Date. The Issuing Bank authorizes and directs the Agent to pay each Bank (other than the Issuing Bank), promptly upon payment thereof by the Company, but only to the extent actually received from the Company, an amount equal to such Bank's Commitment Percentage of all such issuance fees in respect of each Letter of Credit (including any such issuance fee in respect of any period of any renewal or extension thereof). In addition, the Company shall pay to the Issuing Bank in respect of each Letter of Credit all charges, costs and expenses, in the amounts customarily charged by the Issuing Bank from time to time in like circumstances (or as stated in the relevant Letter of Credit Documents) with respect to the issuance of each Letter of Credit and drawings, extensions and other transactions relating thereto. (i) Promptly following the end of each calendar month, each Issuing Bank shall deliver (through the Agent) to each Bank and the Company a notice describing the aggregate amount of all Letters of Credit issued by such Issuing Bank and outstanding at the end of such month. Upon the request of any Bank from time to time, each Issuing Bank shall deliver any other information reasonably requested by such Bank with respect to each Letter of Credit issued by such Issuing Bank and then outstanding. (j) The issuance by any Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 6 hereof, be subject to the conditions precedent that (i) such Letter of Credit shall be in such form, contain such terms and support such transactions as shall be reasonably satisfactory to the Issuing Bank consistent with its then current practices and procedures with respect to letters of credit of the same type and (ii) the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested consistent with its then current practices and procedures with respect to letters of credit of the same type. (k) To the extent that any Bank fails to pay any amount required to be paid pursuant to paragraph (f) or (g) of this Section 2.03 on the due date therefor, such Bank shall pay interest to the relevant Issuing Bank (through the Agent) on such amount from and including such due date to but excluding the date such payment is made (i) during the period from and including such due date to but excluding the date three Business Days thereafter, at a rate per annum equal to the Federal Funds Rate (as in effect from time to time) and (ii) thereafter, at a rate per annum equal to the Base Rate (as in effect from time to time) plus 2.00%. The Company hereby indemnifies and holds harmless each of the Banks, the Issuing Bank and the Agent (unless otherwise provided in the relevant Letter of Credit Documents in the case of the Issuing Bank) from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank, the Issuing Bank or the Agent may incur (or which may be claimed against such Bank or the Agent by any Person whatsoever) by reason of or in connection with the execution and delivery or transfer of or payment or refusal to pay by the Issuing Bank under any Letter of Credit; provided that the Company shall not be required to indemnify any Bank or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, such claims, damages, losses, liabilities, costs or expenses are caused by (x) the willful misconduct or gross negligence of the Issuing Bank or (y) in the case of the Issuing Bank, such Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this Section 2.03 is intended to limit the other obligations of the Company, any Bank or the Agent under this Agreement. 2.04. Changes of Commitments; Mandatory Prepayments. (a) The Commitments shall be automatically terminated on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Facility A Loans, Facility B Loans or Letter of Credit Liabilities are outstanding, to terminate the respective Facility A Commitments, the Facility B Commitments or the Letter of Credit Commitments, as the case may be, and (ii) to reduce the aggregate unused amount of the Facility A Commitments, the Facility B Commitments or the Letter of Credit Commitments; provided that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof, and (y) each partial reduction shall be in an aggregate amount at least equal to $1,000,000 and in multiples of $1,000,000 in excess thereof. (c) Without affecting Section 8.05 hereof in any way, concurrently with the making of any Disposition by the Company or any of its Subsidiaries, the Company shall prepay the principal of the Loans hereunder, and the Commitments shall be reduced, in an aggregate principal amount equal to 100% of the amount of the net cash proceeds (net of expenses reasonably incurred in connection therewith and taxes paid or payable in connection therewith) actually received by the Company or such Subsidiary from such Disposition (including net cash proceeds subsequently received in connection with (i) such Disposition, or (ii) any non-cash consideration received in connection with such Disposition); provided, that, notwithstanding the foregoing, the aggregate amount of the Facility B Commitments shall be reduced to $65,000,000 (less the aggregate amount of any reductions in the Facility B Commitments previously made pursuant to this paragraph (c)) concurrently with the Disposition of substantially all of the assets of the Games and Puzzles division of Western. Any prepayments and reductions in the Commitments required under this paragraph (c) shall be made (i) first with respect to outstanding Facility B Loans and the Facility B Commitments, (ii) second with respect to outstanding Facility A Loans and the Facility A Commitments, and (iii) third with respect to outstanding Letter of Credit Liabilities and the Letter of Credit Commitments. (d) Upon the prepayment by Western of any portion of the outstanding principal of the Subsidiary Note, the Company shall prepay the principal of the Facility A Loans outstanding hereunder in an aggregate principal amount equal to the aggregate principal amount prepaid in respect of the Subsidiary Note. (e) Any of the Commitments once terminated or reduced may not be reinstated. 2.05. Commitment Fees. (a) The Company shall pay to the Agent for account of each Bank a commitment fee on the daily average unused amount of each of such Bank's Commitments, for the period from and including the date of this Agreement to but not including the earlier of the date such Commitments are terminated and the Commitment Termination Date, at a rate per annum equal, for each day during such period, to 0.50%. Accrued commitment fees shall be payable in arrears on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. (b) In addition to the commitment fees provided for in paragraph (a) of this Section 2.05, the Company shall pay to the Agent, for the account of the Banks, an additional one-time commitment fee of $300,000 upon the aggregate outstanding principal amount of Facility B Loans first exceeding $100,000,000. The Agent shall pay to each Bank, promptly upon payment thereof by the Company, an amount equal to such Bank's Commitment Percentage of such additional commitment fee. 2.06. Lending Offices. The Loans made by each Bank shall be made and maintained at such Bank's Lending Office; provided, however, that a Bank may not change its Lending Office if doing so would subject the Loans of such Bank to any of the consequences contemplated by Section 5.01 hereof, unless such Bank shall have waived, to the reasonable satisfaction of the Company, such consequences. 2.07. Several Obligations; Remedies Independent. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither any Bank nor the Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. The amounts payable by the Company at any time hereunder and under the Notes to each Bank shall be a separate and independent debt and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes in accordance with (and subject to) their respective terms, and it shall not be necessary for any other Bank or the Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.08. Notes. (a) The Facility A Loans made by each Bank shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-1 hereto, dated the date hereof, payable to such Bank in a principal amount equal to the amount of its Facility A Commitment as originally in effect and otherwise duly completed. The Facility B Loans made by each Bank shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-2 hereto, dated the date hereof, payable to such Bank in a principal amount equal to the amount of its Facility B Commitment as originally in effect and otherwise duly completed. (b) The date, amount and interest rate of each Facility A Loan or Facility B Loan made by each Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by such Bank on its books and, prior to any transfer of the respective Facility A Note or Facility B Note, as the case may be, held by it, endorsed by such Bank on the schedule attached to such respective Facility A Note or Facility B Note; provided that the failure of such Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under such respective Facility A Note or Facility B Note. (c) No Bank shall be entitled to have its Facility A Note or Facility B Note subdivided, by exchange for promissory notes of lesser denominations or otherwise, except in connection with a permitted assignment of all or any portion of such Bank's Facility A Commitment, Facility A Loans and Facility A Note, or such Bank's Facility B Commitment, Facility B Loans and Facility B Note, as the case may be, pursuant to Section 11.06(b) hereof. 2.09. Prepayments of Loans. Subject to Section 4.04 hereof,the Company shall have the right to prepay Facility A Loans or Facility B Loans, at any time or from time to time, provided that: (i) the Company shall give the Agent notice of each such prepayment as provided in Section 4.05 hereof, and (ii) no Facility A Loans may be prepaid if any Facility B Loans are then outstanding. The Company shall be required to prepay the Loans as required under Section 2.04 hereof. Section 3. Payments of Principal and Interest. 3.01. Repayment of Loans. The Company hereby promises to pay to the Agent for the account of each Bank the entire outstanding principal amount of such Bank's Loans, and each Loan shall mature, on the Commitment Termination Date. 3.02. Interest. The Company hereby promises to pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) in the case of a Facility A Loan, the Base Rate (as in effect from time to time) and (b) in the case of a Facility B Loan, the Base Rate plus the Applicable Margin (each as in effect from time to time). Notwithstanding the foregoing, the Company hereby promises to pay to the Agent for the account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank, on any Reimbursement Obligation held by such Bank, and on any other amount payable by the Company hereunder or under any Note held by such Bank to or for the account of such Bank, which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) quarterly on the Quarterly Dates, and (ii) upon the payment or prepayment of any principal thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Section 4. Payments; Pro Rata Treatment; Computations; Etc. 4.01. Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest, Reimbursement Obligations, commitment fees and letter of credit issuance fees to be made by the Company under this Agreement and the Notes shall be made in Dollars, in immediately available funds, without deduction or set-off, to the Agent at such account at the Principal Office as may be designated by the Agent to the Company from time to time, not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) The Company shall, at the time of making each payment under this Agreement or any Note, specify to the Agent (which shall so notify the intended recipient(s) thereof) or the Issuing Bank (as applicable) the Loans, Reimbursement Obligations or other amounts payable by the Company hereunder to which such payment is to be applied, provided that the Company may not specify that any payment be applied to the Facility A Loans if any Facility B Loans are then outstanding (and in the event that it fails to so specify, or if an Event of Default has occurred and is continuing, such Bank may apply the amount of such payment received by it from the Agent in such manner as such Bank may determine to be appropriate). (c) Each payment received by the Agent under this Agreement or any Note for account of any Bank shall be paid by the Agent promptly to such Bank, in immediately available funds, for the account of such Bank's Lending Office. (d) If the due date of any payment under this Agreement or any Note would otherwise fall on a day which is not a Business Day, such date shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 4.02. Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Banks under Section 2.01 hereof shall be made from the Banks, each payment of commitment fee under Section 2.05 hereof shall be made for the account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.04 hereof shall be applied to the respective Facility A Commitments, Facility B Commitments or Letter of Credit Commitments of the Banks, as the case may be, pro rata according to the amounts of their respective Commitments of such Type; (b) the making of Facility A Loans or Facility B Loans, as the case may be, shall be made pro rata among the Banks according to the amounts of their respective Facility A Commitments or Facility B Commitments, as applicable; (c) each payment or prepayment of principal of Facility A Loans or Facility B Loans by the Company shall be made for the account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Facility A Loans or Facility B Loans, as the case may be, held by them; and (d) each payment of interest on Facility A Loans or Facility B Loans by the Company shall be made for account of the Banks pro rata in accordance with the amounts of interest on such Facility A Loans or Facility B Loans, as the case may be, then due and payable to the respective Banks. 4.03. Computations. Letter of Credit issuance fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, and commitment fees and interest on Loans (and any interest computed at the Post-Default Rate by reference to the Base Rate) shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 4.04. Minimum Amounts. Each borrowing and prepayment of principal of Loans shall be in an amount at least equal to $1,000,000 and in multiples of $1,000,000 in excess thereof (borrowings or prepayments of Loans of different Types at the same time hereunder to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type). 4.05. Certain Notices. Notices by the Company to the Agent of terminations or reductions of the Commitments, and of borrowings and optional prepayments of Loans, shall be irrevocable and shall be effective only if received by the Agent not later than 12:00 noon New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing or prepayment specified below: Number of Business Type of Notice Days Prior ------------- ---------- Termination or reduction of Commitments 1 Borrowings of Loans 1 Prepayment of Loans 1 Each such notice of termination or reduction shall specify the amount and Type of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof) and Type (subject to Sections 2.01 and 2.09 hereof) of each Loan to be borrowed or prepaid and the date of borrowing or optional prepayment (which shall be a Business Day). The Agent shall promptly notify the Banks of the contents of each such notice. 4.06. Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Agent of (in the case of a Bank) the proceeds of a Loan to be made by it, or a participation in a Letter of Credit drawing to be acquired by it, hereunder or (in the case of the Company) a payment to the Agent for the account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid. 4.07. Sharing of Payments, Etc. (a) The Company agrees that, in addition to (and without limitation of) any right of set-off or banker's lien a Bank may otherwise have, each Bank shall be entitled, at its option, upon the occurrence and during the continuance of a Default to offset balances held by it for account of the Company at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans, the Reimbursement Obligations, or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such balances are then due to the Company), in which case it shall promptly notify the Company and the Agent thereof, provided that such Bank's failure to give such notice shall not affect the validity thereof. (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan or Letter of Credit Liability owing to it or payment of any other amount under this Agreement or any Note held by it through the exercise of any right of set-off, banker's lien or similar right (other than from the Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on any Type of Loans or Letter of Credit Liabilities or such other amounts then due hereunder by the Company to such Bank than the percentage received by any other Banks, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans of such Type or Letter of Credit Liabilities or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans of such Type or Letter of Credit Liabilities or such other amounts, respectively, owing to each of the Banks. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank purchasing such a participation (or direct interest) as provided in this Section 4.07 may exercise all rights of set-off, banker's lien or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Section 5. Yield Protection, Etc. 5.01. Additional Costs. (a) The Company shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine in good faith to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs hereinafter incurred which it determines are attributable to the maintenance by such Bank (or any Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 CFR Part 208, Appendix A; 12 CFR Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the Comptroller of the Currency (12 CFR Part 3, Appendix A)), of capital in respect of its Commitments, Loans, Reimbursement Obligations or participations in Letters of Credit (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Lending Office or such bank holding company) to a level below that which such Bank (or any Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). For purposes of this Section 5.01(a), "Basle Accord" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time. (b) Each Bank shall notify the Company of any event occurring after the date of this Agreement that will entitle such Bank to compensation under paragraph (a) of this Section 5.01 as promptly as practicable, but in any event within 45 days, after such Bank obtains actual knowledge thereof; provided, that (i) if any Bank fails to give such notice within 45 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 45 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Lending Office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank. Each Bank will furnish to the Company a certificate setting forth the basis and amount of each request by such Bank for compensation under paragraph (a) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of capital maintained pursuant to paragraph (a) of this Section 5.01 on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive, provided that such determinations and allocations are made on a reasonable basis. (c) If requested by the Company after such Bank has notified the Company of any such event entitling it to compensation under paragraph (a) of this Section 5.01, such Bank shall promptly notify the Company when such event is no longer applicable. 5.02. Additional Costs in Respect of Letters of Credit. Without limiting the obligations of the Company under Section 5.01 hereof (but without duplication), if as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax (other than income or franchise taxes), reserve, special deposit, capital adequacy or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder and the result shall be to increase the cost to any Bank or Banks of issuing (or purchasing participations in) or maintaining its obligation hereunder to issue (or purchase participations in) any Letter of Credit hereunder or reduce any amount receivable by any Bank hereunder in respect of any Letter of Credit (which increases in cost, or reduction in amount receivable, shall be the result of such Bank's or Banks' reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by such Bank or Banks, the Company shall pay immediately to such Bank or Banks, from time to time as specified by such Bank or Banks, such additional amounts as shall be sufficient to compensate such Bank or Banks for such increased costs or reductions in amount. A statement as to such increased costs or reductions in amount incurred by any such Bank or Banks, submitted by such Bank or Banks to the Company shall be conclusive in the absence of manifest error as to the amount thereof. Each Bank shall notify the Company of any event occurring after the date of this Agreement that will entitle such Bank to compensation under this Section 5.02 as promptly as practicable, but in any event within 45 days, after such Bank obtains actual knowledge thereof; provided, that if any Bank falls to give such notice within 45 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.02 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.02 for costs incurred from and after the date 45 days prior to the date that such Bank does give such notice. If requested by the Company after such Bank has notified the Company of any such event, such Bank shall promptly notify the Company when such event is no longer applicable. 5.03. Option to Replace Banks. If any Bank shall become an Affected Bank, then, provided there does not then exist any Default: (a) The Company may request one or more of the other Banks to purchase all (but not part) of such Affected Bank's then outstanding Loans, Reimbursement Obligations and participations in outstanding Letters of Credit and to assume all (but not part) of such Affected Bank's Commitments and obligations hereunder. If one or more Banks shall so agree in writing (herein collectively called the "Assenting Banks" and individually called an "Assenting Bank") with respect to such Affected Bank, then (x) the Facility A Commitments, Facility B Commitments and Letter of Credit Commitments of each Assenting Bank and the obligations of such Assenting Bank under this Agreement shall be increased by its respective pro rata share of the Facility A Commitments, Facility B Commitments and Letter of Credit Commitments, as the case may be, of such Affected Bank under this Agreement and (y) each Assenting Bank shall make Facility A Loans and/or Facility B Loans to the Company pro rata in accordance with the amount of such Affected Bank's Facility A Loans and/or Facility B Loans, as the case may be, being purchased by such Assenting Bank in principal amounts which, when aggregated with Facility A Loans and/or Facility B Loans being made by other Assenting Banks, if any, are equal to the outstanding principal amounts of all the Facility A Loans and/or Facility B Loans of the Affected Bank, on a date mutually acceptable to the Assenting Banks, such Affected Bank and the Company. The proceeds of such Loans, together, if necessary, with funds of the Company, shall be used to prepay the Loans of such Affected Bank, together with all interest accrued thereon (calculated on the basis set forth in a certificate delivered by such Affected Bank) and all other amounts owing to such Affected Bank hereunder, and, upon such assumption by the Assenting Banks and prepayment by the Company, such Affected Bank shall cease to be a "Bank" for purposes of this Agreement and shall no longer have any obligations hereunder. (b) So long as no Event of Default shall have occurred and be continuing, the Company may designate a Replacement Bank to assume the Commitments and the obligations of any such Affected Bank hereunder and to purchase the outstanding Loans of such Affected Bank and such Affected Bank's rights hereunder without recourse upon, or warranty by, or expense to such Affected Bank, for a purchase price equal to the outstanding principal amount of the Loans of such Affected Bank plus all interest accrued and unpaid thereon (calculated on the basis set forth in a certificate delivered by such Affected Bank) and all other amounts owing to such Affected Bank hereunder, and upon such assumption and purchase by the Replacement Bank, such Replacement Bank shall be deemed to be a "Bank" for purposes of this Agreement and such Affected Bank shall cease to be a "Bank" for purposes of this Agreement and shall no longer have any obligations hereunder. The Company shall provide replacement Notes to such Replacement Bank and to any Assenting Bank making Loans pursuant to subsection (a) above to reflect the identity of and/or the outstanding amount of the Loans of such Replacement Bank or such Assenting Bank. As used in this Section 5.03, "Affected Bank" shall mean any Bank that (i) is subject to taxes or Additional Costs described in Section 5.01 or 5.02 hereof and claims reimbursement for such taxes or Additional Costs pursuant to Section 5.01 or 5.02 hereof or (ii) breaches in any material respect its obligations to make Loans hereunder; and "Replacement Bank" shall mean a lending institution designated by the Company pursuant to this Section 5.03, which, at the time of such designation, is not a Bank. Section 6. Conditions Precedent. 6.01. Effectiveness. The effectiveness of this Agreement is subject to the receipt by the Agent on the date of the execution and delivery of this Agreement of the following documents, each of which shall be satisfactory to the Agent in form and substance and shall be dated or certified on or as of the Closing Date, unless otherwise indicated or agreed to by the Agent: (a) Corporate Documents of the Company. The following documents, each certified as indicated below: (i) a copy of the charter, as amended, of the Company certified by the Secretary of State of the State of Delaware, and a certificate as to the good standing of and charter documents filed by the Company from such Secretary of State, dated as of a recent date; (ii) a certificate of the Secretary of the Company, dated the date hereof and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Company as in effect on the date of such certificate, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of the Company authorizing the execution, delivery and performance of this Agreement, the Notes, the Pledge Agreement, the Subsidiary Security Agreement and the extensions of credit hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the charter of the Company has not been amended since the date of the certification thereof furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer of the Company executing this Agreement or any of the Notes and each other document to be delivered by the Company from time to time in connection herewith (and the Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Secretary of the Company); and (iii) a certificate of another officer of the Company as to the incumbency and specimen signature of the Secretary of the Company. (b) Corporate Documents of Western. The following documents, each certified as indicated below: (i) a copy of the charter, as amended, of Western certified by the Secretary of State of the State of Delaware, and a certificate as to the good standing of and charter documents filed by Western from such Secretary of State, dated as of a recent date; (ii) a certificate of the Secretary of Western, dated the date hereof and certifying (A) that attached thereto is a true and complete copy of the by-laws of Western as in effect on the date of such certificate, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of Western authorizing the execution, delivery and performance of the Subsidiary Note and the Subsidiary Security Agreement, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the charter of Western has not been amended since the date of the certification thereof furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer of Western executing the Subsidiary Note, the Subsidiary Security Agreement and each other document to be delivered by Western from time to time in connection therewith (and the Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Secretary of Western); and (iii) a certificate of another officer of Western as to the incumbency and specimen signature of the Secretary of Western. (c) Officer's Certificate. A certificate of a senior officer of the Company to the effect set forth in the first sentence of Section 6.02 hereof. (d) Opinion of Counsel to the Company. An opinion of Morgan, Lewis & Bockius, counsel to the Company, substantially in the form of Exhibit F hereto. (e) Pledge Agreement. The Pledge Agreement, duly executed by the Company. (f) Subsidiary Note. The Subsidiary Note, duly executed by Western, to be held by the Agent pursuant to the Pledge Agreement. (g) Subsidiary Security Agreement. Evidence that the Subsidiary Security Agreement has been duly executed and delivered by the Company and Western, and that all actions reasonably necessary or appropriate to perfect the Liens on Western's accounts receivables and inventory arising thereunder has been taken. (h) Amendment Fee. Payment of an amendment fee of $468,750, for the pro-rata account of the Banks. (i) Expenses. Payment of all reasonable out-of-pocket costs and expenses incurred prior to the Closing Date which the Company is required to pay pursuant to Section 11.03 hereof. (j) Accrued Interest and Fees. Payment of all accrued interest, fees and other amounts (other than the principal of the Loans) outstanding under the Old Credit Agreement. (k) Other Documents. Such other documents as the Agent or any Bank or special New York counsel to the Banks may reasonably request in connection with the execution and delivery of this Agreement, the Notes and the other Loan Documents required hereunder to be delivered on the Closing Date and the extensions of credit hereunder. The execution and delivery of this Credit Agreement by the Agent shall constitute its acknowledgment that the documents delivered pursuant to this Section 6.01 are satisfactory to the Agent as to form and substance. 6.02. Additional Conditions. Each of the effectiveness of this Agreement and the obligation of the Banks to make any Loan or otherwise extend any credit to the Company upon the occasion of each borrowing or other extension of credit hereunder is subject to the further conditions precedent that, both immediately prior to the making of such Loan or other extension of credit and also after giving effect thereto: (i) no Default shall have occurred and be continuing; (ii) the representations and warranties made by the Company in Section 7 hereof shall be true and complete in all material respects on and as of the date of the making of such Loan or other extension of credit with the same force and effect as if made on and as of such date (except to the extent that such representations and warranties expressly relate to an earlier date); and (iii) with respect to any borrowing of a Facility A Loan, the Company represents and warrants that Western has requested a borrowing under the Subsidiary Note equal to the amount to be borrowed with respect to such Facility A Loan. Each notice of borrowing or request for the issuance of a Letter of Credit by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice or request and, unless the Company otherwise notifies the Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). Section 7. Representations and Warranties. The Company represents and warrants to the Banks that: 7.01. Corporate Existence. Each of the Company and its Subsidiaries: (a) is a corporation, partnership or other entity duly organized and validly existing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being conducted; and (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. 7.02. Financial Condition. The consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as at January 29, 1994 and the related consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon (in the case of said consolidated balance sheet and consolidated statements of operations, retained earnings and cash flow) of Deloitte & Touche, heretofore furnished to each of the Banks, are complete and correct and fairly present in all material respects the consolidated financial condition of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition of the Company and of each of its Consolidated Subsidiaries, as at said date and the consolidated and unconsolidated results of their operations for the fiscal year ended on said date, all in accordance with GAAP applied on a consistent basis. Neither the Company nor any of its Subsidiaries had on said dates any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments which in the aggregate is material to the financial condition of the Company and its Subsidiaries taken as a whole (determined on a consolidated basis), except as referred to or reflected or provided for in said balance sheets as at said dates (including the notes thereto). Since January 29, 1994, there has been no material adverse change in the consolidated financial condition, operations or business of the Company and its Consolidated Subsidiaries taken as a whole from that set forth in said financial statements as at said date. 7.03. Litigation. Except as disclosed in Schedule IV hereto, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the Knowledge of the Company) threatened against the Company or any of its Subsidiaries which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. 7.04. No Breach. None of the execution and delivery of this Agreement, the Notes, and the other Loan Documents or the consummation of the transactions contemplated hereby and thereby and compliance by the Company and Western with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Company or Western, or any applicable law or regulation, or any applicable order, writ, injunction or decree of any court or governmental authority or agency, or any material (determined by reference to the Company and its Subsidiaries, taken as a whole) agreement or instrument to which the Company or any of its Significant Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. 7.05. Action. Each of the Company and Western has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement, the Notes and the other Loan Documents; the execution, delivery and performance by the Company and Western of this Agreement, the Notes and the other Loan Documents have been duly authorized by all necessary corporate action on their respective parts; and this Agreement and each of the other Loan Documents has been duly and validly executed and delivered by the Company and Western (to the extent party thereto) and constitutes, and each of the Notes when executed and delivered for value will constitute, the Company's or Western's, as the case may be, legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 7.06. Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Company or Western (to the extent party thereto) of this Agreement, the Notes or the other Loan Documents or for the validity or enforceability thereof. 7.07. Use of Loans. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock and no part of the proceeds of any extension of credit hereunder will be used to buy or carry any Margin Stock. 7.08. ERISA. The Company and the ERISA Affiliates have fulfilled their respective obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or any Plan or Multiemployer Plan (other than to make contributions to the Plans and to pay premiums to the PBGC, in each case in the ordinary course of business). 7.09. Taxes. United States Federal income tax returns of the Company and its Subsidiaries have been examined and closed through the fiscal year of the Company ended January 30, 1988. The Company and its Consolidated Subsidiaries have filed all United States Federal income tax returns and all other tax returns which are required to be filed by them (other than such tax returns the failure of which to file would not have a Material Adverse Effect) and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Consolidated Subsidiaries, except such taxes as are being contested in good faith by appropriate proceedings and for which, in the reasonable opinion of the Company, adequate reserves are maintained on the books of the Company and its Subsidiaries. If the Company is a member of an affiliated group of corporations filing consolidated returns for United States Federal income tax purposes, it is the "common parent" of such group. 7.10. Investment Company Act. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.11. Public Utility Holding Company Act. The Company is not a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.12. Credit Agreements. Schedule I hereto is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, note purchase agreement, guarantee or other arrangement providing for or otherwise relating to any Indebtedness (or commitment therefor) to, or Guarantee by, the Company or any of its Subsidiaries, the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000 and the aggregate principal or face amount outstanding or which may become outstanding under each such arrangement is correctly described in said Schedule I. 7.13. Hazardous Materials. (a) The Company and each of its Subsidiaries have obtained all permits, licenses and other authorizations which the Company and each of its Subsidiaries are required to have under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a Material Adverse Effect. The Company and each of its Subsidiaries are in compliance with (i) the terms and conditions of all such permits, licenses and authorizations, and (ii) all Environmental Laws except to the extent the failure to comply with (i) and/or (ii) would not have a Material Adverse Effect. (b) Neither the Company nor any off its Subsidiaries has retained, assumed or otherwise become or remained liable for, whether by contract, operation of law or otherwise, any Environmental Claim with respect to any former Subsidiary or division of the Company or any of its Subsidiaries, which would have a Material Adverse Effect. (c) No written notice, notification, demand, request for information, citation, summons or order has been received by the Company or any of its Subsidiaries nor does the Company after diligent inquiry have Knowledge of any of the same being issued, no complaint has been served on the Company or any of its Subsidiaries nor does the Company after diligent inquiry have Knowledge of any complaint being filed, no penalty has been assessed against the Company or any of its Subsidiaries, to the Knowledge of the Company after diligent inquiry no investigation or review is pending or threatened by any governmental entity, and neither the Company nor any of its Subsidiaries has received any written notice or has any Knowledge of any pending or threatened investigation by any other entity with respect to any (i) alleged failure by the Company or any of its Subsidiaries to have any permit, license or authorization required in connection with the conduct of the business of the Company or any of its Subsidiaries or (ii) alleged Environmental Law violation involving the generation, treatment, storage, recycling, transportation, discharge, disposal or any Release of any Hazardous Materials by the Company or any of its Subsidiaries or at any of the properties owned or leased by any of them, except to the extent that such failure or violation would not have a Material Adverse Effect. (d) Neither the Company nor any of its Subsidiaries has generated, treated, stored, recycled, transported, discharged, disposed of or Released any Hazardous Material on any property now or previously owned or leased by the Company or any of its Subsidiaries to an extent that it would have a Material Adverse Effect; and (i) no PCB is present at any property now owned or leased by the Company or any of its Subsidiaries and the Company has not received any written notice and does not have any Knowledge of the presence of any PCB at any property previously owned or leased by the Company or any of its Subsidiaries to the extent that any such presence would have a Material Adverse Effect; (ii) no asbestos is present at any property now owned or leased by the Company or any of its Subsidiaries and the Company has not received any written notice and does not have any Knowledge of the presence of any asbestos at any property previously owned or leased by the Company or any of its Subsidiaries to the extent that any such presence would have a Material Adverse Effect; (iii) there are no underground storage tanks for Hazardous Materials, active or abandoned, present at any property now owned or leased by the Company or any of its Subsidiaries and the Company has not received any written notice and does not have any Knowledge of the presence of any such tanks at any property previously owned or leased by the Company or any of its Subsidiaries to the extent that any such presence would have a Material Adverse Effect; (iv) no Hazardous Materials have been Released at, on or under any property now owned or leased by the Company or any of its Subsidiaries and the Company has not received any written notice and does not have any Knowledge of any Release of Hazardous Materials at any property previously owned or leased by the Company or any of its Subsidiaries to the extent that any such Release would have a Material Adverse Effect. (e) Except as set forth on Schedule II hereto, since January 1, 1980 neither the Company nor any of its Subsidiaries has transported or arranged for the transportation of any Hazardous Material to any location which is listed on the National Priorities List under CERCLA, listed for possible inclusion on the National Priorities List by the United States Environmental Protection Agency in the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS") or on any similar published state list. The Company has not received any written notice and has no Knowledge of any allegations that the Company or any of its Subsidiaries is liable, in connection with the transportation or arranging for transportation of Hazardous Materials, for clean-up costs, remedial work, damages to natural resources on or for personal injury claims, including, but not limited to, claims under CERCLA, to the extent such liability would have a Material Adverse Effect. (f) The hazardous material annual generator reports which the Company and each of its Subsidiaries were required to file for calendar years 1991, 1992 and 1993 pursuant to 40 CFR Part 262.41 and 40 CFR Part 262.56 or any similar state regulation are contained in Schedule II, except as otherwise set forth therein. (g) Except as set forth in Schedule II, no written notification of a Release of a Hazardous Material in violation of any Environmental Law or any permit, license or authorization held or received by the Company or any of its Subsidiaries has been filed or made by or on behalf of the Company or any of its Subsidiaries. (h) Except as set forth in Schedule II hereto, no property now or, to the Knowledge of the Company, previously owned or leased by the Company or any of its Subsidiaries is listed on the National Priorities List under CERCLA, listed for possible inclusion on the National Priorities List in CERCLIS or on any similar published state list. (i) No Liens which would have a Material Adverse Effect have arisen under or pursuant to any Environmental Laws on any of the property or properties owned or leased by the Company or any of its Subsidiaries and neither the Company nor any of its Subsidiaries has received any notice or has any Knowledge of any government action which has been taken or is in the process of being taken which could subject any of such Properties to any such Lien. (j) There have been no environmental investigations, studies, audits, tests, reviews or other analyses of which records exist conducted by or on behalf of the Company or any of its Subsidiaries and which are in the possession or control of the Company or any of its Subsidiaries or any of their consultants, attorneys, agents or representatives in relation to any property or facility now or previously owned or leased by the Company or any of its Subsidiaries which have not been made available to the Banks, except for tests, studies, reviews, and other analyses routinely taken to comply or determine compliance with permits held by the Company and its Subsidiaries. 7.14. Subsidiaries, Etc. Set forth in Schedule III hereto is a complete and correct list, as of the date of this Agreement, of all Subsidiaries of the Company (and the respective jurisdiction of incorporation of each such Subsidiary). Except as disclosed in said Schedule III, the Company owns, free and clear of Liens, all outstanding shares of such Subsidiaries (and each such Subsidiary owns, free and clear of Liens, all outstanding shares of its Subsidiaries) and all such shares are validly issued, fully paid and non-assessable. 7.15. No Offsets, Etc. As of the Closing Date, the Company has Facility B Loans outstanding to the Banks hereunder in the aggregate principal amount of $100,000,000. Such amount is due and owing to the Banks and is not subject to any counterclaim, offset or defense. Section 8. Covenants of the Company. The Company covenants and agrees with the Banks and the Agent that, so long as any Commitment, Loan, or Letter of Credit Liability is outstanding and until payment in full of all amounts payable by the Company hereunder: 8.01. Financial Statements. The Company shall deliver to the Agent, with sufficient copies for each of the Banks: (a) as soon as available and in any event within 15 Business Days after the end of each fiscal month, consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition and results of operations of the Company and of each of its Consolidated Subsidiaries, in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 45 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company, consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for the period from the beginning of the respective fiscal year to the end of such period, and consolidated and consolidating statements of operations for such quarterly fiscal period, and the related consolidated and consolidating balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition and results of operations of the Company and of each of its Consolidated Subsidiaries, in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments); (c) as soon as available and in any event within 105 days after the end of each fiscal year of the Company, consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such year and the related consolidated and consolidating balance sheets as at the end of such year, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the preceding fiscal year, and accompanied (i) in the case of said consolidated statements and balance sheet, by an opinion thereon of Deloitte & Touche or other independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and (ii) in the case of said consolidating statements and balance sheets, by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidating financial statements fairly present in all material respects (based upon the financial condition of the Company and its Subsidiaries, taken as a whole) the unconsolidated financial condition and results of operations of the Company and of each of its Consolidated Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such fiscal year; (d) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, which the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (e) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (f) as soon as reasonably practicable, and in any event within 30 days after the Company knows or has reason to know that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, which the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Company or an ERISA Affiliate with resect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); (ii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal by the Company or any ERISA Affiliate under Section 4201 or 4204 of ERISA from a Multiemployer Plan, or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; and (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 60 days; (g) promptly upon its becoming available, any management letter furnished to the Company by Deloitte & Touche or other independent certified public accountants of recognized national standing engaged by the Company; (h) promptly upon their becoming available, copies of all documents relating to the proposed Disposition of all or substantially all of the assets of Western's Games and Puzzles division, including without limitation, any contract for the Disposition thereof; (i) promptly after the Company knows that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken and proposes to take with respect thereto; and (j) from time to time such other information regarding the financial condition, operations or business of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Bank or the Agent may reasonably request. The Company will furnish to the Agent, with sufficient copies for each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a), (b) or (c) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken and proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.07(d), 8.09, 8.10, 8.11, 8.12, 8.18, 8.19 and 8.20 hereof as of the end of the respective fiscal month, quarterly fiscal period or fiscal year. 8.02. Litigation. Promptly after the service of a complaint or the Company otherwise obtains Knowledge thereof, the Company will give to the Agent notice of any legal or arbitral proceeding, and of any proceeding by or before any governmental or regulatory authority or agency, to which the Company or any of its Subsidiaries is a party, except any proceeding which, if adversely determined, could not reasonably be expected to have a Material Adverse Effect. 8.03. Existence, Access, Etc. The Company will, and will cause each of its Subsidiaries to: preserve and maintain its legal existence, and maintain all of its rights, privileges and franchises, except for such rights, privileges and franchises the termination of which would not result in a Material Adverse Effect (provided that nothing in this Section 8.03 shall prohibit any transaction expressly permitted under Section 8.05 hereof); comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities (including, without limitation, all Environmental Laws) if failure to comply with such requirements would have a Material Adverse Effect, except for such laws, rules, regulations or orders which the Company is contesting in good faith by appropriate proceedings, and for which, in the reasonable opinion of the Company, adequate reserves are maintained on the books of the Company and its Subsidiaries, unless contesting any such law, rule or regulation would itself subject the Company or such Subsidiary to or result in a Material Adverse Effect; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by appropriate proceedings and against which adequate reserves (as reasonably estimated by the Company) are being maintained in accordance with GAAP; maintain all of its material properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and permit, and cause each of its Subsidiaries to permit, at the Company's reasonable expense, representatives of, or financial advisors or consultants to, the Banks or the Agent, on reasonable prior notice and during normal business hours, to examine, copy and make extracts from the books and records of the Company and its Subsidiaries, to inspect the properties of the Company and its Subsidiaries, and to discuss the business and affairs of the Company and its Subsidiaries with their executive officers and employees, all to the extent reasonably requested by the Banks or the Agent or their representatives, financial advisors or consultants (as the case may be). 8.04. Insurance. The Company will, and will cause each of its Subsidiaries to, keep insured by financially sound and reputable insurers (determined as at the time such insurance is obtained) all property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations and carry such other insurance as is usually carried by such corporations. 8.05. Prohibition of Fundamental Changes. The Company will not, nor will it permit any of its Significant Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, and will not permit any of its Significant Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or property, whether now owned or hereafter acquired (including, without limitation, receivables and leasehold interests, but excluding (i) any inventory or other property sold or disposed of in the ordinary course of business and on ordinary business terms and (ii) obsolete or worn-out property, tools or equipment no longer used or useful in its business). Notwithstanding the foregoing provisions of this Section 8.05: (a) any Subsidiary of the Company may be merged, consolidated or amalgamated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other such Subsidiary; provided that if any such transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any such Significant Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its business or property (upon voluntary liquidation, dissolution or otherwise) to the Company or a Wholly-Owned Subsidiary of the Company; (c) the Company or any Subsidiary of the Company may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is or becomes a Wholly-Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder; and (d) the Company may convey, sell, lease, transfer or otherwise dispose of any business (whether maintained as a Subsidiary or division) to which is attributable at the time of such conveyance, sale, lease, transfer or other disposition less than 10% of the consolidated assets of the Company and its Consolidated Subsidiaries and to which is attributable less than 10% of the consolidated earnings of the Company and its Consolidated Subsidiaries, determined before taking into account Interest Expense and income taxes for the most recent twelve-month period. 8.06. Limitation on Liens. The Company will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, except: (a) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves (in the reasonable estimation of the Company) with respect thereto are maintained on the books of the Company or any of its Subsidiaries, as the case may be, in accordance with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(h) hereof; (c) pledges or deposits under worker's compensation, unemployment insurance and other similar social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (f) Liens on property of any corporation which becomes a Subsidiary of the Company after the date of this Agreement, provided that such Liens and the Indebtedness secured thereby are in existence at the time such corporation becomes a Subsidiary of the Company and were not created in anticipation thereof; (g) Liens upon real and/or tangible personal property acquired, constructed or improved after the date hereof (by purchase, construction or otherwise) by the Company or any of its Subsidiaries, each of which Liens either (A) existed on such property before the time of its acquisition and was not created in anticipation thereof, or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction or improvement) of such property; provided that no such Lien shall extend to or cover any property of the Company or such Subsidiary other than the property so acquired and improvements thereon; and provided, further, that the principal amount of Indebtedness secured by any such Lien shall at no time exceed the fair market value (as determined in good faith by a senior financial officer of the Company) of such property at the time it was acquired (by purchase, construction or otherwise); (h) Liens securing reimbursement obligations with respect to commercial letters of credit or bankers' acceptances incurred in the ordinary course of business, provided that such Liens extend only to property acquired in transactions supported by such letters of credit or in transactions financed by such bankers' acceptances; and (i) Liens upon property of any Subsidiary which secure only Indebtedness of such Subsidiary owing to the Company or any other Subsidiary of the Company; (j) Liens existing on the date hereof and listed in Schedule I hereto; and (k) any extension, renewal or replacement (in whole or in part) of the foregoing, provided, however, that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or property. 8.07. Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, create, incur or suffer to exist any Indebtedness except: (a) Indebtedness to the Banks hereunder; (b) Indebtedness outstanding on the date hereof and listed in Schedule I hereto; (c) Indebtedness of Subsidiaries of the Company to the Company or to other Subsidiaries of the Company; (d) additional Indebtedness of Subsidiaries of the Company in an aggregate amount at any time outstanding up to but not exceeding 10% of the Company's Tangible Net Worth at such time; and (e) Indebtedness of the Company and its Subsidiaries secured by Liens permitted under Section 8.06(f), Section 8.06(g) or Section 8.06(h). 8.08. Investments. The Company will not, and will not permit any of its Subsidiaries to, make or permit to remain outstanding any Investments except: (a) demand deposit accounts with banks; (b) Permitted Investments; (c) Investments by the Company and its Subsidiaries in capital stock, or Indebtedness, of Subsidiaries of the Company (whether now owned or existing or hereafter acquired) and advances by the Company and its Subsidiaries to Subsidiaries of the Company in the ordinary course of business; (d) Interest Rate Protection Agreements which are reasonably related to floating rate Indebtedness of the Company or its Subsidiaries outstanding or anticipated to be outstanding during the term of the respective Interest Rate Protection Agreement; (e) Investments outstanding on the date hereof; (f) Investments acquired in bankruptcy, liquidation, reorganization or similar proceedings in settlement of claims of the Company or any of its Subsidiaries in such proceedings; (g) subject to Section 8.13, Investments in joint ventures entered into in the ordinary course of the Company's business and having an aggregate book value not exceeding $20,000,000 at any time; (h) Investments constituting forward purchases of foreign exchange entered into in the ordinary course of the Company's business and having a term not exceeding one year; (i) Investments in Indebtedness of the Company, provided that no Event of Default has occurred and is continuing at the time of acquisition of any such Investment; and (j) other Investmentsin an aggregate amount not exceeding $2,000,000 at any time. 8.09. Dividend Payments. The Company will not, and will not permit any of its Subsidiaries to, declare or make any Dividend Payment at any time; provided, however, that the Company may at any time after the date hereof, declare and make Dividend Payments in cash, subject to the satisfaction of each of the following conditions: (a) no Default shall have occurred and be continuing at the time such Dividend Payment was declared; and (b) at the time of the declaration of the Dividend Payment the aggregate amount of Dividend Payments made during the period commencing on August 1, 1992 through and including the date of such Dividend Payment shall not exceed an amount equal to 50% of consolidated net income of the Company and its Consolidated Subsidiaries for the period from August 1, 1992 through and including the last day of the fiscal quarter most recently ended prior to the date of such Dividend Payment (treated for these purposes as a single accounting period). 8.10. Leverage Ratio. The Company shall not permit the Leverage Ratio to exceed 2.50 to 1 as at the end of the third fiscal quarter of any fiscal year of the Company, and shall not permit the Leverage Ratio to exceed 2.00 to 1 as at the end of any first, second or fourth fiscal quarter of any fiscal year of the Company (being the fiscal quarters ending on or about the last day of the months of April, July or January, respectively). 8.11. Tangible Net Worth. The Company will not permit Tangible Net Worth at any time to be less than the sum of (i) $150,000,000 plus (ii) an amount equal to (but not less than zero) 50% of the Company's consolidated net income (determined in accordance with GAAP) for the period from May 2, 1992 through the end of the Company's fiscal quarter most recently ended (treated for this purpose as a single accounting period). 8.12. Interest Coverage Ratio. The Company will not permit the Interest Coverage Ratio for any period set forth below to be less than the ratio set forth below opposite such period: Period Ratio ------ ----- Two fiscal quarters ending January 29, 1994 0.30 to 1 Fiscal quarter ending July 30, 1994 0.25 to 1 Fiscal quarter ending October 29, 1994 3.00 to 1 Fiscal quarter ending January 28, 1995 3.00 to 1 Two fiscal quarters ending April 29, 1995 1.50 to 1 and each fiscal quarter thereafter Notwithstanding the foregoing, in the event that Western sells all or substantially all of the assets of its Games and Puzzles division, the ratio set forth above for the fiscal quarter ending July 30, 1994 shall be increased to 0.65 to 1. 8.13. Lines of Business. Neither the Company nor any of its Subsidiaries shall engage to any substantial extent in any line or lines of business activity other than those in which the Company and its Subsidiaries are engaged on the date hereof and extensions of such lines of business activity and other lines of business activity reasonably related thereto. 8.14. Transactions with Affiliates. Except as expressly permitted by this Agreement, the Company will not, nor will it permit any of its Subsidiaries to, directly or indirectly: (a) make any material (based upon the financial condition of the Company and its Subsidiaries, taken as a whole) Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any material (based upon the financial condition of the Company and its Subsidiaries, taken as a whole) property to an Affiliate; (c) merge into or consolidate with, or purchase or acquire any material (based upon the financial condition of the Company and its Subsidiaries, taken as a whole) property from, an Affiliate; or (d) enter into any other material (based upon the financial condition of the Company and its Subsidiaries, taken as a whole) transaction directly or indirectly with or for the benefit of an Affiliate (including, without limitation, guarantees and assumptions of obligations of an Affiliate); provided that the Company and its Subsidiaries may enter into transactions (other than extensions of credit by the Company or any of its Subsidiaries to an Affiliate) with an Affiliate if the monetary or business consideration to the Company arising therefrom would be comparable to, or more favorable than, the monetary or business consideration which would obtain in a comparable transaction with a Person not an Affiliate. 8.15. Use of Proceeds. The Company will (and, in the case of the Facility A Loans, shall cause Western to) use the proceeds of the Loans hereunder solely for its general corporate purposes, including to finance acquisitions (whether of capital stock or of tangible and/or intangible assets) in privately negotiated transactions or in transactions approved or recommended by the board of directors (or comparable governing body) of the acquired entity (but not for any other type of acquisition); provided that neither the Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.16. Limitation on Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on the ability of any Subsidiary of the Company to (i) pay dividends or make other distributions on such Subsidiary's capital stock or any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any of its Subsidiaries, (ii) make any loans or advances to the Company or any of its Subsidiaries, (iii) transfer any of its property or assets to the Company or any of its Subsidiaries, or (iv) guarantee any Indebtedness of the Company or any of its Subsidiaries; provided that this Section 8.16 shall not prohibit any restriction or encumbrance existing under or by reason of (a) applicable law or (b) any agreement or instrument governing Indebtedness of a Person acquired by the Company or any Subsidiary of the Company existing at the time of such acquisition (and not created in anticipation thereof), which restriction or encumbrance is not applicable to any Person or property or assets of any Person other than the Person so acquired and/or its Subsidiaries. 8.17. Clean-Down. The Company will not permit the aggregate principal amount of Loans outstanding hereunder to exceed (i) if the Disposition by Western of all or substantially all of the assets of its Games and Puzzles division has not been consummated, $115,000,000, or (ii) if such Disposition has been consummated, $15,000,000, in each case for a period of thirty consecutive days during the first fiscal quarter of each fiscal year of the Company (beginning with the fiscal year commencing on January 29, 1995) and after such thirty day period, if the Company has not previously delivered the compliance certificate required by Section 8.01 hereof in respect of the financial statements for the last fiscal month of the preceding fiscal year, until such compliance certificate has been delivered in accordance with Section 8.01 hereof. 8.18. Cash Flow. The Company will not permit its Cash Flow for any period set forth below to be less than the amount set forth below opposite such period: Period Cash Flow ------ --------- Fiscal quarter ended 4/30/94 $ (17,650,000) One fiscal month ended 5/28/94 (1,645,000) Two fiscal months ended 6/25/94 (1,189,000) Three fiscal months ended 7/30/94 3,500,000 One fiscal month ended 8/27/94 4,047,000 Two fiscal months ended 9/24/94 10,007,000 Three fiscal months ended 10/29/94 23,900,000 One fiscal month ended 11/26/94 5,818,000 Two fiscal months ended 12/31/94 8,419,000 Three fiscal months ended 1/28/95 12,100,000 8.19. Loans Outstanding. From and after the Disposition by Western of all or substantially all of the assets of its Games and Puzzles division, the Company will not permit the aggregate principal amount of Loans outstanding at any time during the period commencing with the delivery by the Company to the Agent of a compliance certificate for any fiscal month and ending with the delivery by the Company to the Agent of a compliance certificate for the next succeeding fiscal month to exceed the percentage set forth below opposite such fiscal month of the total amount of Inventory and Accounts Receivable (as each such term is defined under GAAP) of the Company at the end of such fiscal month, as certified by such compliance certificate: Month Percentage ----- ---------- June, 1994 16.5% July, 1994 16.5% August, 1994 23.5% September, 1994 24.0% October, 1994 28.0% November, 1994 29.0% December, 1994 24.0% January, 1995 6.5% February, 1995 and 13.0% thereafter In addition, the Company shall comply with this Section 8.19 with effect from the end of the most recent fiscal month ending prior to the Disposition of all or substantially all of the assets of Western's Games and Puzzles division as provided above in Section 8.19, such compliance to be determined on a pro forma basis by subtracting $100,000,000 from the aggregate principal amount of Loans outstanding and dividing the resulting amount by the total amount of Inventory and Accounts Receivable of the Company at the end of such fiscal month, and accordingly, the Company shall furnish to the Agent, with sufficient copies for each Bank, on or prior to the third Business Day following such Disposition, a certificate of a senior financial officer of the Company setting forth in reasonable detail the computations necessary to determine compliance by the Company with this Section 8.19. The Company shall not borrow any Loans under this Agreement during the period commencing with such Disposition and ending with the delivery of the compliance certificate described in the immediately preceding sentence. In the event that the Disposition of the Company's Advertising Specialty division is consummated, the percentages set forth in this Section 8.19 for each fiscal month ending thereafter shall be reduced by the difference between the Company's projection of "Loans Outstanding as a % of Accounts Receivable and Inventories" for the relevant fiscal month and the respective percentages obtained by dividing (i) the Company's projection of "Loans Outstanding (Direct Borrowings)" for the relevant fiscal month less up to $12,000,000 of the net cash proceeds of such Disposition received by the Company or any of its Subsidiaries by (ii) the sum of the Company's projections for "Accounts Receivable, Net" and "Inventories, Net" for the relevant fiscal month. The projections referred to in the preceding sentence are set forth in Schedule V attached hereto. Notwithstanding anything to the contrary in this Section 8.19, the Company shall be entitled to deliver to the Agent a compliance certificate of a senior financial officer of the Company setting forth the total amount of Inventory and Accounts Receivable of the Company as of the date of such compliance certificate, and thereupon the aggregate principal amount of Loans which the Company may permit to be outstanding for purposes of this Section 8.19 during the period commencing with the delivery of such compliance certificate and ending with the delivery of any subsequent compliance certificate shall be the percentage set forth in this Section 8.19 for the then current fiscal month of the total amount of Inventory and Accounts Receivable reflected in such compliance certificate. 8.20. Capital Expenditures. The Company shall not, and shall not permit its Subsidiaries to, make Capital Expenditures that, in the aggregate, exceed $27,500,000 during any fiscal year of the Company. 8.21. Guarantee and Pledge. The Company shall use its best efforts (i) to cause Western to issue a guarantee of all of the Company's obligations to the Banks, the Agent and the Co-Agent hereunder, in substantially the form set forth as Exhibit B to this Credit Agreement and (ii) to pledge for the ratable benefit of the Banks and the holders (the "Holders") of the Company's 7.65% Debentures due 2002 (the "Debentures"), all of the issued and outstanding capital stock of Western, in each case no later than the earlier of (a) the thirtieth day after the Disposition of all or substantially all of the assets of the Games and Puzzles division of Western, and (b) September 30, 1994. The pledge of the stock of Western shall be to a Person and upon terms reasonably acceptable to the Agent, the Holders of not less than a majority in aggregate principal amount of the outstanding Debentures (the "Majority Holders") and the Trustee for the Debentures. Section 9. Events of Default. If one or more of the following events shall occur and be continuing: (a) The Company shall default in the payment when due of any interest on any Loan or any Reimbursement Obligation, any fee or any other amount (other than principal of any Loan or any Reimbursement Obligation) payable by it hereunder and such default shall have continued unremedied for two or more Business Days, or the Company shall default in the payment when due of any principal of any Loan or any Reimbursement Obligation (including any prepayment thereof required pursuant to Section 2.04 hereof); or (b) The Company or any of its Significant Subsidiaries shall default in the payment when due (after giving effect to any applicable grace period and any requirement for the giving of notice) of any principal of or interest on any of its other Indebtedness aggregating $5,000,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity; or (c) Any representation, warranty or certification made or deemed made herein (other than in Section 7.13 hereof) (or in any modification or amendment hereto) or in any other Loan Document by the Company or Western, or any certificate furnished by the Company or Western to any Bank or the Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material adverse respect; or (d) Any representation or warranty made or deemed made in Section 7.13 hereof by the Company shall prove to have been false or misleading as of the time made in any material respect and the Agent (acting at the direction of the Majority Banks) shall have given written notice thereof to the Company and the Company shall have failed to cure such breach of representation or warranty within 60 days after the giving of such notice by causing such representation or warranty to become true, by remedying the condition or event that is the basis of such breach or by causing such event or condition no longer to have a Material Adverse Effect or by taking such other action which has the effect of curing such breach; or (e) The Company shall default in the performance of any of its obligations under any of Sections 8.05, 8.06, 8.07, 8.08, 8.09, 8.14 or 8.16 hereof; or the Company or Western shall default in the performance of any of its other obligations in this Agreement or any other Loan Document and such default shall continue unremedied for a period of thirty days after notice thereof to the Company by the Agent or any Bank (through the Agent); or (f) The Company or any of its Significant Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (g) The Company or any of its Significant Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) file to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (h) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Significant Subsidiaries, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company or such Significant Subsidiary or of all or any substantial part of its assets, or (iii) similar relief in respect of the Company or such Significant Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Significant Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (i) A final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) or in excess of $20,000,000 in the aggregate (regardless of insurance coverage) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company and/or any of its Significant Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Significant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (j) Any Person (including any "person" as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), other than Richard A. Bernstein and/or any affiliates of Mr. Bernstein, shall acquire direct or indirect beneficial ownership of securities representing more than 50% of the total number of votes which may be cast in the election of directors of the Company by all stockholders entitled to vote in such election; (k) An event or condition specified in Section 8.01(e) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the reasonable opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) which would constitute, in the reasonable determination of the Majority Banks, a Material Adverse Effect; or (l) The Company shall permit Western to prepay all or any portion of the outstanding principal of the Subsidiary Note while any Facility B Loans are then outstanding; THEREUPON: (1) in the case of any such event (other than one referred to in paragraph (g) or (h) of this Section 9) with respect to the Company, the Agent may, and upon request of the Majority Banks shall, notify the Company that an "Event of Default" hereunder exists, and the Agent may and, upon request of the Majority Banks, shall, by notice to the Company, terminate the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement Obligations and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.01 or 5.02 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in paragraph (g) or (h) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement Obligations and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.01 or 5.02 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. In addition, the Company agrees, upon the occurrence and during the continuance of any Event of Default if the Agent has declared the principal amount then outstanding of, and accrued interest on, the Loans, and all other amounts payable by the Company hereunder and under the Notes to be due and payable, it shall, if requested by the Agent or the Majority Banks through the Agent (and, in the case of any Event of Default referred to in paragraph (f), (g) or (h) of this Section 9 with respect to the Company, forthwith, without any demand or the taking of any other action by the Agent or such Banks) provide cash collateral for the Letter of Credit Liabilities then outstanding by paying to the Agent immediately available funds in an amount equal to the then aggregate undrawn face amount of all Letters of Credit, which funds shall be held by the Agent as collateral security for the prompt payment in full when due of the Letter of Credit Liabilities, and the Company hereby grants to the Agent for the benefit of the Banks a security interest in any funds so paid. Section 10. The Agent and Co-Agent. 10.01. Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent and the Co-Agent to act as its agents hereunder with such powers as are specifically delegated to the Agent or the Co-Agent by the terms of this Agreement or any other Loan Document, together with such other powers as are reasonably incidental thereto. The Agent and the Co-Agent (which terms as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Loan Document or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; (d) shall not be responsible to any Bank for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct and (e) shall not be responsible to the Company or the Banks for (i) determining whether or not any of the transactions contemplated hereby qualifies as a highly leveraged transaction ("HLT") as defined by any bank regulatory authority, (ii) notifying the Banks regarding the HLT status of any transaction contemplated hereby or of any change in that status or (iii) the correctness of any determination as to HLT status. Notwithstanding anything in this Agreement to the contrary, the Co-Agent shall have no duties or responsibilities hereunder other than as a Bank, and shall not have any right to take any action hereunder other than as a Bank, except that upon the resignation or removal of the Agent, the Co-Agent shall, as provided in Section 10.08 hereof, succeed to the office of Agent hereunder. The Agent may employ agents and attorneys-in-fact and shall not be responsible to any Bank for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent and the Co-Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Agent. The Agent shall provide to each Bank copies of financial statements and other information furnished to it as required hereby to the extent that the Company is not obligated to deliver such information directly to the Banks. 10.02. Reliance by Agent and Co-Agent. The Agent and the Co-Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent or the Co-Agent, respectively. As to any matters not expressly provided for by this Agreement, as between the Agent or the Co-Agent (on the one hand) and the Banks (on the other hand), the Agent and the Co-Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.03. Defaults. Neither the Agent nor the Co-Agent shall be deemed to have knowledge or notice of the occurrence of a Default (other than, in the case of the Agent, the non-payment of principal of or interest on Loans, Reimbursement Obligations or of commitment fees or Letter of Credit issuance fees) unless the Agent or the Co-Agent, respectively, has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks and (if such notice was received from a Bank) to the Company (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 10.07 hereof) take such action (or refrain from taking such action) with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04. Rights as a Bank. With respect to its Commitment and the Loans made by it, each of the Agent and the Co-Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent or the Co-Agent (as the case may be), and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent and/or the Co-Agent in its individual capacity. Each of the Agent and the Co-Agent and their affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to and generally, engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or Affiliates) as if it were not acting as the Agent or the Co-Agent, as the case may be, and each of the Agent and the Co-Agent and its affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05. Indemnification. The Banks agree to indemnify the Agent and the Co-Agent (to the extent not reimbursed under Section 11.03 hereof, but without affecting the obligations of the Company under said Section 11.03) ratably in accordance with the aggregate principal amount of the Loans and Reimbursement Obligations held by the Banks (or, if no Loans or Reimbursement Obligations are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent or the Co-Agent (including by any Bank) arising out of or by reason of any investigation or any way relating to or arising out of this Agreement, any of the other Loan Documents or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Section 11.03 hereof but excluding, unless an Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any Loan Document, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06. Non-Reliance on Agent, Co-Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or the Co-Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or the Co-Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. Neither the Agent nor the Co-Agent shall be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the properties or books and records of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, neither the Agent nor the Co-Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) which may come into the possession of the Agent or the Co-Agent or any of their affiliates. 10.07. Failure to Act. Except for action expressly required of the Agent hereunder, each of the Agent and the Co-Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.08. Resignation or Removal of Agent or Co-Agent. Subject to the appointment and acceptance of a successor Agent or Co-Agent as provided below, either or both of the Agent or Co-Agent may resign at any time by giving notice thereof to the Banks and the Company, and either or both of the Agent or Co-Agent may be removed at any time with or without cause by Banks holding more than 50% of the aggregate unpaid principal amount of the outstanding Loans and Letter of Credit Liabilities, or, if no Loans or Letter of Credit Liabilities are outstanding, Banks having more than 50% of the aggregate amount of the Commitments. Upon any such resignation or removal of the Agent, the Co-Agent shall succeed to the office of Agent hereunder unless the Majority Banks, with (so long as no Event of Default shall have occurred and be continuing) the consent of the Company (which consent shall not be unreasonably withheld), shall have appointed a different successor Agent. Upon any such resignation or removal of the Co-Agent, the Majority Banks shall have the right to appoint a successor Co-Agent, with (so long as no Event of Default shall have occurred and be continuing) the consent of the Company (which consent shall not be unreasonably withheld). If no successor Agent or Co-Agent (as the case may be) shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Agent's or Co-Agent's giving of notice of resignation or the Banks' removal of the retiring Agent or Co-Agent, then the retiring Agent or Co-Agent may, on behalf of the Banks, appoint a successor Agent or Co-Agent, as the case may be (with the consent of the Company, which consent shall not be unreasonably withheld), which shall be a bank having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Agent or Co-Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent or Co-Agent, as the case may be, and the retiring Agent or Co-Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's or Co-Agent's resignation or removal hereunder, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent or Co-Agent, and the retiring Agent or Co-Agent shall continue to be responsible (to the extent set forth herein and only to such extent) for any actions taken or omitted to be taken by it in its capacity as Agent or Co-Agent while it was acting as Agent or Co-Agent hereunder. Section 11. Miscellaneous. 11.01. Waiver. No failure on the part of the Agent, the Co-Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement, any Note or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement, any Note or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02. Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered (in either case during normal business hours) or, in the ease of a mailed notice, upon receipt, in each case given or addressed as aforesaid. A copy of any notice to or from the Company shall be sent by mail or delivered personally to the intended recipient not later than one Business Day following the giving of such notice. 11.03 Expenses, Etc. The Company agrees to pay or reimburse each of the Banks, the Agent and the Co-Agent for paying: (a) all reasonable out-of-pocket costs and expenses of the Agent and the Co-Agent (including, without limitation, the reasonable fees and expenses of Weil, Gotshal & Manges, special New York counsel to the Agent), in connection with (i) the negotiation, preparation, execution and delivery of this Agreement, the Notes and the other Loan Documents and the extension of credit hereunder and (ii) any amendment, modification or waiver of any of the terms of this Agreement, any of the Notes or any of the other Loan Documents; (b) all reasonable out-of-pocket costs and expenses of the Banks, the Agent and the Co-Agent (including reasonable consultants' and counsels' fees) in connection with (i) any Event of Default and any enforcement or collection proceedings resulting therefrom; (ii) the enforcement of this Section 11.03; and (iii) the retention of any consultant to advise the Agent and the Banks regarding the business and affairs of the Company and its Subsidiaries; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement, any Letter of Credit or any of the Notes or any other Loan Document. The Company hereby agrees to indemnify the Agent, the Co-Agent and each Bank and their respective directors, officers, employees and agents for, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any litigation, or any investigation in contemplation of litigation, or any other proceedings (including any threatened investigation or litigation or other proceedings, but excluding litigation involving only the Banks, the Co-Agent and the Agent) relating to the extensions of credit hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the extensions of credit hereunder or any transaction contemplated hereby or by any other Loan Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). Whenever the Company is obligated to indemnify the Agent, the Co-Agent, any Bank or any Issuing Bank hereunder, the Company shall not be obligated to so indemnify the Agent, the Co-Agent or any Bank or any Issuing Bank in respect of any settlement of any litigation or threatened litigation unless the Company shall have consented to such settlement. In addition, in each such instance the Company shall have the right, at its sole option and expense, to conduct and control, through counsel of its choice, and to defend against, negotiate, settle or otherwise deal with any claim, investigation, action, suit or proceeding for which it is obligated to provide indemnification hereunder; provided, however, that no settlement of any such action, investigation, suit or proceeding shall be made without the prior written consent of the party or parties being indemnified if such settlement does not release the party or parties being indemnified from all liabilities or obligations with respect to any such claim, investigation, action, suit or proceeding; and provided, further, that if the defendants in such action, investigation, suit or proceeding include both the Company and any of the Banks, the Agent or the Co-Agent, and any Bank, the Agent or the Co-Agent shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to the Company and that the Company is unable or unwilling to properly assert, such Bank, the Agent or the Co-Agent (as the case may be) shall be entitled to separate counsel (at the expense of the Company) to assert such defenses. 11.04. Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Company, the Agent and the Majority Banks, or by the Company and the Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks and the Company or by the Agent acting with the consent of the Majority Banks and the Company; provided that no amendment, modification or waiver shall, unless by an instrument signed by all of the Banks or by the Agent acting with the consent of all of the Banks: (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on any Loan, any Reimbursement Obligation or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any commitment fee or Letter of Credit issuance fee is payable hereunder, (v) alter the terms of Section 4.02 or 4.07(b) hereof or of this Section 11.04, (vi) amend the definition of the term "Majority Banks" or (vii) waive any of the conditions precedent set forth in Section 6 hereof; and provided, further, that any amendment of Section 10 hereof shall require the consent of the Agent. 11.05. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06. Assignments and Participations. (a) The Company may not assign its rights or obligations hereunder or under the Notes or any other Loan Document without the prior consent of all of the Banks and the Agent. (b) Each Bank may, with the consent of the Company (which consent shall not be unreasonably withheld), assign any of its Loans, its Notes, its Commitments, and its Letter of Credit Interests (but only with the consent of, in the case of an outstanding Commitment, the Agent and, in the case of a Letter of Credit Interest, each Issuing Bank); provided that, (i) no such consent by the Company or the Agent shall be required in the case of any assignment to another Bank; (ii) any such partial assignment shall be in an amount at least equal to $10,000,000; and (iii) each such assignment by a Bank of its Loans, Notes, Commitments, or Letter of Credit Interests shall be made in such manner so that the same portion of each Type of its Loans, Notes, Commitments, and Letter of Credit Interests is assigned to the respective assignee. Upon execution and delivery by the assignee to the Company, the Agent, and the Issuing Bank of an instrument in writing pursuant to which such assignee agrees to become a "Bank" hereunder (if not already a Bank) having the Commitments, Loans, and, if applicable, Letter of Credit Interests specified in such instrument, and upon consent thereto by the Company, the Agent, and the Issuing Banks to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Company, the Agent, and each Issuing Bank), the obligations, rights and benefits of a Bank hereunder holding the Commitments, Loans, and, if applicable, Letter of Credit Interests (or portions thereof) assigned to it (in addition to the Commitments, Loans, and Letter of Credit Interests, if any, theretofore held by such assignee) and the assigning Bank shall, to the extent of such assignment, be released from the Commitments (or portions thereof) so assigned. Upon each such assignment the assigning Bank shall pay the Agent an assignment fee of $2,000. (c) A Bank may sell or agree to sell, to one or more financial institutions organized under the laws of the United States or any state thereof or, with the consent of the Company which will not be unreasonably withheld, under the laws of any other country or political subdivision thereof, a participation in all or any part of any Loans or Letter of Credit Interests held by it, or in its Commitments, in which event each purchaser of a participation (a "Participant") shall not, except as otherwise provided in Section 4.07(c) hereof, have any rights or benefits under this Agreement, any Notes or any other Loan Document (the Participant's rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in favor of the Participant). All amounts payable by the Company to any Bank under Section 5 hereof in respect of Loans, Letter of Credit Interests held by it, and its Commitments, shall be determined as if such Bank had not sold or agreed to sell any participations in such Loans, Letter of Credit Interests and Commitments, and as if such Bank were funding each of such Loans, Letter of Credit Interests and Commitments in the same way that it is funding the portion of such Loans, Letter of Credit Interests and Commitments in which no participations have been sold. In no event shall a Bank that sells a participation agree with the Participant to take or refrain from taking any action hereunder except that such Bank may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of any of such Bank's Commitments, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans, Reimbursement Obligations or any portion of any commitment fee or Letter of Credit issuance fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, or (iv) reduce the rate at which interest is payable thereon, or any commitment fee or Letter of Credit issuance fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee. (d) Anything in this Section 11.06 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, and such Loans and Notes shall be fully transferrable as provided therein. No such assignment shall release the assigning Bank from its obligations hereunder. (e) Each Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12 hereof. 11.07. Survival. The obligations of the Company under Sections 5.01, 5.02, and 11.03 hereof and the obligations of the Banks under Section 10.05 hereof shall survive the repayment of the Loans and Reimbursement Obligations and the termination of the Commitments. In addition, each representation and warranty made, or deemed to be made by a notice of any extension of credit (whether by means of a Loan or a Letter of Credit), herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any extension of credit hereunder (whether by means of a Loan or a Letter of Credit), any Default which may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Bank, the Agent or the Co-Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such extension of credit was made. 11.08. Captions. The table of contents, captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10. Governing Law; Submission to Jurisdiction. This Agreement and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. Each of the Company, the Agent, the Co-Agent and the Banks hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement, any other Loan Document or the transactions contemplated hereby or thereby. Each of the Company, the Agent, the Co-Agent and the Banks irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 11.11. Waiver of Jury Trial. EACH OF THE COMPANY, THE AGENT, THE CO-AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12. Confidentiality. Each of the Banks, the Agent and the Co-Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential any non-public information supplied to it by or on behalf of the Company pursuant to this Agreement which is identified by the Company as being confidential at the time the same is delivered to the Banks, the Agent or the Co-Agent, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by applicable statute, rule or regulation or by judicial process, (ii) to counsel for any of the Banks, the Agent or the Co-Agent (provided that such counsel agrees, for the benefit of the Company, to be bound by the terms of this Section 11.12), (iii) to bank examiners, auditors or accountants, (iv) to the Agent, the Co-Agent or any other Bank, (v) in connection with any litigation relating to this Agreement or any other Loan Document to which any one or more of the Banks is a party or (vi) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement in substantially the form of Exhibit G hereto prior to the delivery of any such non-public information; and provided that in no event shall any Bank, the Agent or the Co-Agent be obligated or required to return any materials furnished by the Company; and provided, further, that (A) unless specifically prohibited by applicable law or court order, each Bank shall, prior to disclosure thereof pursuant to clause (i) or (v) above, use reasonable efforts to notify the Company of any request for disclosure of any such non-public information (other than any such request in connection with an examination of the financial condition of such Bank by, or any other regulatory matter involving, such governmental agency) sufficiently in advance of such intended disclosure to enable the Company to seek a protective order and (B) such disclosure (except pursuant to any such request in connection with an examination of the financial condition of such Bank by, or any other regulatory matter involving, such governmental agency) shall be limited to that information which counsel for the Bank, the Agent or the Co-Agent, as applicable, advises that the Bank, the Agent or the Co-Agent is legally required to disclose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. WESTERN PUBLISHING GROUP, INC. By: /s/ Steven M. Grossman ------------------------------------------- Title: Executive Vice President Address for Notices: Western Publishing Group, Inc. 444 Madison Avenue New York, New York 10022 Telecopier No.: 212-888-5025 Telephone No.: 212-688-4500 Attention: Mr. Steven M. Grossman Executive Vice President & Chief Financial Officer With a copy to: Morgan Lewis & Bockius 101 Park Avenue New York, New York 10178 Telephone No.: 212-309-6000 Telecopier No.: 212-309-6273 Attention: Mitchell N. Baron, Esq. Facility A Commitment FLEET BANK $ 3,000,000 Facility B By: /s/ Peter Hall Commitment -------------------------- $23,000,000 Title: Vice President Lending Office: Letter of Credit Fleet Bank Commitment 56 East 42nd Street $ 2,000,000 New York, New York 10017 Address for Notices: Fleet Bank 56 East 42nd Street New York, New York 10017 Telephone No.: 212-907-5118 Telecopier No.: 212-907-5614 Attention: Mr. Peter C. Hall Vice President Facility A Commitment THE BANK OF NEW YORK $ 1,875,000 By: /s/ Richard P. Hebner Facility B -------------------------- Commitment Title: Vice President $14,375,000 Lending Office: The Bank of New York One Wall Street New York, New York 10286 Letter of Credit Commitment $ 1,250,000 Address for Notices: The Bank of New York One Wall Street New York, New York 10286 Telephone No.: 212-635-7214 Telecopier No.: 212-635-1480 Attention: Mr. Richard Hebner Vice President Facility A Commitment CREDIT LYONNAIS $ 1,500,000 By: /s/ S. Burdick Facility B -------------------------- Commitment Title: Vice President $11,500,000 By: __________________________ Title: Letter of Credit Lending Office: Commitment $ 1,000,000 Credit Lyonnais, New York Branch 1301 Avenue of the Americas New York, New York 10019 Address for Notices: Credit Lyonnais, New York Branch 1301 Avenue of the Americas New York, New York 10019 Telephone No.: 212-261-7343 Telecopier No.: 212-459-3179 Attention: Ms. Silvana Burdick Vice President Facility A Commitment THE DAIWA BANK, LTD. $ 1,500,000 By: /s/ James H. Broadley Facility B -------------------------- Commitment Title: Vice President $11,500,000 Lending Office: Letter of Credit The Daiwa Bank, Ltd. Commitment 233 S. Wacker Drive $ 1,000,000 Suite 5400 Chicago, Illinois 60606 Address for Notices: The Daiwa Bank, Ltd. 450 Lexington Avenue Suite 1700 New York, NY 10017 Telephone No.: 212-808-2338 Telecopier No.: 212-818-0865 Attention: Mr. James H. Broadley Vice President Facility A Commitment MELLON BANK, N.A. $ 1,500,000 By: __________________________ Facility B Title: Commitment $11,500,000 Lending Office: Letter of Credit Mellon Bank, N.A. Commitment One Mellon Bank Center, #4835 $ 1,000,000 Pittsburgh, Pennsylvania 15258 Address for Notices: Mellon Bank, N.A. One Mellon Bank Center, #4835 Pittsburgh, Pennsylvania 15258 Telephone No.: 412-234-1055 Telecopier No.: 412-234-0286 Attention: Ms. Brigitte R. Bouchat Vice President Facility A Commitment NATIONAL WESTMINSTER BANK USA $ 1,500,000 By: /s/ Phillip Sorace Facility B -------------------------- Commitment Title: Vice President $11,500,000 Lending Office: Letter of Credit National Westminster Bank USA Commitment 592 Fifth Avenue $ 1,000,000 New York, New York 10036 Address for Notices: National Westminster Bank USA 592 Fifth Avenue New York, New York 10036 Telephone No.: 212-602-2557 Telecopier No.: 212-602-2080 Attention: Mr. Philip Sorace Vice President Facility A STANDARD CHARTERED BANK Commitment $ 1,500,000 By: /s/ Brian Taylor -------------------------- Facility B Title: Commitment $11,500,000 Lending Office: Standard Chartered Bank, Letter of Credit New York Branch Commitment 160 Water Street $ 1,000,000 New York, New York 10022 Address for Notices: Standard Chartered Bank, New York Branch 160 Water Street New York, New York 10022 Telephone No.: 212-612-0242 Telecopier No.: 212-612-0225 Attention: Mr. Brian Talor Assist. Vice President Facility A Commitment NORWEST BANK MINNESOTA, NATIONAL $ 1,125,000 ASSOCIATION By: __________________________ Title: Facility B Commitment Lending Office: $ 8,625,000 Norwest Bank Minnesota, N.A. Letter of Credit Sixth and Marquette Streets Commitment Minneapolis, Minnesota $ 750,000 Address for Notices: Norwest Bank Corporate Banking Offices Suite 1200 100 East Wisconsin Avenue Milwaukee, Wisconsin 53233 Telephone No.: 414-224-3793 Telecopier No. 414-224-3795 Attention: Ms. Irene Hogan Vice President Facility A Commitment THE FIRST NATIONAL BANK OF BOSTON $ 1,500,000 By: __________________________ Title: Facility B Commitment Lending Office: $11,500,000 The First National Bank of Boston Letter of Credit 100 Federal Street Commitment Boston, Massachusetts 02110 $ 1,000,000 Address for Notices: The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 Telephone No.: 617-434-1809 Telecopier No.: 617-434-1508 Attention: Mr. William Kelly Vice President FLEET BANK, as Agent By: /s/ Peter C. Hall -------------------------- Title: Vice President Address for Notices to Fleet as Agent: 56 East 42nd Street New York, New York 10017 Attention: Mr. Peter C. Hall Telecopier No.: 212-907-5614 Telephone No.: 212-907-5118 THE BANK OF NEW YORK, as Co-Agent By: /s/ Richard P. Hebner -------------------------- Title: Vice President Address for Notices to Co-Agent: One Wall Street New York, New York 10286 Telecopier No.: 212-635-1480 Telephone No.: 212-635-7214 Attention: Mr. Richard Hebner EX-10.94 7 AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 4, 1994 ("this Amendment"), between WESTERN PUBLISHING GROUP, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the banks listed on the signature pages hereto (individually, a "Bank" and, collectively, the "Banks"); FLEET BANK, a New York bank, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"); and THE BANK OF NEW YORK, a New York bank, as co-agent for the Banks (in such capacity, together with its successors in such capacity, the "Co-Agent"). WHEREAS, the Company, the Banks, the Agent and the Co-Agent are parties to an Amended and Restated Credit Agreement dated as of May 31, 1994 (the "Credit Agreement"), which provides, subject to the terms and conditions thereof, for extensions of credit (by making of loans and issuing letters of credit) by the Banks to the Company; and WHEREAS, the Company, the Banks, the Agent and the Co-Agent wish to amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth herein, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment, terms defined in the Credit Agreement that are used herein have the same meanings herein as are ascribed to such terms in the Credit Agreement. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 6 below, but effective as of the date hereof, the Credit Agreement is hereby amended as follows: A. Section 8.01(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (a) as soon as available and in any event within 20 Business Days after the end of each fiscal month (except for the last fiscal month of each of the first three fiscal quarters and except that, in the case of December, 1994, such delivery shall be made within 15 calendar days after the end thereof), consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition and results of operations of the Company and of each of its Consolidated Subsidiaries, in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments); B. Section 8.01 of the Credit Agreement is hereby amended by redesignating subsections (i) and (j) thereof as subsections (k) and (l), respectively, and by adding new subsections (i) and (j) which read as follows: (i) on or before November 30, 1994, revised forecasted consolidated financial statements for the Company and its Subsidiaries for the fourteen-month period ending January, 1996, in substantially the same detail as the forecasts previously furnished by the Company to the Banks; (j) within 15 Business Days after the beginning of each fiscal month, a forecast of the Company's working capital requirements on a weekly basis, and the supporting assumptions for such forecast in reasonable detail on a monthly basis, for the period beginning on the first day of such fiscal month and ending on the last day of the next succeeding fiscal month; C. Section 8.03 of the Credit Agreement is hereby amended by adding the following to the end thereof: , including, without limitation, full access to all information used in preparing the forecast required to be furnished to the Banks pursuant to Section 8.01(i) hereof. D. Section 2.04 of the Credit Agreement is hereby amended by redesignating subsections (d) and (e) thereof as subsections (e) and (f), respectively, and inserting a new subsection (d) which reads as follows: (d) Immediately upon receipt thereof, the Company shall prepay the principal of the Loans hereunder, and the Commitments shall be reduced, in an aggregate principal amount equal to 100% of the proceeds derived from any refund of amounts previously paid to satisfy the Company's obligations with respect to any federal, state or local taxes arising from the Disposition of the assets of the Company's Games and Puzzles division and/or its Advertising Specialty division. The Company shall make any necessary filings with federal, state and local tax authorities to claim such refunds promptly upon the Company becoming entitled to do so, and shall assign all rights to receive any such tax refund to the Agent, on behalf of the Banks, and irrevocably instruct such tax authorities to pay any such claimed tax refund directly to the Agent, on behalf of the Banks. In addition, in the event that the Company's actual federal, state or local tax liability is less than the Company's estimate of such liability for purposes of calculating the amount of net cash proceeds received by the Company in connection with a Disposition in accordance with Section 2.04(c) hereof, the Company shall immediately prepay the principal of the Loans hereunder, and the Commitments shall be reduced, in an aggregate principal amount equal to the difference between such actual tax liability and such estimate. E. Section 8.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 8.10. Leverage Ratio. Commencing with the fiscal quarter ending January 28, 1995, the Company shall not permit the Leverage Ratio to exceed 2.50 to 1 as at the end of the third fiscal quarter of any fiscal year of the Company, and shall not permit the Leverage Ratio to exceed 2.00 to 1 as at the end of any first, second or fourth fiscal quarter of any fiscal year of the Company (being the fiscal quarters ending on or about the last day of the months of April, July or January, respectively). F. Section 8.11 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 8.11. Tangible Net Worth. The Company will not permit Tangible Net Worth at any time on or after December 31, 1994, to be less than the sum of (i) $150,000,000 plus (ii) an amount equal to (but not less than zero) 50% of the Company's consolidated net income (determined in accordance with GAAP) for the period from May 2, 1992 through the end of the Company's fiscal quarter most recently ended (treated for this purpose as a single accounting period). G. Section 8.12 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 8.12. Interest Coverage Ratio. The Company will not permit the Interest Coverage Ratio for any period set forth below to be less than the ratio set forth below opposite such period: Period Ratio ------ ----- Fiscal quarter ending January 28, 1995 3.00 to 1 Two fiscal quarters ending April 29, 1995 1.50 to 1 and each fiscal quarter thereafter H. Section 8.18 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 8.18 Cash Flow. The Company will not permit its Cash Flow for any period set forth below to be less than the amount set forth below opposite such period: Period Cash Flow ------ --------- Two fiscal months ended 12/31/94 8,419,000 Three fiscal months ended 1/28/95 12,100,000 I. Section 8.19 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 8.19. Loans Outstanding. From and after November 26, 1994, the Company will not permit the aggregate principal amount of Loans outstanding at any time during the period commencing with the delivery by the Company to the Agent of a compliance certificate for any fiscal month and ending with the delivery by the Company to the Agent of a compliance certificate for the next succeeding fiscal month to exceed the percentage set forth below opposite such fiscal month of the total amount of Inventory and Accounts Receivable (as each such term is defined under GAAP) of the Company at the end of such fiscal month, as certified by such compliance certificate: Month Percentage ----- ---------- December, 1994 24.0% January, 1995 6.5% February, 1995 and 13.0% thereafter In the event that the Disposition of the Company's Advertising Specialty division is consummated, the percentages set forth in this Section 8.19 for each fiscal month ending thereafter shall be reduced by the difference between the Company's projection of "Loans Outstanding as a % of Accounts Receivable and Inventories" for the relevant fiscal month and the respective percentages obtained by dividing (i) the Company's projection of "Loans Outstanding (Direct Borrowings)" for the relevant fiscal month less up to $12,000,000 of the net cash proceeds of such Disposition received by the Company or any of its Subsidiaries by (ii) the sum of the Company's projections for "Accounts Receivable, Net" and "Inventories, Net" for the relevant fiscal month. The projections referred to in the preceding sentence are set forth in Schedule V attached hereto. Notwithstanding anything to the contrary in this Section 8.19, the Company shall be entitled to deliver to the Agent a compliance certificate of a senior financial officer of the Company setting forth the total amount of Inventory and Accounts Receivable of the Company as of the date of such compliance certificate, and thereupon the aggregate principal amount of Loans which the Company may permit to be outstanding for purposes of this Section 8.19 during the period commencing with the delivery of such compliance certificate and ending with the delivery of any subsequent compliance certificate shall be the percentage set forth in this Section 8.19 for the then current fiscal month of the total amount of Inventory and Accounts Receivable reflected in such compliance certificate. J. The Credit Agreement is hereby amended by inserting a new Section 8.22, which reads as follows: Section 8.22. Blocked Account. The Company shall establish and maintain an interest bearing account with Fleet Bank (the "Blocked Account"). As promptly as practicable (but in no event later than ten Business Days) after the earlier of (i) the Disposition of all or substantially all of the assets of the Company's Advertising Specialty division (the "Ad Specialty Disposition") and (ii) January 28, 1995, the Company shall deliver to the Agent a certificate of Imowitz, Koenig & Company, or another certified independent public accounting firm reasonably satisfactory to the Agent, certifying the amount of the Company's federal, state and local income tax obligations payable in connection with the Disposition of the assets of its Games and Puzzles division and the amount of any tax benefits arising from the Ad Specialty Disposition or any other event which has the effect of reducing the Company's tax obligations, and such certificate shall present an itemized calculation of such tax obligations and benefits in reasonable detail. The Company shall not withdraw any funds from the Blocked Account except to the extent that such tax obligations, as reduced by such tax benefits, exceed $10,000,000, as evidenced by such certificate, and the Company shall provide such other evidence as the Agent may reasonably request to establish the amount of such tax obligations to the Agent's reasonable satisfaction, as well as to verify the amount and source of other funds either utilized or to be utilized for the payment of such tax obligations. No later than the third Business Day following satisfaction of the conditions set forth in the two immediately preceding sentences, the Agent shall wire transfer to an account designated by the Company the amount of funds from the Blocked Account which the Company is permitted to withdraw in accordance with this Section 8.22, and thereupon any amounts on deposit in the Blocked Account in excess of the amount which the Company is permitted to withdraw therefrom in accordance with this Section 8.22 shall be applied by the Agent to the Loans, and the Commitments shall be permanently reduced by such excess, all in accordance with Section 2.04(d) of the Credit Agreement. If the Company fails to deliver the certificate described in the second sentence of this Section 8.22 within the time period specified in such sentence, the entire amount on deposit in the Blocked Account shall be applied immediately by the Agent to the Loans, and the Commitments shall be permanently reduced by such amount, all in accordance with Section 2.04(d) of the Credit Agreement. K. The Credit Agreement is hereby amended by inserting a new Section 8.23, which reads as follows: Section 8.23. Additional Restrictions on Dividends. Prior to December 31, 1994, the Company shall not, and shall not permit any of its Subsidiaries to, (i) declare or make any Dividend Payment on account of any equity interest otherwise permitted by Section 8.09 of the Credit Agreement, or (ii) declare or make any dividends (in cash, property or obligations) on, or set apart money for a sinking or other analogous fund for, or make any other payments or distributions on account of, or effect any purchase, redemption, retirement or other acquisition of, the Company's Series A Preferred Stock except as required pursuant to the existing terms of the Company's currently outstanding Series A Preferred Stock. L. The Credit Agreement is hereby amended by inserting a new Section 8.24, which reads as follows: Section 8.24. Net Operating Loss. The Company will not permit its net operating loss (determined on a consolidated basis in accordance with GAAP), excluding any restructuring charges, during the period from July 30, 1994 through December 31, 1994, to exceed $20,000,000. M. Section 9(e) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (e) The Company shall default in the performance of any of its obligations under any of Sections 8.05, 8.06, 8.07, 8.08, 8.14, 8.16 or 8.23 hereof; or the Company or Western shall default in the performance of any of its other obligations in this Agreement or any other Loan Document and such default shall continue unremedied for a period of thirty days (or, in the case of any such default in existence at December 31, 1994, five calendar days) after notice thereof to the Company by the Agent or any Bank through the Agent); or Section 3. Reduction of Commitments. Effective as of the date hereof, pursuant to Section 2.04(b) of the Credit Agreement, the Company hereby permanently reduces the aggregate amount of (i) the Facility B Commitments to $50,000,000 and (ii) the Letter of Credit Commitments to $5,000,000. In addition, the Company agrees to permanently reduce the Facility B Commitments by 100% of the amount of any net proceeds of the Disposition of the assets of its Games and Puzzles division (other than proceeds received from the holdback with respect to the Over The Hill Gang consent) which are received by the Company after the date hereof. Section 4. Waiver. Subject to the satisfaction of the conditions precedent specified in Section 6 below, but effective as of the date hereof, the Banks hereby waive receipt of one day's prior notice of borrowing on the date that this Amendment becomes effective of Loans up to the full amounts of the unused Facility A Commitments and Facility B Commitments, after giving effect to the reductions effected pursuant to Section 3 of this Amendment. Section 5. Representations and Warranties. The Company represents and warrants to the Banks that the representations and warranties set forth in Section 7 of the Credit Agreement are true and complete in all material respects on the date hereof (except to the extent that such representations and warranties expressly relate to an earlier date) as if made on and as of the date hereof and as if each reference in said Section 7 to "this Agreement" included reference to the Credit Agreement as amended by this Amendment. Section 6. Conditions Precedent. As provided in Sections 2 and 4 above, the amendments to and waivers under the Credit Agreement set forth in said Sections shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: A. This Amendment shall have been executed and delivered by the Company and by the Majority Banks. B. The Company shall have prepaid the Loans in the amount required pursuant to Section 2.04(c) of the Credit Agreement in connection with the Disposition of the assets of the Company's Games and Puzzles division. C. The Company shall have deposited $15,000,000 in the Blocked Account. D. Western shall have requested a $15,000,000 advance under the Subsidiary Note. E. The Agent shall have received the following documents, each of which shall be satisfactory to the Agent in form and substance: (1) Corporate Documents. The following documents, each certified as indicated below: (a) if the certificate of incorporation of the Company has been amended since the date of the certification thereto delivered pursuant to Section 6.01 of the Credit Agreement, a copy of such certificate, as amended, of the Company; (b) a certificate of the Secretary or an Assistant Secretary of the Company, dated as of a recent date and certifying (i) that attached thereto is a true and complete copy of the by-laws of the Company as in effect on the date of such certificate or that the by-laws of the Company have not been amended since the date of the certification thereto delivered pursuant to Section 6.01 of the Credit Agreement, (ii) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of the Company authorizing the execution, delivery and performance of this Amendment and the performance of the Credit Agreement as amended hereby, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (iii) that the certificate of incorporation of the Company has not been amended since the date of the certification thereto furnished pursuant to clause (a) above or Section 6.01 of the Credit Agreement, as the case may be, and (iv) as to the incumbency and specimen signature of each officer of the Company executing this Amendment and each other document to be delivered by the Company from time to time in connection with the Credit Agreement amended hereby (and the Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Company); and (c) a certificate of another officer of the Company as to the incumbency and specimen signature of the Secretary or such Assistant Secretary of the Company. (2) Opinion of Counsel to the Company. An opinion of Morgan, Lewis & Bockius, counsel to the Company, in the form attached hereto as Exhibit A. (3) Games and Puzzles Certificate. A certificate of a senior financial officer of the Company certifying the total amount of proceeds received by the Company in respect of the Disposition of the assets of its Games and Puzzles division and itemizing in reasonable detail the amounts deducted therefrom in determining the net proceeds of such Disposition for purposes of Section 2.04(c) of the Credit Agreement. (4) Other Documents. Such other documents as the Agent or any Bank or counsel to the Banks may reasonably request. Section 7. Expenses. Without limiting its obligations under Section 11.03 of the Credit Agreement, the Company agrees to pay, promptly following demand, all reasonable out-of-pocket costs and expenses of the Agent and the Co-Agent (including the reasonable fees and disbursements of Weil, Gotshal & Manges, counsel to the Agent and the Banks) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. Section 8. Miscellaneous. Except as expressly herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. This Amendment shall be governed by, and construed in accordance with, the law of the State on New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. WESTERN PUBLISHING GROUP, INC. By /s/ Steven M. Grossman ---------------------------------------- Title: Executive Vice President FLEET BANK By /s/ Patrick F. McAuliffe ---------------------------------------- Title: Senior Vice President THE BANK OF NEW YORK By /s/ Richard P. Hebner ---------------------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By /s/ David Bonington ---------------------------------------- Title: Vice President By /s/ S. Burdick ---------------------------------------- Title: Vice President THE DAIWA BANK, LTD. By /s/ Brian M. ---------------------------------------- Title: Senior Vice President MELLON BANK, N.A. By /s/ Brigitte R. Bouchat ---------------------------------------- Title: Vice President NATIONAL WESTMINSTER BANK USA By /s/ Charles Green ---------------------------------------- Title: Vice President STANDARD CHARTERED BANK By ---------------------------------------- Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By ---------------------------------------- Title: THE FIRST NATIONAL BANK OF BOSTON By ---------------------------------------- Title: FLEET BANK, as Agent By /s/ Patrick F. McAuliffe ---------------------------------------- Title: Senior Vice President THE BANK OF NEW YORK as Co-Agent By /s/ Richard P. Hebner ---------------------------------------- Title: Vice President EX-10.95 8 AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 21, 1995 ("this Amendment"), between WESTERN PUBLISHING GROUP, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the banks listed on the signature pages hereto (individually, a "Bank" and, collectively, the "Banks"); FLEET BANK, a New York bank, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"); and THE BANK OF NEW YORK, a New York bank, as co-agent for the Banks (in such capacity, together with its successors in such capacity, the "Co-Agent"). WHEREAS, the Company, the Banks, the Agent and the Co-Agent are parties to an Amended and Restated Credit Agreement dated as of May 31, 1994, as amended by Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 4, 1994 (the "Credit Agreement"), which provides, subject to the terms and conditions thereof, for extensions of credit (by making of loans and issuing letters of credit) by the Banks to the Company; and WHEREAS, the Company, the Banks, the Agent and the Co-Agent wish to amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth herein, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment, terms defined in the Credit Agreement that are used herein have the same meanings herein as are ascribed to such terms in the Credit Agreement. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 5 below, but effective as of December 24, 1994, the Credit Agreement is hereby amended as follows: A. Section 2.03 of the Credit Agreement is hereby amended by adding a new paragraph (l) thereto which reads as follows: (l) Notwithstanding anything to the contrary in this Section 2.03, no Letters of Credit shall be issued pursuant to this Section 2.03 after February 1, 1995. Upon the expiration of any Letter of Credit after February 1, 1995, the aggregate amount of the Letter of Credit Commitments shall be automatically and permanently reduced by the aggregate amount of Letter of Credit Liabilities relating to such Letter of Credit. B. Sections 2.04 and 4.04 of the Credit Agreement are hereby amended by deleting the amount "$1,000,000" each time it appears in such Sections and substituting in each instance the amount "$100,000" therefor. C. Section 8.01(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (a) as soon as available and in any event within 20 Business Days after the end of each fiscal month other than January, 1995 (except that, in the case of fiscal February, March and April, such delivery shall be made within 30 Business Days after the end of each such fiscal month), consolidated and consolidating statements of operations, retained earnings and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition and results of operations of the Company and of each of its Consolidated Subsidiaries, in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments); D. The last paragraph of Section 8.01 of the Credit Agreement is hereby amended by deleting the references to Sections 8.10, 8.11, 8.12, 8.18 and 8.19 appearing therein and substituting therefor a reference to Section 8.24. E. Sections 8.10, 8.11, 8.12, 8.17, 8.18 and 8.19 of the Credit Agreement are hereby deleted. F. Section 8.24 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 8.24. Loss Before Interest Expense and Income Taxes. The Company will not permit its cumulative Loss Before Interest Expense and Income Taxes (determined on a consolidated basis in accordance with GAAP), excluding any restructuring charges, as of the dates set forth below for the period from and including January 29, 1995 through any such date to exceed the amount set forth opposite such date: Period Ending: Amount: ------------- ------ February 25, 1995 $ 7,500,000 March 25, 1995 $12,200,000 April 29, 1995 $17,400,000 May 27, 1995 $18,500,000 G. Section 8.01 of the Credit Agreement is hereby amended by redesignating subsection (l) thereof as subsection (m), and by adding a new subsection (l) which reads as follows: (l) On or prior to March 15, 1995, a report in reasonable detail describing the Company's financial situation and the status of the Company's efforts, and the actions proposed to be taken by the Company, to repay or refinance all outstanding Loans on or prior to the Commitment Termination Date. H. Section 9(e) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (e) The Company shall default in the performance of any of its obligations under any of Section 8.05, 8.06, 8.07, 8.08, 8.09, 8.14, 8.16 or 8.23 hereof; or the Company or Western shall default in the performance of any of its other obligations in this Agreement or any other Loan Document and such default shall continue unremedied for a period of thirty days (or, in the case of any default in the performance of its obligation to deliver any certificate as required pursuant to the last paragraph of Section 8.01, five Business Days) after notice thereof to the Company by the Agent or any Bank through the Agent); or Section 3. Reduction of Commitments. Effective as of the date hereof, pursuant to Section 2.04(b) of the Credit Agreement, the Company hereby permanently reduces the aggregate amount of (i) the Facility B Commitments to $7,000,000 and (ii) the Letter of Credit Commitments to $747,491.19. Section 4. Representations and Warranties. The Company represents and warrants to the Banks that the representations and warranties set forth in Section 7 of the Credit Agreement are true and complete in all material respects on the date hereof (except to the extent that such representations and warranties expressly relate to an earlier date) as if made on and as of the date hereof and as if each reference in said Section 7 to "this Agreement" included reference to the Credit Agreement as amended by this Amendment. Section 5. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: A. This Amendment shall have been executed and delivered by the Company and by the Majority Banks. B. The Company shall have prepaid the Facility B Loans in an amount equal to $10,000,000. C. The Company shall have paid all reasonable out-of-pocket costs and expenses of the Agent and the Co-Agent, including, without limitation, the reasonable fees and expenses of Weil, Gotshal & Manges and Alvarez & Marsal, invoiced prior to the effectiveness of this Amendment. D. The Agent shall have received the following documents, each of which shall be satisfactory to the Agent in form and substance: (1) Corporate Documents. The following documents, each certified as indicated below: (a) if the certificate of incorporation of the Company has been amended since the date of the certification thereto delivered pursuant to Section 6.01 of the Credit Agreement, a copy of such certificate, as amended, of the Company; (b) a certificate of the Secretary or an Assistant Secretary of the Company, dated as of a recent date and certifying (i) that attached thereto is a true and complete copy of the by-laws of the Company as in effect on the date of such certificate or that the by-laws of the Company have not been amended since the date of the certification thereto delivered pursuant to Section 6.01 of the Credit Agreement, (ii) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of the Company authorizing the execution, delivery and performance of this Amendment and the performance of the Credit Agreement as amended hereby, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (iii) that the certificate of incorporation of the Company has not been amended since the date of the certification thereto furnished pursuant to clause (a) above or Section 6.01 of the Credit Agreement, as the case may be, and (iv) as to the incumbency and specimen signature of each officer of the Company executing this Amendment and each other document to be delivered by the Company from time to time in connection with the Credit Agreement as amended hereby (and the Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Company); and (c) a certificate of another officer of the Company as to the incumbency and specimen signature of the Secretary or such Assistant Secretary of the Company. (2) Opinion of Counsel to the Company. An opinion of Morgan, Lewis & Bockius, counsel to the Company, in the form attached hereto as Exhibit A. (3) Other Documents. Such other documents as the Agent or any Bank or counsel to the Banks may reasonably request. Section 6. Expenses. Without limiting its obligations under Section 11.03 of the Credit Agreement, the Company agrees to pay, promptly following demand, all reasonable out-of-pocket costs and expenses of the Agent and the Co-Agent (including the reasonable fees and disbursements of Weil, Gotshal & Manges, counsel to the Agent and the Banks, and Alvarez & Marsal, consultant to the Agent and the Banks) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. Section 7. Miscellaneous. Except as expressly herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. This Amendment shall be governed by, and construed in accordance with, the law of the State on New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. WESTERN PUBLISHING GROUP, INC. By /s/ Steven M. Grossman ---------------------------------------- Title: Executive Vice President, Chief Financial Officer FLEET BANK By /s/ Patrick F. McAuliffe ---------------------------------------- Title: Senior Vice President THE BANK OF NEW YORK By /s/ Richard P. Hebner ---------------------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By /s/ David Bonington ---------------------------------------- Title: Vice President By ---------------------------------------- Title: THE DAIWA BANK, LTD. By /s/ Jim Broadley ---------------------------------------- Title: Vice President MELLON BANK, N.A. By /s/ Alan J. Kopolow ---------------------------------------- Title: Vice President NATIONAL WESTMINSTER BANK USA By ---------------------------------------- Title: STANDARD CHARTERED BANK By ---------------------------------------- Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Paul Sedio ---------------------------------------- Title: Vice President THE FIRST NATIONAL BANK OF BOSTON By /s/ Ron A. Ferguson ---------------------------------------- Title: Vice President FLEET BANK, as Agent By /s/ Patrick F. McAuliffe ---------------------------------------- Title: Senior Vice President THE BANK OF NEW YORK as Co-Agent By /s/ Richard P. Hebner ---------------------------------------- Title: Vice President EX-10.96 9 ASSET PURCHASE AND SUPPLY AGREEMENT - ------------------------------------------------------------- ASSET PURCHASE AND SUPPLY AGREEMENT dated as of August 4, 1994 among WESTERN PUBLISHING COMPANY, INC., WESTERN PUBLISHING (CANADA), LTD. and HASBRO, INC. - ------------------------------------------------------------- TABLE OF CONTENTS Section Page - ------- ---- ARTICLE I. DEFINITIONS SECTION 1.01. . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. PURCHASE, SALE AND ASSUMPTION SECTION 2.01 Purchase and Sale of Purchased Assets . . . 2 SECTION 2.02 Assumption of Liabilities . . . . . . . . . 4 SECTION 2.03 Non-Assumption of Other Liabilities . . . . 5 SECTION 2.04 Purchase Price and Payment. . . . . . . . . 7 SECTION 2.05 Purchaser's Option With Respect to Undelivered Assets . . . . . . . . . . . . 8 ARTICLE III. CLOSING SECTION 3.01 Date and Place. . . . . . . . . . . . . . . 8 SECTION 3.02 Deliveries by Sellers at Closing. . . . . . 8 SECTION 3.03 Post-Closing Deliveries by Sellers. . . . . 9 SECTION 3.04 Deliveries by Purchaser at Closing. . . . . 9 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SELLERS SECTION 4.01 Corporate Existence and Authority; Authorization; Absence of Conflict . . . . 10 SECTION 4.02 Patents, Trademarks and Other Rights. . . . 11 SECTION 4.03 Molds . . . . . . . . . . . . . . . . . . . 12 SECTION 4.04 Purchased Assets Not in the Possession of Seller . . . . . . . . . . . . . . . . . . 12 SECTION 4.05 Assigned Contracts. . . . . . . . . . . . . 12 SECTION 4.06 Legal Proceedings . . . . . . . . . . . . . 13 SECTION 4.07 Compliance with Law . . . . . . . . . . . . 14 SECTION 4.08 Compliance with Bulk Sales Laws . . . . . . 14 SECTION 4.09 Disclosure; Representations and Warranties . . . . . . . . . . . . . . . . 14 SECTION 4.10 Finders or Brokers. . . . . . . . . . . . . 15 SECTION 4.11 Accuracy of Sales Reports . . . . . . . . . 15 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER SECTION 5.01 Corporate Existence; Authority. . . . . . . 15 SECTION 5.02 Authorization; Absence of Conflict. . . . . 15 SECTION 5.03 Finders or Brokers. . . . . . . . . . . . . 16 SECTION 5.04 Adequacy of Resources . . . . . . . . . . . 16 ARTICLE VI. CERTAIN COVENANTS OF SELLERS AND PURCHASER SECTION 6.01 Access and Information. . . . . . . . . . . 16 SECTION 6.02 Conduct Pending Closing; Certain Covenants of Sellers . . . . . . . . . . . 16 SECTION 6.03 Confidentiality . . . . . . . . . . . . . . 17 SECTION 6.04 H-S-R Act . . . . . . . . . . . . . . . . . 18 SECTION 6.05 Updating Representations and Warranties . . 18 SECTION 6.06 Preservation of Rights and Commitments. . . 18 SECTION 6.07 Pre-Closing Covenants of Purchaser. . . . . 18 SECTION 6.08 Maintenance of Records. . . . . . . . . . . 19 SECTION 6.09 Product Returns . . . . . . . . . . . . . . 20 SECTION 6.10 Post-Closing Obligations. . . . . . . . . . 20 SECTION 6.11 Tax Matters . . . . . . . . . . . . . . . . 20 SECTION 6.12 Certain Obligations Relating to Inventory, Molds and Other Items . . . . . 21 SECTION 6.13 Delivery of Purchased Product Records . . . 22 SECTION 6.14 Delivery of the Inventory . . . . . . . . . 22 SECTION 6.15 Purchaser's Rights with Respect to Undelivered Assets . . . . . . . . . . . . 22 SECTION 6.16 Further Assurances. . . . . . . . . . . . . 25 ARTICLE VII. MANUFACTURING AND SUPPLY AGREEMENT SECTION 7.01 Agreement to Manufacture and Supply . . . . 26 SECTION 7.02 Order . . . . . . . . . . . . . . . . . . . 26 SECTION 7.03 Prices of Manufactured Products . . . . . . 26 SECTION 7.04 Purchaser's Instructions. . . . . . . . . . 26 SECTION 7.05 Payment for Purchased Products; Reconciliation . . . . . . . . . . . . . . 27 SECTION 7.06 Risk of Loss. . . . . . . . . . . . . . . . 28 SECTION 7.07 Conduct Consistent with Past Practice . . . 28 SECTION 7.08 Handling Charge . . . . . . . . . . . . . . 28 SECTION 7.09 Representations and Warranties. . . . . . . 28 ARTICLE VIII. INDEMNIFICATION SECTION 8.01 Indemnification By Sellers. . . . . . . . . 29 SECTION 8.02 Indemnification by Purchaser. . . . . . . . 31 SECTION 8.03 Notification; Legal Proceedings . . . . . . 32 ARTICLE IX. CONDITIONS SECTION 9.01 Conditions to Obligations of Purchaser. . . 34 SECTION 9.02 Conditions to Obligations of Sellers. . . . 35 ARTICLE X. TERMINATION OF AGREEMENT SECTION 10.01 Termination. . . . . . . . . . . . . . . . 36 SECTION 10.02 Effect of Termination. . . . . . . . . . . 36 ARTICLE XI. MISCELLANEOUS SECTION 11.01 Expenses . . . . . . . . . . . . . . . . . 37 SECTION 11.02 Notices. . . . . . . . . . . . . . . . . . 37 SECTION 11.03 Binding Effect; Assignment . . . . . . . . 39 SECTION 11.04 Amendments . . . . . . . . . . . . . . . . 39 SECTION 11.05 Counterparts . . . . . . . . . . . . . . . 39 SECTION 11.06 Entire Agreement . . . . . . . . . . . . . 39 SECTION 11.07 Headings . . . . . . . . . . . . . . . . . 40 SECTION 11.08 Joint and Several Obligations. . . . . . . 40 SECTION 11.09 Governing Law. . . . . . . . . . . . . . . 40 SCHEDULES Schedule 2.01 - Purchased Products Schedule 2.01(a)(i) - Inventory Schedule 2.01(a)(ii) - Molds Schedule 2.01(a)(iii) - Assigned Rights Schedule 2.01(a)(iv) - Mixed License Agreements Schedule 2.01(a)(v) - Assigned Contracts Schedule 2.02(i) - Assumed Guarantees Schedule 4.01 - Required Consents Schedule 4.03 - Ownership of Molds Schedule 4.04 - Purchased Assets Not in the Possession of Seller Schedule 4.06 - Legal Proceedings; Outstanding Judgments, Awards Schedule 4.07(B) - Compliance With Law Schedule 4.11 - Sales Reports Schedule 6.12(b) - Destruction of Inventory Schedule 6.15 - Current Retained Products Schedule 7.08 - Handling Charge Schedule 9.01(c) - Pending Action EXHIBITS Exhibit A - Sellers-to-Purchaser Short-Term Trademark License Agreement Exhibit B - Sellers-to-Purchaser Long-Term License Agreement Exhibit C - Form of Bill of Sale, Assignment and Assumption Agreement Exhibit D-1 - Form of Opinion of Purchaser's General Counsel Exhibit D-2 - Form of Opinion of Sellers' General Counsel ASSET PURCHASE AND SUPPLY AGREEMENT THIS ASSET PURCHASE AND SUPPLY AGREEMENT, dated as of August , 1994, between (1) WESTERN PUBLISHING COMPANY, INC., a Delaware corporation ("Western"), (2) WESTERN PUBLISHING (CANADA), LTD., an Ontario corporation (individually, "Seller" and together, "Sellers") and (3) HASBRO, INC., a Rhode Island corporation ("Purchaser"). W I T N E S S E T H: WHEREAS, the Golden Games division (the "Division") of Sellers is engaged in, among other things, the business of manufacturing and marketing games and puzzles; WHEREAS, Sellers desire to sell, transfer and assign and, in some cases, license certain of the assets of the Division to Purchaser, and Purchaser desires to purchase and/or license such assets pursuant to the terms and conditions hereinafter set forth; WHEREAS, Sellers desire to assign to Purchaser and Purchaser agrees to assume certain specified liabilities of Sellers under the Assigned Contracts and the Mixed License Agreements pursuant to the terms and conditions hereinafter set forth; and WHEREAS, Western desires, from and after the Closing Date hereof until November 15, 1994, to continue to manufacture and warehouse certain of the products purchased hereunder and to transfer title to Purchaser of all of the Inventory to be purchased hereunder upon the pickup thereof by common carriers designated by Purchaser. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01 Capitalized terms used herein shall have the meanings set forth in Annex I hereto. ARTICLE II. PURCHASE, SALE AND ASSUMPTION SECTION 2.01 Purchase and Sale of Purchased Assets. (a) Subject to the terms and conditions specified in this Agreement, on the Closing Date and, in the case of the Inventory described in clause (i) below, at the times indicated in Article VII, Purchaser shall purchase from Sellers, and Sellers shall sell, convey, transfer, assign and deliver to Purchaser, free and clear of all Encumbrances, all right, title and interest in and to the following assets and properties of Sellers, whether or not any of the following has any value for accounting purposes (such assets and properties along with all of the rights and interests granted to Purchaser under the agreements described in paragraph (b) of this Section 2.01 are hereinafter collectively referred to as the "Purchased Assets"): (i) the finished goods inventory of Sellers that relates to the Purchased Products wherever located and in an amount not less than 90% and not to exceed 110% of the total number of units of each item of inventory set forth on Schedule 2.01(a)(i) (collectively, the "Inventory"); (ii) all Molds including, without limitation, those Molds set forth on Schedule 2.01(a)(ii); (iii) all of Sellers' right, title and interest in the registered and unregistered service marks, trademarks, trade names, tradestyles, patents, copyrights, business logos and product names and logos, trade secrets and other intellectual property rights (including any applications for any of the foregoing and any foreign counterparts of any of the foregoing, but expressly excluding patents, trademarks and any other rights which are licensed to Purchaser pursuant to the agreements set forth in paragraph (b) of this Section 2.01), used in the manufacture, assembly, distribution and sale of the Purchased Products including, without limitation, all those set forth on Schedule 2.01(a)(iii), as well as all of Sellers' right, title and interest in all other design, style, appearance and other trademarks or trade dress, trade secrets, confidential information and processes owned by any of Sellers (but expressly excluding patents, trademarks and any other rights which are licensed to Purchaser pursuant to the agreements set forth in paragraph (b) of this Section 2.01) and used solely in connection with the manufacture, assembly, distribution or sale of the Purchased Products (collectively, the "Assigned Rights"); (iv) all of the rights of Sellers to the extent they relate to the Purchased Products under any master, mixed or combined license agreement with third parties, including, without limitation, those license agreements set forth on Schedule 2.01(a)(iv) (the "Mixed License Agreements"); (v) all of the rights of Sellers under any other agreements, including license, royalty, distributorship and sublicense agreements with third parties relating to any Purchased Assets, including, without limitation, those license, royalty, distributorship and sublicense agreements set forth on Schedule 2.01(a)(v) (such agreements that are specifically listed on Schedule 2.01(a)(v) are herein collectively referred to as the "Assigned Contracts" and the Assigned Contracts that are license or royalty agreements are herein called the "License Agreements"); (vi) all of the operating data, files and records (in whatever format or formats such items are kept) in Sellers' possession relating to the Purchased Products including, without limitation, legal records or copies thereof, customer lists, customer service records, accounting records (including, without limitation, product sales, royalty and advertising information for each Purchased Product), product listings, mold drawings, product blueprints and specifications, engineering, maintenance, operating and production records relating to the Molds, art work, film separations, mechanicals, advertising materials (including, without limitation, commercials, print advertising and market research data relating to the Purchased Products) (the "Purchased Products Records"); and (vii) Sellers' prepaid expenses and deposits relating to the Purchased Assets, including (A) all claims against third parties (including claims for breach of contract or claims for indemnification) arising from or relating to the Purchased Assets, (B) all royalties prepaid and advances paid by any Seller to any licensor under any License Agreement and (C) all royalties prepaid and advances paid to any Seller by any licensee or distributor relating to any Purchased Product, in each case, to the extent that such prepaid expense or deposit remains unused or unrecouped as of the Closing Date. (b) Sellers shall license to Purchaser and Purchaser shall acquire all of the rights granted by Sellers to Purchaser under (A) the Sellers-to-Purchaser Short-Term Trademark License Agreement attached as Exhibit A hereto, (B) the Sellers-to-Purchaser Long-Term License Agreement attached as Exhibit B hereto. (c) To the extent that the sale, conveyance, transfer or assignment of any agreement, contract or other document or instrument requires the consent of any Person other than Purchaser or a Seller, this Agreement shall not constitute an agreement to effect such sale, conveyance, transfer or assignment if such action would constitute a breach thereof. Sellers and Purchaser shall cooperate reasonably to obtain, on or prior to the Closing Date, all required consents necessary to effect the sales, conveyances, transfers and assignments contemplated hereby. SECTION 2.02 Assumption of Liabilities. Subject to the terms and conditions set forth herein, Purchaser agrees that, at the Closing, it will assume and thereafter pay, perform or discharge, as the case may be, the following obligations and liabilities (and only the following obligations and liabilities) to the extent they relate to the Purchased Assets and to the extent the same do not constitute Retained Liabilities (the "Assumed Liabilities"): (i) all obligations and liabilities of Sellers under (A) the Assigned Contracts, and (B) the Mixed License Agreements identified on Schedule 2.01(a)(iv) to the extent (and only to the extent) that the obligations and liabilities of Sellers under such Mixed License Agreements relate to the Purchased Products; provided, however, that there shall be excepted from such obligations and liabilities, and Purchaser shall not assume, any liability or obligation of any Seller (A) that arises as a result of a breach by any Seller of any Assigned Contract or any Mixed License Agreement, (B) that relates to an obligation, liability, event or circumstance for any period prior to the Closing (including those relating to royalties or other amounts accrued with respect to products sold prior to the Closing, whether payable before or after the Closing), (C) relating to any guarantee payable pursuant to any Assigned Contract or Mixed License Agreement (except for those guarantees specifically listed on Schedule 2.02(i) (the "Assumed Guarantees"), or (D) that arises from or relates to any Product Liability Event relating to product, including the Purchased Products, manufactured or sold by, or on behalf of, any Seller (whether before or after the Closing); and (ii) all obligations and liabilities arising out of the ownership, use, operation and sale of the Purchased Assets by Purchaser from and after the Closing Date, including, without limitation, all obligations and liabilities in connection with Product Liability Events occurring after the Closing Date and relating to the Purchased Products that are manufactured and sold by or on behalf of Purchaser after the Closing Date; provided, however, that Purchaser shall not assume and the Assumed Liabilities shall not include any obligation or liability in connection with any Product Liability Event relating to any product (including the Purchased Products) that is manufactured by or on behalf of any Seller and sold to Purchaser whether before or after the Closing Date. SECTION 2.03 Non-Assumption of Other Liabilities. Other than the Assumed Liabilities, Purchaser shall not assume and shall in no event be liable for or deemed to have assumed any claims, liabilities, damages, debts or obligations of any Seller, whether accrued, absolute, matured, contingent or otherwise, now existing or hereafter arising (the "Retained Liabilities"). The Retained Liabilities shall include, without limitation, the following: (i) all obligations and liabilities arising out of the ownership, use, operation and sale of the Purchased Assets by Sellers prior to the Closing Date, including, without limitation, all obligations and liabilities under the Assigned Contracts and the Mixed License Agreements to the extent relating to any period prior to the Closing, whether or not any claim with respect to any of the foregoing is asserted before or after the Closing; (ii) all obligations and liabilities under the Mixed License Agreements for products other than the Purchased Products; (iii) any obligation or liability of any Seller with respect to guaranteed royalties or other payments that accrued on or before the Closing Date (other than the Assumed Guarantees) under either the Assigned Contracts or the Mixed License Agreements; (iv) any Product Liability Event relating to or arising in connection with the design, manufacture, assembly or sale by, or on behalf of, any Seller of any Purchased Product, whether any claim relating thereto arises or is asserted before or after the Closing; (v) any violation of any Requirement of Law by any Seller, including any such liability which may arise in connection with agreements, contracts, commitments or orders for the sale of goods or services by any Seller; (vi) any Environmental Liability relating to any real or personal property that is or was owned, leased or otherwise used or occupied by any Seller, or relating to the conduct by any Seller of its business or the manufacture, ownership, use or operation of its businesses or assets or properties, except that Purchaser shall be responsible for the proper operation and disposal of any Purchased Assets so as not to give rise to an Environmental Liability; (vii) any action, suit or proceeding to which any Seller is a party, or to which any of its assets, properties or business (including the Purchased Assets) is subject, which is (A) instituted on or before the Closing or (B) instituted after the Closing and relates to facts, acts, omissions or circumstances that existed, occurred or arose prior to the Closing (whether or not such action, suit or proceeding is disclosed in any Schedule hereto); (viii) subject to Section 11.01(b) hereof, any Taxes incurred by or relating to any Seller whether or not resulting from the transfer and sale of the Purchased Assets to Purchaser hereunder; (ix) any liability, obligation or responsibility to any union, bargaining unit, employee, former employee, retiree, consultant, agent or distributor of any Seller, including any compensation or other payments due to any such persons by any Seller by contract or otherwise for any reason including terminations, closure or shutdown of any facility (whether partial or otherwise) or the operations of any Seller whether before or after the Closing Date; and (x) except with respect to the Assigned Contracts, any deduction from any receivable taken by any Person as a result of any sales term or commitment of any Seller. The foregoing clauses (i) through (x) are illustrative of the types of Retained Liabilities described in the first sentence of this Section 2.03, and are not meant to exclude other examples or types of Retained Liabilities. Sellers shall retain all liability with respect to the Retained Liabilities and shall indemnify Purchaser therefor as provided below in Section 8.01. SECTION 2.04 Purchase Price and Payment. (a) The Purchased Assets shall be sold by Sellers and shall be purchased by Purchaser for an aggregate purchase price equal to the sum of (i) the Closing Payment, (ii) the Inventory Advance, and (iii) any other Inventory payments that are made in accordance with Article VII; provided that the aggregate amount to be paid for Inventory shall not exceed the Inventory Value (the sum of the preceding clauses (i), (ii) and (iii) is hereinafter referred to as the "Purchase Price"). For purposes of this Agreement, "Inventory Value" means the value of the Inventory, calculated by multiplying (x) the number of units of each item of Inventory that Sellers are assigning and transferring to Purchaser pursuant to this Agreement (provided that the number of units of such item shall be an amount not less than 90% and not to exceed 110% of the number of units for such item set forth on Schedule 2.01(a)(i)) times (y) the respective Cost Per Unit, and subtracting $1,515,000.00 therefrom. (b) The Purchase Price shall be paid by Purchaser to Guarantor or as Guarantor may direct as agent for Sellers as follows: (i) on the Closing Date, Purchaser shall pay to Sellers the sum of $88,000,000.00 (the "Closing Payment"); (ii) on the Closing Date, Purchaser shall pay to Sellers $6,598,925.86 (the "Inventory Advance"); and (iii) Purchaser shall pay any additional amounts which may be due for the Inventory that has been accepted by Purchaser's designated common carriers in accordance with the terms of Article VII hereof. (c) The Closing Payment, the Inventory Advance and the payments for Inventory under Article VII shall be paid by Purchaser to Sellers by wire transfer of immediately available funds to the account or accounts that are designated by Guarantor at least two business days prior to the date such payment is to be made. SECTION 2.05 Purchaser's Option With Respect to Undelivered Assets. As additional consideration, Sellers hereby grant to Purchaser an exclusive option (the "Option") to acquire from Sellers after the Closing certain additional assets as provided in Section 6.15. ARTICLE III. CLOSING SECTION 3.01 Date and Place. Subject to the terms and conditions set forth herein, the closing of the purchase and sale of the Purchased Assets and the related transactions described herein (the "Closing") shall take place at the offices of Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166, at 10:00 a.m. on the date hereof, or at such other date, place and time as the parties hereto may agree (the date and time of the Closing being hereinafter called the "Closing Date"). SECTION 3.02 Deliveries by Sellers at Closing. At the Closing, Sellers shall deliver or cause to be delivered to Purchaser the instruments specified in Section 9.01 and all other documents and instruments necessary or reasonably requested by Purchaser, to transfer to and to vest in Purchaser all of the right, title and interest in and to the Purchased Assets to the extent provided in Section 2.01, and all such documents and instruments shall be in form and substance reasonably satisfactory to Purchaser, including, without limitation: (a) certified resolutions of the Board of Directors of Sellers and Guarantor which evidence the authority of Sellers and Guarantor to execute and deliver this Agreement and perform their respective obligations hereunder; (b) releases by the creditors of Sellers or other holders of Encumbrances of all Encumbrances on the Purchased Assets; (c) a Bill of Sale, Assignment and Assumption Agreement transferring to Purchaser all right, title and interest in the Purchased Assets; (d) all consents to assignments of Sellers' rights under the Assigned Contracts and all of Sellers' rights under the Mixed License Agreements with respect to the Purchased Products as may be required from appropriate third parties, in each case, in form and substance reasonably satisfactory to Purchaser's counsel; (e) assignments from Sellers assigning to Purchaser all of Sellers' right, title and interest in trademarks, patents and copyrights in form and substance reasonably satisfactory to Purchaser's counsel; (f) the Sellers-to-Purchaser Short-Term Trademark License Agreement and the Sellers-to-Purchaser Long-Term License Agreement, each duly executed by Sellers; (g) a schedule setting forth a true, correct and complete statement of the quantities of each type of Purchased Product on hand as of a date not more than ten days prior to the Closing Date (the "Closing Inventory Estimate"); and (h) such other documents, certificates and instruments as may be reasonably requested by Purchaser in connection with the transactions contemplated hereby. SECTION 3.03 Post-Closing Deliveries by Sellers. (a) Sellers shall deliver or cause to be delivered to Purchaser the executed originals of the Assigned Contracts within five days following the Closing Date. (b) Sellers shall deliver the Purchased Products Records as reasonably requested by Purchaser and in any event by December 1, 1994. (c) Sellers shall deliver within four days following the Closing Date a final statement (the "Closing Inventory Statement") setting forth the amount of each item of Inventory on hand as of the Closing Date, together with a complete listing of the locations thereof. (d) Sellers shall deliver promptly following the Closing Date the WP Return List. (e) Sellers shall deliver or cause to be delivered to Purchaser all Undelivered Assets as provided in Section 6.15 as well as any documents or instruments necessary or reasonably requested by Purchaser to transfer to and vest in Purchaser all right, title and interest in the Undelivered Assets, and all such documents and instruments shall be in form and substance reasonably satisfactory to Purchaser. SECTION 3.04 Deliveries by Purchaser at Closing. At the Closing, Purchaser shall deliver to Sellers the instruments specified in Section 9.02 and: (a) evidence of Purchaser's authority to execute, deliver and perform this Agreement; (b) the Bill of Sale, Assignment and Assumption Agreement, duly executed by Purchaser; (c) the Sellers-to-Purchaser Short-Term Trademark License Agreement and the Sellers-to-Purchaser Long-Term License Agreement, each duly executed by Purchaser; and (d) such other documents, certificates and instruments as may be reasonably requested by Sellers in connection with the transaction contemplated hereby. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SELLERS In order to induce Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby, each Seller, jointly and severally with each other Seller, represents and warrants as follows in this Article IV: SECTION 4.01 Corporate Existence and Authority; Authorization; Absence of Conflict. (a) Each Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Seller has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and all other agreements, documents and instruments to be delivered by it in connection herewith. (b) The execution, delivery and performance by each Seller of this Agreement and consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of such Seller and do not violate, conflict with, contravene or constitute (with or without notice or lapse of time or both) a default under any provision of its certificate of incorporation or by-laws, any applicable law or regulation or any judgment, order, decree, permit or other Requirement of Law that is binding upon it or any of its properties. (c) Except as set forth on Schedule 4.01, the execution, delivery and performance by each Seller of this Agreement and consummation of the transactions contemplated hereby (including the purchase and sale of the Purchased Assets) does not violate or conflict with and will not result in a breach of any agreement that is binding on any Seller or to which any Seller may be party or be bound and that relates to or affects any Purchased Asset or the transactions contemplated hereby. Schedule 4.01 sets forth a complete list of all Required Consents. (d) Except for applicable requirements of the H-S-R Act which have already been fulfilled, and except for notices already given, the execution, delivery and performance by each Seller of this Agreement requires no action by, or with respect to, or filing with, or notice to, any governmental body, agency or official. (e) This Agreement is a valid and binding agreement of each Seller, enforceable against such Seller in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and (ii) equitable principles of general applicability. SECTION 4.02 Patents, Trademarks and Other Rights. (a) The manufacture and sale of the Purchased Products within the last ten (10) years, has not infringed upon or violated the patents, trademarks, trade names, service marks, trade secrets, copyrights or other intellectual property rights (collectively, "Intellectual Property Rights") of any Person. There is no claim or demand of any Person pending, or to the knowledge of Sellers threatened, which challenges the right of any Seller to use the Assigned Rights or rights granted to any Seller under the Assigned Contracts or the Mixed License Agreements (to the extent they relate to the Purchased Products) or rights granted under the Sellers-to-Purchaser Short-Term Trademark License Agreement and the Sellers-to-Purchaser Long-Term License Agreement or charges that any of Purchased Assets or the manufacture, marketing or sale of the Purchased Products infringes upon the Intellectual Property Rights of others and no basis exists for any such claim or demand. (b) None of the Assigned Rights or rights granted by the Assigned Contracts or the Mixed License Agreements (to the extent relating to the Purchased Products), or the Sellers-to-Purchaser Short-Term Trademark License Agreement or the Sellers-to-Purchaser Long-Term License Agreement are being infringed by others. (c) The rights of Sellers to the Assigned Rights, the Assigned Contracts and the Mixed License Agreements (to the extent relating to the Purchased Products), together with rights granted by Sellers under the Sellers-to- Purchaser Short-Term Trademark License Agreement and the Sellers-to-Purchaser Long-Term License Agreement constitute all Intellectual Property Rights necessary to manufacture, sell and distribute the Purchased Products and to own and operate the Purchased Assets as now owned and operated. SECTION 4.03 Molds. On the Closing Date, the Molds shall be in good and working condition, reasonable wear and tear excepted, and suitable and usable in the ordinary course of business for the purpose for which intended. To the best of Sellers' knowledge, the condition of each Mold in Sellers' possession is of sufficient quality to produce those Purchased Products specified on Schedule 2.01 on a basis equal to or in excess of Sellers' quality control standards in effect as of April 7, 1994. No molds, tools or dies (and, to the best of Sellers' knowledge, jigs, assembly, line and test fixtures other than equipment which is commonly considered to be part of a general assembly line used to manufacture games and puzzles) which are dedicated only to the manufacture and assembly of the Purchased Products are owned by any Person other than Sellers except as otherwise set forth in Schedule 4.03. All film, artwork and color reproductions used in the production of the Purchased Products are either owned by Sellers or licensed by Sellers under one or more of the documents described on Schedule 2.01(a)(iv) or Schedule 2.01(a)(v). The Molds and the items referred to in the two preceding sentences constitute all of the molds, tools, dies and film, artwork and color reproductions (including jigs, assembly, line and test fixtures other than equipment which is commonly considered to be part of a general assembly line used to manufacture games and puzzles) which are dedicated only to the manufacture and assembly of the Purchased Products. SECTION 4.04 Purchased Assets Not in the Possession of Seller. Schedule 4.04 also sets forth a complete list of all Inventory and Molds which are in the possession of any vendors, suppliers, employees and other Persons other than a Seller. Schedule 4.04 also includes an accurate description of any such Inventory and Molds sufficient to identify such Purchased Assets to Purchaser, the names, addresses and telephone numbers of the Persons in possession of any such Inventory and Molds, the addresses where any such Inventory and Molds are located and any consents required by any such Person for the transfer of any such Inventory and Molds. SECTION 4.05 Assigned Contracts. (a) Sellers have delivered to Purchaser true and complete copies of all Assigned Contracts (including all License Agreements) and Mixed License Agreements now in effect and all amendments and other agreements relating thereto. No default, alleged default or anticipatory breach exists on the part of any Seller or, to the best knowledge of any Seller, on the part of any other party, under any Assigned Contract, and there are no material agreements of the parties relating to any Assigned Contract that has not been disclosed to Purchaser. No Seller is a party to any written or oral contract or commitment which could materially adversely affect the Purchased Assets or the manufacture and sale of the Purchased Products. (b) There is no agreement, understanding, commitment or other arrangement relating to the Purchased Assets or the manufacture and sale of the Purchased Products which is material to the Purchased Assets or the manufacture and sale of the Purchased Products, other than the Assigned Contracts, the Mixed License Agreements, the Sellers-to- Purchaser Short-Term Trademark License Agreement and the Sellers-to-Purchaser Long-Term License Agreement. SECTION 4.06 Legal Proceedings. (a) Except as set forth on Schedule 4.06, there is no claim, action, suit, inquiry, investigation or proceeding pending or, to any Seller's knowledge, threatened, against any Seller or any affiliate of any Seller before any court or governmental body, United States or foreign authority, which (i) could create a claim or Encumbrance on any Purchased Asset or could constitute a liability of Purchaser after the Closing Date or (ii) separately or in the aggregate, could have a material adverse effect on the Purchased Assets or the ownership, use, control, operation or sale of any of the Purchased Assets by Purchaser for their intended purposes or (iii), if adversely determined, would have a material adverse effect on or otherwise impair any Seller's ability to perform its obligations under this Agreement. Except as set forth on Schedule 4.06, there are no outstanding orders, judgments, injunctions, awards or decrees of any court, governmental or regulatory body or arbitration tribunal against, or settlement agreements by, any Seller and relating to, or affecting the ownership, use, operation or sale of, any Purchased Asset. (b) Without limiting the generality of the foregoing, no Seller has received notice or is otherwise aware of any claim, action, suit or proceeding relating to any Product Liability Event. Except as set forth on Schedule 4.06, there is no claim, suit, action, or proceeding by any Person that alleges the breach by any Seller of any Assigned Contract or any Mixed License Agreement to the extent relating to the Purchased Products, and there is no request by any Person to renegotiate any term of any Assigned Contract or any Mixed License Agreement. There is no claim, suit, action or proceeding by any Seller against any Person relating to or arising in connection with any Assigned Contract, any Mixed License Agreement, or any of the Purchased Assets. SECTION 4.07 Compliance with Law. (a) Except as set forth on Schedule 4.07(B), each Seller is in compliance with all Requirements of Law applicable to the ownership, use, operation or sale of the Purchased Assets and the manufacture, marketing and sale of the Purchased Products, including laws, rules and regulations relating to the protection of the environment or to health and safety, except to the extent that any failure to so comply, individually and in the aggregate, does not and will not have a material adverse effect on the Purchased Assets or the manufacture and sale of the Purchased Products. No Seller has received any notice of violation (and there is no pending audit, investigation or other review by governmental authorities to determine the existence of any violation) of applicable laws or governmental regulations which would have an adverse effect on the manufacture, sale, use, operation or control of the Purchased Assets for their intended purposes. (b) Sellers have furnished to Purchaser copies of all letters listed in Schedule 4.07(B) and such letters constitute all of the letters from the Consumer Products Safety Commission (the "CPSC") to any Seller within the last ten (10) years relating to the Purchased Assets or the manufacture and sale of the Purchased Products. Neither the CPSC nor any other governmental body or authority has made any, and no Seller knows of any basis for any, determination to recall, or other adverse determination with respect to, any Purchased Product and there is no design, manufacturing or other defect in any of the Purchased Products or the Purchased Assets that could result in any material liability to Sellers or, after the Closing, the Purchaser. SECTION 4.08 Compliance with Bulk Sales Laws. The sale, transfer and assignment by Sellers to Purchaser hereunder and the consummation of the other transactions contemplated hereby do not constitute a "bulk sale" for purposes of Article VI of the Uniform Commercial Code (the "Bulk Sales Laws") by any Seller, and it is not necessary under the laws of any jurisdiction that any Seller comply with the Bulk Sales Laws of such jurisdiction. SECTION 4.09 Disclosure; Representations and Warranties. Sellers' responses to Purchaser's requests for information, documents, contracts and records of Sellers relating to the Purchased Assets were, at the times such responses were made, true and complete to the best of Sellers' knowledge. Neither this Agreement, including any Schedule or Exhibit hereto, nor any statement, certificate, writing or document furnished to Purchaser by a Seller under this Agreement contains, as of the dates of such documents, any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading. Except as set forth in this Agreement or in a Schedule hereto, no fact with respect to the Purchased Assets is known to any Seller which materially and adversely affects the Purchased Assets or the manufacture and sale of the Purchased Products in the aggregate. SECTION 4.10 Finders or Brokers. No Seller has utilized the services of any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or commission in connection with this Agreement or upon consummation of the transactions contemplated hereby. SECTION 4.11 Accuracy of Sales Reports. The sales reports of Sellers set forth in Schedule 4.11 are true and complete in all respects. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER In order to induce Sellers to enter into this Agreement and to consummate the transactions contemplated hereby, Purchaser represents and warrants as follows in this Article V: SECTION 5.01 Corporate Existence; Authority. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Rhode Island. Purchaser has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and all other agreements, documents and instruments to be delivered by it in connection herewith. SECTION 5.02 Authorization; Absence of Conflict. The execution, delivery and performance of this Agreement by Purchaser and consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Purchaser, and do not and will not contravene or constitute a default under any provision of the charter documents or by-laws of Purchaser or of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument binding upon Purchaser or its properties. Except for applicable requirements of the H-S-R Act which have already been fulfilled, the execution, delivery and performance by Purchaser of this Agreement require no action by, or filing with, or notice to, any governmental body, agency or official. This Agreement constitutes the valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms, except to the extent that enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and (b) equitable principles of general applicability. SECTION 5.03 Finders or Brokers. Purchaser has not utilized the services of any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or commission in connection with this Agreement or upon consummation of the transactions contemplated hereby. SECTION 5.04 Adequacy of Resources. As of the Closing Date, Purchaser will have funds and access to lines of credit or other sources of funds which, in the aggregate, will be adequate to enable Purchaser to perform its obligations under this Agreement. ARTICLE VI. CERTAIN COVENANTS OF SELLERS AND PURCHASER SECTION 6.01 Access and Information. Each Seller will afford Purchaser and its accountants, counsel and other representatives and financing institutions access to all of the Purchased Assets at each of the locations where the Purchased Assets are situated and all of Sellers' business records relating thereto, upon reasonable notice during normal business hours throughout the period from the date hereof until the Closing, and during such period, Seller will (or will cause its representatives to) furnish to Purchaser and its accountants, counsel, other represent- atives and financing institutions all such other information concerning the Purchased Assets as Purchaser may reasonably request. SECTION 6.02 Conduct Pending Closing; Certain Covenants of Sellers. Each Seller covenants and agrees that, prior to the earlier of the Closing or termination of this Agreement, except as otherwise agreed to in writing by Purchaser or otherwise expressly contemplated by this Agreement: (i) Each Seller will maintain, preserve and insure the Purchased Assets in a manner consistent with such Seller's past practices and, subject to the other provisions of this Agreement, use its best efforts to maintain existing customer and distribution relationships concerning such Purchased Assets; (ii) Each Seller shall conduct its business operations that involve the Purchased Assets only in the ordinary course; (iii) Sellers shall not enter into, amend, or undertake any contract or obligation concerning or affecting the Purchased Assets without the prior consent of Purchaser; (iv) from the date hereof through the Closing Date, Sellers shall notify Purchaser promptly of (A) any action or proceeding pending or threatened against any Seller which could impair its ability to perform its obligations under this Agreement or could affect the Purchased Assets or the manufacture and sale of the Purchased Products and (B) any requests for additional information or documentary materials by any governmental or regulatory body in connection with the transactions contemplated hereby; (v) No Seller shall obtain a refund or repayment of any prepayments, advances or deposits made by it relating to the Purchased Assets or the manufacture and sale of Purchased Products nor shall any Seller refund or repay any prepayments, advances or deposits made to it relating to the Purchased Assets or the manufacture and sale of the Purchased Products; and (vi) Each Seller will use its best efforts to assure that all Closing conditions to be satisfied by it are satisfied as expeditiously as possible. SECTION 6.03 Confidentiality. Purchaser and Sellers hereby acknowledge and agree that the certain letter agreement between Guarantor and Purchaser dated December 6, 1993 (the "Confidentiality Agreement") is currently in effect and the provisions of such Confidentiality Agreement shall continue to be in effect and govern the treatment of confidential information following the Closing. Sellers agree to be bound by the Confidentiality Agreement and the obligations of Guarantor under the Confidentiality Agreement shall be the obligations of Sellers. Sellers further agree not to (i) divulge, publish or otherwise reveal to any person, firm, corporation or other entity for any reason or purpose whatsoever, any confidential information related to the Purchased Assets (including the Purchased Products Records) or the manufacture and sale of the Purchased Products as of the Closing Date; or (ii) interfere with, disrupt or attempt to disrupt any past, present or prospective contractual or other relationship between Purchaser and any of the customers, suppliers, or employees of Purchaser, as the same relate to the Purchased Assets and/or the manufacture and sale of the Purchased Products. SECTION 6.04 H-S-R Act. Purchaser and Sellers have each filed a Notification and Report Form pursuant to the H-S-R Act with respect to the acquisition of the Purchased Assets by Purchaser, with the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission and the waiting period thereunder has expired. SECTION 6.05 Updating Representations and Warranties. Between the date of this Agreement and the Closing Date: (a) Sellers shall notify Purchaser promptly of any state of facts, event, circumstance, action or proceeding that would have been required to be disclosed in a Schedule hereto or would have been an exception to a representation or warranty of Sellers herein if it occurred or existed prior to the date hereof, or would otherwise result in the inaccuracy of any representation or the breach of any warranty; and any such notice shall describe such inaccuracy, state of facts, event, circumstance, action or proceeding in reasonable detail; and (b) Purchaser shall notify Sellers promptly of any state of facts, event, circumstance, action or proceeding that would have been required to be disclosed in a Schedule hereto or would have been an exception to a representation or warranty of Purchaser herein if it occurred or existed prior to the date hereof, or would otherwise result in the inaccuracy of any representation or the breach of any warranty; and any such notice shall describe such inaccuracy, state of facts, event, circumstance, action or proceeding in reasonable detail. SECTION 6.06 Preservation of Rights and Commitments. From the date hereof through the Closing Date, Sellers shall not permit, through action or inaction, any ownership or other rights in or to the Purchased Assets to lapse or become void or unenforceable, if such lapse, voidability or unenforceability of such rights would have a material adverse effect on the Purchased Assets, on Purchaser's right or ability to own, use, operate or sell any Purchased Asset or Purchaser's ability to use or operate the Purchased Assets substantially in the same manner as heretofore conducted by Sellers. SECTION 6.07 Pre-Closing Covenants of Purchaser. Purchaser agrees to: (a) use its best efforts to obtain, prior to the Closing Date, all consents, approvals and authorizations required to be obtained by Purchaser for the consummation of the transactions contemplated by this Agreement; and (b) use its best efforts to assure that all Closing conditions to be satisfied by Purchaser are satisfied as expeditiously as possible. SECTION 6.08 Maintenance of Records. (a) Sellers shall be entitled to make and keep copies of Purchased Products Records, and any records delivered pursuant to the Option, prior to their delivery to Purchaser hereunder. Purchaser shall keep and maintain all Purchased Products Records and any other records which are delivered to Purchaser, for a period of six years after the Closing Date (or for a longer period reasonably requested by Sellers); provided, that Purchaser may destroy or otherwise dispose of any such records prior to such date if Purchaser furnishes Sellers with 30 days notice thereof and affords Sellers the opportunity to take possession thereof; provided further, that if Sellers receive such a notice from Purchaser and thereafter deliver to Purchaser notice that Sellers desire to take possession of such records proposed for destruction or disposition, then Purchaser shall deliver such records to Sellers, at Sellers' expense. (b) Upon request made by any Seller to Purchaser after the Closing Date, Purchaser shall make such Purchased Products Records and any other records which are delivered to Purchaser hereunder available to such Seller for inspection and copying at Purchaser's facilities (or at such other locations at which such records may be located), at such Seller's expense, during regular business hours, in order to permit such Seller to: (i) prepare for, dispute or respond to, any litigation, action, claim or proceeding, including, without limitation, audits in connection with Tax returns; (ii) comply with governmental requirements applicable to such Seller; and (iii) prepare for any dispute or respond to any inquiry, request, notice or other communication from any licensor under any of the Assigned Contracts or the Mixed License Agreements. provided, however, that any such inspection pursuant to this Section shall be conducted in such a manner so as not to unreasonably interfere with the normal conduct of business by Purchaser. SECTION 6.09 Product Returns. Promptly following the Closing, Sellers shall provide Purchaser with a list of all Purchased Products which were (a) shipped and sold by or on behalf of any Seller prior to the Closing Date and as to which any Seller has authorized a return, and (b) not returned to Sellers on or prior to the Closing Date (the "WP Return List"). Any Purchased Products which are returned within sixty (60) days following the Closing Date and which cannot be otherwise identified as part of a shipment of any Seller or Purchaser, will be presumed to be solely for the account of Sellers and any credits or deductions taken by customers in connection therewith shall be solely for the account of Sellers. Any Purchased Products which are returned after sixty (60) days following the Closing Date and which cannot be otherwise identified as part of a shipment of any Seller or Purchaser, will be presumed to be solely for the account of Purchaser and any credits or deductions taken by customers in connection therewith shall be solely for the account of Purchaser. Purchaser shall purchase any such returned Purchased Products which are for the account of Sellers at a purchase price equal to the Cost Per Unit for such items; provided, however, that such returned Purchased Products are in good and merchantable condition and otherwise salable in the ordinary course of business. Any returned Purchased Products that are for the account of Sellers and that are not in good and merchantable condition and otherwise salable in the ordinary course of business shall be destroyed by Sellers. SECTION 6.10 Post-Closing Obligations. (a) Seller shall afford Purchaser the right to perform a quality audit of the Inventory described in the Closing Inventory Statement at each of the locations where the Inventory is located. (b) Each party shall use reasonable efforts to forward promptly to the other any misdirected payments it may receive after the Closing. (c) Purchaser agrees to pay to Sellers on September 10, 1994, an amount equal to $75,000 in regard to reimbursement of an advance paid by Sellers pursuant to the agreement identified as item 3 on Schedule 2.01(a)(v)(II) less an amount equal to eight percent (8%) of the net shipments of the Purchased Products that Sellers have made to Shopko in calendar year 1994 through the Closing Date ("Sellers' 1994 Shopko Shipments"). Sellers shall provide Purchaser promptly after the Closing Date with a certificate setting forth the actual amount of Sellers' 1994 Shopko Shipments. SECTION 6.11 Tax Matters. The Purchase Price, together with the Assumed Liabilities, shall be allocated among such Purchased Assets as set forth in a Schedule that shall be prepared and agreed upon by the parties prior to or after the Closing, but, in any event, prior to the date that Purchaser's Federal income tax return for its 1994 fiscal year shall be required to be filed (the "Tax Allocation Schedule"), which will include, among other things, an allocation between Sellers. Sellers, on the one hand, and Purchaser, on the other hand, acknowledge and agree that, when prepared and agreed upon by Sellers and Purchaser, such allocation shall have been determined in accordance with the fair market value of the properties and in arm's length negotiations. All Federal, state and other tax returns prepared by Sellers or Purchaser shall be prepared on a basis consistent therewith, and no party shall voluntarily take any position inconsistent therewith upon examination of any such tax return, in any claim, in any tax litigation or otherwise with respect to such tax returns; provided, however, that such party may file a protective claim (by way of an amended return or otherwise) if, in connection with any examination of a tax return of a party other than the filing party, an adjustment to such allocation is proposed by any taxing authority which, if sustained, would entitle the non-filing party to take a different position for tax purposes than that agreed to herein. The parties shall cooperate in good faith in the preparation of any required returns or reports under the Code and any Canadian federal or provincial Tax statutes reflecting the foregoing. SECTION 6.12 Certain Obligations Relating to Inventory, Molds and Other Items. (a) Without limiting Sellers' obligations under Section 6.02 with respect to the operations of the Purchased Assets in the ordinary course between the date of this Agreement and the Closing, Sellers shall not sell any Purchased Products at other than the usual discount or otherwise dispose of such Purchased Products, except in the ordinary course of Sellers' business as conducted prior to the date hereof and in accordance with agreements as in effect on the date hereof. (b) Sellers shall, promptly after the Closing, destroy all of the finished goods inventory and work in process inventory of the items set forth on Schedule 6.12(b). Promptly after the termination of the manufacturing and supply arrangement described in Article VII and no later than December 15, 1994, Sellers shall destroy all finished goods inventory and work in process of items set forth in Schedule 2.01(a)(i) that are not purchased by Purchaser whether because the inventory produced is in excess of the amounts set forth in Schedule 2.01(a)(i) or the inventory is not in good and merchantable condition. Each Seller shall provide Purchaser with a certificate of the President of Seller which certifies that such finished goods inventory and work in process have been destroyed. (c) Sellers shall cancel and terminate, or cause to be canceled and terminated, effective as of the Closing Date, the portion of any purchase orders from customers that relates to the Purchased Products. (d) After the Closing and upon Purchaser's request, Sellers shall deliver or cause to be delivered any of the Molds that are located in the United States to Purchaser's manufacturing facility in East Longmeadow, Massachusetts or to other facilities of Purchaser in the United States. Purchaser, on the one hand, and Sellers, on the other hand, shall each pay half of the costs incurred in connection with the delivery of such Molds to Purchaser's manufacturing facility in East Longmeadow, Massachusetts or to other facilities of Purchaser in the United States. SECTION 6.13 Delivery of Purchased Product Records. Sellers shall be responsible at their own expense to deliver all of the Purchased Products Records to Purchaser's manufacturing facility in East Longmeadow, Massachusetts or to such other facility of Purchaser as Purchaser may reasonably direct or partially to East Longmeadow, Massachusetts and partially to such other of Purchaser's facilities as Purchaser shall reasonably direct. SECTION 6.14 Delivery of the Inventory. Within ten (10) days following the receipt by Purchaser of the Closing Inventory Statement, Sellers and Purchaser shall calculate the aggregate amount of freight charges which would have been incurred in the event that all of the Inventory (assuming that (i) all of the items of Inventory in the amounts set forth in the Closing Inventory Statement were delivered to common carriers designated by Purchaser and (ii) the permitted 90% - 110% range described in Section 2.01(a)(i) did not apply) had been shipped to Purchaser's facility at East Longmeadow, Massachusetts on the Closing Date (the "Freight Charge"). Purchaser shall be entitled to a credit against the Purchase Price in an amount which is equal to fifty-percent (50%) of the Freight Charge. SECTION 6.15 Purchaser's Rights with Respect to Undelivered Assets. (a) From and after the Closing Date and until the sixth anniversary of the Closing Date, Purchaser may deliver to Sellers a notice ("Option Notice"), specifying a date (an "Option Closing Date") not less than thirty (30) days after the date of the Option Notice upon which Sellers shall transfer, assign, convey and deliver to Purchaser the Undelivered Assets of Sellers (the "Option Closing") for (i) any products set forth in Schedule 6.15 (the "Current Retained Products") and (ii) any games and puzzles which were previously but are not as of the date of this Agreement manufactured or sold by Sellers and which are in Sellers' archive (the "Archived Games and Puzzles"). (b) For purposes of the Option and this Section 6.15, the following assets and properties of Sellers are the "Undelivered Assets" but only to the extent that any such assets and properties exist and are in Sellers' possession or control on any Option Closing Date: (i) all right, title and interest of Sellers, if any, under license agreements (including any master, mixed or combined license agreements) relating to the manufacture, marketing and sale of the Current Retained Products and the Archived Games and Puzzles (the "Section 6.15 Licenses"), including rights to the prepaid expenses thereto along the lines of Section 2.01(a)(vii); (ii) all finished goods inventory, if any, of Sellers that relates to the Current Retained Products, at Sellers' actual cost calculated on a basis comparable to the Cost Per Unit calculation or the Archived Games and Puzzles; (iii) all molds, tools, dies and film, artwork and color reproductions (including jigs, assembly, line and test fixtures other than equipment which is commonly considered to be part of a general assembly line used to manufacture games and puzzles) which, in each case, are dedicated only to the manufacture and assembly of the Current Retained Products and the Archived Games and Puzzles; (iv) all right, title and interest of Sellers with respect to any Intellectual Property Rights pertaining to the Current Retained Products and the Archived Games and Puzzles, except to the extent that the Intellectual Property Rights are owned by Sellers and extend beyond the games and puzzles businesses; and (v) all records of the kind described in Section 2.01(a)(vi), for the Current Retained Products and the Archived Games and Puzzles. (c) In connection with each Option Closing, Sellers hereby agree: (i) to seek any necessary third-party consents upon terms substantially similar to those agreed by Sellers and Purchaser in connection with the transfer of the Purchased Assets, or as otherwise reasonably agreed by Purchaser and Sellers; (ii) to make disclosures, representations and warranties comparable to those set forth in Article IV hereof and Section 7.09; provided, however, that all such representations and warranties shall be updated as to the then existing knowledge of Sellers as of such Option Closing Date and provided further that in regard to Section 4.07, no representations and warranties shall be made with respect to Archived Games and Puzzles and the representations and warranties with respect to Current Retained Products shall be made as of the Closing Date; (iii) to execute and deliver to Purchaser such assignments, conveyances, documents and instruments and to take any other action reasonably requested by Purchaser to effect transfer to Purchaser of Sellers' rights in the Undelivered Assets to be transferred at such Option Closing; (iv) to the extent that the Intellectual Property Rights are owned by Sellers and extend beyond the games and puzzles businesses, to license such rights to Purchaser under terms substantially similar to those of the Sellers-to-Purchaser Short- Term Trademark License Agreement and the Sellers- to-Purchaser Long-Term License Agreement; and (v) to indemnify Purchaser upon substantially the same terms as set forth in Article VIII hereof with respect to the Undelivered Assets sold, assigned, transferred and delivered, or licensed, at such Option Closing. (d) In connection with any Option Closing, Sellers shall disclose to Purchaser any liabilities of Sellers required to be assumed by Purchaser at such Option Closing in order to put Purchaser in the position of Sellers. If, after such disclosure has been made, Purchaser determines to proceed to such Option Closing, Purchaser shall assume all such liabilities, except for Product Liability Events for products that are sold or manufactured by Sellers prior to the Option Closing. (e) Sellers shall not be required to maintain any of the Section 6.15 Licenses in full force and effect, or to manufacture, distribute or sell any of the Current Retained Products or the Archived Games and Puzzles, or other property subject to the Option, and Sellers shall have no liability hereunder to Purchaser if any of the Section 6.15 Licenses shall lapse or terminate, or any of the Undelivered Assets shall become lost, damaged or destroyed prior to exercise of the Option; provided, however, that Sellers shall not intentionally transfer or destroy any of the Undelivered Assets without notifying Purchaser in writing and Purchaser shall, for a period not to exceed 10 business days following the date of such notice, have the right to exercise the Option with respect to such Undelivered Assets; provided, further, that Sellers shall have the right during the period from the Closing Date until the first anniversary thereof to transfer Current Retained Products in the ordinary course of business, including routine sales of large lots at heavily discounted prices. (f) From the first anniversary of the Closing Date until the sixth anniversary thereof, Sellers agree to notify Purchaser of any serious business discussion of Sellers regarding the sale, transfer and assignment to any Third Party of the Undelivered Assets with respect to any of the Current Retained Products and Purchaser shall, for a period not to exceed 10 business days following the date of such notice, have the right to exercise the Option with respect to such Undelivered Assets. SECTION 6.16 Further Assurances. (a) Sellers shall cooperate in an orderly transfer of the Purchased Assets to Purchaser. At or after the Closing Date, each Seller shall execute, acknowledge and deliver to Purchaser any deeds, assignments, conveyances and other assurances, documents and instruments reasonably requested by Purchaser, and will take any other action that may be reasonably requested by Purchaser, for the purpose of assigning, transferring, granting, conveying and confirming to Purchaser, or reducing to possession, any or all of the Purchased Assets or otherwise to effect the purposes and intent of this Agreement. (b) In the event that Purchaser identifies any information, documents, materials or items related to the Purchased Assets which it considers necessary or appropriate to facilitate Purchaser's operation of the Purchased Assets Sellers shall use their best efforts promptly to locate such information, documents, materials or other items and deliver the same to Purchaser. Following the Closing, Sellers shall, as promptly as practicable, forward to Purchaser any telephone calls, orders, notices, requests, inquiries and other communications relating to the Purchased Assets that they or their affiliates may receive. (c) At or after the Closing Date, Purchaser shall execute, acknowledge and deliver to Sellers any deeds, assignments, conveyances and other assurances, documents and instruments reasonably requested by Sellers, and will take any other action that may be reasonably requested by Sellers, for the purpose of the assumption by Purchaser of the Assumed Liabilities or otherwise to effect the purposes and intent of this Agreement. ARTICLE VII. MANUFACTURING AND SUPPLY AGREEMENT SECTION 7.01 Agreement to Manufacture and Supply. Sellers hereby agree, from and after the Closing (i) until November 1, 1994, to manufacture, and (ii) until November 15, 1994, to package, and make available for shipment, such Purchased Products as are included in the Inventory. Sellers shall be responsible for providing sufficient plant facilities, raw materials, supplies, labor and equipment and maintaining any vendor relationships which may be necessary or advisable in order to satisfy their obligations under the terms of this Article VII. All Purchased Products shall be packaged by Sellers at Sellers' expense in standard master cartons. SECTION 7.02 Order. Promptly following the delivery of the Closing Inventory Statement by Sellers but in no event later than August 19, 1994, Purchaser shall deliver to Sellers an order for at least the difference (the "Difference") between the number of units of each item of Inventory set forth in the Closing Inventory Statement and the corresponding number of units of such item of Inventory set forth on Schedule 2.01(a)(i) (the "Order") and Sellers shall make a good faith effort to manufacture no more than the amounts of Inventory set forth in the Order; provided, however, that delivery of the Order shall not affect the rights and obligations of Purchaser, on the one hand, and Sellers, on the other hand, to purchase and sell the amounts of Inventory required to be purchased and sold pursuant to Section 2.01. Purchaser agrees that any part of the Order for more than the Difference for any item shall be subject to Sellers' reasonable ability to manufacture said item at no incremental cost above the Cost Per Unit using reasonable lead times. SECTION 7.03 Prices of Manufactured Products. The purchase price for each Purchased Product described in the Order shall be the Cost Per Unit for such Purchased Product. SECTION 7.04 Purchaser's Instructions. (a) Purchaser shall from time to time instruct Sellers to have Purchased Products ready for pickup by submitting written instructions to Sellers four days prior to the pickup date. Each such written request shall specify the number of each Purchased Product to be shipped, Sellers' locations where the products will be picked up, the scheduled pickup date and Purchaser's designated common carrier. Purchaser shall designate the common carriers to be used for all shipments of Purchased Products and Purchaser shall be responsible for all freight charges incurred in connection with such deliveries. Each of Purchaser's designated common carriers shall use the "count and load" method of shipping whereby the common carrier shall assume responsibility for risk of loss and any discrepancies between the bill of lading and the products actually delivered. Sellers have indicated to Purchaser that they would like the Inventory which is currently located outside of Fayetteville, North Carolina to be used first. Purchaser agrees that it will use the Inventory located outside of Fayetteville, North Carolina (the "Outside Locations") for shipments to Purchaser's customers before using the Inventory located in Fayetteville, North Carolina provided that the Inventory to be shipped from the Outside Locations is available and, provided further, that if the Inventory to be shipped is available both in Fayetteville, North Carolina and at the Outside Locations, Purchaser will not designate Fayetteville, North Carolina as the location for pickup without prior consultation with and the reasonable agreement of Sellers. (b) Sellers agree that all the Inventory shall be manufactured on or prior to November 1, 1994. Purchaser shall not be required to purchase any Inventory that is not manufactured on or prior to November 1, 1994. (c) Upon Sellers' determination at any time that Sellers will be unable to produce at least 90% of the quantity of any Purchased Product identified on Schedule 2.01(a)(i), Sellers shall promptly so advise Purchaser. In such event, Sellers agree to permit Purchaser, and Purchaser may thereafter elect, by notice to Sellers hereunder, to manufacture such Purchased Product pursuant to the Sellers-to-Purchaser Short-Term Trademark License Agreement. SECTION 7.05 Payment for Purchased Products; Reconciliation. Purchaser shall pay for any Purchased Products which have been accepted by Purchaser's designated common carrier on or prior to the tenth calendar day of the month following such acceptance; provided, however, that 75% of the cost of such shipments shall be applied against the Inventory Advance until the amount of the Inventory Advance is fully recouped by Purchaser. On or prior to December 15, 1994, Purchaser and Sellers shall reconcile their respective accounts against the bills of lading for the Purchased Products and any applicable accounting and sales records. Purchaser agrees to pay to Sellers the full amount of the Inventory Value for all Inventory delivered to Purchaser's common carriers in accordance with the terms of this Agreement; and Sellers agree to pay to Purchaser any amounts that Purchaser may have paid to Sellers that exceed the Inventory Value for all Inventory delivered to Purchaser's designated common carriers in accordance with the terms of this Agreement. Any outstanding amounts which are owed under Article VII by Purchaser, on the one hand, and Sellers, on the other hand, may be netted against each other. SECTION 7.06 Risk of Loss. Sellers shall bear the risk of damage to or deterioration or loss of any Inventory or Purchased Products purchased by Purchaser pursuant to the terms of this Agreement until such Purchased Products are properly delivered into the possession of Purchaser's designated common carrier and accepted by such common carrier. Sellers shall be responsible for all costs associated with misshipments caused by any Seller including, without limitation, any additional freight, handling and storage costs. SECTION 7.07 Conduct Consistent with Past Practice. In connection with the performance of their obligations under this Article VII, Sellers agree to conduct their business operations consistent with Sellers past practices, including (i) providing for insurance coverage at current levels, (ii) providing that the Purchased Products manufactured by Sellers on behalf of Purchaser shall satisfy Sellers' quality standards and (iii) taking periodic cycle counts of the Purchased Products. Sellers shall provide Purchaser with copies of all documentation reasonably requested by Purchaser concerning Sellers' performance under this Article VII. SECTION 7.08 Handling Charge. Purchaser shall pay Sellers handling charges as set forth on Schedule 7.08 for Purchased Products delivered in accordance herewith. SECTION 7.09 Representations and Warranties. (a) On the date of each delivery of Inventory by Sellers to Purchaser's designated common carrier, Seller shall transfer good and marketable title to such Inventory, free and clear of all Encumbrances. (b) On the date of each delivery of Inventory by Sellers to Purchaser's designated common carrier, all of such Inventory shall be in good and merchantable condition, in conformity with applicable voluntary Toy Manufacturing Standards of the Toy Manufacturer's Association promulgated on or before the Closing Date, and suitable and usable or salable in the ordinary course of business for the purpose for which intended. (c) Schedule 2.01(a)(i) sets forth the unit cost with respect to each item of Inventory listed thereon, which, in each case, represents no more than the actual cost, exclusive of handling and freight to Purchaser or Purchaser's customers, to Sellers of such item or for the manufacture of such item, as the case may be, as determined in accordance with generally accepted accounting principles applied on a basis consistent with Sellers' past practices (such cost per unit of Inventory is herein called the "Cost Per Unit"). SECTION 7.10 Access to Sellers' Facilities; Information. Sellers will afford Purchaser and its representatives access to all of Sellers' locations during working hours and permit Purchaser to observe the manufacturing, assembly and warehousing operations of Sellers. Purchaser and its representatives shall be permitted to examine any finished goods inventory of Purchased Products as well as work in process and materials used in connection with the manufacture and distribution of the Purchased Products. SECTION 7.11 Force Majeure. Sellers shall not be liable for any failure to perform any obligation set forth in this Article VII arising or resulting from events outside Sellers' control, including, without limitation, (i) the failure of any of Sellers' vendors in Southeast Asia to perform their respective obligations made to Sellers, (ii) war, riot, revolution, piracy or sabotage; (iii) natural disasters, including storms, cyclones, earthquakes, floods or destruction by lightning or otherwise; and (iv) boycotts, strikes or lock-outs of any kind, work slowdowns and work stoppages affecting Sellers' business operations; provided, however, that Purchaser shall not be required to purchase any Inventory of Sellers produced in the United States unless it is packaged and available for shipment by November 15, 1994. ARTICLE VIII. INDEMNIFICATION SECTION 8.01 Indemnification By Sellers. (a) Each of Sellers shall be jointly and severally liable to Purchaser for, and shall indemnify, reimburse, hold harmless, protect and defend Purchaser from any and all Purchaser's Damages (as defined in Section 8.01(b)), without duplication, in the manner and to the extent set forth in this Section 8.01. (b) The term "Purchaser's Damages" shall include all Damages sustained by Purchaser, its officers, directors, employees, affiliates, successors or assigns (collectively, the "Purchaser Indemnified Parties") (provided that no provision of any of the following clauses shall limit the scope of any other such clause) arising out of, by reason of, in connection with, or resulting from: (i) any misrepresentation or breach of warranty by any Seller contained in Article IV of this Agreement; (ii) any default by any Seller in the performance of any of the covenants or obligations that such Seller is required to perform under this Agreement or under any certificate, instrument or agreement delivered to Purchaser pursuant to or in connection with this Agreement; (iii) any claim, dispute, setoff or deduction by any customer of any Seller against any receivable of any of the Purchaser Indemnified Parties from such customer on account of any claim, dispute, setoff or deduction by such customer against any Seller; (iv) any failure to comply with the Bulk Sales Laws or similar law of any jurisdiction, or any claim or levy by any Person against Purchaser, its successors or assigns, or the Purchased Assets that is based upon or arises in connection with the Bulk Sales Laws of any jurisdiction; and (v) any of the Retained Liabilities. provided, however, that, Sellers shall not be required to pay any Purchaser's Damages arising under Section 8.01(b)(i), unless and until the aggregate amount of all Purchaser's Damages shall have exceeded $300,000, in which event Purchaser shall be entitled to indemnification for all of Purchaser's Damages under Section 8.01(b)(i). (c) The representations and warranties of Sellers set forth in Article IV shall survive the Closing for a period of two (2) years after the Closing Date. Any claim for Purchaser's Damages which is made by Purchaser under Section 8.01(b)(i) must be made within such two-year period following the Closing Date. Any claim or demand against Sellers arising out of Section 8.02(b)(i) of which notice has been given pursuant to Section 8.03 at or prior to the expiration of the two-year survival period shall continue to be subject to indemnification hereunder notwithstanding the expiration of such survival period. (d) Except as otherwise provided in Section 8.01, Sellers' obligations hereunder with respect to Purchaser's Damages shall remain in effect indefinitely, and, as between Purchaser, on the one hand, and Sellers, on the other hand, each Seller hereby expressly waives any defense to any claim by a Purchaser Indemnified Party with respect thereto which defense is based upon the applicable statute of limitations; provided, however, that nothing herein shall constitute a waiver by any Seller of its rights to assert the statute of limitations as a defense against any Third Party. (e) The aggregate amount of Purchaser's Damages to be paid by Sellers with respect to Purchaser's Damages arising under Section 8.01(b)(i) shall not exceed the amount of the Purchase Price. SECTION 8.02 Indemnification by Purchaser. (a) Purchaser shall be liable to Sellers for, and shall indemnify, reimburse, hold harmless, protect and defend each Seller for and from any and all Sellers' Damages (as defined in Section 8.02(b)), without duplication, in the manner and to the extent set forth in this Section 8.02. (b) The term "Sellers' Damages" shall include all Damages sustained by any Seller, its officers, directors, employees, affiliates, successors or assigns (collectively, the "Seller Indemnified Parties"), prior to any reimbursement therefor (provided that no provision of any of the following clauses shall limit the scope of any other such clause) arising out of, by reason of, in connection with, or resulting from: (i) any misrepresentation or breach of warranty by Purchaser contained in Article V of this Agreement; (ii) any default by Purchaser in the performance of any of the covenants or obligations that Purchaser is required to perform under this Agreement or under any certificate, instrument or agreement delivered to Sellers pursuant to or in connection with this Agreement; (iii) any Assumed Liability; and (iv) the conduct of the businesses of Purchaser, the ownership or use of Purchaser's assets or properties, or the manufacture or sale of its goods or products after the Closing Date, except to the extent the liability therefor constitutes a Retained Liability. provided, however, that Purchaser shall not be required to pay any Sellers' Damages arising under Section 8.02(b)(i) unless and until the aggregate amount of all Sellers' Damages shall have exceeded $300,000, in which event Sellers shall be entitled to indemnification for all of Sellers' Damages under Section 8.02(b)(i). (c) The representations and warranties of Purchaser set forth in Article V shall survive the Closing for a period of two (2) years after the Closing Date. Any claim or demand against Sellers arising out of Section 8.02(b)(i) of which notice has been given pursuant to Section 8.03 at or prior to the expiration of the two-year survival period shall continue to be subject to indemnification hereunder notwithstanding the expiration of such survival period. (d) Except as otherwise provided in this Section 8.02, Purchaser's obligations hereunder with respect to Sellers' Damages shall remain in effect indefinitely, and, as between Sellers, on the one hand, and Purchaser, on the other hand, Purchaser hereby expressly waives any defense to any claim by a Seller Indemnified Party with respect thereto which defense is based upon the applicable statute of limitations; provided, however, that nothing herein shall constitute a waiver by Purchaser of its rights to assert the statute of limitations as a defense against any Third Party. (e) The aggregate amount of Sellers' Damages to be paid by Purchaser with respect to Sellers' Damages arising under Section 8.02(b)(i) shall not exceed the amount of the Purchase Price. SECTION 8.03 Notification; Legal Proceedings. (a) If any legal proceeding shall be instituted, or any claim or demand made, against an indemnitee in respect of which an indemnitor may be liable hereunder, then such indemnitee shall give prompt written notice thereof to the indemnitor. The indemnitor shall have the right, in its sole discretion, to settle any such legal proceeding, claim or demand; provided, however, that the indemnitor shall not, without the written consent of the indemnitee, settle any such proceeding, claim or demand or consent to an entry of judgment which does not include as an unconditional term thereof a release of the indemnitee from all liability arising in connection with such proceeding, claim or demand. The indemnitee, at its expense, may participate in any such legal proceeding and the negotiation and settlement of any such claim or demand. (b) If the amount of Purchaser's Damages or Sellers' Damages paid, at any time subsequent to such payment, shall be reduced by any recovery, settlement or otherwise (including by any insurance payment or settlement), then the amount of such reduction, less any expense incurred by the party receiving such recovery in connection therewith, promptly shall be repaid to the indemnitor. (c) Sellers and Purchaser shall consult and use their best efforts to cooperate in resolving questions regarding Purchaser's Damages or Sellers' Damages. If either Sellers or Purchaser shall believe that it has a claim under this Article VIII, then such person shall give prompt notice of such claim to the other party, specifying in reasonable detail the nature of Purchaser's Damages or Sellers' Damages for which payment is claimed, the Section or Sections of this Agreement upon which such claim is based and the amount payable in respect thereof. The party seeking indemnification shall provide to the indemnitor copies of such notices, service of process, pleadings and other pertinent written information and communications that such indemnitee has received or thereafter receives in connection with the matter on which its claim is based. (d) Notwithstanding the provisions of Section 8.03(a) or 8.03(b), if any indemnitee shall fail promptly to notify the indemnitor of such a legal proceeding or of such a claim, then such indemnitee shall not be barred from recovery hereunder with respect to such claim except only to the extent that the indemnitor with respect thereto has been prejudiced or has incurred damages directly as a result of such delay. For purposes of this Section, each Seller hereby irrevocably designates and appoints the Guarantor as the agent for such Seller to accept or receive on behalf of such Seller any notice, demand or claim given or made hereunder, and any such notice, demand or claim shall be deemed to have been duly given or made hereunder by a Purchaser Indemnified Party when given or made to the Guarantor in accordance with Section 11.02. (e) To the extent, if any, that the same factual bases give rise both to a claim for indemnity by a Purchaser Indemnified Party against a Seller (for example for the period during which a Seller owned or controlled the Purchased Assets prior to the Closing) and a claim for indemnity by a Seller Indemnified Party against Purchaser (for example for the period during which Purchaser owned or controlled the Purchased Assets after the Closing) each party will ultimately pay and be liable to the other for that portion of such factual bases for which it is responsible hereunder. ARTICLE IX. CONDITIONS SECTION 9.01 Conditions to Obligations of Purchaser. The obligation of Purchaser to purchase the Purchased Assets and assume the Assumed Liabilities and otherwise to consummate the transactions contemplated hereby is subject to the satisfaction on or prior to the Closing Date of the following conditions (any of which may be waived, in whole or in part, by Purchaser in its sole discretion): (a) the receipt of all of documents, instruments and agreements identified in Section 3.02 hereof; (b) The representations and warranties of Sellers contained in this Agreement (including the Schedules and Exhibits hereto), or in any certificate or document delivered to Purchaser hereunder shall be true in all respects on the Closing Date as if made again on and as of the Closing Date. Sellers shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by them on or before the Closing Date. No material adverse change shall have occurred in the financial condition or operations of the Purchased Assets or the manufacture and sale of the Purchased Products as at the Closing Date from the condition thereof as at the date of this Agreement. (c) There shall not be any statute, rule or regulation promulgated or enacted which makes it illegal for consummation of the transactions contemplated hereby; there shall not be any order or judgment enjoining, restraining or prohibiting or assessing substantial damages in respect of, consummation of the transactions contemplated hereby; there shall not be any suit, claim, action or proceeding instituted by any Person which seeks to enjoin, restrain, prohibit or to assess substantial damages in respect of, consummation of the transactions contemplated hereby or which would impair the ability of Purchaser to own and control the Purchased Assets after the Closing; provided, however, that the existence of the currently pending suit described on Schedule 9.01(c) shall not constitute a condition to Purchaser's obligations hereunder so long as such suit is not amended after the date hereof in a manner that expands the claims or relief or increases the damages sought therein as of the date hereof. (d) Sellers shall have received, or received evidence satisfactory to Purchaser (in its sole discretion) of, all written consents, authorizations and approvals required by any applicable law, rule or regulation or by contract or otherwise of any Federal, commonwealth or state governmental or administrative body or any Third Party respecting the sales, conveyances, transfers and assignments of the Purchased Assets to Purchaser pursuant to the provisions of this Agreement, including all Required Consents. Sellers shall have furnished copies of such consents, authorizations and approvals to Purchaser. (e) Each of the parties under each Mixed License Agreement shall have consented to the assignment by Sellers of their obligations thereunder, to the extent related to Purchased Products, to Purchaser. (f) On the Closing Date, Purchaser shall have been furnished with a certificate of each Seller, dated the Closing Date, certifying in such detail as Purchaser may reasonably request to the fulfillment of the foregoing conditions in subparagraphs (b), (c) and (d) of this Section 9.01. (g) Purchaser shall have received the Opinion of Counsel for Sellers, dated the Closing Date, properly completed and signed. SECTION 9.02 Conditions to Obligations of Sellers. The obligations of Sellers to sell the Purchased Assets and otherwise to consummate the transactions contemplated hereby is subject to the satisfaction on or prior to the Closing Date of the following conditions (any of which may be waived, in whole or in part, by Sellers in their sole discretion): (a) Purchaser shall have tendered to Sellers the Closing Payment in accordance with Section 2.04(b)(i) hereof. (b) Purchaser shall have executed and delivered the Bill of Sale, Assignment and Assumption Agreement. (c) The representations and warranties of Purchaser contained in this Agreement (including the Schedules and Exhibits hereto), or in any certificate or document delivered to Sellers hereunder shall be true in all respects on the Closing Date as if made again on and as of the Closing Date. Purchaser shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. (d) On the Closing Date, Sellers shall have been furnished with a certificate of Purchaser, dated the Closing Date, certifying in such detail as Sellers may reasonably request to the fulfillment of the foregoing conditions in subparagraph (c) of this Section 9.02. (e) Sellers shall have received the Opinion of Counsel for Purchaser, dated the Closing Date, properly completed and signed. ARTICLE X. TERMINATION OF AGREEMENT SECTION 10.01 Termination. This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing Date as follows: (a) by mutual written consent of Sellers and Purchaser; (b) by either Purchaser or Sellers in the event that the Closing does not take place prior to the close of business on August __, 1994; provided, however, that the party seeking to terminate this Agreement pursuant to this Section 10.01(b) shall be permitted to do so only if the failure to close shall not have resulted from the failure or breach by such party with respect to any of the terms of this Agreement or from the inaccuracy of any representation or warranty of such party; (c) by Purchaser, by notice to Sellers at any time, if satisfaction of one or more of the conditions specified in Section 9.01 is or becomes impossible or impracticable and such condition has not been waived by Purchaser; (d) by Sellers, by notice to Purchaser at any time, if satisfaction of one or more of the conditions specified in Section 9.02 is or becomes impossible or impracticable and such condition has not been waived by Sellers. SECTION 10.02 Effect of Termination. If this Agreement shall be terminated pursuant to Section 10.01 hereof, all further obligations of Purchaser and Sellers under this Agreement shall terminate without further liability of any party hereto, except that the parties' obligations under Sections 6.03 and Article VIII shall survive such termination, and no termination shall relieve any party of liability for any breach of warranty, obligation, covenant or agreement of such party or for any misrepresentation by such party hereunder. ARTICLE XI. MISCELLANEOUS SECTION 11.01 Expenses. (a) All legal and other costs and expenses incurred in connection herewith and the transactions contemplated hereby shall be paid by the party incurring such expenses. (b) Notwithstanding Section 11.1(a), Sellers, on the one hand, and Purchaser, on the other, shall divide equally the cost of any transfer, conveyance or recording taxes or charges assessed or payable as a result of the sale, conveyance, transfer and assignment of the Purchased Assets to, or the assumption of the Assumed Liabilities by, Purchaser. SECTION 11.02 Notices. (a) All notices, requests, consents and other communications to any party hereunder shall be in writing and shall be deemed given if delivered personally, or sent by telecopy or other telecommunications device capable of creating a written record to the parties at the following addresses: if to Purchaser, to: Hasbro, Inc. 32 West 23rd Street New York, New York 10010 Telephone: (212) 645-2400 Telecopy: (212) 741-0663 Attention: Mr. Barry J. Alperin Vice Chairman with copy to: Hasbro, Inc. 32 West 23rd Street New York, New York 10010 Telephone: (212) 645-2400 Telecopy: (212) 741-0663 Attention: Phillip H. Waldoks, Esq. Senior Vice President - Corporate Legal Affairs and a copy to: Hasbro, Inc. 1027 Newport Avenue Pawtucket, Rhode Island 02862 Attention: General Counsel Telephone: (401) 431-8691 Telecopy: (401) 727-5089 if to either Seller or both Sellers, to Guarantor (the "Contact Seller"): Western Publishing Group, Inc. 444 Madison Avenue New York, New York 10022 Telephone: (212) 688-4500 Telecopy: (212) 888-5025 Attention: Richard A. Bernstein Chairman and Chief Executive Officer with copies to Western Publishing Company, Inc. 444 Madison Avenue New York, New York 10022 Telephone: (212) 688-4500 Telecopy: (212) 888-5025 Attention: James A. Cohen, Esq. Senior Vice President - Legal Affairs and: Western Publishing Company, Inc. 1220 Mound Avenue Racine, WI Telephone: (414) 631-5253 Telecopy: (414) 631-1862 Attention: Dale C. Gordon, Esq. Vice President and General Counsel and: Morgan, Lewis & Bockius 101 Park Avenue New York, New York 10178 Telephone: (212) 309-6000 Telecopy: (212) 309-6273 Attention: Mitchell N. Baron, Esq. or such other address or telecopy number as such party may hereafter specify by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 11.02, provided such telecopy is deposited in the U.S. mail properly addressed as required by this Section 11.02, (ii) if given by U.S. mail, on the fifth business day after the deposit thereof in the mail, postage prepaid and properly addressed to the address specified in this Section 11.02, (iii) if sent by overnight courier, on the second business day after the delivery thereof to a reputable, nationally recognized courier service, and (iv) if given by hand, when delivered at the address specified in this Section 11.02. (b) Each Seller appoints Western Publishing Group, Inc. as "Contact Seller" and hereby constitutes and appoints the Contact Seller as such Seller's agent and attorney-in- fact for purposes of executing and delivering all consents, approvals and authorizations hereunder or in connection herewith by such Seller, and any such consent, approval or authorization so executed by the Contact Seller shall constitute the legal, valid and binding agreement of such Seller. SECTION 11.03 Binding Effect; Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. Neither party may assign any of its rights or delegate any of its duties under this Agreement without the written consent of the other party, except that Purchaser may assign the right to purchase the Purchased Assets, in whole or in part, to any direct or indirect subsidiaries of Purchaser, provided, that Purchaser shall remain liable for all of Purchaser's obligations set forth in this Agreement. The parties hereby agree that the Purchased Assets located in Canada will be assigned and transferred to Hasbro Canada Inc., a wholly owned subsidiary of Purchaser. SECTION 11.04 Amendments. This Agreement may only be amended by written agreement of Purchaser and Sellers. SECTION 11.05 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. SECTION 11.06 Entire Agreement. This Agreement and the documents and exhibits described herein, or attached or delivered pursuant hereto, together with a side letter agreement(s) among the parties hereto of even date herewith, set forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby, and supersedes all prior letters of intent, agreements, arrangements and understandings relating to the subject matter hereof. SECTION 11.07 Headings. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties, and shall not affect the meaning or interpretation of this Agreement. All references in this Agreement to Articles, Sections, Schedules and Exhibits are to articles and sections of, and to schedules and exhibits to, this Agreement unless otherwise indicated. SECTION 11.08 Joint and Several Obligations. The obligations of Sellers under this Agreement are joint and several, and Purchaser may pursue, enforce, seek, obtain and recover any Damages with respect to which any Seller is liable hereunder from any one Seller or from any combination of Sellers. SECTION 11.09 Governing Law. This Agreement and (unless otherwise provided) all amendments hereof, and waivers and consents hereunder, shall be governed by, and construed in, accordance with the laws of the State of New York applicable to agreements made and to be wholly performed within such state. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered on behalf of each of the parties hereto as of the day and year first above written. WESTERN PUBLISHING COMPANY, INC. By: /s/ James A. Cohen --------------------- Name: James A. Cohen Title: Vice President WESTERN PUBLISHING (CANADA), LTD. By: /s/ James A. Cohen --------------------- Name: James A. Cohen Title: Vice President HASBRO, INC. By: /s/ Barry J. Alger --------------------- Name: Barry J. Alger Title: Vice Chairman GUARANTOR'S GUARANTEE Western Publishing Group, Inc., a Delaware corporation ("Guarantor"), hereby irrevocably and unconditionally guarantees to Purchaser, its successors and assigns, the full, faithful and prompt payment and performance, as and when due, by each Seller of each of its obligations, undertakings and agreements under the foregoing Asset Purchase and Supply Agreement, including, without limitation, its obligations under Articles II, VII and VIII thereof. The foregoing guarantee of Guarantor shall remain in effect without regard to, and shall not be released, discharged, terminated or diminished as a result of, any condition or event that might constitute a release, discharge, termination of a guarantee by a guarantor, including any subsequent amendment, supplement or modification to such Asset Purchase Agreement or any other agreement. WESTERN PUBLISHING GROUP, INC. By: /s/ James A. Cohen ---------------------- Name: James A. Cohen Title: Vice President EX-10.97 10 SEPARATION AGREEMENT [LETTERHEAD OF WESTERN PUBLISHING COMPANY, INC.] Dale C. Gordon Vice President and Direct Line: (414) 631-5253 General Counsel Facsimile: (414) 631-1862 As of September 23, 1994 Mr. George P. Oess 5 Ironwood Court Racine, Wisconsin 53402 Dear George: I make reference to any and all written or oral communications between you and Western Publishing Group, Inc. ("Group") or Western Publishing Company, Inc. ("Western") or representatives of either company regarding the terms and benefits of your employment by Western and your retirement from such employment as of the close of business on September 23, 1994. By your countersignature and return of the enclosed duplicate original of this Letter Agreement to me, you will confirm your agreement with all of the within terms. This letter is intended to document the full and final agreement between you, Group, Western, and any affiliates, subsidiaries, successors or assigns of either concerning the terms of your retirement, which agreement is as follows: 1. Retirement: This Agreement shall confirm your immediate resignation, stemming from your retirement as of this date, from any and all offices and directorships currently held by you in Western and its affiliates. 2. Separation Payments. In recognition of your long service to Western and its existing policies, Western shall pay separation pay to you by continuing your current salary for twelve months through September 23, 1995. Such payments shall be made by Western through its normal payroll system as applicable to its full-time employees from time to time (currently every other Friday), and all payments shall be net of applicable taxes. In addition, this separation benefit shall be continued if, on September 23, 1995, you are not "Employed". As used herein, "Employed" shall refer only to your employment as a full time salaried employee of an independent third party. Your self-employment, consulting work or immaterial third party employment such as the teaching of one or more business education courses or your membership on a Board of Directors shall not constitute the status of being Employed. If so extended, your separation benefit shall expire on the first to occur of your becoming "Employed" or on March 23, 1996. Separation payments are not considered for purposes of the Golden Comprehensive Security Program. 3. Mitigation. Should you achieve earned income during the period of severance pay entitlement set forth in Paragraph 2 above, whether from being Employed, from self-employment or from limited third party employment, severance payments will be reduced by an amount equal to 50% of the gross income derived from such sources of earned income. You are obligated, if requested by Western, to provide documentation such as periodic reports whether or not you are Employed before or after the fact as to amount of such earned income. 4. Insurance and Other Benefits Provided by Law. Western shall continue at its expense through and including the date your separation pay benefit expires pursuant to Paragraph 2, all of your (and your previously covered dependents') life, health, dental, prescription drug, vision and Executive Medical Reimbursement Plan insurance (but neither short or long term disability) benefits. Thereafter, you may continue health, dental, prescription drug, vision and EMRP insurance, at your expense, under the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") for the period allowed under law. Additionally, nothing in this Letter Agreement is meant to amend, modify or limit in any way life insurance, health insurance or other benefits you or your dependents are entitled to receive under (i) Western policies as a retiree as Western's retiree policies may provide from time to time, or (ii) any obligations of law. 5. Computer. You have agreed to purchase the personal computer you are now using in the performance of your business duties at Western. Western hereby agrees that it shall sell to you the IBM Thinkpad Model 755C, the H.P. Model 4P Printer and all accessories and software in your possession on an as-is where-is basis for a total cost of $5,000, such amount to be paid by you to Western, by means of a personal check delivered to my office on or before January 10, 1995. If not so paid, the $5,000 price shall be deducted from the first amounts thereafter due you under this letter agreement. 6. Deferred Compensations. The "Rabbi Trust" Agreement dated April 1, 1993 between you and the Company is currently "funded" in the amount of $60,000--$30,000 on behalf of each of 1992 and 1993. Western shall contribute $30,000 to said "fund" in regard to 1994 as its final contribution thereto and the trustee shall distribute all such funds, including any interest payments due thereunder, in accordance with the trust. Payments shall be made on or before January 5, 1995. 7. Confidentiality. You agree that you will neither disclose to anyone other than Western representatives nor use in any way any trade secrets, records, processes, compilations of information, specifications, customer lists, product information, pricing structures, marketing strategies, future strategies, or any other confidential information or knowledge pertaining to the business of Western or any of its affiliates or subsidiaries obtained by you during your employment with Western. You further represent that you have returned all documents and records which could in any manner be deemed to include such confidential information or knowledge to Western and you agree that, if any such documents and records are hereafter discovered to be in your possession, custody or control, they will be returned to Western immediately. You agree that this Section 7 shall be deemed a material part of this agreement between you and Western and, in the event of any breach of this specific section by you or your representatives, Western may elect to seek any rights or remedies it may have at law and equity or either, the latter to include injunction and specific performance, and you hereby waive the securing or posting of any bond in connection with any such equitable remedy. You and Western further agree that this Letter Agreement, as well as the terms and provisions of all prior written or oral agreements between you and Western are strictly confidential and shall not be divulged or disclosed in any way by you to any other person and that you will protect the confidentiality thereof in all regards. Western shall keep this Letter Agreement and all of its provisions confidential, except where required by law or an order of a court, administrative tribunal or similar governmental body. It is acknowledged that, as an Executive Officer of Group, proxy rules and the like will require substantial disclosures. 8. Release. As a material inducement to Western to enter into this agreement, you hereby irrevocably and unconditionally release, acquit, and forever discharge Western, and Group, their successors, assigns, agents, directors, officers, employees, representatives, divisions, subsidiaries, departments and affiliates and all other persons acting by, through or in concert with any of them (collectively "Releasees") from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, actions, damages, expenses (including attorneys' fees and costs actually incurred), or rights of any and every kind or nature, accrued or unaccrued, known or unknown, which you may have or claim to have against Western, Group, or any of the Releasees. This release pertains to but is in no way limited to all matters related to or arising out of your employment and separation of your employment from Western and all claims for separation benefits, which are not explicitly mentioned in this Letter Agreement, the enclosed letter and attachments from Patrick Hoffman dated September 23, 1994 or otherwise provided you by law. This release further pertains to but is in no way limited to rights and claims under the Age Discrimination in Employment Act of 1967 (29 U.S.C. Section 621 et. seq.), the Wisconsin Fair Employment Act, Title VII of the Civil Rights Act and the Americans With Disabilities Act. 9. Other Benefits. In addition to all other benefits described herein, Western shall reimburse you for reasonable fees (up to a maximum aggregate of $3,750) you incur from this date through December 31, 1995 for advice secured from Mark Imowitz and/or Arthur Andersen & Co. in regard to retirement and investment planning. The aggregate maximum is just that -- a total reimbursable for bills from one or both sources. All bills for which reimbursement is sought must be submitted on or before January 20, 1996. 10. Indemnification. Western hereby confirms that it shall hereafter continue to indemnify you and hold you harmless from and against any and all third party demands, claims, damages, liabilities, costs and expenses, including reasonable attorneys' fees, or causes of action arising out of your acts or omissions while an employee of Western except no such obligation shall attach in regard to instances where you incur liability because you breached or failed to perform a duty you owed to Western and such breach or failure constituted any action specified in Section 180.0851(2)(a) of the Wisconsin Annotated Statutes Law as of this date. 11. Entire Agreement. Western and you understand and agree that no representations or commitments were made by the parties to induce this Letter Agreement other than as expressly set forth herein. You further represent that you have had the opportunity and time to consult with legal counsel concerning the provisions of this Agreement and that you have been given twenty-one days within which to execute the same. This Agreement may not be modified or supplemented except by a subsequent written agreement signed by the party against whom enforcement is sought. To the extent the terms of this Letter Agreement are inconsistent with those in Mr. Hoffman's letter, this Letter Agreement shall prevail. Very truly yours, WESTERN PUBLISHING GROUP, INC. AND WESTERN PUBLISHING COMPANY, INC. /s/ Dale C. Gordon Dale C. Gordon Vice President and General Counsel Agreed and Accepted by: /s/ George P. Oess George P. Oess CAUTION: THIS IS A RELEASE. CONSULT WITH AN ATTORNEY AND READ IT BEFORE SIGNING. THIS AGREEMENT MAY BE REVOKED IN WRITING BY YOU WITHIN SEVEN DAYS OF YOUR EXECUTION OF THE DOCUMENT. EX-21.1 11 SUBSIDIARIES WESTERN PUBLISHING GROUP, INC. Jurisdiction of Percentage of Name of Subsidiary Incorporation Ownership Subsidiaries of Western Publishing Group, Inc. - ---------------------------------------------- Western Publishing Company, Inc. Delaware 100% Penn Corporation Delaware 100% Western Publishing (Hong Kong) Limited Hong Kong 100% Subsidiaries of Penn Corporation - -------------------------------- None Subsidiaries of Western Publishing Company, Inc. - ------------------------------------------------ Western Publishing (Canada) Inc./Les Editions Ontario, Canada 100% Western (Canada) Inc. Golden Press, Inc. New York 100% Skil-Craft Corporation Illinois 100% Dickie Do, Inc. Illinois 100% Dickie Dony, Inc. Delaware 100% Dickie Doc, Inc. Delaware 100% Golden Showcase Stores, Inc. Delaware 100% Children's Productions, Inc. Delaware 100% EX-99.1 12 FINANCIAL STATEMENTS FOR THE GOLDEN COMPREHENSIVE SECURITY PROGRAM GOLDEN COMPREHENSIVE SECURITY PROGRAM Financial Statements for the Years Ended December 31, 1994 and 1993 and Independent Auditors' Report GOLDEN COMPREHENSIVE SECURITY PROGRAM TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits - December 31, 1994 and 1993 2 Statements of Changes in Net Assets Available for Benefits - Years ended December 31, 1994 and 1993 3 Notes to Financial Statements 4-12 ALL FUNDS OF THE PLAN ARE HELD IN A MASTER TRUST. AS A RESULT, SUPPLEMENTAL SCHEDULES ARE OMITTED BECAUSE THEY ARE INAPPLICABLE UNDER THE DEPARTMENT OF LABOR'S RULES AND REGULATIONS. INDEPENDENT AUDITORS' REPORT Benefit Plans Administration Committee Western Publishing Company, Inc.: We have audited the accompanying statements of net assets available for benefits of Golden Comprehensive Security Program as of December 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 1994 and 1993, and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE, LLP Milwaukee, Wisconsin April 21, 1995 GOLDEN COMPREHENSIVE SECURITY PROGRAM STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1994 AND 1993
1994 1993 ASSETS: Investments in Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts (Notes 3 and 4): Investment funds $ 9,221,176 $24,924,230 Guaranteed investment contracts 48,328,918 33,635,413 Parent company stock 1,093,811 2,473,163 Loans receivable from participants 2,197,940 2,229,615 Accrued income receivable 185,566 151,273 Receivable from investments sold 18,555 Contributions receivable: Employers 1,117,331 1,507,925 Participants 207,133 240,682 ----------- ----------- Total assets 62,351,875 65,180,856 ----------- ----------- LIABILITIES: Payable to third parties 51,113 33,114 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $62,300,762 $65,147,742 =========== ==========
See notes to financial statements. -2- GOLDEN COMPREHENSIVE SECURITY PROGRAM STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 Investment income - Increase in equity of allocable portion of Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts - (Notes 3 and 8): Interest $ 2,712,885 $ 3,332,445 Dividends 1,018,924 674,687 (Depreciation) appreciation on pooled investment accounts (2,321,334) 106,692 Contributions - Note 5: Employers 2,475,965 2,831,222 Participants 3,586,212 3,420,620 ----------- ----------- Total additions 7,472,652 10,365,666 ----------- ----------- Payments to or on behalf of participants 10,155,071 4,497,840 Administrative expenses 164,561 153,813 ----------- ----------- Total deductions 10,319,632 4,651,653 ----------- ----------- Net (decrease) increase (2,846,980) 5,714,013 Net assets available for benefits: Beginning of year 65,147,742 59,433,729 ----------- ----------- End of year $62,300,762 $65,147,742 ----------- ----------- ----------- -----------
See notes to financial statements. -3- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 AND 1993 1. THE PLAN Golden Comprehensive Security Program (the "Plan") is a contributory defined contribution plan offered to all eligible employees of Western Publishing Company, Inc. (the "Company") and effective April 23, 1986, to all eligible employees of Western Publishing Group, Inc., the Company's parent, and eligible employees of any United States subsidiary of the Company or the parent which adopts the Plan, with the consent of the Company, who meet certain eligibility requirements. The Plan became effective on November 1, 1984 and conforms with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). An employee becomes a participant of the Plan on specified quarterly entry dates after meeting the following requirements: a. Is a salaried employee or a member of a group or class of employees to which the Plan has been extended by the Board of Directors of the Company; and b. Is not a member of a collective bargaining unit of employees represented by a collective bargaining representative, except to the extent that an agreement between the participating company ("employer") and such representative extends the Plan to such unit of employees; and c. Has completed six months of continuous employment (as defined in the Plan). Participants, by means of authorized payroll deductions, may elect to make contributions to the Plan in amounts based on a percentage of compensation, as defined in the Plan. A participating employee's total contribution ("income deferral" and "participant") is limited to 16% of compensation. Income deferral contributions were limited to no more than $9,240 for 1994 and $8,994 for 1993 in accordance with the Internal Revenue Code ("Code"). Each participating employer annually contributes to the Plan an amount equal to 3% of the aggregate compensation of participants entitled to share in the contribution for that year. In addition, the employers contribute for a participant an amount equal to 60% of the first 6% of "income deferral contributions" made by, or on behalf of the participant. Employer contributions are reduced by any forfeitures to be credited for the applicable period. Forfeitures for 1994 and 1993 totalled $242,089 and $54,717, respectively. The employers' 3% contribution is always invested in the Interest Accumulation Fund. Amounts credited to a participant's account are designated as "Plan Credits." Contributions made by, or on behalf of, a participant are invested (in proportions designated by the participant) in one or more of the following funds: -4- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Number of Participants Invested in Fund at Fund Type December 31, 1994 Conservative Equity Fund 519 Aggressive Equity Fund 467 Interest Accumulation Fund 1,370 Parent Company Stock Fund 297 Interest, dividends and net realized and unrealized gains and losses on Plan investments are allocated to participants' accounts monthly based on their proportionate share of the applicable fund's assets. The employers' 3% contribution for each plan year is allocated to the participants' accounts pro rata based on the eligible compensation paid to the participant by the employer in that year. If a participant's employment terminates for any reason other than retirement, disability or death, the participant is entitled to receive Plan Credits resulting from employer contributions which are then vested according to the following schedule: Vested Percentage Years of Continuous of Employer Employment Contribution Account Less than 1 0% 1 but less than 2 25% 2 but less than 3 50% 3 but less than 4 75% 4 or more 100% Balances in a participant's income deferral contribution account, participant contribution account and prior plan account are fully vested at all times. In the event of a participant's retirement, disability or death, Plan Credits not previously vested, become fully vested and are not subject to forfeiture, and all Plan Credits become immediately distributable in the manner described below. When a participant's employment terminates for any reason, all vested Plan Credits of the participant may be distributed to the participant or, in the event of death, to the beneficiary by one or both of the following methods: -5- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) a. By a lump-sum distribution of any or all Plan Credits. b. By applying the cash equivalent of any or all such Plan Credits towards the purchase of an annuity contract, subject to certain requirements as defined in the Plan. A participant may elect to defer distribution of vested Plan Credits until age 70-1/2. No more often than once per quarter, a participant may elect to withdraw all or any portion of the net credit balance in the participant 's contribution account, prior plan account or rollover account. Participants may borrow, up to certain limits, against their account balance. The loan must be repaid over a period not to exceed 60 months unless the proceeds were used for the purchase of a primary residence in which case it must be repaid within 240 months (360 months for loans made prior to October 18, 1989). Generally, loan repayments are made by payroll deduction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting. Investments - The Plan participates in investment accounts under the Western Publishing Group, Inc. Master Retirement Trust (the "Master Trust"). Investment income, realized gains and losses on investment transactions, expenses and investment appreciation or depreciation on assets held in the Master Trust are allocated monthly to each fund under the Plan based on its proportionate share of Master Trust assets. Plan participation in the Master Trust is adjusted monthly for withdrawals for benefit payments to Plan participants and for contributions made to the Plan. Valuation of Investments - Investments in the Master Trust pooled investment accounts and parent company stock are valued at fair value. Investments in guaranteed investment contracts are valued at contract value. Contract value represents contributions made under the contract plus interest at the contract rate, less funds used to purchase annuities and pay administrative expenses. Expenses - Plan expenses, such as trustee and accounting fees, are charged to the Plan. Benefits Payable - In 1993, the Plan changed its method of accounting for benefits payable to comply with the 1993 AICPA Audit and Accounting Guide, Audits of Employee Benefit Plans. The new guidance requires that benefits payable to persons who have withdrawn from participation in a defined contribution plan be disclosed in the footnotes to the financial statements rather than be recorded as a liability of the Plan. Net assets available for benefits included benefits of $1,278,859 and $726,457 due to participants who have withdrawn from participation in the Plan as of December 31, 1994 and 1993, respectively. -6- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS IN MASTER TRUST Investments in the Master Trust at December 31, 1994 and 1993 were as follows: 1994 1993 (Dollars in Thousands) Guaranteed investment contracts $ 77,725 $ 54,077 Pooled investment funds 26,821 51,480 Common stock 1,610 3,602 -------- -------- Total investments $106,156 $109,159 ======== ======== The net investment gain of the Master Trust for the years ended December 31, 1994 and 1993 was as follows: 1994 1993 (Dollars in Thousands) Interest and Dividends $ 6,129 $ 6,425 (Depreciation) appreciation in fair value of investments (4,024) 1,404 Administrative expenses (453) (402) ------- ------- Net investment gain $ 1,652 $ 7,427 ======= ======= The Plan's interest in the Master Trust as a percentage of net assets of the Master Trust was approximately 56% at December 31, 1994 and 1993. 4. INVESTMENTS Investments in pooled investment funds at December 31, 1994 and 1993 were as follows:
1994 1993 ------------------- ----------------------- UNITS FAIR VALUE UNITS FAIR VALUE Conservative Equity Fund (Evergreen Total Return Fund) 306,156 $5,213,834 261,867 $ 5,137,839 Aggressive Equity Fund (Evergreen Fund) 331,346 3,986,095 303,284 4,306,646 Bankers Trust Pyramid Directed Account Cash Fund 21,247 21,247 15,479,745 15,479,745 ---------- ----------- $9,221,176 $24,924,230 ========== ===========
-7- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Investments in guaranteed investment contracts at December 31, 1994 and 1993 were as follows: 1994 1993 John Hancock Mutual Life Insurance Company Contract #GAC-7313-0 $ 8,981,197 Principal Mutual Life Insurance Company Contract #GAC4-6187-1 7,096,087 $ 8,154,315 CNA Insurance Company Contract #12732-006 7,315,142 Allstate Life Insurance Company Group Annuity Contract #GA-5343-1 6,301,458 7,217,607 New York Life Insurance Company Contract #GA-06701-2-1 5,776,869 6,864,703 New York Life Insurance Company Contract #GA-06701-1 3,553,714 4,083,646 Metropolitan Life Insurance Company Contract #GA-13981-069 6,469,572 Metropolitan Life Insurance Company Contract #A-13823-069 1,856,754 Hartford Life Insurance Company Contract #GA3-10145-AA 8,293,267 ----------- ----------- $48,328,918 $33,635,413 =========== =========== Investments in parent company stock at December 31, 1994 and 1994 were as follows: Fair Shares Value Western Publishing Group, Inc. common stock: December 31, 1994 115,138 $1,093,811 ========== December 31, 1993 128,476 $2,473,163 ========== -8- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Transactions in the common stock of Western Publishing Group, Inc. were as follows: 1994 1993 ----------------- ----------------- Shares Amount Shares Amount Aggregate purchases 26,675 $326,799 57,960 $923,155 ======== ======== Aggregate sales and distributions to participants 40,013 $595,345 4,106 $ 60,154 ======== ======== 5. CONTRIBUTIONS Contributions from the Company, Western Publishing Group, Inc. and their respective participants were as follows: 1994 ------------------------------------- Employer Employee Total Western Publishing Company, Inc. $2,358,026 $3,459,197 $5,817,223 Western Publishing Group, Inc. 117,939 127,015 244,954 ---------- ---------- ---------- $2,475,965 $3,586,212 $6,062,177 ========== ========== ========== 1993 ------------------------------------- Employer Employee Total Western Publishing Company, Inc. $2,743,409 $3,324,537 $6,067,946 Western Publishing Group, Inc. 87,813 96,083 183,896 ---------- ---------- ---------- $2,831,222 $3,420,620 $6,251,842 ========== ========== ========== 6. INTERNAL REVENUE SERVICE STATUS The Internal Revenue Service has determined and informed the Company by a letter dated May 10, 1985, that the Plan is qualified and the trust established under the Plan is tax- exempt, under the appropriate sections of the Code. The Plan has been amended since receiving the determination -9- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) letter and subsequent to December 31, 1994, the Company filed the amended Plan with the Internal Revenue Service for the purpose of obtaining an updated determination letter. However, the plan administrator believes that the plan is currently designed and being operated in compliance with the applicable requirements of the Code. Therefore, the plan administrator believes that the Plan was qualified and the related trust was tax-exempt as of the financial statement date. 7. TERMINATION OF THE PLAN In the event that the Plan is terminated at some future time, each participant's account will become fully vested and will be distributed in accordance with provisions of the Plan. -10- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CHANGES IN NET ASSETS BY FUND: Plan participants have the ability to self-direct employee and certain employer contributions into any of the funds described in Note 1. Net assets at December 31, 1994 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Interest $ 519 $ 446 $ 1,502 $ 2,560,063 $ 150,355 $ 2,712,885 Dividends 398,017 620,907 1,018,924 Depreciation on pooled investment accounts (738,220) (580,183) (1,002,931) (2,321,334) ---------- ---------- ---------- ----------- ---------- ----------- Total investment income (loss) (339,684) 41,170 (1,001,429) 2,560,063 150,355 1,410,475 Contributions: Employers 260,298 210,436 93,543 1,911,688 2,475,965 Participants 691,766 563,384 253,490 2,077,572 3,586,212 Transfers of assets from (to) other funds (373,138) 42,880 277,361 32,669 20,228 ---------- ---------- ---------- ----------- ---------- ----------- Total additions 239,242 857,870 (377,035) 6,581,992 170,583 7,472,652 ---------- ---------- ---------- ----------- ---------- ----------- Payments to or on behalf of participants 844,840 948,979 262,199 7,928,256 170,797 10,155,071 Administrative expenses 7,936 8,068 2,417 146,140 164,561 ---------- ---------- ---------- ----------- ---------- ----------- Total deductions 852,776 957,047 264,616 8,074,396 170,797 10,319,632 ---------- ---------- ---------- ----------- ---------- ---------- Net decrease (613,534) (99,177) (641,651) (1,492,404) (214) (2,846,980) Net assets available for benefits: Beginning of year 5,584,921 4,069,062 1,910,970 51,353,174 2,229,615 65,147,742 ---------- ---------- ---------- ----------- ---------- ----------- End of year $4,971,387 $3,969,885 $1,269,319 $49,860,770 $2,229,401 $62,300,762 ========== ========== ========== =========== ========== ===========
-11- GOLDEN COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CHANGES IN NET ASSETS BY FUND: Plan participants have the ability to self-direct employee and certain employer contributions into any of the funds described in Note 1. Net assets at December 31, 1994 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Interest $ 519 $ 446 $ 1,502 $ 2,560,063 $ 150,355 $2,712,885 Dividends 398,017 620,907 1,018,924 Depreciation on pooled investment accounts (738,220) (580,183) (1,002,193) (2,321,334) ----------- ----------- ----------- ------------ ---------- ----------- Total investment income (loss) (339,684) 41,170 (1,001,429) 2,560,063 150,355 1,410,475 Contributions: Employers 260,298 210,436 93,543 1,911,688 2,475,965 Participants 691,766 563,384 253,490 2,077,572 3,586,212 Transfers of assets from (to) other funds (373,138) 42,880 277,361 32,669 20,228 ----------- ----------- ----------- ------------ ---------- ----------- Total additions 239,242 857,870 (377,035) 6,581,992 170,583 7,472,652 ----------- ----------- ----------- ------------ ---------- ----------- Payments to or on behalf of participants 844,840 948,979 262,199 7,928,256 170,797 10,155,071 Administrative expenses 7,936 8,068 2,417 146,140 164,561 ----------- ----------- ----------- ------------ ---------- ----------- Total deductions 852,776 957,047 264,616 8,074,396 170,797 10,319,632 ----------- ----------- ----------- ------------ ---------- ----------- Net decrease (613,534) (99,177) (641,651) (1,492,404) (214) (2,846,980) Net assets available for benefits: Beginning of year 5,584,921 4,069,062 1,910,970 $ 51,353,174 2,229,401 65,147,742 ----------- ----------- ----------- ------------ ---------- ----------- End of year $ 4,971,387 $ 3,969,885 $ 1,269,319 $ 49,860,770 $2,229,401 $62,300,762 =========== =========== =========== ============ ========== ===========
-12- EX-99.2 13 FINANCIAL STATEMENTS FOR THE GOLDEN RETIREMENT SAVINGS PROGRAM GOLDEN RETIREMENT SAVINGS PROGRAM Financial Statements for the Years Ended December 31, 1994 and 1993 and Independent Auditors' Report GOLDEN RETIREMENT SAVINGS PROGRAM TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits - December 31, 1994 and 1993 2 Statements of Changes in Net Assets Available for Benefits - Years ended December 31, 1994 and 1993 3 Notes to Financial Statements 4-11 ALL FUNDS OF THE PLAN ARE HELD IN A MASTER TRUST. AS A RESULT, SUPPLEMENTAL SCHEDULES ARE OMITTED BECAUSE THEY ARE INAPPLICABLE UNDER THE DEPARTMENT OF LABOR'S RULES AND REGULATIONS. INDEPENDENT AUDITORS' REPORT Benefit Plans Administration Committee Western Publishing Company, Inc.: We have audited the accompanying statements of net assets available for benefits of Golden Retirement Savings Program as of December 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 1994 and 1993, and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE, LLP Milwaukee, Wisconsin April 21, 1995 GOLDEN RETIREMENT SAVINGS PROGRAM STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1994 AND 1993
1994 1993 ASSETS: Investments in Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts (Notes 3 and 4): Investment funds $ 2,895,585 $ 8,574,837 Guaranteed investment contracts 25,166,596 17,737,713 Parent company stock 451,051 963,135 Loans receivable from participants 1,446,781 1,425,192 Accrued income receivable 95,927 79,092 Contributions receivable: Western Publishing Company, Inc. 10,417 70,547 Participants 198,176 220,260 ----------- ----------- Total assets 30,264,533 29,070,776 ----------- ----------- LIABILITIES: Payable to third parties 43,791 28,689 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $30,220,742 $29,042,087 =========== ===========
See notes to financial statements. -2- GOLDEN RETIREMENT SAVINGS PROGRAM STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 Investment income - Increase in equity of allocable portion of Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts - (Notes 3 and 7): Interest $ 1,370,732 $1,554,415 Dividends 324,364 181,828 (Depreciation) appreciation on pooled investment accounts (856,321) 32,483 Contributions: Western Publishing Company, Inc. 709,867 843,875 Participants 2,100,388 2,366,834 ----------- ----------- Total additions 3,649,030 4,979,435 ----------- ----------- Payments to or on behalf of participants 2,355,925 1,584,775 Administrative expenses 114,450 106,132 ----------- ----------- Total deductions 2,470,375 1,690,907 ----------- ----------- Net increase 1,178,655 3,288,528 Net assets available for benefits: Beginning of year 29,042,087 25,753,559 ----------- ----------- End of year $30,220,742 $29,042,087 =========== ===========
See notes to financial statements. -3- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 and 1993 1. THE PLAN Golden Retirement Savings Program (the "Plan") is a contributory defined contribution plan offered to all eligible employees of Western Publishing Company, Inc. (the "Company") and eligible employees of any United States subsidiary of the Company which adopts the Plan, with the consent of the Company, who meet certain eligibility requirements. The Plan became effective on July 1, 1987 and conforms with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). An employee becomes a participant of the Plan on specified quarterly entry dates after meeting the following requirements: a. Is a member of a group of employees to which the Plan has been and continues to be extended by the participating company ("employer"), either unilaterally or through collective bargaining; and b. Has completed six months of continuous employment (as defined in the Plan). Participants, by means of authorized payroll deductions, may elect to make contributions to the Plan in amounts based on a percentage of compensation, as defined in the Plan. A participating employee's total contribution ("income deferral" and "participant") is limited to 16% of compensation. Income deferral contributions were limited to no more than $9,240 in 1994 and $8,994 for 1993 in accordance with the Internal Revenue Code ("Code"). Each participating employer contributes to the Plan an amount equal to 50% of the first 6% of income deferral contributions made by or on behalf of the participant. Employer contributions are reduced by any forfeitures to be credited for the applicable period. Forfeitures for 1994 and 1993 totalled $60,837 and $10,329, respectively. Amounts credited to a participant's account are designated as "Plan Credits." Contributions made by, or on behalf of, a participant are invested (in proportions designated by the participant) in one or more of the following funds: -4- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Number of Participants Invested in Fund at Fund Type December 31, 1994 Conservative Equity Fund 346 Aggressive Equity Fund 322 Interest Accumulation Fund 1,247 Parent Company Stock Fund 284 Interest, dividends and net realized and unrealized gains and losses on Plan investments are allocated to participants' accounts monthly based on their proportionate share of the applicable fund's assets. If a participant's employment terminates for any reason other than retirement, disability or death, the participant is entitled to receive Plan Credits resulting from employer contributions which are then vested according to the following schedule: Vested Percentage Years of Continuous of Employer Employment Contribution Account Less than 1 0% 1 but less than 2 25% 2 but less than 3 50% 3 but less than 4 75% 4 or more 100% Balances in a participant's income deferral contribution account, participant contribution account and prior plan account are fully vested at all times. In the event of a participant's retirement, disability or death, Plan Credits not previously vested, become fully vested and are not subject to forfeiture, and all Plan Credits become immediately distributable in the manner described below. When a participant's employment terminates for any reason, all vested Plan Credits of the participant will be distributed to the participant or, in the event of death, to the beneficiary by one or both of the following methods: -5- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) a. By a lump-sum distribution of any or all Plan Credits. b. By applying the cash equivalent of any or all such Plan Credits towards the purchase of an annuity contract, subject to certain requirements as defined in the Plan. A participant may elect to defer distribution of vested Plan Credits until age 70-1/2. No more often than once per quarter, a participant may elect to withdraw all or any portion of the net credit balance in the participant's contribution account, prior plan account or rollover account. In addition, effective July 1, 1988 participants may borrow, up to certain limits, against their account balance. The loan must be repaid over a period not to exceed 60 months unless the proceeds were used for the purchase of a primary residence in which case it must be repaid within 240 months (360 months for loans made prior to October 18, 1989). Generally, loan repayments are made by payroll deduction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The accompanying financing statements have been prepared on the accrual basis for accounting. Investments - The Plan participates in investment accounts under the Western Publishing Group, Inc. Master Retirement Trust (the "Master Trust"). Investment income, realized gains and losses on investment transactions, expenses and investment appreciation or depreciation on assets held in the Master Trust are allocated monthly to each fund under the Plan based on its proportionate share of Master Trust assets. Plan participation in the Master Trust is adjusted monthly for withdrawals for benefit payments to Plan participants and for contributions made to the Plan. Valuation of Investments - Investments in the Master Trust pooled investment accounts and parent company stock are valued at fair value. Investments in guaranteed investment contracts are valued at contract value. Contract value represents contributions made under the contract plus interest at the contract rate, less funds used to purchase annuities and pay administrative expenses. Expenses - Plan expenses, such as trustee and accounting fees, are charged to the Plan. Benefits Payable - In 1993, the Plan changed its method of accounting for benefits payable to comply with the 1993 AICPA Audit and Accounting Guide, Audits of Employee Benefit Plans. The new guidance requires that benefits payable to persons who have withdrawn from participation in a defined contribution plan be disclosed in the footnotes to the financial statements rather than be recorded as a liability of the Plan. Net assets available for benefits included benefits of $1,107,068 and $160,070 due to participants who have withdrawn from participation in the Plan as of December 31, 1994, and 1993, respectively. -6- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS IN MASTER TRUST Investments in the Master Trust at December 31, 1994 and 1993 were as follows: 1994 1993 (Dollars in Thousands) Guaranteed investment contracts $ 77,725 $ 54,077 Pooled investment funds 26,821 51,480 Common stock 1,610 3,602 -------- -------- Total investments $106,156 $109,159 ======== ======== The net investment gain of the Master Trust for the years ended December 31, 1994 and 1993 was as follows: 1994 1993 (Dollars in Thousands) Interest and Dividends $ 6,129 $ 6,425 (Depreciation) appreciation in fair value of investments (4,024) 1,404 Administrative expenses (453) (402) -------- -------- Net investment gain $ 1,652 $ 7,427 ======== ======== The Plan's interest in the Master Trust as a percentage of net assets of the Master Trust was approximately 27% and 25% at December 31, 1994 and 1993, respectively. 4. INVESTMENTS Investments in pooled investment funds at December 31, 1994 and 1993 were as follows:
1994 1993 ------------------- ----------------------- UNITS FAIR VALUE UNITS FAIR VALUE Conservative Equity Fund (Evergreen Total Return Fund) 88,049 $1,499,470 68,486 $ 1,343,705 Aggressive Equity Fund (Evergreen Fund) 115,236 1,386,290 90,663 1,287,415 Bankers Trust Pyramid Directed Account Cash Fund 9,825 9,825 5,943,717 5,943,717 ---------- ----------- $2,895,585 $ 8,574,837 ========== ===========
-7- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Investments in guaranteed investment contracts at December 31, 1994 and 1993 were as follows: 1994 1993 Principal Mutual Life Insurance Company $3,915,676 $4,188,938 Contract #GA4-6187-2 New York Life Insurance Company 3,626,593 4,013,043 Contract #GA-06701-2-2 Allstate Life Insurance Company 3,617,030 3,857,719 Group Annuity Contract #GA- 5343-2 John Hancock Mutual Life Insurance Company 3,963,771 Contract #GAC-7313-1 CNA Insurance Company Contract #12732-016 3,666,600 New York Life Insurance Company 1,879,800 2,011,413 Contract #GA-06701-2 Metropolitan Life Insurance Company 3,470,292 Contract #GA-13981-169 Metropolitan Life Insurance Company 1,264,372 Contract #GA-13823-169 Hartford Life Insurance Company Contract #GA-10145-A 3,429,062 ----------- ----------- $25,166,596 $17,737,713 =========== =========== Investments in parent company stock at December 31, 1994 and 1993 were as follows: Fair Shares Value Western Publishing Group, Inc. common stock: December 31, 1994 47,479 $451,051 ======== December 31, 1993 50,033 $963,135 ======== -8- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Transactions in the common stock of Western Publishing Group, Inc. were as follows: 1994 1993 ----------------- ----------------- Shares Amount Shares Amount Aggregate purchases 14,411 $175,595 23,096 $366,846 ======== ======== Aggregate sales and distributions to participants 16,965 $267,499 2,070 $ 34,220 ======== ======== 5. INTERNAL REVENUE SERVICE STATUS The Internal Revenue Service has determined and informed the Company by a letter dated July 27, 1989, that the Plan is qualified and the trust established under the Plan is tax-exempt, under the appropriate sections of the Code. The plan has been amended since receiving the determination letter and subsequent to December 31, 1994, the Company filed the amended Plan with the Internal Revenue Service for the purpose of obtaining an updated determination letter. However, the plan administrator believes that the plan is currently designed and being operated in compliance with the applicable requirements of the Code. Therefore, the plan administrator believes that the Plan was qualified and the related trust was tax-exempt as of the financial statement date. 6. TERMINATION OF THE PLAN In the event that the Plan is terminated at some future time, each participant's account will become fully vested and will be distributed in accordance with provisions of the Plan. -9- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. CHANGES IN NET ASSETS BY FUND: Plan participants have the ability to self-direct employee and certain employer contributions into any of the funds described in Note 1. Net assets at December 31, 1994 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Interest $ 138 $ 140 $ 743 $ 1,271,978 $ 97,733 $ 1,370,732 Dividends 108,427 215,937 324,364 Depreciation on pooled investment accounts (201,820) (208,624) (445,877) (856,321) ---------- ---------- ---------- ----------- ---------- ----------- Total investment income (loss) (93,255) 7,453 (445,134) 1,271,978 97,733 838,775 Contributions: Western Publishing Company Inc. 70,740 50,310 34,771 554,046 709,867 Participants 216,268 170,599 112,896 1,600,625 2,100,388 Transfers of assets from (to) other funds (119,647) (39,225) (24,670) 51,785 131,757 ---------- ---------- ---------- ----------- ---------- ----------- Total additions 74,106 189,137 (322,137) 3,478,434 229,490 3,649,030 ---------- ---------- ---------- ----------- ---------- ----------- Payments to or on behalf of participants 54,692 85,748 58,247 1,961,833 195,405 2,355,925 Administrative expenses 3,758 3,823 2,065 104,804 114,450 ---------- ---------- ---------- ----------- ---------- ----------- Total deductions 58,450 89,571 60,312 2,066,637 195,405 2,470,375 ---------- ---------- ---------- ----------- ---------- ----------- Net decrease 15,656 99,566 (382,449) 1,411,797 34,085 1,178,655 Net assets available for benefits: Beginning of year 1,472,907 1,299,394 852,469 23,992,125 1,425,192 29,042,087 ---------- ---------- ---------- ----------- ---------- ----------- End of year $1,488,563 $1,398,960 $ 470,020 $25,403,922 $1,459,277 $30,220,742 ========== ========== ========== =========== ========== ===========
-10- GOLDEN RETIREMENT SAVINGS PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Net assets at December 31, 1993 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Interest $ 14,442 $ 98 $ 712 $ 1,437,019 $ 102,144 $ 1,554,415 Dividends 121,673 60,155 181,828 Appreciation (depreciation) on pooled investment accounts (7,868) 14,321 26,030 32,483 ---------- ---------- ---------- ----------- ---------- ----------- Total investment income 128,247 74,574 26,742 1,437,019 102,144 1,768,726 Contributions: Western Publishing Company, Inc. 62,292 61,821 50,787 668,975 843,875 Participants 170,581 180,852 141,856 1,873,545 2,366,834 Transfers of assets from (to) other funds 187,194 (94,329) 76,847 (167,048) (2,664) ---------- ---------- ---------- ----------- ---------- ----------- Total additions 548,314 222,918 296,232 3,812,491 99,480 4,979,435 ---------- ---------- ---------- ----------- ---------- ----------- Payments to or on behalf of participants 22,992 17,879 19,194 1,507,844 16,866 1,584,775 Administrative expenses 3,573 3,780 2,034 96,745 106,132 ---------- ---------- ---------- ----------- ---------- ----------- Total deductions 26,565 21,659 21,228 1,604,589 16,866 1,690,907 ---------- ---------- ---------- ----------- ---------- ----------- Net increase 521,749 201,259 275,004 2,207,902 82,614 3,288,528 Net assets available for benefits: Beginning of year 951,158 1,098,135 577,465 21,784,223 1,342,578 25,753,559 ---------- ---------- ---------- ----------- ---------- ----------- End of year $1,472,907 $1,299,394 $ 852,469 $23,992,125 $1,425,192 $29,042,087 ========== ========== ========== =========== ========== =========== (Concluded)
-11- EX-99.3 14 FINANCIAL STATEMENTS FOR THE PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM Financial Statements for the Years Ended December 31, 1994 and 1993 and Independent Auditors' Report PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits - December 31, 1994 and 1993 2 Statements of Changes in Net Assets Available for Benefits - Years Ended December 31, 1994 and 1993 3 Notes to Financial Statements 4-11 ALL FUNDS OF THE PLAN ARE HELD IN A MASTER TRUST. AS A RESULT, SUPPLEMENTAL SCHEDULES ARE OMITTED BECAUSE THEY ARE INAPPLICABLE UNDER THE DEPARTMENT OF LABOR'S RULES AND REGULATIONS. INDEPENDENT AUDITORS' REPORT Benefit Plans Administration Committee Penn Corporation: We have audited the accompanying statements of net assets available for benefits of Penn Corporation Comprehensive Security Program as of December 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 1994 and 1993, and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Milwaukee, WI April 21, 1995 PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1994 AND 1993
1994 1993 ASSETS: Investments in Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts (Notes 3 and 4): Investment funds $ 423,031 $1,077,562 Guaranteed investment contracts 2,925,750 1,880,389 Parent company stock 64,609 165,319 Loans receivable from participants 85,668 79,017 Accrued income receivable 13,524 8,604 Contributions receivable: Penn Corporation 151,552 383,865 Participants 21,184 46,968 ---------- ---------- Total assets 3,685,318 3,641,724 ---------- ---------- LIABILITIES: Payable to third parties 4,573 2,401 ---------- ---------- NET ASSETS AVAILABLE FOR BENEFITS $3,680,745 $3,639,323 ========== ==========
See notes to financial statements. -2- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEARS ENDED DECEMBER 31, 1994 AND 1993 1994 1993 Investment income - Increase in equity of allocable portion of Western Publishing Group, Inc. Master Retirement Trust pooled investment accounts (Notes 3 and 7): Interest $ 158,146 $ 171,927 Dividends 49,714 21,945 Depreciation on pooled investment accounts (137,350) (14,252) Contributions: Penn Corporation 150,521 383,915 Participants 482,664 524,379 ---------- ---------- Total additions 703,695 1,087,914 ---------- ---------- Payments to or on behalf of participants 651,549 627,373 Administrative expenses 10,724 17,205 ---------- ---------- Total deductions 662,273 644,578 ---------- ---------- Net increase 41,422 443,336 Net assets available for benefits: Beginning of year 3,639,323 3,195,987 ---------- ---------- End of year $3,680,745 $3,639,323 ========== ========== See notes to financial statements. -3- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 and 1993 1. THE PLAN Penn Corporation Comprehensive Security Program (the "Plan") is a contributory defined contribution plan offered to certain employees of Penn Corporation (the "Company"), a wholly-owned subsidiary of Western Publishing Group, Inc., and eligible employees of any other United States corporation that is a member of the controlled group of corporations of which Penn Corporation is a member, which adopts the Plan, with the consent of the Company, who meet certain eligibility requirements. The Plan became effective on January 1, 1987 and conforms with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). An employee becomes a participant of the Plan on specified quarterly entry dates after meeting the following requirements: a. Is a salaried employee or a member of a group or class of employees to which the Plan has been extended by the Board of Directors of the employer; and b. Is not a member of a collective bargaining unit of employees represented by a collective bargaining representative, except to the extent that an agreement between the participating company ("employer") and such representative extends the Plan to such unit of employees; and c. Has completed six months of continuous employment (as defined in the Plan). Participants, by means of authorized payroll deductions, may elect to make contributions to the Plan in amounts based on a percentage of compensation, as defined in the Plan. A participating employee's total contribution ("income deferral" and "voluntary participant") is limited to 16% of compensation. Income deferral contributions were limited to $9,240 for 1994 and $8,944 for 1993 in accordance with the Internal Revenue Code ("Code"). The Company contributes to the Plan an amount equal to 3% of the aggregate compensation of participants entitled to share in the contribution for that year. Employer contributions are reduced by any forfeitures to be credited for the applicable period. Forfeitures for 1994 and 1993 totaled $21,058 and $4,769, respectively. The employers' contributions are always invested in the Interest Accumulation Fund. -4- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Amounts credited to a participant's account are designated as "Plan Credits." Contributions made by, or on behalf of, a participant, are invested (in proportions designated by the participant) in one or more of the following funds: Number of Participants Invested in Fund at Fund Type December 31, 1994 Conservative Equity Fund 65 Aggressive Equity Fund 59 Interest Accumulation Fund 288 Parent Company Stock Fund 40 Interest, dividends and net realized and unrealized gains and losses on Plan investments are allocated to participants' accounts based on their proportionate share of the applicable fund's assets. If a participant's employment terminates for any reason other than retirement, disability or death, the participant is entitled to receive Plan Credits resulting from employer contributions which are then vested according to the following schedule: Vested Percentage Years of Continuous of Employer Employment Contribution Account Less than 1 0% 1 but less than 2 25% 2 but less than 3 50% 3 but less than 4 75% 4 or more 100% Balances in a participant's income deferral contribution account and voluntary participant account are fully vested at all times. In the event of a participant's retirement, disability or death, Plan Credits not previously vested, become fully vested and are not subject to forfeiture, and all Plan Credits become immediately distributable in the manner described below. -5- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) When a participant's employment terminates for any reason, all vested Plan Credits of the participant may be distributed to the participant or, in the event of death, to the beneficiary by one or both of the following methods: a. By a lump-sum distribution of any or all Plan Credits. b. By applying the cash equivalent of any or all such Plan Credits towards the purchase of an annuity contract, subject to certain requirements as defined in the Plan. A participant may elect to defer distribution of vested Plan Credits until age 70-1/2. No more often than once per quarter, a participant may elect to withdraw all or any portion of the net credit balance in the voluntary participant contribution account or rollover account. In addition, participants may borrow, up to certain limits, against their account balance. The loan must be repaid over a period not to exceed 60 months unless the proceeds were used for the purchase of a primary residence in which case it must be repaid within 360 months. Generally, loan repayments are made by payroll deduction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting. Investments - The Plan participates in investment accounts under the Western Publishing Group, Inc. Master Retirement Trust (the "Master Trust"). Investment income, realized gains and losses on investment transactions, expenses and investment appreciation or depreciation on assets held in the Master Trust are allocated monthly to each fund under the Plan based on its proportionate share of Master Trust assets. Plan participation in the Master Trust is adjusted monthly for withdrawals for benefit payments to Plan participants and annually for employer contributions made to the Plan. Valuation of Investments - Investments in the Master Trust pooled investment accounts and parent company stock are valued at fair value. Investments in guaranteed investment contracts are valued at contract value. Contract value represents contributions made under the contract plus interest at the contract rate, less funds used to purchase annuities and pay administrative expenses. Expenses - Plan expenses, such as trustee and accounting fees, are chargeable to the Plan. During 1994 and 1993, $10,724 and $17,205, respectively, of such expenses were paid by the Plan. -6- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Benefits Payable - In 1993, the Plan changed its method of accounting for benefits payable to comply with the 1993 AICPA Audit and Accounting Guide, Audits of Employee Benefit Plans. The new guidance requires that benefits payable to persons who have withdrawn from participation in a defined contribution plan be disclosed in the footnotes to the financial statements rather than be recorded as a liability of the Plan. Net assets available for benefits included benefits of $1,476,859 and $61,944 due to participants who have withdrawn from participation in the Plan as of December 31, 1994 and 1993, respectively. 3. INVESTMENTS IN MASTER TRUST Investments in the Master Trust at December 31, 1994 and 1993 were as follows: 1994 1993 (Dollars in Thousands) Guaranteed investment contracts $ 77,725 $ 54,077 Pooled investment funds 26,821 51,480 Common stock 1,610 3,602 -------- -------- Total investments $106,156 $109,159 ======== ======== The net investment gain of the Master Trust for the years ended December 31, 1994 and 1993 was as follows: 1994 1993 (Dollars in Thousands) Interest and Dividends $ 6,129 $ 6,425 (Depreciation) appreciation in fair value of investments (4,024) 1,404 Administrative expenses (453) (402) -------- -------- Net investment gain $ 1,652 $ 7,427 ======== ======== The Plan's interest in the Master Trust as a percentage of net assets of the Master Trust was approximately 3% at December 31, 1994 and 1993. -7- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS Investments in pooled investment funds at December 31, 1994 and 1993 were as follows:
1994 1993 ------------------- ----------------------- UNITS FAIR VALUE UNITS FAIR VALUE Conservative Equity Fund (Evergreen Total Return Fund) 11,703 $ 199,306 8,792 $ 172,491 Aggressive Equity Fund (Evergreen Fund) 18,368 200,963 12,533 177,973 Bankers Trust Pyramid Directed Account Cash Fund 2,762 2,762 727,098 727,098 ---------- ----------- $423,031 $1,077,562 ========== ===========
Investments in guaranteed investment contracts at December 31, 1994 and 1993 were as follows: 1994 1993 Principal Mutual Life Insurance Company Contract #GA4-6187-3 $ 608,537 $ 711,685 John Hancock Mutual Life Insurance Company Contract #GAC-7313-2 794,214 CNA Insurance Company Contract #12732-026 478,308 New York Life Insurance Company Contract #GA-06701-2-3 211,465 255,940 New York Life Insurance Company Contract #GA-06701-3 190,114 222,404 Allstate Life Insurance Company Group Annuity Contract #GA-5343-3 181,860 212,052 Metropolitan Life Insurance Company Contract #GA-13981-269 412,737 Metropolitan Life Insurance Company Contract #GA-13823-269 140,382 Hartford Life Insurance Company Contract #GA-1014-AZ 386,441 ---------- ---------- $2,925,750 $1,880,389 ========== ========== -8- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Investments in parent company stock at December 31, 1994 and 1993 were as follows: Fair Shares Value Western Publishing Group, Inc. common stock: December 31, 1994 6,801 $ 64,609 ======== December 31, 1993 8,588 $165,319 ======== Transactions in the common stock of Western Publishing Group, Inc. were as follows: 1994 1993 ----------------- ----------------- Shares Amount Shares Amount Aggregate purchases 1,510 $17,997 1,466 $23,267 ======== ======== Aggregate sales 3,297 $52,502 1,373 $22,835 ======== ======== 5. INTERNAL REVENUE SERVICE STATUS The Internal Revenue Service has determined and informed the Company by a letter dated September 15, 1989, that the Plan is qualified and the trust established under the Plan is tax- exempt, under the appropriate sections of the Code. The Plan has been amended since receiving the determination letter and subsequent to December 31, 1994, the Company filed the amended Plan with the Internal Revenue Service for the purpose of obtaining an updated determination letter. However, the plan administrator believes that the Plan is currently designed and being operated in compliance with the applicable requirements of the Code. Therefore, the plan administrator believes that the Plan was qualified and the related trust was tax-exempt as of the financial statement date. 6. TERMINATION OF THE PLAN In the event that the Plan is terminated at some future time, each participant's account will become fully vested and will be distributed in accordance with provisions of the Plan. -9- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. CHANGES IN NET ASSETS BY FUND: Plan participants have the ability to self-direct employee contributions into any of the funds described in Note 1. Net assets at December 31, 1994 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Intererest $ 19 $ 21 $ 120 $ 152,846 $ 5,140 $ 158,146 Dividends 15,241 34,473 49,714 Depreciation on pooled investment accountants (27,193) (32,968) (77,189) (137,350) -------- -------- -------- ---------- ------- ---------- Total investment income (loss) (11,933) 1,526 (77,069) 152,846 5,140 70,510 Contribtions: Penn Corporation 150,521 150,521 Participants 87,608 82,244 35,450 277,362 482,664 Transfers of assets from (to) other funds (9,455) (2,613) (34,623) 37,003 9,688 -------- -------- -------- ---------- ------- ---------- Total additions 66,220 81,157 (76,242) 617,732 14,828 703,695 -------- -------- -------- ---------- ------- ---------- Payments to or on behalf of participants 43,030 32,075 16,127 548,525 11,792 651,549 Administrative expenses 182 196 584 9,762 10,724 -------- -------- -------- ---------- ------- ---------- Total deductions 43,212 32,271 16,711 558,287 11,792 662,273 -------- -------- -------- ---------- ------- ---------- Net increase (decrease) 23,008 48,886 (92,953) 59,445 3,036 41,422 Net assets available for benefits: Beginning of year 180,044 175,055 162,285 3,042,922 79,017 3,639,323 -------- -------- ------- ---------- ------- ---------- End of year $203,052 $223,941 $69,332 $3,102,367 $82,053 $3,680,745 ======== ======== ======= ========== ======= ==========
-10- PENN CORPORATION COMPREHENSIVE SECURITY PROGRAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) Net assets at December 31, 1993 and the changes in net assets available for benefits for the year then ended were as follows:
Interest Conservative Aggressive Parent Company Accumulation Equity Fund Equity Fund Stock Fund Fund Loan Fund Total Investment income: Interest $ 1,731 $ 12 $ 2 $ 165,436 $ 4,746 $ 171,927 Dividends 14,375 7,570 21,945 (Depreciation) appreciation on pooled investment accounts (2,463) 2,044 (13,833) (14,252) -------- -------- ----------- ---------- ------- ----------- Total investment income (loss) 13,643 9,626 (13,831) 165,436 4,746 179,620 Contributions: Penn Corporation 383,915 383,915 Participants 67,909 70,258 52,196 334,016 524,379 Transfers of assets from (to) other funds 6,319 (10,230) (26,028) 4,297 25,642 -------- -------- -------- ---------- ------- ---------- Total additions 87,871 69,654 12,337 887,664 30,388 1,087,914 -------- -------- -------- ---------- ------- ---------- Payments to or on behalf of participants 8,328 10,058 16,354 589,574 3,059 627,373 Administrative expenses 598 367 858 15,382 17,205 -------- -------- -------- ---------- ------- ---------- Total deductions 8,946 10,425 17,212 604,956 3,059 644,578 -------- -------- -------- ---------- ------- ---------- Net increase (decrease) 78,945 59,229 (4,875) 282,708 27,329 443,336 Net assets available for benefits: Beginning of year 101,099 115,826 167,160 2,760,214 51,688 3,195,987 -------- -------- -------- ---------- ------- ---------- End of year $180,044 $175,055 $162,285 $3,042,922 $79,017 $3,639,323 ======== ======== ======== ========== ======= ========== (Concluded)
-11- EX-27 15 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Western Publishing Group, Inc. and Subsidiaries Consolidated Financial Statements as of and for the year ended January 28, 1995 and is qualified in its entirety by reference to such financial statements. WESTERN PUBLISHING GROUP, INC. Financial Data Schedule Article 5 of Regulation S-X 1000 YEAR JAN-28-1995 JAN-28-1995 85,406 0 94,790 11,539 108,738 327,624 122,990 47,325 428,806 99,384 149,828 9,985 0 212 140,582 428,806 398,354 402,555 297,421 124,128 0 472 17,567 (15,109) 2,470 (17,579) 0 0 0 (17,579) (0.88) 0
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