-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qgiq3UoqsRtwPAGc0DYx6nDtONtw2CIUYMib82Gwyc3cHsZcDbH6MsxvZA7oNl+o AbUplQb17MrNTZWSkX50Ow== 0000950136-98-000572.txt : 19980330 0000950136-98-000572.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950136-98-000572 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN BOOKS FAMILY ENTERTAINMENT INC CENTRAL INDEX KEY: 0000790706 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 061104930 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14399 FILM NUMBER: 98576779 BUSINESS ADDRESS: STREET 1: 888 SEVENTH AVE 43RD FL STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10106 BUSINESS PHONE: 2127538500 MAIL ADDRESS: STREET 1: 850 THIRD AVENUE STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN PUBLISHING GROUP INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal period ended December 27 , 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ...... to ...... Commission file number 0-14399 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Delaware 06-1104930 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 888 Seventh Avenue, New York, New York 10106 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 547-6700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $ .01 per share 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, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 March 20 , 1998 , was approximately $ 306,566,646. As of March 16, 1998 27,099,814 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1998 annual meeting of stockholders to be held on May 12 , 1998 are incorporated by reference into Part III of this Form 10-K. GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES DECEMBER 27, 1997 INDEX
PART I Item 1. Business...................................................................................1 Item 2. Properties.................................................................................8 Item 3. Legal Proceedings..........................................................................9 Item 4. Submission of Matters to a Vote of Security Holders.......................................10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................11 Item 6. Selected Financial Data...................................................................12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..................................................................13 Item 7A Quantitative and Qualitative Disclosures About Market Risk................................19 Item 8. Financial Statements and Supplementary Data...............................................20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................20 PART III Item 10. Directors and Executive Officers of the Registrant........................................21 Item 11. Executive Compensation....................................................................21 Item 12. Security Ownership of Certain Beneficial Owners and Management............................21 Item 13. Certain Relationships and Related Transactions............................................21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................21
FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In connection with these "safe harbor" provisions, the Company has identified important factors that could cause actual results to differ materially from those contained in any forward looking statements made by the Company. Any such statement is qualified by reference to the following cautionary statements. The Company's businesses operate in highly competitive markets and are subject to changes in general economic conditions, intense competition, changes in consumer preferences, loss of key licenses, adverse changes in relationships with key retailers and/or wholesalers, the degree of acceptance of new product introductions, the uncertainties of litigation, as well as other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. Developments in any of these areas, which are more fully described elsewhere in Part I, Item 1-Business, and Item 3-Legal Proceedings, and in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward looking statements contained herein or that may be made from time to time by or on behalf of the Company. PART I. ITEM 1. BUSINESS GENERAL Golden Books Family Entertainment, Inc. (including its subsidiaries, the "Company" or "Golden Books"), publishes, produces, licenses and markets an extensive range of children's and family related entertainment products throughout all media through its Children's and Adult Publishing, Golden Books Entertainment Group ("GBEG") and Commercial Printing divisions. RECENT HISTORY/BUSINESS STRATEGY On May 8, 1996, Golden Press Holding, L.L.C., an investment vehicle formed by Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested $65 million in the Company. At that time, the Company's name was changed to Golden Books Family Entertainment, Inc., and Mr. Snyder, the former Chairman and Chief Executive Officer of Simon & Schuster, Inc., was appointed Chairman and Chief Executive Officer of the Company. Since such time, and in connection with the August 20, 1996 acquisition of an extensive library of character-based properties which constituted substantially all of the family entertainment assets of Broadway Video Entertainment, L.P. (the "Broadway Video Acquisition"), Mr. Snyder has assembled a new senior management team to implement a new business strategy: to build a leading family entertainment company that publishes, produces, markets and licenses children's and family related entertainment products, utilizing the strength of the Golden Books brand, to provide family-oriented content through multiple media. In furtherance of this goal, the Company took the following strategic actions during 1997: o The Children's Publishing division's sales organization was restructured, with a renewed emphasis on strengthening the Company's relationships with its customers, including assisting customers with sales strategies through category management initiatives, as well as a focus on expanding sales efforts into new retail channels; 1 o The Company launched new publishing initiatives, including an agreement to publish R.L. Stine's Fear Street books beginning in March 1998, the launch in September 1997 of the Company's Adult Publishing list, featuring Stephen Covey's The 7 Habits of Highly Effective Families, and the reorganization and relaunching of its price competitive value publishing line under the Merrigold Press imprint; o The Company took steps to strengthen relationships with existing licensors, including signing a new, five-year license agreement with The Walt Disney Company ("Disney"); o The GBEG division expanded its library, as well as its television production operations, through the acquisition of Shari Lewis Enterprises, Inc. (the "Shari Lewis Acquisition"). In addition, GBEG expanded its licensing operations through agreements with Eden, LLC ("Eden"), a leading creator and manufacturer of infant toys, and Swat-Fame, Inc. ("Swat-Fame"), a leading manufacturer of children's wear, to manufacture products based on characters from the Company's library, including Pat the Bunny and The Poky Little Puppy. The GBEG division established a presence in the manufacture, production and distribution of children's home video and audio products through its strategic alliance with Sony Wonder, a division of Sony Music; o Construction began on a new, more efficient manufacturing and administrative facility in Racine, Wisconsin in July 1997, pursuant to an agreement with a developer which is building the facility to the Company's specifications and leasing it to the Company on a long-term basis. The Company began manufacturing at the new facility in February 1998, and expects the new facility to be fully operational by May 1998; o The Company continued its disposition of non-core assets with the sale of its printing operations in Cambridge, Maryland for approximately $20.2 million, as well as the sale of the building which had housed its main plant in Racine for approximately $2.4 million. In addition, in February 1998, in an effort to further simplify its supply chain, the Company announced that it would be closing its distribution center in Coffeyville, Kansas by June 1998 and consolidating its distribution facility in Crawfordsville, Indiana. BUSINESS SEGMENT INFORMATION The Company has three business segments, which it operates through its principal operating subsidiary, Golden Books Publishing Company, Inc. ("Golden Books Publishing"): (1) Consumer Products, which includes its Children's and Adult Publishing divisions, (2) Entertainment, which includes its Golden Books Entertainment Group division, and Commercial Products, which includes its Commercial Printing division. For certain information with respect to net sales, operating profits and identifiable assets attributable to the Company's business segments, see note 20 to the Company's Consolidated Financial Statements herein. CHILDREN'S AND ADULT PUBLISHING CHILDREN'S PUBLISHING. Golden Books is the largest publisher of children's books in the North American retail market, and through its Children's Publishing division, produces storybooks, coloring/activity books, electronic storybooks, puzzles, educational workbooks, reference books, novelty books, chapter books and fiction. The Company has published its flagship product line, "Little Golden Books", for over 50 years. The Company's Children's Publishing products utilize both owned characters, such as The Poky Little Puppy and Lassie, and characters licensed by the Company from third parties, such as Barney and the Muppets. Many of the Company's products, particularly its coloring/activity books, use licenses from Children's Television Workshop (Sesame Street), Mattel, Inc. (Barbie), Mercer Mayer (Little Critters) and Disney. On September 26, 1997, the Company signed a new, five year license agreement with Disney (the Company's previous main license agreement with Disney was to have expired on December 31, 1997). The Disney character license allows the Company to use, in selected product categories, all of Disney's animated characters, including Mickey Mouse, Winnie the Pooh and Pinocchio and characters from The Little Mermaid, The Lion King, Aladdin, The Hunchback of Notre Dame and Toy Story, as well as characters from more recent releases such as Hercules and future releases such as the upcoming Mulan and A Bug's Life. The Company also had 2 licensing agreements in connection with the animated feature film Anastasia and has licensing agreements in connection with the educational television series Between the Lions, anticipated to debut on PBS in November 1999. In July, 1997, the Company acquired the right to publish 65 Fear Street books by R.L. Stine, extending the Company's core age group from 0-7 to 0-14 and representing the Company's first venture into chapter books aimed at older children. The Company began publishing the Fear Street series in March, 1998. Golden Value Books and Special Markets. In July 1997, the Company established the Golden Value Books and Special Markets business unit within its Children's Publishing division. The goal of the new business unit is twofold: to develop more competitively priced value product for all retail channels and to continue to pursue other specialty publishing opportunities outside of traditional retail channels, such as premium, book clubs and fairs, continuity and direct mail, electronic retailing and television shopping. Product in the Golden Value Books and Special Markets business unit will be published under the Merrigold Press imprint. Fear Street Publishing Agreement. In July 1997, the Company extended the core age group for which its Children's Publishing products are designed from 0-7 to 0-14 by acquiring the right to publish 65 Fear Street books by R.L. Stine, the Company's first venture into books aimed at older children. The Company began publishing three Fear Street related series in March 1998, under the Gold Key imprint: Fear Street, R.L. Stine's original series for young adult readers (ages 13 and up), Fear Street Sagas, another young adult spin-off and Ghosts of Fear Street for mid-grade readers (ages 8-12). The Company intends to publish a young adult series based on its Turok the Dinosaur Hunter character in the Fall of 1998, and has agreements in principle to publish Barbie and other young adult, mid-grade and chapter books aimed at younger readers (ages 5-7). The Company's Children's Publishing products, which generally are designed to be appropriate for children up to age seven, fall into four broad categories: (i) "Classic Format," (ii) electronic storybooks, (iii) education and reference, and (iv) trade and novelty. Historically, the Company has distributed its children's publishing products primarily through mass market channels (which include national discount store chains, such as Wal- Mart, K Mart, Target and Toys "R" Us), and to a lesser extent, the Company has sold children's products through bookstores and other retailers (children's educational specialty retailers, other toy stores, supermarkets, drugstores and warehouse clubs), special markets (such as school book clubs, school book fairs, paperback jobbers, catalogue sales and educational institutions) and international channels. In 1997, the Children's Publishing division's sales organization was restructured, with a renewed emphasis on strengthening the Company's relationships with its customers as well as a focus on expanding sales efforts into new retail channels. See "--Distribution and Sales." CLASSIC FORMAT PRODUCTS The Company's Classic Format category of products consists of storybooks and coloring/activity books and products, as described below. This category of products accounts for the largest share of the Company's children's publishing revenues and unit sales. Most products in the Classic Format category are high volume products that carry a retail price under $5.00. The volume and price point of these products makes them particularly attractive to mass market retailers, although Classic Format products are distributed through other channels to a lesser extent. In 1997, the Company introduced new Classic Format products with higher price points which were sold through mass market channels, in bookstores and in specialty retail stores. Storybooks are published principally under the Golden Books, Little Golden Books and Golden Look Look trademarks. In addition to storybooks in the foregoing formats, the Company also publishes paperback books and touch and feel books for babies. The Company's storybook products, in particular those bearing the Golden Books brand, stress "classic" themes such as self-esteem, friendship, family values and general issues associated with growing up. Typical storylines involve topics such as dealing with a new school, family dynamics and the pressures and rewards of friendships. 3 Coloring/activity books and products include coloring books, paint books, sticker books, paper doll books, crayons and boxed activity products. The Company markets these products under the Golden Books and Merrigold Press trademarks. The Company's coloring/activity books and products generally are designed to be appropriate for children ages three to five and are designed to encourage age-appropriate activities, particularly the development of artistic and motor skills. They contain less thematic material than the Company's storybooks and focus primarily on images and scenes utilizing licensed or owned characters. The Company utilizes selected properties and characters in the GBEG library in its children's publishing products, in particular in the storybook and coloring/activity book categories. ELECTRONIC STORYBOOKS The Company believes that it was the first to release electronic storybook products and was at one time the leading manufacturer and distributor of interactive children's books incorporating electronically produced audio effects. However, in recent years, the Company's products in this category have not been cost competitive with those of other manufacturers and the Company's market share has declined substantially. The Company's products in the electronic storybook category have a higher price point than the Company's Classic Format products, with a retail price between $5.00 and $20.00. Products in this category are sold primarily to mass market accounts and independent distributors. EDUCATION AND REFERENCE The Company's education and reference products consist of workbooks, flashcards and reference books. The Company's workbook and flashcard products have price points between $2.00 and $3.50 and its reference books have price points between $4.00 and $5.00. All such products are sold primarily through mass market outlets, although the Company continues to take advantage of sales opportunities for these products through bookstores, specialty retail and special markets distribution channels. The Company intends to increase its product offerings in this category, marketing workbooks that utilize both licensed and proprietary characters and that contain enhanced characteristics such as full color interiors. The Company intends to begin publishing leveled reading series using its existing characters and titles, as well as licensed characters, in the fall of 1998. TRADE AND NOVELTY PRODUCTS The Company's current product offerings in this category consist of flap books, pop-up books, book plus products, multiple format books and treasuries. Products in this category are primarily in the $5.00 to $10.00 retail price range and are primarily distributed through bookstores and specialty retail stores and special markets. The Company's product offerings in this category are at present limited due to the Company's historical focus on products suitable primarily for mass market distribution. However, the Company continues to expand its product offerings in the trade and novelty category, with an emphasis on products featuring the Company's proprietary characters. Products in this category that the Company introduced in 1997 include a number of novelty book and book plus formats with retail price points under $10.00. The Company believes that significant sales opportunities for both its existing and proposed trade and novelty products exist through bookstores, mass market, special market and international distribution channels. ADULT BOOKS In 1997, the Company expanded the Golden Books brand into trade books focusing primarily on parenting and the family with the launch of the Adult Publishing division. The Adult Publishing division's first list in 4 September 1997 included Stephen Covey's The 7 Habits of Highly Effect Families, which hit the New York Times best-seller list. The Adult Publishing division has published a total of 14 titles through the first quarter of 1998, including Christina Ferrare's Family Entertaining, a cookbook by the television personality, and I've Been Rich. I've Been Poor. Rich is Better. by Judy Resnick, the investment advisor. The Adult Publishing division intends to publish an additional 17 titles through 1998, including books by Maria Shriver on discussing death with children and by Richard and Linda Eyre on talking to your children about sex. Additionally, the Adult Publishing Division expects to publish The Parents Answer Book, the first title of three planned co-branded series, comprising a total of 17 books, based on Parents magazine editorial contents, in the fall of 1998. The Company distributes its family-oriented adult trade book line primarily through bookstores, although the line includes books published in formats suitable for mass market distribution. In February 1998, the Adult Publishing division signed an agreement with St. Martin's Press, Incorporated to distribute its books in the United States and Canada. GOLDEN BOOKS ENTERTAINMENT GROUP DIVISION The Company's GBEG division was established in August 1996, upon the acquisition by the Company of an extensive library of character-based family entertainment properties through the Broadway Video Acquisition. The GBEG division's library is comprised of copyrights, distribution rights, trademarks and licenses relating to characters, television programs and motion pictures, both animation and live action, and includes individual specials and multiple episode series. Among the library titles are Rudolph the Red-Nosed Reindeer, Frosty the Snowman, Santa Claus Is Coming to Town, Lassie, 26 half-hour episodes of Felix the Cat, Underdog, 52 half-hour episodes of Abbott and Costello, The Lone Ranger and Tennessee Tuxedo. The Company generates revenues from the GBEG division by licensing properties from the library to third parties, both domestically and internationally, for use on television, on home video and in ancillary media. The Company also, where its rights so permit, licenses specific characters in the GBEG division library (rather than the entire property) for use in new television programs, theatrical films and home video. In addition, the GBEG division licenses merchandising rights in its characters and owned or controlled characters of the Children's Publishing division for use in a variety of products. In August 1997, GBEG entered into a licensing arrangement with Eden, a leading creator and manufacturer of infant toys, to develop and market products based on characters in the Company's library, including a line of soft toys based on Pat the Bunny which was introduced in December 1997. Additionally, in September 1997, GBEG announced a licensing arrangement with Swat-Fame, a leading children's wear manufacturer, to produce apparel featuring Pat the Bunny, The Poky Little Puppy and Little Lulu, to be introduced in the Spring of 1998. The existing licenses granted to third parties in respect of the GBEG division's properties generally cover a limited time period, usually of two to three years in duration. GBEG's licenses are typically narrow, allowing the same property to be simultaneously licensed to multiple parties for different purposes and enhancing the ability of the GBEG division to maximize license revenue from the properties in its library. Shari Lewis Acquisition/ Sony Wonder Venture. In July, 1997, the GBEG division acquired Shari Lewis Enterprises, Inc., expanding its library with the addition of the Lamb Chop, Charlie Horse and Hush Puppy characters, books, television specials, films and home video titles. GBEG began distribution of a new 40-episode series for children by Shari Lewis, The Charlie Horse Music Pizza, which premiered on PBS in January 1998. In December 1997, the GBEG division announced the formation of a long-term strategic alliance with Sony Wonder, a division of Sony Music, for the manufacture, production and distribution of children's home video and audio products. The Company believes that the GBEG division's library, combined with the distribution capabilities of Sony Wonder, will allow the Company to meaningfully compete in the home video market with Golden Books branded content. Through transactions such as the Shari Lewis Acquisition and the formation of a joint venture with Sony Wonder, the GBEG division intends not only to add to its library and enhance its licensing operations but also to expand its role as not only a licensor of but also a creator, producer, manufacturer and distributor of children's related entertainment products. 5 COMMERCIAL PRINTING DIVISION The Company's manufacturing capabilities as a leading producer of coloring and activity books, picture books and educational and supplemental materials allow it to market these capabilities to third parties through its Commercial Printing Division. In 1997, the Company manufactured products for its Commercial Printing Division at factories located in Racine, Wisconsin and Cambridge, Maryland. Customers of the Commercial Printing Division include educational publishers, religious publishers, brand marketers targeting children and families, and other juvenile publishers and entertainment companies. Additionally, the Commercial Printing division engages in commodity printing (such as tax instruction booklets and tax forms), generally during periods of excess production capacity. Cambridge Sale. As part of the Company's effort to streamline its printing operations in order to focus on its core publishing and entertainment businesses, the Company sold its commercial printing operations in Cambridge, Maryland to Mail-Well, Inc. on December 1, 1997 for approximately $20.2 million. DISTRIBUTION AND SALES The Company's children's publishing products are distributed through (i) mass market, both directly and through independent distributors, (ii) bookstores and specialty retail stores, (iii) special markets, and (iv) international distribution channels. Historically, mass market distribution has accounted for, and continues to account for, the largest portion of children's publishing product sales. Among the Company's largest customers in 1997 were Wal-Mart, Toys "R" Us, K Mart and Target. To a lesser extent, the Company has distributed its children's publishing products through other domestic distribution channels. In 1997, the Children's Publishing division's sales organization was restructured. The Children's Publishing division's new sales organization emphasizes strengthening its relationships with its traditional retail customers, including assisting customers with sales strategies through new category management and in-store display initiatives, as well as a focus on expanding sales efforts into new retail channels, such as supermarkets, drugstores, airports and zoos. Closing of Coffeyville Distribution Center. In February 1998, the Company announced that it would be closing its distribution center in Coffeyville, Kansas by June 1998 and consolidating into its distribution facility in Crawfordsville, Indiana. The Company believes this consolidation will allow it to further simplify its supply chain and improve its inventory management function. Internationally, the Company's children's publishing products are marketed in approximately 80 countries and are published in English, Spanish, Japanese, Korean and Portuguese. Books produced under subsidiary rights licensing are issued in 23 languages, including Finnish, Indonesian and Mandarin. The Company has the largest market share in the children's book category in Canada. The Company's sales in Canada, and to a lesser extent the United Kingdom, account for a majority of its international sales revenues. The Adult Publishing division distributes its book line primarily through bookstores, although the line also includes books published in formats suitable for mass market distribution. In February 1998, the Adult Publishing division signed an agreement with St. Martin's Press, Incorporated to distribute its books in the United States and Canada. The GBEG division exploits its library assets in all media and territories worldwide directly or through sub-distributors. GBEG's series, specials, and features are licensed directly to domestic and international broadcasters (terrestrial, cable and satellite) and home video distributors through an internal program distribution staff. Sub-agents have been appointed in specific territories on a case-by-case basis. Similarly, product licensing and merchandising is conducted by an internal department with occasional use of outside agents. 6 COMPETITION The children's publishing market is highly competitive. Competition is based primarily on price, quality, distribution, marketing and licenses. In mass market sales, the Company faces competition primarily from smaller competitors, including, but not limited to, Landoll, Inc., in the coloring/activity category, Publications International, Ltd., in the electronic storybook category, and School Zone Publishing Co., in the educational workbook category. In the trade and specialty trade categories, the Company's principal competitors are Random House, Inc., Simon & Schuster, Inc., Scholastic Corp. and HarperCollins Publishers, Inc. The Company also competes for a share of consumer spending on children's entertainment and educational products against companies that market a broad range of products utilizing a broad range of technologies that are unrelated to those marketed by the Company. The market for licenses is also highly competitive and the Company competes against many other licensees for significant licenses. In recent years, licensors have fragmented licenses, which has reduced the cost of purchasing a license. As a result, smaller bidders have been able to enter the market for licenses, which has resulted in increased competition in this market. Many of the Company's current competitors have greater financial resources than the Company and, in selected markets, greater experience than the Company. Many of the markets which the Company intends to enter each contain a number of competing entities, many of which may have greater financial resources and experience with respect to these markets than the Company. The licensing industry is highly competitive, and the GBEG division faces strong competition from other independent licensing agencies and from the in-house licensing divisions of motion picture and television studios. Additionally, as the division expands its efforts to produce, manufacture and distribute home video products, it will face intense competition for available creative personnel, distribution channels and financing including from motion picture studios, television networks and independent production companies, many of which have greater financial resources than the Company. MANUFACTURING During 1997, the Company manufactured the majority of its Children's Publishing products from its plants in Racine, Wisconsin and Cambridge, Maryland, with additional components and services obtained from third party vendors in the United States and abroad. The Company's electronic products typically contain a higher portion of outsourced content than its printed products, particularly the software and electrical components. In an effort to streamline the Company's printing business, the Company sold its printing operations plant in Cambridge, Maryland on December 1, 1997. NEW MANUFACTURING FACILITY. The Company had previously announced that it would continue to manufacture certain of its core children's publishing products in a new, more efficient manufacturing and administrative facility in Racine, Wisconsin, and outsource all other printing and manufacturing. Construction began on the new facility on July 2, 1997, pursuant to an agreement with a developer which is building the facility to the Company's specifications and will lease it to the Company on a long-term basis upon completion. The Company began manufacturing at the new facility in February 1998, and expects the new facility to be fully operational by May 1998. In connection with its move to the new facility, on October 31, 1997, the Company sold the building which had housed its main plant in Racine for net proceeds of approximately $2.4 million. EMPLOYEES The Company and its subsidiaries have approximately 1,200 employees, calculated on a full-time equivalent basis. Approximately 420 employees are represented by labor unions. The Company negotiated and signed new agreements with its labor unions in the first quarter of 1998. The Company's contracts with (i) the Graphic Communications International Union, Local 223B, (ii) the Graphic Communications International Union, Local 254M, (iii) the International Union of Operating Engineers, Local 309, (iv) the International 7 Brotherhood of Teamsters, Local 43, and (v) the United Auto Workers Local 1007, expire on December 31, 2002. The Company's Canadian subsidiary signed a new contract in January 1998 with Local 1024 of the United Rubber, Cork, Linoleum and Plastic Workers of America AFL-CIO, CLC, which expires on December 31, 2000. The Company believes that its relations with its employees generally are good. In connection with the production of storybooks and coloring/activity books, the Company typically hires writers, illustrators and other creative talent on a freelance, work-for-hire basis to complete its projects. Similarly, to manufacture electronic storybooks, the Company generally outsources tasks such as electrical design and software programming while retaining artistic supervision and control. ITEM 2. PROPERTIES Certain information as to the significant properties used by the Company in the conduct of its business is set forth in the following table:
LOCATION SQUARE FEET TYPE OF USE New York, NY 112,000 Corporate offices; publishing offices; sales offices Racine, WI 498,300 Printing facilities and administrative offices Crawfordsville, IN 403,000 Warehousing and distribution Cambridge, Ontario, Canada 148,000 Corporate offices; sales offices; warehousing and distribution
In addition to the properties described above, the Company owns or rents various other properties that are used for administration, sales offices and warehousing. Construction began on the Company's new, more efficient manufacturing and administrative facility in Racine, Wisconsin on July 2, 1997, pursuant to an agreement with a developer which is building the facility to the Company's specifications and leasing it to the Company on a long-term basis. The Company began manufacturing at the new facility in February 1998, and expects the new facility to be fully operational by May 1998. In connection with its move to the new facility, on October 31, 1997, the Company sold the building which had housed its main plant in Racine for approximately $2.4 million, and is leasing such building until June 1998, as it completes its move to the new facility. The Company moved into its new, 112,000 square foot corporate headquarters in New York City in August 1997. In February, 1998, the Company announced that it would be closing its distribution center in Coffeyville, Kansas by June 1998 and consolidating into its distribution facility in Crawfordsville, Indiana. The Company's 547,000 square foot warehouse and distribution center in Coffeyville is classified as an asset held for sale. In addition to the foregoing properties, the Company also owns a 702,000 square foot facility in Fayetteville, North Carolina which was primarily used in connection with the manufacture and distribution of games and puzzles. During August 1994, the Company sold its game and puzzle operation to Hasbro, Inc., although this facility was not included in the sale. The Company intends to accelerate the sale of this facility. This facility currently is classified as an asset held for sale. The Company sold its printing operations in Cambridge, Maryland, which included a 231,000 square foot printing and warehousing facility, in December 1997. 8 ITEM 3. LEGAL PROCEEDINGS Golden Books Publishing and Penn Corporation ("Penn") have been informed by the Environmental Protection Agency (the "EPA") and/or state regulatory agencies that they may be potentially responsible parties ("PRPs") and face liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act (commonly known as "CERCLA" or "Superfund") or similar state laws. In all cases except those described below, the Company has resolved its liability or is in the process of resolving its liability for amounts not material. Although the Company divested Penn in December 1996, the Company has agreed to indemnify Contempo Colours, Inc. ("Contempo") against certain of Penn's environmental liabilities, including the Cork Street Landfill and Fulford Street Property discussed herein. The Wisconsin Department of Natural Resources (the "WDNR") alleges that the Company is a responsible party for drums found at a site located in unincorporated Racine County. The WDNR and the Company have entered into an agreement which requires the Company to remove drums and soil from the site. The disposal of these drums dates back almost 30 years. The Company did not authorize disposal of its waste drums at the site. The Company has completed the removal of drums and soil from the site. At the Hunt's Landfill site in Racine County, Wisconsin, the Company's liability pursuant to the terms of a consent decree is limited to approximately 4% of the total remedial costs. Although the last phase of construction activities was completed in 1996, Golden Books Publishing and the other PRPs are obligated to fund the operation and maintenance of the site for the next 20-30 years. The current estimate of the total costs of such operation and maintenance is in the range of $14 million. In accordance with the consent decree, the Company has established a reserve for its share of the probable clean-up costs. At the Hertel Landfill in Plattekill, New York, the Company is one of five PRPs sued by the EPA in 1994 for recovery of past EPA response costs of approximately $2.5 million. In September 1991, the EPA approved a remedial action for the Hertel Landfill site that currently is estimated to cost $4.1 million other than groundwater remediation costs, if any are required. One of the site's non-defendant PRPs has been complying with an EPA unilateral administrative order requiring investigation and clean-up of the site and is now seeking contribution towards its cost from the Company and more than 20 other PRPs. At the time the 1991 order was issued, the Company did not comply. As of June 26, 1996, representatives of the Company reached agreement with the EPA to come into compliance with the order and pay a penalty of $625,000 for previous non-compliance. Additionally, during 1997, the Company paid a total of $1,701,000 for the remediation of the Hertel site, including settlement payments to other PRPs. The Company, other PRPs and the government have reached an interm allocation and are in the process of negotiating a consent decree which will establish the Company's future responsibilities at the site. The Company also has been identified as a PRP at another site located in Poughkeepsie, New York. The Company and eight other PRPs received a notice letter in 1995 from the State of New York regarding this site. New York State will be seeking recovery of its past oversight costs of more than $600,000 plus future oversight and maintenance costs associated with this site, currently estimated by the State at $830,000. There has been no attempt made to develop an allocation or to identify all PRPs to date, but the construction phase of the remedy has been completed by other parties without Company involvement. On October 2, 1996, the Company received notice from the City Attorney of Kalamazoo, Michigan that Beach Products, a division of Penn, will be asked to participate in the remediation of the Cork Street Landfill site located in the city which was allegedly used by Beach Products in the past. Current cost estimates for the remediation required at the site are as high as $24,000,000. More than 70 entities will be requested to provided financial contribution to the remediation. On November 14, 1996, the Michigan Department of Environmental Quality requested that corrective actions be taken as a result of the discovery of a leaking underground storage tank system at the Fulford Street Property of the Company on November 8, 1996. An initial site assessment is being completed by the Company's outside consultant. Current estimates indicate that the costs associated with this release should 9 not exceed $200,000. However, in the event that the contamination has migrated off the Company's property, these costs could increase. In addition to these environmental matters, the Company filed an action in 1994 in the United States District Court, Eastern District of Wisconsin captioned as Western Publishing Company, Inc. v. MindGames, Inc. seeking a declaration of rights in regard to the Company's alleged breach of various of its obligations under its licensing agreement with the defendant for distribution through 1994 of the adult board game known as "Clever Endeavor." This case involves the Company's now-discontinued adult and children's game division. The defendant, believing its board game had the potential to become one of the most popular of all time, has maintained that certain of the alleged breaches entitle it to damages of as much as $40 million resulting from lost profits and unpaid royalties. The Court recently granted the Company's partial motion for summary judgment and held that the defendant is precluded from recovering lost profits. Accordingly, the defendant's damage claim is now limited to its unpaid royalties of $1.2 million. The Company denies that it has any liability to defendant. On December 19, 1997, Contempo Colours, Inc. filed suit against the Company in the circuit court for the County of Kalamazoo, Michigan, alleging damages arising out of a dispute between Contempo and the Company relating to the sale to Contempo of Penn on December 23, 1996. The Company and Contempo entered into a standstill agreement with respect to the suit on January 7, 1998, whereby Contempo has agreed to suspend the suit while the parties attempt to negotiate a settlement of all claims. The Company is adequately reserved with respect to this matter. The Company is actively pursuing resolution of the aforementioned matters or, in the case of environmental matters, is awaiting further government response. While it is not feasible to predict or determine the outcomes of these proceedings, it is the opinion of management that these outcomes have been adequately reserved for and will not have a materially adverse effect on the Company's financial position or future results of operations. The Company and its subsidiaries are parties to certain other legal proceedings which are incidental to their ordinary business, none of which the Company believes are material to the Company and its subsidiaries taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCKHOLDERS' INFORMATION COMMON STOCK PRICES The Company's Common Stock, par value $.01 per share ("Common Stock") is traded over-the-counter and is quoted on the NASDAQ National Market System (symbol GBFE). Common stockholders of record at December 27, 1997 numbered approximately 7,000 . 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 DECEMBER 27, 1997 - ------------------------------------------------------------------------------- High Low First Quarter 12 1/4 8 11/16 Second Quarter 12 7/8 7 7/8 Third Quarter 12 5/8 9 1/2 Fourth Quarter 11 3/4 9 1/8 FISCAL YEAR ENDED DECEMBER 28, 1996 (1) - ------------------------------------------------------------------------------- High Low First Quarter 10 7/8 7 7/8 Second Quarter 15 1/8 10 3/8 Third Quarter 12 1/2 10 3/8 Fourth Quarter 12 1/4 10 3/4 (1) On November 30, 1996, the Company changed its Fiscal year end so as to end on the last Saturday in December. Accordingly, the quarterly range of prices has been restated to reflect the Company's revised quarters as follows: 1996 ---- First Quarter March 30th Second Quarter June 29th Third Quarter September 28th Fourth Quarter December 28th DIVIDEND POLICY Holders of Common Stock are entitled to receive such dividends as may be lawfully declared by the Board of Directors. Since its organization in 1984, the Company has not paid a cash dividend on the its Common Stock and management does not currently anticipate the payment of cash dividends on the Common Stock in the foreseeable future. The ability of the Company to pay cash dividends may be limited by the indenture governing the Company's 7.65% Senior Notes due 2002, which restricts the ability of Golden Books Publishing to pay cash dividends or make other cash distributions to the Company. In addition, the ability of the Company to pay cash dividends may be limited by the indenture governing the Company's 8 3/4 % Convertible Debentures due 2016 (which Debentures are held by Golden Books Financing Trust, the issuer of the 8 3/4 % Convertible Trust Originated Preferred Securities due 2016), which restricts, under certain circumstances, the ability of the Company to pay cash dividends and make other distributions on Common Stock. 11 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data below is derived from the consolidated financial statements of the Company and should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Consolidated Financial Statements". In 1996 the Company changed it's fiscal year end so as to end on the last Saturday of December in each year. As a result the current fiscal period ended on December 27, 1997. The Fiscal 1996 results from operations are not necessarily comparable to other periods as presented. The earnings per share amounts have been presented as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"). For further discussion of Statement No. 128, see the notes to the consolidated financial statements beginning on page F-10.
YEAR ENDED ELEVEN MONTHS YEAR ENDED ----------- ENDED ------------------------------------ DECEMBER 27, DECEMBER 28, FEBRUARY 3, JANUARY 28, JANUARY 29, 1997 1996 1996 1995 1994 ------------------------------------------------------------- INCOME STATEMENT DATA: (In Thousands, Except Per Share Data) REVENUES Net sales $ 242,481 $ 254,046 $ 369,572 $ 398,354 $ 613,464 Royalties and other income 1,080 959 1,722 2,207 2,404 ------------------------------------------------------------- Total Revenues 243,561 255,005 371,294 400,561 615,868 ------------------------------------------------------------- COSTS AND EXPENSES: Cost of sales 176,238 231,792 281,392 297,421 432,503 Selling, general and administrative 111,307 142,721 129,020 124,128 203,042 Restructuring plan, net of gains on sale of assets (10,786) 65,741 6,701 (20,352) - Provision for write-down of Division - - - (1,100) 28,180 ------------------------------------------------------------- Total costs and expenses 276,759 440,254 417,113 400,097 663,725 ------------------------------------------------------------- (LOSS) INCOME BEFORE DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, PROVISION (BENEFIT) FOR INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (33,198) (185,249) (45,819) 464 (47,857) DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 10,282 3,597 - - - INTEREST EXPENSE, net of interest income 6,163 6,764 9,896 15,573 15,463 ------------------------------------------------------------- LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (49,643) (195,610) (55,715) (15,109) (63,320) PROVISION (BENEFIT) FOR INCOME TAXES 37 1,893 11,332 2,470 (22,295) ------------------------------------------------------------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (49,680) (197,503) (67,047) (17,579) (41,025) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - - (14,800) ------------------------------------------------------------- NET LOSS $ (49,680) $(197,503) $ (67,047) $ (17,579) $ (55,825) ============================================================= LOSS PER COMMON SHARE - BASIC: Before cumulative effect of change in accounting principle $ (2.18) $ (8.73) $ (3.23) $ (0.88) $ (1.99) Cumulative effect of change in accounting principle - - - - (0.71) ------------------------------------------------------------- NET LOSS PER COMMON SHARE - BASIC $ (2.18) $ (8.73) $ (3.23) $ (0.88) $ (2.70) ============================================================= BALANCE SHEET DATA (AT PERIOD END): Working Capital $ 95,780 $ 168,210 $ 165,309 $ 228,240 $ 332,979 Total assets 323,164 367,235 321,965 428,806 505,116 Long-term debt 149,897 149,862 149,845 149,828 229,812 Guaranteed preferred beneficial interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures 110,707 110,488 - - - Convertible Preferred Stock - Series A - - 9,985 9,985 9,985 Common stockholders' (deficit) equity (61,309) (19,637) 74,368 140,794 158,673
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As part of the Company's plan to return its core publishing business to profitability and to re-deploy assets, the Company incurred approximately $11.5 million in one-time transition costs during 1997 in connection with the Company's strategic plan, consisting of: (i) $3.1 million of moving costs associated with new facilities, (ii) $3.5 million for outsourcing of the information technology department, (iii) $4.5 million in consulting services associated with implementing the strategic plan, and (iv) $0.4 million in other costs. The Company anticipates that it will incur additional one-time transition costs of approximately $13.0 million in 1998. The Company's return to profitability is dependent in part on the successful implementation of management's new strategy. As the Company's new strategy has not yet been fully implemented, the Company does not expect to generate positive net income until 1999 at the earliest. For the year ended December 27, 1997, the Company reported results under three segments: (i) the Consumer Products Segment, (ii) the Commercial Products Segment and (iii) Entertainment Segment. Historically, the Company has reported operating results under two segments: (i) the Consumer Products Segment and (ii) the Commercial Products Segment. The following discussion has been revised to reflect these new reporting segments. The Consumer Products Segment ("Publishing") includes the Children's and Adult Publishing Divisions and, during the eleven months ended December 28, 1996 and the year ended February 3, 1996, Penn Corporation, which was sold on December 23, 1996. The Commercial Products Segment includes the Commercial Printing division. The Golden Books Entertainment Group, which was formed following the Broadway Video Aquisition, is reported as the Entertainment Segment and includes home video, television program licensing, merchandising and other character licensing. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 changes the way companies report segment information in financial statements. The Company has not yet determined the impact of the implementation of FAS 131 on the Company's segment reporting but its adoption will not have a material effect on the Company's statement of position or revenues, only on the composition of its reportable segments. On November 30, 1996, the Company changed its fiscal year so as to end on the last Saturday of December in each year. As a result, the Company's current fiscal period of the twelve months ended December 27, 1997 (Fiscal 1997) is compared to the eleven months ended December 28, 1996 (Fiscal 1996), and Fiscal 1996 is compared to the twelve months ended February 3, 1996 (Fiscal 1995). Due to the change in year end, the results of these fiscal periods are not necessarily comparable. Additionally, certain prior year's amounts have been reclassified to conform with the current year's presentation. FISCAL YEAR ENDED DECEMBER 27, 1997 (FISCAL 1997) COMPARED TO ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996) Revenues for Fiscal 1997 decreased $14.9 million (5.8%) to $243.5 million, as compared to $258.4 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers), for Fiscal 1996. Consumer Products Segment revenues decreased $40.2 million (19.0%) to $171.7 million for Fiscal 1997, compared to $211.9 million (before consideration of $3.4 million of one time charges to establish reserves to resolve differences with customers) for Fiscal 1996. The decrease in revenue for the Consumer Products Segment for Fiscal 1997 resulted principally from the sale of Penn, which was sold in December of 1996 (revenues of $40.7 million) along with a sales decline in electronic storybooks, offset by a sales increase in classics. Commercial Products Segment revenues were $42.4 million for both Fiscal 1997 and Fiscal 1996. During 1997 the Company has focused on internal production requirements as inventory levels have been built in preparation for the move to the Company's manufacturing facility early in 1998. 13 Entertainment Segment revenues increased $25.3 million to $29.4 million for Fiscal 1997 compared to $4.1 million for Fiscal 1996. The increase in revenues for 1997 was due to the fact that the Entertainment Segment was active for only four months in 1996 compared to the full year during 1997. Gross profit increased $15.7 million (30.4%) for Fiscal 1997 to $67.3 million, compared to $51.6 million (before consideration of $28.4 million in one-time revenue and cost of sales charges associated with the strategic redirection of the Company, comprised of $3.4 million in revenue reserves established to resolve differences with customers, $17.6 million relating to the discontinuance or replacement of certain product lines and $7.4 million of other inventory related costs) for Fiscal 1996. As a percentage of revenues, the gross profit margin increased to 27.6% for Fiscal 1997 from 20.0% for Fiscal 1996 (before consideration of one time charges associated with the strategic redirection of the Company). In the Consumer Products Segment, gross profit increased $1.1 million (2.3%) to $48.2 million for Fiscal 1997, compared to $47.1 million for Fiscal 1996 (before consideration of one time charges of $28.4 million described above). As a percentage of revenues, the gross profit margin for the Consumer Products Segment increased to 28.1% for Fiscal 1997 from 22.2% for Fiscal 1996. The increase in Consumer Products Segment gross profit for Fiscal 1997, compared to Fiscal 1996, resulted from lower manufacturing costs. Commercial Products Segment gross profit decreased $0.4 million (10.3%) to $3.5 million for Fiscal 1997, compared to $3.9 million for Fiscal 1996. As a percentage of revenues, the gross profit margin for the Commercial Products Segment decreased to 8.2% for Fiscal 1997, compared to 9.1% for Fiscal 1996. The Entertainment Segment gross profit increased $15.0 million to $15.6 million for Fiscal 1997 compared to $0.6 million for Fiscal 1996. As a percentage of revenues, the gross profit margin was 53.3% for Fiscal 1997 compared to 15.8% for Fiscal 1996. The increase in the Entertainment gross profit margin was primarily due to higher levels of home video sales activity with higher gross margins in Fiscal 1997, compared to Fiscal 1996. Selling, general and administrative expenses (before consideration of $11.5 million of one time transition costs associated with the redirection of the Company, which are comprised of consulting costs of $4.5 million, information systems changeover costs of $3.5 million, costs associated with the move to the Company's new manufacturing facility in Racine, Wisconsin of $2.4 million, costs associated with the move of the Company's New York corporate headquarters of $0.6 million and other costs of $0.5 million), were $99.9 million for Fiscal 1997, a decrease of $4.6 million from $104.5 million (before giving consideration to one time charges of $38.2 million, comprised of $11.0 million relating to costs associated with new management's plans to resolve certain legal and contractual matters, $9.5 million in consulting fees and other costs, and $17.7 million of expenses related to the acquisition of an equity interest by GP Holding). These reductions were primarily attributable to reductions in selling expenses due to lower sales levels. Interest income for Fiscal 1997 increased $1.4 million to $5.6 million from $4.2 million for Fiscal 1996. The increase results from higher average cash balances during 1997 due to cash generated towards the end of 1996 which has subsequently been reduced during 1997 to fund operations, previous period restructure expenses and one time transition costs necessary to implement management's plans to change the strategic direction of the Company. The cash increases during 1996 were generated as follows (1) the sale of the Company's Series B Convertible Preferred Stock to GP Holding for an aggregate purchase price of $65.0 million in May 1996, (2) the issuance of Preferred Securities for $115.0 million in August 1996, (3) the sale of the Company's Common Stock for $25.0 million to HC Crown Corporation, an affiliate of Hallmark Cards, Incorporated, in September 1996 and (4) the sale of Penn Corporation for consideration including approximately $14.0 million in cash, partially offset by the Broadway Video Acquisition for $81.0 million in cash in August 1996 and the redemption of the Company's Series A Preferred Stock for $10.0 million in May 1996. Interest expense (including the distributions on the Preferred Securities), for Fiscal 1997 increased by $7.4 million to $22.0 million, as compared to $14.6 million for Fiscal 1996. The increase in interest expense was primarily due to higher average debt outstanding resulting from the issuance of the Preferred Securities in August 1996. Total average outstanding debt (including the Preferred Securities) increased to $265.0 million for Fiscal 1997, compared to $194.4 million for Fiscal 1996. The Company did not incur a significant provision or benefit for income taxes in the fiscal period ending December 27, 1997. As such, operations for Fiscal 1997 did not include an income tax benefit from domestic operations as no tax benefit was provided on operating losses. Profitable operating results in subsequent periods will benefit from an income tax rate which will be lower than the statutory rate due to the reinstatement of deferred tax assets for which a valuation allowance was established. The provision for Fiscal 1996 pertained principally to anticipated resolution of outstanding issues from prior years. At December 27, 1997, the 14 Company had available net operating loss carryforwards of approximately $207.7 million for Federal income tax purposes. In addition the Company had tax credit carryforwards of approximately $4.3 million. The net loss for Fiscal 1997 was $(49.7) million, or $(2.18) per basic common share, compared to a net loss of $(197.5) million, or $(8.73) per basic common share for Fiscal 1996. Results for Fiscal 1997 include one time transition costs of $11.5 million, and a gain on the disposal of assets of $10.8 million as follows: (i) $10.2 million on the sale of the Cambridge facility, (ii) $0.3 million on the sale of the old Racine plant, and (iii) $0.3 million on the sale of other assets. Results for the eleven months ended December 28, 1996 included one time writedowns and other charges in the consolidated financial statements totaling approximately $132.3 million as follows: (i) a restructuring charge totaling $65.7 million including a: o $21.5 million loss on sale of disposal of a business resulting from the Company's decision to exit non-core business activities; o $24.3 million non-cash charge consisting of: (i) $10.2 million for the write-down of the commercial printing operation to net realizable value to be disposed of in connection with the Company's plan to exit non-core business activities, (ii) $9.6 million for the loss on sale of assets associated with the Company's strategic decision to outsource its information technology department and (iii) $4.5 million for the write-down of assets to net realizable value which have been identified as nonproductive assets as a result of the Company's strategic plan to operate in a new efficient manufacturing facility; o $8.0 million charge for severance related to the above; o $3.0 million net realizable value adjustment related to idle facility associated with the Company's game business, which was previously sold; o $7.6 million write-off of non-productive assets associated with the termination of customer program initiatives in connection with the strategic redirection of the Company; and o $1.3 million for facility exit costs related to a lease termination which were paid in December 1996. (ii) a cost of sales adjustment of $25.0 million comprised of: o $17.6 million of costs pertaining to the Company's decision to discontinue or replace certain product lines and expeditiously liquidate related inventory and slow moving product; and o $7.4 million of other inventory related costs, consisting primarily of licensing and prepublication costs. (iii) a selling, general and administrative charge of $11.0 million relating to costs associated with management's revised plans to resolve certain legal and contractual matters. (iv) adjustments totaling $5.7 million consisting of: o $3.4 million in revenue adjustments; and o $2.3 million in operating expenses to establish reserves to resolve differences with customers with a view toward mending and improving the Company's relationships with its customers. (v) approximately $17.7 million of charges in connection with the sale of a significant equity interest to GP Holding. (vi) $7.2 million of other one time charges consisting primarily of: o $3.8 million in consulting fees incurred in relation to new management's review of the operations of the Company; o $1.7 million of facility costs; and o other one time miscellaneous charges of $1.7 million. As of December 27, 1997, $1.6 million of the facility related costs and $4.2 million of the severance have been paid. 15 ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996) COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) Revenues for Fiscal 1996 decreased $112.9 million (30.4%) to $258.4 million (before giving effect to a $3.4 million reserve adjustment to resolve differences with customers with a view towards mending and improving the Company's relationships with its customers), as compared to $371.3 million for Fiscal 1995. Consumer Products Segment revenues decreased $96.4 million (31.3%) to $211.9 million for Fiscal 1996 (before giving effect to the $3.4 million reserve adjustment described above) from $308.3 million for Fiscal 1995. Sales volume declines were experienced across the board with the fourth quarter decreases being consistent with these in the earlier part of the year. Electronic storybook products were sold at significantly reduced prices from Fiscal 1995 resulting in overall price reductions from the prior year. Excluding the impact of electronic storybooks, sales prices increased by 14.4% with the largest increases in the activity books and picture books. Discontinued product lines accounted for $16.0 million in the reduction of sales. Sales at Penn were down $12.3 million, resulting from the continuing decline in popularity of licensed characters which had been introduced in earlier years, the pending loss of the Disney license and increased competition in the marketplace. Commercial Products segment revenues, comprised of printing services, decreased $20.6 million (32.7%) to $42.4 million for Fiscal 1996 from $63.0 million for Fiscal 1995. The decline is largely attributable to the historically high levels of January revenue which are not included in Fiscal 1996 but were included in Fiscal 1995, and certain reclassifications between business segments. The Entertainment Segment revenues were $4.1 million since the date of acquisition, August 20, 1996. Gross Profit decreased $38.3 million (42.6%) to $51.6 million for Fiscal 1996 (before giving consideration to $28.4 million of revenue and cost of sales adjustments described above) from $89.9 million for Fiscal 1995. As a percentage of revenues, the gross profit margin decreased to 20.0% for Fiscal 1996 (before giving consideration to $28.4 million of revenue and cost of sales adjustments described above) as compared to 24.2% for Fiscal 1995. In the Consumer Products Segment, gross profit decreased $34.3 million (42.1%) to $47.1 million for Fiscal 1996 (before giving consideration to $28.4 million of revenue and cost of sales adjustments described above) from $81.4 million for Fiscal 1995. As a percentage of revenues, the Consumer Products Segment gross profit margin decreased to 22.2% for Fiscal 1996 (before giving consideration to $28.4 million of revenue and cost of sales adjustments described above) from 26.4% for Fiscal 1995. The decline in the Consumer Products Segment gross profit margin is mainly attributable to increased levels of royalty cost resulting from changes in the sales mix towards the higher royalties associated with licensed characters' products, and a deterioration in the gross profit margins at Penn which decreased to 12.0% from 22.1%. The liquidation of last-in, first-out ("LIFO") inventory resulted in a decrease to cost of goods sold of $5.2 million which was offset by charges to cost of goods sold of $4.6 million relating to slow moving and obsolete inventory. The Commercial Products Segment gross profit decreased $4.6 million (54.1%) to $3.9 million for Fiscal 1996 from $8.5 million for Fiscal 1995. As a percentage of revenues, the Commercial Products Segment gross profit margin decreased to 9.1% for Fiscal 1996 as compared to 13.5% for Fiscal 1995, primarily due to continuing unfavorable manufacturing variances. The newly established Entertainment Segment had little impact on the consolidated gross profit margin during this period. In Fiscal 1996, as a percentage of revenues, the Entertainment Segment gross profit margin was 15.8%. Selling, general and administration expenses for Fiscal 1996 decreased $24.4 million (18.9%) to $104.5 million (before giving consideration to one time charges of $38.2 million comprised of $11.0 million relating to costs associated with new management's plans to resolve certain legal and contractual matters, $9.5 million in consulting fees and other costs as described above and $17.7 million of expenses related to the acquisition of an equity interest by GP Holding) from $129.0 million for Fiscal 1995. These reductions were primarily attributable to the shorter fiscal period, reductions in selling expenses due to lower sales levels and the Company's workforce reduction program. Interest expense for Fiscal 1996 increased by $1.7 million (including $3.6 million related to the distributions on the Preferred Securities) to $14.6 million as compared to $12.9 million for Fiscal 1995. The increase in interest expense for Fiscal 1996 was primarily due to higher average debt outstanding, as the Company completed its private placement of the Preferred Securities on September 9, 1996. Total average outstanding debt increased to $194.4 million in Fiscal 1996 from $152.8 million in Fiscal 1995. 16 The Company's provision for income taxes decreased from $11.3 million to $1.9 million for Fiscal 1996 compared to Fiscal 1995. The provision for Fiscal 1996 pertained principally to anticipated resolution of outstanding issues from prior years. The Company has established an additional valuation allowance for the future tax benefits associated with the current year increase in the deductible temporary difference items since the future realization of such benefits is uncertain. The Fiscal 1995 provision includes a non-cash charge of $13.9 million, reflecting an increase in the income tax valuation allowance as the future realization of existing deductible temporary differences is uncertain. The effective income tax rates from operations of (1.0%) in Fiscal 1996 and (20.3%) in Fiscal 1995 are significantly below the Federal statutory rate due to losses incurred during each period for which no tax benefit has been recognized. 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 valuation allowances have been established. At December 28, 1996, the Company had available net operating loss carryforwards of approximately $138.7 million for Federal income tax purposes. In addition the Company had tax credit carry forwards of approximately $4.4 million. The loss for Fiscal 1996 was $197.5 million, or $(8.73) per basic common share compared to a net loss of $67.0 million or $(3.23) per basic common share for fiscal 1995. Results for Fiscal 1996 include restructuring and other charges of a one time nature aggregating $132.3 million, as discussed above. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES As of December 27, 1997, the Company had approximately $95.8 million in working capital, including approximately $57.4 million in cash. Based upon current projections, the continued implementation of management's plan to return the Company's core publishing business to profitability and to re-deploy assets during the next twelve months may require financial resources greater than the Company's current cash position and future cash flow. Accordingly, the Company is currently seeking additional financing. In connection therewith, the Company is presently negotiating for a three year $25 million line of credit ("Line of Credit"), which requires approval from a majority (over 50%) of the holders of the Company's $150 million 7.65% Senior Notes. In the alternative, the Company is also presently negotiating an accounts receivable purchase program for the purchase of up to $30 million of qualified receivables ("Accounts Receivable Purchase Program") at any one time. Management believes that it will be successful in obtaining both the Line of Credit and the Accounts Receivable Purchase Program on acceptable terms. However, there can be no assurance that either the Line of Credit or the Accounts Receivable Purchase Program will be obtained by the Company on acceptable terms. If the Company does not consummate the aforementioned financing arrangements, it may be required to seek equity or other sources of financing. To the extent that the Company finances its requirements through the issuance of additional equity securities, any such issuance would result in dilution of the Common Stock. Operations for Fiscal 1997, including one time transition costs of $11.5 million associated with the strategic redirection of the Company and payments of restructuring costs accrued during Fiscal 1996 of $4.2 million, utilized cash of approximately $82.3 million compared to cash provided of $94.5 million for Fiscal 1996. Acquisitions of property, plant and equipment were $20.4 million during Fiscal 1997, as compared to $5.7 million during Fiscal 1996. Additions to the Company's film library were $6.3 million in Fiscal 1997. Working capital at December 27, 1997 was $95.8 million, as compared to $168.2 million at December 28, 1996. The decrease resulted primarily from cash reductions associated with investment in property, plant and equipment, funding the loss from operations and transition costs associated with the strategic redirection of the Company during Fiscal 1997. The Company incurred $11.5 million attributable to transition costs in connection with the strategic redirection of the Company during 1997. The Company's plan to change its strategic direction in order to return the core publishing business to profitability originally anticipated incurring $20.5 million in one time transition costs during 1997. Since this announcement the Company has made additional decisions (as described below) which made it impractical for all such transition costs to be incurred during 1997. As a result, the Company expects that approximately $13.0 million of one time transition costs will be incurred during 1998. The major factor impacting this change in timing is management's decision to delay the construction and move of the Company's main operating facility in Racine, Wisconsin, which it expects to be fully operational by May 1998. As of December 27, 1997, the Company maintained sufficient accruals for restructuring costs which are expected to be paid out during 1998. In connection with its move to the new facility, on October 31, 1997, the Company sold the building which had housed its main plant in Racine for net proceeds of approximately $2.4 million. 17 In connection with the construction of the new manufacturing facility, the Company was awarded low interest loans and other financial incentives valued at $5.0 million by the State of Wisconsin and the City and County of Racine, $3.0 million of which were received during Fiscal 1997. The Company continued its disposition of non-core assets with the December 1, 1997 sale of its printing operations in Cambridge, Maryland for approximately $20.2 million, the sale of the Racine plant for $2.4 million (described above), and the sale of other assets for approximately $0.1 million. The Company believes that, based on the carrying value of both certain assets held for sale and inventory to be discontinued or replaced in connection with the Company's strategic actions, it will realize cash proceeds in excess of $10.0 million on the sale of such assets. Such proceeds and cash attributable to the Company's cost savings will be used in connection with the Company's change in strategic focus and other strategic measures. On September 26, 1997, the Company signed a new license agreement with Disney (the "New Disney License Agreement") (the Company's previous main license agreement with Disney was to have expired on December 31, 1997). The New Disney License Agreement commenced on October 1, 1997 and runs through December 31, 2001, and can be extended under certain conditions for an additional year through December 31, 2002. The book formats covered under the New Disney License Agreement include: coloring books, activity books, Little Golden Books, First Little Golden Books, Look/Look Books, Super Shape Books and Sturdy Shape Books. New formats approved by Disney also may be covered under the New Disney License Agreement. Properties covered under the New Disney License Agreement include Disney classic characters as well as characters from major new Disney branded films released during the term thereof. Royalty rates under the New Disney License Agreement vary by product covered. The New Disney License Agreement contains minimum royalty guarantees of $7,370,000 for the nine-month period commencing January 1, 1998 and ending September 30, 1998, $11,670,000 for the second year of the term, $13,340,000 for the third year of the term, $15,340,000 for the fourth year of the term and $5,280,000 for the period commencing October 1, 2001 and ending December 31, 2001; provided that if the New Disney License Agreement is extended for an additional year, the minimum royalty guaranty for the year commencing October 1, 2001 shall be $16,670,000, and for the period commencing October 1, 2002 and ending December 31, 2002 shall be $5,610,000. In addition, upon the execution and delivery thereof, Disney received warrants to purchase 1.1 million shares of the Company's common stock at a per share price of $11.375 (subject to certain adjustments), exercisable beginning on the earlier of i) 90 days after the expiration of the New Disney License Agreement or ii) 30 days after the announcement by either Disney or the Company that they will a) be entering into a new license agreement or b) that they will not be entering into a new licensing agreement, and expiring on March 31, 2008. LEGAL PROCEEDINGS The Company is currently involved in various litigation as described under "Item 3. Legal Proceedings". The Company is actively pursuing resolution to those matters or is awaiting further government response. While it is not feasible to predict or determine the outcome of the proceedings, it is the opinion of Management that their outcomes have been adequately reserved for and will not have a materially adverse effect on the Company's financial position or future results of operations. INDENTURE RESTRICTIONS The indenture governing the 7.65% Senior Note restricts, under certain circumstances, distributions from Golden Books Publishing to the Company. In addition, the indenture restricts, with customary exceptions, the ability of Golden Books Publishing to place liens on its assets. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries to represent years. Any computer program that has date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or other miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Since early 1997, the Company has been pursuing a strategy of replacing and updating its information systems in connection with its change in strategic focus. The Company believes that the costs of modifying and replacing those systems which are not Year 2000 18 compliant will be approximately $10.3 million, of which approximately $5.3 million represents new systems development, which will be capitalized, and approximately $5.0 million represents making existing systems Year 2000 compliant, which will be expensed as incurred. In addition, the Company is discussing with its vendors and customers the possibility of any interface difficulties which may affect the Company. The project is estimated to be completed prior to any anticipated impact on its operating systems. The Company believes that with a modification and replacement strategy the Year 2000 issue will not pose significant conversion problems for its computer systems. However, if this strategy is not completed on a timely basis, the Year 2000 issue could have a material impact on the operations of the Company. SEASONALITY The Company has historically experienced significant fluctuations in quarterly operating results. The children's publishing business in general is seasonal and depends to a significant extent on the Christmas selling season, generally resulting in a disproportionately higher percentage of revenues in the Company's third fiscal quarter. The Company's quarterly operating results also will fluctuate based on the timing of the introduction of products that utilize licensed characters, which, in the case of characters appearing in movies, will be dependent upon the period in which costs and expenses attributable to the development and introduction of such products are incurred. EFFECTS OF INFLATION The Company believes that the relatively moderate rates of inflation over the last three years have not had a significant impact on the profitability of the Company. In general, the Company believes the effects of inflation are offset through increases in sales prices. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for years beginning after December 15, 1997. FAS 130 establishes new rules for the reporting and display of comprehensive income and its components. FAS 130 requires the Company's foreign currency translation adjustments, which are currently reported in stockholders' (deficit) equity, to be included in other comprehensive income and the disclosure of total comprehensive income. FAS 130 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore, the Company will adopt the new requirements in 1998. Management has not completed its review of FAS 130, but does not anticipate that its adoption will have a material effect on the consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("FAS 131"), which is effective for years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements in 1998. Management has not yet completed its review of FAS 131 but its adoption will not have a material effect on the Company's statement of position or revenues, only on the composition of its reportable segments. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Post-Retirement Benefits" ("FAS 132"), which is effective for years beginning after December 15, 1997. FAS 132 standardizes the disclosure requirements for pension and other post-retirement benefits to the extent practicable, requires additional information on charges in the benefit obligations and fair value of plan assets that will facilitate financial analysis, and eliminates certain disclosure. FAS 132 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements in 1998. Management has not completed its review of FAS 132 but does not anticipate that its adoption will have a material effect on the consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 14 of Part IV. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FIRST SECOND THIRD FOURTH QUARTER (1) QUARTER (1) QUARTER (1) QUARTER (1) 1997 Net sales $ 65,624 $ 50,445 $ 52,805 $ 73,607 Gross profit 20,815 15,135 15,599 15,774 Net loss (2) (8,872) (11,292) (17,899) (11,617) Net loss per common share - basic (.41) (.52) (.76) (.51) Weighted average number of common shares - basic 25,983 26,139 26,489 26,814 1996 Net sales $ 67,314 $ 72,317 $ 67,308 $ 75,246 Gross profit (loss) 20,750 18,749 (11,341) 6,038 Net loss (3) (10,700) (24,464) (96,815) (70,072) Net loss per common share - basic (.50) (1.19) (4.29) (2.80) Weighted average number of common shares - basic 21,669 21,980 23,098 25,750
(1) On November 30, 1996, the Company changed its Fiscal year end so as to end on the last Saturday in December. Accordingly, the consolidated quarterly financial information has been restated to reflect the Company's revised quarters follows: 1996 ---- First Quarter March 30th Second Quarter June 29th Third Quarter September 28th Fourth Quarter December 28th (2) Includes gain on disposal of a number of items, mainly the Cambridge facility of $10,209 during the fourth quarter. (3) Includes a total provision for restructuring and closure of operations of $65,741, of which $40,680 and $25,061 were recognized in the third and fourth quarters, respectively. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None noted. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included in the Company's definitive proxy statement for the annual meeting of shareholders to be held on May 12, 1998 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included in the Company's definitive proxy statement for the annual meeting of shareholders to be held on May 12, 1998 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included in the Company's definitive proxy statement for the annual meeting of shareholders to be held on May 12, 1998 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included in the Company's definitive proxy statement for the annual meeting of shareholders to be held on May 12, 1998 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1 and 2) Financial Statements. See Index to Consolidated Financial Statements and Schedules which appears on Page F-1 herein. (a)(3) Exhibits 3.1* Restated Certificate of Incorporation of the Registrant dated March 25, 1998. 3.2 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 Registration Statement No. 33-4127). 4.2 Certificate of Designation of the Series B Convertible Preferred Stock dated May 8, 1996 (included in Exhibit 3.1 filed herewith). 4.3 Indenture governing the Golden Books Publishing Company's 7.65% Senior Notes due 2002 (incorporated by reference to Registration Statement 33-51568). 4.4 Certificate of Trust of Golden Book Financing Trust (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement No. 333-14335). 4.5 Amended and Restated Declaration of Trust of Golden Books Financing Trust, dated as of August 20, 1996, among Golden Books Family Entertainment, Inc., as Sponsor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee and Willa M. Perlman and Philip E. Rowley, as Trustees (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the quarterly period ended August 3, 1996 (the "August 3, 1996 10-Q")). 21 4.6 Indenture for the 8 3/4% Convertible Debentures, dated as of August 20, 1996, among Golden Books Family Entertainment, Inc., Golden Books Publishing Company, Inc. and The Bank of New York, as Indenture Trustee (incorporated by reference to Exhibit 10.2 of the August 3, 1996 Form 10-Q). 4.7 Form of 8 3/4% Preferred Securities (included in Exhibit A-1 to Exhibit 4.4 above). 4.8 Form of 8 3/4% Convertible Debentures (included in Exhibit A to Exhibit 4.5 above). 4.9 Preferred Securities Guarantee Agreement, dated as of August 20, 1996, between Golden Books Family Entertainment, Inc., as Guarantor, and The Bank of New York, as Guarantee Trustee (incorporated by reference to Exhibit 10.3 of the August 3, 1996 Form 10-Q). 10.01 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 Fiscal year 1993 (the "1993 Form 10-K")). 10.02 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). 10.03 Amended and Restated 1986 Employee Stock Option Plan (incorporated by reference to Exhibit 10.40 to the 1988 Form 10-K). 10.04 Amendment dated April 11, 1989 to the Amended and Restated 1986 Employee Stock Option Plan (incorporated by reference to Exhibit 10.56 to the 1990 Form 10-K). 10.05* Golden Books Family Entertainment, Inc. Amended and Restated 1995 Stock Option Plan. 10.06 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). 10.07 Registration Rights Agreement, dated August 20, 1996, among Golden Books Financing Trust, Golden Books Family Entertainment, Inc., Golden Books Publishing Company, Inc., Merrill Lynch & Co., Donaldson, Lufkin & Jenrette Securities Corporation and SBC Warburg Inc. (incorporated by reference to Exhibit 10.4 to the August 3, 1996 Form 10-Q). 10.08 Registration Rights Agreement, dated as of September 6, 1996, between Golden Books Family Entertainment, Inc. and H C Crown Corp. (incorporated by reference to Exhibit 10.6 to the August 3, 1996 Form 10-Q). 10.09 Asset Purchase Agreement dated as of July 30, 1996 among Broadway Video Entertainment, L.P., Broadway Video Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited Partnership, Golden Books Family Entertainment, Inc., Golden Books Publishing Company, Inc., and LRM Acquisition Corp. (incorporated by reference to the Registrant's current report on Form 8-K dated August 29, 1996). 10.10 Amendment No. 1 to Asset Purchase Agreement, dated as of August 20, 1996 among Broadway Video Entertainment, L.P., Broadway Video Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited Partnership, Golden Books Family Entertainment, Inc., Golden Books Publishing Company, Inc. and LRM Acquisition Corp. (incorporated by reference to Exhibit 10.7 to the August 3, 1996 Form 10-Q). 10.11 Registration Rights Agreement, dated August 20, 1996, between Golden Books Family Entertainment, Inc. and Broadway Video Entertainment, L.P. (incorporated by reference to Exhibit 10.8 the August 3, 1996 Form 10-Q). 10.12 Amended and Restated Non-Recourse Promissory Note, dated as of August 20, 1996, executed by Richard E. Snyder in favor of Golden Books Family Entertainment, Inc. (incorporated by reference to Exhibit 10.16 to the August 3, 1996 Form 10-Q). 22 10.13 Amended and Restated Pledge Agreement, dated as of August 20, 1996, executed by Richard E. Snyder (incorporated by reference to Exhibit 10.18 to the August 3, 1996 Form 10-Q). 10.14 Golden Books Family Entertainment, Inc. Executive Officer Bonus Plan (incorporated by reference to Appendix VII to the 1996 Proxy). 10.15 Amended and Restated Employment Agreement, dated as of August 20, 1996, between Golden Books Family Entertainment, Inc. and Richard E. Snyder (incorporated by reference to Exhibit 10.16 to the August 3, 1996 Form 10-Q). 10.16* Amendment No. 1 to Richard E. Snyder's Amended and Restated Employment Agreement, dated as of September 9, 1997. 10.17 Employment Agreement, dated July 30, 1996, between Golden Books Family Entertainment, Inc. and Eric Ellenbogen (incorporated by reference to Exhibit 10.19 to the August 3, 1996 Form 10-Q). 10.18 Employment Agreement, dated as of July 1, 1996, between Golden Books Family Entertainment, Inc. and Philip E. Rowley (incorporated by reference to Exhibit 10.20 to the August 3, 1996 Form 10-Q). 10.19 Employment Agreement, dated as of May 28, 1996, between Golden Books Family Entertainment, Inc. and Willa M. Perlman (incorporated by reference to Exhibit 10.21 to the August 3, 1996 Form 10-Q). 10.20* Employment Agreement, dated as of July 28, 1997 between Golden Books Publishing Company, Inc. and Richard Collins. 10.21* Industrial Building Lease Agreement dated as of June 23, 1997 between Golden Books Family Entertainment, Inc., and First Industrial Development Services Group, L.P. 10.22 Licensed Book Publishing Agreement between Disney Licensed Publishing and Golden Books Publishing Company, Inc., dated September 26, 1997 (incorporated by reference to exhibit 10.01 to the 10-Q/A filed on November 17, 1997). 10.23 Warrant Agreement between Golden Books Family Entertainment, Inc. and Disney Enterprises, Inc., dated September 26, 1997 (incorporated by reference to exhibit 10.02 to the 10-Q/A filed on November 17, 1997). 21.1* List of Subsidiaries. 23.1* Consent of Ernst & Young LLP, Independent Auditors 23.2* Consent of Deloitte & Touche LLP, Independent Auditors 27.1* Financial Data Schedule. 99.1 Undertaking incorporated by reference into certain registration statements on Form S-8 of the Registrant (incorporated by reference to Exhibit 99.4 to the 10-K for the year February 3, 1996). * Filed electronically herewith. (b) Reports on Form 8-K filed during the last two months ended December 28, 1996: Form 8-K, dated October 1, 1997. 23 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. March 24, 1998 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. /s/ Richard. E. Snyder --------------------------- Richard E. Snyder Chairman of the Board of Directors and Chief Executive Officer /s/ Philip E. Rowley --------------------------- Philip E. Rowley Executive Vice President and Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date - ---- ----- ---- /s/ Richard E. Snyder Chairman of the Board and Chief Executive Officer March 24, 1998 - -------------------- Richard E. Snyder /s/ Eric Ellenbogen Executive Vice President and Director March 24, 1998 - -------------------- Eric Ellenbogen /s/ Shahara Ahmad-Llewellyn Director - --------------------------- Shahara Ahmad-Llewellyn March 24, 1998 /s/ Linda L. Janklow Director March 24, 1998 - -------------------- Linda L. Janklow 24 Director /s/ Marshall Rose March 24, 1998 - --------------------------- Marshall Rose /s/ John L. Vogelstein Director March 24, 1998 - --------------------------- John L. Vogelstein /s/ David A. Tanner Director March 24, 1998 - --------------------------- David A. Tanner /s/ H. Brian Thompson Director March 24, 1998 - --------------------------- H. Brian Thompson
25 GOLDEN BOOKS FAMILY ENTERTAINMENT AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Auditors ........................................................ F-2 Independent Auditors' Report .......................................................... F-3 Consolidated Financial Statements: Consolidated Balance Sheets at December 27 , 1997 and December 28, 1996................ F-4 Consolidated Statements of Operations for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996.......... F-6 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996 ...................................................................... F-7 Consolidated Statements of Cash Flows for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996 ......... F-8 Notes to Consolidated Financial Statements ............................................ F-10 Schedule I - Condensed Financial Information of Registrant ............................ S-1 Schedule II - Valuation and Qualifying Accounts ....................................... S-4
All other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the consolidated financial statements or the notes thereto. F-1 Report of Independent Auditors To the Board of Directors and Stockholders Golden Books Family Entertainment, Inc. We have audited the accompanying consolidated balance sheets of Golden Books Family Entertainment, Inc. and Subsidiaries as of December 27, 1997 and December 28, 1996, and the consolidated statements of operations, stockholders' (deficit) equity and cash flows for the year ended December 27, 1997 and the period from February 4, 1996 to December 28, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Golden Books Family Entertainment, Inc. and Subsidiaries at December 27, 1997 and December 28, 1996, and the consolidated results of their operations and their cash flows for the year ended December 27, 1997 and the period from February 4, 1996 to December 28, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York March 24, 1998 F-2 Independent Auditors' Report To the Board of Directors and Stockholders Golden Books Family Entertainment, Inc. We have audited the consolidated statement of operations, stockholders' equity (deficit) and cash flows of Golden Books Family Entertainment, Inc. and Subsidiaries (formerly Western Publishing Group, Inc. and Subsidiaries) for the year ended February 3, 1996. Our audit also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects results of their operations and their cash flows for the year ended February 3, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the consolidated financial statements taken as a whole, present fairly in all material respects the information required to be set forth therein. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin April 2, 1996 F-3 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS DECEMBER 27, DECEMBER 28, CURRENT ASSETS 1997 1996 ---- ---- Cash and cash equivalents $ 57,411 $139,686 Accounts receivable 51,153 41,415 Inventories 34,659 27,608 Royalty advances 10,416 5,239 Refundable income taxes 1,781 1,781 Net assets held for sale 9,873 19,779 Other current assets 5,053 5,365 -------- -------- Total current assets 170,346 240,873 -------- -------- OTHER ASSETS Deposits 3,497 - Accounts receivable - long term 3,207 1,001 Other noncurrent assets 13,629 8,102 -------- -------- Total other assets 20,333 9,103 -------- -------- PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $39,620 as of December 27, 1997 and $40,672 as of December 28, 1996 38,256 27,504 FILM LIBRARY, net of accumulated amortization of $4,364 as of December 27, 1997 and $1,082 as of December 28, 1996 63,638 60,668 GOODWILL, net of accumulated amortization of $1,605 as of December 27, 1997 and $405 as of December 28, 1996 30,591 29,087 -------- -------- TOTAL ASSETS $323,164 $367,235 ======== ========
See notes to consolidated financial statements F-4 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) LIABILITIES AND STOCKHOLDERS' DEFICIT
DECEMBER 27, DECEMBER 28, 1997 1996 ---- ---- CURRENT LIABILITIES Accounts payable $ 21,454 $ 15,655 Accrued compensation and fringe benefits 5,887 5,787 Other current liabilities 47,225 51,221 --------- --------- Total current liabilities 74,566 72,663 --------- --------- NONCURRENT LIABILITIES Long term debt 149,897 149,862 Accumulated post-retirement benefit obligation 29,365 28,787 Deferred compensation and other deferred liabilities 19,938 25,072 --------- --------- Total noncurrent liabilities 199,200 203,721 --------- --------- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES 110,707 110,488 STOCKHOLDERS' DEFICIT: Convertible Preferred Stock - Series B, 13,000 shares authorized, no par value, 13,000 shares issued and outstanding; 65,000 65,000 Common Stock, $.01 par value, 60,000,000 shares authorized, 26,887,313 and 25,964,711 shares issued as of December 27, 1997 and December 28, 1996, respectively 269 259 Additional paid in capital 128,533 120,376 Accumulated deficit (250,791) (201,111) Cumulative translation adjustments (1,498) (1,339) --------- --------- (58,487) (16,815) Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822 --------- --------- Total common stockholders' deficit (61,309) (19,637) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 323,164 $ 367,235 ========= =========
See notes to consolidated financial statements F-5 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 27, DECEMBER 28, FEBRUARY 3, 1997 1996 1996 ---- ---- ---- REVENUES: Net sales $ 242,481 $ 254,046 $ 369,572 Royalties and other income 1,080 959 1,722 --------- --------- --------- Total revenues 243,561 255,005 371,294 --------- --------- --------- COSTS AND EXPENSES: Cost of sales 176,238 231,792 281,392 Selling, general and administrative 111,307 142,721 129,020 Restructuring plan, net of gains on sale of assets (10,786) 65,741 6,701 --------- --------- --------- Total costs and expenses 276,759 440,254 417,113 --------- --------- --------- LOSS BEFORE INTEREST INCOME, DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES, INTEREST EXPENSE, AND PROVISION FOR INCOME TAXES (33,198) (185,249) (45,819) INTEREST INCOME 5,579 4,235 2,963 DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES (10,282) (3,597) - INTEREST EXPENSE (11,742) (10,999) (12,859) --------- --------- --------- LOSS BEFORE PROVISION FOR INCOME TAXES (49,643) (195,610) (55,715) PROVISION FOR INCOME TAXES 37 1,893 11,332 --------- --------- --------- NET LOSS $ (49,680) $(197,503) $ (67,047) ========= ========= ========= NET LOSS PER BASIC COMMON SHARE $ (2.18) $ (8.73) $ (3.23) ========= ========= =========
See notes to consolidated financial statements F-6 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY TWO YEARS AND ELEVEN MONTHS ENDED DECEMBER 27, 1997 (In Thousands Except for Shares and Per Share Data) - -------------------------------------------------------------------------------
CONVERTIBLE COMMON STOCK PREFERRED STOCK - SERIES B -------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- ----------- ------------- ---------------- Balances, January 28, 1995 21,232,074 $ 212 - $ - Net loss - - - - Dividends on Preferred Stock - Series A - $42.50 per share - - - - Exercise of stock options 44,000 1 - - Issuance of Common Stock 599,465 6 - - Translation adjustments - - - - -------------- ----------- ------------- ---------------- Balances, February 3, 1996 21,875,539 219 - - Net loss - - - - Issuance of Preferred Stock - Series B - - 13,000 65,000 Dividends on Preferred Stock - Series A - $42.50 - - - - Common Stock issued as dividend on Preferred Stock - Series B 390,000 4 - - Exercise of stock options 356,599 3 - - Issuance of Common Stock 3,342,573 33 - - Translation Adjustment - - - - -------------- ----------- ------------- ---------------- Balances, December 28, 1996 25,964,711 259 13,000 65,000 Net loss - - - - Common Stock issued as dividend on Preferred Stock - Series B 780,000 8 - - Exercise of stock options 142,602 2 - - Issuance of Warrants - - - - Translation Adjustment - - - - -------------- ----------- ------------- ---------------- Balances, December 27, 1997 26,887,313 $ 269 13,000 $ 65,000 ============== =========== ============= ================
(RESTUBBED TABLE CONTINUED FROM ABOVE)
ADDITIONAL NOTE RECEIVABLE RETAINED CUMULATIVE PAID-IN FROM SALE OF EARNINGS TRANSLATION CAPITAL COMMON STOCK (DEFICIT) ADJUSTMENTS ----------------- ----------------- -------------- ------------- Balances, January 28, 1995 $ 80,914 $ - $ 64,287 $ (1,797) Net loss - - (67,047) - Dividends on Preferred Stock - Series A - $42.50 per share - - (848) - Exercise of stock options 516 - - - Issuance of Common Stock 5,614 (4,796) - - Translation adjustments - - - 128 ----------------- ----------------- -------------- ------------- Balances, February 3, 1996 87,044 (4,796) (3,608) (1,669) Net loss - - (197,503) Issuance of Preferred Stock - Series B (6,248) - - - Dividends on Preferred Stock - Series A - $42.50 (221) - - - Common Stock issued as dividend on Preferred Stock - Series B (4) - - - Exercise of stock options 3,883 - - - Issuance of Common Stock 35,922 4,796 - - Translation Adjustment - - - 330 ----------------- ----------------- -------------- ------------- Balances, December 28, 1996 120,376 0 (201,111) (1,339) Net loss - - (49,680) - Common Stock issued as dividend on Preferred Stock - Series B (8) - - - Exercise of stock options 1,554 - - - Issuance of Warrants 6,611 - - - Translation Adjustment - - - (159) ----------------- ----------------- -------------- ------------- Balances, December 27, 1997 $ 128,533 $ - $ (250,791) $ (1,498) ================= ================= ============== =============
(RESTUBBED TABLE CONTINUED FROM ABOVE)
TREASURY STOCK --------------------------- SHARES AMOUNT -------------- ------------ Balances, January 28, 1995 208,800 $ 2,822 Net loss - - Dividends on Preferred Stock - Series A - $42.50 per share - - Exercise of stock options - - Issuance of Common Stock - - Translation adjustments - - -------------- ------------ Balances, February 3, 1996 208,800 2,822 Net loss Issuance of Preferred Stock - Series B - - Dividends on Preferred Stock - Series A - $42.50 - - Common Stock issued as dividend on Preferred Stock - Series B - - Exercise of stock options - - Issuance of Common Stock - - Translation Adjustment - - -------------- ------------ Balances, December 28, 1996 208,800 2,822 Net loss - - Common Stock issued as dividend on Preferred Stock - Series B - - Exercise of stock options - - Issuance of Warrants - - Translation Adjustment - - -------------- ------------ Balances, December 27, 1997 208,800 $ 2,822 ============== ============
See notes to consolidated financial statements. F-7 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 27, DECEMBER 28, FEBRUARY 3, 1997 1996 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (49,680) $(197,503) $ (67,047) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 6,732 12,534 13,963 Amortization of intangibles 4,482 1,487 2,032 Provision for losses on accounts receivable 3,608 5,719 1,440 Restructuring, net of gains on sale of assets (10,786) 63,917 (46) Other non-cash charges associated with the redirection of the Company - 39,450 - Non-cash compensation expenses - 14,335 - Gains on sale of equipment - (98) (339) Other - 1,439 2,935 Changes in assets and liabilities, net of effect of acquisition and dispositions: (Increase) decrease in accounts receivable (15,392) 1,001 20,451 (Increase) decrease in inventories (7,051) 27,432 22,550 Decrease in net assets held for sale 1,755 1,628 - Decrease in refundable income taxes - 1,463 2,614 (Increase) decrease in other current assets and royalty advances (3,215) (3,600) 2,125 Increase (decrease) in accounts payable 3,199 (5,916) 539 Increase (decrease) in accrued compensation and fringe benefits 100 143 (696) Increase in deferred income taxes - - 13,886 Other (12,970) 17,149 (13,552) --------- --------- --------- Net cash (used in) provided by operating activities (79,218) (19,420) 855 CASH FLOWS FROM INVESTING ACTIVITIES: Broadway Video acquisition - (81,000) - Investment in joint venture - (2,250) - Deposits (3,497) - - Acquisitions of property, plant and equipment (20,386) (5,739) (17,921) Additions to Film Library (6,348) - - Proceeds from streamlining plan - 661 8,252 Proceeds from sale of assets 22,712 14,535 - Other - 229 916 --------- --------- --------- Net cash used in investing activities (7,519) (73,564) (8,753)
F-8 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
ELEVEN MONTHS YEAR ENDED ENDED DECEMBER 27, DECEMBER 28, FEBRUARY 3, 1997 1996 1996 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures - 115,000 - Issuance costs of Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures - (4,579) - Proceeds from Municipal Government Grants 3,000 - - Repayments under Credit Agreement - - (32,000) Proceeds from issuance of Preferred Stock - Series B - 65,000 - Issuance costs of Preferred Stock - Series B - (6,248) - Redemption of Preferred Stock - Series A - (9,985) - Proceeds from sale of Common Stock 1,556 28,886 517 Dividends paid on Preferred Stock - Series A - (646) - Other - (74) (768) --------- --------- --------- Net cash provided by (used in) financing activities 4,556 187,354 (32,251) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (94) 93 (34) --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (82,275) 94,463 (40,183) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 139,686 45,223 85,406 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 57,411 $ 139,686 $ 45,223 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest and distribution on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures $ 21,553 $ 13,992 $ 11,893 ========= ========= ========= Income taxes, net of refunds received $ (416) $ (319) $ (5,465) ========= ========= ========= Non-cash activity: Issuance of warrants in connection with Disney License Agreement $ 6,611 $ - $ - ========= ========= =========
See notes to consolidated financial statements F-9 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 1. Nature of Business and Organization Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company") publishes, produces, licenses and markets an extensive range of children's and family related entertainment products throughout all media through its Children's and Adult Publishing, Golden Books Entertainment Group and Commercial Printing Divisions. The Company, through its Children's and Adult Publishing divisions, creates, publishes and markets an extensive range of children's and family entertainment products, including "Little Golden Books" and other storybooks, coloring / activity books, electronic storybooks, puzzles, educational workbooks, reference books and novelty book formats. The Company has published its flagship product line, "Little Golden Books", for over 50 years. The Company, through the Commercial Printing Division of its wholly owned subsidiary, Golden Books Publishing Company, Inc. ("Golden Books Publishing"), provides creative, printing and publishing services to third parties. The Company groups these activities into three business categories: graphic art services and commercial printing; educational kit manufacturing; and custom publishing services. The Company's Golden Books Entertainment Group ("Golden Books Entertainment") division was established in August 1996, upon the acquisition from Broadway Video Entertainment, L.P. ("BVELP") of an extensive library of character-based family entertainment properties. The Golden Books Entertainment division's library is comprised of copyrights, distribution rights, trademarks and licenses relating to characters, television programs and motion pictures, both animation and live action, and includes individual specials and multiple episode series. On May 8, 1996, the Company effected a reorganization of certain of its subsidiaries (the "Reorganization"). First, the Company conveyed to Golden Books, Inc. ("GB"), a Delaware corporation and wholly owned subsidiary of the Company, (i) all of the issued and outstanding shares of capital stock of Penn Corporation ("Penn") and (ii) all of the issued and outstanding shares of capital stock of Western Publishing. Immediately thereafter, the Company caused GB to merge with and into Western Publishing. In connection with the Reorganization, the Company, Western Publishing and GB entered into a First Supplemental Indenture, dated as of May 8, 1996, with Marine Midland Bank, a New York banking and trust company, as Successor Trustee, pursuant to which Western Publishing (the name of which was subsequently changed to Golden Books Publishing) was substituted for the Company as obligor with respect to the 7.65% Senior Notes due 2002 originally issued by the Company (see Note 11). 2. LIQUIDITY As of December 27, 1997, the Company had approximately $95.8 million in working capital, including approximately $57.4 million in cash. The continued implementation of management's plan to return the Company's core publishing business to profitability and to re-deploy assets (the "Plan") during the next twelve months may require financial resources greater than the Company's current cash position and future cash flow. Accordingly, the Company is currently seeking additional financing. In connection therewith, the Company is presently negotiating for a three year $25 million line of credit ("Line of Credit"), which requires approval from 50% of the holders of the Company's $150 million 7.65% Senior Notes. In the alternative, the Company is also presently negotiating an accounts receivable purchase program for the purchase of up to $30 million of receivables ("Accounts Receivable Purchase Program") at any one time. Management believes that they will be successful in obtaining both the Line of Credit and the Accounts Receivable Purchase Program. However, there can be no assurance that the Line of Credit or the Accounts Receivable Purchase Program will be obtained on acceptable terms. If the Company does not consummate the aforementioned financing arrangements, it may be required to seek equity or other sources of financing. To the extent F-10 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 2. Liquidity (cont'd) that the Company finances its requirements through the issuance of additional equity securities, any such issuance would result in dilution of the Common Stock. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all its wholly owned subsidiaries. The consolidated financial statements of the Company include the operations of Golden Books Entertainment from the date of its acquisition on August 20, 1996. The results of Golden Books Financing Trust (the "Trust") are included in the Company's consolidated financial statements since its inception on August 20, 1996. The Trust, which is the issuer of 8 3/4% Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing's Convertible Debentures (the "Preferred Securities"), is wholly owned by the Company, has no independent operations and its assets consist solely of the 8 3/4% Convertible Debentures due 2016 of the Company and Golden Books Publishing (see Note 12). All material intercompany items and transactions have been eliminated. Certain prior years' amounts have been reclassified to conform with the current year's presentation. CHANGE IN YEAR END On November 30, 1996, the Company changed its Fiscal year so as to end on the last Saturday of December in each year. Accordingly, the accompanying consolidated financial statements present the financial position of the Company as of December 27, 1997 and December 28, 1996, and the results of its operations, stockholders' (deficit) equity and cash flows for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996. 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. At December 27 , 1997 and December 28, 1996, all of the Company's cash equivalents are classified as held to maturity and their carrying amounts approximate fair value. INCOME TAXES The Company accounts for income taxes in accordance with the liability method. Under this method, deferred income taxes are provided for differences between the book and tax bases of the Company's assets and liabilities. F-11 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to provision for returns and other sales allowances, doubtful accounts, slow moving and obsolete inventories, reserve for royalty guarantees and advances, film forecast ultimates, long-term asset impairments, net assets held for sale and taxes. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated / amortized on the straight-line method over the following estimated useful lives: CLASSIFICATION ESTIMATED LIFE (YEARS) - -------------- ---------------------- Buildings and improvements 10 - 40 Machinery and equipment 3 - 10 Expenditures which significantly increase the value or extend the useful lives of assets are capitalized, while maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation / amortization of assets, replaced, retired or disposed of are eliminated from their respective property, plant and equipment accounts, and any gain or loss is reflected in consolidated statements of 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. REVENUE RECOGNITION Sales are recorded upon shipment of products. Sales made on a returnable basis are recorded net of provisions for estimated returns and allowances. These estimates are revised, as necessary, to reflect actual experience and market conditions. Revenue from the sale of film rights, principally for the home video and domestic and foreign syndicated television markets, is recognized when the film is available for showing or exploitation. Income from licensing is recorded at the time characters are available to the licensee and collections are reasonably assured. Receivables due more than one year beyond the balance sheet date are discounted to their present value. PER SHARE DATA In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to the FAS 128 requirements. F-12 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net loss per common share for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996 is based on the net loss for the period plus preferred dividend requirements divided by the weighted average number of basic common shares outstanding. Shares issuable upon the exercise of all common stock equivalents consisting primarily of stock options and warrants are not included in the computations since their effect is antidilutive (see Note 21). INVENTORIES Inventories are valued at the lower of cost or market value. 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 method. At December 27, 1997 and December 28, 1996, approximately 89% and 85%, respectively, of total inventories were valued under the LIFO method. DEPOSITS The Company has placed approximately $3.5 million in Certificates of Deposit to collateralize lease obligations associated with the Company's new corporate headquarters located in New York City. 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' (deficit) equity. ADVERTISING COSTS The Company expenses advertising costs related to its publishing operations as they are incurred. Advertising expenses for the year ended December 27, 1997, the eleven month period ended December 28, 1996, and the year ended February 3, 1996, amounted to approximately $3.6 million, $1.0 million and $4.1 million, respectively. FILM LIBRARY Film library consists of the costs of acquiring the film library, costs of additional licenses and television production costs, which are stated at the lower of unamortized costs or net realizable value. The costs are being amortized using the film-forecast method which amortizes such costs in the same ratio that current revenues bear to anticipated total revenues. Under this method, the useful lives do not exceed 20 years in duration. The liabilities for various profit participations and residuals are accrued in the proportion which revenue for a period bears to ultimate revenue. GOODWILL AND LONG LIVED ASSETS Goodwill at December 27, 1997 and December 28, 1996, consists of the cost in excess of net assets acquired in connection with the acquisition of substantially all the assets of BVELP, which is being amortized on a straight-line basis over a 25-year period (see Note 14). F-13 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) It is the Company's policy to account for goodwill at the lower of amortized cost or estimated realizable value. As part of an ongoing review of the valuation and amortization of goodwill and long lived assets of the Company and its subsidiaries, management assesses the carrying value of goodwill and long lived assets if facts and circumstances suggest that there may be impairment. If this review indicates that goodwill and long lived assets will not be recoverable as determined by a non-discounted cash flow analysis of the operating results over the remaining amortization period, the carrying value of the goodwill and long lived assets would be reduced to estimated realizable value. REPORTING COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for years beginning after December 15, 1997. FAS 130 establishes new rules for the reporting and display of comprehensive income and its components. FAS 130 requires the Company's foreign currency translation adjustments, which are currently reported in stockholders' (deficit) equity, to be included in other comprehensive income and the disclosure of total comprehensive income. FAS 130 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore, the Company will adopt the new requirements in 1998. Management has not completed its review of FAS 130, but does not anticipate that its adoption will have a material effect on the consolidated financial statements. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("FAS 131"), which is effective for years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements in 1998. Management has not yet completed its review of FAS 131 but its adoption will not have a material effect on the Company's statement of position or revenues, only on the composition of its reportable segments. EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Post-Retirement Benefits" ("FAS 132"), which is effective for years beginning after December 15, 1997. FAS 132 standardizes the disclosure requirements for pension and other post-retirement benefits to the extent practicable, requires additional information on charges in the benefit obligations and fair value of plan assets that will facilitate financial analysis, and eliminates certain disclosure. FAS 132 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements in 1998. Management has not completed its review of FAS 132 but does not anticipate that its adoption will have a material effect on the consolidated financial statements. F-14 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 4. STRATEGIC DIRECTION OF THE COMPANY On May 8, 1996, the Company completed the sale of a significant equity interest to Golden Press Holding LLC ("GP Holding"), a Delaware limited liability company owned by Richard E. Snyder, Barry Diller and Warburg, Pincus Ventures, L.P. The Company issued to GP Holding, for an aggregate purchase price of $65.0 million, (i) 13,000 shares of the Company's Series B Convertible Preferred Stock, no par value (the "Series B Preferred Stock"), each of which shares is convertible into shares of the Company's common stock, par value $.01 per share ("Common Stock"), at an initial conversion price of $10 per share, and (ii) a warrant to purchase 3,250,000 shares of Common Stock at an initial exercise price of $10 per share (the "GPH Transaction"). Net proceeds associated with the transaction were $58.8 million, after giving effect to $6.2 million of transaction costs. Net proceeds were partially used to retire approximately $10.0 million of Series A Preferred Stock, no par value (the "Series A Preferred Stock"), at its face amount plus $0.7 million of related accrued dividends, in addition to payments of approximately $3.4 million of severance and transition costs. On January 31, 1996, the Company entered into an interim employment agreement (the "Interim Employment Agreement") with Richard E. Snyder, whereby Mr. Snyder became President of the Company. Pursuant to the Interim Employment Agreement, the Company issued 599,465 shares of Common Stock (the "Snyder Incentive Stock") to Mr. Snyder at a price of $8 per share in exchange for a non-recourse note in the amount of the purchase price secured by a pledge of the shares. On May 8, 1996, the Interim Employment Agreement was superseded by a five-year employment agreement (the "Employment Agreement") pursuant to which Mr. Snyder was entitled to receive annual compensation of $500,000 and received options to acquire 1,113,293 shares of Common Stock at a price of $12.81 per share (the "Snyder Option"), as well as special bonuses based on the market price of the Common Stock, supplemental retirement benefits, post-retirement medical benefits and certain other benefits. Accordingly, the Company recorded a charge of approximately $12.8 million in costs associated with the Employment Agreement which is included in the consolidated statements of operations for the eleven months ended December 28, 1996. In connection with the offering of the Preferred Securities (see Note 12), the Broadway Video Acquisition (as hereinafter defined, see Note 14) and the Hallmark Transaction (as hereinafter defined, see Note 16), and in accordance with the anti-dilution provisions of the Employment Agreement, the Company issued 84,987 additional shares of Snyder Incentive Stock in exchange for a non recourse note in the amount of the purchase price, increased by 157,796 the number of shares exercisable under the Snyder Option and adjusted the special bonuses provided for in the Employment Agreement. Accordingly, the Company recorded an additional charge of approximately $1.5 million which is included in the consolidated statements of operations for the eleven months ended December 28, 1996. On September 9, 1997, the Employment Agreement was subsequently amended whereby Mr. Snyder's annual compensation was increased and his term of employment was extended to May 8, 2003. During 1997, the Company continued its disposition of non-core assets with the sale of its printing operations in Cambridge, Maryland, the sale of the building which had housed its main plant in Racine, and disposals of other assets. On December 1, 1997, the Cambridge commercial printing operation was sold to Mail-Well Inc. ("Mail-Well") for approximately $20.2 million in cash, subject to a working capital adjustment which resulted in a gain of approximately $10.2 million recorded in the consolidated statement of operations for the year ended December 27, 1997. Additionally, the sales of the Racine plant and other assets each resulted in gains of $0.3 million for the year ended December 27, 1997. In connection with the Company's strategic plan, the Company incurred approximately $11.5 million in one time transition costs during 1997 consisting of: (i) $3.1 million of moving costs associated with new facilities, (ii) $3.5 million for outsourcing of the information F-15 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED) technology department, (iii) $4.5 million in consulting services associated with implementing the strategic plan, and (iv) $0.4 million in other costs. As part of management's plan to return the Company's core publishing business to profitability and to re-deploy assets, new management took a number of strategic actions and accordingly, made decisions with respect to certain of the Company's assets, writedowns and other charges in the consolidated financial statements for the eleven months ending December 28, 1996 totaling approximately $132.3 million as follows: (i) a restructuring charge totaling $65.7 million including a: o $21.5 million loss on sale of disposal of a business resulting from the Company's decision to exit non-core business activities; o $24.3 million non-cash charge consisting of: i) $10.2 million for the write-down of the commercial printing operation to net realizable value to be disposed of in connection with the Company's plan to exit non-core business activities, ii) $9.6 million for the loss on sale of assets associated with the Company's strategic decision to outsource its information technology department, and iii) $4.5 million for the write-down of assets to net realizable value which have been identified as nonproductive assets as a result of the Company's strategic plan to operate in a new efficient manufacturing facility; o $8.0 million charge for severance related to the above; o $3.0 million net realizable value adjustment related to an idle facility associated with the Company's game business, which was previously sold; o $7.6 million write-off of non-productive assets associated with the termination of customer program initiatives in connection with the strategic redirection of the Company; and o $1.3 million for facility exit costs related to lease terminations which were paid in December 1996. (ii) a cost of sales adjustment of $25.0 million comprised of: o $17.6 million of costs pertaining to the Company's decision to discontinue or replace certain product lines and expeditiously liquidate related inventory and slow moving product; o $7.4 million of other inventory related costs, consisting primarily of licensing and prepublication costs. (iii) a selling, general and administrative charge of $11.0 million relating to costs associated with management's revised plans to resolve certain legal and contractual matters (iv) adjustments totaling $5.7 million consisting of: o $3.4 million in revenue adjustments; and o $2.3 million in operating expenses to establish reserves to resolve differences with customers with a view toward mending and improving the Company's relationships with its customers. (v) approximately $17.7 million of charges in connection with the sale of a significant equity interest to GP Holding. F-16 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED) (vi) $7.2 million of other one time charges consisting primarily of: o $3.8 million in consulting fees incurred in relation to new management's review of the operations of the Company; o $1.7 million of facility costs; o other one time miscellaneous charges of $1.7 million. As of December 27, 1997, $1.6 million of the facility related costs and $4.2 million of the severance have been paid. 5. PRIOR PERIOD'S RESTRUCTURING During the year ended February 3, 1996, the Company recorded an approximate $6.7 million provision for restructuring and closure of operations in a further effort to reduce its operating cost structure and improve future operating results, and to reflect the costs incurred in connection with the termination of a previously announced transaction to sell a significant interest in the Company. The provision includes a non-cash charge of approximately $2.0 million and consists of the following components: o Severance costs of approximately $3.6 million associated with the Company's previously announced workforce reductions of salaried and hourly personnel. These reductions were completed in the quarter ended February 3, 1996. o Unrecoverable assets and costs of approximately $3.2 million to be incurred in connection with the Company's decision to close certain of its retail store locations. o Transaction costs of approximately $1.9 million resulting from the Company's October 17, 1995 announcement of the termination of its initial agreement in principle to sell a significant interest in the Company to Warburg, Pincus Ventures, L.P. and Richard E. Snyder. o A plan designed to improve the Company's 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 were less than originally anticipated. A gain of approximately $2.0 million as certain costs and expenses of the Plan were less than originally anticipated. 6. NET ASSETS HELD FOR SALE AND DISPOSITIONS As of December 27, 1997, net assets held for sale totaling approximately $9.9 million included the Company's (i) Fayetteville facility, which was closed in conjunction with the sale of the Company's game and puzzle business, (ii) Creative Center, a facility of Golden Books Publishing, and (iii) Coffeyville Distribution Center, a facility of Golden Books Publishing. As of December 28, 1996, net assets held for sale totaling approximately $19.8 million included the Company's (i) Fayetteville facility, which was closed in conjunction with the sale of the Company's game and puzzle business (a $3.0 million revision to the estimated net realizable value of this facility was recorded in the consolidated statements of operations during the eleven months ended December 28, 1996), (ii) Cambridge facility, which was a part of the commercial printing group and was subsequently sold in F-17 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 6. NET ASSETS HELD FOR SALE AND DISPOSITIONS (CONTINUED) December 1997 to Mail-Well, (iii) Fulford Street facility, a facility of Penn which was not sold to Peacock Papers, Inc. ("Peacock") and (iv) the Creative Center, a facility of Golden Books Publishing. During 1997, the Company continued its disposition of non-core assets with the sale of its printing operations in Cambridge, Maryland, the sale of the building which had housed its main plant in Racine, and disposals of other assets. On December 1, 1997, the Cambridge commercial printing operation was sold to Mail-Well for approximately $20.2 million in cash, (subject to a working capital adjustment) which resulted in a gain of approximately $10.2 million recorded in the consolidated statement of operations for the year ended December 27, 1997 (see Note 4). The results of operations of the Cambridge facility are included in the Company's consolidated results of operations until its date of disposition. The facilities results of operations for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996 were as follows:
Period from December 29, Eleven months 1996 to Decembver 1,1997 Ended Year Ended (date of disposition) December 28, 1996 February 3, 1996 --------------------- ----------------- ---------------- (In thousands) Revenues $ 25,552 $ 26,962 $34,488 Gross profit 3,656 1,694 2,962 Income (loss) before interest expense and provision for income taxes 1,952 (223) 993
During the year ended December 28, 1996, new management determined that Penn, formerly a wholly owned subsidiary of Golden Books Publishing that designed, produced and distributed decorated paper tableware, party accessories and giftware, did not fit into the Company's future strategic direction and, accordingly, decided to divest Penn (see Note 17). As a result, on December 23, 1996 Golden Books Publishing sold the stock of Penn to Peacock for approximately $14.5 million in cash plus Notes, subject to a working capital adjustment. The results of operations of Penn are included in the Company's consolidated results of operations until its date of disposition. Penn's results of operations for the eleven months ended December 28, 1996 and the year ended February 3, 1996 were as follows:
Period from February 4, 1996 to December 23, 1996 Year Ended (date of disposition) February 3, 1996 --------------------- ---------------- (In thousands) Revenues $ 40,660 $ 52,955 Gross profit 4,930 11,733 Loss before interest expense and provision for income taxes (7,152) (3,395)
F-18 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 7. Accounts Receivable Accounts receivable consisted of the following: December 27, December 28, 1997 1996 ---- ---- (In thousands) Accounts receivable $ 78,609 $ 63,542 Allowance for doubtful accounts (7,208) (4,379) Allowance for sales discount and returns (17,041) (16,747) -------- -------- 54,360 42,416 Less long term portion (3,207) (1,001) -------- -------- $ 51,153 $ 41,415 ======== ======== On September 29, 1995, Golden Books Publishing, a wholly owned subsidiary of the Company entered into an extendible one-year Receivables Purchasing Agreement, which included a letter of credit facility, with a financial institution to sell in pools, trade accounts receivable on a revolving basis, up to a maximum of $62.5 million outstanding at any one time. The pools were sold on a non-recourse basis for credit losses and were subjected to a discount fee. During the year ended February 3, 1996, the Company sold approximately $19.0 million of receivables of which approximately $1.5 million were outstanding at February 3, 1996. The Company did not sell any receivables during the eleven month period ending December 28, 1996 and the year ended December 27, 1997. The proceeds from the sale of receivables are reported as providing operating cash flow in the accompanying consolidated statements of cash flows. The costs associated with this program of $505,000 and $571,000 for the eleven months ended December 28, 1996 and the year ended February 3, 1996, respectively, are included as a component of interest expense in the accompanying consolidated statements of operations. There were no costs associated with this program for the year ended December 27, 1997. In accordance with the terms of this agreement, the Receivable Purchasing Agreement terminated on September 29, 1996. 8. INVENTORIES Inventories consisted of the following: December 27, December 28, 1997 1996 ---- ---- (In thousands) Raw materials $ 2,373 $ 2,810 Work-in-process 3,819 1,829 Finished goods 25,121 19,719 Film library 3,346 3,250 ------- ------- $34,659 $27,608 ======= ======= At December 27, 1997 and December 28, 1996, the replacement cost of inventories valued using LIFO exceeded the net carrying amount of such inventories by approximately $2.5 million and $3.5 million, respectively. For the eleven months ended December 28, 1996, the liquidation of LIFO inventories decreased cost of sales by $5.2 million. For the year ended December 27, 1997, there was no LIFO liquidation and therefore, no impact on the consolidated financial statements. F-19 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following: December 27, December 28, 1997 1996 ---- ---- (In thousands) Land $ 393 $ 356 Building and improvements 13,393 13,607 Machinery and equipment 55,381 54,013 Machinery and equipment in the process of installation 8,709 200 -------- -------- 77,876 68,176 Less accumulated depreciation and amortization (39,620) (40,672) -------- -------- $ 38,256 $ 27,504 ======== ======== 10. OTHER CURRENT LIABILITIES Other current liabilities consisted of the following: December 27, December 28, 1997 1996 ---- ---- (In thousands) Royalties payable $12,841 $ 8,789 Accrued interest 4,388 4,388 Accrued worker's compensation 3,221 4,396 Accrued video duplication costs - 3,704 Restructuring costs 4,559 8,538 Other 22,216 21,406 ------- ------- $47,225 $51,221 ======= ======= 11. LONG TERM DEBT Long-term debt consisted of the following:
December 27, December 28, 1997 1996 ---- ---- (In thousands) 7.65% Senior Notes ($150,000,000 face amount) due 2002 $149,897 $ 149,862 ======== ===========
Golden Books Publishing Company is obligor with respect to $150.0 million of 7.65% Senior Notes, which were originally issued on September 17, 1992 and are due September 15, 2002. Interest is payable semiannually on March 15th and September 15th. There is no obligation to redeem, purchase or repay the Senior Notes prior to maturity. F-20 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 11. LONG TERM DEBT (CONTINUED) The Indenture covering the Senior Notes contains certain provisions limiting subsidiary indebtedness, guarantees, liens and the payment of cash dividends on Preferred and Common Stock. At December 27, 1997, there were no retained earnings available to pay dividends on Common Stock. The Company's 7.65% Senior Notes had a fair value of approximately $147.0 million and $135.0 million at December 27, 1997 and December 28, 1996, respectively, based on market interest rates. 12. PREFERRED SECURITIES During the eleven months ended December 28, 1996, the Company raised a total of $115.0 million through a private placement of Preferred Securities under Rule 144A under the Securities Act of 1933, as amended (the "Preferred Securities"). The Preferred Securities were issued by the Trust, a Delaware business trust financing vehicle. The Company owns all of the common securities of the Trust. The net proceeds of such offering, after commissions and expenses, were approximately $110.8 million. The Preferred Securities pay quarterly distributions at an annual distribution rate of 8 3/4% (subject to any deferral of interest payments on the Preferred Securities by the Company and Golden Books Publishing), have an aggregate liquidation preference of $115.0 million and are convertible at the option of their holders into Convertible Debentures, which are immediately convertible into Common Stock at an initial conversion price of $13.00 per share. The Convertible Debentures will mature on August 20, 2016, and may be redeemed, in whole or in part, at any time after the occurrence of a Tax Event or on Investment Company Event (both as defined). The carrying amount of the Preferred Securities approximates its fair value. Effective January 10, 1997, the Company registered the Preferred Securities with the Securities and Exchange Commission. The Company and its subsidiary, Golden Books Publishing, are joint and several obligor's of the Preferred Securities and they have fully and unconditionally guaranteed the Trust's obligations under the Preferred Securities. Separate financial statements of Golden Books Publishing are not presented in their entirety as the separate financial statements would not be materially different from the consolidated financial statements of the Company. Summarized financial statements of Golden Books Publishing for the year ended December 27, 1997 and the eleven months ended December 28, 1996 are as follows (in thousands):
December 27, December 28, 1997 1996 ---- ---- Current assets $ 150,837 $ 175,387 Non current assets 134,560 126,253 --------- --------- Total Assets $ 285,397 $ 301,640 ========= ========= Current liabilities $ 149,452 $ 104,918 Noncurrent liabilities 188,290 191,939 --------- --------- Total Liabilities 337,742 296,857 Preferred Securities 110,707 110,488 Stockholders' Deficit (163,052) (105,705) --------- --------- Total Liabilities and Stockholders' Deficit $ 285,397 $ 301,640 ========= ========= Revenues $ 243,561 $ 255,005 Gross profit 67,323 23,213 Loss before interest expense and provision for income taxes (32,136) (169,594) Net loss (57,347) (186,417)
F-21 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 12. PREFERRED SECURITIES (CONTINUED) The Indenture covering the Senior Notes (see Note 11) restricts the ability of Golden Books Publishing to pay cash dividends or make other cash distributions to the Company. 13. PREFERRED STOCK Prior to May 8, 1996, the Company had 100,000 authorized preferred shares, no par value, including 20,000 shares of Convertible Preferred Stock, Series A. The Series A Convertible Preferred Stock had a dividend rate of 8.5% per annum. The conversion price was $24 per share. The stock was 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. On May 8, 1996, in connection with the GPH Transaction (see Note 4) the Series A Convertible Preferred Stock was retired at its face value plus accrued dividends and the Company issued to GP Holding, for an aggregate purchase price of $65.0 million, (i) 13,000 shares of the Company's Series B Preferred Stock, no par value, each of which shares is convertible into shares of the Company's Common Stock at an initial conversion price of $10 per share, and (ii) a warrant to purchase 3,250,000 shares of Common Stock at an initial exercise price of $10 per share (the "Warrant"). The Series B Preferred Stock votes on an as-converted basis with the Common Stock on all matters submitted to a vote of the stockholders of the Company, including the election of directors. The Warrant will be exercisable beginning on May 8, 1998, subject to acceleration upon certain circumstances. The Warrant will be exercisable until May 8, 2003. The Series B Preferred Stock entitles GPH to receive a 12% annual dividend payable (i) during each of the first four years following issuance in an amount equal to approximately 195,000 shares of the Company's Common Stock per Fiscal quarter of the Company, subject to certain adjustments, and (ii) thereafter, when and as declared out of legally available funds, in cash at the rate of $150 per share, compounded quarterly, all of which dividends shall be cumulative from the initial issuance. At December 27, 1997, the Company had cumulative preferred dividends payable of 130,000 shares of Common Stock (approximately $1.4 million). In addition, the Certificate of Designation governing the Series B Preferred Stock prevents the Company from paying dividends or making other distributions on the Common Stock until all dividends owed on the Series B Preferred Stock have been paid in full. The holders of the Series B Preferred Stock have the right to receive $5,000 per share, plus accrued and unpaid dividends, in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company. Such liquidation preference shall rank senior to any liquidation rights of the Company's Common Stock. The merger or sale of the Company or the sale of all or substantially all its assets shall not be deemed to be a liquidation, dissolution or winding up of the Company for this purpose. The Series B Preferred Stock is subject to optional redemption by the Company at a redemption price of $5,000 per share, plus an amount equal to any accrued and unpaid dividends, at any time on or after May 8, 2000. The Company is not required to madatorily redeem the Series B Preferred Stock and the Series B Preferred Stock is not the subject of any sinking fund requirement. F-22 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 13. PREFERRED STOCK (CONTINUED) The Series B Preferred Stock is convertible, at the option of the holders of the Series B Preferred Stock, into shares of Company Common Stock, at the exchange rate of 500 shares of Company Common Stock for each share of Series B Preferred Stock, representing a conversion price of $10.00 per share of Series B Preferred Stock. The number of shares of Company Common Stock for which the Series B Preferred Stock may be converted is subject to antidilution adjustments pursuant to the Certificate of Designations to prevent dilution on the occurrence of certain events as described in the Certificate of Designations. 14. ACQUISITION On August 20, 1996, pursuant to an Asset Purchase Agreement, dated as of July 30, 1996, among BVELP, the Company and certain of the Company's subsidiaries, the Company acquired, among other things, substantially all of BVELP's television and film library properties, and assumed payables and all liabilities incurred in connection with the exploitation of such assets after the closing for an aggregate purchase price of approximately $81.0 million in cash and $10.0 million in Common Stock (901,408 shares), as provided for in the Asset Purchase Agreement (the "Broadway Video Acquisition"). On November 22, 1996, the Company paid an additional amount of approximately $900,000 to BVELP in satisfaction of the Company's obligations under the working capital adjustment provided for in the Asset Purchase Agreement. Additionally, the Company initially recorded approximately $4.1 million in additional costs associated with the Broadway Video Transaction. The Broadway Video Acquisition has been accounted for under the purchase method of accounting. Based on the Company's final allocation of purchase price, goodwill, consisting of the excess of the net assets and film library acquired, amounted to approximately $32.2 million and is being amortized on a straight-line basis over a 25-year period (see Note 3). The results of operations of the Broadway Video Acquisition are included in the Company's consolidated results of operations from the date of its acquisition. Unaudited pro forma results from operations for the eleven months ended December 28, 1996 and the year ended February 3, 1996 assume that the issuance of the Preferred Securities and the Broadway Video Acquisition had occurred on January 29, 1995. The pro forma information is not necessarily indicative either of the results of operations that would have occurred had these transaction been made on January 29, 1995 or of future results of operations.
Eleven Months Ended Year Ended December 28, February 3, 1996 1996 ------------- ---------- (In thousands, except per share data) Revenues $ 265,324 $ 380,830 Net loss $(203,400) $ (69,349) Net loss per basic common share $ (8.78) $ (3.20)
F-23 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 15. EMPLOYEE STOCK OPTIONS In December 1995, the Company adopted a stock option plan, which as amended and restated as of March 11, 1997 (the "1995 Plan"), provides for the granting of options to purchase up to 5,750,000 shares of Common Stock to employees of the Company and its subsidiaries. As of December 27, 1997 options to purchase 4,292,310 shares of Common Stock have been granted under the 1995 Plan. 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. Prior to February 3, 1990, options granted generally become exercisable with respect to one-half of the options granted two years after the date of grant and with respect to the remaining one-half of such options three years after the date of grant. Options granted between February 4, 1990 and January 29, 1994 generally become exercisable in their entirety five years after the date of grant. Options granted between January 30, 1994 and February 28, 1995 generally become exercisable with respect to one-third of the options granted on the date of grant, with respect to an additional one-third such options one year after the date of grant and with respect to the remaining one-third of such options two years after the date of grant. Options granted subsequent to February 28, 1995 generally become exercisable over various periods in accordance with the terms of the individual awards. The following table of data is presented in connection with the stock option plans:
Option Price Weighted Average Shares Per Share Exercise Price ------------------------ ------------------------ ------------------------------- Outstanding at January 28, 1995 1,376,700 Exercised (44,000) $10.00-$11.75 Canceled (539,600) $ 9.50-$20.00 Granted 771,000 $ 8.25-$13.50 ------------------------ Outstanding at February 3, 1996 1,564,100 Exercised (356,579) $ 9.25-$12.00 $10.90 Canceled (547,221) $ 9.25-$20.00 $15.84 Granted 2,851,089 $10.44-$14.25 $12.34 ------------------------ Outstanding at December 28, 1996 3,511,389 Exercised (47,500) $8.25-$11.75 $10.61 Canceled (441,300) $9.88-$16.75 $12.79 Granted 1,559,721 $8.50-$12.75 $ 9.64 ------------------------ Outstanding at December 27, 1997 4,582,310 ======================== Weighted average fair value of options granted during the year $ 5.90
F-24 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 15. EMPLOYEE STOCK OPTIONS (CONTINUED) Options to purchase 1,174,869 shares and 532,636 shares were exercisable at December 27, 1997 and December 28, 1996, respectively.
Options Outstanding Options Exercisable -------------------------------------------------------------------------------- Weighted Number Average Number Outstanding at Remaining Weighted Exercisable at Weighted Range of Exercise December 27, Contractual Average December 27, Average Exercise Prices 1997 Life Exercise Price 1997 Price ------ ---- ---- -------------- ---- ----- $ 8.50 - $10.00 1,365,721 6.6 $ 9.33 70,672 $ 9.91 $10.01 - $12.00 1,183,250 5.8 $10.99 425,167 $11.19 $12.01 - $14.50 1,978,839 5.6 $12.72 624,530 $12.76 $15.50 - $16.75 54,500 4.2 $15.64 54,500 $15.64 --------- --- ------ --------- ------ 4,582,310 6.0 $11.31 1,174,869 $12.15 ========= === ====== ========= ======
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"). Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value of that statement. For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. Had compensation cost for the stock option plans been determined based on the fair value at the grant date for awards under the stock option plans consistent with the methodology prescribed under SFAS 123, the Company's net loss and net loss per basic common share would have been increased by approximately $10.1 million or $0.38 per basic common share, and $5.3 million or $.23 per basic common share for the year ended December 27, 1997 and the eleven months ended December 28, 1996, respectively. If the Company was to implement SFAS 123, the pro forma net loss and net loss per basic common share would have been approximately $67.6 million or $2.56 per basic common share, and $208.9 million or $8.96 per basic common share for the year ended December 27, 1997 and the eleven months ended December 28, 1996, respectively. Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect is not fully reflected until Fiscal 1997. The fair value for each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions for the various grants made during 1997 and 1996: risk-free interest rate of 6.5% and 5.12%; expected volatility of 50.1% and 55.8%; no dividend yield; no forfeiture rate and expected lives of seven to ten years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation models require input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. F-25 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 16. STOCKHOLDERS' (DEFICIT) EQUITY On September 26, 1997, the Company entered into a new licensed book publishing agreement (the "Agreement") with Disney Licensed Publishing ("Disney"). In connection with the Agreement, Disney received warrants to purchase 1.1 million shares of the Company's Common Stock (valued at approximately $6.6 million) at a per share price of $11.375 exercisable beginning on the earlier of (i) 90 days after the expiration of the Agreement or (ii) 30 days after the announcement by either Disney or the Company that they will (a) be entering into a new license agreement or (b) that they will not be entering into a new license agreement, and expiring on March 31, 2008. On May 8, 1996, pursuant to the sale of a significant equity interest in the Company to GP Holding, and the requisite vote of the stockholders of the Company, an amendment to increase the authorized number of shares of the Company's Common Stock, $.01 par value from 40.0 million shares to 60.0 million shares was approved. In connection with the GPH Transaction, 13,000 shares of the Company's Series B Preferred Stock was issued for an aggregate purchase price of $65.0 million. Net proceeds associated with the transaction was approximately $58.8 million, after giving effect to approximately $6.2 million of transaction costs. For the first four years, the Series B Preferred Stock remits dividends equal to approximately 195,000 shares of the Company's Common Stock per Fiscal quarter of the Company. On January 31, 1996, in accordance with his Interim Employment Agreement, the Company issued 599,465 shares of Common Stock to Mr. Snyder at a price of $8.00 per share in exchange for a non-recourse note in the amount of the purchase price, secured by a pledge of the shares. The non-recourse note was shown as a separate component of consolidated stockholders' (deficit) equity at February 3, 1996. During the year ended December 28, 1996, the Company exchanged another non-recourse note of approximately $1.0 million in connection with the 84,987 additional shares issued to Mr. Snyder under the antidilution provisions of his Employment Agreement. On September 6, 1996, the Company completed the sale to H.C. Crown Corporation, a wholly owned subsidiary of Hallmark Cards Incorporated ("Hallmark"), of 2,356,198 shares of Common Stock for approximately $25.0 million (the "Hallmark Transaction"). Hallmark and the Company continue to discuss a strategic relationship between the two companies, premised on the good faith efforts to develop constructive working relationships across appropriate lines of business. As of December 27, 1997, the Company has reserved 24,283,214 shares of common stock for the conversion of the (i) Series B Preferred Stock (see Note 4), (ii) warrants issued in connection with the GPH Transaction (see Note 4), (iii) Preferred Securities (see Note 12), (iv) warrants issued in connection with the Disney Agreement and (v) the exercise of outstanding options (see Note 15). F-26 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities, machinery and vehicles under various noncancellable operating lease agreements over periods of one to ten years. Future minimum lease payments required under such leases in effect at December 27, 1997 and thereafter are as follows: AMOUNT (IN THOUSANDS) -------------- 1998 $5,467 1999 7,046 2000 6,455 2001 6,378 2002 6,192 and thereafter 64,752 Total rent expense charged to operations was approximately $5.7 million, $4.7 million and $6.1 million for the year ended December 27, 1997, the eleven months ended December 28, 1996 and for the year ended February 3, 1996, respectively. The Company is required to meet certain contractual payments under contracts in effect at December 27, 1997 and thereafter, as follows: AMOUNT (IN THOUSANDS) -------------- 1998 $11,105 1999 14,064 2000 13,856 2001 20,620 2002 - and thereafter - Contingencies Golden Books Publishing and Penn have been informed by the Environmental Protection Agency (the "EPA") and/or state regulatory agencies that they may be potentially responsible parties ("PRPs") and face liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act (commonly known as "CERCLA" or "Superfund") or similar state laws. In all cases except those described below, the Company has resolved its liability or is in the process of resolving its liability for amounts not material. Although the Company divested Penn in December 1996, the Company has agreed to indemnify Contempo Colours, Inc. against certain of Penn's environmental liabilities, including the Cork Street Landfill and Fulford Street Property discussed herein. F-27 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Wisconsin Department of Natural Resources (the "WDNR") alleges that the Company is a responsible party for drums found at a site located in unincorporated Racine County. The WDNR and the Company have entered into an agreement which requires the Company to remove drums and soil from the site. The disposal of these drums dates back almost 30 years. Golden Books Publishing did not authorize disposal of its waste drums at the site. The Company has completed the removal of drums and soil from the site. At the Hunt's Landfill site in Racine County, Wisconsin, Golden Books Publishing's liability pursuant to the terms of a consent decree is limited to approximately 4% of the total remedial costs. Although the last phase of construction activities was completed in 1996, Golden Books Publishing and the other potentially responsible parties are obligated to fund the operation and maintenance of the site for the next 20-30 years. The current estimate of the total costs of such operation and maintenance is in the range of $14 million. In accordance with the consent decree, the Company has established a reserve for its share of the probable clean-up costs. At the Hertel Landfill in Plattekill, New York, Golden Books Publishing is one of five PRPs sued by the EPA in 1994 for recovery of past EPA response costs of approximately $2.5 million. In September 1991, the EPA approved a remedial action for the Hertel Landfill site that currently is estimated to cost $4.1 million other than groundwater remediation costs, if any are required. One of the site's non-defendant PRPs has been complying with an EPA unilateral administrative order requiring investigation and clean-up of the site and is now seeking contribution towards its cost from Golden Books Publishing and more than 20 other PRPs. At the time the 1991 order was issued, Golden Books Publishing did not comply. As of June 26, 1996, representatives of Golden Books Publishing reached agreement with the EPA to come into compliance with the order and pay a penalty of $625,000 for previous non-compliance. Additionally, during 1997, Golden Books Publishing paid a total of $1,701,000 for the remediation of the Hertel site, including settlement payments to other PRPs. The Company, other PRPs and the government have reached an interm allocation and are in the process of negotiating a consent decree which will establish the Company's future responsibilities at the site. Golden Books Publishing also has been identified as a PRP at another site located in Poughkeepsie, New York. Golden Books Publishing and eight other PRPs received a notice letter in 1995 from the State of New York regarding this site. New York State will be seeking recovery of its past oversight costs of more than $600,000 plus future oversight and maintenance costs associated with this site, currently estimated by the State at $830,000. There has been no attempt made to develop an allocation or to identify all PRPs to date, but the construction phase of the remedy has been completed by other parties without Company involvement. On October 2, 1996, the Company received notice from the City Attorney of Kalamazoo, Michigan that Beach Products, a division of Penn, will be asked to participate in the remediation of the Cork Street Landfill site located in the city which was allegedly used by Beach Products in the past. Current cost estimates for the remediation required at the site are as high as $24,000,000. More that 70 entities will be requested to provided financial contribution to the remediation. On November 14, 1996, the Michigan Department of Environmental Quality requested that corrective actions be taken as a result of the discovery of a leaking underground storage tank system at the Fulford Street Property of the Company on November 8, 1996. An initial site assessment is being completed by the Company's outside consultant. Current estimates indicate that the costs associated with this release should not exceed $200,000. However, in the event that the contamination has migrated off the Company's property, these costs could increase. F-28 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition to these environmental matters, Golden Books Publishing filed an action in 1994 in the United States District Court, Eastern District of Wisconsin captioned as Western Publishing Company, Inc. v. MindGames, Inc. seeking a declaration of rights in regard to Golden Books Publishing's alleged breach of various of its obligations under its licensing agreement with the defendant for distribution through 1994 of the adult board game known as "Clever Endeavor." This case involves the Company's now-discontinued adult and children's game division. The defendant, believing its board game had the potential to become one of the most popular of all time, has maintained that certain of the alleged breaches entitle it to damages of as much as $40 million resulting from lost profits and unpaid royalties. The Court recently granted Golden Books Publishing's partial motion for summary judgment and held that the defendant is precluded from recovering lost profits. Accordingly, the defendant's damage claim is now limited to its unpaid royalties of $1.2 million. Golden Books Publishing denies that it has any liability to defendant. In consideration of the aforementioned matters, the Company has recorded accruals in the deferred compensation and other deferred liabilities account of approximately $6.5 million in the consolidated balance sheet. On December 19,1997, Contempo Colours, Inc. ("Contempo") filed suit against Golden Books Publishing in the circuit court for the County of Kalamazoo, Michigan, alleging damages arising out of a dispute between Contempo and Golden Books Publishing relating to the sale to Contempo of Penn on December 23, 1996. The Company and Contempo entered into a standstill agreement with respect to the suit on January 7, 1998, whereby Contempo has agreed to suspend the suit while the parties attempt to negotiate a settlement of all claims. The Company is adequately reserved with respect to this matter. The Company is actively pursuing resolution of the aforementioned matters or, in the case environmental matters, is awaiting further government response. While it is not feasible to predict or determine the outcomes of these proceedings, it is the opinion of management that these outcomes have been adequately reserved for and will not have a materially adverse effect on the Company's financial position or future results of operations. The Company and its subsidiaries are parties to certain other legal proceedings which are incidental to their ordinary business, none of which the Company believes are material to the Company and its subsidiaries taken together as a whole. Effective December 1996, the Company entered into a five-year outsourcing agreement to manage its information technology services department. The amount of annual service fees will vary with the cost of living adjustment and is dependent upon the services provided, which services depend upon the Company's volume of business and system needs. F-29 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 18. INCOME TAXES Income tax expense calculated in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", consisted of the following:
Year Eleven Months Year Ended Ended Ended December 27, December 28, February 3, 1997 1996 1996 ---- ---- ---- (In thousands) Current payable (benefit): Federal $ - $2,051 $(2,092) State 59 (53) 78 Foreign (22) (105) (540) ---------- -------- -------- 37 1,893 (2,554) ---------- -------- -------- Deferred: Federal - - 11,281 State - - 2,615 Foreign - - (10) ---------- -------- -------- - - 13,886 ---------- -------- -------- $37 $1,893 $11,332 ========== ======== ========
Loss before income tax expense of Golden Books Publishing's Canadian subsidiary was approximately $(669,000), $(577,000) and $(920,000) for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996, respectively. F-30 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 18. INCOME TAXES (CONTINUED) A reconciliation of the statutory United States Federal income tax rate to the Company's effective income tax rate follows:
Eleven Months Year Ended Ended Year Ended December 27, December 28, February 3, 1997 1996 1996 ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% State income taxes, net of Federal benefit 5.0 4.2 (.2) Valuation allowance, net of refundable amounts (38.5) (33.7) (56.8) Permanent differences relating to the sale of Divisions/Subsidiaries (0.6) (4.1) - Other - net (1.0) (2.4) 1.7 ----- ----- --- (0.1)% (1.0)% (20.3)% ===== ===== =====
The income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 27, 1997 and December 28, 1996 are as follows:
December 27, December 28, 1997 1996 -------------------------- (In thousands) Deferred tax assets: Allowance for doubtful accounts & returns $ 9,950 $ 9,881 Inventories 1,368 2,896 Property, plant & equipment - 4,413 Accrued expenses 24,450 24,898 Post retirement benefits 11,746 11,515 Net operating loss carryforwards 87,991 60,015 Other - net 133 561 --------- --------- Total deferred tax assets 135,638 114,179 Valuation allowance (133,569) (112,481) --------- --------- Deferred tax assets, net of valuation allowance 2,069 1,698 --------- --------- Deferred tax liabilities: Property, plant & equipment 397 - Pension contributions 1,672 1,698 Other - net - - --------- --------- Total deferred tax liabilities 2,069 1,698 --------- --------- Net deferred tax assets / (liabilities) $ - $ - ========= =========
F-31 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 18. INCOME TAXES (CONTINUED) The current balance of the total deferred tax assets less total deferred tax liabilities ("Net Deferred Tax Asset") was $31.2 million and $32.8 million at December 27, 1997 and December 28, 1996, respectively. The noncurrent balance of the Net Deferred Tax Asset was $102.4 million and $79.7 million at December 27, 1997 and December 28, 1996, respectively. The entire Net Deferred Tax Asset was offset by a valuation allowance at both December 27, 1997 and December 28, 1996, due to the uncertainty of realizing the Federal and state income tax benefits associated with the Net Deferred Tax Asset . At December 27, 1997, the Company had available net operating loss carryforwards of approximately $207.7 million for Federal income tax purposes of which approximately $71.9 million, $75.4 million and $60.4 million expire in the years 2011, 2012 and 2013, respectively. The Company has tax credit carryforwards at December 27, 1997 of approximately $4.3 million. 19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS Golden Books Publishing 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 December 27, 1997 and December 28, 1996, and for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996 :
December 27, 1997 December 28, 1996 ----------------- ----------------- (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $17,097 and $15,937 in 1997 and 1996, respectively $17,224 $16,109 ========= ======== Projected benefit obligations for services rendered $17,735 $16,656 Plan assets at fair value (primarily U.S. government securities, corporate bonds and equity mutual funds) 21,721 18,684 --------- -------- Projected benefit obligations less than plan assets 3,986 2,028 Unrecognized net (gain)/loss (1,648) 120 Unrecognized prior service cost 1,843 2,129 Unamortized portion of unrecognized net asset at January 31, 1987 - (32) --------- -------- Prepaid pension costs recognized in accompanying consolidated balance sheets $ 4,181 $ 4,245 ========= ========
F-32 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
Year Ended Eleven Months Ended Year Ended December 27, December 28, February 3, 1997 1996 1996 ---- ---- ---- (In thousands) Net pension (income) expense, included in the following components: Service cost - benefits earned during the period $ 490 $ 498 $ 441 Interest cost on projected benefit obligations 1,164 1,084 1,054 Actual return on plan assets (3,803) (2,268) (3,437) Net amortization and deferral 2,213 734 2,070 Net settlement gain - - (3) -------- --------- -------- Net pension expense $ 64 $ 48 $ 125 ======== ========= ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% for both the year ended December 27, 1997 and the eleven months ended December 28, 1996. The expected long-term rate of return on assets was 10%. 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 approximately $326,000, $349,000 and $503,000 for the year ended December 27, 1997, the eleven months ended December 28, 1996 and for the year ended February 3, 1996, 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 upon specified levels of voluntary employee contributions. Golden Books Publishing and its Canadian subsidiary also maintain a profit sharing plan for certain salaried employees. Expense for these plans was approximately $2.0 million, $2.5 million and $3.1 million for the year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996, respectively. Post-retirement Benefits Golden Books Publishing provides certain health care and life insurance benefits for substantially all of its retired employees. The Company accrues the estimated cost of retiree benefit payments during the years the employee provides services. F-33 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The post-retirement benefit obligation recorded in the consolidated balance sheets consisted of the following amounts:
December 27, December 28, 1997 1996 ---- ---- (In thousands) Retirees currently receiving benefits $17,865 $18,487 Current employees eligible to receive benefits 4,200 4,500 Current employees not yet eligible to receive benefits 8,000 8,300 Unrecognized net gain from past experience (3,200) (5,800) Unrecognized prior service cost 2,500 3,300 ------------ ------------ $29,365 $28,787 ============ ============
The net post-retirement benefit cost, which is not currently funded, consisted of the following components:
Eleven Months Ended Year Ended Year Ended December 27, December 28, February 3, 1997 1996 1996 ---- ---- ---- (In thousands) Service cost - benefits earned during the year $ 560 $ 550 $ 500 Interest cost on accumulated post-retirement benefit obligation 1,980 1,925 2,000 Net amortization and deferral of unrecognized amounts (210) - (100) ------- ------- ------- Net post-retirement benefit expense $ 2,330 $ 2,475 $ 2,400 ======= ======= =======
The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation as of January 1, 1997 was 7.5% for 1997 decreasing linearly to 5% in 2010; and remaining level thereafter. If the healthcare cost trend rate were increased one percentage point in each year, the accumulated post-retirement benefit obligation as of January 1, 1998 and the net post-retirement cost would have been increased by approximately 9.8 %. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation as of December 27, 1997 and January 1, 1997 was 7.0%. F-34 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 20. INDUSTRY SEGMENTS The Company has three industry segments: Consumer Products, Commercial Products and Entertainment. The Company's Consumer Products Segment 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'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. The Company's Entertainment Segment includes the Golden Books Entertainment division which was established in August 1996, upon the acquisition by the Company from Broadway Video Entertainment, L.P. of an extensive library of character-based family entertainment properties. The Golden Books Entertainment division's library is comprised of copyrights, distribution rights, trademarks or licenses relating to characters, television programs and motion pictures, both animation and live action, and includes individual specials and multiple episode series. 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, 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 year ended December 27, 1997, the eleven months ended December 28, 1996 and the year ended February 3, 1996. Information by industry segment is set forth below:
Year Ended Eleven Months Ended Year Ended December 27, 1997 December 28, 1996 February 3, 1996 ------------------- -------------------- ----------------- (In thousands) Net sales: Consumer Products $ 170,637 $ 207,590 $ 306,543 Commercial Products 42,446 42,404 63,029 Entertainment 29,398 4,052 - ------------ ------------- ---------- $ 242,481 $ 254,046 $ 369,572 ============ ============= ========== Operating income/(loss): Consumer Products $ (23,994) $ (66,114) $ (23,887) Commercial Products (2,848) (18,051) 805 Entertainment 4,422 (4,930) - ------------ ------------- ---------- (22,420) (89,095) (23,082) Interest and other income 5,579 4,235 3,386 General corporate expense (21,564) (30,413) (16,459) Restructuring plan 10,786 (65,741) (6,701)
F-35 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 20. INDUSTRY SEGMENTS (CONTINUED)
Interest expense and distributions on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Convertible Debentures (22,024) (14,596) (12,859) -------- --------- -------- Loss before income taxes $(49,643) $(195,610) $(55,715) ======== ========= ========
Consumer Commercial Products Products Entertainment Corporate Total -------- ---------- ------------- --------- ----- (In thousands) Identifiable assets: Year ended December 27, 1997 $146,969 $29,846 $113,334 $33,015 $323,164 Eleven months ended December 28, 1996 181,256 25,923 99,527 60,529 367,235 Year ended February 3, 1996 213,792 33,521 - 74,652 321,965 Depreciation and amortization: Year ended December 27, 1997 2,959 3,175 4,591 489 11,214 Eleven months ended December 9,891 1,550 1,523 1,057 14,021 28, 1996 Year ended February 3, 1996 12,816 1,734 - 1,445 15,995 Capital expenditures: Year ended December 27, 1997 5,797 4,653 50 9,886 20,386 Eleven months ended December 28, 1996 3,890 1,275 116 458 5,739 Year ended February 3, 1996 12,540 5,202 - 179 17,921
For the year ended December 27, 1997 and eleven months ended December 28, 1996, revenues from one single customer did not exceed more than 10% of the Company's net sales. For the year ended February 3, 1996, revenues from the Company's two largest customers, Wal-Mart Stores, Inc. and Toys 'R' Us, Inc. totaled approximately $78.4 million or 21% of net sales. The Company's products are primarily sold to mass market retailers throughout the United States, Canada and the United Kingdom. F-36 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 21. NET LOSS PER BASIC COMMON SHARE Loss per basic common share was computed as follows:
Eleven Months Year Ended Ended Year Ended December 27, December 28, February 3, 1997 1996 1996 ---- ---- ---- (In thousands except for per share data) Net loss $ (49,680) $ (197,503) $ (67,047) Preferred dividend requirements (7,849) (6,136) (848) ------------------- ---------------------------------- Loss applicable to basic common stock $ (57,529) $ (203,639) $ (67,895) =================== =================== ================= Weighted average basic common shares outstanding 26,357 23,317 21,047 =================== =================== ================= Loss per basic common share $ (2.18) $ (8.73) $ (3.23) =================== =================== =================
22. RELATED PARTY TRANSACTIONS GEORGETOWN TRANSACTION Pursuant to a letter agreement (the "Georgetown Agreement") dated as of August 1, 1996, The Georgetown Company ("Georgetown"), a corporation of which Marshall Rose (a director of the Company) is the Managing Partner, has acted as a real estate advisor to the Company. Pursuant to the Georgetown Agreement, the Company is obligated to make the following payments to Georgetown: (i) $25,000 per month for the period beginning August 1, 1996 and ending July 1, 1999; and (ii) an incentive fee, payable in cash or Common Stock, for each completed real estate transaction during the period beginning August 1, 1996 and ending July 3, 2000, in an amount equal to one-half of each commission that would be paid to an outside broker representing the Company. To date, the Company has paid to Georgetown (i) $75,000 in respect of a property located at 630 Fifth Avenue, New York, New York, (ii) approximately $580,000 in respect of a property located at 888 Seventh Avenue, New York, New York, (iii) approximately $108,000 in respect of a property located at 850 Third Avenue, New York, New York, and (iv) approximately $217,000 in respect of a property located in Fayetteville, North Carolina. TRIBECA TRANSACTION Pursuant to a letter agreement (the "Tribeca Agreement") dated as of July 1, 1996, the Company agreed to pay to Tribeca Technologies LLC ("Tribeca"), a limited liability company in which Philip E. Rowley (an officer of the Company) is a member, as compensation for the loss by Tribeca of the exclusive services of Mr. Rowley following his employment by the Company, the sum of $200,000 on each of the following dates (provided that Mr. Rowley is in the employ of the Company at such time); (1) July 1, 1996; (ii) July 1, 1997; and (iii) July 1, 1998. In consideration for such payments, Tribeca agreed to pay the Company one-third of the aggregate amount of any F-37 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997 (CONTINUED) 22. RELATED PARTY TRANSACTIONS (CONTINUED) and all distributions otherwise to be made by Tribeca to Mr. Rowley and the President of Tribeca on or before June 30, 1999 (or such earlier time as Mr. Rowley's employment with the Company ceases), provided, that the maximum amount payable to the Company is the lesser of (i) $600,000 and (ii) the amount paid by the Company to Tribeca pursuant to the previous sentence. As of December 27, 1997, the Company has fulfilled its obligation and made payments totaling $570,000 as follows: $200,000 in Fiscal 1996, $200,000 during June 1997, and $170,000 (paid in advance at a discounted rate) during November 1997. On November 25, 1997, the Company and Tribeca entered into a settlement agreement and release whereby the Company paid $170,000 in advance at a discount rate as final payment for all obligations of the Company to Tribeca. POWERHOUSE TRANSACTION On May 8, 1996, the Company and Powerhouse Entertainment Company, Inc., ("Powerhouse"), a corporation affiliated with Richard A. Bernstein, the former Chairman and Chief Executive Officer of the Company, entered into a software development agreement (the "Development and Licensing Agreement") relating to the development by Powerhouse of six interactive PC CD-ROM storybooks under the Little Golden Books Interactive name and logo (the "Powerhouse Products") and certain other computer software products. Under the terms of the Development and Licensing Agreement, Powerhouse received a fee in the amount of $1.0 million for the development of the Powerhouse Products. All development costs were incurred by Powerhouse with the Powerhouse Products' content, packaging and design subject to the Company's approval. Separately, Powerhouse is paid a royalty based upon the net proceeds of sales of the Powerhouse Products and such royalty obligation continues for the term of copyright. To date, the Company has paid approximately $75,000 to Powerhouse in royalties. There is also an agreement (the "Support Agreement") of even date between the parties wherein, Powerhouse, on behalf of Company and at the Company's sole cost and expense, performed all services relating to the manufacturing, marketing, distribution, sales and licensing of the Powerhouse Products. To date, the Company has paid approximately $615,000 to Powerhouse in connection with such services. F-38 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (IN THOUSANDS)
December 27, 1997 December 28, 1996 ----------------- ----------------- ASSETS CURRENT ASSETS Cash $ 19,155 $ 59,995 Refundable income taxes 637 637 Other current assets 1,375 - --------- --------- Total current assets 21,167 60,632 OTHER ASSETS 8,963 10 PROPERTY, PLANT AND EQUIPMENT 9,985 99 Less allowances for depreciation and amortization (489) - --------- --------- 9,496 99 INVESTMENT AND ADVANCES IN SUBSIDIARIES (83,335) (64,097) --------- --------- $ (43,709) $ (3,356) ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accrued compensation and fringe benefits $ 20 $ 299 Other current liabilities 6,671 8,023 ----- ------- 6,691 8,322 DEFERRED COMPENSATION 7,909 7,759 OTHER NONCURRENT LIABILITIES 3,000 200 ----- --- 10,909 7,959 STOCKHOLDERS' DEFICIT Convertible preferred stock - series B 65,000 65,000 Common stock 269 259 Additional paid in capital 128,533 120,376 Accumulated deficit (250,791) (201,111) Cumulative translation adjustment (1,498) (1,339) ------- -------- (58,487) (16,815) Less common stock in treasury (2,822) (2,822) ------- ------- (61,309) (19,637) --------- -------- $(43,709) $(3,356) ========= ========
S-1 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS)
ELEVEN MONTHS YEAR YEAR ENDED ENDED ENDED DECEMBER 27, DECEMBER 28, FEBRUARY 3, 1997 1996 1996 --------------------------------------------------------- NET REVENUES (PRINCIPALLY INTERCOMPANY INTEREST INCOME) $ 8,730 $ 8,736 $ 27,473 COSTS AND EXPENSES: Selling, general and administrative 1,063 14,335 - Restructuring charges - 1,072 1,870 Interest expense (primarily intercompany) - 4,143 12,494 ----------------------------------------------------- (LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 7,667 (10,814) 13,109 PROVISION (BENEFIT) FOR INCOME TAXES - 272 (431) ----------------------------------------------------- 7,667 (11,086) 13,540 DEFICIT IN NET LOSS OF SUBSIDIARY (57,347) (186,417) (80,587) ----------------------------------------------------- NET LOSS $ (49,680) $ (197,503) $ (67,047) =====================================================
S-2 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
ELEVEN MONTHS YEAR YEAR ENDED ENDED ENDED DECEMBER 27, DECEMBER 28, FEBRUARY 3, 1997 1996 1996 --------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES $ 6,254 $ 6,366 $ 10,596 INVESTING ACTIVITIES: Purchase of property, plant and equipment (9,885) (99) (19) Deposits (3,497) - - ------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (13,383) (99) (19) FINANCING ACTIVITIES: Proceeds from issuance of Preferred Stock - Series B - 65,000 - Issuance costs of Preferred Stock - Series B - (6,248) - Redemption of Preferred Stock - Series A - (9,985) - Dividends paid on Preferred Stock - Series A - (646) - Proceeds from sale of Common Stock 1,556 28,886 517 Proceeds from Municipal Government Grants 3,000 - - Net decrease in borrowings of revolving credit facility - - (32,000) Net loans to subsidiaries (38,109) (23,208) 17,905 Other (159) (85) (509) ------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (33,712) 53,714 (14,087) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,840) 59,981 (3,510) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 59,995 14 3,524 ------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,155 $ 59,995 $ 14 =======================================================
NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION In the Golden Books Family Entertainment, Inc. (the "Company")-only financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed losses of subsidiaries since the date of acquisition. Descriptions of the Company's long-term obligations, mandatory dividend and guarantees of the Company have been separately disclosed in the Company's consolidated financial statements. The Company-only financial statements should be read in conjunction with the Company's consolidated financial statements. S-3 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 27, 1997, THE ELEVEN MONTHS ENDED DECEMBER 28, 1996 AND THE YEAR ENDED JANUARY 3, 1996 (IN THOUSANDS)
ALLOWANCE ALLOWANCE FOR DOUBTFUL FOR SALES DISCOUNTS ACCOUNTS AND RETURNS TOTAL ---------------------- ------------------- ----------------------- BALANCES, JANUARY 28, 1995 $ 4,067 $ 7,472 $ 11,539 Additions charged to costs and expenses 1,440 16,712 18,152 Deductions - amounts written off (2,989) (19,708) (22,697) Foreign currency conversion 4 6 10 ----------------------- ------------------- ----------------------- BALANCES, FEBRUARY 3, 1996 2,522 4,482 7,004 Additions charged to costs and expenses 5,719 21,742 27,461 Deductions - amounts written off (3,865) (9,480) (13,345) Foreign currency conversion 3 3 6 ----------------------- ------------------- ----------------------- BALANCES, DECEMBER 28, 1996 4,379 16,747 21,126 Additions charged to costs and expenses 3,608 13,736 17,344 Deductions - amounts written off (776) (13,426) (14,202) Foreign currency conversion (3) (16) (19) ----------------------- --------------------- ----------------------- BALANCES, DECEMBER 27, 1997 $ 7,208 $ 17,041 $ 24,249 ======================= ===================== =======================
S-4 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION OF GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. RESTATED CERTIFICATE OF INCORPORATION OF GOLDEN BOOKS FAMILY ENTERTAINMENT,INC. PURSUANT TO SECTION 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE The undersigned, the Chairman and Chief Executive Officer of Golden Books Family Entertainment, Inc. (the "Corporation"), certifies that: 1. The Corporation was originally incorporated under the name of R.A.B. Holdings, Inc. and the Corporation's original certificate of incorporation was filed with the Delaware Secretary of State on January 4, 1984. 2. The restated certificate of incorporation has been duly adopted by the Corporation's Board of Directors in accordance with Section 245 of the General Corporation Law of the State of Delaware, and only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as heretofore amended and supplemented, and there is no discrepancy between such provisions and the provisions of the restated certificate as set forth herein. 3. The certificate of incorporation as heretofore amended is hereby restated to read in its entirety as set forth below: FIRST: The name of the corporation (the "Corporation") is Golden Books Family Entertainment, Inc. SECOND: The registered office of the Corporation is c/o United Corporate Services, Inc., 15 East North Street in the city of Dover, County of Kent, State of Delaware. The name of its registered agent at that address is United Corporate Services, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The Corporation shall have the authority to issue 60,100,000 shares, consisting of 60,000,000 shares of common stock, par value $.01, and 100,000 shares of preferred stock, without par value. The board of directors may authorize the issuance from time to time of the preferred stock in one or more series and with such designations, preferences, relative, participating, optional and other special rights, and qualifications, limitations or restrictions (which may differ with respect to each series) as the board may fix by resolution. FIFTH: The Corporation shall have the authority to issue a series of 13,000 shares of preferred stock, with the designations and preferences, rights, qualifications, limitations and restrictions as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated "Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting such series shall be 13,000. 2. DIVIDENDS. (a) The holders of Series B Preferred Stock (i) shall receive on the first day of February, May, August and November (each a "Dividend Date") of each twelve-month period following the date of initial issuance of the Series B Preferred Stock (the "Initial Issuance Date") through the fourth anniversary of the Initial Issuance Date, a stock dividend per share of Series B Preferred Stock equal to a number of shares of Common Stock of the Corporation ("Common Stock") determined by multiplying the Conversion Rate (as determined pursuant to Sections 5 and 6 below) by .03 (such that at the initial Conversion Rate the holders of the Series B Preferred Stock shall receive in the aggregate 195,000 shares of Common Stock on a quarterly basis, resulting in the receipt of an aggregate of 780,000 shares of Common Stock in each of the first four years after the Initial Issuance Date, subject to adjustment in the event of any dividend, stock split, stock distribution or combination with respect to any such shares), provided, however, that (x) in the event that the product of the number of shares of Common Stock per share of Series B Preferred Stock to be distributed in any quarter and the Market Price (as defined below) (the "Dividend Value") is less than $93.75, then, in addition to such shares of Common Stock, the holders shall receive on such date, out of legally available funds of the Corporation, cash per share of Series B Preferred Stock in an amount equal to the excess of $93.75 over the Dividend Value, compounded quarterly, and (y) in the event that the Dividend Value exceeds $187.50, then the number of shares of Common Stock to be so distributed shall be reduced by an amount sufficient to cause the Dividend Value to equal $187.50 (subject in each case to adjustment in the event of any dividend, stock split, stock distribution or combination with respect to any such shares), and (ii) shall be entitled to receive thereafter, beginning on the first to occur of the first day of February, May, August or November after the fourth anniversary of the Initial Issuance Date, when and as declared, out of legally available funds of the Corporation, cash dividends (computed on the basis of a 360-day year of twelve 30-day months) at the rate of $150 per share (subject to adjustment in the event of any dividend, stock split, stock distribution or combination with respect to any such shares), compounded quarterly, payable quarterly on the first day of February, May, August and November -2- of each twelve month period after the fourth anniversary of the Initial Issuance Date, on a pari passu basis with the Series A Preferred Stock of the Corporation (the "Series A Preferred Stock") (such stock and any other class or series of the preferred stock of the Corporation which shall rank with respect to the payment of dividends on a parity with the Series B Preferred Stock being referred to hereinafter, collectively, as "Parity Stock") and before any dividends shall be set apart for or paid upon the Common Stock or any other stock ranking with respect to the payment of dividends junior to the Series B Preferred Stock (such stock being referred to hereinafter collectively as "Junior Stock") in any year. All dividends declared upon Series B Preferred Stock shall be declared pro rata per share. For purposes of this Section 2, the term "Market Price" shall mean the average closing price of a share of Common Stock for the ten consecutive trading days immediately preceding the Dividend Date or the conversion date, as the case may be, as reported on the principal national securities exchange on which the shares of Common Stock or securities are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices during such ten trading day period in the over-the-counter market as reported by the Nasdaq National Market or any comparable system, or, if no such firm is then engaged in the business of reporting such prices, as reported by The Wall Street Journal, or, if not so reported, as furnished by any member of the National Association of Securities Dealers, Inc. selected by the Corporation or, if the shares of Common Stock or securities are not publicly traded, the Market Price for such date shall be the fair market value thereof determined jointly by the Corporation and the holders of record of a majority of the Series B Preferred Stock then outstanding; provided, however, that if such parties are unable to reach agreement within a reasonable period of time, the Market Price shall be determined in good faith by an independent investment banking firm selected jointly by the Corporation and the holders of record of a majority of the Series B Preferred Stock then outstanding or, if that selection cannot be made within ten days, by an independent investment banking firm selected by the American Arbitration Association in accordance with its rules, and provided further, that the Corporation shall pay all of the fees and expenses of any third parties incurred in connection with determining the Market Price. (b) Dividends on the Series B Preferred Stock shall be cumulative, whether or not in any fiscal year there shall be net profits or surplus available for the payment of dividends in such fiscal year, so that if in any fiscal year or years, dividends in whole or in part are not paid upon the Series B Preferred Stock, (i) unpaid dividends shall accumulate and no sums in any years shall be paid to the holders of the Junior Stock until all dividends payable on the Series B Preferred Stock have been paid in full, and (ii) no full dividends shall be declared or paid or set apart for payment on any Parity Stock for any period unless -3- full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. If at any time the Corporation shall have failed to pay full dividends which have accrued (whether or not earned or declared) on the shares of the Series B Preferred Stock and any other Parity Stock, all dividends (other than Series B Preferred Stock dividends paid in shares of Common Stock) declared upon shares of the Series B Preferred Stock and any other Parity Stock shall be declared pro rata so that the amount of dividends declared per share on the Series B Preferred Stock and such other Parity Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Series B Preferred Stock and other such Parity Stock bear to each other. 3. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other Preferred Stock of the Corporation ranking on liquidation prior and in preference to the Series B Preferred Stock (such Preferred Stock being referred to hereinafter as "Senior Preferred Stock") upon such liquidation, dissolution or winding up, but before any payment shall be made to the holders of Junior Stock, an amount equal to $5,000 per share plus any dividends thereon cumulated or accrued but unpaid, whether or not declared (subject to adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to such shares). If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for the distribution to its stockholders after payment in full of amounts required to be paid or distributed to holders of Senior Preferred Stock shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series B Preferred Stock and shares of Parity Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect to the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of Senior Preferred Stock, Series B Preferred Stock and Parity Stock and any other series of Preferred Stock upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Common Stock then outstanding shall be entitled to receive the remaining assets and -4- funds of the Corporation available for distribution to its stockholders. (c) The merger or consolidation of the Corporation into or with another corporation, the merger or consolidation of any other corporation into or with the Corporation, or the sale, conveyance, mortgage, pledge or lease of all or substantially all the assets of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 3. 4. VOTING. (a) Each issued and outstanding share of Series B Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which each such share of Series B Preferred Stock is convertible (as adjusted from time to time pursuant to Section 5 thereof), at each meeting of stockholders of the Corporation with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration, including, without limitation, the election of all directors (the "Non-Series B Directors") other than those as to which the Series B Preferred Stock has rights voting separately as a class as set out in paragraphs (b) and (c) below. Except as provided by law, by the provisions of paragraphs (b), (c) and (d) below or by the provisions establishing any other series of Preferred Stock, holders of Series B Preferred Stock, and of any other outstanding Preferred Stock that is entitled to vote together with the holders of Common Stock as a single class, shall vote together with the holders of Common Stock as a single class. (b) In addition to the right of the holders of Series B Preferred Stock to vote together with the holders of Common Stock as a single class with respect to the election of the Non-Series B Directors, for as long as at least (i) 40% of the shares of Series B Preferred Stock issued on the Initial Issuance Date (after taking into account any adjustments provided for hereunder)(the "Initial Series B Shares") are owned by Golden Press Holding, L.L.C. ("GP Holding"), any of its members, any Affiliates (as defined below) of such members (other than of Warburg, Pincus Ventures, L.P. ("WPV")) and the general partnership that acts as a general partner of WPV (GP Holding, its members, such Affiliates, WPV and such general partnership being herein collectively referred to as the "GP Holding Parties"), the holders of Series B Preferred Stock shall have the exclusive right, voting separately as a class, to elect one-third of the members of the Corporation's Board of Directors (herein referred to as the "Series B Directors"), (ii) 30% of the Initial Series B Shares are owned by GP Holding Parties, the holders of Series B Preferred Stock shall have the exclusive right, voting separately as a class, to elect two Series B Directors, and (iii) 20% of the Initial Series B Shares are owned by GP Holding Parties, the holders of Series B Preferred Stock shall have the exclusive right, voting separately as a class, to elect one Series B Director. In case such number of members calculated -5- pursuant to clause (i) of the immediately preceding sentence is not an integer, the number of Series B Directors shall be rounded up to the next integer. All such Series B Directors shall be elected by the affirmative vote of the holders of record of a majority of the outstanding shares of Series B Preferred Stock either at meetings of stockholders at which directors are elected, a special meeting of holders of Series B Preferred Stock or by written consent without a meeting in accordance with the General Corporation Law of Delaware. Each Series B Director so elected shall serve for a term of one year and until his successor is elected and qualified, provided, however, that promptly upon any decrease in the number of Series B Directors that the holders of the Series B Preferred Stock are entitled to elect pursuant to the first sentence of this paragraph (b), the appropriate number of Series B Directors shall resign from the Corporation's Board of Directors. Any vacancy in the position of a Series B Director, other than pursuant to the proviso in the immediately preceding sentence, may be filled only by the holders of the Series B Preferred Stock. Each Series B Director may, during his term of office, be removed at any time, with or without cause, by and only by the affirmative vote, at a special meeting of holders of Series B Preferred Stock called for such purpose, or the written consent, of the holders of record of a majority of the outstanding shares of Series B Preferred Stock. Any vacancy created by such removal may also be filled at such meeting or by such consent. On the Initial Issuance Date, the Board of Directors of the Corporation shall consist of nine members. For purposes hereof, "Affiliates" shall include persons included under the definition thereof in Rule 405 under the Securities Act of 1933, as amended, immediate family members and trusts, 25% or more of the beneficial interests of which are owned by such persons or one or more of their immediate family members. (c) In addition to any other rights provided by law, for as long as at least one-half (1/2) of the Initial Series B Shares are owned by GP Holding Parties, the Corporation shall not (nor shall it, in the case of clauses (ii), (iii), (iv) and (v), permit any of its subsidiaries to), without first obtaining the affirmative vote or written consent of the holders of record of a majority of the shares of the Series B Preferred Stock, voting as a separate class: (i) amend or repeal any provision of the Corporation's Certificate of Incorporation or By-Laws, including without limitation a change in the number of members of the Board of Directors of the Corporation; (ii) authorize or effect the incurrence or issuance of any Indebtedness (as defined below) (other than pursuant to an agreement to incur the same which has been approved in writing by holders of a majority of outstanding shares of Series B Preferred Stock, and other than pursuant to that certain Credit Agreement, dated September 29, 1995, between Western Publishing Company, Inc. and Heller Financial, Inc.) or shares of capital stock or rights to acquire capital -6- stock other than, in the case of shares of Common Stock, (x) options to acquire up to 1,874,300 shares of Common Stock issued to employees of the Corporation pursuant to the Amended and Restated 1986 Employee Stock Option Plan of the Corporation (the "Stock Option Plan") or (y) thereafter approved with the consent of the holders of record of a majority of the then outstanding shares of Series B Preferred Stock; provided, however, that the incurrence of Indebtedness among the Corporation and its subsidiaries shall not require such consent; (iii) authorize or effect (A) in one or in a series of two or more related transactions, any sale, lease, license, transfer or other disposition of assets for consideration in excess of $5,000,000 (other than in the ordinary course of business or among the Corporation and its subsidiaries); (B) any merger or consolidation or other reorganization involving the Corporation or any of its subsidiaries (other than with one another or in respect of which the aggregate consideration paid to or received by the Corporation or its subsidiaries is less than $5,000,000) or (C) a liquidation, winding up, dissolution or adoption of any plan for the same other than the liquidation, winding up, dissolution or adoption of any plan for the same of a subsidiary into the Corporation or another subsidiary thereof; (iv) authorize or effect, in one or in a series of two or more related transactions, (A) any acquisition or lease of assets or (B) any license of patent, trademark or other rights relating to any intellectual property, in each case, that involves by its terms a per annum payment in excess of $5,000,000 as determined in good faith by the Corporation's Board of Directors, other than among the Corporation and its subsidiaries or in the ordinary course of business; or (v) terminate the employment of the chief executive officer of the Corporation. For purposes of this Section 4(c), "Indebtedness" means liability for borrowed money or the deferred purchase price of property or services (except payables arising in the ordinary course of business) and including any guaranties thereof. Notwithstanding anything in paragraphs (b) or (c) to the contrary, in the event that the shares of Series B Preferred Stock are held by more than 10 holders, then (i) the right of the holders of Series B Preferred Stock to vote separately as a class to elect the Series B Directors shall terminate, and the holders of the Series B Preferred Stock shall have the right to vote together with the holders of Common Stock with respect to the election of all directors as set forth in paragraph (a) above and (ii) the restrictions on the Corporation set forth in this paragraph (c) shall terminate, provided that for purposes of this sentence, each member of GP Holding (other than WPV) together with the Affiliates of such member shall be deemed to be one holder (if such member or Affiliate directly owns shares of -7- Sries B Preferred Stock) and WPV and the general partnership that acts as a general partner of WPV together shall be deemed to be one holder (if any such entity directly owns shares of Series B Preferred Stock). (d) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series B Preferred Stock so as to affect adversely the Series B Preferred Stock, without the written consent or affirmative vote of the holders of record of at least a majority of the then outstanding aggregate number of shares of such adversely affected Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. For this purpose, without limiting the generality of the foregoing, the authorization or issuance of any series of Preferred Stock with preference or priority over, or being on a parity with, the Series B Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall be deemed so to affect adversely the Series B Preferred Stock. 5. OPTIONAL CONVERSION. Each share of Series B Preferred Stock may be converted at any time from and after the Initial Issuance Date, at the option of the holder thereof, in the manner hereinafter provided, into fully-paid and nonassessable shares of Common Stock, provided, however, that on any redemption of any Series B Preferred Stock or any liquidation of the Corporation, the right of conversion shall terminate at the close of business on the date fixed for such redemption or for the payment of any amounts distributable on liquidation to the holders of Series B Preferred Stock, as the case may be (unless the Corporation defaults upon the payment due upon such redemption or liquidation). (a) The applicable conversion rate ("Conversion Rate") and conversion price ("Conversion Price") of the Series B Preferred Stock from time to time in effect is subject to adjustment as hereinafter provided. The initial Conversion Rate shall be 500 shares of Common Stock for each one share of Series B Preferred Stock surrendered for conversion representing an initial Conversion Price (for purposes of Section 6) of $10.00 per share of Common Stock. Exercise of the conversion right set forth herein by the exercising holder shall not extinguish such holder's right to receive, and of the Corporation's obligation to pay, any and all accrued but unpaid dividends, whether or not declared, up to and including the time of conversion in respect of any shares of Series B Preferred Stock then being converted. In the event any such accrued but unpaid dividends are not paid at the time of such conversion, interest on the unpaid amount of such dividends shall continue to accrue at the rate of 12% per annum, compounded quarterly, until such amount is paid. (b) The Corporation shall not issue fractions of shares of Common Stock upon conversion of Series B Preferred Stock or scrip in lieu thereof. If any fraction of a share of Common Stock would, except for the provisions of this paragraph (b), be -8- issuable upon conversion of any Series B Preferred Stock, the Corporation shall in lieu thereof pay to the person entitled thereto an amount in cash equal to such fraction multiplied by the Market Price of one share of Common Stock, calculated to the nearest one-hundredth (1/100) of a share. (c) Whenever the Conversion Rate and Conversion Price shall be adjusted as provided in Section 6 hereof, the Corporation shall forthwith file at each office designated for the conversion of Series B Preferred Stock, a statement, signed by the Chairman of the Board, the President, any Vice President or Treasurer of the Corporation, showing in reasonable detail the facts requiring such adjustment and the Conversion Rate that will be effective after such adjustment. The Corporation shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to each holder of record of Series B Preferred Stock at his or its address appearing on the stock register. If such notice relates to an adjustment resulting from an event referred to in paragraph 6(g), such notice shall be included as part of the notice required to be mailed and published under the provisions of paragraph 6(g) hereof. (d) In order to exercise the conversion privilege, the holder of record of any Series B Preferred Stock to be converted shall surrender his or its certificate or certificates therefor to the principal office of the transfer agent for the Series B Preferred Stock (or if no transfer agent is at the time appointed, then the Corporation at its principal office), and shall give written notice to the Corporation at such office that the holder elects to convert the Series B Preferred Stock represented by such certificates, or any number thereof. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of the Series B Preferred Stock or shares of Common Stock upon conversion thereof. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly authorized in writing. The date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of the certificates and notice shall be the conversion date. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for Series B Preferred Stock as aforesaid, the Corporation shall cause to be issued and delivered at such office to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in paragraph (b) of this Section 5 in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (e) The Corporation shall at all times when the Series B Preferred Stock shall be outstanding reserve and keep available -9- out of its authorized but unissued stock, for the purposes of effecting the conversion of the Series B Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series B Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series B Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully-paid and nonassessable shares of such Common Stock at such adjusted Conversion Price. (f) All shares of Series B Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except the right of the holder thereof to receive payment of any accrued but unpaid dividends thereon and shares of Common Stock in exchange therefor. Any shares of Series B Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series B Preferred Stock accordingly. 6. ANTI-DILUTION PROVISIONS. (a) In order to prevent dilution of the right granted hereunder, the Conversion Price shall be subject to adjustment from time to time in accordance with this paragraph 6(a). At any given time the Conversion Price, whether as the initial price of $10.00 per share or as last adjusted, shall be that dollar (or part of a dollar) amount the payment of which shall be sufficient at the given time to acquire one share of Common Stock upon conversion of shares of Series B Preferred Stock. Upon each adjustment of the Conversion Price pursuant to Section 6, the Conversion Rate shall be adjusted such that the registered holders of shares of Series B Preferred Stock shall thereafter be entitled to acquire upon exercise, at the Conversion Price resulting from such adjustment, the number of shares of Common Stock obtainable by multiplying the Conversion Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable immediately prior to such adjustment and dividing the product thereof by the Conversion Price resulting from such adjustment. For purposes of this Section 6, the term "Number of Common Shares Deemed Outstanding" at any given time shall mean the sum of (x) the number of shares of Common Stock outstanding at such time, (y) the number of shares of Common Stock issuable assuming conversion at such time of the Corporation's Series A Preferred Stock and Series B Preferred Stock and (z) the number of shares of Common Stock deemed to be outstanding under subparagraphs 6(b)(1) to (9), inclusive, at such time. -10- (b) Except as provided in paragraph 6(c) or 6(f) below, if and whenever on or after the Initial Issuance Date, the Corporation shall issue or sell, or shall in accordance with subparagraphs 6(b)(1) to (9), inclusive, be deemed to have granted, issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such grant, issue or sale, then forthwith upon such grant, issue or sale (the "Triggering Transaction"), the Conversion Price shall, subject to subparagraphs (1) to (9) of this paragraph 6(b), be reduced to the Conversion Price (calculated to the nearest tenth of a cent) determined by dividing: (i) an amount equal to the sum of (x) the product derived by multiplying the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction by the Conversion Price then in effect, plus (y) the consideration, if any, received by the Corporation upon consummation of such Triggering Transaction, by (ii) an amount equal to the sum of (x) the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction, plus (y) the number of shares of Common Stock granted, issued or sold (or deemed to be granted, issued or sold in accordance with subparagraphs 6(b)(1) to (9) hereof) in connection with such Triggering Transaction; provided, however, that the Conversion Price shall not be so reduced if (A) for so long as the holders of the Series B Preferred Stock have the right to elect one or more Series B Directors pursuant to Section 4(b) hereof or to approve certain transactions by the Corporation pursuant to Section 4(c) hereof, such Triggering Transaction involves a grant, issuance or sale of Common Stock to any GP Holding Party other than ratably to all holders of the Common Stock, and such Triggering Transaction has not been approved by a majority of the Non-Series B Directors (other than natural persons who are GP Holding Parties or officers, directors or employees of entities that are GP Holding Parties) or (B) the Triggering Transaction involves a grant, issuance or sale of Common Stock that has not been registered pursuant to the Securities Act of 1933, as amended, and an investment bank of national standing and reputation, engaged for a fee by the Corporation pursuant to a written engagement letter, has not been consulted by the Corporation with respect to the structure of such Triggering Transaction and participated in the negotiation of such Triggering Transaction. For purposes of determining the adjusted Conversion Price under this paragraph 6(b), the following subsections (1) to (9), inclusive, shall be applicable: (1) In case the Corporation at any time shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (A) -11- Common Stock or (B) any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities" ), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which the Common Stock is issuable upon exercise, conversion or exchange (determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the granting of such Option, then the total maximum amount of Common Stock issuable upon the exercise of such Options or in the case of Options which relate to Convertible Securities, upon the conversion or exchange of such Convertible Securities, shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. No adjustment of the Conversion Price shall be made upon the actual issue of such shares of Common Stock or such Convertible Securities upon the exercise of such Options, except as otherwise provided in subparagraph (3) below. (2) In case the Corporation at any time shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such -12- Convertible Securities) shall be less than the Conversion Price in respect of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. No adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon exercise of the rights to exchange or convert under such Convertible Securities, except as otherwise provided in subparagraph (3) below. (3) If the purchase price provided for in any Options referred to in subparagraph (1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraphs (1) or (2), or the rate at which any Convertible Securities referred to in subparagraph (1) or (2) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in paragraphs 6(b) or 6(d)), the Conversion Price in effect at the time of such change shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any Option referred to in subparagraph (1) or the rate at which any Convertible Securities referred to in subparagraphs (1) or (2) are convertible into or exchangeable for Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Conversion Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Conversion Price then in effect hereunder is hereby reduced. (4) On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. -13- (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration (but shall otherwise be deemed issued for the specific consideration allocated thereto). (6) In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor less any underwriting discounts, selling commissions and other expenses paid or incurred in respect of such issuance or sale, shall be deemed to be the amount received by the Corporation therefor. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the value attributable to such shares in such merger, provided that, to the extent such value is not readily ascertainable, such value shall be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation. (7) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this paragraph 6(b). (8) In case the Corporation shall declare a dividend or make any other distribution upon the stock of the Corporation (other than dividends payable on the Series B Preferred Stock pursuant to Section 2 hereof) payable in Common Stock, Options, or Convertible Securities (other than a dividend or distribution payable in Common Stock covered by subparagraph 6(c) or 6(d)), then in such case any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (9) For purposes of this paragraph 6(b), in case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (x) -14- to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities, or (y) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. (c) In the event the Corporation shall declare a dividend upon the Common Stock payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries but without increasing the same as a result of any write-up of assets related to such dividend or any gain from the sale of any capital assets related to such dividend (herein referred to as "Liquidating Dividends"), then, the Corporation shall pay to the holders of the Series B Preferred Stock (in respect of each share of Class B Preferred Stock), at the time such dividend is paid to holders of the Common Stock and in addition to any other dividend required to be paid to the holders of the Series B Preferred Stock, an amount equal to the product of the Conversion Rate then in effect and the aggregate value at such time of all Liquidating Dividends paid in respect of one share of Common Stock. For the purposes of this paragraph 6(c), a dividend shall be considered payable out of earnings or earned surplus only if paid in cash and to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board of Directors of the Corporation. (d) In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) If any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation (other than pursuant to a liquidation subject to Section 3 hereof) shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Series B Preferred Stock shall have the right to acquire and receive upon conversion of the Series B Preferred Stock, which right shall be pari passu -15- with the rights of holders of Parity Stock and prior to the rights of the holders of Junior Stock (but after and subject to the rights of holders of Senior Preferred Stock, if any), such shares of stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of Common Stock as would have been received upon conversion of the Series B Preferred Stock at the Conversion Price then in effect. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument (in form and substance reasonably satisfactory to the holders of a majority of the outstanding Series B Preferred Stock) mailed or delivered to the holders of the Series B Preferred Stock at the last address of each such holder appearing on the books of the Corporation, the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. (f) The provisions of this Section 6 shall not apply to any Common Stock issued or issuable to any person or entity, or deemed outstanding, under subparagraphs 6(b)(1) to (9) inclusive: (i) on exercise of options outstanding as of the Initial Issuance Date to acquire up to 1,874,300 shares of Common Stock issued to employees of the Corporation pursuant to the Stock Option Plan or any options approved by the holders of record of a majority of the outstanding shares of Series B Preferred Stock pursuant to Section 4(c)(ii)(y) hereof, (ii) pursuant to options granted to Richard E. Snyder under the Stock Option Plan, as amended by the Corporation's Board of Directors on January 31, 1996, (iii) on conversion of the Series B Preferred Stock or Series A Preferred Stock, (iv) as a dividend on the Series B Preferred Stock, or (v) on exercise of the Warrant issued to GP Holding on the Initial Issuance Date. (g) In the event that: (1) the Corporation shall declare any cash dividend upon its Common Stock, or (2) the Corporation shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock, or (3) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights, or (4) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, including any subdivision or combination of its outstanding shares of Common Stock, or consolidation or merger of the -16- Corporation with, or sale of all or substantially all of its assets to, another individual or entity, or (5) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in connection with such event, the Corporation shall give to the holders of the Series B Preferred Stock: (i) at least ten (10) days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up; and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (ii) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of the Series B Preferred Stock at the address of each such holder as shown on the books of the Corporation. (h) If at any time or from time to time on or after the Initial Issuance Date, the Corporation shall grant, issue or sell any Options, Convertible Securities, rights to purchase property or evidences of indebtedness (the "Purchase Rights") pro rata to the record holders of any class of Common Stock and such grants, issuances or sales do not result in an adjustment of the Conversion Price under paragraph 6(b) hereof, then each holder of record of Series B Preferred Stock shall be entitled to acquire (within thirty (30) days after the later to occur of the initial exercise date of such Purchase Rights or receipt by such holder of the notice concerning Purchase Rights to which such holder shall be entitled under paragraph 6(g)) and upon the terms applicable to such Purchase Rights either: -17- (i) the aggregate Purchase Rights which such holder could have acquired if it had held the number of shares of Common Stock acquirable upon conversion of the Series B Preferred Stock immediately before the grant, issuance or sale of such Purchase Rights; provided that if any Purchase Rights were distributed to holders of Common Stock without the payment of additional consideration by such holders, corresponding Purchase Rights shall be distributed to the exercising holders of the Series B Preferred Stock as soon as possible after such exercise and it shall not be necessary for the exercising holders of the Series B Preferred Stock specifically to request delivery of such rights; or (ii) in the event that any such Purchase Rights shall have expired or shall expire prior to the end of said thirty (30) day period, the number of shares of Common Stock or the amount of property which such holder could have acquired upon such exercise at the time or times at which the Corporation granted, issued or sold such expired Purchase Rights. (i) If any event occurs as to which, in the opinion of the Board of Directors of the Corporation, the provisions of this Section 6 are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of the Series B Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Conversion Price as otherwise determined pursuant to any of the provisions of this Section 6 except in the case of a combination of shares of a type contemplated in paragraph 6(d) and then in no event to an amount larger than the Conversion Price as adjusted pursuant to paragraph 6(d). 7. REDEMPTION. (a) The Corporation, at its option, may redeem (to the extent that such redemption shall not violate any applicable provisions of the laws of the State of Delaware) all or a portion of the shares of Series B Preferred Stock at a price of $5,000 per share (subject to adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to such shares), plus an amount equal to any dividends thereon cumulated or accrued but unpaid, whether or not declared (such amount is hereinafter referred to as the "Redemption Price"), from time to time after the fourth anniversary of the Initial Issuance Date (any such date of redemption is hereafter referred to as a "Redemption Date"), if prior to such redemption all accrued but unpaid dividends on all outstanding shares of -18- Series B Preferred Stock have been paid, provided, however, that, without the written consent of the holders of a majority of the outstanding shares of Class A Preferred Stock, the Corporation shall not redeem any shares of Class B Preferred Stock so long as any shares of Class A Preferred Stock remain outstanding. (b) In the event of any redemption of only a part of the then outstanding Series B Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof (based on the number of shares of Series B Preferred Stock held on the date of notice of redemption). (c) At least thirty (30) days prior to any proposed Redemption Date, written notice shall be mailed, postage prepaid, to each holder of record of Series B Preferred Stock to be redeemed, at his or its post office address last shown on the records of the Corporation, notifying such holder of the number of shares so to be redeemed, specifying the Redemption Date and the date on which such holder's conversion rights (pursuant to Section 5 hereof) as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his or its certificate or certificates representing the shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to each Redemption Date, each holder of record of Series B Preferred Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the Series B Preferred Stock designated for redemption in the Redemption Notice as holders of Series B Preferred Stock of the Corporation (except the right to receive the Redemption Price upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (d) Except as provided in paragraph (a) above, the Corporation shall have no right to redeem the shares of Series B Preferred Stock. Any shares of Series B Preferred Stock so redeemed shall be permanently retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued, and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the amount of authorized Series B Preferred Stock accordingly. Nothing herein contained shall prevent or restrict the purchase by the Corporation, from time to time either at public or private sale, of the whole or any part of the Series B Preferred Stock at such -19- price or prices as the Corporation and the selling holders of the Series B Preferred Stock may mutually determine, subject to the provisions of applicable law. SIXTH: Unless, and except to the extent that, the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. SEVENTH: The Board of Directors may from time to time adopt, amend or repeal the by-laws of the corporation, subject to the power of the stockholders to adopt any by-laws or to amend or repeal any by-laws adopted, amended or repealed by the Board of Directors. GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. Dated: March 25, 1998 By: /s/ Richard E. Snyder ----------------------- Name: Richard E. Snyder Title: Chairman and Chief Executive Officer By: /s/ Philip E. Rowley ----------------------- Name: Philip E. Rowley Title: Executive Vice President -20- EX-10.05 3 GOLDEN BOOKS FAMILY ENTERTAINMENT INC. GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. 1995 STOCK OPTION PLAN, AS AMENDED Section 1. Purpose The Plan authorizes the Committee to provide Employees and Consultants of the Corporation and its Subsidiaries and Non-Employee Directors of the Corporation, who are in a position to contribute materially to the long-term success of the Corporation, with options to acquire Common Stock, par value $.0l per share, of the Corporation. The Corporation believes that this incentive program will cause those persons to increase their interest in the Corporation's welfare, and aid in attracting and retaining Employees, Consultants and Non-Employee Directors of outstanding ability. Section 2. Definitions Unless the context clearly indicates otherwise, the following terms, when used in this Plan, shall have the meanings set forth in this Section: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Cause" shall mean failure to comply with any agreements with, or policies of, the Corporation concerning disclosure of confidential or proprietary information or competition with, or employment by, a competitor of the Corporation; fraud or misappropriation with respect to the business of the Corporation or intentional material damage to the property or business of the Corporation; wilful failure to perform reasonable duties and responsibilities consistent with the Grantee"s position; breach of fiduciary duty or wilful material misrepresentation to the Corporation; wilful failure to act in accordance with any specific, reasonable and lawful instructions consistent with Grantee"s position; conviction of a felony or crime involving moral turpitude; habitual abuse of alcohol, drugs or controlled substances; or other proper cause as determined in the sole discretion of the Committee; provided, however, that the Committee may in its sole discretion provide for a different definition of Cause with respect to any particular Option grant and set forth such definition in the related Stock Option Agreement. (c) "Code" shall mean the Internal Revenue Code of 1986 as it may be amended from time to time. (d) "Committee" shall mean the Board, or any Committee of two or more Directors that may be designated by the Board to administer the Plan. (e) "Consultant" shall mean any person who is engaged to perform services for the Corporation or its Subsidiaries, other than as an Employee or Director. (f) "Control Person" shall mean any person who, as of the date of grant of an Option, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Corporation or of an y parent or Subsidiary. (g) "Corporation" shall mean Golden Books Family Entertainment, Inc., a Delaware corporation. (h) "Director" shall mean any member of the Board. (i) "Employee" shall mean any full-time employee of the Corporation or its Subsidiaries (including Directors who are otherwise employed on a full-time basis by the Corporation or its Subsidiaries). (j) "Exchange Act" shall mean the Securities Exchange Act of 1934 as it may be amended from time to time. (k) "Fair Market Value" of stock on a given date shall be based upon: (i) if the Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the last sales price or, if unavailable, the average of the closing bid and asked prices per share of the Stock on such date (or, if there was not trading or quotation in the Stock on such date, on the next preceding date on which there was trading or quotation) as provided by one of such organizations; or (ii) if the Stock is not listed on a national securities exchange or quoted in an interdealer quotation system, as determined by the Committee in good faith in its sole discretion. (1) "Grantee" shall mean a person granted an option under the Plan. (m) "ISO" shall mean an Option granted pursuant to the Plan to purchase shares of the Stock and intended to qualify as an incentive stock option under Section 422 of the Code, as now or hereafter constituted. (n) "Non-Employee Director" shall mean a member of the Board who is not an Employee of the Corporation, its Parent or any Subsidiaries. (o) "NQSO" shall mean an option granted pursuant to the Plan to purchase shares of the Stock that is not an ISO. (p) "Options" shall refer collectively to ISOs and NQSOs issued under and subject to the Plan. (q) "Parent" shall mean any parent corporation as defined in Section 424 of the Code. (r) "Plan" shall mean this 1995 Stock Option Plan as set forth herein and as amended from time to time. (s) "Stock" shall mean shares of the Common Stock of the Corporation. (t) "Stock Option Agreement" shall mean a written agreement between the Corporation and the Grantee, or a certificate accepted by the Grantee, evidencing the grant of an Option hereunder and containing such terms and conditions, not inconsistent with the Plan, as the Committee shall a pprove. (u) "Subsidiary" shall mean any corporation with respect to which the Corporation owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation. Section 3. Shares of Stock Subject to the Plan Subject to the provisions of Section 9, the total amount of Stock with respect to which options may be granted under the Plan shall not exceed 5,750,000. Stock issuable under the Plan may be authorized but unissued shares or reacquired shares of Stock. If, prior to exercise, any options are forfeited, lapse or terminate for any reason, the Stock covered thereby may again be available for Option grants under the Plan. Section 4. Administration of the Plan The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Stock Option Agreements thereunder and to make all other determinations necessary or advisable for the administration of the Plan. Any controversy or claim arising out of or related to this Plan or the Options granted thereunder shall be determined unilaterally by, and at the sole discretion of, the Committee. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Corporation, subsidiaries of the Corporation, Grantees, any person claiming any rights under the Plan from or through any Grantee, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. To the extent necessary to comply with Rule 16b-3 under the Exchange Act, determinations concerning Options granted to any person who is subject to Section 16(b) of the Exchange Act shall be made by the Committee, all of whose members shall be "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act. The Committee may delegate to officers or managers of the Corporation or any Subsidiary the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, with respect to persons not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3, if applicable, and other applicable law. Section 5. Types of Options Options granted under the Plan may be of two types: ISOs or NQSOs. The Committee shall have the authority and discretion to grant to an eligible Employee either ISOs, NQSOs or both, but shall clearly designate the nature of each Option at the time of grant in the Stock Option Agreement. Grantees who are not Employees of the Corporation or a Subsidiary on the date an Option is granted shall only receive NQSOs. Section 6. Grant of Options to Employees, Consultants and Non-Employee Directors (a) Employees and Consultants of the Corporation and its Subsidiaries and Non-Employee Directors of the Corporation shall be eligible to receive Options under the Plan. (b) The exercise price per share of Stock subject to an Option granted to an Employee or Consultant shall be determined by the Committee and specified in the Stock Option Agreement, provided, however, that the exercise price of each share subject to an Option shall be not less than (i) in the case of an NQSO, 85%, (ii) in the case of an ISO granted to other than a Control Person, 100%, and (iii) in the case of an ISO granted to a Control Person, 110%, of the Fair Market Value of a share of the Stock on the date such Option is granted. (c) The term of each Option granted to an Employee or Consultant shall be determined by the Committee and specified in a Stock Option Agreement, provided that no Option shall be exercisable more than ten years from the date such Option is granted, and provided further that no ISO gran ted to a Control Person shall be exercisable more than five years from the date of Option grant. (d) Each Non-Employee Director who is elected or appointed as a member of the Board on or after May 8, 1996, upon the date of such election or appointment, shall receive an NQSO to purchase 5,000 shares of Stock, subject to adjustment as provided in Section 9. Each year on the date of the annual meeting of the stockholders of the Corporation subsequent to such election or appointment, each Non-Employee Director shall automatically receive an NQSO to purchase 3,000 shares of Stock, subject to adjustment as provided in Section 9. The exercise price per share of Stock subject to each NQSO granted under this Section 6(d) shall equal 100% of the Fair Market Value of the Stock on the date such NQSO is granted. No NQSO granted under this Section 6(d) shall be exercisable after the expiration of ten years from the date such NQSO is granted. (e) The Committee shall determine and designate from time to time Employees or Consultants who are to be granted options, and shall specify in the Stock Option Agreement the nature of each Option granted and the number of shares of Stock subject to each such Option, provided, however, that in any calendar year, no Employee or Consultant may be granted an Option to purchase more than 1,500,000 shares of Stock (determined without regard to when such Option is exercisable), subject to adjustment pursuant to Section 9. (f) Notwithstanding any other provisions hereof, the aggregate Fair Market Value (determined at the time the ISO is granted) of the Stock with respect to which ISOs are exercisable for the first time by any Employee during any calendar year under all plans of the Corporation and any P arent or Subsidiary corporation shall not exceed $100,000. To the extent the limitation set forth in the preceding sentence is exceeded, the Options with respect to such excess all be treated as NQSOs. (g) The Committee shall determine whether any Option granted to an Employee or Consultant shall become exercisable in one or more installments and specify the installment dates in the Stock Option Agreement and, with respect to any outstanding option, the Committee may, at any time or upon the occurrence of any event, accelerate the exercisability of any such installment. The Committee may also specify in the Stock Option Agreement such other provisions, not inconsistent with the terms of this Plan, as it may deem desirable, including such provisions as it may deem necessary to qualify any ISO under the provisions of Section 422 of the Code. (h) The Committee may, at any time, grant new or additional options to any eligible Employee or Consultant who has previously received options under this Plan, or options under other plans, whether such prior options or other options are still outstanding, have been exercised previously in whole or in part, or have been canceled. The exercise price of such new or additional options may be established by the Committee, subject to Section 6(b) hereof, without regard to such previously granted Options or other options. Section 7. Exercise of Options (a) A Grantee shall exercise an Option by delivery of written notice to the Corporation setting forth the number of shares with respect to which the Option is to be exercised, together with cash, certified check, bank draft, wire transfer, or postal or express money order payable to the order of the Corporation for an amount equal to the Option price of such shares and any income tax required to be withheld. The Committee may, in its sole discretion, permit a Grantee to pay all or a portion of the exercise price by delivery of Stock or other property (including notes or other contractual obligations of Grantees to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Stock will be delive red or deemed to be delivered to Grantees. (b) Except as provided pursuant to Section 8(a), no option granted to an Employee or Consultant shall be exercised unless at the time of such exercise the Grantee is then an Employee or Consultant of the Corporation or a Subsidiary. (c) The number of shares of Stock which are issued pursuant to the exercise of an Option shall be charged against the maximum limitation on shares set forth in Section 3 hereof. Section 8. Exercise of Options upon Termination (a) Unless otherwise determined by the Committee and specified in the Stock Option Agreement, upon the termination of a Grantee"s relationship with the Corporation and its Subsidiaries, the period during which such Grantee may exercise any outstanding and then exercisable installments of his Options shall not exceed: (i) if such termination is due to death, 90 days from the date of such termination, and (ii) in all other cases, 30 days from the date of such termination, provided, however, that in no event shall the period extend beyond the expiration of the Option term. Notwithstanding the foregoing, all Options shall immediately terminate upon a termination of a Grantee"s employment if the Committee determines, in its sole discretion, that such termination is for Cause. (b) Unless otherwise determined by the Committee and specified in the Stock Option Agreement, in no event shall any Option be exercisable for more than the maximum number of shares that the Grantee was entitled to purchase at the date of termination of the relationship with the Corpor ation and its Subsidiaries. (c) The sale of any Subsidiary shall be treated as a termination of employment with respect to any Grantee employed by such Subsidiary. (d) Subject to the foregoing, in the event of death, Options may be exercised by a Grantee"s legal representative. Section 9. Adjustment Upon Changes in Capitalization In the event of any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Optionees under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock deemed to be available thereafter for grants of Options under Section 3, (ii) the number and kind of shares of Stock that may be delivered or deliverable in respect of outstanding Options, (iii) the number of shares with respect to which Options may be granted to a given Grantee in the specified period as set forth in Section 6(e), and (iv) the exercise price (or, if deemed appropriate, the Committee may make provision for a cash payment with respect to any outstanding Option). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Options (including, without limitation, cash payments in exchange for an Option or substitution of Options using stock of a successor or other entity) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence) affecting the Corporation or any Subsidiary or the financial statements of the Corporation or any Subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. Section 10. Restrictions on Issuing Shares The Corporation shall not be obligated to deliver Stock upon the exercise or settlement of any Option or take other actions under the Plan until the Corporation shall have determined that applicable federal and state laws, rules, and regulations have been complied with and such approvals o f any regulatory or governmental agency have been obtained and contractual obligations to which the option may be subject have been satisfied. The Corporation, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any federal or state law, rule, or regulation as the Corporation may consider appropriate, and may require any Grantee to make such repres entations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock under the Plan. Section 11. Tax Withholding The Corporation shall have the right to require that the Grantee make such provision, or furnish the Corporation such authorization, necessary or desirable so that the Corporation may satisfy its obligation, under applicable laws, to withhold or otherwise pay for income or other taxes of the Grantee attributable to the grant or exercise of Options granted under the Plan or the sale of Stock issued with respect to Options. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Grantee"s tax obligations. Section 12. Transferability No Option shall be subject to anticipation, sale, assignment, pledge, encumbrance, charge or transfer except by will or the laws of descent and distribution, and an Option shall be exercisable during the Grantee"s lifetime only by the Grantee, provided, however, that the Committee may perm it a Grantee to transfer an Option to a family member or a trust created for the benefit of family members. In the case of such a transfer, the transferee"s rights and obligations with respect to the Option shall be determined by reference to the Grantee and the Grantee"s rights and obligations with respect to the Option had no transfer been made. Notwithstanding such transfer, the Grantee shall remain obligated pursuant to Section 11 if required by applicable law. Section 13. General Provisions (a) Each Option shall be evidenced by a Stock Option Agreement. The terms and provisions of such Stock Option Agreements may vary among Grantees and among different Options granted to the same Grantee. (b) The grant of an Option in any year shall not give the Grantee any right to similar grants in future years, any right to continue such Grantee"s employment relationship with the Corporation or its Subsidiaries, or, until such Option is exercised and share certificates are issued, any rights as a Stockholder of the Corporation. All Grantees shall remain subject to discharge to the same extent as if the Plan were not in effect. (c) No Grantee, and no beneficiary or other persons claiming under or through the Grantee shall have any right, title or interest by reason of any Option to any particular assets of the Corporation or its Subsidiaries, or any shares of Stock allocated or reserved for the purposes of t he Plan or subject to any Option except as set forth herein. The Corporation shall not be required to establish any fund or make any other segregation of assets to assure the payment of any option. (d) The issuance of shares of Stock to Grantees or to their legal representatives shall be subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof. Section 14. Amendment or Termination The Board may, at any time, alter, amend, suspend, discontinue or terminate this Plan; provided, however, that no such action shall adversely affect the rights of Grantees to Options previously granted hereunder and, provided further, however, that any shareholder approval necessary or desirable in order to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or other applicable law or regulation) shall be obtained in the manner required therein. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Option theretofore granted and any Stock Option Agreement relating thereto; provided, however, that, without the consent of an affected Grantee, no such action may materially impair the rights of such Grantee under such Option. Notwithstanding anything to the contrary herein, the provisions of Section 6(d) shall not be amended more than once every six months other than to comport with changes in the Code, ERISA, or the rules thereunder. Section 15. Effective Date of Plan This Plan is effective upon its adoption by the Board, conditional upon approval of the Corporation"s stockholders. No ISO may be granted more than ten years after such date. EX-10.16 4 AMENDMENT NO. 1 TO RICHARD E. SNYDER'S AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDMENT to the Amended and Restated Employment dated as of the 20th day of August, 1996 between Golden Books Family Entertainment, Inc., a Delaware Corporation (the "Company") and Richard E. Snyder (the "Executive"). WHEREAS, the Company and the Executive entered into an employment agreement on May 8, 1996, which employment agreement was amended and restated pursuant to the Amended and Restated Employment Agreement dated as of the 20th day of August, 1996 (the "Employment Agreement"); and WHEREAS, the Company and the Executive now desire to enter into this Amendment to amend the Employment Agreement upon the terms, and subject to the conditions, set forth herein; NOW, THEREFORE, based on the above premises and in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Employment Period. Executive's employment period as set forth in Section 2 of the Employment Agreement is hereby extended, and will end on the seventh anniversary of the Closing Date. 2. Compensation. Executive's Annual Base Salary, as set forth in Section 3(b)(i) of the Employment Agreement, is hereby increased to $950,000, retroactive to January 1, 1997. In addition, upon the execution of this Amendment, Executive shall receive a signing bonus of $500,000, payable on the date hereof. 3. Exchange Option Agreement. Notwithstanding anything to the contrary in the Executive Officer Bonus Plan (the "Plan"), Section 4 of The Exchange Option Agreement between the Executive and the Company dated as of May 13, 1997 is hereby amended to provide that the Exchange Options granted thereu under, once vested pursuant to Section 4 of the Exchange Option Agreement and the terms of the Plan, will remain exercisable after Executives death or Retirement, or the termination of his employment by reason of Disability or Change of Control, until May 13, 2007. 4. Certain Terms. All capitalized terms used herein and not defined shall have the meanings given to them in the Employment Agreement, except that capitalized terms used in paragraph 3 above and not defined shall have the meanings given to them in the Exchange Option Agreement. IN WITNESS WHEREOF, the Executive has hereunder set the Executive's hand and the Company has caused these presents to be executed in its name on its behalf, all as of this 9th day of September, 1997. RICHARD E. SNYDER /s/ Richard E. Snyder ---------------------- GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. /s/ Philip E. Rowley --------------------- EX-10.20 5 EMPLOYMENT AGREEMENT DATED AS OF JULY 28, 1997 EMPLOYMENT AGREEMENT AGREEMENT by and between Golden Books Publishing Company, Inc. (the "Company"), and Richard K. Collins (the "Executive"), effective as of July 28, 1997 (the "Effective Date"). 1. Employment Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to continue within the employ of the Company, commencing on the Effective Date and continuing through and including December 31, 2000, unless terminated earlier in accordance with Section 4 below (the "Employment Term"). 2. Title, Reporting and Duties. (a) As of the Effective Date and for the remainder of the Employment Term, the Executive shall serve as the Company's Executive Vice President, Director of Sales and Retail Marketing, Golden Books Children's Publishing Group, with such duties, responsibilities and authorities as shall be consistent therewith in the reasonable judgment of the Company. The Executive shall report to the President of Golden Books Children's Publishing Group. The Executive shall be based in New York, New York. (b) During the Employment Term, and excluding any periods of vacation, holiday and sick leave to which the Executive is entitled, the Executive agrees to devote full time during normal business hours to the business and affairs of the Company and to use the Executive's best efforts to perform faithfully and efficiently such responsibilities. 3. Compensation and Benefits. (a) Base Salary. During the Employment Term, the Executive shall receive a minimum annual base salary ("Annual Base Salary") of $212,000. The Annual Base Salary shall be paid in equal biweekly installments. The Company and the Executive agree to meet on an annual basis, at a date mutually convenient to both on or around the anniversary of this Agreement, to review Executive's Annual Base Salary; provided that this agreement to meet shall create no additional obligation or duty on the part of either party hereto with respect to Executive's Annual Base Salary. (b) Annual Bonus. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year during the Employment Term, an annual bonus (the "Annual Bonus") pursuant to the Company's annual incentive plans (the "Annual Plans", which term includes, as of the date hereof, the Company's Executive Officer Bonus Plan). The Executive shall have a target Annual Bonus of 100% of his Annual Base Salary earned in such year (the "Target Bonus"), subject in each case to attainment of the performance goals set forth in the Annual Plans (provided that the Executive's target Annual Bonus for 1997 shall be computed pro rata based on his actual salary earned during the year). 1 Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Notwithstanding the above, it is the intent of the parties hereto that the Annual Plans meet all applicable requirements for the exemption of the payments thereunder from the limitations of Section 162(m) of the Internal Revenue Code of 1986, as amended, including the requirement that the Annual Plans be approved by the shareholders of the Company prior to the payment of any bonuses thereunder. The Board may award the Executive bonuses other than pursuant to the Annual Plans in its discretion. (c) Stock Options. The Executive will be granted, as of the Effective date hereof, a stock option (the "Option") to purchase 25,000 shares of the common stock ("Stock") of Golden Books Family Entertainment, Inc. The parties agree that the Company's Board of Directors and the Compensation Committee shall take all action necessary to effectuate such Option grant. The exercise price with respect to each share of Stock subject to the Option will be the last transaction price of the Stock on the NASDAQ market on the Effective Date. The Option will become exercisable as to one-third of the shares of Stock subject thereto on the first anniversary of the date of grant, as to an additional one-third of such shares on the second anniversary of the date of grant and as to an additional one-third of such shares on the third anniversary of the date of grant. The Option will have a term of seven years (the "Option Term"). Upon the termination of Executive's employment: (1) by reason of death, the Executive's estate may exercise the Option (to the extent exercisable at the time of death) until the earliest of one year following the Executive's death or the end of the Option Term, following which time the Option shall terminate and be no longer exercisable; (2) by the Company for "cause" (except the Executive's disability) or by the Executive voluntarily without "good reason" (as each such term is defined in Section 4 below), the Option shall terminate and no longer be exercisable on the date the Executive is advised by the Board that he is being terminated for cause, or the effective date of the Executive's voluntary termination without good reason, as applicable; or (3) by the Company without Cause or by the Executive with good reason, or because of the Executive's disability, the entire Option shall become fully and immediately exercisable and the Executive may exercise the Option until the earliest of one year following the Executive's termination or the end of the Option Term, following which time the Option shall terminate and be no longer exercisable. The Executive shall be entitled to participate in other Company stock option grants or other equity plans or programs, if any, in which comparable executives of the Company are eligible to participate generally as may be determined by the Compensation Committee, including, without 2 limitation, the Exchange Option Program pursuant to the Executive Officer Bonus Plan. Other than as stated above, the Option will be governed by the terms and conditions of the Company's Stock Option Plan and the standard Stock Option Agreement thereunder to be executed by the Executive and the Company. (d) Incentive, Savings and Retirement Plans. During the Employment Term, the Executive shall be eligible to participate in all incentive, savings and retirement plans, practices, policies and programs, if any, that are applicable generally to other comparable executives of the Company and its affiliated companies. The Company intends to establish incentive, savings and retirement plans that are comparable in level of benefits to such plans as generally exist in the Company's industry. It is acknowledged that the Executive's participation in these plans shall be consistent with an executive of his stature in the Company and in the Company's industry. (e) Welfare Benefit Plans. During the Employment Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee term life, group life, accidental death and travel accident insurance plans and programs, if any) that are applicable generally to other comparable executives of the Company and its affiliated companies (including, without limitation, the Company's 1997 Executive Benefit Program). The Company intends to establish new welfare benefit plans that are comparable in level of benefits to such plans as generally exist in the Company's industry. It is acknowledged that the Executive's level of participation in these plans shall be consistent with an executive of his stature in the Company and in the Company's industry. (f) Expenses. During the Employment Term, the Company shall pay or promptly reimburse the Executive for all reasonable business expenses upon presentation of receipts therefor in accordance with the normal practices of the Company. (g) Fringe Benefits. During the Employment Term, the Executive shall be entitled to fringe benefits appropriate to an executive of Executive's stature in the Company's industry. The Company shall pay the Executive's reasonable legal fees for preparation and review of this Employment Agreement, and shall reimburse the Executive, up to $7,500.00 per year, for personal tax and legal counsel in connection with the Company stock option plan. Furthermore, the Company shall pay the Executive an annual car and parking allowance of $15,000.00 per year, such amount to be paid with Executive's salary. (h) Vacation and Holidays. During the Employment Term, the Executive shall be entitled to four weeks of paid vacation per year and all other paid holidays, sick and personal days given to employees of the Company. 3 4. Termination of Employment. (a) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the conviction of, or pleading guilty to, a felony or crime involving moral turpitude, or (ii) the Executive's failure to perform, in any material respect, his obligations under this Agreement unless said failure is remedied by the Executive to the Company's satisfaction within twenty (20) days after notice by the Company, which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not performed the Executive's duties (provided that upon such notice, the Executive shall be given an opportunity to meet with the President of Golden Books Publishing Group or other senior management of the Company to discuss the substance thereof); or (iii) a disability that prohibits the Executive from substantially meeting his responsibilities as a senior executive of the Company on a full-time basis for 90 out of 120 consecutive business days. (b) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in each case, without the Executive's prior written consent: (i) the assignment to the Executive of any duties materially inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied by the Company to the Executive's satisfaction within twenty (20) days after receipt of written notice thereof given by the Executive; (ii) any failure by the Company, in any material respect, to comply with any of the compensation and benefits provisions of Section 3 of this Agreement, other than failure not occurring in bad faith and which is remedied by the Company to the Executive's satisfaction within twenty (20) days after receipt of written notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside a twenty-five mile radius of New York, New York; (iv) any failure by the Company to comply with and satisfy any covenant or agreement contained in this Agreement, excluding for this purpose any failure or omission not occurring in bad faith or any action not taken in bad faith and which is remedied by the Company to the Executive's satisfaction within twenty (20) days after receipt of written notice thereof given by the Executive. (c) Death. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. 4 (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with Section 4(a) or 4(b) of this Agreement, respectively), (ii) if the Executive's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death, the Date of Termination shall be the date of death of the Executive. 5. Obligations of the Company Upon Termination. (a) Good Reason; Other Than for Cause. If, during the Employment Term, the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate employment for Good Reason: (i) The Executive shall (a) continue to receive his Annual Base Salary for the balance of the term of this Agreement (the "Continuation Period") and (b) receive a payment, no later than 30 days following the Date of Termination, equal to any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid. Further, during the Continuation Period the Company shall continue to provide the Executive with medical and life insurance benefits at the level such benefits would have been provided to him had his employment not been terminated, subject to the Executive's making any required contributions to the cost thereof at a rate no less favorable than that applicable to active employees of the Company. If within the Continuation Period the Executive obtains other employment, (i) the Company's obligation to pay the Executive's salary will be reduced by 100% of the new compensation earned over the balance of that period, and 5 (ii) the Company's obligation to provide the Executive with medical and life insurance benefits shall be suspended during the period that the Executive is eligible to obtain such benefits from his new employer. Nothing in this paragraph 5 shall be deemed a waiver by Executive of any rights he has or may have under COBRA or ERISA. The Executive agrees to promptly report to the Company any such other employment and the compensation earned by him thereunder during the Continuation Period. In the event of the Executive's death, the Company shall continue to pay his estate his salary at the time of death, through the anniversary of the Effective Date next following the date of death; (ii) on the Date of Termination, all of the Executive's stock options, restricted stock and other stock-based compensation shall become exercisable or vested pursuant to Section 3(c)(3) herein; (iii) the Company shall provide to the Executive six (6) months of executive outplacement service, which service shall be mutually agreed upon by the parties, to assist the Executive in securing employment; and (iv) The Executive shall have the right to approve, such approval not be unreasonably withheld, any written announcement, if any, of the termination of the Executive's employment with the Company. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations, the right to exercise the Executive's Stock Option under Section 3(c)(1) herein, and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (c) Cause; Other Than for Good Reason. If, during the Employment Term, the Executive's employment shall be terminated by the Company for Cause or by the Executive without Good Reason, this Agreement shall terminate without further obligations to the Executive other than the payment of Accrued Obligations, and the payment or provision of Other Benefits. All Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. Upon a termination of the Executive's employment for Cause by the Company or by the Executive without Good Reason, the Executive shall forfeit all stock options that are not vested on the Date of Termination. If the Executive's employment is terminated for Cause, nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Executive. 6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify nor shall anything herein limit or 6 otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. 8. Confidential Information; Non-Solicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) For a period of one year following the termination of the Executive's employment for any reason, the Executive shall not, directly or indirectly, employ or seek to employ any person who is at the Date of Termination, or was at any time within the six-month period preceding the Date of Termination, an employee of the Company or any of its subsidiaries or affiliates or otherwise cause or induce any employee of the Company or any of its subsidiaries or affiliates to terminate such employee's employment with the Company or such subsidiary or affiliate for the employment of another company. 7 9. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's executors, successors and legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Agreement shall not be assignable in the event of insolvency by the Company. 10. Pre-Termination Meeting. (a) On or before June 1, 2000, the Company and the Executive agree to meet to discuss each others intentions with respect to Executive's employment with the Company after the termination of this Agreement; provided, however, that this paragraph shall create no duty or obligation on behalf of either the Company or the Executive with respect to such discussion. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Richard K. Collins 41 Georgian Road Morristown, NJ 07960 If to the Company: Golden Books Family Entertainment, Inc. 850 Third Avenue New York, New York 10022 Attention: General Counsel 8 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 (b) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. GOLDEN BOOKS PUBLISHING COMPANY, INC. By: /s/ Willa Perlman -------------------------------------- /s/ Richard K. Collins ----------------------------------------- Richard K. Collins EX-10.21 6 INDUSTRIAL BUILDING LEASE AGREEMENT INDUSTRIAL BUILDING LEASE (BUILD-TO-SUIT) SECTION 1: BASIC TERMS This Section 1 contains the Basic Terms of this Lease between Landlord and Tenant, named below. Other Sections of the Lease referred to in this Section 1 explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. 1.1 Date of Lease: June 23, 1997 (the "Commencement Date") 1.2 Landlord: First Industrial Development Services Group, L.P., a Delaware limited partnership, its successors or assigns 1.3 Tenant: Golden Books Family Entertainment, Inc., a Delaware corporation 1.4 Premises: See Exhibit "A" 1.5 Lease Term: 15 years 0 months ("Initial Term"), commencing on, with respect to each Building, the date of Substantial Completion of the Improvements as defined in Lease Exhibit C hereto and ending fifteen (15) years after the date of Substantial Completion of the later of such two Buildings or on the expiration date of one or two Renewal Terms (as defined in Section 2.2 below) if properly exercised by Tenant ("Expiration Date"). The Initial Term as it may be extended by the applicable Renewal Term(s) is the "Term". 1.6 Rent Commencement: Tenant's obligation to pay Rent (as defined in Section 2.3 below), under this Lease shall commence on the date on which, pursuant to Exhibit "C", the Printing Facility is deemed Substantially Completed which amount of Rent shall be increased to include the square footage of the Office Facility due to the Substantial Completion of the Office Building which increase shall be effective on the date on which, pursuant to Exhibit "C" the Office Building is deemed Substantially Complete. The calculation and determination of Rent is set forth in Exhibit B and elsewhere in the Lease. 1.7 Permitted Uses: (See Section 4) light manufacturing, assembly, warehousing, printing and distribution and general office use, all as consistent with applicable laws, rules, codes and regulations. 1.8 Tenant's Guarantor: (if none, so state) None 1.9 Brokers: (See Section 22; if none, so state) (A) Tenant's Broker: The Georgetown Group ("Georgetown"). (B) Landlord's Broker: Mooney LeSage Group. 1.10 Security Deposit: (See Section 4) None 1.11 Rent Payable by Tenant: See Exhibit "B" and Section 2.3 hereof 1.12 Riders to Lease: The following riders are attached to and made a part of this Lease. (If none, so state) Exhibits A, A-1, A-2, B, C, C-1, C-2, C-3, C-4, C-5, D, E, F, G, H and I. SECTION 2: LEASE OF PREMISES; RENT 2.1 Lease of Premises for Lease Term. Landlord hereby leases the Premises to Tenant, and Tenant hereby rents the Premises from Landlord, for the Term and subject to the conditions of this Lease. 2.2 Renewal Term. Provided that this Lease is in full force and effect and Tenant is not in default (beyond any applicable notice and cure periods) under the terms of this Lease, and the Premises are occupied by the original Tenant named herein (or Landlord has approved the entity to whom this Lease has been assigned or sublet or any other entity for which Landlord's approval is not required ), Landlord hereby grants to Tenant the option to extend the Term of this Lease on the same terms, conditions and provisions as contained in this Lease, except as otherwise provided herein, for two (2) periods of five (5) years (each, a "Renewal Term"). In order to exercise said option Tenant must give Landlord written notice (an "Extension Notice") of such renewal not less than 270 days prior to the Expiration Date of the Initial Term, or first Renewal Term, as the case may be. The annual Net Base Rent (as hereinafter defined) of the Premises during the Renewal Term(s) shall be equal to the greater of (a) ninety-five percent (95%) of the Market Rental Rate (as hereinafter defined) and (b) ninety-five percent (95%) of the annual Net Base Rent in effect for the 12 month period immediately preceding the commencement of applicable Renewal Term. "Market Rental Rate" shall mean the annual rate of Net Base Rent then prevailing in the market as reasonably determined by Landlord, for premises comparable in square footage, location and type to the Premises being leased for a duration comparable to the applicable period for which the Premises is then to be leased. The Market Rental Rate shall be determined by taking into consideration comparable relevant fact situations involving arm's length negotiations in new and renewal leases during the twelve (12) month period, or more recent relevant period prior to the applicable Renewal Term. Within sixty (60) days following Tenant's notice to Landlord of the exercise of its option to extend the Term for the applicable Renewal Term, Landlord shall notify Tenant of Landlord's determination of the Market Rental Rate for the Premises for the applicable Renewal Term. Tenant shall have fifteen (15) days following receipt of Landlord's determination in which to accept or reject such determination. If Tenant does not notify Landlord of its acceptance of the determination within such fifteen (15) day period, Tenant shall be deemed conclusively to have accepted the Market Rental Rate set forth therein. If Tenant timely notifies Landlord that g Tenant rejects Landlord's determination which notice from Tenant shall set forth Tenant's determination of Market Rental Rate and if Landlord and Tenant in good faith cannot agree upon the Market Rental Rate within ten (10) days following Tenant's rejection of Landlord's determination, then such dispute shall be determined by arbitration as hereinafter provided. Landlord and Tenant will each select an arbitrator who shall be disinterested and shall be a person that has been actively engaged in the development or leasing of industrial and manufacturing buildings for a period not less than seven (7) years immediately preceding his or her appointment. Landlord and Tenant shall each simultaneously submit to the arbitrators a determination of Market Rental Rate (if no submittal is made, the parties shall be deemed to have submitted their original determinations). The arbitrators shall be directed as promptly as possible to select from the two determinations submitted by Landlord and Tenant the one that is closer to the Market Rental Rate as determined by the arbitrators, and said selection shall thereafter be deemed the Market Rental Rate. In determining the appropriate Market Rental Rate, the arbitrators shall be entitled to rely on such factors as they deem appropriate in determining the relevant geographic market, if any, and what constitutes comparable premises or circumstances. If the two arbitrators so appointed fail to agree as to which of the determinations submitted by Landlord and Tenant is closest to the actual Market Rental Rate, the two arbitrators shall appoint a third arbitrator, using the criteria described above, to decide upon which of the two determinations submitted is closest to the actual Market Rental Rate. The cost of the foregoing arbitration process shall be borne by the losing party. If no determination is made prior to the date for commencement of payment of rent for which Market Rental Rate must be determined, then Landlord's determination shall be used until the arbitration is completed. If Tenant's determination is later selected, Landlord shall promptly refund any overpayments to Tenant together with interest thereon at 6% per annum. 2.3 Types of Rental Payments. Commencing on the Rent Commencement Date, Tenant shall pay rents of (a) net base rent ("Net Base Rent") payable (1) in monthly installments of the rent determined pursuant to the terms set forth in Exhibit "B" attached hereto with respect to the Initial Term, and (2) in monthly installments of the Net Base Rent as determined pursuant to Paragraph 2.2 hereof with respect to the applicable Renewal Term, if appropriate, in advance, on the first day of each and every calendar month during the Term; (b) except as otherwise specifically provided herein, all costs, expenses and charges of every nature relating to, or incurred in connection with the ownership and operation of the Premises and that are attributable to the Term ("Additional Rent"); and (c) in the event that any two monthly installment[S] of Net Base Rent per 12 month period during the Term are not paid within five (5) days of the date when due, a late charge in an amount equal to four percent (4%) of each subsequent delinquent installment of Net Base Rent that occurs in a two (2) year period after the later of such two delinquencies (the "Late Charge") and (d) an administrative fee (the "Administrative Fee") payable with each installment of Net Base Rent, equal to one percent (1%) of the Net Base Rent due and payable for such month. The Net Base Rent, the Additional Rent, the Late Charge, the Administrative Fee, and any other amounts due and owing by Tenant under this Lease shall collectively be referred to herein as "Rent"). All Rent shall be paid to Landlord c/o First Industrial, L.P., P.O. Box 75631, Chicago, Illinois 60675-5631, or if sent by overnight courier, The Northern Trust Company, 801 South Canal, 4th Floor, Receipt and Dispatch, Chicago, Illinois 60607 Attention: First Industrial, L.P., Lockbox #75631 (or to such other entity designated in writing as Landlord's management agent, if any, and if Landlord so appoints such a management agent, the "Agent"), or pursuant to such other written directions as Landlord shall designate in this Lease or otherwise. Notwithstanding anything contained herein to the contrary, Tenant shall not be obligated to pay as Additional Rent those costs expenses and charges that are specifically designated herein as payable by Landlord, which costs, expenses and charges are specifically defined as the Total Project Costs, the items set forth in Section 13.3 to the extent Landlord is solely responsible therefor, the cost of Landlord's warranty obligations pursuant to Section 7 of Exhibit C hereto and costs to Landlord for Landlord's income taxes or payments due on mortgage and other non-operating related debts of Landlord and income and franchise taxes of Landlord. 2.4 Covenants Concerning Rental Payments. Tenant shall pay the Rent promptly when due, without notice or demand, and without any abatement, deduction or setoff. No payment by Tenant, or receipt or acceptance by Agent or Landlord, of a lesser amount than the correct Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or letter accompanying any payment be deemed an accord or satisfaction, and Agent or Landlord may accept such payment without prejudice to its right to recover the balance due or to pursue any other remedy available to Landlord. If the Rent Commencement Date occurs on a day other than the first day of a calendar month, the Rent due for the partial calendar months occurring at the commencement and the expiration of the Term shall be prorated on a per diem basis. It is intended that the Net Base Rent provided in this Lease shall be an absolute net return to Landlord throughout the Term, unless otherwise expressly set forth in this Lease, free of any and all expenses or charges with respect to the Premises. All costs, expenses and charges of every nature relating to or incurred in connection with, the ownership and operation of the Premises that may be attributable to the Term to Landlord or third parties, as the case may be, will be paid, on a timely basis, by the Tenant, subject only to Landlord's obligations as set forth in Sections 13.3, 17, 18 and Section 7 of Exhibit C (as indicated) hereunder. Tenant hereby indemnifies and holds Landlord and all Landlord Affiliates (defined below) harmless from and against the consequences (excluding consequential and speculative damages) resulting from Tenant's failure, at any time or from time to time, to comply with the preceding obligation. 2.5 Expansion Option. Landlord and Tenant acknowledge that under the Purchase Contract between Landlord and the current owner of the Property (the "Purchase Contract"), Landlord has an option to purchase the Expansion Parcel (hereinafter defined) subject to certain terms and conditions. Provided that this Lease is in full force and effect and Tenant is not in default under the terms of this Lease beyond applicable notice and cure periods, at (a) the date on which Tenant delivers an Expansion Notice (defined below) and (b) at all times prior to, and during, Landlord's construction of improvements on the Expansion Parcel (defined below), and the Premises are occupied by the original Tenant named herein (or a Landlord approved entity to whom this Lease has been assigned or sublet or an entity for which Landlord's approval is not required), Landlord hereby grants to Tenant an option (the "Expansion Option") to expand the Premises onto the parcel adjacent to the Premises described on Exhibit "A-2" attached hereto (the "Expansion Parcel") by directing Landlord to exercise the Expansion Option under the Purchase Contract. The 2 Expansion Option must be exercised by Tenant by written notice to Landlord not less than 270 days prior to November 1, 2000 (the "Expansion Notice"). The terms of the Expansion Option, the respective rights and obligations of Tenant and Landlord with respect thereto and the additional conditions precedent to the development on the Expansion Parcel are set forth on Exhibit "E" hereto. SECTION 3: TAXES AND ASSESSMENTS; ASSOCIATION DUES 3.1 Taxes. Tenant agrees to pay for the Premises (i) all governmental taxes, assessments, fees, penalties and charges of every kind or nature (other than Landlord's income taxes, franchise taxes, mortgage recording taxes and property transfer taxes ), whether general, special, ordinary or extraordinary, due at any time, or from time to time, for any period during the Term and any extensions thereof, in connection with the ownership, leasing or operation of the Premises or of the personal property and equipment located therein or in connection therewith, (ii) all general and special assessments arising under the Declaration (hereinafter defined) or any other document or instrument of record for any period during the Term or any extensions thereof, and (iii) any expenses incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the Premises (the "Taxes"). All such Taxes shall be paid by Tenant directly to the taxing authority, and, to the extent Landlord has supplied Tenant with copies of the tax bills not less than twenty (20) days prior to any delinquency date, before they become delinquent. The Taxes for the first and last year of the Term, will be appropriately prorated. If any general or special assessments, whether ordinary or extraordinary, levied against the Premises are payable in installments, Tenant shall be responsible only for those installments that are attributable to the Term (and any period during which Tenant has possession of the Premises prior to the Term pursuant to Section 4 of Exhibit C). For purposes hereof, Taxes for any year shall be Taxes that are due for payment or paid in that year, rather than taxes that are assessed or become a lien or accrue during such year. If at any time during the Term, the methods of taxation prevailing on the date hereof shall be altered, such additional or substitute tax, assessment, levy, charge or imposition shall be deemed to be included within the term "Taxes" for the purposes hereof. In the event that Tenant shall desire in good faith to contest or otherwise review by appropriate legal or administrative proceeding any Taxes that are not yet due and payable, Tenant shall, at least sixty (60) days prior to the due date of such Taxes, give Landlord written notice of its intention to do so. Tenant may withhold payment of the Tax being contested if, but only if, both (i) nonpayment is permitted during the pendency of such proceedings without the foreclosure of any tax lien or the imposition of any fine or penalty and without prejudice to any rights of Landlord, and (ii) Tenant shall obtain and furnish Landlord with a bond or other security sufficient to protect Landlord's interest in the Premises. Tenant may contest any Taxes that it has previously paid provided that it gives Landlord not less than thirty (30) day prior written notice of such contest. Any such contest shall be prosecuted at Tenant's sole expense. Tenant shall protect, hold harmless and indemnify Landlord against any and all liabilities, cost, penalties, fines, fees, expense or damage (except for consequential and speculative damages) resulting from such contest or other proceeding. At the request of Tenant, Landlord shall join in any tax contest or other tax proceedings which Tenant may desire to bring pursuant to this Section. Tenant shall pay all of Landlord's actual out-of-pocket expenses arising out of such joinder. Within ten (10) days after the final determination of the amount due from Tenant with respect to the Taxes contested, Tenant shall (if not paid previously) pay the amount so determined to be due, together with all costs, expenses and interest, whether or not this Lease shall have then expired or terminated. If such Taxes that were contested were paid by Tenant and any refund is applicable thereto, such refund shall be paid to the Tenant and if the taxing authority issues the refund check to Landlord, Landlord shall promptly pay over such refund to Tenant, after deducting therefrom any costs owed to Landlord hereunder which were not otherwise reimbursed from Tenant. SECTION 4: USE OF PREMISES 4.1 Use of Premises. The Premises shall be used for the purpose(s) set forth in Section 1.7 above and for no other purpose. Tenant shall not, at any time, use or occupy, or suffer or permit anyone to use or occupy, the Premises, or do or permit anything to be done in the Premises, in any manner that may (a) violate any Certificate of Occupancy for the Premises; (b) cause, or be liable to cause, injury to the Premises or any equipment, facilities or systems therein; (c) constitute a violation of the laws and requirements of any public authority, the requirements of insurance bodies or the rules and regulations of the Premises or the requirements set forth in any document or instrument of record, including, without limitation that certain Declaration of Protective Covenants for The Renaissance, as amended (the "Declaration"); (d) impair or tend to impair the character, reputation or appearance of the Premises as a first-class property (it being acknowledged that the publishing, reproduction, distribution, storage or assembly and construction of pornographic materials shall be deemed to impair the character and reputation of the Premises); and (e) impair or tend to impair the proper and economic maintenance, operation, and repair of the Premises and its equipment, facilities or systems. Tenant shall not, at any time, use or occupy, or suffer or permit anyone to use or occupy all or any portion of the Premises as a tannery, brewery, bottling facility, waste disposal plant, food processing, packaging or storage facility or hard manufacturing facility. 4.2 Signage. Landlord and Tenant shall agree to Tenant's signage for the Premises subject to any approvals required by laws, rules, regulations or the Declaration. Tenant shall not modify such signage or affix any additional sign of any size or character to any portion of the Premises without the prior written approval of Landlord, which approval shall not be unreasonably withheld subject to any approvals required by laws, rules, regulations or the Declaration. Except to the extent that such logo fails to comply with any laws, ordinances, regulations or restrictions applicable thereto, Landlord hereby pre-approves the use of Tenant's corporate logo in any signage otherwise approved for use on the Premises or the Property. Tenant's signage shall comply with all applicable laws, ordinances, rules, regulations or restrictions applicable thereto. Tenant shall remove all signs of Tenant upon the expiration or earlier termination of this Lease and immediately repair any damage to the Premises caused by, or resulting from, such removal. 3 SECTION 5: CONDITION AND DELIVERY OF PREMISES 5.1 Condition of Premises. Landlord shall deliver the applicable portion of the Premises to Tenant in a Substantially Completed condition, substantially consistent with the Final Plans and Specifications (excluding any Tenant's Work described therein) as revised by change orders or Tenant's Extra Work, subject to Tenant's "punch list" (all as defined and further described in Exhibit C attached hereto). Except as otherwise expressly provided herein, neither Landlord nor Agent shall be obligated to make any repairs, replacements or improvements (whether structural or otherwise) of any kind or nature to the Premises in connection with, or in consideration of, this Lease. 5.2 Delay in Commencement. Except as otherwise provided in Exhibit C, Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Printing Facility or the Office Building to Tenant on or before the Printing Facility Delivery Date and the Office Building Delivery Date, respectively (as such terms are defined in Lease Exhibit C) therefor. The obligations of Tenant under the Lease shall not thereby be affected, except that the Rent Commencement Date shall be delayed until Landlord satisfies the requirements for the Rent Commencement Date pursuant to the terms of Exhibit C hereof. SECTION 6: SUBORDINATION; NOTICES TO SUPERIOR LESSORS AND MORTGAGEES; ATTORNMENT 6.1 Subordination of Lease. This Lease, and all rights of Tenant hereunder, are subject and subordinate to all ground leases of the Premises now or hereafter existing and to all mortgages or trust deeds or deeds of trust (all of which are hereafter referred to collectively as "Mortgages"), that may now or hereafter affect or encumber all or any portion of Landlord's interest in the Premises; provided, however, that no such subordination shall apply to Tenant unless and until a reasonable nondisturbance agreement, has been executed by the holder(s) of any such Mortgages in recordable form and delivered to Tenant in form acceptable for recordation, together with any reasonable documentation required to place third parties on notice thereof (including, without limitation, a memorandum of lease, if necessary). Landlord represents and warrants that, at the time of the commencement of the Term, no Mortgages which are superior to this Lease will encumber the Premises unless such a nondisturbance agreement has been so executed and delivered to Tenant in form acceptable for recordation, together with any reasonable documentation required to place third parties on notice thereof (including, without limitation, a memorandum of lease, if necessary). This subordination shall apply to each and every advance made, or to be made, under such Mortgages; to all renewals, modifications, replacements and extensions of such Mortgages; and to "spreaders" and consolidations of such Mortgages. Without limitation on Landlord's obligation to provide a nondisturbance agreement in form reasonably acceptable to Tenant as a pre-condition of the effectiveness of any subordination of this Lease, this Section 6.1 shall be self-operative and no further instrument of subordination shall be required; however, in confirmation of such subordination, Tenant shall from time to time, and in any event within twenty (20) days after Landlord's request therefor, execute, acknowledge and deliver any instrument that Landlord may from time to time reasonably require in order to evidence or confirm such subordination; provided, that such instrument shall include a provision, reasonably satisfactory to Tenant, that Tenant's possession under this Lease shall not be disturbed in the event of a foreclosure of the Mortgage as long as Tenant is not in default under the Lease beyond applicable notice and cure periods. Tenant acknowledges that this Lease may be assigned by Landlord to a superior mortgagee as additional collateral security for the loans secured by the Superior Mortgage (defined below) held by such Superior Mortgagee. Any ground lease to which this Lease is subject and subordinate is hereinafter referred to as a "Superior Lease," the lessor under a Superior Lease is hereinafter referred to as a "Superior Lessor," and the lessee thereunder, a "Superior Lessee"; and any Mortgage to which this Lease is subject and subordinate is hereinafter referred to as a "Superior Mortgage," and the holder of a Superior Mortgage is hereinafter referred to as a "Superior Mortgagee." Notwithstanding the foregoing, this Lease may be made senior to the lien of any Superior Mortgage, if and only if the Superior Mortgagee thereunder so requests. 6.2 Notice in the Event of Default. In the event that Landlord breaches or otherwise fails to timely perform any of its obligations under this Lease, Tenant shall give written notice of such alleged breach or default to Landlord and to each Superior Mortgagee and Superior Lessor whose name and address shall previously have been furnished, in writing, to Tenant, whereupon any or all of Landlord, a Superior Mortgagee or Superior Landlord may remedy or cure such breach or default within thirty (30) days following the giving of such notice; provided, however, that said thirty (30)-day cure period shall be automatically extended in the event that the breach or default cannot, by its nature, be cured within thirty (30) days and one or more of Landlord, the Superior Mortgagee or the Superior Lessor is diligently proceeding to cure said default. 6.3 Successor Landlord. If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord hereunder, then, at the request of such party (hereinafter referred to as "Successor Landlord"), Tenant shall attorn to and recognize each Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument such Successor Landlord may reasonably request to further evidence such attornment, provided that any such Successor Landlord provides Tenant with a nondisturbance agreement as described in Section 6.1 hereto. Tenant hereby acknowledges that in the event of such succession, then from and after the date on which the Successor Landlord acquires Landlord's rights and interest under this Lease (the "Succession Date"), the rights and remedies available to Tenant under this Lease with respect to any obligations of any Successor Landlord shall be limited to the equity interest of the Successor Landlord in the Premises; and the Successor Landlord shall not (a) be liable for any act, omission or default of Landlord or other prior lessor under this Lease if and to the extent that such act, omission or default occurs prior to the Succession Date; (b) except as otherwise expressly required hereunder, be required to make or complete any tenant improvements or capital improvements, or to repair, restore, rebuild or replace the Premises or any part thereof in the event of damage, casualty or condemnation, provided that Successor Landlord shall be liable for obligations of Landlord arising prior to the Substantial Completion of the Printing Facility and the Office Building, as such terms are defined on Exhibit C hereto; or (c) be required to pay any amounts to Tenant that are due and payable, under the express terms of this Lease, prior to the Succession Date. Additionally, from and after the Succession Date, 4 Tenant's obligation to pay Rent (as provided in Sections 2 and 3 hereof) shall not be subject to any abatement, deduction, set-off or counterclaim against the Successor Landlord that arises as a result of, or due to, a default of Landlord or any other lessor that occurs prior to the Succession Date. Moreover, no Successor Landlord shall be bound by any advance payments of Rent made prior to the calendar month in which the Succession Date occurs, nor by any Security that is not actually delivered to, and received by, the Successor Landlord. SECTION 7: QUIET ENJOYMENT Subject to the provisions of this Lease, so long as Tenant is not in default hereunder beyond applicable notice and cure periods, Tenant shall not be disturbed in its possession of the Premises by Landlord, Agent or any other person lawfully claiming through or under Landlord. This covenant shall be construed as a covenant running with the land of the Premises and is not a personal covenant of Landlord. SECTION 8: ASSIGNMENT, SUBLETTING AND MORTGAGING 8.1 Prohibition. Tenant acknowledges that this Lease and the Rent due under this Lease have been agreed to by Landlord in reliance upon Tenant's reputation and creditworthiness and upon the continued operation of the Premises by Tenant for the particular use set forth in Section 4 above; therefore, Tenant shall not, whether voluntarily, or by operation of law, or otherwise: (a) assign or otherwise transfer this Lease (except to an entity having a net worth at least equal to Tenant's net worth, as of the date hereof, a certification as to which was provided by Tenant in favor of Landlord as of the date hereof, ("Tenant's Net Worth") and which entity proposes to engage in a use allowed pursuant to Section 1.7, in which case Tenant shall provide Landlord with not less than thirty (30) days prior written notice of such assignment including, a certification as to such assignee's net worth and proposed use executed by Tenant and assignee, but need not obtain Landlord's consent); (b) sublet the Premises or any part thereof, or allow the same to be used or occupied by anyone other than Tenant; provided, however, that Tenant may, without the necessity of Landlord's consent and upon not less than thirty (30) days prior written notice to Landlord identifying the sublessee and terms of the sublease, sublet (i) up to twenty-five percent (25%) of the Premises to not more than two (2) sublessees who propose(s) to engage in a use allowed pursuant to Sections 1.7 and 4.1; or (ii) to a single entity with a net worth at least equal to Tenant's Net Worth provided that Tenant provides a written certification executed by Tenant and the sublessee together with its notice of its intention to sublet certifying as to such sublessee's net worth; or (c) mortgage, pledge, encumber, or otherwise hypothecate this Lease or the Premises, or any part thereof, in any manner whatsoever, without in each instance obtaining the prior written consent of Landlord, which consent may be withheld for any or no reason to the extent that an assignee or sublessee's proposed use of the Premises is not a permitted use pursuant to Section 1.7 or prohibited by Section 4.1, but shall not otherwise be unreasonably withheld. Any purported assignment, mortgage, transfer, pledge or sublease made without the prior written consent of Landlord shall be absolutely null and void and of no legal force or effect. No assignment of this Lease shall be effective and valid unless and until the assignee executes and delivers to Landlord any and all documentation reasonably required by Landlord in order to evidence assignee's assumption of all obligations of Tenant hereunder. Any consent by Landlord to a particular assignment, sublease or mortgage shall not constitute consent or approval of any subsequent assignment, sublease or mortgage, and Landlord's written approval shall be required in all such instances. Any consent by Landlord to any assignment or sublease shall not be deemed to release Tenant from its obligation hereunder and Tenant shall remain fully liable for performance of all obligations under this Lease. Landlord shall not be deemed to have unreasonably withheld its consent to a proposed assignment of this Lease or to a proposed sublease of part or all of the Premises if its consent is withheld because: (i) Tenant is then in default hereunder beyond applicable notice and cure periods; (ii) either the portion of the Premises which Tenant proposes to sublease, or the remaining portion of the Premises, or means of ingress or egress to either the portion of the Premises which Tenant proposes to sublease or the remaining portion of the Premises, or the proposed use of the Premises or any portion thereof by the proposed assignee or subtenant, (A) will violate any laws or (B) will impose any obligation upon Landlord or increase Landlord's obligations under any laws to the extent that the cost of such increased obligation is not passed through to Tenant or such subtenant or assignee; (iii) the proposed assignee or subtenant is not sufficiently financially responsible to perform its obligations under the proposed assignment or sublease; or (iv) the proposed assignee or subtenant is a government (or subdivision or agency thereof); provided, however, that the foregoing are merely examples of reasons for which Landlord may withhold its consent and shall not be deemed exclusive of any permitted reasons for reasonably withholding consent, whether similar or dissimilar to the foregoing examples. 8.2 Rights of Landlord. If this Lease is assigned, or if the Premises (or any part thereof) are sublet or used or occupied by anyone other than Tenant, if Tenant is in violation of this Lease, Landlord or Agent may (without prejudice to, or waiver of its rights), collect rent from the assignee, subtenant or occupant. If Landlord or Agent collects such rent, Landlord or Agent may apply the net amount collected to the Rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of this Section 8. With respect to the allocable portion of the Premises sublet, in the event that the total rent and any other considerations (whether cash or non-cash) received under any sublease by Tenant is greater than the total Rent required to be paid, from time to time, under this Lease, Tenant shall pay to Agent 50% of such excess as received from any subtenant and such amount shall be deemed a component of the Additional Rent due under this Lease. In determining the amount of such excess, there shall be deducted, any and all reasonable costs of Tenant directly incurred in connection with that sublease, including, but not limited to, leasing commissions, advertising costs, attorney's fees and build-out and improvement costs. 8.3 Permitted Transfers. The provisions of Section 8.1(a) shall apply to a transfer of a majority of the voting stock of Tenant or to any other change in voting control of Tenant (if Tenant is a corporation), or to a transfer of a majority of the general partnership interests in Tenant or managerial control of Tenant (if Tenant is a partnership), or to any comparable transaction involving any other form of business entity, whether effectuated in one (1) or more transactions, as if such transfer were an assignment of this Lease; but said provisions shall not apply to a transfer to a corporation into or with which Tenant is merged or consolidated, or to which substantially all of Tenant's assets are 5 transferred, or to any corporation that controls or is controlled by Tenant, or is under common control with Tenant, provided in any of such events (a) the successor to Tenant has a net worth (computed in accordance with generally accepted accounting principles), at least equal to the greater of (i) the net worth of Tenant immediately prior to such merger, consolidation or transfer or (ii) Tenant's Net Worth and (b) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction to the extent reasonably practicable, but in no event less than ten (10) days after the effective date of such transaction. Tenant may assign this Lease or sublet all or some portion of the premises to a subsidiary or affiliate of Tenant or an entity controlled by or under common control with Tenant (a "Tenant's Affiliate") without the necessity of obtaining Landlord consent so long as it provides Landlord with not less than thirty (30) days prior written notice; provided, however, that Tenant shall remain liable hereunder and the provisions of Section 8.1(a) shall continue to apply to a transfer of a majority of the voting stock of Tenant or to any other change in voting control of Tenant, whether effectuated in one (1) or more comparable transactions, as if such transfer were an assignment of this Lease; but the provisions of Section 8.1(a) shall not apply to a corporation into or with which Tenant is merged or consolidated, or to which substantially all of Tenant's assets are transferred, or to any corporation that controls or is controlled by Tenant, or is under common control with Tenant, provided that the conditions set forth in items (a) and (b) of the preceding sentence are satisfied. The provisions of this Section 8.3 shall not restrict a transfer of the voting stock of Tenant when Tenant is a corporation, the outstanding stock of which is listed on a recognized security exchange. Any such permitted transferee shall execute and deliver to Landlord any and all documentation reasonably required by Landlord in order to evidence assignee's assumption of all obligations of Tenant hereunder. SECTION 9: COMPLIANCE WITH LAWS If any license or permit is required for the conduct of Tenant's business in the Premises, Tenant, at its expense, shall procure such license or permit, and shall maintain in good standing and renew such license or permit, including, without limitation, those relating to compliance with environmental regulations or laws. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any law or requirement of any governmental or administrative authority with respect to the Premises or the use or occupation thereof. Tenant shall, at Tenant's expense, comply with all laws and requirements of any governmental or administrative authorities and any requirements imposed by any document or instrument of record, including the Declaration, that impose any duty on Landlord, Agent or Tenant arising from Tenant's actions regarding its business operations or use of the Premises, and Tenant shall pay all expenses, fines and damages that are imposed upon any or all of Landlord, Agent, any Superior Lessee, Superior Lessor or Superior Mortgagee, by reason or arising out of Tenant's failure to fully and promptly comply with and observe the provisions of this Section. In the course of construction of the Landlord's Improvements (exclusive of Tenant's Improvements), Landlord shall perform its obligations pursuant to Section 13.3 hereof and Section 7 of Exhibit C in accordance with all applicable statutes, ordinances and building codes, governmental rules, regulations and orders; provided, however, that Landlord shall have no liability, responsibility or obligation with respect to compliance with statutes, ordinances and building codes, restrictions, governmental rules, regulations and orders applicable to Tenant's Improvements or Tenant's Work Items. In no event shall Landlord be required to obtain on behalf of Tenant any license or permit required for the conduct of Tenant's business and operations in the Premises, including, but not limited to, any air, waste water discharge or any other permits and approvals required to be obtained by Tenant by any governmental authority as a result of the proposed use by Tenant of the Premises or the Tenant's operations at the Premises. In the event that any law or requirement of governmental authority of general applicability requires (i) a change in the structural or mechanical systems of the buildings other than as a result of Tenant's business operations or use of the Premises or (ii) any repairs, additions or improvements in or to the Premises other than as a result of Tenant's business operations or use of the Premises, Landlord shall, at its sole expense, comply with such law or requirement; provided, however, that, upon completion of such changes, Tenant shall reimburse Landlord in equal monthly installments of Additional Rent over the remaining portion of the Term (inclusive of any renewals) for that portion of any and all such costs incurred by Landlord in connection with such changes that are incurred during the Term based upon a reasonable amortization of such costs over their useful life at an interest rate of twelve percent (12%). It is acknowledged and agreed by the parties that to the extent that any changes, repairs, alterations, additions or improvements in or to the Premises, including, but not limited to, the structural and mechanical systems thereof, are required under any law or requirement or any governmental or administrative authority as a result of Tenant's use and occupation of the Premises, such changes, repairs, alterations, additions or improvements shall be made at Tenant's sole cost and expense and in strict accordance with the terms and conditions of this Lease and all such laws and requirements. SECTION 10: INSURANCE 10.1 Tenant Activities. Tenant shall not violate, or permit the violation of, any condition imposed by any insurance policy issued in respect of the Premises and shall not do, or permit anything to be done, or keep or permit anything to be kept in the Premises, that would: (a) unreasonably subject any or all of Landlord, Agent, any Superior Lessor, any Superior Lessee or any Superior Mortgagee to any liability or responsibility for personal injury or death or property damage; (b) result in insurance companies of good standing refusing to insure (or imposing special conditions on insuring for which Tenant does not pay) any or all of the Premises or the property therein, in amounts reasonably satisfactory to Landlord; or (c) result in the cancellation of (or the assertion of any defense by the insurer, in whole or in part, to claims under) any policy of insurance with respect to any or all of the Premises or the property therein. 10.2 Insurance to be Maintained by Tenant. Tenant shall, at its sole cost and expense, at all times during the Term (and any extensions thereof) obtain and pay for and maintain in full force and effect the insurance policy or policies described in Exhibit D attached hereto. Certificates of insurance for all insurance policies required pursuant to this Lease shall be delivered to Landlord not less than ten (10) days after the Commencement Date. If Tenant fails to submit such certificates to Landlord within the specified time, or otherwise fails to obtain and maintain insurance coverages in accordance with this Section 10.2, then Landlord, at Landlord's sole option, may, but shall not be obligated 6 to, procure such insurance on behalf of, and at the expense of, Tenant. Tenant shall reimburse Landlord for such amounts upon demand which amounts shall constitute Additional Rent. SECTION 11: ALTERATIONS 11.1 Procedural Requirements. Tenant may, from time to time, at its expense, make alterations or improvements in and to the Premises (hereinafter collectively referred to as "Alterations"), provided that Tenant first obtains the written consent of Landlord in each instance. Landlord's consent to Alterations shall not be unreasonably withheld, provided that: (a) the structural integrity of the Premises shall not be adversely affected; (b) the Alterations are to the interior of the Premises; (c) the proper functioning of the mechanical, electrical, heating, ventilating, air-conditioning ("HVAC"), sanitary and other service systems of the Premises shall not be adversely affected; (d) Tenant shall have appropriate insurance coverage reasonably satisfactory to Landlord regarding the performance and installation of the Alterations; (e) the Alterations shall conform with all other requirements of this Lease; (f) Tenant shall have provided Landlord with detailed plans (the "Plans") for such Alterations in advance of requesting Landlord's consent, and (g) Tenant complies with the terms of the Declaration with respect to the Alterations and timely obtains any consents required thereunder. Landlord's consent shall not be required for Alterations satisfying clauses (a) through (g) above and costing $75,000 or less in any one instance (up to a maximum aggregate of $75,000 over any consecutive twelve (12) month period); provided, however, that the maximum aggregate amount of Alterations not requiring Landlord's consent during the Initial Term shall not exceed $750,000 and $250,000 during any Renewal Term. Landlord shall not be deemed to have acted unreasonably if it withholds its consent to Alterations because, in Landlord's reasonable opinion, such Alterations could adversely affect the safety of the Premises or its occupants; would materially increase Landlord's cost of satisfying its obligations hereunder or Landlord's ability to furnish services to other future tenants; involves toxic or hazardous materials; would materially and adversely impact Landlord's ability to sell the Premises or lease the Premises to other tenants; or is prohibited by any mortgage on the Building(s). The foregoing reasons, however, shall not be exclusive of the reasons for which Landlord may withhold consent to proposed Alterations, whether or not such other reasons are similar or dissimilar to the foregoing. Landlord hereby consents to the Alteration described in Exhibit G hereto relating to the erection of certain interior walls so long as Tenant (x) performs such Alteration not later than the third anniversary of the Commencement Date; (y) complies with terms, conditions and limitations with respect to the performance of Alterations contained in this Article 11 other than the requirement of Landlord's consent, and (z) the actual work performed in connection with such Alteration is substantially consistent with the narrative description of such Alteration contained in Exhibit G. Additionally, after obtaining Landlord's preliminary consent to the Plans, but before proceeding with any Alterations, Tenant shall, at its expense, obtain all necessary governmental permits and certificates for the commencement and prosecution of Alterations and shall submit to Landlord, for Landlord's written approval, working drawings, plans and specifications, and all permits for the work to be done and Tenant shall not proceed with such Alterations until it has received said approval. After obtaining Landlord's approval to the Alterations (to the extent required hereunder), Tenant shall give Landlord at least twenty (20) days prior written notice of the commencement of any Alterations at the Premises, and Landlord may elect to record and post notices of non-responsibility at the Premises. If and to the extent that any Alterations (whether permitted or deemed approved hereunder) impact on any structural element of the Premises or the HVAC, utilities, sanitary or other systems serving the Premises, Tenant shall (w) cause all such Alterations to be performed in strict accordance with the terms, conditions and limitations of any and all guaranties and warranties provided for the benefit of Landlord in connection with its construction of the Improvements or otherwise, including, but not limited, any requirement that any work thereon be performed by the contractor that originally provided the guaranty and warranty to Landlord; (x) be deemed to have waived any warranty provided by Landlord to Tenant hereunder with respect to such structural elements or systems, including, but not limited to, any warranty contained in Section 7 of Exhibit C, to the extent that any such Alterations cause damage to such structural elements or systems, invalidate any warranty provided to Landlord with respect thereto or can reasonably be expected to or do materially increase the costs to Landlord of satisfying such warranty with respect to such structural elements or systems; and (y) shall be obligated to provide any replacements to such structural elements of systems notwithstanding the requirements of Section 13.3 hereof to the extent of any damage thereto caused by such Alterations or to the extent that such Alterations can reasonably be expected to or do materially increase the cost of such a replacement. 11.2 Performance of Alterations. Tenant shall cause the Alterations to be performed in compliance with all applicable permits, laws and requirements of public authorities. Tenant shall cause the Alterations to be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the standards for the Premises established by Landlord or Agent. Alterations shall be performed by contractors first approved by Landlord (except to the extent performed by Tenant's employees, who shall be appropriately trained to perform the same and licensed to the extent required by law), and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees shall work in harmony, and not interfere with, Landlord and its agents and contractors (if any). Tenant shall obtain all necessary permits and certificates for final governmental approval of the Alterations and shall provide Landlord with "as built" plans, copies of all construction contracts, governmental permits and certificates and proof of payment for all labor and materials, including, without limitation, copies of paid invoices and final lien waivers. To the extent any of the Alterations affect any portion of the roof, Tenant shall use the contractor who provided the warranty for the roof in connection with the performance of such Alteration, so as not to invalidate or limit any roof-related warranty obtained pursuant to the construction of the Improvements. 11.3 Lien Prohibition. Tenant shall pay when due all claims for labor and material furnished to the Premises in connection with the Alterations. Tenant shall not permit any mechanics or materialmen's liens to attach to the Premises or Tenant's leasehold estate. Tenant, at its expense, shall procure the satisfaction or discharge of record of all such liens and encumbrances within sixty (60) days after the filing thereof. In the event Tenant has not so performed, Landlord may, at its option, pay and discharge such liens, but only to the extent that Tenant has failed to do so after Landlord gives Tenant written notice of its intention to do so (which notice may be delivered on or prior to the expiration of such sixty (60) day period), and Tenant shall be responsible to reimburse Landlord, on demand, for all 7 costs and expenses incurred in connection therewith, together with interest thereon at the rate set forth in Section 21.3 below, which expenses shall include reasonable fees of attorneys of Landlord's choosing, and any costs in posting bond to effect discharge or release of the lien as an encumbrance against the Premises. Any sums due from Tenant pursuant to the preceding sentence shall constitute Additional Rent under this Lease. SECTION 12: LANDLORD'S AND TENANT'S PROPERTY 12.1 Landlord's Property. Subject to Section 12.2 below, all fixtures, machinery, equipment, improvements and appurtenances attached to, or built into, the Premises at the commencement of this Lease, including, but not limited to, the Tenant Funded Improvements and certain of the Tenant's Work Items, or during the Term, whether or not placed there by or at the expense of Tenant, shall become and remain a part of the Premises; shall be deemed the property of Landlord (the "Landlord's Property"), without compensation or credit to Tenant; and shall not be removed by Tenant unless Landlord permits their removal. Further, any personal property in the Premises on the Rent Commencement Date, movable or otherwise, unless installed and paid for by Tenant, shall be and shall remain the property of Landlord and shall not be removed by Tenant. In no event shall Tenant remove any of the following materials or equipment without Landlord's prior written consent: any power wiring or power panels, lighting or lighting fixtures, the primary power source, wall or window coverings, attached carpets or other floor coverings, air conditioners or any other heating or air conditioning equipment (but excluding any special heating, ventilation or air conditioning systems not part of the HVAC systems serving the Premises generally that are used in Tenant's archive, library, and paper seasoning areas, or the electronic pre-press control, or otherwise in its printing operations to the extent that Tenant paid for all of the cost thereof), permanent fencing or security gates, or other similar building operating equipment and decorations. Notwithstanding anything contained herein to the contrary, upon the expiration or earlier termination of this Lease, Tenant shall not be required to remove any of the items noted on Exhibit I hereto as "Tenant will not remove." 12.2 Tenant's Property. All movable non-structural partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to, or built into, the Premises, which are installed in the Premises by, or for the account of, Tenant without expense to Landlord and that can be removed without structural damage to the Premises (except to the extent that Tenant restores such damage), and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively, the "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term, provided Tenant repairs or pays the cost of repairing any damage to the Premises resulting from the installation and/or removal thereof. 12.3 Removal of Tenant's Property. At or before the Expiration Date, or the date of any earlier termination, Tenant, at its expense, shall remove from the Premises all of Tenant's Property and any other property or fixtures which Landlord may require in writing that Tenant remove (except such items thereof as Landlord shall have expressly permitted, in writing, to remain, which property shall become the property of Landlord), and Tenant shall repair any damage to the Premises resulting from any installation and/or removal of Tenant's Property. Any other items of Tenant's Property that shall remain in the Premises after the Expiration Date, or following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case, such items may be retained by Landlord as its property or be disposed of by Landlord, in Landlord's sole and absolute discretion and without accountability, at Tenant's expense. Notwithstanding the foregoing, if Tenant is in default under the terms of this Lease, it may remove Tenant's Property from the Premises only upon the express written direction of Landlord. Notwithstanding anything contained herein to the contrary, upon the expiration or earlier termination of this Lease, Tenant shall remove all of the items noted on Exhibit I hereto as "Tenant will remove". SECTION 13: REPAIRS AND MAINTENANCE 13.1 Tenant Repairs and Maintenance. Tenant shall, at its expense, throughout the Term, maintain and preserve, in good working condition, the Premises and the fixtures and appurtenances therein, subject to ordinary wear and tear and fire and casualty. Except as otherwise specifically provided in Exhibit "C" and Section 13.3 hereof, Tenant shall also be responsible for all repairs and maintenance and all non-structural replacements, interior and exterior, ordinary and extraordinary, in and to the Premises and the facilities and systems thereof (including the electrical, mechanical, HVAC, and plumbing systems, roof and the exterior sidewalks, parking lots, driveways, dock areas and landscaped areas). Tenant shall enter into preventative maintenance and service contracts with reputable service providers for maintenance of the HVAC systems serving the Premises. Any repairs or replacements required to be made by Tenant to the mechanical, electrical, sanitary, HVAC, or other systems of the Premises shall be performed by appropriately licensed contractors approved by Landlord, which approval shall not be unreasonably withheld; provided that such preventative maintenance and repairs may be done by Tenant's employees to the extent duly licensed, and Landlord's approval shall not be required in such instances. Tenant shall maintain, during the period of the General Contractor's warranty, reasonably detailed maintenance logs describing repairs and maintenance programs and activities undertaken by Tenant pursuant to its obligations under this Section 13.1, which maintenance log will be made available to Landlord and the General Contractor upon reasonable prior notice. Tenant shall promptly forward to Landlord and General Contractor (x) copies of any maintenance and service contracts entered into for the HVAC systems to the extent that Tenant elects to enter into such service and maintenance contracts rather than to cause such repairs and maintenance to be performed by its duly licensed employees and (y) copies of any and all service records with respect to such systems (or to the extent that Tenant elects to cause such repairs and maintenance to be performed by its duly licensed employees, to make available upon demand by Landlord copies of Tenant's maintenance logs with respect to the HVAC systems, which maintenance logs shall be maintained with reasonable specificity and detail). All such repairs or replacements shall be subject to the supervision and control of Landlord or Agent, and all repairs and replacements shall be made with materials of equal or better quality than the items being repaired or replaced. Without limiting the generality of the foregoing, Tenant, at its expense, shall promptly replace or repair all scratched, damaged, or broken 8 doors and glass in and about the Premises and floor coverings in the Premises and repair and maintain all sanitary and electrical fixtures therein. 13.2 Tenant Equipment. Tenant shall not place a load upon any floor of the Premises that exceeds either the load per square foot that such floor was designed to carry pursuant to the Final Plans and Specifications or that which is allowed by law. Business machines and mechanical equipment belonging to Tenant that cause noise or vibrations that may be transmitted to the structure of the Premises to such a degree as to be objectionable or of concern to Landlord shall, at Tenant's expense, be placed and maintained by Tenant in settings or cork, rubber or spring-type vibration eliminators sufficient to eliminate such noise or vibration; provided, however, that Tenant's printing and other equipment shall not be deemed objectionable except to the extent that it causes materially more noise or vibration than the equipment described to Landlord in connection with the formulation of the Final Plans and Specifications (defined below). 13.3 Landlord Replacements. Notwithstanding anything contained herein to the contrary, except as otherwise provided in Section 11.1 hereof and Exhibit C and this Section 13.3, but limited by the extent to which any act, omission or neglect of Tenant in any way adversely affects any warranties relating to the structural elements of the Premises, Landlord (and not Tenant) shall be responsible for any replacement due to structural defects of the foundation, exterior load bearing walls, roof structure and roof covering and tuckpointing of the Buildings (as defined in Exhibit C) and no other replacements whatsoever; provided, however, Tenant shall reimburse Landlord for that portion of the costs and expenses of any replacement required to be performed hereunder by Landlord that results (in whole or in part) from (a) the performance by Tenant or existence of any Alterations, (b) the installation, use or operation of Tenant's Property in the Premises, (c) the moving of Tenant's Property in or out of the Premises and/or the Building(s), or (d) any act, omission, or neglect of Tenant, its employees, agent, contractors, invitees, or others entering into the Premises by act or omission of Tenant, and such reimbursement shall be paid, in full, within ten (10) days after Landlord's delivery of demand therefor. SECTION 14: UTILITIES 14.1 Purchasing Utilities. Tenant shall purchase all utility services from the utility or municipality providing such service; shall provide for scavenger, cleaning and extermination services; and shall pay for such services when payments are due. Tenant shall be solely responsible for the repair and maintenance of any meters necessary in connection with such services. Landlord represents and warrants that the utility capacities specified in the Final Plans and Specifications shall be available as of the Substantial Completion of the Improvements; provided, however, that Landlord makes no representation and warranty with respect to electrical capacity. Tenant represents and warrants that the utility services proposed to be provided to the Premises pursuant to the Final Plans and Specifications and including the proposed water pressure, are adequate for its proposed operations and use of the Premises, including any contemplated potential expansion of Tenant's operations at the Premises. 14.2 Use of Electrical Energy by Tenant. Tenant's use of electrical energy in the Premises shall not, at any time, exceed the capacity of (i) any of the electrical conductors and equipment in or otherwise servicing the Premises; or (ii) the Premises' HVAC systems. SECTION 15: LANDLORD'S RIGHTS 15.1 Landlord's Rights of Access. Landlord, Agent and their respective agents, employees and representatives shall have the right to enter and/or pass through the Premises at any time or times (a) to examine and inspect the Premises and to show them to actual and prospective mortgagees or ground lessees ("Superior Parties") or prospective purchasers or mortgagees of the Premises or providers of capital to Landlord and its affiliates and all consultants and advisors relating thereto; and (b) to make such repairs, alterations, additions and improvements in or to the Premises or its facilities and equipment as Landlord is required to make. Landlord and Agent shall be allowed to take all materials into and upon the Premises that may be required in connection therewith, without any liability to Tenant and without any reduction or modification of Tenant's covenants and obligations hereunder. During the period of six (6) months prior to the Expiration Date (or at any time, if Tenant has vacated or abandoned the Premises or is otherwise in default under this Lease beyond applicable notice and cure periods ), Landlord and its agents may exhibit the Premises to prospective tenants. In the exercise of each of the foregoing rights, Landlord shall give Tenant reasonable prior notice of its entry and use reasonable efforts to avoid interference with Tenant's business operations, except in the case of emergency. Nothing set forth above implies obligations of improvement beyond the Improvements described in Exhibit C. SECTION 16: NON-LIABILITY AND INDEMNIFICATION 16.1 Non-Liability. Except as otherwise provided in Section 16.4, and without limitation on Landlord's liability for breach of this Lease (as such liability may otherwise be limited hereunder), none of Landlord, Agent, any affiliates of Landlord ("Landlord Affiliates"), any other managing agent, Superior Parties, or their respective affiliates, owners, partners, directors, officers, agents and employees shall be liable to Tenant for any loss, injury, or damage, to Tenant or to any other person, or to its or their property, irrespective of the cause of such injury, damage or loss, unless caused by, or resulting from, the gross negligence or willful misconduct of Landlord, Agent or their respective agents, servants or employees in the operation or maintenance of the Premises (subject, however, to the doctrine of comparative negligence in the event of negligence on the part of Tenant or any of its contractors). Further, none of Landlord, Agent, any other managing agent, Superior Parties, or their respective partners, directors, officers, agents and employees shall be liable (a) for any such damage caused by other persons in, upon or about the Premises, or caused by operations in construction of any private, public or quasi-public work; or (b) with respect to matters for which Landlord is liable, for 9 consequential or indirect damages purportedly arising out of any loss of use of the Premises or any equipment or facilities therein by Tenant or any person claiming through or under Tenant. 16.2 Indemnification. Tenant hereby indemnifies, defends, and holds Landlord and all Landlord Affiliates harmless from and against any and all claims, judgments, liens, causes of action, liabilities, damages (except for consequential or speculative damages unless specifically provided for hereunder), costs, losses and expenses (including, but not limited to reasonable legal, engineering and consulting fees of engineers, attorneys and consultants selected by Landlord) arising from or in connection with (a) the conduct or management of the Premises by Tenant or its employees, agents, invitees, contractors, or representatives or any business therein by Tenant or its employees, agents, invitees, contractors, or representatives, or any work or Alterations done by Tenant or its employees, agents, invitees, contractors, or representatives, or any condition created in or about the Premises by Tenant or its employees, agents, invitees, contractors or representatives during either or both of the Term and the period of time, if any, prior to the Rent Commencement Date that Tenant may have been given access to the Premises, including any and all mechanics and other liens and encumbrances in connection with the Tenant's Work (as defined in Exhibit C) or resulting from a failure by Tenant to make a payment that it is required to make hereunder; (b) any act, omission or negligence of Tenant or any of its subtenants or licensees or their partners, directors, officers, agents, employees, invitees or contractors, including, but not limited to, any act or omission in connection with the performance of the Tenant's Work; (c) any accident, injury or damage whatsoever (unless caused by Landlord's, or its agent's servants or employees, willful misconduct or gross negligence) occurring in, at or upon the Premises; (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; (e) any breach by Tenant of any of its warranties and representations under this Lease; and (f) any actions necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding or other proceeding under the Bankruptcy Code involving Tenant, or its permitted successors heirs or assigns, as the bankrupt entity. In case any action or proceeding is brought against Landlord or any Landlord Affiliate by reason of any such claim, Tenant, upon notice from any or all of Landlord, Agent or any Superior Party, shall resist and defend such action or proceeding by counsel reasonably satisfactory to, or selected by, Landlord or such Superior Party. Landlord's and Tenant's obligations under this Section 16.2 shall survive the termination of this Lease for any reason. 16.3 Force Majeure. The obligations of Tenant hereunder shall not be affected, impaired or excused, and Landlord shall have no liability whatsoever to Tenant, with respect to any act, event or circumstance arising out of (a) Landlord's failure to fulfill, or delay in fulfilling any of its obligations under this Lease by reason of strikes, lockouts, labor disputes, governmental preemption of property in connection with a public emergency, inability to obtain labor or materials, or reasonable substitutes therefore, inclement weather which delays or precludes activities relating to construction, or shortages of fuel, supplies, or labor, or any other cause, whether similar or dissimilar, beyond Landlord's reasonable control; or (b) any failure or defect in the supply, quantity or character of utilities furnished to the Premises, or by reason of any requirement, act or omission of any public utility or others serving the Premises, in each case beyond Landlord's reasonable control. Landlord covenants and agrees to use reasonable efforts (without cost and expense to Landlord) to mitigate the adverse effects of the circumstances described in items (a) and (b) of the preceding sentence. Except as otherwise expressly provided in Exhibit "C", Tenant shall not hold Landlord or Agent liable for any latent defect in the Premises, nor, except as otherwise expressly provided in Section 16.4, shall Landlord be liable for injury or damage to person or property caused by fire, or theft, or resulting from the operation of heating or air conditioning or lighting apparatus, or from falling plaster, or from steam, gas, electricity, water, rain, snow, ice, or dampness, that may leak or flow from any part of the Premises, or from the pipes, appliances or plumbing work of the same. Except to the extent of Landlord's gross negligence or willful misconduct, Tenant agrees that under no circumstances shall Landlord or Agent be liable to Tenant or any third party for any loss of, destruction of, damage to or shortage of any property; including, but not limited to, Tenant's Property. 16.4 Limitation of Liability. Notwithstanding anything to the contrary contained in this Lease, the liability of Landlord (and of any Successor Landlord hereunder) to Tenant shall be limited to the interest of Landlord in the Premises, and Tenant agrees to look solely to Landlord's interest in the Premises for the recovery of any judgment or award against Landlord, it being intended that Landlord shall not be personally liable for any judgment or deficiency; provided, however, that if Tenant obtains a final, nonappealable judgment against Landlord due to a breach of Landlord's obligations under this Lease (the "Judgment") and the amount of such Judgment exceeds the value of Landlord's equity interest in the Property as of the date on which the order entering such final, nonappealable order is entered (the "Equity Interest"), then Tenant shall be entitled to seek recourse directly against Landlord for an amount equal to the positive difference, if any, between the amount of the Judgment and the Equity Interest (the "Deficiency"); provided, further, however, that the maximum amount of Deficiency for which Landlord shall be liable is equal to (i) the product of (x) fifteen percent (15% ) and (y) the fair market value of the Property as of the date of such Judgment less (ii) the Equity Interest. In addition, Tenant acknowledges that Agent is acting solely in its capacity as agent for Landlord and, shall not be liable for any obligations, liabilities, losses or damages arising out of or in connection with this Lease, all of which are expressly waived by Tenant, except to the extent of Agent's gross negligence or willful misconduct. 16.5 Waiver of Subrogation. None of Landlord, Agent or Tenant shall be liable to one another or to any insurance company (by way of subrogation or otherwise) insuring any such party for any loss or damage to the Premises, the structure of the buildings located thereon, other tangible property located on the Premises, or any resulting loss of income, or losses under workers' compensation laws and benefits, despite the fact that such loss or damage might have been occasioned by the negligence or misconduct of such party, its agents or employees, provided and to the extent that any such loss or damage would be covered by insurance that the party suffering the loss is required to maintain pursuant to the terms of this Lease. Each of Landlord, Agent and Tenant shall secure an appropriate clause in, or an endorsement upon, each insurance policy obtained by it and covering or applicable to the Premises and the personal property, fixtures, and equipment located therein or thereon, pursuant to which the insurance company consents to such waiver of right of recovery. The waiver of right of recovery set forth above in this Section 16.5 shall extend to Landlord, Agent, 10 Tenant, and their respective agents and employees, Superior Parties and to other appropriate parties designated by Landlord. SECTION 17: DAMAGE OR DESTRUCTION 17.1 Notification. Tenant shall give prompt notice to Landlord and Agent of (a) any occurrence in or about the Premises for which Landlord or Agent might be liable, (b) any fire or other casualty in the Premises, (c) any damage to, or defect in, the Premises, for the repair of which Landlord or Agent might be responsible, and (d) any damage to, or defect in any part or appurtenance of the Premises' sanitary, electrical, HVAC, elevator or other systems located in or passing through the Premises or any part thereof. 17.2 Repair Provisions. Subject to the provisions of Section 17.4 below, if the Premises are damaged by fire or other insured casualty, to the extent insurance proceeds are adjusted, Landlord shall repair or cause Agent to repair the damage and restore and rebuild the Premises (inclusive of Tenant's Funded Items (as defined in Exhibit C) and those items of Tenant's Property and that were part of Total Project Costs but exclusive of any other Tenant's Property or improvements relating to Tenant's Work) with reasonable dispatch after (a) notice to it of the damage or destruction and (b) the collection of the insurance proceeds attributable to such damage, and Tenant shall repair the damage to and restore and repair Tenant's Property, with reasonable dispatch after such damage or destruction. Landlord shall use reasonable efforts to collect such insurance proceeds as expeditiously as possible. 17.3 Rental Abatement. If (a) the Premises are damaged by fire or other casualty thereby causing the Premises to be inaccessible or (b) the Premises are partially damaged by fire or other casualty, the Rent shall be abated in the amount of any rent loss insurance proceeds actually collected by Landlord from Tenant's insurer on account of such damage. 17.4 Total Destruction. If the Premises shall be totally destroyed by fire or other casualty, or if the Premises shall be so damaged by fire or other casualty that (in the reasonable opinion of a reputable contractor or architect designated by Landlord) (i) its repair or restoration requires more than one hundred eighty (180) days or (ii) such repair or restoration requires the expenditure of more than fifty percent (50%) of the full insurable value of the Premises immediately prior to the casualty or (iii) except as hereinafter provided, the damage is less than the amount stated in (i) and (ii) above but is reasonably anticipated to require in excess of three months to repair or cost more than twenty-five percent (25%) of the full insurable value of the Premises to repair, but occurs during the last two (2) years of Lease Term, Landlord and Tenant shall each have the option to terminate this Lease within five (5) days after said contractor or architect delivers written notice of its opinion to Landlord and Tenant, but in all events prior to the commencement of any restoration of the Premises by Landlord. Notwithstanding item (iii) of the preceding sentence, except as otherwise provided in this Section 17.4, if and to the extent a casualty occurs in the final two (2) years of the Initial Term or the first Renewal Term, as the case may be, Landlord shall be obligated to restore the Premises if and to the extent that Tenant either has previously delivered or timely delivers an Extension Notice with respect to the first Renewal Term or the second Renewal Term, as the case may be, with its notice to Landlord of such casualty. Nothing in the preceding sentence shall be construed to relieve Tenant of its obligation to provide to Landlord a timely Extension Notice pursuant to Section 2.2 of this Lease to properly extend the Term of this Lease. In the event either party elects to terminate this Lease pursuant to this Section 17.4, the termination shall be effective as of the 120th date after the date on which the casualty occurs. If (A) any Superior Party or other party entitled to the insurance proceeds fails to make such proceeds available to Landlord in an amount sufficient for restoration of the Premises, or (B) the issuer of any casualty insurance policies on the Premises fails to make available to Landlord sufficient proceeds for restoration of the Premises (except to the extent that Tenant unconditionally agrees to pay the entire shortfall) then Landlord may not later than thirty (30) days after Landlord receives written notice of a final determination that such proceeds will not be made available from Superior Party or the issuer of any casualty insurance policy, as the case may be, at Landlord's sole option, terminate this Lease, effective as of the one hundred twentieth (120th) day after such casualty, by giving Tenant written notice to such effect within one hundred twenty (120) days after the date of the casualty. For purposes of this Section 17.4 only, "full insurable value" shall mean replacement cost, less the cost of footings, foundations and other structures below grade to the extent undamaged. 17.5 Repair or Restoration. Subject to the provisions of Section 17.4 above, Tenant shall not be entitled to terminate this Lease and no damages, compensation or claim shall be payable by Landlord for purported inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises pursuant to this Section. Landlord shall use its diligent, good faith efforts to make such repair or restoration promptly and in such manner as not to unreasonably interfere with Tenant's use and occupancy of the Premises, but Landlord or Agent shall not be required to do such repair or restoration work except during normal business hours of business days unless the cost of any after hours work is covered by insurance or Tenant is willing to pay the additional cost of such work. 17.6 Liability of Tenant. Notwithstanding any of the foregoing provisions of this Section, if by reason of any act or omission on the part of Tenant or any of its subtenants or its or their partners, directors, officers, servants, employees, agents, or contractors, Landlord shall be unable to collect all of the insurance proceeds (including, without limitation, rent insurance proceeds) applicable to damage or destruction of the Premises by fire or other casualty (the "Insurance Proceeds"), then, without prejudice to any other remedies that may be available against Tenant, the abatement or reduction of the Rent provided for herein shall be reduced to the extent resulting therefrom, notwithstanding lack of usability. Further, and only to the extent that, as a result of or due to or because of any negligent act or omission by any or all of Tenant, its agents, employees, invitees and representatives, Landlord is unable to collect all of the Insurance Proceeds (other than rent insurance proceeds), then Tenant shall be liable to Landlord for the payment of an amount equal to that portion of the Insurance Proceeds (other than rent insurance proceeds) that Landlord is unable to collect. 11 SECTION 18: EMINENT DOMAIN 18.1 Total Condemnation. If, in the reasonable opinion of Landlord, the whole of the Premises, or if any part of the Premises that materially affects Tenant's use and occupancy of the Premises, shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose, this Lease and the term and estate hereby granted shall terminate as of the date of vesting of title on such taking (herein called "Date of the Taking"), and the Rent shall be prorated and adjusted as of such date. 18.2 Award. Landlord shall be entitled to receive the entire award or payment in connection with any taking of the Premises; provided, however, that if the condemning authority allocates any portion of the award specifically to Tenant's Property, Tenant shall be entitled to that portion of the award. Additionally, Tenant shall have the right to separately pursue, against the condemning authority, an award in respect of the loss, if any, to Tenant's Property (including, but not limited to, the Tenant's Improvements that Tenant is entitled to remove) and to the leasehold improvements or other interest of Tenant in the Premises paid for by Tenant, without any credit or allowance from Landlord, provided that such separate award does not diminish or interfere with Landlord's pursuit of its own award. 18.3 Compensation to Tenant for Temporary Use. If the temporary use or occupancy of all or any part of the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose during the Term, Tenant shall be entitled, except as hereinafter set forth, to receive that portion of the award or payment for such taking which represents compensation for the use and occupancy of the Premises, for the taking of Tenant's Property, leasehold improvements or other interests of Tenant in the Premises paid for by Tenant (other than Tenant Funded Improvements) and for moving expenses, and Landlord shall be entitled to receive that portion that represents reimbursement for the cost of restoration of the Premises (including Tenant Funded Improvements). This Lease shall be and remain unaffected by such taking, and Tenant shall continue to be responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay, in full, the Rent when due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award that represents compensation for the use and occupancy of the Premises (or a part thereof) shall be prorated between Landlord and Tenant so that Tenant shall receive so much thereof as represents the period up to and including such Expiration Date and Landlord shall receive so much thereof as represents the period after such Expiration Date. All monies paid as, or as part of, an award for temporary use and occupancy for a period beyond the date to which the Rent have been paid shall be received, held and applied by Landlord as a trust fund for payment of the Rent becoming due. 18.4 Partial or Temporary Taking. Subject to the rights of any Superior Mortgagee or Superior Lessor, and other parties having rights to condemnation proceeds, in the event of any taking of less than the whole of the Premises, which taking does not result in termination of this Lease, or in the event of a taking for a temporary use or occupancy of all or any part of the Premises, or other partial taking of the Premises, that in any such case does not result in a termination of this Lease: (a) Landlord, at its expense, and to the extent that a condemnation award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair the remaining parts of the Premises (inclusive of that portion of the Premises that represents Tenant Funded Improvements, but other than those parts of the Premises that are Tenant's Property and Tenant's Improvements that Tenant is entitled to remove) to substantially their former condition, to the extent that the same is feasible (subject to those changes which Landlord reasonably deems desirable and Tenant reasonably accepts, and to building and other governmental codes and regulations) and so as to constitute a complete and tenantable Premises, and (b) Tenant, at its expense, and to the extent any award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair Tenant's Property and Tenant's Improvements, to substantially its former condition, to the extent feasible, subject to such reasonable changes as Landlord and Tenant shall agree upon, in writing. Such work by Tenant shall be deemed Alterations (the approval for which Alterations shall not be unreasonably withheld by Landlord). Furthermore, in the event of a partial taking of the Premises that does not result in a termination of this Lease, the Net Base Rent due hereunder shall be reduced in a proportionate amount, based upon the proportion that the area that has been taken bears to the total area of the Premises. Such reduction shall be effective from the date on which the partial taking occurs until the date, if any, on which the partial taking terminates and the Premises have been restored in accordance with the terms of this Lease. SECTION 19: SURRENDER AND HOLDOVER On the last day of the Term, or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Premises, (a) Tenant shall quit and surrender the Premises to Landlord "broom-clean" and in good order, condition and repair, except for ordinary wear and tear and such damage or destruction as Landlord is required to repair or restore under this Lease, and (b) Tenant shall remove all of Tenant's Property therefrom, except as otherwise expressly provided in this Lease. The obligations imposed under the preceding sentence shall survive the termination or expiration of this Lease. If Tenant retains possession of the Premises or any part thereof after the Expiration Date hereof or after any earlier termination date of this Lease by lapse of time or otherwise, or termination of Tenant's right to possession: Tenant shall pay to Landlord one hundred fifty percent (150%) of the Rent last prevailing hereunder computed on a per-month basis, for each month or part hereof that Tenant thus remains in possession, and, in addition thereto, Tenant shall pay all direct and consequential damages sustained by Landlord, by reason of Tenant's retention of possession; provided, however, that Tenant shall not be liable to Landlord for consequential damages in connection with a holdover by Tenant unless such holdover extends beyond thirty (30) days after the Expiration Date or other earlier termination date of this Lease. There shall be no renewal or extension of this Lease by operation of law. The provisions of this Section 19 shall not constitute a waiver by Landlord of any re-entry rights of Landlord provided hereunder or by law. 12 SECTION 20: EVENTS OF DEFAULT 20.1 Bankruptcy of Tenant. It shall be an "Event of Default" by Tenant under this Lease if Tenant makes an assignment for the benefit of creditors, or files a voluntary petition under any state or federal bankruptcy or insolvency law, or an involuntary petition alleging an act of bankruptcy or insolvency is filed against Tenant under any state or federal bankruptcy or insolvency law that is not vacated within ninety (90) days, or whenever a petition is filed by or against (and, to the extent of any such involuntary filing, not vacated within ninety (90) days) Tenant under the reorganization provisions of the United States Bankruptcy Code or under the provisions of any law or like import, or whenever a petition shall be filed by Tenant under the arrangement provisions of the United States Bankruptcy Code or similar law, or whenever a receiver of Tenant, or of, or for, the property of Tenant shall be appointed, or Tenant admits it is insolvent or is not able to pay its debts as they mature. 20.2 Default Provisions. Each of the following shall constitute an "Event of Default" by Tenant under this Lease: (a) if Tenant fails to pay Net Base Rent within five (5) days after written notice from Landlord of the delinquency thereof; or (b) if Tenant fails to pay Additional Rent or any other sum due to Landlord within fifteen (15) days after written notice from Landlord with respect to the delinquency thereof, provided, however, that if and to the extent that Tenant fails to pay Rent or any other payment required hereunder when due hereunder more than twice in any consecutive twelve (12) month period, Landlord shall have no obligation whatsoever for a period of two (2) years after the latter of such two delinquencies to provide (x) any written notice to Tenant of any further delinquency or (y) any grace period with respect to Net Base Rent, Additional Rent or any other sum due hereunder, and, after the expiration of any such two (2) year period, Tenant shall again be entitled to written notice and the above described grace period for up to two (2) delinquencies in any consecutive twelve (12) month period; or (c) if Tenant fails, whether by action or inaction, to timely comply in any material respect with, or satisfy, any or all of the obligations imposed on Tenant under this Lease for a period of thirty (30) days after Landlord's delivery to Tenant of written notice of such default under this subsection 20.2(c); provided, however, that if the default cannot, by its nature, be cured within such thirty (30) day period, but Tenant commences and diligently pursues a cure of such default promptly within the initial thirty (30) day cure period and thereafter continues to diligently pursue a cure, then Landlord shall not exercise its remedies under Section 21 unless such default remains uncured for more than one hundred eighty (180) days after Landlord's initial delivery to Tenant of notice of such default. SECTION 21: REMEDIES 21.1 Landlord's Cure Rights Upon Default of Tenant. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account, and at the expense of, Tenant, in compliance with any notice requirements and cure periods set forth in Section 20. 21.2 Landlord's Remedies. If any Event of Default by Tenant under this Lease remains uncured after applicable notice and cure periods, Landlord, at its option, without further notice or demand to Tenant, may, in addition to all other rights and remedies provided in this Lease, or otherwise at law or in equity: (a) terminate this Lease and Tenant's right of possession of the Premises, and recover all damages to which Landlord is entitled under law, specifically including, without limitation, accelerated Rent attributable to the balance of the Term, and all Landlord's reasonable expenses of reletting the Premises (including reasonable repairs, alterations, improvements, additions, decorations, legal fees and brokerage commissions), or (b) terminate Tenant's right of possession of the Premises without terminating this Lease; provided, however, that Landlord shall use its reasonable efforts, whether Landlord elects to proceed under Subsections (a) or (b) above, to relet the Premises, or any part thereof for the account of Tenant, for such rent and term and upon such terms and conditions as are reasonably acceptable to Landlord. If Landlord shall elect to pursue its rights and remedies under Subsection (b), then Landlord shall at any time have the further right and remedy to rescind such election and pursue its rights and remedies under Subsection (a), including but not limited to such time as Landlord has obtained a tenant to relet the Premises, which, in Landlord's reasonable judgment, is a suitable tenant. For purposes of such reletting, Landlord is authorized to decorate, repair, alter and improve the Premises to the extent deemed reasonably necessary by Landlord. If the Premises are relet and a sufficient sum is not realized therefrom, after payment of all Landlord's reasonable expenses of reletting (including reasonable repairs, alterations, improvements, additions, decorations, legal fees and brokerage commissions), to satisfy the payment, when due, of Base Rent and Additional Rent reserved under the Lease for any monthly period, then Tenant shall, in Landlord's sole judgment, either (i) pay any such deficiency monthly or (ii) pay such deficiency on an accelerated basis, which accelerated deficiency shall be discounted at a rate of six percent (6%) per annum. If Landlord fails to relet the Premises, then Tenant shall pay to Landlord the sum of (i) the projected costs of Landlord's reasonable expenses of reletting (including the reasonably anticipated costs of repairs, alterations, improvements, additions, legal fees and brokerage commissions) as reasonably estimated by Landlord and (ii) the accelerated amount of Net Base Rent and Additional Rent due under the Lease attributable to the balance of the Term discounted at a rate of six percent (6%) per annum. Tenant agrees that Landlord may file suit to recover any sums due to Landlord hereunder from time to time and that such suit or recovery of any amount due Landlord hereunder shall not be any defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Landlord. In the event Landlord elects, pursuant to Subsection (b) of this Section 21.2, to terminate Tenant's right of possession only, without terminating this Lease, Landlord may, at Landlord's option, enter into the Premises, remove Tenant's Property, Tenant's signs and other evidences of tenancy, and take and hold possession thereof as provided in Section 19 hereof; provided, however, that such entry and possession shall not terminate this Lease or release Tenant, in whole or in part, from Tenant's obligation to pay the Rent reserved hereunder for the full Term, or from any other obligation of Tenant under this Lease (except to the extent Landlord shall be able to mitigate its damages as described above). Any and all property that may be removed from the Premises by Landlord pursuant to the authority of the Lease or of law, to which Tenant is or may be entitled, may be handled, removed or stored by Landlord at the risk, cost and expense of Tenant, and in no event or circumstance shall Landlord be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon 13 demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken from storage by Tenant within forty-five (45) days after the end of the Term, however terminated, shall be conclusively presumed to have been conveyed by Tenant to Landlord under this Lease as in a bill of sale, without further payment or credit by Landlord to Tenant. Upon default and expiration of all cure periods, Tenant hereby grants to Landlord a first lien upon the interest of Tenant under this Lease to secure the payment of moneys due under this Lease, which lien may be enforced in equity; and Landlord shall be entitled as a matter of right to have a receiver appointed to take possession of the Premises and relet the same under order of court. 21.3 Additional Rights of Landlord. Any and all reasonable costs, expenses and disbursements, of any kind or nature, incurred by Landlord in connection with the enforcement of any and all of the terms and provisions of this Lease, including reasonable attorneys' fees (through all appellate proceedings), shall be due and payable upon Landlord's submission of an invoice therefor. All sums advanced by Landlord or Agent on account of Tenant under this Section, or pursuant to any other provision of this Lease, and all Rent, if delinquent or not paid by Tenant and received by Landlord when due hereunder, shall bear interest at the rate of five percent (5%) per annum above the "prime" or "reference" or "base" rate of interest publicly announced as such, from time to time, by The First National Bank of Chicago, from the due date thereof until paid, and such interest shall be and constitute Additional Rent and be due and payable upon Landlord's or Agent's submission of an invoice therefor. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the Expiration Date, nor limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder by Tenant. The various rights, remedies and elections of Landlord reserved, expressed or contained herein are cumulative and no one of them shall be deemed to be exclusive of the others or of such other rights, remedies, options or elections as are now or may hereafter be conferred upon Landlord by law. 21.4 Event of Bankruptcy. In addition to, and in no way limiting the other remedies set forth herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then: (a) "Adequate assurance of future performance" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of a security deposit in the amount of three (3) times the then-current Rent payable hereunder. (b) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed, without further act or deed, to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability. (c) Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as "Rent", shall constitute "rent" for the purposes of Section 502(b)(6) of the Bankruptcy Code. (d) If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord or Agent (including Rent and other amounts hereunder), shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord or Agent shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. SECTION 22: BROKER Tenant covenants, warrants and represents that the broker set forth in Section 1.9(A) was the only broker to represent Tenant in the negotiation of this Lease ("Tenant's Broker"). Landlord covenants, warrants and represents that the broker set forth in Section 1.9(B) was the only broker to represent Landlord in the negotiation of this Lease ("Landlord's Broker"). Landlord shall be solely responsible for paying the commissions of Landlord's Broker and Tenant's Broker. Each party agrees to and hereby does defend, indemnify and hold the other harmless against and from any brokerage commissions or finder's fees or claims therefor by a party (other than Tenant's Broker and Landlord's Broker) claiming to have dealt with the indemnifying party and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses, for any breach of the foregoing. The foregoing indemnification shall survive the termination of this Lease for any reason. SECTION 23: ESTOPPEL CERTIFICATES Tenant shall, from time to time and within twenty (20) days after any request by Landlord, execute and deliver to Landlord (and to any existing or prospective mortgage lender, ground lessor, or purchaser designated by Landlord), a statement: (i) certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); (ii) certifying the dates to which the Rent has been paid; (iii) stating whether Landlord is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default; (iv) stating whether any event has occurred which, with the giving of notice or 14 passage of time, or both, would constitute such a default, and, if so, specifying each such event; and (v) stating whether any rights of Tenant (e.g., options) have been waived. Any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the party requesting the certificate and by others with whom Landlord may be dealing, regardless of independent investigation. Tenant also shall include in any such statements such other information concerning this Lease as Landlord or Agent may reasonably request including, but not limited to, the amount of Rent under this Lease, and whether Landlord has completed all (if any) improvements to the Premises required under this Lease. Notwithstanding the foregoing, Landlord shall deliver to Tenant a proposed document for Tenant's approval and signature. SECTION 24: HAZARDOUS MATERIALS 24.1 Definitions. (i) "ENVIRONMENTAL LAW" or "ENVIRONMENTAL LAWS" shall mean all past, present or future federal, state and local statutes, laws, regulations, directives, ordinances, rules, codes, policies, guidelines, court orders, decrees, arbitration awards and the common law, which govern, regulate or impose liability or standards of conduct concerning the use, treatment, generation, storage, disposal or other handling or release of any Hazardous Material or Materials or health and safety matters, as such have been amended, modified or supplemented from time to time (including all present and future amendments thereto and re-authorizations thereof). Environmental Laws include, without limitation, those relating to: (i) the manufacture, processing, use, distribution, treatment, storage, disposal, generation or transportation of Hazardous Materials; (ii) air, soil, surface, subsurface, groundwater, odor or noise pollution; (iii) Releases; (iv) protection of wildlife, endangered species, wetlands, environmentally sensitive areas or natural resources; (v) health and safety of employees and other persons; and (vi) notification requirements relating to the foregoing. Without limiting the above, Environmental Law also includes the following: (i) the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. ss.ss. 9601 et seq.), as amended ("CERCLA"); (ii) the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.), as amended ("RCRA"); (iii) the Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C. ss.ss. 11001 et seq.), as amended; (iv) the Clean Air Act (42 U.S.C. ss.ss. 7401 et seq.), as amended; (v) the Clean Water Act (33 U.S.C. ss.ss. 1251 et seq.), as amended; (vi) the Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.), as amended; (vii) the Hazardous Materials Transportation Act (49 U.S.C. ss.ss. 1801 et seq.), as amended; (viii) the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.ss. 136 et seq.), as amended; (ix) the Federal Safe Drinking Water Act (42 U.S.C. ss.ss. 300f et seq.), as amended; (x) the Federal Radon and Indoor Air Quality Research Act (42 U.S.C. ss.ss. 7401, et seq.); (xi) the Occupational Safety and Health Act (29 U.S.C. ss.ss. 651 et seq.), as amended; (xii) any other statute, rule, regulation or order of any governmental authority having jurisdiction of Hazardous Materials or health and safety, including, but not limited to, the USEPA, Wisconsin Department of Natural Resources and the US Nuclear Regulatory Agency; (xiii) Environmental Permits; (xiv) any state, county, municipal or local statutes, laws or ordinances similar or analogous to (including counterparts of) any of the statutes listed above; and (xv) any rules, regulations, guidelines, directives, orders or the like adopted pursuant to or implementing any of the above. (ii) "ENVIRONMENTAL PERMIT" or "ENVIRONMENTAL PERMITS" shall mean licenses, certificates, permits, directives, requirements, registrations, government approvals, agreements, authorizations, and consents which are required under or are issued pursuant to an Environmental Law or are otherwise required by Governmental Authorities. (iii) "GOVERNMENTAL AUTHORITY" shall mean any agency, commission, department or body of any municipal, township, county, local, state or Federal governmental or quasi-governmental regulatory unit, entity or authority having jurisdiction or authority over all or any portion of the Project or the management, operation, use or improvement thereof. (iv) "HAZARDOUS CONDITIONS" refers to the existence or presence, release or threatened release of any Hazardous Materials on, in, under, at, near, from or about the Property or any portion thereof (including groundwater) or any other adverse public health effect. (v) "HAZARDOUS MATERIAL" or "HAZARDOUS MATERIALS" shall mean: (A) any chemical, pollutant, contaminant, pesticide, petroleum or petroleum product or by product, radioactive substance, solid waste (including hazardous or extremely hazardous), special, dangerous or toxic waste, substance, chemical or material regulated, listed, limited or prohibited under any Environmental Law, including without limitation: (i) asbestos, asbestos-containing material, presumed asbestos-containing material, polychlorinated biphenyls ("PCBS"), solvents and waste oil; (ii) any "hazardous materials" or "hazardous substances" as defined under CERCLA; (iii) any "hazardous waste" as defined under RCRA; (iv) any hazardous air pollutant or criteria pollutant as defined under the CAA; and (v) any hazardous substance defined or regulated under Wisconsin law; and (B) even if not prohibited, listed, limited or regulated by an Environmental Law, all pollutants, contaminants, hazardous, dangerous or toxic chemical materials, wastes or any other substances, including without limitation, any industrial process or pollution control waste 15 (whether or not hazardous within the meaning of RCRA or Wisconsin law) which could pose a hazard to the environment, or the health and safety of any person or impair the use or value of any portion of the Property. (vi) "RELEASE" means any spill, discharge, leak, migration, emission, escape, injection, dumping or other release or threatened release of any Hazardous Material into the environment, whether or not notification or reporting to any governmental agency was or is required. Release includes, without limitation, historical releases and the meaning of Release as defined under CERCLA and the meaning of discharges or spills under the laws of the State of Wisconsin. (vii) "REMEDIAL ACTION" shall mean any and all corrective or remedial action, preventative measures, response, removal, transport, disposal, clean-up, abatement, treatment and monitoring of Hazardous Materials or Hazardous Conditions, whether or not at the direction or request of a governmental authority, and includes all studies, assessments, reports, analyses or investigations performed in connection therewith to determine if such actions are necessary or appropriate (including investigations performed to determine the progress or status of any such actions). (viii) "REMEDIAL COSTS" shall include all costs, liabilities expenses and fees incurred in connection with Remedial Action, including but not limited to: (i) the fees of environmental consultants and contractors; (ii) reasonable attorneys' fees (including compensation for in-house and corporate counsel provided such compensation does not exceed customary rates for comparable services); (iii) the costs associated with the preparation of reports, and laboratory analysis (including charges for expedited results if reasonably necessary); (iv) regulatory, permitting and review fees; (v) costs of soil and/or water treatment (including groundwater monitoring) and/or transport and disposal; and (iv) the cost of supplies, equipment, material and utilities used in connection with Remedial Action. For purposes of this Section 24, "Landlord's Environmental Liability" means: any and all losses, liabilities, obligations, penalties, claims, fines, demands, litigation, actions, expenses, injuries, administrative order, defenses, costs (including Remedial Costs), judgments, suits, proceedings, damages (including punitive and exemplary damages), disbursements or expenses of any kind or nature whatsoever (including attorneys' fees at trial and appellate levels and experts' fees and disbursements and expenses incurred in investigating, defending against, settling or prosecuting any suit, litigation, claim or proceeding) which may at any time be either directly or indirectly imposed upon, incurred by or asserted or awarded against Landlord or any of Landlord's parent and subsidiary corporations and their affiliates, shareholders, directors, officers, employees, and agents in connection with or arising from: (i) any Hazardous Materials used, exposed, emitted, released, discharged, generated, manufactured, sold, transported, handled, stored, treated, reused, presented, disposed of or recycled on, in, at, near, from or under all or any portion of the Property, or any surrounding areas resulting therefrom; (ii) any Hazardous Condition and/or Remedial Action to the extent caused or contributed to by Tenant or any party acting by, through or under Tenant, including any licensees or invitees of Tenant or such parties; (iii) any misrepresentation, inaccuracy or breach of any warranty, covenant or agreement contained or referred to in this Section 24; (iv) any violation, liability or claim or notice of a violation or liability under any Environmental Laws or Environmental Permits to the extent caused or contributed to by Tenant or any party acting by, through or under Tenant, including any licensees or invitees of Tenant or such parties; or (v) the imposition of any lien for damages caused by, or the recovery of any costs incurred for the cleanup of, any release or threatened release of a Hazardous Materials to the extent caused or contributed to by Tenant or any party acting by, through or under Tenant, including any licensees or invitees of Tenant or such parties. 24.2 Prohibition. (i) Tenant shall not use any Hazardous Materials, as defined herein, except those ordinarily used in the normal course of Tenant's business, and provided that Tenant shall use such Hazardous Materials in accordance with their intended use and comply with all applicable Environmental Laws with respect to their use, storage, transportation and disposal and (ii) Tenant shall comply and operate its business in accordance with all applicable Environmental Laws, and will make all improvements, repairs, alterations and install all pollution control equipment, including any equipment necessary to monitor such pollution control equipment, in accordance with all applicable Environmental Laws. Tenant acknowledges that as the sole operator of the Premises, Tenant will be in possession and control of the Premises for the term of the Lease. Tenant may use and store reasonable quantities of the substances listed on Exhibit H attached hereto (the "Permitted Substances"), all in accordance with (and to the extent permitted by) all Environmental Laws and according to normal and ordinary business practices of similar entities engaged in the same or similar operations. 24.3 Tenant's Duties. Tenant shall promptly provide Agent with copies of all communications, permits or agreements with any Governmental Authority or any private entity relating in any way to the presence, Release, threat of Release, placement on, at or in the Premises, or the generation, transportation, storage, use, treatment, or disposal at, in or on the Premises, of any Hazardous Materials, except that Tenant shall not be obligated to provide copies to Landlord of its routine correspondence regarding Permitted Substances used in its day to day use and operation of the Premises. Landlord, Agent and their respective agents and employees shall have the right to enter the Premises and/or conduct appropriate tests, at any time and from time to time, for the purposes of ascertaining Tenant compliance with all Environmental Laws. If and to the extent that Landlord reasonably believes that Tenant's use and operation of the Premises are not in compliance with all Environmental Laws in any material respect or any of Tenant's acts or omissions (or the acts or omissions of Tenant's employees, agents, representatives or invitees) at the Premises have resulted in a material breach of Environmental Laws, Tenant shall provide Landlord with the results of appropriate tests of air, water or soil to demonstrate that Tenant complies with all Environmental Laws upon written request by Landlord or Agent. 16 24.4 Remedial Action. If the presence, Release, threat of Release, emissions from, placement on, at or in the Premises or Property or any portion thereof, or the generation, transportation, storage, use, treatment, or disposal at or from the Premises or Property or any portion thereof of any Hazardous Materials gives rise to a Landlord's Environmental Liability, then Tenant, at its sole cost and expense, shall promptly take any and all Remedial Action with respect to the Premises or any portion thereof, and shall mitigate any and all exposure to liability arising from the Hazardous Materials and/or the Hazardous Conditions, regardless whether required by Environmental Law. 24.5 Indemnity and Release. Except as otherwise provided in Section 2(b)(i) of Exhibit C, Tenant shall and does hereby protect, indemnify, defend (at trial and appellate levels and with counsel, experts and consultants acceptable to Landlord and at Tenant's sole cost) and hold Landlord and each Landlord Affiliate free and harmless from and against any Landlord's Environmental Liability (collectively, "Tenant's Indemnification Obligations"). Except as otherwise provided in Section 2(b)(i) of Exhibit C, Tenant and its successors and assigns hereby waive, release and agree not to make any claim or bring any cost recovery action against Landlord under or with respect to any Environmental Law, except to the extent of any gross negligence or willful misconduct by Landlord or its agent and their employees. Tenant's obligation to Landlord under this indemnity shall likewise be without regard to fault on the part of Tenant or Landlord with respect to the violation or condition which results in liability to Landlord. The foregoing indemnity and Tenant's other obligations under this Section 24 shall indefinitely survive the expiration or termination of this Lease. SECTION 25: MISCELLANEOUS 25.1 Merger. All prior understandings and agreements between the parties are merged in this Lease, which alone fully and completely expresses the agreement of the parties. No agreement shall be effective to modify this Lease, in whole or in part, unless such agreement is in writing, and is signed by the party against whom enforcement of said change or modification is sought. 25.2 Notices. Any notice required to be given by either party pursuant to this Lease, shall be in writing and shall be deemed to have been properly given, rendered or made only if personally delivered or if sent by Federal Express or other comparable commercial overnight delivery service, addressed to the other party at the addresses set forth below (or to such other address as Landlord or Tenant may designate to each other from time to time by written notice), and shall be deemed to have been given, rendered or made on the day so delivered or on the first business day after having been deposited with the courier service: If to Landlord: First Industrial Development Services Group, L.P. 150 North Wacker Drive, Suite 150 Chicago, Illinois 60606 Attn: Anthony Muscatello First Industrial, L.P. 150 North Wacker Drive, Suite 150 Chicago, Illinois 60606 Attn: Michael W. Brennan With a copy to: Barack Ferrazzano Kirschbaum Perlman & Nagelberg 333 West Wacker Drive Suite 2700 Chicago, Illinois 60606 Attn: Howard Nagelberg, Esq. If to Tenant: Golden Books Family Entertainment Inc. 850 3rd Avenue, 7th Floor New York, New York 10022 Attn: General Counsel With a copy to: Becker, Glynn, Melamed & Muffy, LLP 299 Park Avenue, 16th Floor New York, New York 10171 Attn: Bruce A. Rich, Esq. Golden Books Family Entertainment, Inc. 1220 Mound Avenue Racine, Wisconsin 53404 Attn: Mr. Owen Mitchell 25.3 Non-Waiver. The failure of either party to insist, in any one or more instances, upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the Lease shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt and acceptance by Landlord or Agent of Rent with knowledge of breach by Tenant of any obligation of this Lease shall not be deemed a waiver of such breach. 25.4 Legal Costs. Any party in breach or default under this Lease (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting 17 Party incurs in connection with the breach or default, regardless whether suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, in the event of litigation, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs, which sum shall be paid by the losing party. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under provisions of this Lease governing assignment and subletting, or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. 25.5 Parties Bound. Except as otherwise expressly provided for in this Lease, this Lease shall be binding upon, and inure to the benefit of, the successors and assignees of the parties hereto. Tenant hereby releases Landlord named herein from any obligations of Landlord for any period subsequent to the conveyance and transfer of Landlord's ownership interest in the Premises. In the event of such conveyance and transfer, Landlord's obligations shall thereafter be binding upon each transferee (whether Successor Landlord or otherwise). No obligation of either party shall rise under this Lease until the instrument is signed by, and delivered to, both Landlord and Tenant. 25.6 Recordation of Lease. Tenant shall not record or file this Lease (or any memorandum hereof) in the public records of any county or state, except as may be required in connection with the recording or filing of any nondisturbance agreement relating hereto. 25.7 Survival of Obligations. Upon the expiration or other termination of this Lease, neither party shall have any further obligation or liability to the other except as otherwise expressly provided in this Lease and except for such obligations as, by their nature or under the circumstances, can only be, or by the provisions of this Lease, may be performed after such expiration or other termination. Without limitation of the foregoing, the provisions of Sections 2, 3, 12, 16, 17.3, 18.3, 19, 22, and 24 shall survive any termination of this Lease. 25.8 Governing Law; Construction. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located. If any provision of this Lease shall be invalid or unenforceable, the remainder of this Lease shall not be affected but shall be enforced to the extent permitted by law. The captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. Each covenant, agreement, obligation, or other provision of this Lease to be performed by Tenant, shall be construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. 25.9 Time. Time is of the essence of this Lease. If the time for performance hereunder falls on a Saturday, Sunday or a day that is recognized as a holiday in the state in which the Premises are located, then such time shall be deemed extended to the next day that is not a Saturday, Sunday or holiday in said state. 25.10 Authority of Tenant. If Tenant is a corporation, partnership, association or any other entity, it shall deliver to Landlord, concurrently with the delivery to Landlord of an executed Lease, certified resolutions of Tenant's directors or other governing person or body (i) authorizing execution and delivery of this Lease and the performance by Tenant of its obligations hereunder and (ii) certifying the authority of the party executing the Lease as having been duly authorized to do so. Landlord represents and warrants to Tenant that (a) the execution and delivery of this Lease and the performance by Landlord of its obligations hereunder has been duly authorized by all necessary corporate and partnership action and (b) the party affixing his or her signature hereto has been duly authorized to execute this Lease on behalf of Landlord's general partner. 25.11 Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant hereunder. 25.12 Counterpart Execution. This Lease may be executed in counterpart and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. 25.13 Riders. All Riders and Exhibits attached hereto shall be deemed to be a part hereof and hereby incorporated herein. 25.14 WAIVER OF TRIAL BY JURY. THE LANDLORD AND THE TENANT, TO THE FULLEST EXTENT THAT THEY MAY LAWFULLY DO SO, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY COURT ACTION BROUGHT BY ANY PARTY TO THIS LEASE WITH RESPECT TO THIS LEASE, THE PREMISES, OR ANY OTHER MATTER RELATED TO THIS LEASE OR THE PREMISES. 25.15 Lease Contingency. The terms and provisions of this Lease shall be contingent upon the closing by Landlord of the purchase of fee simple title to the Land on or before August 4, 1997 (the "Contingency Date"). If Landlord does not close on the purchase of the Land, for whatever reason, on or before such date, this Lease shall automatically terminate and neither party shall have any further obligations, except as may be specifically provided hereunder. Landlord agrees to use best efforts to promptly close upon Land as soon as reasonably practicable after the Tenant's Permitting Date. In the event that Landlord is unable to purchase the Land on or prior to the Contingency Date, and Tenant is not in default hereunder (beyond any applicable notice and cure periods), Tenant shall purchase, and Landlord shall make a quit claim conveyance to Tenant, of all assignable plans, permits, materials, specifications, rights to purchase the Land and the Option Parcel, and agreements relating to the Project at such time as Tenant has 18 reimbursed Landlord for any costs and expenses incurred by Landlord in connection with this Lease as of the effective date of such conveyance. 25.16 Right of First Refusal. Tenant shall have the Right of First Refusal to purchase the Property subject to the terms and conditions set forth in Exhibit F. 25.17 Landlord's Assignment of this Lease. Within a reasonable period of time after the later to occur of the Office Building Rent Commencement Date or the execution of an Acceptance Agreement by Landlord and Tenant with respect to the Office Building, Landlord covenants and agrees to either (x) sell, transfer, convey and assign all of its right, title and interest in and to this Lease to First Industrial, L.P., a Delaware limited partnership ("FILP") or any other Landlord's Affiliate (such assignee being hereinafter referred to as "Landlord's Transferee") to the extent such Landlord's Affiliate's liabilities and obligations are guaranteed by FILP (subject to all of the limitations herein set forth with respect to Landlord's liability), which guarantee shall be in form reasonably acceptable to Tenant, or (y) cause FILP to guarantee all of Landlord's liabilities and obligations pursuant to the Lease (as such liabilities and obligations may be limited by the terms of this Lease), which guarantee shall be in a form reasonably acceptable to Tenant. Notwithstanding anything contained herein to the contrary, in the event that such Landlord's Transferee sells, transfers, conveys or assigns its right, title, interest, liability and obligation pursuant to this Lease on or prior to the expiration of the Warranty Period, Landlord's Transferee shall remain secondarily liable for the satisfaction of only Landlord's obligations pursuant to Section 7 of Exhibit C. Nothing contained herein shall limit or affect the provisions of Section 16 of this Lease and nothing contained herein shall limit or restrict Landlord, FILP or any other successor or assign from transferring its interest under this Lease. 19 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. LANDLORD: First Industrial Development Services Group, L.P., a Delaware limited partnership By: FI Development Services Corporation, a Maryland corporation, its general partner By: /s/ Anthony Muscatello ---------------------------- Its: President TENANT: Golden Books Family Entertainment, Inc., a Delaware corporation By: /s/ Mitchell Grossman___________________ Its: Senior Vice President___________________ Acknowledged and agreed by First Industrial, L.P. for the limited purpose of acknowledging its agreement and acceptance of Section 25.17: First Industrial, L.P., a Delaware limited partnership By: First Industrial Realty Trust, Inc., a Maryland corporation By: /s/ Michael Brennan__________________________ Its: Chief Operating Officer______________________ LEASE EXHIBIT A PREMISES The Premises shall consist of that certain parcel of land located in Sturtevant, Wisconsin, and legally described on the attached Exhibit A-1 (the "Land") together with all infrastructure and utilities (if any) currently located on the Land (together with the Land, the "Property") and the "Improvements" defined in Lease Exhibit C attached hereto. LEASE EXHIBIT B RENTAL PAYMENTS B.1 NET BASE RENT. Net Base Rent for both of the Printing Facility and the Office Building portions of the Premises shall be determined based on Landlord earning a cash-on-cash "all-in" yield of 11.05% of Total Project Costs (as defined in Exhibit C); provided, however, that to the extent that any Additional Landlord Funding Amounts (as defined in Exhibit C) have been included by Landlord in the Total Project Costs, then Landlord shall be entitled to earn (and Net Base Rent on such Additional Landlord Funding Amounts shall be calculated on the basis of) a cash-on-cash all-in yield of 12.05% on such Additional Landlord Funding Amounts and such amounts shall be amortized over the initial Term of the Lease. By way of illustration, if the Total Project Costs were to equal the Maximum Total Project Costs, Landlord would be entitled to receive annual Net Base Rent of $2,372,918.55 ($5.09 per square foot), which amount is equal to the product of (x) the Maximum Total Project Costs and (y) 11.05%. The foregoing example is a hypothetical based upon current estimates of the Project Budget, and shall in no event be deemed binding as either a calculation of Net Base Rent or a determination of Total Project Costs. Landlord will disclose to Tenant its Total Project Costs (including, without limitation, any net increase or decrease in projected Total Project Costs that occurs after completion of the Final Plans and Specifications), it being the intention of the parties that Net Base Rent will be calculated pursuant to verification of Total Project Costs under an "open book" procedure. The parties anticipate that Landlord will receive $1,200,000 in proceeds of tax increment financing ("TIF Proceeds") from the Village of Sturtevant ("Village"), subject to certain requirements with which the parties will attempt to comply. It is acknowledged and agreed by the parties that (x) the proposed Developer's Agreement by and between the Village, Landlord and the Community Development Authority of the Village of Sturtevant provides that such TIF Proceeds shall not be delivered to Landlord until the satisfaction of certain contingencies following the Substantial Completion of the Improvements; and (y) the TIF Proceeds shall be deducted from Total Project Costs only when, as, if, and to the extent actually received by Landlord, and, prior to such receipt, if any, the Total Project Costs used to determine Net Base Rent shall exclude the TIF Proceeds. Total Project Costs shall include, without limitation, the costs of all carrying costs accruing in connection with any funds advanced by Landlord towards Total Project Costs that are later recovered by Landlord in the form of TIF Proceeds. It is acknowledged by the parties that the Printing Facility is projected to be completed approximately 1 month in advance of the Office Building, and that Tenant shall be obligated to commence paying Net Base Rent allocable to the Printing Facility as of the Printing Facility Rent Commencement Date. As of the Printing Facility Rent Commencement Date (and until the final determination of Net Base Rent pursuant to this Exhibit B on or about the date of the Substantial Completion of the Office Building), Tenant shall pay as annual Net Base Rent allocable to the Printing Facility $5.09 per square foot of the Printing Facility (the "Estimated Net Base Rent"). If and to the extent that the estimated Total Project Costs referred to in the preceding paragraph are greater or less than actual Total Project Costs (as the same may be increased by Additional Landlord Funding Amounts on which Additional Landlord Funding Amounts Landlord shall be entitled to earn a cash-on-cash "all-in" yield of 12.05% and such amounts shall be amortized over the initial Term of the Lease) as determined following Substantial Completion of the Improvements, Net Base Rent payable for the period between the Printing Facility Rent Commencement Date and the Office Building Rent Commencement Date (the "Interim Period") shall be recomputed by substituting such actual Total Project Costs for estimated Total Project Costs in the formula set forth in the preceding paragraph, and either (x) Landlord shall credit against the next installment(s) of Net Base Rent due following such recomputation the amount, if any, by which Net Base Rent for the Interim Period was overpaid, together with interest thereon at the annual rate of 8%, or (y) Tenant shall pay to Landlord with the next installment of Net Base Rent due following such recomputation the amount, if any, by which Net Base Rent for the Interim Period was underpaid, together with interest thereon at the annual rate of 8%. Landlord and Tenant shall determine the amount of such difference simultaneously with the determination (and, if applicable, any redetermination) of Net Base Rent pursuant to Section B-3 hereof. B.2 RENT ESCALATIONS. The Net Base Rent shall increase annually, commencing with the second (2nd) anniversary of the Rent Commencement Date through the end of the initial Term in the amount of 05/100s Dollars ($.05) per square foot, but not during any Renewal Term, except as otherwise determined pursuant to the market rent calculation for the Renewal Term. B.3 DETERMINATION AND RECONCILIATION OF NET BASE RENT. Net Base Rent shall be determined as of the Rent Commencement Date based on actual Total Project Costs. To the extent that the amounts of any items to be included in or credited against Total Project Costs are not then finally ascertainable, Net Base Rent shall be determined using Landlord's best estimates of the amounts of such items, except that no TIF Proceeds shall be credited against Total Project Costs until actually received by Landlord. When the actual amounts of such estimated items are finally ascertained and/or when Landlord actually receives the TIF Proceeds, Net Base Rent shall be redetermined based on the actual amounts thereof. If Net Base Rent as so redetermined is greater than or less than Net Base Rent as previously determined, either: (i) Tenant shall pay to Landlord with the next installment of Net Base Rent due following such redetermination the amount, if any, by which Net Base Rent for any prior period was underpaid, together with interest thereon at the annual rate of 8% or (ii) Landlord shall credit against the next installment(s) of Base Rent due following such redetermination the amount, if any, by which Net Base Rent for any prior period was overpaid, together with interest thereon at the annual rate of 8%. EX-21.1 7 LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES o Golden Books Publishing Company, Inc. (Delaware) o LRM Acquisition Corp. (Delaware) o Western Publishing Limited (Hong Kong) o Golden Books Publishing (Canada), Inc. o Golden Showcase Stores, Inc. (Delaware) o Shari Lewis Enterprise, Inc. (California) o Golden Books Home Video, Inc. (Delaware) EX-23.1 8 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-18430, 33-18692, 33-18693 and 33-28019) and in the Registration Statement (Form S-3 No. 333-34051) of Golden Books Family Entertainment, Inc. and Subsidiaries of our report dated March 24, 1998, with respect to the consolidated financial statements and schedules of Golden Books Family Entertainment, Inc. included in this Annual Report (Form 10-K) for the year ended December 27, 1997. ERNST & YOUNG LLP New York, New York March 24, 1998 EX-23.2 9 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-18430, 33-18692, 33-18693 and 33-28019 of Golden Books Family Entertainment, Inc. and Subsidiaries (formerly Western Publishing Group, Inc. and Subsidiaries) on Form S-8 of our report dated April 2, 1996, appearing in the Annual Report on Form 10-K of Golden Books Family Entertainment, Inc. and Subsidiaries for the year ended February 3, 1996. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin March 27, 1998 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 0000790706 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. 1000 12-MOS DEC-27-1997 DEC-27-1997 57,411 0 78,609 24,249 34,659 170,346 77,876 39,620 323,164 74,566 149,897 269 110,707 65,000 0 323,164 242,481 243,561 176,238 276,759 0 0 22,024 (49,643) 37 (49,680) 0 0 0 (49,680) (2.18) 0 For the attached financials, the value EPS-DILUTED is not applicable
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