-----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, RAJL49Ea/qXJUqhaXrnzLJ3cTkF1ana1fxfgbbRV/R+FVZnLVq7eQSALqWKSaPlG 7ebADnialRGAn3ktDp+weg== 0001012975-99-000083.txt : 19990413 0001012975-99-000083.hdr.sgml : 19990413 ACCESSION NUMBER: 0001012975-99-000083 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981226 FILED AS OF DATE: 19990412 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: 99591708 BUSINESS ADDRESS: STREET 1: 888 SEVENTH AVE 40TH FL STREET 2: STE 601 CITY: NEW YORK STATE: NY ZIP: 10106 BUSINESS PHONE: 2125476700 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 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 year ended December 26, 1998 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, 40th Floor, 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 was $8,206,836, computed by reference to the bid price as quoted on the OTC Bulletin Board on April 6, 1999 of approximately $0.29.* As of April 6, 1999, 28,299,434 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. - -------- * For purposes of this calculation, all outstanding shares of Common Stock have been considered held by non-affiliates other than the 6,546,353 shares held by directors and certain principal shareholders. In making such calculation, the Registrant does not determine the affiliate or non-affiliate status of any shares for any other purpose. 1 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES December 26, 1998 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................11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................12 ITEM 6. SELECTED FINANCIAL DATA............................................13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................................27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................28 ITEM 11. EXECUTIVE COMPENSATION..............................................30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....39 2 PART I In February 1999, the Registrant reached an agreement with its major creditors pursuant to which its existing long term debt would be significantly reduced. In accordance with that agreement, the Registrant and two of its subsidiaries, Golden Books Publishing Company, Inc. ("Golden Books Publishing") and Golden Books Home Video, Inc. ("GBHV" and collectively with the Registrant and Golden Books Publishing, the "Debtors") on February 26, 1999 filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The Debtors have filed a Joint Plan of Reorganization and a Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code, both of which are exhibits to this Form 10-K. The Debtors hope to confirm and consummate the Plan of Reorganization by June or July of 1999. See "Item 1. Business -- Recent Events," below. As used herein, the "Company" refers to Golden Books Family Entertainment, Inc. (the "Registrant"), its subsidiaries, and the Debtors as debtors-in-possession. ITEM 1. BUSINESS The Company publishes, produces, licenses and markets an extensive range of children's books and family related entertainment products. The Company has three business segments, which it operates primarily through its principal operating subsidiary, Golden Books Publishing Company, Inc. ("Golden Books Publishing"): (1) Consumer Products, which includes its Children's and Adult Publishing divisions, (2) Entertainment, which operates as the Golden Books Entertainment Group division ("GBEG"), and (3) Commercial Products, through its Commercial Printing division. For certain financial information with respect to the Company's business segments see note 18 to the Company's Consolidated Financial Statements herein. On March 11, 1999, the Company signed an agreement to sell its Adult Publishing division to St. Martin's Press, Inc., subject to certain conditions. On March 25, 1999, the bankruptcy court gave final approval authorizing the closing of the sale, which has not yet occurred. Consumer Products Children's Publishing. Golden Books is the largest publisher of children's books in the North American retail market and has published its flagship product line, "Little Golden Books", for over 50 years. The Children's Publishing division produces storybooks, coloring/activity books, puzzles, educational workbooks, reference books, novelty books, chapter books and electronic storybooks. The products of the Children's Publishing division utilize both owned (in whole or in part) characters, such as The Poky Little Puppy and Lassie, and characters licensed by the Company from third parties, such as Disney (A Bug's Life, Mulan), Mattel (Barbie) and Mercer Mayer (Little Critters). The Children's Publishing division's products have traditionally been designed primarily for children up to age seven and have been distributed mainly through mass market channels (which include national discount store chains, such as Wal-Mart, K mart, Target and Toys "R" Us). The Company has also 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. The Company's Children's Publishing products fall into four broad categories: (i) "Classic Format," (ii) education and reference,(iii) trade and novelty and (iv) electronic storybooks. (i) 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 1998, the Company 1 continued to introduce new Classic Format products with higher price points which were sold through mass market channels, in bookstores and in specialty retail stores. Effective January 1, 1999, the Company raised prices on selected products, principally in the Classic Format Category. 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, including Pat the Bunny. 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. (ii) Education and Reference The Company's education and reference products consist of Road to Reading (a level reading series), workbooks, flashcards and reference books. The Company's workbook and flashcard products have price points between $2.00 and $3.50 and its Road to Reading 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 first began publishing its Road to Reading level reading series in 1998 using its existing characters and titles, as well as licensed characters such as Barbie. (iii) 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. Most products in this category are 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 continues to expand its product offerings in the trade and novelty category, with an emphasis on products featuring the Company's proprietary characters. The Company believes that significant sales opportunities for its higher priced trade and novelty products exist through bookstores, mass market, special market and international distribution channels. (iv) Electronic Storybooks The Company is marketing a declining number of electronic books. The electronic books are sold primarily through mass market outlets. Adult Publishing. Less than 10% of the revenues of the Consumer Products business segment is accounted for by the Adult Publishing division. The division publishes trade books focusing on hobbies, parenting and the family. The Company has distributed its adult trade book line primarily through bookstores, although the line also includes books published in formats suitable for mass market distribution. Since February 1998, products published by the Adult Publishing division have been distributed in the United States and Canada by St. Martin's Press, Incorporated. On March 11, 1999, the Company signed an agreement to sell its Adult Publishing division to St. Martin's Press, subject to certain conditions. If all of the conditions are satisfied, the sale should be closed shortly. If the closing does not occur as scheduled, either party may terminate the agreement. 2 Licensing and Publishing Agreement Developments. In December 1998, the Company signed a license agreement with Disney, amending the terms of the license the Company had entered into with Disney in 1997. The Disney agreement allows the Company to use, in selected product categories and for a limited time, 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, Mulan and A Bug's Life. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. The Company also has a licensing agreement in connection with the educational television series Between the Lions, anticipated to debut on PBS in Spring 2000. The Company's character license with Children's Television Workshop terminated by its terms in December, 1998. In January, 1999, the Company renegotiated its publishing agreement with Parachute Press, pursuant to which the Company will continue to publish only R. L. Stine's "Seniors" series, a part of R.L. Stine's Fear Street series, through June 1999. The Fear Street books, including the "Seniors" series, are intended for older children and young adult readers, ages 8 and up. Golden Books Entertainment Group Division The Company generates revenues from the GBEG division by selling its video products, licensing properties from its library to third parties, both domestically and internationally, for use on television, on home video and in ancillary media, licensing properties from its library for merchandise and exploiting certain music publishing rights. The Company's GBEG division was established in August 1996, upon the acquisition from Broadway Video Entertainment, L.P. of an extensive library of character-based family entertainment properties. The 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, Underdog, The Lone Ranger, Tennessee Tuxedo, Shari Lewis' Lambchop and Hush Puppy, as well as 26 half-hour episodes of Felix the Cat, and 52 half-hour episodes of Abbott and Costello. The existing licenses granted to third parties in respect of the GBEG division's properties generally cover a limited time period, usually two to three years. 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. Commercial Products The Commercial Printing division allows the Company to market its surplus manufacturing capabilities to third parties. In addition, the division sells printing services. In 1998, the Company manufactured products for its Commercial Printing Division at its printing facility in Sturtevant, WI and at third party printing facilities. Customers of the Commercial Printing Division include educational publishers, religious publishers, brand marketers, and other juvenile publishers and entertainment companies. Additionally, the Commercial Printing division engages in commodity printing (such as tax instruction booklets and tax forms). 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, such as book clubs and internet distributors, 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 1998 were Wal-Mart, K mart and Target. To a lesser extent, the Company has distributed its children's publishing products through other domestic distribution channels. 3 In June 1998, the Company closed its distribution center in Coffeyville, Kansas and consolidated it 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 distributes its Children's Publishing products mainly through third parties and through a wholly-owned subsidiary in Canada. The Company's sales in Canada account for the majority of its international sales revenues. In 1998, the Company wound down its operations in the United Kingdom, substantially eliminating its sales operation and engaging independent sales representatives. 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. The GBEG division has a long-term distribution agreement with Sony Wonder, a division of Sony Music, under which Sony Wonder produces and distributes the division's children's home video and audio products, with the Company receiving the gross proceeds, less Sony's manufacturing cost and a distribution fee. 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, School Zone Publishing Co., in the educational workbook category and Publications International, Ltd., in the electronic storybook 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, such as computer-based products. The market for licenses is also highly competitive and the Company competes against many other licensees for significant licenses. 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 in which the Company operates 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, the division faces 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 Prior to 1998, a substantial part of the Company's Children Publishing products were manufactured at a facility in Racine, WI, which was sold in 1997. During 1998, the Company manufactured the majority of its Children's Publishing products from its plant in Sturtevant, WI, with additional components and services obtained from third party vendors in the United States and abroad. The Company began manufacturing at the Sturtevant, WI facility in February 1998. As a result of the decline in the revenues of the Children's Publishing division, the Sturtevant, WI facility exceeds the Company's current needs. Because of the Company's inability to utilize the full capacity of the facility, among other reasons, the facility is burdened by high operating costs. The Company is seeking a buyer for the Sturtevant, WI facility. See "Item 2. Properties." 4 Employees The Company and its subsidiaries have approximately 950 employees, calculated on a full-time equivalent basis. Approximately 350 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 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. 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. Recent Events The Company has experienced liquidity difficulties as a result of operating losses, working capital deficiencies and negative operating cash flows. These difficulties have hampered the Company's ability to fund day-to-day operations. On September 15, 1998, the Company announced that it was deferring a $5.7 million interest payment on its 7.65% senior notes due 2002 (the "Senior Notes") due on such date for a 30-day grace period in accordance with the Indenture ("Indenture") governing the Senior Notes. Subsequently, on October 15, 1998, the Company announced that it would not pay the September 15th interest payment. Accordingly, at October 15th the Company was in default under the Indenture and the holders of the Senior Notes, at their option, have the right (i) to demand the redemption of the entire $150 million principal amount of the Senior Notes due and (ii) foreclose on the collateral securing the Senior Notes. Due to the default under the Senior Notes, cross-default provisions regarding the Company's $30 million Revolving Credit Facility with NationsCredit Commercial Funding, a division of NationsCredit Commercial Corp. ("NationsCredit") entered into June 3, 1998 and its $25 million Loan Facility with Golden Press Holdings, LLC, entered into September 4, 1998 (see Note 9 to the Consolidated Financial Statements) resulted in defaults under such agreements. The Company also decided on November 5, 1998 that it would defer a $2.5 million interest payment on the Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures (the " TOPrS") due on the TOPrS in accordance with the Indenture governing the TOPrS. Additionally, on February 20, 1999, the Company again deferred the next scheduled $2.5 million interest payment due on the TOPrS in accordance with the Indenture governing the TOPrS. As a result of the Company's failure to make the interest payment on the Senior Notes, a steering committee representing certain holders of the Senior Notes (the "Senior Notes Steering Committee") was established. Additionally, as a result of the Company's failure to make the interest payment due on the TOPrS, a steering committee representing certain holders of the TOPrS (the "TOPrS Steering Committee") was established. The Company, along with the Senior Notes Steering Committee and the TOPrS Steering Committee engaged in extensive negotiations regarding a restructuring of the Company's indebtedness and capital equity structure. These negotiations resulted in an agreement in principle regarding the terms of the Company's restructuring, which the parties determined would be accomplished through a pre-negotiated Chapter 11 proceeding. Accordingly, on February 24, 1999, the Company announced that it had reached an agreement with its major creditors. The agreement in principle would allow the Company to significantly reduce its existing debt, pay all trade creditors in full and, under the direction of its current management team, proceed with its publishing and entertainment operations. Under the agreement in principle, the restructuring of the Company's indebtedness and revised capital structure will be provided for as follows: 5 o The Senior Notes will be converted into (i) a new secured note in the principal amount of $87 million due 2004, with interest at the rate of 10%, if paid in cash, or, at the Company's option for the first three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new common stock to be issued post recapitalization, prior to dilution. The note will be secured by the existing collateral already granted to the holders of the Senior Notes as well as certain additional collateral. o The TOPrS indebtedness will be converted into 50% of the Company's new common stock to be issued post recapitalization, prior to dilution. o The Golden Press Holdings, L.L.C. loan in the amount of $10 million will be converted into 5% of the Company's new common stock to be issued post recapitalization, prior to dilution. Existing preferred and common shareholders will surrender their stock in exchange for out-of-the money warrants to purchase 5% of the new Company stock, exercisable until the third anniversary of the Joint Plan of Reorganization (as defined below), to be allocated two-thirds to the preferred and one-third to the common shareholders, to be issued post recapitalization, prior to dilution. The agreement also provides for a management stock incentive program for an amount of common stock equal to 10% of the common stock issued on the effective date of the Joint Plan of Reorganization. Of that amount, one-half (5%) will be allocated to senior management on the effective date with the balance being made available for other management personnel and for future grants. Also on the effective date of the Joint Plan of Reorganization, the employment agreement with Richard E. Snyder, the Company's Chairman of the Board and Chief Executive Officer, will be amended as further described in the Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in consideration of his surrendering certain claims and rights under his current employment arrangement, 2-1/2% of the Company's new common stock, among other things. The foregoing is an incomplete summary of the principal provision of the agreement. For a full understanding of the restructuring arrangements, reference should be made to the Joint Plan of Reorganization and the Disclosure Statement referred to below. Similarly, wherever licensing, distribution or other agreements of the Company are described or summarized in this Form 10-K, such descriptions are subject to the provisions of such agreements, to which references should be made. The agreement in principle regarding the restructuring provided that the restructuring be effectuated pursuant to a Chapter 11 Plan. Accordingly, on February 26, 1999 the Debtors filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The petitions were filed in the United States Bankruptcy Court for the Southern District of New York. The Debtors are continuing to operate their business and hold their assets as debtors-in-possession. No trustee has been appointed. The Debtors received approval from the Bankruptcy Court to pay on time and in full undisputed pre-petition obligations including salaries, wages and benefits to all of its employees. On March 25, 1999, the Bankruptcy Court gave final approval to a $55 million three-year debtor-in-possession financing facility consisting of a $45 million credit facility and a $10 million term facility, which is provided by The CIT Group (the "DIP Loan"). The DIP Loan is subject to covenants and events of default. The Company utilized the proceeds from the DIP Loan to repay all outstanding amounts under the Revolving Credit Facility with NationsCredit with the remainder to be used to fund operations during the pendency of the Chapter 11 proceedings. On March 25, 1999, the Debtors filed a Joint Plan of Reorganization (the "Joint Plan of Reorganization") with the Bankruptcy Court and a Disclosure Statement (the "Disclosure Statement") pursuant to Section 1125 of the Bankruptcy Code. The Disclosure Statement and the Joint Plan of Reorganization are subject to approval of the Bankruptcy Court. Prior to the filing of the Joint Plan of Reorganization and Disclosure Statement, the Debtors entered into a Restructuring Agreement with certain holders of senior notes and the TOPrS as well as Golden Press Holdings, LLC and Richard E. Snyder which obligates such signatories to support the restructuring provided for under the Joint Plan of Reorganization providing certain conditions are met including that the Joint Plan of Reorganization is confirmed within 150 days of the date of the Restructuring Agreement. 6 On March 25, 1999, the Bankruptcy Court gave final approval to the Asset Purchase Agreement with St. Martin's Press, Incorporated dated March 11, 1999 with respect to the sale of certain assets of the Company's Adult Publishing business. If all of the conditions of the Agreement are met, the Adult Publishing sale should be closed shortly. If the closing does not occur as scheduled, either party may terminate the Agreement. A Bankruptcy Court hearing on the Disclosure Statement is currently scheduled for May 10, 1999. The Company hopes to confirm and consummate the Joint Plan of Reorganization by June or July of 1999, although there can be no assurance that the Joint Plan of Reorganization will be confirmed or consummated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Since the latter part of fiscal 1998, a number of executives have left the Company, including Eric Ellenbogen (President of the GBEG), John C. Ferrara (Chief Financial Officer) and Robert J. Asahina (President of the Adult Publishing division). See Executive Officers of the Registrant, below. 7 ITEM 2. PROPERTIES The principal properties currently used by the Company in the conduct of its business are the following: The Company's corporate offices, publishing and principal sales offices are located in leased premises on three floors at 888 Seventh Avenue in New York City. In January 1999, the Company reduced the space covered by the lease from 112,000 square feet (on six floors) to 55,000 square feet. The amended lease covering the reduced space is for a term expiring July 31, 2013. The Company believes that the facilities covered by the amended lease are adequate for the restructured Company's needs. The Company's printing facilities and principal administration offices are located in 498,300 square foot leased facilities in Sturtevant, WI. These facilities were constructed for the Company and service the Company's publishing and commercial divisions. The Company began manufacturing at the new Sturtevant, WI facility in February 1998. The printing facilities have a capacity which exceeds the Company's current needs. The Company is seeking a buyer for the Sturtevant, WI facility who would enter into an agreement with the Company to continue to manufacture certain of the Company's Children's Publishing products at the facility. The Company's principal warehousing and distribution facilities are located in a 403,000 square foot building owned by the Company and located in Crawfordsville, Indiana. In 1998, the Company closed a distribution center in Coffeyville, Kansas and consolidated the distribution functions in Crawfordsville, Indiana. The Coffeyville, Kansas property was sold in January 1999. In addition, the Company owns or rents several other smaller properties that are used for administration, sales offices and warehousing, or are held for sale, such as a building in Racine, WI, which was formerly known as the Creative Center. As part of the Company's program to dispose of non-core assets, the Company in December 1998 sold its 702,000 square foot facility in Fayetteville, North Carolina which had been used primarily in connection with the manufacture and distribution of games and puzzles. In December 1997, the Company sold the facility that had been its Canadian warehousing and distribution center in Cambridge, Ontario. 8 ITEM 3. LEGAL PROCEEDINGS On February 26, 1999, the Debtors filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. ss.ss. 101 et seq. The petitions were filed in the United States Bankruptcy Court for the Southern District of New York and were assigned Cases Nos. 99-10030, 99-10031 and 99-10032, assigned to Judge Tina L. Brozman. The Debtors are continuing to operate their business and hold their assets as debtors-in-possession. No trustee has been appointed. On August 12, 1998, a class action complaint was filed in the United States District Court for the Southern District of New York on behalf of all persons who purchased the Common Stock of the Company between May 13, 1997 and August 4, 1998, inclusive (the "Class Period"). On October 7, 1998, holders of the Company's TOPrS filed a class-action complaint based on substantially identical allegations, which complaints were subsequently consolidated. The consolidated complaint charges that the Company and certain officers and directors of the Company during the relevant time period were in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that the defendants issued a series of materially false and misleading statements concerning the impact of the Company's 1996 restructuring plan on the Company's financial condition, liquidity and future prospects. While the outcome of the case cannot be predicted with any certainty, the Company believes that it has meritorious defenses to the claims, and that the claims against the Company will be resolved or discharged during the pendency of the Chapter 11 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. In 1991 the United States Environmental Protection Agency ("EPA") issued a unilateral administrative order (the "1991 Order") to the Company and four other PRPs, requiring the respondents to perform a remedial design and remedial action at the Hertel Landfill Superfund Site in Plattekill, New York (the "Site"). The Company did not agree to comply with the Order. EPA subsequently sued the Company and other PRPs seeking recovery of its costs at the Site. Various PRPs in the litigation brought claims for contribution against each other and the Company. The Company settled its liability to the United States for noncompliance with the 1991 Order and agreed to comply with the Order by implementing the remedy at the Site, which is now estimated to cost up to $4.9 million, excluding potential groundwater remediation costs. On July 9, 1998, the Company and other PRPs entered into a Consent Decree with the United States and the State of New York to resolve their alleged Liability for past response costs and formalize their agreement to perform the remedy at the site. Under the Decree, the Company and the other settling parties are jointly and severally obligated to perform 9 the remedy and reimburse certain governmental past and future costs. Golden Books has paid approximately $1.7 million toward remedial costs since 1996 and has completed construction of the landfill cap. The Company's share of future costs for operation and maintenance of the cap and landfill monitoring are expected to be less that $500,000. 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 not exceed $200,000. However, in the event that the contamination has migrated off the Company's property, these costs could increase. It is uncertain whether the claims against the Company in the foregoing environmental matters will be resolved during the pendency of the Chapter 11 proceedings. 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. 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. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Since the latter part of fiscal 1998, a number of executives have left the Company, including Eric Ellenbogen (President of the GBEG), John C. Ferrara (Chief Financial Officer) and Robert J. Asahina (President of the Adult Publishing division). Set forth below is information regarding the current executive officers of the Company. Richard E. Snyder Age: 65 Mr. Snyder has served as Chief Executive Officer of the Company since May 8, 1996. Mr. Snyder was President of the Company from January 31, 1996 to May 8, 1996. Prior to that time, Mr. Snyder had, since 1994, been an independent business consultant and investor. He was the Chairman and Chief Executive Officer of Simon & Schuster from 1975 to 1994. Mr. Snyder is a director of Reliance Group Holdings, Inc. Richard Collins Age: 47 Mr. Collins has served as Golden Books Publishing Company, Inc.'s Chief Operating Officer since June 1998. From July 1997 until June 1998, he served as the Company's Executive Vice President, Director of Sales and Retail Marketing. From October 1991 to July 1997, Mr. Collins was employed at Unilever/Lipton, most recently as Vice President, Strategic Customer Management. Philip Galanes Age: 35 Mr. Galanes has served as Chief Administrative Officer of the Company since November 1998. From December 1996 until November 1998 he served as the Company's General Counsel and Vice President, Legal Affairs. From January 1995 to November 1996, Mr. Galanes was an associate at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Previously, Mr. Galanes was an associate at the law firm of Debevoise & Plimpton. Colin Finkelstein Age: 39 Mr. Finkelstein has served as Executive Vice President and Chief Financial Officer of the Company since January, 1999. He served as Senior Vice President, Finance and Planning of the Company and Executive Vice President, General Manager of the Company's Children's Publishing Division from October 1996 until January 1999. From November 1988 until September 1996, Mr. Finkelstein was employed by EMI Music, Inc., most recently as Vice President, Controller. 11 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") has historically been traded over-the-counter and quoted on the NASDAQ National Market System (symbol GBFE). On February 17, 1999, the Company's Common Stock was delisted from the NASDAQ National Market System for failure to meet continued listing standards. Since that date the Company's Common Stock has been quoted on the OTC Bulletin Board. Common stockholders of record at December 26, 1998 numbered approximately 550. 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 26, 1998 - -------------------------------------------------------------------------------- High Low First Quarter 11 13/16 10 5/16 Second Quarter 11 3/4 3 3/4 Third Quarter 6 1/8 5/16 Fourth Quarter 7/8 1/8 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
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 its Common Stock and management does not currently anticipate the payment of cash dividends on the Common Stock in the foreseeable future. 12 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 its fiscal year end so as to end on the last Saturday of December in each year. As a result, the fiscal 1996 results from operations are not necessarily comparable to other periods as presented.
11 Months Year Ended Ended Year Ended December 26, December 27, December 28, February 3, January 28, 1998 1997 1996 1996 1995 (In Thousands, Except Per Share Data) Income Statement Data: Revenues Net sales $193,573 $242,481 $254,046 $369,572 $398,354 Royalties and other income 653 1,080 959 1,722 2,207 --- ----- --- ----- ----- Total Revenues 194,226 243,561 255,005 371,294 400,561 ------- ------- ------- ------- ------- Costs and expenses: Cost of sales 181,141 176,238 231,792 281,392 297,421 Selling, general and administrative 98,293 111,307 142,721 129,020 124,128 Restructuring, net of (gains) losses on sales of assets 6,462 (10,786) 65,741 6,701 (21,452) Write-off of assets 10,609 -- -- -- -- ------ Total costs and expenses 296,505 276,759 440,254 417,113 400,097 ------- ------- ------- ------- ------- (Loss) income before distributions on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures, interest expense and (benefit) provision for income taxes (102,279) (33,198) (185,249) (45,819) 464 Distributions on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures 10,282 10,282 3,597 -- -- Interest expense, net of interest income 16,704 6,163 6,764 9,896 15,573 ------ ----- ----- ----- ------ Loss before (benefit) provision for income taxes (129,265) (49,643) (195,610) (55,715) (15,109) (Benefit) provision for income taxes (666) 37 1,893 11,332 2,470 Net loss $ (128,599) $ (49,680) $ (197,503) $ (67,047) $ (17,579) =========== =========== =========== ============= ============ Net loss per common share - basic ($4.89) ($2.18) ($8.73) ($3.23) ($0.88) Balance sheet data (at period end): Working (deficiency) capital $ (264,297) $ 95,780 $ 168,210 $ 165,309 $ 228,240 Total assets 254,951 323,164 367,235 321,965 428,806 Long-term debt (including amount show as current) 150,000 149,897 149,862 149,845 149,828 Guaranteed preferred beneficial interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures 115,000 110,707 110,488 -- -- Convertible Preferred Stock - Series A -- -- -- 9,985 9,985 Common stockholders' (deficit) equity (189,081) (61,309) (19,637) 74,368 140,794
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Annual Report on Form 10-K and in particular Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as Item 1-Business and Item 3-Legal Proceedings, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results of operations and future financial condition may differ materially from those expressed or implied in any such forward-looking statements as a result of many factors, including factors that may be beyond the Company's control. The Company is currently operating its business as debtor-in-possession under Chapter 11 and continuation of the Company as a going concern is contingent upon, among other things, the ability to gain approval of the requisite parties under the United States Bankruptcy Code and confirmation by the Bankruptcy Court of the Company's Joint Plan of Reorganization. In addition, the Company's continuation as a going concern is contingent upon its ability to comply with its debtor-in-possession financing facility, resolution of various litigations against the Company, the Company's ability to generate sufficient cash from operations and to obtain financing sources to meet its future obligations. If the Company's Joint Plan of Reorganization is confirmed and consummated, continuation of the Company's business thereafter is dependent, among other things, on the Company's near-term ability to obtain adequate financing to meet cash flow obligations and medium-term ability to generate sufficient cash flow to meet its operational and financing requirements. Other factors that may cause actual results of operations and future financial condition to differ from those expressed or implied in any forward-looking statements contained herein include loss of key licenses, adverse changes in relationships with key customers, the degree of acceptance of new product introductions, the level of product returns, changes in consumer preferences, such as the growth of computer-based products, and consumer spending habits, competition from existing and potential competitors, pricing pressures, costs of labor and other costs and expenses, demographics and general economic conditions. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements contained herein or that may be made from time to time by or on behalf of the Company. Financial Condition, Liquidity and Capital Resources As a result of incurring operating losses, working capital deficiencies and negative operating cash flows, the Company, in 1998, defaulted on its Senior Notes, its NationsCredit Revolving Credit Facility, and other obligations. After extensive negotiations with the Senior Notes Steering Committee and the TOPrS Steering Committee, the Company reached an agreement in principle with its major creditors, pursuant to which its existing long-term debt would be significantly reduced. In accordance with that agreement, the Company and two of its subsidiaries on February 26, 1999 filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The Debtors have filed a Joint Plan of Reorganization and a Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code. As a result of the defaults and the filing of the petitions in the pre-negotiated Chapter 11 proceeding, the Company's long-term debt has been classified as current liabilities. The Company's independent auditors have issued their opinion on the consolidated financial statements as at December 26, 1998 with a going concern paragraph. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and they do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. The Joint Plan of Reorganization allows the Company to significantly reduce its existing debt, pay all trade creditors in full and, under the direction of its current management team, proceed with its publishing and entertainment operations. The restructuring of the Company's indebtedness and revised capital structure will be provided for as follows: 14 o The Senior Notes will be converted into (i) a new secured note in the principal amount of $87.0 million due 2004, with interest at the rate of 10%, if paid in cash, or, at the Company's option for the first three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new common stock to be issued post recapitalization, prior to dilution. The new note will be secured by the existing collateral already granted to the holders of the Senior Notes as well as certain additional collateral. o The TOPrS Indebtedness will be converted into 50% of the Company's new common stock to be issued post recapitalization, prior to dilution. o The Golden Press Holdings, L.L.C. loan in the amount of $10 million will be converted into 5% of the Company's new common stock to be issued post recapitalization, prior to dilution. Existing preferred and common shareholders will surrender their stock in exchange for out-of-the money warrants to purchase 5% of the new Company's stock to be allocated two-thirds to the preferred and one-third to the common shareholders, to be issued post recapitalization, prior to dilution. The restructuring also provides for a management stock incentive program for an amount of common stock equal to 10% of the common stock issued on the effective date of the Joint Plan of Reorganization. Of that amount, one-half (5%) will be allocated to senior management upon the effective date with the balance being made available for other management personnel and for future grants. Additionally, on the effective date of the Joint Plan of Reorganization, Richard E. Snyder's (the Company's current Chairman of the Board and Chief Executive Officer) employment agreement will be amended, as more fully described in the Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in consideration of his surrendering certain claims and rights under his current employment arrangements, 2-1/2% of the Company's new common stock, among other things. The foregoing summary of the Joint Plan of Reorganization does not purport to be complete and is subject to the terms of the Joint Plan of Reorganization. There can be no assurance that the Joint Plan of Reorganization will be confirmed by the Bankruptcy Court. If the Company is unable to obtain approval of its Joint Plan of Reorganization, the Company, its creditors and/or equity security holders may seek other alternatives for the Company, including the sale of the Company or parts thereof through an auction process. The Bankruptcy Court has approved a $55 million debtor-in-possession financing facility consisting of a $45 million credit facility and a $10 million term facility from The CIT Group (the "DIP Loan"). The DIP Loan is for an initial period of two years with annual renewals thereafter with interest rates ranging from the Prime Rate plus 1/8th of 1% to 5/8th of 1%. Additionally, the DIP Loan contains various financial covenants which the Company is required to maintain on a quarterly basis. The DIP Loan is secured by certain receivables and inventory of the Company. The Company utilized the proceeds from the DIP Loan to repay all outstanding amounts under the NationsCredit Revolving Credit Facility (approximately $9.6 million) with the remainder anticipated to be utilized to fund operations during the pendency of the Chapter 11 proceedings. Continuation of the Company as a going concern is contingent upon, among other things, the ability to gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court of the final Joint Plan of Reorganization, the ability to comply with the DIP Loan, resolution of various litigation against the Company and the Company's ability to return to profitability, generate sufficient cash from operations and obtain financing sources to meet its future obligations. Assuming the Joint Plan of Reorganization is confirmed and consummated, continuation of the business thereafter is dependent on the Company's near-term ability to obtain adequate exit financing to meet cash flow obligations and medium-term ability to generate sufficient cash flow to meet its operational and financing requirements. Under the Joint Plan of Reorganization, the Company's ability to obtain exit financing is limited to $60 million as long as the new $87 million secured note is outstanding, and initially to $45 million. Assuming the Joint Plan of Reorganization is confirmed and consummated, the Company is expected to adopt "Fresh Start Accounting" in accordance with SOP 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." 15 Cash Flow for Fiscal 1998 (including one-time transition costs of $12.2 million associated with the strategic redirection of the Company) utilized cash of approximately $42.1 million compared to cash utilized of approximately $82.3 million 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). Acquisitions of property, plant and equipment were approximately $13.4 million during Fiscal 1998 as compared to approximately $20.4 million during Fiscal 1997. Additions to the Company's film library were approximately $4.7 million during Fiscal 1998 as compared to approximately $6.3 million during Fiscal 1997. Working capital deficiency at December 26, 1998 was approximately $(264.3 million) as compared to working capital of approximately $95.8 million at December 27, 1997. The decrease resulted primarily from cash reductions, funding the loss from operations and the classification of all debt facilities as current. During 1998, the Company continued its disposition of non-core assets with the sale of its distribution center in Fayetteville, North Carolina. The facility was sold for approximately $7.2 million in cash which resulted in a loss of approximately $1.8 million, which was recorded in the consolidated statement of operations and comprehensive loss for the year ended December 26, 1998. In addition, the Company has recorded losses of (i) $4.7 million principally composed of a write-off of leasehold improvements associated with the Company's reduction of office space in connection with their New York lease agreement, (ii) $9.2 million related to the write down of the manufacturing facility in Sturtevant, WI, and (iii) $1.4 million related to the acceleration of the amortization period of one of the Company's entertainment productions. In 1998, the Company also incurred approximately $12.2 million in one-time transition costs consisting of: (i) $4.4 million in outsourcing premium, and (ii) $7.8 million in costs associated with the move to the new facility in Sturtevant, WI. On December 12, 1998, the Company signed an amended license agreement with Disney (the "Amended Disney License Agreement"). The Amended Disney License Agreement supersedes a prior agreement signed on September 26, 1997 that ran through December 31, 2001. The Amended Disney License Agreement commenced on December 12, 1998 and ends September 30, 2000 with a possible extension through September 30, 2001 under certain conditions. Royalty rates under the Amended Disney License Agreement vary by product. The Amended Disney License Agreement contains minimum royalty guarantees. The Company is required to meet contractual payments in effect at December 26, 1998 of $13.4 million in Fiscal 1999 and $14.9 million in Fiscal 2000, of which the minimum royalty guarantees under the Amended Disney License Agreement account for a significant portion. The Company expects to meet these obligations through cash generated from operations or from its DIP Loan or exit financing. The Company has announced its intention to sell the Sturtevant, WI facility. On March 25, 1999, the Bankruptcy Court gave formal approval to the Company to sell its Adult Publishing business for approximately $11.0 million, subject to working capital and certain other closing conditions. The Company reports results under three segments: (i) the Consumer Products Segment, (ii) the Commercial Products Segment and (iii) the Entertainment Segment. The Consumer Products Segment ("Publishing") includes the Children's and Adult Publishing Divisions and, during the eleven months ended December 28, 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 Acquisition on August 20, 1996, is reported as the Entertainment Segment and includes home video, television program licensing, merchandising and other character licensing results since its date of acquisition. During 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). 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 26, 1998 (Fiscal 1998) is 16 compared to the twelve months ended December 27, 1997 (Fiscal 1997), and Fiscal 1997 is compared to the eleven months ended December 28, 1996 (Fiscal 1996). Fiscal Year Ended December 26, 1998 Compared to Fiscal Year Ended December 27, 1997 Revenues Total revenues for Fiscal 1998 decreased $49.3 million (20.3%) to $194.2 million compared to $243.5 million for Fiscal 1997. Excluding the 20.9 million in revenues from the Cambridge printing facility which was sold during Fiscal 1997, revenues decreased $28.4 million (12.8%) to $194.2 million for the Fiscal 1998 compared to $222.7 million for Fiscal 1997 due to the factors described below. Consumer revenues decreased $21.0 million (12.2%) to $150.7 million for Fiscal 1998 compared to $171.7 million for Fiscal 1997. The decline for Fiscal 1998 is primarily due to lower electronic and education categories sales, higher returns in Fiscal 1998, and a temporary reduction in buying by certain major retailers, including K-Mart and Zellers during the first half of Fiscal 1998. This decline was partially offset by revenue increases in the Company's strategically priced Merrigold line, improvements in the trade and novelty category, and increased sales with certain major retailers including Target and other key distributors. Entertainment revenues decreased $0.3 million (1%) to $29.0 million for Fiscal 1998 compared to $29.3 million for Fiscal 1997. The decrease for Fiscal 1998 was primarily due to a decline in video sales of approximately $3.6 million offset by increases in television distribution and merchandising revenues of $2.5 million and $0.7 million, respectively. Commercial revenues for Fiscal 1998 (excluding the 20.9 million in revenues from the Cambridge printing facility which was sold during Fiscal 1997) decreased $7.1 million (32.9%) to $14.5 million compared to $21.6 million for Fiscal 1997. The overall decline for Fiscal 1998 was primarily due to the new manufacturing facility in Sturtevant, WI, which did not become fully operational until the second quarter of 1998. Gross Profit Total gross profit (excluding gross profit of $3.5 million in Fiscal 1997 from the sale of the Cambridge Printing Facility that was sold as described above and one-time transition costs of $4.4 million in Fiscal 1998 related to outsourcing premiums) decreased $46.3 million to $17.5 million (72.6)% for Fiscal 1998, from $63.8 million for Fiscal 1997 due to the factors described below. As a percentage of revenues, total gross profit margin (excluding the items noted above) decreased to 9.0% for Fiscal 1998 from 28.9% in Fiscal 1997. Consumer gross profit decreased $42.3 million (87.8)% to $5.9 million for Fiscal 1998, compared to $48.2 million for Fiscal 1997. As a percentage of revenues, the Consumer gross profit margin decreased to 3.9% for Fiscal 1998 from 28.1% for Fiscal 1997. The decrease in gross profit for Fiscal 1998 was primarily due to higher manufacturing costs, higher royalty rates associated with the Disney and Mattel license arrangements, an increased provision for royalty guarantees, higher inventory obsolescence reserves for inventory relating to expired license agreements, unprofitable product, and increased warehousing and shipping costs. Entertainment gross profit decreased $4.3 million (25.6)% to $11.6 million for Fiscal 1998 compared to $15.6 million for Fiscal 1997. As a percentage of revenues, the gross profit margin decreased to 40.0% for Fiscal 1998 compared to 53.1% for Fiscal 1997. The decrease is mainly attributable to lower margins related to Home Video sales due to lower overall sales and an increased provision for returns. This decrease was partially offset by favorable gross profit related to television distribution and merchandising sales. The Commercial Products segment utilizes the Company's manufacturing facility and third-party manufacturers to provide printing, graphic and distribution services to both the Company and third parties. During Fiscal 1997, the Company sold its primary third party printing operation (Cambridge) which had contributed a gross profit of 17 $3.5 million for Fiscal 1997. During Fiscal 1998, the Company's manufacturing facility was utilized primarily for internal production. Such internal production costs were allocated to the Consumer Products segment. Selling, General and Administrative Expenses Selling, general and administrative expenses (before consideration of one-time transition costs described below) decreased $9.4 million to $90.5 million for Fiscal 1998 compared to $99.9 million for Fiscal 1997. The decrease was primarily attributable to lower advertising, editorial and design costs, and a general reduction of overhead costs which were partially offset by an increase in the Company's general bad debt reserve. One-time transition costs of $7.8 million in Fiscal 1998 was comprised primarily of costs related to the move to the new manufacturing facility in Sturtevant, WI. One-time transition costs of $11.5 million in Fiscal 1997 was comprised of $3.1 million of moving costs associated with the new facilities, $3.5 million for outsourcing the information technology department, $4.5 million in consulting services associated with implementing the Company's Strategic Plan and $0.4 million in other costs. Restructuring, Net of (Gains) Losses on Sales of Assets Restructuring, net of (gains) losses on sales of assets of $6.5 million in Fiscal 1998 was comprised of: (i) $4.7 million principally consisting of a write-off of leasehold improvements associated with the Company's reduction of office space in connection with their New York lease agreement and (ii) $1.8 million associated with the sale of the Fayetteville facility. Restructuring, net of (gains) losses on sales of assets of $(10.8 million) in Fiscal 1997 was comprised primarily of a gain on the sale of the Company's Cambridge commercial printing operations. Write-Off of Assets Write-off of assets of $10.6 million in Fiscal 1998 was comprised on: (i) $9.2 million associated with the write-down of the Company's manufacturing facility in Sturtevant, WI due to recurring losses by the Company's Children's Publishing business primarily due to reduced level of sales, high operating costs (including an unfavorable lease agreement and disadvantageous union contracts) and the underutilization of the facility's capacity and (ii) $1.4 million related to the acceleration of the amortization period of one of the Company's entertainment productions. Interest Income Interest income for Fiscal 1998 decreased $3.9 million to $1.7 million from $5.6 million for Fiscal 1997. The decrease in interest income was attributable to decreased investment income as a result of lower cash and cash equivalent balances throughout the year. Interest Expense Interest expense (including the distributions on the TOPrS) for Fiscal 1998 increased by $6.7 million to $28.7 million, as compared to $22.0 million for Fiscal 1997 due to increased debt levels primarily associated with the NationsCredit Revolving Credit Facility which was entered into in June 1998. Total average outstanding debt (including the TOPrS) was $281.3 million for Fiscal 1998 and $265.0 million for Fiscal 1997. 18 Income Taxes The income tax benefit recorded in Fiscal 1998 primarily relates to current year losses of the Company's Canadian Subsidiary, which files separately in that jurisdiction. These losses are expected to offset income already recognized by that Subsidiary. In Fiscal 1997, the tax provision primarily related to various state and local income taxes imposed on the Company. At December 26, 1998, the Company has net operating loss carryforwards of approximately $305 million with expiration dates between 2011 and 2018. Utilization of such losses in the future could be significantly limited should there have been an ownership change (as defined in Internal Revenue code Section 382). Further, there are specific modifications which may be required to be made to the net operating loss carryforwards of the Company as a result of the Chapter 11 bankruptcy proceedings. At such time as the Company emerges from bankruptcy, it is likely there will be an ownership change for tax purposes which would result in a Section 382 limitation on future utilization of net operating losses. Since there are a number of variables which could affect the Company's Bankruptcy proceedings (including the fact that the Joint Plan of Reorganization has not yet been approved by the Bankruptcy Court), it is not currently possible to determine whether the Company's net operating loss carryforwards will produce tax benefits in the future. Benefit was not provided for these loss carryforwards at December 26, 1998. Net Loss The net loss for Fiscal 1998 was $(128.6) million, or $(4.89) per basic common share, compared to a net loss of $(49.7) million , or $(2.18) per basic common share, for the year ended December 27, 1997. The changes were due to the factors described above. Fiscal Year Ended December 27, 1997 (Fiscal 1997) Compared to Eleven Months Ended December 28, 1996 (Fiscal 1996) Revenues 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. Entertainment Segment revenues increased $25.2 million to $29.3 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 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 19 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 28.9% 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 53.1% 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 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 (i) $3.5 million for outsourcing of the information technology department, (ii) $3.1 million of moving costs associated with new facilities, (iii) $4.5 million in consulting services associated with implementing the Strategic Plan, and (iv) $0.4 million in other costs 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 Expense, net 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. 20 Income Taxes The Company did not incur a significant provision or benefit for income taxes in Fiscal 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. The provision for Fiscal 1996 pertained principally to anticipated resolution of outstanding issues from prior years. 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 Fiscal 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: 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 non-productive 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. 21 (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. Legal Proceedings The Company is currently involved in various litigation as described under "Item 3. Legal Proceedings." 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. Year 2000 Compliance Management has initiated an enterprise-wide program to prepare the Company's computer systems and applications for the Year 2000 (Y2K), as well as to identify and address any other Y2K operational issues which may affect the Company. Updates on the Company's Year 2000 program are presented regularly to senior management. The Company's Year 2000 program began in 1997 and is currently being administered by internal staff augmented by outside consultants. The program consists of the following three components relating to the Company's operations: (i) Information Technology ("IT") computer systems and applications that may be impacted by the Year 2000 problem, (ii) non-IT systems and equipment which include embedded technology that may be impacted by the Year 2000 problem and (iii) third-party suppliers and customers with which the Company has material relationships. The general phases common to all three components of the Company's Year 2000 program are: (1) ASSESSMENT (the identification, assessment and prioritization of the Y2K issues facing the Company in each of the above areas and the actions to be taken in respect of such issues or items); (2) REMEDIATION (implementation of the specific actions determined upon assessment, including repair, modification or replacement of items that are determined not to be Year 2000 compliant); (3) TESTING (testing of the new or modified information systems, other systems, and equipment to verify the Year 2000 readiness); (4) CONTINGENCY PLANNING (designing contingency and business continuation plans for the Company; and (5) IMPLEMENTATION (actual operation of systems and equipment and, if necessary, the actual implementation of any contingency plans in the event Year 2000 problems occur, notwithstanding the Company's remediation program). The progress to date of the three components in the Company's Year 2000 program is as follows: IT SYSTEMS AND APPLICATIONS. The principal IT systems and applications of the Company affected by Year 2000 issues are Order Processing, Purchasing, Manufacturing, Distribution Systems and Financial Systems. The Company has completed the Assessment phase with respect to all IT systems and applications and has begun remediation efforts. The Company anticipates that the replacement phase related to these principal systems and applications should be completed by the end of July 1999 and that the Testing, Contingency Planning and Implementation phases should be substantially completed by the end of August 1999. In addition, the Company expects to implement the remainder of Year 2000 remediated IT systems and applications based on current assessments prior to September 30, 1999. Excluding normal system upgrades, the Company estimates that total costs for conversion and testing of new or modified IT systems and applications will aggregate approximately $2.0 million to $2.2 million of which an aggregate of $.25 million had been incurred to date. Total conversion and testing costs through fiscal 1999 are estimated at $1.9 million. 22 NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the Company which utilizes embedded technology affected by Y2K issues include: security systems, elevator systems, HVAC, phone systems, business machines, printing press equipment and distribution systems. The Company has completed the Assessment of its principal non-IT equipment and has begun remediation. The Company anticipates the Remediation phase related to these principal systems should be substantially completed by the end of April 1999 and that the Testing, Contingency Planning and Implementation phases should be substantially completed by the end of May, 1999. The Company estimates that total costs for modifying or replacing new systems and equipment in this area will be approximately $.50 million, of which an aggregate of $.05 million has been incurred to date. Total modification and replacement costs through fiscal 1999 are estimated at $.45 million. MATERIAL THIRD PARTY RELATIONSHIPS. Material third party suppliers/vendors affected by Year 2000 issues relates primarily to paper and printing supplies, distribution/delivery services, fulfillment, licensing and financial services. The Assessment phase for determining the Year 2000 readiness of the Company's principal suppliers is ongoing; however the Company has received dates of compliance from a majority of those suppliers. Concentration has been centered on mission critical vendors without whom the Company would be at risk for doing business. Substantially all of the Company's principal suppliers have reported that they have initiated Year 2000 programs. The Company will seek updates from these parties to attempt to ascertain the adequacy of their programs as it relates to the Company including personal contact interviews for those mission critical suppliers. The Company expects to have completed these updates by May 1999. The Company anticipates that it will develop contingency plans with respect to its principal third party suppliers by the end of May 1999. Costs to the Company in this area, excluding costs due to unanticipated third party Year 2000 problems, will principally consist of internal staff costs, which are not expected to be material. Including the costs set forth above, the Company estimates that total program costs for implementing its Year 2000 program will be $2.5 million to $2.7 million, of which total program costs to date have been $.3 million. Total program costs through fiscal 1999 are estimated at $2.2 million to $2.4 million. These costs include costs related to the matters above, as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the Company for the Year 2000. The costs do not include internal staff costs incurred or to be incurred in connection with the implementation of the program. Costs are expected to be expensed as incurred, and cash generated from the Company's operations or borrowings under its credit agreements will fund such costs. The above-stated amounts have been budgeted for the appropriate fiscal years. Projected Year 2000 costs for fiscal 1999 comprise approximately 15% to 20% of the Company's IT budget for that period. Based on the current progress of the Company's Year 2000 program, the Company anticipates its Year 2000 program to be substantially completed by September 30, 1999. As a result of the Company's Year 2000 program, it is anticipated that there may be delays in other new and continuing IT projects, although diligence is being put forth to allow for concurrent development where possible. However, no material adverse affect is expected from any delays, as the Company has procedures in place to ensure that critical projects will be handled in a timely manner. The cost of the Company's Year 2000 program and the dates provided herein are based on management's best estimates, which were derived utilizing numerous assumptions of future events, many of which are beyond the Company's control. The failure to correct a material Year 2000 problem could result in an interruption in certain normal business activities or operations of the Company. Such interruptions could materially and adversely affect the Company's financial condition, results of operations and cash flows. Based on current plans and assumptions, the Company does not expect that the Year 2000 issue will have an adverse impact on the Company as a whole. Due to the general uncertainty inherent in the Year 2000 problem, however, there can be no assurance that all Year 2000 problems will be foreseen and corrected, or if foreseen, corrected on a timely basis, or that no material disruption to the Company's business or operations will occur. Further, the Company's expectations are based on the assumption that there will be no general failure of external local, national or international systems (including power, communication, postal or other transportation systems) necessary for the ordinary conduct of business. The Company is currently assessing those scenarios in which unexpected failures would have a material adverse effect on the Company and will attempt to develop 23 contingency plans designed to deal with such scenarios. There can be no assurance, however, that successful contingency plans can, in fact, be developed or implemented. 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. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standard's Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), which is effective for all quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Unless the entity can treat the derivative as a hedge according to certain criteria, the entity may be required to deduct any changes in the derivative's fair value from its operating income. The adoption of SFAS 133 is not expected to have a material effect on the Company's Consolidated Financial Statements. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 25 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 Quarter Quarter Quarter 1998 Total revenues $ 46,534 $ 43,145 $ 52,020 $ 52,527 Gross profit 9,559 1,313 6,589 (4,376) Net loss (1) (20,872) (30,642) (18,850) (58,235) Net loss per common share - basic (0.85) (1.21) (0.71) (2.10) Weighted average number of common shares - basic 27,077 27,165 27,525 27,965 1997 Total revenues $ 65,624 $ 50,445 $ 52,805 $ 74,687 Gross profit (loss) 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 (0.41) (0.52) (0.76) (0.51) Weighted average number of common shares - basic 25,983 26,139 26,489 26,814
(1) Includes a charge of $9.2 million relating to a writedown of long-lived assets at the Sturtevant, WI facility during the fourth quarter. (2) Includes gain on disposal of a number of items, mainly the Cambridge facility, of $10,209 during the fourth quarter. 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to Executive Officers required by this item is included in Part I of the Company's Annual Report on Form 10-K. Directors of Registrant Shahara Ahmad-Llewellyn Director since: May 8, 1996 Age: 55 Ms. Ahmad-Llewellyn is Vice Chairman of Philadelphia Coca-Cola Bottling Company Inc. From its founding in 1971 until 1991, she served as President of H.A.V.A. Inc., a home health care company. Ms. Ahmad-Llewellyn is President of the Board of Directors of the Northside Center for Child Development and a member of the Board of Directors of The New 42nd Street Corporation (The New Victory Theatre), Jazz at Lincoln Center, WNET Channel Thirteen and the National Board of America's Promise -- The Alliance for Youth. Ms. Ahmad-Llewellyn previously served as Chairperson of the Small Business Administration District Advisory Council for Region II, as Vice President of the Home Care Council of New York City Inc. and as a Presidential appointee to the White House Conference on Small Business. Lorne Michaels Director since: September 17, 1996 Age: 54 Mr. Michaels is the Chairman and founder of Broadway Video, Inc., an entertainment company based in New York City. Mr. Michaels has worked for the National Broadcasting Company since 1975, producing such comedy shows as Saturday Night Live and Late Night With Conan O'Brien. Since 1991, Mr. Michaels has produced motion pictures for Paramount Pictures. Marshall Rose Director since: May 8, 1996 Age: 62 Mr. Rose is Chairman of The Georgetown Group, Inc., a privately held real estate development and financial services group. Mr. Rose serves as a director of One Liberty Properties, Estee Lauder Companies, Inc. and BRT Realty Trust. In addition, Mr. Rose serves as Chairman of the Board of Trustees of The New York Public Library; as a Trustee of the New York University Medical Center; as Director of Lincoln Center for the Performing Arts; as a member of the Executive Committee of the Board of Visitors of the Graduate School and University Center of The City University of New York; as Director and Executive Committee member of the Bryant Park Restoration Committee; and as a Trustee of the Robert Steel Foundation for Pediatric Cancer Research. Richard E. Snyder Director since: May 8, 1996 Age: 65 Mr. Snyder has been Chairman of the Board of Directors and Chief Executive Officer of the Company since May 8, 1996. Mr. Snyder was President of the Company from January 31, 1996 to May 8, 1996. Prior to that time, Mr. Snyder had, since 1994, been an independent business consultant and investor. He was the Chairman and Chief Executive Officer of Simon & Schuster from 1975 to 1994. Mr. Snyder is a director of Reliance Group Holdings, Inc. and HSN, Inc. 28 H. Brian Thompson Director since: 1996 Age: 60 Mr. Thompson has been Chairman of the Board of Directors and Chief Executive Officer of LCI International and its subsidiaries since July 1991. Mr. Thompson previously served as Executive Vice President of MCI Communications Corporation from 1981 to 1990, with responsibility for its operating divisions, including MCI International. Prior to that time, Mr. Thompson was a management consultant with McKinsey & Company for nine years in its Washington, D.C. office. Mr. Thompson serves as a member of the board of directors of Microdyne Corporation and Comcast UK Cable Partners Limited and is a member of the Listed Company Advisory Committee to The New York Stock Exchange Board of Directors. John L. Vogelstein Director since: May 8, 1996 Age: 64 Mr. Vogelstein has served since 1982 as Vice Chairman of the Board of Directors, and since 1994 as President, of E.M. Warburg, Pincus & Co., LLC. Prior thereto, he was an officer and a director of E.M. Warburg, Pincus & Co., LLC and certain of its affiliates. Mr. Vogelstein currently is a director of ADVO Inc., Journal Registry Company, Mattel, Inc., and several privately held companies. Douglas M. Karp Director since: July 8, 1998 Age: 43 Mr. Karp is Managing Director and a member of the Operating Committee of E. M. Warburg Pincus & Company, L.L.C. Prior to joining Warburg Pincus he was a Managing Director of Mergers and Acquisitions at Salomon Brothers, Inc. and a Manager with the Boston Consulting Group and founder of its New York office. Mr. Karp is a member of the Board of Directors of Qwest Communications, Journal Register Company, TV Filme, Inc., Primus Telecommunications Group, StarMedia Network, Inc. and PageNet do Brasil. He is a member of the Connecticut and Florida Bars, a member of the Board of Trustees of the New Canaan Country School, a director of the Horizons education program and the City Parks Foundation. 29 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the aggregate compensation paid or accrued by the Company to (i) its Chief Executive Officer, (ii) its executive officers, other than the Chief Executive Officer, who were serving as executive officers at December 26, 1998, and (iii) two former executive officers who would have been among the four most highly compensated executive officers other than the Chief Executive Officer during Fiscal 1998.
Summary Compensation Table Long Term Compensation ------------------------- Annual Compensation Awards -------------------------------------------------------------------------------- Other Name and Annual Restricted Securities All Other Principal Compensation Stock Underlying Compensation Position Year (1) Salary ($) Bonus ($) ($) Awards ($) Options (#) ($ -------- -------- ---------- --------- --- ---------- ----------- -- Richard E. Snyder FY98 $949,985 --- $403,099 (2) $ --- --- $1,722 (3) Chairman and Chief FY97 $937,885 $500,000 $442,147 --- 293,210 (4) $1,722 (3) Executive Officer FY96 465,891 491,667 276,143 --- 1,271,089 431 Philip Galanes FY98 319,107 --- --- --- 240,000 --- Chief Administrative FY97 236,925 (5) --- --- --- 62,243 (5) --- Officer FY96 16,053 --- --- --- 35,000 --- Richard Collins FY98 317,852 --- --- --- 65,000 --- Chief Operating FY97 94,490 --- --- --- 57,350 --- Officer FY96 --- --- --- --- --- --- Robert J. Asahina (6) FY98 200,000 --- --- --- --- --- President of the FY97 200,000 ---(7) --- --- 26,682 (7) --- Golden Books Adult FY96 153,846 75,000 --- --- 100,000 --- Publishing division Eric Ellenbogen (8) FY98 1,062,486 --- --- --- 65,000 $1,722 (3) President of the FY97 769,808 ---(9) --- --- 277,194 (9) --- Golden Books FY96 256,731 105,000 --- --- 500,000 --- Entertainment Group, Executive Vice President and Director John C. Ferrara (10) FY98 334,316 --- --- --- 445,000 --- Chief Financial FY97 --- --- --- --- --- --- Officer FY96 --- --- --- --- --- ---
- --------------------------- (1) The three years reported upon in the table are the fiscal years ended December 28, 1996 ("FY96"), December 27, 1997 ("FY97") and December 26, 1999 ("FY98"). 30 (2) Includes $340,000 of imputed income with respect to the non-recourse note issued by Mr. Snyder to the Company in connection with his purchase of incentive stock in January 1996. See "Executive Compensation -- Employment Agreements -- Richard E. Snyder." (3) Represents payments made by the Company with respect to life insurance premiums. (4) Pursuant to the Company's Executive Officer Bonus Plan, in May 1997, Mr. Snyder elected to exchange 100% of his 1997 target bonus opportunity for options issued under the Company's 1995 Stock Option Plan, as amended, with a value (determined pursuant to the Black-Scholes method) equal to twice the amount of such target opportunity. In 1997, the Company's operating divisions (with the exception of the Golden Books Entertainment Group ("GBEG")) did not achieve the financial targets necessary for the payment of bonuses to eligible employees pursuant to the Company's Executive Officer Bonus Plan. However, on December 15, 1997, the Compensation Committee decided to reward eligible employees for their contributions. With respect to employees who had previously elected to exchange all or a percentage of their target bonuses for options pursuant to the Company's Executive Officer Bonus Plan, the Compensation Committee reduced the amount of such options initially granted in May 1997 by 25% (12.5% with respect to GBEG employees). (5) Pursuant to the Company's Executive Officer Bonus Plan, in May 1997, Mr. Galanes elected to exchange 100% of his 1997 target bonus opportunity for options issued under the Company's 1995 Stock Option Plan, as amended, with a value (determined pursuant to the Black-Scholes method) equal to twice the amount of such target opportunity. In 1997, the Company's operating divisions (with the exception of GBEG) did not achieve the financial targets necessary for the payment of bonuses to eligible employees pursuant to the Company's Executive Officer Bonus Plan. However, on December 15, 1997, the Compensation Committee decided to reward eligible employees for their contributions. With respect to employees who had previously elected to exchange all or a percentage of their target bonuses for options pursuant to the Company's Executive Officer Bonus Plan, the Compensation Committee reduced the amount of such options initially granted in May 1997 by 25% (12.5% with respect to GBEG employees). (6) Mr. Asahina's employment with the Company terminated in January 1999. (7) Pursuant to the Company's Executive Officer Bonus Plan, in May 1997, Mr. Asahina elected to exchange 25% of his 1997 target bonus opportunity for options issued under the Company's 1995 Stock Option Plan, as amended, with a value (determined pursuant to the Black-Scholes method) equal to twice the amount of such target opportunity. In 1997, the Company's operating divisions (with the exception of GBEG) did not achieve the financial targets necessary for the payment of bonuses to eligible employees pursuant to the Company's Executive Officer Bonus Plan. However, on December 15, 1997, the Compensation Committee decided to reward eligible employees for their contributions by granting stock options to such employees in an amount equal to .75 options for every $10 of target bonus at an exercise price of $10, the closing price of the Common Stock on December 15, 1997. With respect to employees who had previously elected to exchange all or a percentage of their target bonuses for options pursuant to the Company's Executive Officer Bonus Plan, the Compensation Committee reduced the amount of such options initially granted in May 1997 by 25% (12.5% with respect to GBEG employees). (8) Mr. Ellenbogen's employment with the Company terminated in November 1998. Mr. Ellenbogen resigned as a director in November 1998. (9) Pursuant to the Company's Executive Officer Bonus Plan, in May 1997, Mr. Ellenbogen elected to exchange 100% of his 1997 target bonus opportunity for options issued under the Company's 1995 Stock Option Plan, as amended, with a value (determined pursuant to the Black-Scholes method) equal to twice the amount of such target opportunity. In 1997, the Company's operating divisions (with the exception of GBEG) did not achieve the financial targets necessary for the payment of bonuses to eligible employees pursuant to the Company's Executive Officer Bonus Plan. However, on December 15, 1997, the Compensation Committee decided to 31 reward eligible employees for their contributions. With respect to employees who had previously elected to exchange all or a percentage of their target bonuses for options pursuant to the Company's Executive Officer Bonus Plan, the Compensation Committee reduced the amount of such options initially granted in May 1997 by 25% (12.5% with respect to GBEG employees). (10) John Ferrara ceased to act as Chief Financial Officer of the Company in December 1998. Mr. Snyder is currently employed pursuant to an employment agreement dated May 8, 1996, as amended. See Note 14 to the Consolidated Financial Statements. It is contemplated that on the confirmation of the Joint Plan of Reorganization, such employment agreement shall be deemed canceled and terminated and the Company and Mr. Snyder will enter into a revised employment agreement. On July 28, 1997, the Company entered into an employment agreement with Mr. Collins, commencing on such date and continuing through December 31, 2000, which agreement was subsequently amended by Amendment No. 1 dated September 1, 1998. Under his employment agreement as amended, Mr. Collins is entitled to receive an annual base salary of $300,000 for each year of the term. In addition, Mr. Collins is eligible to receive an annual bonus pursuant to the Bonus Plan of up to 200% of his annual base salary, subject to the attainment of certain goals, with a target bonus of 100% of his annual base salary. In the event the Company terminates Mr. Collins' employment for any reason other than cause or Mr. Collins terminates his employment for good reason, the Company will be required to pay him, in addition to accrued obligations, his annual base salary for the longer of (a) two years or (b) the duration of the term of the agreement, to be offset by any new compensation earned over the balance of such period by Mr. Collins. Pursuant to his employment agreement, Mr. Collins was granted, under the Company's 1995 Stock Option Plan, options to acquire 25,000 shares of Common Stock of the Company at an exercise price of $12.375. Such options have a term of seven years from the date of grant and become exercisable in equal parts on each of the first three consecutive anniversaries of the date of grant. On May 7, 1998, the Company entered into an amended and restated employment agreement with Philip Galanes, commencing on such date and continuing through May 6, 2002. Under the agreement, Mr. Galanes is entitled to receive an annual base salary of $350,000 for the first year of the term, $357,000 for the second year of the term, and $400,000 for the third and fourth years of the term. In addition, Mr. Galanes is eligible to receive an annual bonus pursuant to the Bonus Plan of up to 200% of his annual base salary, subject to the attainment of certain goals, with a target bonus of 100% of his annual base salary. In the event the Company terminates Mr. Galanes' employment for any reason other than cause or Mr. Galanes' terminates is employment for good reason (including upon a change of control), the Company will be required to pay him, in addition to accrued obligations, his annual base salary and target bonus for two years. Pursuant to his employment agreement, Mr. Galanes was granted, under the Company's 1995 Stock Option Plan, options to acquire 200,000 shares of Common Stock of the Company at an exercise price of $10.438. Such options have a term of seven years from the date of grant and become exercisable in equal parts on each of the first four consecutive anniversaries of the date of grant. Compensation decisions relating to executive officers, including decisions with respect to the granting of options, were made through the first part of fiscal 1998 by a Board Compensation Committee. Certain decisions regarding severance arrangements made later in fiscal 1998 were made by the Board of Directors. During the latter part of 1998, the Company negotiated with the committees representing creditors with respect to issues of executive compensation in the reorganized Company, as proposed in the Joint Plan of Reorganization. 32 FIVE-YEAR PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative total stockholder return on the Company's Common Stock against the cumulative total return for (i) the Standard & Poor's 500 Composite Index ("S&P 500 Index") and (ii) an index of Peer Group companies selected by the Company for the five-year period ended December 26, 1998 (the "Peer Group"). The graph below assumes that $100 was invested at the close of business at December 26, 1993 in the Company's Common Stock, the S&P 500 Index and the Peer Group. The total return calculated assumes the reinvestment of dividends. The Company does not pay a dividend on its Common Stock. [GRAPHIC OMITTED] The Peer Group is comprised of other publishing and related companies of comparable size, complexity and quality as selected by the Company with the assistance of an outside consultant. The Peer Group consists of the following companies: American Greetings Corporation, Banta Corp., Courier Corporation, Daily Journal Corp. S.C., Gibson Greetings Inc., Intervisual Books Inc., John Wiley and Sons Inc., Pharmaceuticals Marketing Services, Pulitzer Publishing Co., Scholastic Corporation, Thomas Nelson Inc., and Topps Company Inc. The following companies, which have previously been included in the Company's Peer Group, are not included because the common stock trading prices for such companies are unavailable: American City Business Journals Inc.,Commerce Clearing House, Inc., Multimedia Incorporated, Price Stern Sloan Inc. and United Newspapers Public Ltd. Co. ADR. 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP BY MANAGEMENT Pursuant to the Joint Plan of Reorganization existing holders of the Company's Preferred and Common Stock will surrender their stock for out-of-the money warrants to purchase 5% of the new company stock to be allocated two-thirds to the preferred shareholders and one-third to the common shareholders, to be issued post recapitalization, prior to dilution. See Item 1. Business -- Recent Events. The following table sets forth certain information regarding the beneficial ownership of the Common Stock and the Preferred Stock as of April 6, 1999 (except as set forth in notes, 5, 6 and 7 below), based upon 28,299,434 shares of Common Stock and 13,000 shares of Preferred Stock outstanding on such date, by (a) each person or group known by the Company to be the beneficial owner of more than 5% of each such class of capital stock, (b) each of the Company's Directors, (c) the Company's Chief Executive Officer and the other current executive officers of the Company named in the Summary Compensation Table and (d) the Directors and executive officers of the Company as a group.
Beneficial Ownership (1) -------------------------------------------------------------------------- Number of Shares of Number of Shares of Percentage of Name and Address of Beneficial Owner Preferred Stock Common Stock Common Stock (1) 5% Holders Warburg, Pincus Ventures, L.P. Warburg, Pincus & Co. E.M. Warburg, Pincus & Co., LLC Golden Press Holding, L.L.C. 466 Lexington Avenue New York, New York 10017.......... 13,000 (2) 15,018,271 (3) 43.2% (4) Richard A. Bernstein 444 Madison Avenue New York, New York 10022.......... --- 3,513,271 (5) 12.4% Hallmark Cards, Inc. H C Crown Corp. 2501 McGee Street Kansas City, Missouri 64141....... --- 2,356,198 (6) 8.3% Directors and Executive Officers Shahara Ahmad-Llewellyn (7) --- 19,100 * Lorne Michaels (7) --- 455,550 1.6% Marshall Rose (7) --- 15,000 * H. Brian Thompson (7) --- 15,000 * John L. Vogelstein (8) --- --- --- Douglas M. Karp (8) --- --- --- Philip Galanes --- 85,576 * Richard Collins --- 16,667 * Richard E. Snyder (9) --- 684,432 2.4% Directors and executive officers of the Company as a group --- 1,291,325 4.6%
- --------------------- * Less than one percent. 34 (1) Except where otherwise indicated, the Company believes that all parties named in the table, based on information provided by such persons, have sole voting and dispositive power over the securities beneficially owned by them, subject to community property laws, where applicable. For purposes of this table, a person or group of persons is deemed to be the "beneficial owner" of any shares that such person has the right to acquire within 60 days. For purposes of computing the percentage of outstanding shares held by each person or group of persons named in the table on a given date, any security that such person or persons has the right to acquire within 60 days of April 6,1999 is deemed to be outstanding (including by way of conversion of the Preferred Stock), but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) Each share of Preferred Stock is convertible into 500 shares of Common Stock, or a total of 6,500,000 shares of Common Stock. GPH owns 100% of the issued and outstanding shares of Preferred Stock. (3) Includes 1,755,000 shares of Common Stock owned by GPH, a warrant held by GPH (the "Warrant") to purchase 3,250,000 shares of Common Stock that became exercisable on May 8, 1998 and 6,500,000 shares of Common Stock issuable upon conversion of the 13,000 shares of Preferred Stock owned by GPH. Each of the other reporting entities may be deemed to share the power to vote and dispose of the shares of Common Stock held by GPH, the shares of Common Stock issuable upon conversion of the Preferred Stock and the shares of Common Stock issuable upon exercise of the Warrant. Also includes 3,513,271 shares of Common Stock beneficially owned by Richard A. Bernstein (the "Bernstein Shares") as to which Mr. Bernstein and certain of his affiliates have granted irrevocable proxies to GPH to vote such shares on any matter presented for the vote or consent of the Company's stockholders. Each of the reporting entities may be deemed to beneficially own the Bernstein Shares and to share the power to vote or direct the voting of the Bernstein Shares. (4) Assumes the conversion of the Preferred Stock into Common Stock. (5) Beneficial ownership of these shares was reported in Amendment No. 3 to its Schedule 13G, that was filed on February 10, 1999. (6) Beneficial ownership of these shares was reported in a Schedule 13D that was filed on September 10, 1996. H C Crown Corp. ("H C Crown") is a wholly owned subsidiary of Hallmark Cards, Incorporated ("Hallmark") and Hallmark may be deemed to beneficially own all of the shares owned by H C Crown. (7) Includes non-qualified stock options to purchase 15,000 shares of Common Stock granted pursuant to the 1995 Stock Option Plan, as amended, of the Company. Such options are presently exercisable. (8) Such person is a general partner of WP, the general partner of Warburg, Pincus Ventures, an equity investor in GPH. Beneficial ownership of the securities owned by GPH is disclaimed by such person. (9) Consists of 599,465 shares of Common Stock issued to Mr. Snyder on January 31, 1996 pursuant to his employment agreement with the Company and 84,967 shares of Common Stock issued to Mr. Snyder pursuant to certain anti-dilution provisions contained therein. Mr. Snyder controls the Snyder 1996 Family Limited Partnership, an equity investor in GPH. Mr. Snyder disclaims beneficial ownership of the securities owned by GPH. Mr. Snyder also owns non-qualified stock options to purchase 1,271,089 shares of Common Stock granted pursuant to Mr. Snyder's employment agreement with the Company, including pursuant to certain anti-dilution provisions contained therein, as well as additional stock options to purchase 293,210 shares of 35 Common Stock which Mr. Snyder received as consideration for his election to forego his 1997 bonus pursuant to the Company's 1997 Executive Officer Bonus Plan. None of the options owned by Mr. Snyder are exercisable within 60 days of April 6, 1999. 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 current director of the Company) is the Managing Partner, has acted as a real estate advisor to the Company. In March 1999, the Company and Georgetown agreed to terminate all remaining obligations under the Georgetown agreement. Pursuant to the Georgetown Agreement, the Company was 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 $131,000 in respect of a property located at 850 Third Avenue, New York, New York, (iv) approximately $217,000 in respect of a property located in Fayetteville, North Carolina, and (v) approximately $78,000 in respect of a property located in Coffeyville, KS. Tribeca Transaction Pursuant to a letter agreement (the "Tribeca Agreement") dated as of July 1, 1996, the Company was obligated to pay to Tribeca Technologies LLC (" Tribeca"), a limited liability company in which Philip E. Rowley (an officer of the Company through May 1998) was 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 employment of the Company at such time); (i) July 1, 1996; (ii) July 1, 1997; and (iii) July 1, 1998. In consideration for such payments, Tribeca is obligated to pay the Company one-third of the aggregate amount of any 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 26, 1998, 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. 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. The Company has paid approximately $75,000 to Powerhouse in royalties through December 26, 1998. 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, 37 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. 38 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 Restated Certificate of Incorporation of the Registrant dated March 25, 1998 (incorporated by reference to the Registrant's Annual Report on Form 10-K for fiscal year 1997 (the "1997 Form 10-K")). By-laws of the Registrant (incorporated by reference to Exhibit 3.4 to the 1988 Form 10-K). Form of certificate for shares of the Registrant's Common Stock (incorporated by reference to Exhibit 4.4 to Registration Statement No. 33-4127). Certificate of Designation of the Series B Convertible Preferred Stock dated May 8, 1996 (included in Exhibit 3.1 filed herewith). Indenture governing the Golden Books Publishing Company's 7.65% Senior Notes due 2002 (incorporated by reference to Registration Statement 33-51568). Certificate of Trust of Golden Book Financing Trust (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement No. 333-14335). 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")). 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). Form of 8 3/4% Preferred Securities (included in Exhibit A-1 to Exhibit 4.4 above). Form of 8 3/4% Convertible Debentures (included in Exhibit A to Exhibit 4.5 above). 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). 2.1* Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated March 25, 1999. 2.2* Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code for the Joint Plan of Reorganization of the Debtors, dated March 25, 1999. 39 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 (incorporated by reference to Exhibit 10.05 to the 1997 Form 10-K). 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). 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). 40 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 (incorporated by reference to Exhibit 10.16 to the 1997 Form 10-K). 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 (incorporated by reference to Exhibit 10.20 to the 1997 Form 10-K). 10.21* Employment Agreement dated May 7, 1998 between Golden Books Family Entertainment, Inc. and Philip Galanes. 10.22 Industrial Building Lease Agreement dated as of June 23, 1997 between Golden Books Family Entertainment, Inc. and First Industrial Development Services Group, L.P. (incorporated by reference to Exhibit 10.21 to the 1997 Form 10-K). 10.23* Real Estate Purchase Agreement dated October 13, 1998 between Golden Books Family Entertainment, Inc. and Ablah Enterprises, Inc. 10.24 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). 10.25 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). 10.26* Licensed Book Publishing Agreement between Disney Licensed Publishing and Golden Books Publishing Company, Inc., dated December 12, 1998. 21.1 * List of Subsidiaries. 23.1 * Consent of Ernst & Young 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. Reports on Form 8-K filed during the three months ended December 26, 1998: Form 8-K filed September 16, 1998 41 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. April 9, 1999 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. /s/ Richard. E. Snyder Richard E. Snyder Chairman of the Board of Directors and Chief Executive Officer /s/ Colin Finkelstein Colin Finkelstein 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 April 9, 1999 - ---------------------------- Richard E. Snyder Executive Officer /s/ Shahara Ahmad-Llewellyn Director April 9, 1999 - ---------------------------- Shahara Ahmad-Llewellyn /s/ Marshall Rose Director April 9, 1999 - ---------------------------- Marshall Rose - ---------------------------- Director April 9, 1999 John L. Vogelstein /s/ H. Brian Thompson - ---------------------------- Director April 9, 1999 H. Brian Thompson - ---------------------------- Director April 9, 1999 Lorne Michaels /s/ Douglas Karp - ---------------------------- Director April 9, 1999 Douglas Karp GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page Report of Independent Auditors..............................................F-2 Consolidated Financial Statements: Consolidated Balance Sheets at December 26, 1998 and December 27, 1997......F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996...................................F-5 Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996...........................................................F-6 Consolidated Statements of Cash Flows for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996.........F-7 Notes to Consolidated Financial Statements..................................F-9 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 (the "Company") as of December 26, 1998 and December 27, 1997, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit and cash flows for the years then ended 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 26, 1998 and December 27, 1997, and the consolidated results of their operations and their cash flows for the years then ended 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, on February 26, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company is currently operating its business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), and continuation of the Company as a going concern is contingent upon, among other things, the ability to gain approval of the requisite parties under the United States Bankruptcy Code and confirmation by the Bankruptcy Court of the joint plan of reorganization, the ability to comply with its debtor-in-possession financing facility, resolution of various litigation against the Company, and the Company's ability to return to profitability, generate sufficient cash from operations and obtain financing sources to meet its future obligations. In addition, the Company has experienced operating losses, working capital deficiencies, negative operating cash flows and is currently in default under substantially all of its debt agreements. These matters raise substantial doubt about the Company's ability to continue as a going concern. In the event a joint plan of reorganization is confirmed and consummated, continuation of the business thereafter is dependent on the Company's ability to obtain adequate exit financing to meet cash flow obligations and ability to generate sufficient cash flow to meet its operational and financing requirements. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. ERNST & YOUNG LLP New York, New York April 7, 1999 F-2 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) - --------------------------------------------------------------------------------
ASSETS December 26, December 27, CURRENT ASSETS 1998 1997 ------------------ ------------------- Cash and cash equivalents $ 15,330 $ 57,411 Accounts receivable 41,411 51,153 Inventories 33,068 34,659 Royalty advances 17,198 10,416 Refundable income taxes 1,781 1,781 Net assets held for sale 1,292 9,873 Deposits 7,708 - Other current assets 7,165 5,053 ------------------- ------------------- Total current assets 124,953 170,346 ------------------- ------------------- OTHER ASSETS Deposits - 3,497 Accounts receivable - long term 4,127 3,207 Other noncurrent assets 10,667 13,629 ------------------- ------------------- Total other assets 14,794 20,333 ------------------- ------------------- PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $37,946 as of December 26, 1998 and $39,620 as of December 27, 1997 29,955 38,256 FILM LIBRARY, net of accumulated amortization of $7,849 as of December 26, 1998 and $4,364 as of December 27, 1997 55,858 63,638 GOODWILL, net of accumulated amortization of $2,805 as of December 26, 1998 and $1,605 as of December 27, 1997 29,391 30,591 ------------------- ------------------- TOTAL ASSETS $ 254,951 $ 323,164 =================== ===================
See notes to consolidated financial statements F-3 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except for Per Share Data) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' DEFICIT
December 26, December 27, 1998 1997 -------------- ------------ CURRENT LIABILITIES Accounts payable $ 26,002 $ 21,454 Accrued compensation and fringe benefits 4,977 5,887 Revolving credit facility 21,637 - Loan facility 10,000 - Long term debt in default 150,000 - Guaranteed preferred beneficial interests in the Company's and Golden Book Publishing Company, Inc.'s convertible debentures 115,000 Other current liabilities 61,634 47,225 -------------- ------------ Total current liabilities 389,250 74,566 -------------- ------------ NONCURRENT LIABILITIES Long term debt - 149,897 Accumulated post-retirement benefit obligation 29,609 29,365 Deferred compensation and other deferred liabilities 25,173 19,938 -------------- ------------ Total noncurrent liabilities 54,782 199,200 -------------- ------------ Guaranteed preferred beneficial interests in the Company's and Golden Books Publishing Company, Inc.'s convertible debentures - 110,707 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, 27,899,047 and 26,887,313 shares issued as of December 26, 1998 and December 27, 1997, respectively 279 269 Additional paid in capital 128,956 128,533 Accumulated deficit (379,390) (250,791) Accumulated other comprehensive loss (1,104) (1,498) -------------- ------------ (186,259) (58,487) Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822 -------------- ------------ Total common stockholders' deficit (189,081) (61,309) -------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 254,951 $ 323,164 ============== ============
See notes to consolidated financial statements F-4 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In Thousands, Except for Per Share Data) - --------------------------------------------------------------------------------
Eleven Months Year Ended Year Ended Ended December 26, December 27, December 28, 1998 1997 1996 ------------- ------------ ------------- Revenues: Net sales $ 193,573 $ 242,481 $ 254,046 Royalties and other income 653 1,080 959 ------------- ------------ ------------- Total revenues 194,226 243,561 255,005 ------------- ------------ ------------- Costs and Expenses: Cost of sales 181,141 176,238 231,792 Selling, general and administrative 98,293 111,307 142,721 Restructuring, net of (gains) losses on sales of assets 6,462 (10,786) 65,741 Write-off of assets 10,609 - - ------------- ------------ ------------- Total costs and expenses 296,505 276,759 440,254 ------------- ------------ ------------- 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 (Benefit) Provisions for Income Taxes (102,279) (33,198) (185,249) Interest Income 1,700 5,579 4,235 Distributions on Guaranteed Preferred Beneficial Interest in The Company's And Golden Books Publishing Company, Inc.'s Convertible Debentures (10,282) (10,282) (3,597) Interest Expense (18,404) (11,742) (10,999) ------------- ------------ ------------- Loss Before (Benefit) Provision For Income Taxes (129,265) (49,643) (195,610) (Benefit) Provision For Income Taxes (666) 37 1,893 ------------- ------------ ------------- Net Loss (128,599) (49,680) (197,503) Other Comprehensive Income (Loss): Foreign Currency Translation 394 (159) 330 ------------- ------------ ------------- Comprehensive Loss $ (128,205) $ (49,839) $ (197,173) ============= ============= ============== Net Loss per Basic Common Share $ (4.89) $ (2.18) $ (8.73) ============= ============== ==============
See notes to consolidated financial statements F-5 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997 AND THE ELEVEN MONTHS ENDED DECEMBER 28, 1996 (In Thousands Except for Shares and Per Share Data) - --------------------------------------------------------------------------------
Convertible Common Stock Preferred Stock - Series B Additional Note Receivable -------------------- ---------------------------- Paid-In from sale of Shares Amount Shares Amount Capital Common Stock ----------- -------- ----------- --------------- ----------- ------------- Balances, February 3,1996 21,875,539 $ 219 - $ - $ 87,044 $ (4,796) Net loss - - - - - - Issuance of Preferred Stock - Series B - - 13,000 65,000 (6,248) - Dividends on Preferred Stock - Series A - $42.50 - - - - (221) - Common Stock issued as dividend on Preferred Stock - Series B 390,000 4 - - (4) - Exercise of stock options 356,599 3 - - 3,883 - Issuance of Common Stock 3,342,573 33 - - 35,922 4,796 Currency translation adjustment - - - - - - ----------- --------- ----------- --------------- ----------- ------------- Balances, December 28, 1996 25,964,711 259 13,000 65,000 120,376 - Net loss - - - - - - Common Stock issued as dividend on Preferred Stock - Series B 780,000 8 - - (8) - Exercise of stock options 142,602 2 - - 1,554 - Issuance of Warrants - - - - 6,611 - Currency translation adjustment - - - - - - ----------- --------- ----------- --------------- ----------- ------------- Balances, December 27, 1997 26,887,313 269 13,000 65,000 128,533 - Net loss - - - - - - Common Stock issued as dividend on Preferred Stock - Series B 585,000 6 - - (6) - Exercise of stock options 17,501 - - - 183 - Common Stock issued as contribution to Company 401k Plan 409,233 4 - - 539 - Dividends on Preferred Stock - Series B - - - - (293) - Currency translation adjustment - - - - - - ----------- --------- ----------- --------------- ----------- ------------- Balances, December 26, 1998 27,889,047 $ 279 13,000 $ 65,000 $ 128,956 $ - =========== ========= =========== =============== =========== =============
Accumulated Other Treasury Stock Accumulated Comprehensive --------------------- Deficit Loss Shares Amount ------------ ------------- ---------- ---------- Balances, February 3,1996 $ (3,608) $ (1,669) 208,800 $ 2,822 Net loss (197,503) 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 - - - - Currency translation adjustment - 330 - - ------------ ------------- ---------- ----------- Balances, December 28, 1996 (201,111) (1,339) 208,800 2,822 Net loss (49,680) - - - Common Stock issued as dividend on Preferred Stock - Series B - - - - Exercise of stock options - - - - Issuance of Warrants - - - - Currency translation adjustment - (159) - - ------------ ------------- ---------- ----------- Balances, December 27, 1997 (250,791) (1,498) 208,800 2,822 Net loss (128,599) - - - Common Stock issued as dividend on Preferred Stock - Series B - - - - Exercise of stock options - - - - Common Stock issued as contribution to Company 401k Plan - - - - Dividends on Preferred Stock - Series B - - - - Currency translation adjustment - 394 - - ------------ ------------- ---------- ----------- Balances, December 26, 1998 $ (379,390) $ (1,104) 208,800 $ 2,822 ============ ============= ========== ===========
F-6 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) - --------------------------------------------------------------------------------
Eleven Months Year Ended Year Ended Ended December 26, December 27, December 28, 1998 1997 1996 ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (128,599) $ (49,680) $ 197,503) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,895 6,732 12,534 Amortization of intangibles 4,685 4,482 1,487 Provision for losses on accounts receivable 3,734 3,608 5,719 Restructuring, net of (gains) losses on sales of assets 4,396 (10,786) 103,367 Write-off of assets 10,609 - - Non-cash compensation expenses - - 14,335 Loss (gain) on sale of equipment 4,692 - (98) Other 1,320 - 1,439 Changes in assets and liabilities, net of effect of acquisition and dispositions: Decrease (increase) in accounts receivable 11,556 (15,392) 1,001 Decrease (increase) in inventories 1,591 (7,051) 27,432 (Increase) decrease in net assets held for sale (213) 1,755 1,628 Decrease in refundable income taxes - - 1,463 Increase in other current assets and royalty advances (12,894) (3,215) (3,600) Increase (decrease) in accounts payable 4,548 3,199 (5,916) Increase (decrease) in accrued compensation and fringe benefits (910) 100 143 Other 23,373 (12,970) 17,149 ------------- ------------ ------------- Net cash used in operating activities (64,217) (79,218) (19,420) CASH FLOWS FROM INVESTING ACTIVITIES: Broadway Video acquisition - - (81,000) Investment in joint venture - - (2,250) Deposits and other (211) (3,497) 229 Acquisitions of property, plant and equipment (13,400) (20,386) (5,739) Additions to film library (4,668) (6,348) - Proceeds from streamlining plan - - 661 Proceeds from sales of assets 7,667 22,712 14,535 ------------- ------------ ------------- Net cash used in investing activities (10,612) (7,519) (73,564)
F-7 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In Thousands) - --------------------------------------------------------------------------------
Eleven Months Year Ended Year Ended Ended December 26, December 27, December 28, 1998 1997 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 in the - - (4,579) Proceeds from Municipal Government Grants - 3,000 - Net proceeds from Loan Facility 10,000 - - Net proceeds from Revolving Credit Facility 21,637 - - 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 Dividends paid on Preferred Stock - Series A - - (646) Common Stock Transactions - Other 728 - (74) ------------- ------------- -------------- Net cash provided by financing activities 32,365 4,556 187,354 ------------- ------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 383 (94) 93 ------------- ------------- -------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (42,081) (82,275) 94,463 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 57,411 139,686 45,223 ------------- ------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,330 $ 57,411 $ 139,686 ============= ============= ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest and distributing on Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures $ 15,235 $ 21,553 $ 13,992 ============= ============= ============= Income taxes, net of refunds received $ (108) $ (416) $ (319) ============= ============= ============= Non-cash activity: Issuance of warrants in connection with Disney License Agreement $ - $ 6,611 $ - ============= =========== =============
See notes to consolidated financial statements F-8 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 - -------------------------------------------------------------------------------- 1. Nature of Business and Organization Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company") is a publisher of children's books and family related entertainment products primarily in the North American retail market. The Company, through its Consumer Products division creates, publishes and markets an extensive range of children's entertainment products, including "Little Golden Books" and other storybooks, coloring / activity books, electronic storybooks, puzzles, educational workbooks, reference books and novelty book formats. The Company has published its flagship product line, "Little Golden Books", for over 50 years. The Company, 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 "1996 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 Company Inc. In connection with the 1996 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 (the "Senior Notes") originally issued by the Company. F-9 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 2. Liquidity and Business Outlook The Company has experienced liquidity difficulties as a result of operating losses, working capital deficiencies and negative operating cash flows. These difficulties have hampered the Company's ability to fund day-to-day operations. As a result of the aforementioned facts and as more fully described below, on February 26, 1999 the Company, as well as Golden Books Publishing and Golden Books Home Video, Inc. (collectively, the "Debtors") filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code"). The petitions were filed in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Debtors are continuing to operate their business and hold their assets as debtors-in-possession. No trustee has been appointed. On September 15, 1998, the Company announced that it was deferring a $5.7 million interest payment on the Senior Notes due on such date for a 30-day grace period in accordance with the Indenture ("Indenture") governing the Senior Notes. Subsequently, on October 15, 1998, the Company announced that it would not pay the September 15th interest payment. Accordingly, at October 15th the Company was in default under the Indenture and the holders of the Senior Notes, at their option, have the right (i) to demand the redemption of the entire $150.0 million principal amount of the Senior Notes due and (ii) foreclose on the collateral securing the Senior Notes. The Company does not have sufficient resources to repay this obligation. Additionally, on March 15, 1999, the Company defaulted on a $5.7 million interest payment on the Senior Notes due on such date. As a result of the defaults, the Senior Notes are classified as a current liability on the accompanying consolidated balance sheet. The Company has not been informed of any such acceleration of payment. Due to the October 15, 1998 default under the Senior Notes, cross-default provisions regarding the Company's $30.0 million Revolving Credit Facility (as defined) with NationsCredit and its $25.0 million Loan Facility (as defined) with Golden Press Holdings, LLC, (see Note 9) have resulted in defaults under such agreements. Accordingly, the lenders under the Revolving Credit Facility and the Loan Facility have the right, at their option, to demand the acceleration of all amounts due thereunder. The Company does not have sufficient resources to repay these obligations. The Revolving Credit Facility and Loan Facility have been classified as current liabilities on the accompanying consolidated balance sheet. The Company has not been informed of any such acceleration of payment. The Company also decided on November 1, 1998 that the dividend consisting of 195,000 shares of Class A common stock and $292,500 in cash due on the Series B Preferred Stock would not be declared or paid in accordance with the consent of the holders of its Series B Preferred Stock. Additionally, on February 1, 1999 the Company again decided that it would not declare the dividend consisting of 195,000 shares of Class A common stock or pay a cash dividend on the Series B Preferred Stock in accordance with the consent of the holders of the Series B Preferred Stock. The Company also decided on November 5, 1998 that it would defer a $2.5 million interest payment on the Guaranteed Preferred Beneficial Interests in the Company's and Golden Books Publishing Company, Inc.'s Convertible Debentures (the "TOPrS" or the "Preferred Securities") due in accordance with the Indenture underlying the TOPrS. Additionally, on February 20, 1999, the Company deferred the next scheduled $2.5 million interest payment due on the TOPrS in accordance with the Indenture governing the TOPrS. As a result of the Bankruptcy filing, default provisions in the Indenture underlying the TOPrS have been violated which have resulted in the holders of the TOPrS having the right, at their option, to demand acceleration of the $115.0 million due under the TOPrS agreement. The Company does not have sufficient resources to repay this obligation. As a result of the default, the TOPrS are classified as a current liability on the accompanying consolidated balance sheet. The Company has not been informed of any such acceleration of payment. F-10 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 2. Liquidity and Business Outlook (continued) As a result of the Company's failure to make the interest payments on the Senior Notes, a steering committee representing certain holders of the Senior Notes (the "Senior Notes Steering Committee") was established. Additionally, as a result of the Company's failure to make interest payments due on the TOPrS, a steering committee representing certain holders of the TOPrS (the "TOPrS Steering Committee") was established. The Company, along with the Senior Notes Steering Committee and the TOPrS Steering Committee engaged in extensive negotiations regarding a restructuring of the Company's indebtedness and capital equity structure. These negotiations ultimately resulted in the filing of a joint plan of reorganization regarding the terms of the Company's restructuring (the "Joint Plan of Reorganization"). Accordingly, on March 25, 1999, the Company filed the Joint Plan of Reorganization with the Bankruptcy Court. The Joint Plan of Reorganization allows the Company to significantly reduce its existing debt, pay all trade creditors in full and, under the direction of its current management team, proceed with its publishing and entertainment operations. The restructuring of the Company's indebtedness and revised capital structure will be provided for as follows: o The Senior Notes will be converted into (i) a new secured note in the principal amount of $87.0 million due 2004, with interest at the rate of 10%, if paid in cash, or, at the Company's option for the first three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new common stock to be issued post recapitalization, prior to dilution. The new note will be secured by the existing collateral already granted to the holders of the Senior Notes as well as certain additional collateral. o The TOPrS indebtedness will be converted into 50% of the Company's new common stock to be issued post recapitalization, prior to dilution. o The Golden Press Holdings, L.L.C. loan in the amount of $10 million will be converted into 5% of the Company's new common stock to be issued post recapitalization, prior to dilution. Existing preferred and common shareholders will surrender their stock in exchange for out-of-the money warrants to purchase 5% of the new Company's stock to be allocated two-thirds to the preferred and one-third to the common shareholders, to be issued post recapitalization, prior to dilution. The restructuring also provides for a management stock incentive program for an amount of common stock equal to 10% of the common stock issued on the effective date of the Joint Plan of Reorganization. Of that amount, one-half (5%) will be allocated to senior management upon the effective date with the balance being made available for other management personnel and for future grants. Additionally, on the effective date of the Joint Plan of Reorganization, Richard E. Snyder's (the Company's current Chairman of the Board and Chief Executive Officer) employment agreement will be amended, as more fully disclosed in the Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in consideration of his surrendering certain claims and rights under his current employment agreement, 2-1/2% of the Company's new common stock, among other things. The foregoing summary of the Joint Plan of Reorganization does not purport to be complete and is subject to the terms of the Joint Plan of Reorganization. There can be no assurance that the Joint Plan of Reorganization will be confirmed by the Bankruptcy Court. If the Company is unable to obtain approval of its Joint Plan of Reorganization, the Company, its creditors and/or security holders may seek other alternatives for the Company, including the sale of the Company or parts thereof through an auction process. The Debtors received approval from the Bankruptcy Court to pay in full satisfaction and on a timely basis, all undisputed pre-petition obligations including salaries, wages and benefits to all of its current employees. Additionally, F-11 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 2. Liquidity and Business Outlook (continued) On March 25, 1999, the Bankruptcy Court gave final approval to a $55.0 million debtor-in-possession financing facility consisting of a $45.0 million credit facility and a $10.0 million term facility from The CIT Group (the "DIP Loan"). The DIP Loan is for an initial period of two years with annual renewals thereafter with interest rates ranging from the Prime Rate plus 1/8th of 1% to 5/8th of 1%. Additionally, the DIP Loan contains various financial covenants which the Company is required to maintain on a quarterly basis. The DIP Loan is secured by certain receivables and inventory of the Company. The Company utilized the proceeds from the DIP Loan to repay all outstanding amounts under their Revolving Credit Facility (approximately $9.6 million) with the remainder anticipated to be utilized to fund operations during the pendency of the Chapter 11 proceedings. As previously noted, the Company is currently operating its business under the Bankruptcy Court and continuation of the Company as a going concern is contingent upon, among other things, the ability to gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court of the final Joint Plan of Reorganization, the ability to comply with its debtor in possession financing facility (the DIP Loan), resolution of various litigation against the Company and the Company's ability to return to profitability, generate sufficient cash from operations and obtain financing sources to meet its future obligations. In addition, the Company has experienced recurring operating losses, working capital deficiencies, negative operating cash flow and is currently in default under substantially all of its debt agreements. Those matters raise substantial doubt about the Company's ability to continue as a going concern. In the event the Joint Plan of Reorganization is confirmed and consummated, continuation of the business thereafter is dependent on the Company's near-term ability to obtain adequate exit financing to meet cash flow obligations and medium-term ability to generate sufficient cash flow to meet its operational and financing requirements. Under the Joint Plan of Reorganization, the Company's ability to obtain exit financing is limited to $60.0 million as long as the new $87.0 million secured note is outstanding, and initially to $45.0 million. The Company has announced its intention to sell the Sturevant, WI facility. On March 25, 1999, the Bankruptcy Court gave formal approval to the Company to sell its Adult Publishing business for approximately $11.0 million subject to working capital and certain other closing conditions. The Company is expecting to record again upon the consummation of the sale. 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 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 10). All material intercompany items and transactions have been eliminated. The Company has experienced recurring operating losses, working capital deficiencies, negative operating cash flows and they are currently in default under substantially all of their debt agreements. As discussed in Note 2, on February 26, 1999 the Company filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. These matters raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-12 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 3. Summary of Significant Accounting Policies (continued) Basis of Presentation (continued) 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 26, 1998 and December 27, 1997, and the results of its operations, stockholders' deficit and cash flows for the years ended December 26, 1998 and December 27, 1997, and the eleven months ended December 28. 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 26, 1998 and December 27, 1997, all of the Company's cash equivalents are classified as held to maturity and their carrying amounts approximate fair value. The Company has placed approximately $3.7 million in certificates of deposit to collateralize lease obligations associated with the Company's corporate headquarters located in New York City. Such amounts are included in deposits on the accompanying consolidated balance sheets. 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. 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: Classifcation Estimated Life (Years) --------------------------------- -------------------------- Buildings and improvements 10 - 20 Machinery and equipment 3 - 10 F-13 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 3. Summary of Significant Accounting Policies (continued) Property, Plant and Equipment (continued) 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. Loss Per Common Share Net loss per basic common share for the years ended December 26, 1998 and December 27, 1997, and the eleven months ended December 28, 1996 are 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 19). 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 26, 1998 and December 27, 1997, approximately 75 % and 89%, respectively, of total inventories were valued under the LIFO method. 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. During the year ended December 26, 1998, the Company recorded a translation charge of approximately $777,000 relating to the wind-down of the United Kingdom operations. Such amount has been included in selling, general and administrative expenses in the consolidated statement of stockholders' deficit. Advertising Costs The Company expenses advertising costs related to its publishing operations as they are incurred. Advertising expenses for the years ended December 26, 1998 and December 27, 1997, and for the eleven month period ended December 28, 1996, amounted to approximately $2.4 million, $3.6 million and $1.0 million, respectively. F-14 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 3. Summary of Significant Accounting Policies (continued) 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. During the fourth quarter of 1998, the Company recorded a non-cash charge of approximately $1.4 million as a component of write-off of assets in the consolidated statement of operations and comprehensive loss due to the acceleration of the amortization period of one of the Company's entertainment productions. Goodwill and Long Lived Assets Goodwill at December 26, 1998 and December 27, 1997, 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 12). 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. F-15 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 3. Summary of Significant Accounting Policies (continued) Goodwill and Long Lived Assets (continued) As a result of the recurring losses by the Children's Publishing business primarily due to a reduced level of sales, high operating costs (including an unfavorable lease agreement and disadvantageous union contracts) and the under utilization of manufacturing capacity at their manufacturing facility in Sturtevant, WI, during the fourth quarter of 1998, management evaluated the ongoing value of the property, plant and equipment associated with its manufacturing facility in Sturtevant, WI. Based on this evaluation, the Company determined that assets with a carrying value of $19.2 million were impaired and wrote them down by approximately $9.2 million to their estimated fair value. Fair value was based upon estimates by management using current market values from vendors and appraisals. Such amount has been included in write-off of assets in the accompanying consolidated statement of operations and comprehensive loss. The Company has announced its intention to sell the Sturtevant, WI facility. Reporting Comprehensive Income In the first quarter of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires the Company's foreign currency translation adjustments, which are currently reported in stockholders' deficit, to be included in other comprehensive income (loss) and the disclosure of total comprehensive income (loss). The Company adopted the requirements in the first quarter of 1998. Disclosures About Segments of an Enterprise and Related Information In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS established standards for the way that public business enterprises report information and operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas and major customers. The Company adopted the requirements of SFAS 131 in the fourth quarter of 1998. The adoption of SFAS 131 did not have an effect on the Company's consolidated statement of operations and comprehensive loss (see Note 18). 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" ("SFAS 132"), which is effective for fiscal years beginning after December 15, 1997. SFAS 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. The Company adopted the requirements of SFAS 132 in the fourth quarter of 1998. The adoption of SFAS 132 did not have a material effect on the Company's consolidated state of position or revenue, only on its disclosure (see Note 17). Reporting the Costs of Start-up Activities In April 1998 the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that companies expense start-up costs and organization costs as they are incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged. The initial application of SOP 98-5 is to be reported as F-16 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 3. Summary of Significant Accounting Policies (continued) Reporting the Costs of Start-up Activities (continued) a cumulative effect or a change in accounting principle. The Company has not yet completed it's review of SOP 98-5, but does not anticipate that its adoption will have a material effect in the consolidated financial statements. 4. Restructuring, Net Assets Held for Sale and Other Charges During 1996, the Company made decisions with respect to certain of the its assets resulting in 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 non-productive 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; 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 F-17 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 4. Restructuring Net Assets Held for Sale and Other Charges (continued) During the year ended December 28, 1996, management also 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 16). As a result, on December 23, 1996 Golden Books Publishing sold the stock of Penn 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 were as follows:
Period from February 4, 1996 to December 23, 1996 (date of disposition) (In thousands) ------------------------------ Revenues $ 40,660 Gross profit 4,930 Loss before interest expense and provision for income taxes (7,152)
During 1997, the Company sold 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 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. 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, and the eleven months ended December 28, 1996 were as follows:
Period from December 29, 1996 Eleven months to December 1, 1997 Ended (date of disposition) December 28, 1996 (In thousands) ------------------ ----------------------------- Revenues $ 25,552 $ 26,962 Gross profit 3,656 1,694 Income (loss) before interest expense and provision for income taxes 1,952 (223)
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 technology department, (iii) $4.5 million in consulting services associated with implementing the strategic plan, and (iv) $0.4 million in other costs. These one time transition costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss. F-18 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 4. Restructuring, Net Assets Held for Sale and Other Charges (continued) During 1998, the Company continued its restructuring with the sale of its facility in Fayetteville, North Carolina and a reduction of its office space in New York (see Note 15). The Fayetteville facility was sold for approximately $7.2 million in cash which resulted in a loss of approximately $1.8 million, which was recorded in the consolidated statement of operations and comprehensive loss for the year ended December 26, 1998. Accordingly, restructuring, net of (gains) losses on the sales of the assets for the year ended December 26, 1998 is composed of the following: (i) $1.8 million loss on the sale of the Fayetteville facility, and (ii) $4.7 million principally composed of a write-off of leasehold improvements associated with the Company's reduction of office space in connection with their New York lease agreement. Additionally, in 1998, the Company incurred approximately $12.2 million in one-time transition costs, consisting of: (i) $4.4 million in outsourcing premium and (ii) $7.8 million in costs associated with the move to the new Sturtevant, WI facility. These one time transition costs are included in: (i) cost of sales and (ii) selling, general and administrative expenses, respectively, in the accompanying consolidated statement of operations and comprehensive loss. As of December 26, 1998, substantially all of the facility closing and severance costs, except for approximately $0.3 million (which is contractually obligated), have been paid. 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 (and sold in 1998), (ii) Coffeyville Distribution Center, a facility of Golden Books Publishing , and (iii) the Creative Center, a facility of Golden Books Publishing in Racine, WI. As of December 26, 1998, net assets held for sale totaling approximately $1.3 million included the Company's, (i) Creative Center and (ii) Coffeyville Distribution Center, both facilities of Golden Books Publishing. In January 1999 the Company sold their Coffeyville Distribution Center for approximately $2.2 million, which resulted in a gain of approximately $1.4 million. Such gain will be recorded in the Company's three months ended March 27, 1999 results of operations. The Company has announced its intention to sell the Sturtevant, WI facility. On March 25, 1999, the Bankruptcy Court gave formal approval to the Company to sell its Adult Publishing business for approximately $11.0 million subject to working capital and certain other closing conditions. If the sale is consummated, the Company is expecting to record a gain. F-19 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 5. Accounts Receivable Accounts receivable consisted of the following:
December 26, December 27, 1998 1997 ------------ ------------- (In thousands) Accounts receivable $ 79,165 $ 78,609 Allowance for doubtful accounts (6,800) (7,208) Allowance for sales discount and returns (26,827) (17,041) ------------ -------------- 45,538 54,360 Less: long term portion (4,127) (3,207) ------------ -------------- $ 41,411 $ 51,153 ============ ==============
6. Inventories Inventories consisted of the following:
December 26, December 27, 1998 1997 ------------ ------------ (In thousands) Raw materials $ 1,911 $ 2,373 Work-in-process 2,914 3,819 Finished goods 24,993 25,121 Film library 3,250 3,346 ------------ -------------- $ 33,068 $ 34,659 ============ ==============
At December 26, 1998 and December 27, 1997, the replacement cost of inventories valued using LIFO exceeded the net carrying amount of such inventories by approximately $3.2 million and $2.5 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 26, 1998 the liquidation of LIFO inventories decreased cost of sales by approximately $1.4 million. For the year ended December 27, 1997 there was no LIFO liquidation and therefore, no impact on the consolidated financial statements. F-20 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 7. Property, Plant and Equipment Property, plant and equipment consisted of the following:
December 26, December 27, 1998 1997 ------------ ------------ (In thousands) Land $ 393 $ 393 Building and improvements 9,265 13,393 Machinery and equipment 56,162 55,381 Machinery and equipment in the process of installation 2,081 8,709 ---------- ------------- 67,901 77,876 Less accumulated depreciation and amortization (37,946) (39,620) ---------- ------------- $ 29,955 $ 38,256 ========== =============
8. Other Current Liabilities Other current liabilities consisted of the following:
December 26, December 27, 1998 1997 ------------ ------------ (In thousands) Royalties payable $ 17,426 $ 12,841 Accrued interest 12,958 4,388 Accrued worker's compensation 3,524 3,221 Restructuring costs 620 4,559 Other 27,106 22,216 ---------- ------------- $ 61,634 $ 47,225 ========== =============
F-21 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 9. Short-Term Borrowings and Long-Term Debt Short-term borrowings and long-term debt consisted of the following:
December 26, December 27, 1998 1997 ------------ ------------ (In thousands) 7.65% Senior Notes ($150,000,000 face amount) due 2002 $ 150,000 $ 149,897 Revolving credit facility 21,637 -- Loan facility 10,000 -- ---------- -------------- 181,637 149,897 Less long-term portion -- (149,897) ---------- -------------- $ 181,637 $ -- ========== ==============
Senior Notes: The Company currently has outstanding $150.0 million principal amount of Senior Notes. Interest is payable semiannually on September 15th and March 15th. The Indenture contains certain provisions limiting subsidiary indebtedness, guarantees, liens and the payment of cash dividends on Preferred and Common Stock. On September 15, 1998, the Company announced that it was deferring, at its option, a $5.7 million interest payment on the Senior Notes due on such date for a 30-day grace period in accordance with the Indenture. Subsequently, on October 15, 1998, the Company announced that it would not pay the September 15th interest payment. As a result, the Company is in default under the Indenture and the holders of the Senior Notes have the right (i) to demand the entire $150.0 million principal amount of the Senior Notes and (ii) to foreclose on the collateral securing the Senior Notes. The Company does not have sufficient resources to repay this obligation. As a result of the default, the Senior Notes have been classified as a current liability on the consolidated balance sheet. As described in Note 2, under the terms of the Joint Plan of Reorganization, the Senior Notes will be converted into (i) a new secured note in the principal amount of $87.0 million, due 2004, with interest at the rate of 10%, if paid in cash, or, at the Company's option for the first three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new common stock to be issued post recapitalization, prior to dilution. The note will be secured by the existing collateral already granted to the holders of the Senior Notes as well as certain additional collateral. Revolving Credit Facility: On June 3, 1998, the Company entered into a $30.0 million three-year revolving credit facility, with NationsCredit ("Line of Credit"). Borrowings under the facility bear interest at the prime rate. The Line of Credit is secured by certain receivables and inventory of Golden Books Publishing. As a result of entering into the Line of Credit, Golden Books Publishing amended the Indenture governing the Senior Notes due 2002 to, among other things, (i) permit Golden Books Publishing to secure up to $30.0 million of borrowings and related obligations under the Line of Credit, (ii) grant to the holders of the Senior Notes a security interest in certain assets of Golden Books Publishing, (iii) add a guarantee from the Company and (iv) add additional covenants and amend certain existing covenants. At December 26, 1998, the Company had outstanding borrowings under the Line of Credit totaling approximately $21.6 million. As a result of the Company's failure to make the required interest payment under the Indenture (see above), the Company is not in compliance with certain covenants under the Line of Credit. Accordingly, the lender at its option may give notice that the amounts outstanding are immediate due and payable. As a result, the Line of Credit has been classified as a current liability on the consolidated balance sheet. The Company does not have sufficient resources to repay this obligation. As described in Note 2, on March 25, 1999, the Company entered into a F-22 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 9. Short-Term Borrowings and Long-Term Debt (continued) $55.0 million, three-year revolving credit ($45.0 million) and term facility ($10.0 million), with The CIT Group. The revolving credit and term facility is for an initial period of two years with annual renewals thereafter with interest rates ranging from the Prime Rate plus 1/8% of 1% to 5/8% of 1%. Additionally, they maintain various financial covenants which the Company is required to maintain on a quarterly basis. The revolving credit and term facilities are secured by certain receivables and inventory of the Company. The Company utilized a portion of the proceeds from the financing arrangements to repay all outstanding amounts under the Company's Line of Credit of approximately $9.6 million. Loan Facility: On September 4, 1998, the Company entered into a $25.0 million loan facility with GP Holdings (the "Loan Facility"). The Loan Facility permits Golden Books Publishing to borrow at its option, but subject to certain conditions, up to $25.0 million. Borrowings under the Loan Facility are guaranteed by the Company and secured by certain assets. All outstanding amounts under the Loan Facility are due, together with accrued and unpaid interest, on September 9, 1999 or earlier under certain conditions, including if certain assets of the Company are sold. Interest is due monthly and is set at an initial rate of 5% per annum increasing to 7% in February 1999, but the payment of interest may be deferred at the Company's option until maturity. At December 26, 1998, the Company had outstanding borrowings under the Loan Facility totaling $10.0 million. Due to the Company's failure to make the September 15, 1998 interest payment on the Senior Notes, the Company is in default under the terms of the Loan Facility. Accordingly, the Loan Facility has been classified as a current liability on the consolidated balance sheet. As a result of the Company's filing for Bankruptcy and in accordance with the Joint Plan of Reorganization, the Loan Facility in the amount of $10.0 million will be converted into 5% of the Company's new common stock to be issued post recapitalization, prior to dilution. Additionally, GPH will also waive and release the collateral extended to it with respect to the borrowings and will be relieved of its obligation to loan up to an additional $15.0 million to the Company. 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 26, 1998, there were no retained earnings available to pay dividends on the Company's Common Stock. 10. Preferred Securities ("TOPrS") 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). 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 F-23 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 10. Preferred Securities ("TOPrS") (continued) statements of Golden Books Publishing for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996 are as follows (in thousands):
December 26, December 27, December 28, 1998 1997 1996 ------------ ------------ ------------ Current assets $ 116,931 $ 150,837 Non current assets 126,804 134,560 ------------ --------------- Total Assets $ 243,735 $ 285,397 ============= =============== Current liabilities $ 498,683 $ 149,452 Noncurrent liabilities 46,854 188,290 ------------- --------------- Total Liabilities 545,537 337,742 Preferred Securities -- 110,707 Stockholders' Deficit (301,802) (163,052) ------------- --------------- Total Liabilities and Stockholders' Deficit $ 243,735 $ 285,397 ============= ================ Revenues $ 194,226 $ 243,561 $ 255,005 ============= ================ ============= Gross profit $ 13,085 $ 67,323 $ 23,213 ============= ================ ============= Loss before interest expense and provision for income taxes $ (102,625) $ (32,136) $ (169,594) ============= ================ ============= Net loss $ (138,750) $ (57,347) $ (186,417) ============= ================ =============
The Indenture covering the Senior Notes (see Note 9) restricts the ability of Golden Books Publishing to pay cash dividends or make other cash distributions to the Company. Due to its liquidity difficulties, the Company decided on November 5, 1998 that it was deferring a $2.5 million interest payment on the Preferred Securities on such date until February 20, 1999, in accordance with the indenture governing the Preferred Securities. On February 20, 1999, the Company again decided that it was deferring the $2.5 million interest payment on the Preferred Securities in accordance with the indenture governing the Preferred Securities. On February 26, 1999, the Company filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. As a result, the holders of the TOPrS, at their option, can demand acceleration of the $115.0 million due under the TOPrS agreement. The Company does not have sufficient resources to repay this obligation. As a result of the default, the TOPrS are classified as a current liability, on the accompanying consolidated balance sheet. The Company has not been informed of any such acceleration. As described in Note 2, under the terms of the Joint Plan of Reorganization the Preferred Securities will be converted into 50% of the Company's new common stock to be issued post recapitalization, prior to dilution. F-24 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 11. 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, the Company completed the sale, for net proceeds of $58.8 million after giving effect to $6.2 million of transaction costs, of a significant equity interest to Golden Press Holdings, LLC ("GPH Holding" or "GPH") whereby the Series A Convertible Preferred Stock was retired at its face value plus accrued dividends and the Company issued to GPH 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, 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 became exercisable beginning on May 8, 1998, subject to acceleration upon certain circumstances. The Warrant will be exercisable until May 8, 2003. Upon confirmation of the Joint Plan of Reorganization, the Warrants will in effect be cancelled. 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. 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. On November 5, 1998, the Company with the consent of the holders of its Series B Preferred Stock stated that the dividend due on November 1, 1998 would not be declared or paid. At December 26, 1998, the Company had cumulative preferred dividends payable of 195,000 shares of Common Stock and $292,500 in cash which has been accrued for in the accompanying consolidated balance sheet. Additionally, on February 1, 1999 the Company again decided that it would not declare the dividend consisting of 195,000 shares of Class A Common Stock or pay a cash dividend on the Series B Preferred Stock in accordance with the consent of the holders of the Series B Preferred Stock. 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 mandatorily redeem the Series B Preferred Stock and the Series B Preferred Stock is not the subject of any sinking fund requirement. 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. F-25 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 11. Preferred Stock (continued) As described in Note 2, in accordance with the Joint Plan of Reorganization, the existing preferred shareholders will surrender their stock in exchange for out-of-the money warrants to purchase to 3.3% of the Company's new common stock, to be issued post recapitalization, prior to dilution. 12. 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. 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. 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. 13. 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 26, 1998 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, one half of these options granted generally become exercisable two years after the date of grant and 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 as follows: (i) one-third of the options granted on the date of grant, (ii) one-third of such options one year after the date of grant and (iii) 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. F-26 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 13. Employee Stock Options (continued) The following table of data is presented in connection with the stock option plans:
Shares Option Price Per Weighted Average Share Exercise Price ------------- ----------------- ---------------- 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 Exercised (8,339) $11.06 $ 11.06 Canceled (1,010,453) $4.63 - $14.25 $ 10.72 Granted at December 26, 1998 1,243,000 $3.94 - $11.63 $ 8.04 ------------- Exercisable at December 26, 1998 4,806,518 =============
The weighted average fair value of options was $5.53, $5.90 and $7.90 for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996, respectively. Options to purchase 1,414,892 shares and 1,174,869 shares were exercisable at December 26, 1998 and December 27, 1997, respectively.
Options Outstanding Options Exercisable - ------------------- --------------------------------------------------------- -------------------------------------- Weighted Number Average Weighted Number Outstanding at Remaining Average Exercisable at Range of Exercise December 26, Contractual Exercise December 26, Weighted Average Prices 1998 Life Price 1998 Exercise Price ----------------- -------------- ----------- --------- -------------- ---------------- $3.94 - $5.91 515,000 9.53 $ 4.61 - - $5.92 - $8.86 20,000 9.17 $ 7.88 1,667 $ 8.63 $8.87 - 13.38 4,271,518 7.43 $10.40 1,413,225 $ 12.21 --------- ===== ------ --------- -------- 4,806,518 7.66 $ 9.77 1,414,892 $ 12.20 ========= ===== ====== ========= ========
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 method described in SFAS 123. For purposes of SFAS 123 pro forma F-27 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 13. Employee Stock Options (continued) 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 pro forma net loss and net loss per basic common share would have been approximately $136.0 million or $4.96 per basic common share, and $67.6 million or $2.56 per basic common share for the years ended December 26, 1998 and December 27, 1997, respectively. 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 1998 and 1997: risk-free interest rate of 5.6% and 6.5%; expected volatility of 66.1% and 50.1%; no dividend yield; no forfeiture rate and expected lives of seven 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. Upon confirmation of the Joint Plan of Reorganization, all outstanding unexercised stock options, warrants and similar rights will in effect be cancelled. 14. Stockholders' Deficit In connection with the GP Holding 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 provides for dividends to be paid equal to approximately 195,000 shares of the Company's Common Stock per fiscal quarter. 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 10), the Broadway Video Acquisition (see Note 12) and the Hallmark Transaction (see below), 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 amended whereby Mr. Snyder's annual compensation was increased and his term of employment was extended to May 8, 2003. On February 26, 1999, the F-28 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 14. Stockholders' Deficit (continued) Company filed petitions for reorganization under Chapter 11 of the United States bankruptcy Code. In accordance with the Joint Plan of Reorganization, Mr. Snyder's employment agreement will be amended, as more fully described in the Disclosure Statement and the exhibits thereto, and Mr. Snyder will receive, in consideration of his surrendering certain claims and rights under his current employment arrangement, 2 1/2% of the Company's new common stock, among other things (see Note 2). On September 6, 1996, the Company completed the sale to H.C. Crown Corporation, a wholly owned subsidiary of Hallmark Cards Incorporated, of 2,356,198 shares of Common Stock for approximately $25.0 million (the "Hallmark Transaction"). On September 26, 1997, the Company entered into a 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 (a) that they will 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. As of December 26, 1998, the Company has reserved 24,283,214 shares of common stock for the conversion of the (i) Series B Preferred Stock, (ii) warrants issued in connection with the GPH Transaction, (iii) Preferred Securities, (iv) warrants issued in connection with the Disney Agreement and (v) the exercise of outstanding options. As described in Note 2, in accordance with the Joint Plan of Reorganization, the existing preferred and common shareholders will surrender their shares for out-of-the money warrants to purchase 5% of the new Company stock to be allocated two-thirds to the preferred and one-third to the common shareholders, to be issued post recapitalization, prior to dilution. 15. 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 26, 1998 and thereafter are as follows: Amount (In thousands) -------------- 1,999 $ 5,873 2,000 4,816 2,001 4,486 2,002 3,998 2,003 4,070 and thereafter 41,655 Total rent expense charged to operations was approximately $5.8 million, $5.7 million and $4.7 million for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996, respectively. In January 1999, the Company reduced their New York office space from six floors to three floors. In connection with F-29 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 15. Commitments and Contingencies (continued) such reduction, the Company recorded a non-cash charge of approximately $3.1 million as a component of restructuring, net of (gains) losses on sales of assets in the consolidated statement of operations and comprehensive loss. The Company is required to meet certain contractual payments under contracts in effect at December 26, 1998 and thereafter, as follows: Amount (In thousands) -------------- 1,999 $ 13,351 2,000 14,908 2,001 15,638 2,002 1,388 2,003 -- and thereafter 5,585 Contingencies On August 12, 1998, a class action complaint was filed in the United States District Court for the Southern District of New York on behalf of all persons who purchased the Common Stock of the Company between May 13, 1997 and August 4, 1998, inclusive (the "Class Period"). On October 7, 1998, holders of the Company's TOPrS filed a class- action complaint based on substantially identical allegations, which complaints were subsequently consolidated. The consolidated complaint charges that the Company and certain officers and directors of the Company during the relevant time period were in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that the defendants issued a series of materially false and misleading statements concerning the impact of the Company's restructuring plan on the Company's financial condition, liquidity and future prospects. While the outcome of the case cannot be predicted with any certainty, the Company believes that it has meritorious defenses to the claims, and that the claim against the Company will be relieved or discharged during the pendency of the Chapter 11 proceedings. Golden Books Publishing and Penn Corporation 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 know 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 Peacock Papers, Inc. 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. 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 F-30 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 15. Commitments and Contingencies (continued) 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. In 1991 the EPA issued a unilateral administrative order (the "1991 Order") to the Company and four other PRPs, requiring the respondents to perform a remedial design and remedial action at the Hertel Landfill Superfund Site in Plattekill, New York (the "Site"). The Company did not agree to comply with the Order. EPA subsequently sued the Company and other PRPs seeking recovery of its costs at the Site. Various PRPs in the litigation brought claims for contribution against each other and the Company. The Company settled its liability to the United States for noncompliance with the 1991 Order and agreed to comply with the Order by implementing the remedy at the Site, which is now estimated to cost up to $4.9 million, excluding potential groundwater remediation costs. On July 9, 1998, the Company and other PRPs entered into a Consent Decree with the United States and the State of New York to resolve their alleged liability for past response costs and formalize their agreement to perform the remedy at the site. Under the decree, the Company and the other settling parties are jointly and severally obligated to perform the remedy and reimburse certain governmental past and future costs. The Company has paid approximately $1.7 million toward remedial costs since 1996 and has completed construction of the landfill cap. The Company's share of future costs for operation and maintenance of the cap and landfill monitoring are expected to be less that $500,000. 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 commitments and contingencies 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 provide financial contribution to the remediation. On November 14, 1996, the Michigan Department of Environmental Quality requested that corrective actions be taken as a result of the discovery of a leaking underground storage tank system at the Fulford Street Property of the Company on November 8, 1996. An initial site assessment 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. It is uncertain whether the claims against the Company in the foregoing environmental matters will be resolved during the pendency of the Chapter 11 proceedings. 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 F-31 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 15. Commitments and Contingencies (continued) 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 $5.8 million in the consolidated balance sheet. While it is not feasible to predict or determine the outcomes of these aforementioned proceedings, it is the opinion of management that they maintain adequate reserves in the consolidated balance sheet. The Company and its subsidiaries are parties to certain other legal proceedings which are incidental to their ordinary business, none of which the Company believes are material to the Company and its subsidiaries taken together as a whole. The Company's Common Stock was delisted from the NASDAQ National Market on February 17, 1999 for failure to meet continued listing standards. The Company's Common Stock is currently being quoted on the OTC bulletin board. 16. Income Taxes Income tax expense calculated in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", consisted of the following:
Eleven Year Year Months Ended Ended Ended December 26, December 27, December 28, 1998 1997 1996 ------------ ------------- ------------- (In thousands) Current payable (benefit): Federal $ - $ - $ 2,051 State 25 59 (53) Foreign (691) (22) (105) ------------ ------------- ------------- (666) 37 1,893 ------------ ------------- ------------- Deferred: Federal - - - State - - - Foreign - - - - - - ------------ ------------- ------------- $ (666) $ 37 $ 1,893 ============= ============= =============
Loss before income tax expense of Golden Books Publishing's Canadian subsidiary was approximately $(3,067,000), $(669,000) and $(577,000) for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 26, 1996, respectively. F-32 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 16. Income Taxes (continued) A reconciliation of the statutory United States Federal income tax rate to the Company's effective income tax rate follows:
Eleven Year Year Months Ended Ended Ended December 26, December 27, December 28, 1998 1997 1996 -------------- -------------- ------------- Statutory rate 35.0% 35.0% 35.0% State income taxes, net of Federal benefit 5.0 5.0 4.2 Valuation allowance, net of refundable amounts (42.0) (38.5) (33.7) Permanent differences relating to the sale of Division/Subsidiaries - (0.6) (4.1) Other - net 2.6 (1.0) (2.4) -------------- -------------- ------------- 0.6% (0.1)% (1.0)% ============== ============== =============
The income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 26, 1998 and December 27, 1997 are as follows:
December 26, 1998 December 27, 1997 -------------------- ------------------- (In thousands) Deferred tax assets: Allowance for doubtful accounts and returns $ 11,704 $ 9,950 Inventories - 1,368 Property, plant & equipment 5,164 - Accrued expenses 28,874 24,450 Post retirement benefits 11,843 11,746 Net operating loss carryforwards 126,519 87,991 Other - net - 133 -------------------- ------------------ Total deferred tax assets 184,104 135,638 Valuation allowance (182,102) (133,569) -------------------- ------------------ Deferred tax assets, net of valuation allowance 2,002 2,069 Deferred tax liabilities: Property, plant & equipment 290 397 Pension contributions 1,661 1,672 Other - net 51 - -------------------- ------------------ Total deferred tax liabilities 2,002 2,069 -------------------- ------------------ Net deferred tax assets/(liabilities) $ - $ - ==================== ==================
The IRS has completed its examination of the Company's consolidated federal income tax returns through the years ended January 28, 1995. The Fiscal 1998 and Fiscal 1997 consolidated financial statements reflect the net receivable due to the Company as a result of this examination. F-33 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 16. Income Taxes (continued) At December 26, 1998 the Company has net operating loss carryforwards of approximately $305.0 million with expiration dates between 2011 and 2018. Utilization of such losses in the future could be significantly limited should there have been an ownership change (as defined in Internal Revenue Code Section 382). Further, there are specific modifications which may be required to be made to the net operating loss carryforwards of the Company as a result of the Chapter 11 Bankruptcy proceedings. At such time as the Company emerges from Bankruptcy, it is likely there will be an ownership change for tax purposes which would result in a Section 382 limitation on future utilization of net operating losses. Since there are a number of variables which could affect the Company's Bankruptcy proceedings (including the fact that the Joint Plan of Reorganization has not yet been approved by the Bankruptcy Court), it is not currently possible to determine whether the Company's net operating loss carryforwards will produce tax benefits in the future. Benefit was not provided for these loss carryforwards at December 26, 1998. 17. Pension, Post-retirement and Post-employment Benefits Golden Books Publishing has a noncontributory defined benefit retirement plans covering substantially all domestic 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 Company adopted SFAS No. 132 during the fourth quarter of 1998. SFAS No. 132 is intended to standardize certain footnote disclosure requirements for pensions and other retiree benefits. Information concerning the Company's defined benefit pension plan consists of the following:
Defined Benefit Plans: December 26, 1998 December 27, 1997 ----------------------- ------------------------- (In thousands) Change in Plan Assets: Fair Value of plan assets at beginning of year $ 20,836 $ 17,843 Actual return on plan assets 3,359 3,542 Benefits Paid (764) (549) ----------------------- ------------------------- Fair value of plan assets at the end of the year $ 23,431 $ 20,836 ======================= ========================== Changes in Benefit Obligations: December 26, 1998 December 27, 1997 ----------------------- ------------------------- (In thousands) Benefit obligations at the beginning of the year $ 17,184 $ 15,989 Service Cost 368 455 Interest Cost 1,288 1,115 Plan Amendments 1,296 -- Other actuarial gains (losses) (449) 174 Benefits Paid (764) (549) ----------------------- ------------------------- Benefits obligations at the end of the year $ 18,923 $ 17,184 ======================= =========================
F-34 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 17. Pension, Post-retirement and Post-employment Benefits (continued) Funded Status Reconciliation:
December 26, 1998 December 27, 1997 ----------------------- ---------------------- (In thousands) Funded Status $ 4,508 $ 3,653 Unrecognized prior amounts: Prior Service Costs 2,713 1,843 Net Gains (losses) (3,069) (1,314) ----------------------- ---------------------- Total (356) 529 ----------------------- ---------------------- Prepaid benefit recognized in consolidated balance sheet at the end of the year $ 4,152 $ 4,182 ======================== ======================
Components of Net Benefits Expense: Year Ended Year Ended Eleven Months December 26, December 27, December 28, 1998 1997 1998 --------------- ----------------- ---------------- (In thousands) Service cost $ 368 $ 455 $ 475 Interest cost 1,288 1,115 1,030 Expected return on plan assets (2,052) (1,760) (1,619) Net amortization: Transition (Asset/Obligation) -- (32) (108) Prior Service Cost 426 286 269 Total 426 254 161 --------------- ------------------ ---------------- Net benefits expense for the year $ 30 $ 64 $ 47 =============== ================== ================
Other Post-retirement Benefit Plans:
December 26, December 27, 1998 1997 ----------------- ----------------- (In thousands) Benefit obligations at the beginning of the year $ 30,065 $ 31,287 Service cost 654 565 Interest cost 2,070 1,981 Plan amendments (186) Actuarial (gains) losses 438 (1,827) Net retiree benefit payments: Benefits payments (2,870) (2,191) Retiree contributions 563 436 ----------------- ------------------ Total (2,307) (1,755) ----------------- ------------------ Benefit obligations at the end of the year $ 30,920 $ 30,065 ================= ==================
F-35 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 17. Pension, Post-retirement and Post-employment Benefits (continued) Funded Status Reconciliation:
December 26, December 27, 1998 1997 ------------------ ----------------- (In thousands) Funded Status $ 30,920 $ 30,065 Unrecognized amounts: Transition asset (obligation) Prior service costs 2,263 2,499 Net gains (losses) (3,574) (3,200) ------------------ ----------------- Total (1,311) (701) ------------------ ----------------- Accrued benefit recognized in the consolidated balance sheet at the end of the year $ 29,609 $ 29,364 ================== =================
Components of Net Benefits Expense:
Eleven Months Year Ended Year Ended Ended December 26, December 27, December 28, 1998 1997 1996 ------------------ ----------------- ------------------ (In thousands) Service cost $ 654 $ 565 $ 550 Interest cost 2,070 1,981 1,925 Net amortization Transition (asset) obligation 47 5 Prior service cost (221) (221) Prior (gains) losses -- -- -- ------------------ ----------------- ------------------ Total (174) (216) -- ------------------ ----------------- ------------------ Net benefit expense for the year $ 2,550 $ 2,330 $ 2,475 ================== ================= ================== Net retire benefit payments (2,307) (1,755) (1,260) Net balance sheet recognition 243 575 1,215 The weighted average actuarial assumptions utilized in determining the above amounts for other benefit plans as of the year were as follows: December 26, December 27, 1998 1997 ------------------ ----------------- Discount rate 7% 7% Rate of compensation increase 1.5% 5%
F-36 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 17. Pension, Post-retirement and Post-employment Benefits (continued) The weighted average actuarial assumptions utilized in determining the above amounts for other post-retirement benefit plans as of the year were as follows: December 26, December 27, 1998 1997 ------------------ ----------------- Discount rate 7% 7% Rate of compensation increase 4% 4% The Company's other post-retirement benefit plans identified above provide health and life insurance benefits to a number of existing retirees from certain of its operations under the provision of a number of different plans. Contributions currently required to be paid by the retirees towards the cost of such plans range from zero to 100%. The Company also has a number of active employees who might receive such benefits upon retirement. Relative to the above information, the actuarial valuations assume a medical cost trend of 7% for fiscal 1998, decreasing linearly to 5% in 2010; and remaining level thereafter. The assumed health care trend rate has a significant effect on the amounts reported. A one-time percentage-point change in the assumed health care trend rate would have the following effects:
1% 1% Increase Decrease -------- -------- Effect on the total of service and interest cost for 1998 $ 375 $ (310) Effect on post retirement benefit obligation as of the end of the year $ 3,909 $(3,277)
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 $305,000, $326,000 and $349,000 for the years ended December 26, 1998 and December 27, 1997, and the eleven months ended December 28, 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 $0.8 million, $2.0 million and $2.5 million for the years ended December 26, 1998 and December 27, 1997 and the eleven months ended December 28, 1996, respectively. 18. Industry Segments The Company adopted SFAS No. 131 during the fourth quarter of 1998. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. The Company identifies such segments based on management responsibility within the United States and geographically for all international units. The Company has three operating 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, coloring books and other activity books, interactive electronic books and games, and products for children as well as multimedia "entertainment" products. The Company's foreign operations within the Consumer Products Segment consist of a sales subsidiary in Canada and a small sales branch in the United Kingdom. F-37 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 18. Industry Segments (continued) The Consumer Product segment includes the Company's children's and adult publishing divisions. The Commercial Products segment provides printing, graphic, creative and distribution services, and printing business. The Company's Entertainment Segment operates as the Golden Books Entertainment Group 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. Identifiable assets are those assets used specifically in the operations of each operating 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 years ended December 26, 1998 and December 27, 1997 and for the eleven months ended December 28, 1996. The Company evaluates performance based on several factors, of which the primary measure is operating segment earnings before interest, taxes, depreciation and amortization ("EBITDA"). The accounting policies of the operating segments are the same as described in the Summary of Significant Accounting Policies (Note 3). Information by industry segment is set forth below:
Eleven Months Year Ended Year Ended Ended December 26, 1998 December 27, 1997 December 28, 1996 -------------------- ------------------- -------------------- (In millions) Consumer Products $ 150.7 $ 171.7 $ 208.5 Commercial Products 14.5 42.5 42.4 Entertainment 29.0 29.3 4.1 -------------------- -------------------- -------------------- Total $ 194.2 $ 243.5 $ 255.0 ==================== ==================== ==================== Gross Profit: Consumer $ 5.9 $ 48.2 $ 20.9 Entertainment 11.6 15.6 0.6 -------------------- -------------------- -------------------- 17.5 63.8 21.5 Commercial Facility Sold - 3.5 1.7 -------------------- -------------------- -------------------- 17.5 67.3 23.2 Transition Costs (4.4) - - -------------------- -------------------- -------------------- Total $ 13.1 $ 67.3 $ 23.2 ==================== ==================== ==================== SG&A SG&A before Transition Costs $ 90.5 $ 99.9 $ 142.7 Restructuring, Net of (Gains) Losses on Sales of Assets 6.5 (10.8) 65.7 Write-off of assets 10.6 - - -------------------- -------------------- -------------------- 107.6 89.1 208.4 Transition Costs 7.8 11. - -------------------- -------------------- -------------------- Total $ 115.4 $ 100.5 $ 208.4 ==================== ==================== ====================
F-38 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 18. Industry Segments (continued)
Eleven Months Year Ended Year Ended Ended December 26, 1998 December 27, 1997 December 28, 1996 -------------------- -------------------- -------------------- (In millions) EBITDA Gross Profit before Transition Costs $ 17.5 $ 67.3 $ 23.2 SG&A before Transition Costs 107.6 89.1 170.2 -------------------- -------------------- -------------------- Operating Results before Transition (90.1) (21.8) (147.0) Costs Depreciation and Amortization 12.6 11.2 14.0 -------------------- -------------------- -------------------- EBITDA before Transition Costs $ (77.5) $ (10.6) $ (133.0) ==================== ==================== ==================== Operating Results before Transition Costs $ (90.1) $ (21.8) $ (185.2) Transition Cost 12.2 11.4 -- -------------------- -------------------- -------------------- Operating Loss $ (102.3) $ (33.2) $ (185.2) ==================== ==================== ==================== Eleven Months Year Ended Year Ended Ended December 26, 1998 December 27, 1997 December 28, 1996 -------------------- -------------------- -------------------- (In thousands) Depreciation of Property, Plant and Equipment: Consumer Products $ 6,273 $ 2,959 $ 9,891 Commercial Products 409 3,175 1,550 Entertainment 4,817 4,591 1,523 Corporate 1,081 489 1,057 =================== ==================== ==================== Total Depreciation & Amortization $ 12,580 $ 11,214 $ 14,021 =================== ===================== ==================== Assets: Consumer Products $ 129,467 $ 146,969 $ 181,256 Commercial Products 11,051 29,846 25,923 Entertainment 102,217 113,334 99,527 Corporate 12,216 33,015 60,529 -------------------- -------------------- -------------------- Total Assets $ 254,951 $ 323,164 $ 367,235 ==================== ==================== ==================== Capital Expenditures: Consumer Products $ 11,874 $ 5,797 $ 3,890 Commercial Products 1,422 4,653 1,275 Entertainment -- 50 116 Corporate 104 9,886 458 -------------------- -------------------- -------------------- Total Capital Expenditures $ 13,400 $ 20,386 $ 5,739 ==================== ==================== ====================
F-39 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 18. Industry Segments (continued) For the years ended December 26, 1998 and 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. The Company's products are primarily sold to mass market retailers throughout the United States and to a lesser degree Canada and the United Kingdom. 19. Net Loss Per Basic Common Share Loss per basic common share was computed as follows:
Year Ended Year Ended Years Ended December 26, 1998 December 27, 1997 December 28, 1996 -------------------- -------------------- ------------------- (In thousands except for per share data) Net loss $ (128,599) $ (49,680) $ (197,503) Preferred dividend requirements (5,491) (7,849) (6,136) -------------------- -------------------- ------------------- Loss applicable to basic common stock (134,090) $ (57,529) $ (203,639) ==================== ==================== =================== Weighted average basic common shares outstanding 27,433 26,357 23,317 ==================== ==================== =================== Loss per basic common share $ (4.89) $ (2.18) $ (8.73) ==================== ==================== ===================
20. 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 current director of the Company) is the Managing Partner, has acted as a real estate advisor to the Company. In March 1999 the Company and Georgetown agreed to terminate all remaining obligations under the Georgetown agreement. Pursuant to the Georgetown Agreement, the Company was 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 $131,000 in respect of a property located at 850 Third Avenue, New York, New York, (iv) approximately $217,000 in respect of a property located in Fayetteville, North Carolina, and (v) approximately $78,000 in respect of a property located in Coffeyville, KS. Tribeca Transaction Pursuant to a letter agreement (the "Tribeca Agreement") dated as of July 1, 1996, the Company was obligated to pay to Tribeca Technologies LLC ("Tribeca"), a limited liability company in which Philip E. Rowley (an officer of the Company through May 1998) was 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 employment of the Company at such time); (i) July 1, 1996; (ii) July 1, 1997; and (iii) July 1, 1998. In consideration for such payments, Tribeca is obligated to pay the Company one-third of the aggregate amount of any 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 or (ii) the amount paid by the Company to Tribeca pursuant to the F-40 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998 (CONTINUED) - -------------------------------------------------------------------------------- 20. Related Party Transactions (continued) Tribeca Transaction (continued) previous sentence. As of December 26, 1998, 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. 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. The Company has paid approximately $75,000 to Powerhouse in royalties through December 26, 1998. There is also an 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-41 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Condensed Balance Sheets (In Thousands)
December 26, 1998 December 27, 1997 -------------------- -------------------- Assets Current assets Cash $ 1,511 $ 19,155 Deposits 3,708 - Refundable income taxes 637 637 Other current assets 2,166 1,375 -------------------- -------------------- Total current assets 8,022 21,167 Other assets 3,164 8,963 Property, plant and equipment 99 9,985 Less allowances for depreciation and amortization (69) (489) -------------------- -------------------- 30 9,496 Investment and advances in subsidiaries (184,796) (83,335) -------------------- -------------------- $ (173,580) $ (43,709) ==================== ==================== Liabilities and stockholders' equity Current liabilities Accrued compensation and fringe benefits $ 89 $ 20 Other current liabilities 7,485 6,671 -------------------- -------------------- 7,574 6,691 Deferred compensation 7,927 7,909 Other noncurrent liabilities - 3,000 -------------------- -------------------- 7,927 10,909 Stockholders' deficit Convertible preferred stock - series B 65,000 65,000 Common stock 279 269 Additional paid in capital 128,956 128,533 Accumulated deficit (379,390) (250,791) Cumulative translation adjustment (1,104) (1,498) -------------------- -------------------- (186,259) (58,487) Less common stock in treasury (2,822) (2,822) -------------------- -------------------- (189,081) (61,309) -------------------- -------------------- $ (173,580) $ (43,709) ==================== ====================
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 Ended Year Ended Ended December 26, December 27, December 28, 1998 1997 1996 ------------------ ------------------ ------------------- Net revenues (principally intercompany interest income) $ 10,055 $ 8,730 $ 8,736 Costs and expenses: Selling, general and administrative (346) 1,063 14,335 Restructuring charges - - 1,072 Interest expense (primarily intercompany) 250 - 4,143 ------------------ ------------------ ------------------- Income (loss) before provision for income taxes 10,151 7,667 (10,814) Provision for income taxes - - 272 ------------------ ------------------ ------------------- 10,151 7,667 (11,086) Deficit in net loss of subsidiary (138,750) (57,347) (186,417) ------------------ ------------------ ------------------- Net loss $ (128,599) $ (49,680) $ (197,503) ================== ================== ===================
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 Year Year Months Ended Ended Ended December December December 26, 1998 27, 1997 28, 1996 ----------------- --------------- --------------- Cash (used in) provided by Operating Activities $ (18,077) $ 6,254 $ 6,366 Investing Activities: Purchase of property, plant and equipment (84) (9,885) (99) Deposits (211) (3,497) - ----------------- ---------------- --------------- Net cash used in investing activities (295) (13,382) (99) 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 Proceeds from Municipal Government Grants - 3,000 - Net loans to subsidiaries - (38,109) (23,208) Common Stock Transactions - Other 728 (159) (85) --------------- ------------- --------------- Net cash (used in) provided by financing activities 728 (33,712) 53,714 Net (decrease) increase in cash and cash equivalents (17,644) (40,840) 59,981 Cash and cash equivalents, beginning of period 19,155 59,995 14 --------------- ------------- --------------- Cash and cash equivalents, end of period $ 1,511 $ 19,155 $ 59,995 =============== ============= ===============
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 YEARS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997 AND THE ELEVEN MONTHS ENDED DECEMBER 28, 1996 - --------------------------------------------------------------------------------
Allowance for Sales Allowance Discounts for Doubtful and Accounts Returns Total --------------- ------------- ---------------- 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 Additions charged to costs and expenses 2,859 35,970 38,829 Deductions - amounts written off (3,267) (26,184) (29,451) --------------- ------------- ---------------- BALANCES, DECEMBER 26, 1998 $ 6,800 $ 26,827 $ 33,627 =============== ============= ================
S-4 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0000790706 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. 1,000 12-MOS DEC-26-1998 DEC-26-1998 15,330 0 75,038 (33,627) 33,068 124,953 74,052 (44,097) 254,951 389,250 150,000 115,000 65,000 279 (381) 254,951 193,573 194,226 181,141 296,505 0 (666) 28,686 (129,265) (128,599) 0 0 0 0 0 (4.89) 0 For the attached financials, the value EPS-DILUTED is not applicable
EX-2.1 3 EXHIBIT 2.1 PROSKAUER ROSE LLP Counsel for Debtors and Debtors-in-Possession 1585 Broadway New York, New York 10036 (212) 969-3000 Alan B. Hyman (AH-6655) Michael E. Foreman (MF-5802) Scott K. Rutsky (SR-0712) UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -------------------------------------------------x : In re: : (Chapter 11) : GOLDEN BOOKS FAMILY : ENTERTAINMENT, INC., et al., : Case Nos. 99-10030 : Through 99-10032 (TLB) : Debtors. : (Jointly Administered) : - -------------------------------------------------x JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE Dated: March 25, 1999 New York, New York UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -------------------------------------------------x : In re: : (Chapter 11) : GOLDEN BOOKS FAMILY : ENTERTAINMENT, INC., et al., : Case Nos. 99-10030 : Through 99-10032 (TLB) : Debtors. : (Jointly Administered) : - -------------------------------------------------x JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE Golden Books Family Entertainment, Inc., Golden Books Publishing Company, Inc. and Golden Books Home Video, Inc., propose the following joint plan of reorganization under Section 1121(a) of title 11 of the United States Code: ARTICLE 1 DEFINITIONS AND CONSTRUCTION OF TERMS Definitions; Interpretation; Application of Definitions and Rules of Construction. For purposes of this Plan, the following terms shall have the meanings specified in this Article 1. A term used herein that is not defined herein, but that is used in the Bankruptcy Code, shall have the meaning ascribed to that term in the Bankruptcy Code. Wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include both the singular and the plural and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter. Unless otherwise specified, all Section, article, schedule or exhibit references in the Plan are to the respective Section in, Article of, Schedule to, or Exhibit to, the Plan. The words "herein," "'hereof," "hereto," "hereunder" and other words of similar import refer to the Plan as a whole and not to any particular Section, subSection or clause contained in the Plan. The rules of construction contained in Section 102 of the Bankruptcy Code shall apply to the construction hereof. The headings in the Plan are for convenience of reference only and shall not limit or otherwise affect the provisions hereof. 1 1.1 "Administrative Expense Claim" shall mean a Claim Allowed under Section 503(b) of the Bankruptcy Code that is entitled to priority under Section 507(a)(1) of the Bankruptcy Code, including, without limitation, (a) any actual and necessary costs and expenses of preserving the Estates or administering the Chapter 11 Cases as authorized and approved by a Final Order, (b) any actual and necessary costs and expenses incurred in the ordinary course of the Debtors' business, (c) fees and expenses of Professionals to the extent Allowed by Final Order under Sections 330, 331, or 503 of the Bankruptcy Code, and (d) all fees and charges assessed against the Estates pursuant to 28 U.S.C. ss. 1930. 1.2 "Allowed" shall mean, with reference to any Claim: (a) a Claim that has been listed by the Debtors in their Schedules and (i) is not listed as disputed, contingent or unliquidated, and (ii) is not a Claim as to which a proof of claim has been filed; (b) a Claim as to which a timely proof of Claim has been filed as of the Bar Date and either (i) no objection thereto, or application to estimate, equitably subordinate or otherwise limit recovery, has been made on or before any applicable deadline, or (ii) if an objection thereto, or application to estimate, equitably subordinate or otherwise limit recovery, has been interposed, the extent to which such Claim (whether in whole or in part) has been allowed by a Final Order; (c) a Claim arising from the recovery of property under Section 550 or 553 of the Bankruptcy Code and allowed in accordance with Section 502(h) of the Bankruptcy Code; or (d) any Claim allowed under this Plan. 1.3 "Ballot" shall mean the form or forms distributed to each holder of an impaired Claim or Equity Interest entitled to vote on the Plan on which an acceptance or rejection of the Plan shall be indicated. 1.4 "Bankruptcy Code" shall mean title 11 of the United States Code, as amended from time to time, as applicable to the Chapter 11 Cases. 1.5 "Bankruptcy Court" shall mean the United States District Court for the Southern District of New York having jurisdiction over the Chapter 11 Cases and, to the extent of any reference under 28 U.S.C. ss. 157, the unit of such District Court under 28 U.S.C. ss. 151. 1.6 "Bankruptcy Rules" shall mean the Federal Rules of Bankruptcy Procedure as promulgated under 28 U.S.C. ss. 2075, and any Local Rules of the Bankruptcy Court. 1.7 "Bar Date" shall mean the date fixed by order of the Bankruptcy Court by which Persons asserting a Claim against the Debtors must file a proof of claim or be forever barred from asserting a Claim against the Debtors or their property and from voting on the Plan and/or sharing in distributions hereunder. 1.8 "Business Day" shall mean any day other than a Saturday, Sunday or legal holiday, as such term is defined in Bankruptcy Rule 9006. 2 1.9 "Cash" shall mean cash, cash equivalents (including personal checks drawn on a bank insured by the Federal Deposit Insurance Corporation, certified checks and money orders) and other readily marketable direct obligations of the United States of America and certificates of deposit issued by banks. 1.10 "Causes of Action" shall mean, without limitation, any and all actions, causes of action, liabilities, obligations, rights, suits, debts, sums of money, damages, judgments, Claims and demands whatsoever, whether known or unknown, in law, equity or otherwise. 1.11 "Chapter 11 Cases" shall mean the Debtors' cases under Chapter 11 of the Bankruptcy Code administered in the Bankruptcy Court. 1.12 "Claim" shall mean a claim against a Person or its property as defined in Section 101(5) of the Bankruptcy Code, including, without limitation, (a) any right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (b) any right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. 1.13 "Class" shall mean a category of Persons holding Claims or Equity Interests which are substantially similar in nature to the Claims or the Equity Interests of other holders in such Class, as designated in Article 3 of this Plan. 1.14 "Collateral" shall mean any property or interest in property of the Estates subject to a Lien to secure the payment or performance of a Claim, which Lien is not subject to avoidance under the Bankruptcy Code or otherwise invalid under the Bankruptcy Code or applicable state law. 1.15 "Confirmation Date" shall mean the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order on the docket. 1.16 "Confirmation Hearing" shall mean the hearing held by the Bankruptcy Court to consider confirmation of the Plan pursuant to Section 1129 of the Bankruptcy Code, as such hearing may be adjourned or continued from time to time. 1.17 "Confirmation Order" shall mean the order of the Bankruptcy Court confirming the Plan pursuant to the provisions of the Bankruptcy Code. 1.18 "Contingent Claim" shall mean any Claim for which a proof of claim has been filed with the Bankruptcy Court (a) which was not filed in a sum certain, or which has not accrued and is dependent upon a future event that has not occurred or may never occur, and (b) which has not been Allowed. 3 1.19 "Convertible Debenture Claims" shall mean all Claims based upon or evidenced by a Convertible Debenture. 1.20 "Convertible Debentures" shall mean the 8.75% convertible debentures due 2016 issued by Publishing and Parent in the original principal amount of $118 million pursuant to the Convertible Debenture Indenture. 1.21 "Convertible Debenture Indenture" shall mean that certain indenture dated August 20, 1996, as amended or supplemented from time to time in accordance with the terms thereof, among Parent, Publishing and the Bank of New York, as Trustee. 1.22 "Debt Securities Recission or Damage Claims" shall mean any and all Claims (including, without limitation, all Claims asserted or assertable in that certain consolidated litigation pending in the United States District Court for the Southern District of New York encaptioned "Kevin Lemmer v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 5748 (AGS) and Green Fund and Cynthia Green Colin v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 7072 (AGS)"): (i) for recission of the purchase or sale of any debt instruments issued by any or all of the Debtors (including, without limitation, Old Senior Notes, TOPrS Certificates or Convertible Debentures), (ii) for damages arising from the purchase or sale of any debt instruments issued by any or all of the Debtors (including, without limitation, Old Senior Notes, TOPrS Certificates or Convertible Debentures), or (iii) for reimbursement or contribution in connection with such recission or damage Claims. 1.23 "Debtors" shall mean, collectively, Parent, Publishing and Video. 1.24 "Debtors-in-Possession" shall mean the Debtors in their capacity as debtors-in-possession in the Chapter 11 Cases pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. 1.25 "DIP Financing Order" shall mean the order or orders of the Bankruptcy Court approving and authorizing the terms of debtor-in-possession financing arrangements in the Chapter 11 cases pursuant to the DIP Loan Documents. 1.26 "DIP Lender" shall mean the lender or lenders under the DIP Loan Documents. 1.27 "DIP Loan Documents" shall mean all documents and instruments evidencing and/or setting forth the terms of debtor-in-possession financing arrangements in the Chapter 11 Cases as approved by the DIP Financing Order. 1.28 "Disclosure Statement" shall mean the disclosure statement relating to the Plan, including, without limitation, all exhibits and schedules thereto, in the form approved by the Bankruptcy Court pursuant to Section 1125 of the Bankruptcy Code. 4 1.29 "Disputed" shall mean, with respect to Claims or Equity Interests, any such Claim or Equity Interest: (a) that is listed in the Schedules as unliquidated, disputed or contingent; or (b) as to which the Debtors or any other party-in-interest has interposed a timely objection or request for estimation, or have sought to equitably subordinate or otherwise limit recovery in accordance with the Bankruptcy Code and the Bankruptcy Rules, or which is otherwise disputed by the Debtors in accordance with applicable law, which objection, request for estimation, action to limit recovery or dispute has not been withdrawn or determined by Final Order; or (c) which is a Contingent Claim. 1.30 "Distribution Agreement" shall mean, collectively, (i) that certain agreement dated as of November 11, 1997, by and between Video and Sony Music (a Group of Sony Music Entertainment, Inc.), as such agreement may have been amended or supplemented from time to time, and (ii) that certain license agreement, dated as of January 1, 1998, between Publishing and Video, respecting Video's license from Publishing of rights to the Golden Properties (as defined therein), as such agreement may have been amended or supplemented from time to time. 1.31 "Distribution Record Date" shall mean the Confirmation Date. 1.32 "Effective Date" shall mean the date which is eleven (11) days after the Confirmation Date, or if such date is not a Business Day, the next succeeding Business Day; provided, however, that if, as of such date, all conditions to the occurrence of the Effective Date set forth in Section 8.1 of this Plan have not been satisfied or waived pursuant to Section 8.2 of this Plan, then the first Business Day on which all such conditions have been satisfied or waived. 1.33 "Equity Interests" shall mean, collectively, Old Preferred Stock Interests and Old Common Stock Interests. 1.34 "Equity Interest Recission or Damage Claims" shall mean any and all Claims (including, without limitation, all Claims asserted or assertable in that certain consolidated litigation pending in the United States District Court for the Southern District of New York encaptioned "Kevin Lemmer v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 5748 (AGS) and Green Fund and Cynthia Green Colin v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 7072 (AGS)"): (i) for recission of the purchase or sale of Old Preferred Stock Interests and/or Old Common Stock Interests; (ii) for damages arising from the purchase or sale of Old Preferred Stock Interests and/or Old Common Stock Interests; or (iii) for reimbursement or contribution in connection with such recission or damage Claims. 5 1.35 "Estates" shall mean the estates created in the Chapter 11 Cases pursuant to Section 541 of the Bankruptcy Code. 1.36 "Final Order" shall mean an order or judgment of the Bankruptcy Court as to which the time to appeal, petition for certiorari, or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari, or other proceedings for reargument or rehearing shall then be pending or as to which any right to appeal, petition for certiorari, reargue, or rehear shall have been waived in writing in form and substance satisfactory to the Debtors or the Reorganized Debtors or, in the event that an appeal, writ of certiorari, or reargument or rehearing thereof has been sought, such order or judgment of the Bankruptcy Court shall have been determined by the highest court to which such order was appealed, or certiorari, reargument or rehearing shall have been denied and the time to take any further appeal, petition for certiorari or move for reargument or rehearing shall have expired; provided, however, that the possibility that a motion under Rule 59 or Rule 60 of the Federal Rules of Civil Procedure, or any analogous rule under the Bankruptcy Rules, may be filed with respect to such order shall not cause such order not to be a Final Order. 1.37 "General Secured Claim" shall mean any Secured Claim other than an Old Senior Note Claim and a GPH Claim. 1.38 "General Unsecured Claim" shall mean any Claim that is not a Secured Claim, Administrative Expense Claim, Priority Tax Claim, Priority Claim, Old Senior Note Claim, GPH Claim, TOPrS Claim, TOPrS Securities Litigation Claim or Common Stock Securities Litigation Claim. General Unsecured Claims shall not include any portion of Old Senior Note Claims or GPH Claims that are not Secured Claims. 1.39 "GPH" shall mean Golden Press Holding, L.L.C., a Delaware limited liability company. 1.40 "GPH Claims" shall mean all Claims based upon or evidenced by a GPH Note. 1.41 "GPH Note Purchase Agreement" shall mean that certain note purchase agreement dated as of September 8, 1998, among GPH, Publishing and Video. 1.42 "GPH Notes" shall mean the promissory notes of Video in the original principal amount of $10 million issued pursuant to the GPH Note Purchase Agreement. 1.43 "Indemnification Claims" shall mean all obligations relating to contribution, indemnification and exculpation by Parent and its subsidiaries, as arise under applicable laws or agreements or as provided in any of (i) Parent's certificate of incorporation as in effect prior to or as of the date hereof, (ii) Parent's by-laws in effect prior to or as of the date hereof, (iii) any agreement with Parent, or (iv) the certificates of incorporation, by-laws, or similar documents or agreements of or with any of Parent's subsidiaries as in effect prior to or as of the date hereof. 6 1.44 "Indenture Trustee Charging Lien" shall mean any lien or other priority in payment available to the Old Senior Note Indenture Trustee pursuant to the Old Senior Note Indenture, or the TOPrS Trustee pursuant to the TOPrS Trust and/or Convertible Debenture Indenture, or otherwise available to all such Persons under applicable law, for the payment of fees and expenses incurred by such Persons, to the extent not paid pursuant to the applicable terms of the Plan. 1.45 "Informal Committees" shall mean, collectively, the Informal Senior Note Committee and the Informal TOPrS Committee. 1.46 "Informal Senior Note Committee" shall mean the ad hoc committee of holders of Old Senior Notes as constituted and in existence as of the Petition Date and which has retained Stroock & Stroock & Lavan LLP, as counsel, and Houlihan Lokey Howard & Zukin, as financial advisors, as same may be reconstituted from time to time. 1.47 "Informal TOPrS Committee" shall mean the ad hoc committee of holders of TOPrS Certificates as constituted and in existence as of the Petition Date and which has retained Cleary, Gottlieb, Steen & Hamilton, as counsel, and Jefferies & Co., Inc., as financial advisors, as same may be reconstituted from time to time. 1.48 "Lien" shall have the meaning set forth in Section 101(37) of the Bankruptcy Code; except that a lien that has been avoided in accordance with Sections 544, 545, 546, 547, 548 or 549 of the Bankruptcy Code shall not constitute a lien. 1.49 "Management Stock Option Plan" shall mean the stock option plan to be established by Reorganized Parent, substantially in the form included in the Plan Supplement, which plan shall provide for the issuance upon exercise of such options of shares of New Parent Common Stock constituting 10%, on a fully-diluted basis, of the authorized shares of New Parent Common Stock on the Effective Date. 1.50 "New Parent Common Stock" shall mean the $____ par value common stock of Reorganized Parent issued pursuant to this Plan and the Reorganized Parent Charter. 1.51 "New Senior Notes" shall mean the senior secured notes to be issued by Reorganized Publishing pursuant to the New Senior Note Indenture and distributed to holders of Allowed Old Senior Note Claims pursuant to Section 4.3(c) of the Plan. 1.52 "New Senior Note Indenture" shall mean the indenture, dated as of the Effective Date, between Reorganized Publishing and the New Senior Note Indenture Trustee respecting the New Senior Notes, substantially in the form included in the Plan Supplement. 1.53 "New Senior Note Indenture Trustee" shall mean the Old Senior Note Indenture Trustee or such other entity reasonably acceptable to the Informal Senior Note Committee who shall act as indenture trustee under the New Senior Note Indenture. 7 1.54 "New Senior Note Security Agreement" shall mean the security agreement, dated as of the Effective Date, respecting the collateral which shall secure the New Senior Notes. 1.55 "New Warrants" shall mean warrants issued pursuant to the Warrant Agreement to purchase that number of shares of New Parent Common Stock constituting 5% of the authorized shares of New Parent Common Stock on the Effective Date, which shall be exercisable until the third anniversary of the Effective Date at a price of $__________ per share; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (ii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. 1.56 "Official Committee" shall mean the official committee(s), if any, appointed in the Chapter 11 Cases pursuant to Section 1102 of the Bankruptcy Code, as the same may be constituted from time to time. 1.57 "Old Common Stock Interests" shall mean the equity interests represented by duly authorized, validly issued and outstanding shares of common stock of Parent, par value $.01 per share, together with all accrued and unpaid dividends on the Old Preferred Stock Interests, prior to the Effective Date. 1.58 "Old Preferred Stock Interests" shall mean the equity interests represented by duly authorized, validly issued and outstanding shares of Series B Convertible Preferred Stock of Parent, no par value per share, prior to the Effective Date. 1.59 "Old Senior Notes" shall mean the 7.65% senior notes due 2002, in the original principal amount of $150 million, issued pursuant to the Old Senior Note Indenture. 1.60 "Old Senior Note Claims" shall mean all claims based upon or evidenced by an Old Senior Note. 1.61 "Old Senior Note Indenture" shall mean that certain indenture dated as of September 15, 1992, as amended or supplemented from time to time in accordance with the terms thereof, between Publishing and the Old Senior Note Indenture Trustee, pursuant to which the Old Senior Notes were issued. 1.62 "Old Senior Note Indenture Trustee" shall mean Marine Midland Bank, as successor indenture trustee to the Bank of New York under the Old Senior Note Indenture. 1.63 "Parent" shall mean Golden Books Family Entertainment, Inc., a Delaware corporation. 8 1.64 "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated association or organization, governmental agency or political subdivision thereof. 1.65 "Petition Date" shall mean the respective date or dates upon which the Debtors filed their voluntary Chapter 11 petitions with the Bankruptcy Court pursuant to the Bankruptcy Code. 1.66 "Plan" shall mean this Chapter 11 plan of reorganization, including, without limitation, the Plan Supplement and the Plan Documents, and all exhibits, supplements, appendices and schedules hereto and thereto, either in its present form or as the same may be altered, amended or modified from time to time. 1.67 "Plan Documents" shall mean the Reorganized Debtors' Charters, the Management Stock Option Plan, the New Senior Note Indenture, the New Senior Note Security Agreement (and all other documents relating to the New Senior Notes), the Registration Rights Agreement, the Warrant Agreement, and the Post-Effective Date Financing Facility Documents, as they may be amended at any time prior to the conclusion of the Confirmation Hearing, or thereafter, in accordance with Section 12.4 hereof. 1.68 "Plan Supplement" shall mean the supplement, containing copies of the Plan Documents, which shall be filed with the Bankruptcy Court. The Plan Supplement is incorporated into, and is a part of, this Plan as if set forth in full herein, and all references to this Plan shall refer to this Plan together with all documents contained in the Plan Supplement. The Plan Supplement (containing drafts or final versions of the Plan Documents) shall be filed with the Bankruptcy Court as early as practicable (but in no event later than seven (7) Business Days) prior to the deadline fixed for filing objections to Confirmation of the Plan, or on such other date as the Bankruptcy Court may establish. 1.69 "Post-Effective Date Financing Facility" shall mean a post-Effective Date term loan and working capital revolving credit financing between the Reorganized Debtors and a lender selected by the Reorganized Debtors in consultation with the Informal Committees containing terms and conditions in form and substance acceptable to the Reorganized Debtors. 1.70 "Post-Effective Date Financing Facility Documents" shall mean the documents or term sheets setting forth the terms of the Post-Effective Date Financing Facility, substantially in the form included in the Plan Supplement. 1.71 "Priority Claims" shall mean any and all Claims (or portions thereof), if any, entitled to priority under Section 507(a) of the Bankruptcy Code other than Priority Tax Claims and Administrative Expense Claims. 9 1.72 "Priority Tax Claim" shall mean any Claim of a governmental unit entitled to priority under Section 507(a)(8) of the Bankruptcy Code. 1.73 "Professionals" shall mean those Persons (a) employed pursuant to an order of the Bankruptcy Court in accordance with Sections 327 or 1103 of the Bankruptcy Code and to be compensated for services pursuant to Sections 327, 328, 329, 330 and 331 of the Bankruptcy Code, or (b) for which compensation and reimbursement has been allowed by the Bankruptcy Court pursuant to Section 503(b)(4) of the Bankruptcy Code. 1.74 "Pro Rata Share" shall mean a proportionate share, so that the ratio of the consideration distributed on account of an Allowed Claim or Equity Interest in a Class to the amount of such Allowed Claim or Equity Interest is the same as the ratio of the amount of the consideration distributed on account of all Allowed Claims or Equity Interests in such Class to the amount of all Allowed Claims or Equity Interests in such Class. 1.75 "Publishing" shall mean Golden Books Publishing Company, Inc., a Delaware corporation. 1.76 "Publishing Notes" shall mean the promissory notes of Publishing, dated as of September 8, 1998, in the original principal amount of $10 million, issued in connection with, and pledged as collateral for, the GPH Notes. 1.77 "Recission or Damage Claims" shall mean, collectively Debt Securities Recission or Damage Claims and Equity Interest Recission or Damage Claims. 1.78 "Registration Rights Agreement" shall have the meaning set forth in Section 5.20 of the Plan. 1.79 "Released Parties" shall mean, collectively, the Debtors, Reorganized Debtors, members of the Informal Senior Note Committee, members of the Informal TOPrS Committee, GPH (and including, without limitation, each of its members and all of the partners of any such member), and all past and present officers, directors, agents, employees, counsel, financial advisors and Professionals of each of the foregoing. 1.80 "Reorganized Debtors" shall mean collectively, Reorganized Parent, Reorganized Publishing and Reorganized Video, or any successors thereto by merger, consolidation or otherwise, on or after the Effective Date. 1.81 "Reorganized Debtors' Charters" shall mean, collectively, the amended and restated certificates of incorporation and bylaws of each of Reorganized Parent, Reorganized Publishing, and Reorganized Video, which shall be substantially in the forms contained in the Plan Supplement. 10 1.82 "Reorganized Parent" shall mean Parent, or any successor thereto by merger, consolidation or otherwise, on and after the Effective Date. 1.83 "Reorganized Parent Charter" shall mean, collectively, the amended and restated certificate of incorporation and bylaws of Reorganized Parent, which shall be substantially in the forms contained in the Plan Supplement. 1.84 "Reorganized Publishing" shall mean Publishing, or any successor thereto by merger, consolidation or otherwise, on and after the Effective Date. 1.85 "Reorganized Video" shall mean Video, or any successor thereto by merger, consolidation or otherwise, on and after the Effective Date. 1.86 "Restructuring Agreement" shall mean that certain restructuring agreement, dated as of March 11, 1999, a copy of which is attached as Exhibit D to the Disclosure Statement. 1.87 "Retiree Benefits" shall mean payments to any entity or Person for the purpose of providing or reimbursing payments for retired employees of the Debtors and of any other entities as to which the Debtors are obligated to provide retiree benefits and the eligible spouses and eligible dependents of such retired employees, for medical, surgical, or hospital care benefits, or in the event of death of a retiree under any plan, fund or program (through the purchase of insurance or otherwise) maintained or established by the Debtors prior to the Petition Date, as such plan, fund or program was then in effect or as heretofore or hereafter amended. 1.88 "Schedules" shall mean the schedules of assets and liabilities, the list of holders of interests and the statements of financial affairs filed by the Debtors under Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007, as such schedules, lists and statements have been or may be supplemented or amended from time to time. 1.89 "Secured Claim" shall mean any Claim, to the extent reflected in the Schedules or a proof of claim as a Secured Claim, which is secured by a Lien on Collateral to the extent of the value of such Collateral, as determined in accordance with Section 506(a) of the Bankruptcy Code, or, in the event that such Claim is subject to setoff under Section 553 of the Bankruptcy Code, to the extent of such setoff. 1.90 "Subsidiary" shall mean any entity of which the outstanding capital stock entitled to vote for the election of directors is owned or controlled, directly or indirectly, by a Debtor, by one or more Subsidiaries of a Debtor, or by a Debtor and one or more of its other Subsidiaries. 1.91 "Subsidiary Equity Interest" shall mean any share of common stock or other instrument evidencing a present ownership interest in any of the Subsidiaries, whether or not transferable, and any option, warrant or right, contractual or otherwise, to acquire any such interest. 11 1.92 "Substantive Consolidation Order" shall mean the order, or provisions of the Confirmation Order, substantively consolidating the Debtors' Estates as provided in Article 8 hereof. 1.93 "TOPrS Certificates" shall mean the 8.75% Convertible Trust Originated Preferred Securities due 2016 issued by Golden Books Financing Trust, a Delaware business trust, pursuant to the TOPrS Trust. 1.94 "TOPrS Claims" shall mean, collectively, all claims based upon or evidenced by a TOPrS Certificate and/or a Convertible Debenture, provided, however, that TOPrS Claims shall not include any Debt Securities Recission or Damage Claims. 1.95 "TOPrS Trust" shall mean that certain amended and restated declaration of trust dated August 20, 1996 respecting the issuance of the TOPrS Certificates. 1.96 "TOPrS Trustee" shall mean, collectively, the trustee with respect to the TOPrS Trust and the indenture trustee under the Convertible Debenture Indenture. 1.97 "Video" shall mean Golden Books Home Video, Inc., a Delaware corporation. 1.98 "Warrant Agreement" shall mean the warrant agreement between Reorganized Parent and the warrant agent named therein, substantially in the form included in the Plan Supplement. ARTICLE 2 TREATMENT OF ALLOWED ADMINISTRATIVE EXPENSE CLAIMS AND ALLOWED PRIORITY TAX CLAIMS 2.1 Non-Classification. As provided in Section 1123(a)(1) of the Bankruptcy Code, Administrative Expense Claims and Priority Tax Claims against the Debtors are not classified for the purposes of voting on or receiving distributions under this Plan. All such Claims are instead treated separately upon the terms set forth in this Article 2. 2.2 Administrative Expense Claims. (a) In General. All Administrative Expense Claims shall be paid in full, in Cash, in such amounts as (a) are incurred in the ordinary course of business by the Debtors, (b) are Allowed by the Bankruptcy Court upon the later of the Effective Date, the date upon which there is a Final Order allowing such Administrative Expense Claim or any other date specified in such order, or (c) may be agreed upon between the holder of such Administrative Expense Claim and the Debtors. Such Administrative Expense Claims shall include obligations to the DIP Lender, costs incurred in the operation of the Debtors' businesses after the Petition Date, the fees and expenses of Professionals retained by the Debtors, the Informal Senior Note Committee, the Old Senior Note Indenture Trustee, the Informal TOPrS Committee, the TOPrS Trustee, GPH, any statutory 12 committee appointed to serve in the Chapter 11 Cases, and the fees due to the United States Trustee pursuant to 28 U.S.C. ss. 1930. The reasonable fees and expenses incurred on or before the Effective Date by the Old Senior Note Indenture Trustee, the TOPrS Trustee, the members of the Informal Senior Note Committee and the Informal TOPrS Committee, including the respective counsel and financial advisors to such committees, and the reasonable fees and expenses of counsel to GPH, incurred in connection with the Chapter 11 Cases or this Plan shall be paid by the Reorganized Debtors as Administrative Expense Claims (without application by, or on behalf of, any such Person to the Bankruptcy Court, unless specifically ordered by the Bankruptcy Court, or any such Person has been retained by an Official Committee pursuant to Sections 327 or 1103 of the Bankruptcy Code, in either of which events, Section 2.2(b) of this Plan shall apply). If the Reorganized Debtors and any such Person cannot agree on the amount of fees and expenses to be paid to such Person, such amount shall be determined by the Bankruptcy Court. (b) Professional Compensation and Expense Reimbursement Claims. All entities seeking an award by the Bankruptcy Court of Professional Fees, or of compensation for services rendered or reimbursement of expenses incurred through and including the Confirmation Date under Sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy Code, (a) shall file their respective final applications for allowances of compensation for services rendered and reimbursement of expenses incurred through the Confirmation Date within thirty (30) days after the Confirmation Date, and (b) if granted such an award by the Bankruptcy Court, shall be paid in full in such amounts as are allowed by the Bankruptcy Court (i) on the later of the Effective Date or the date such Administrative Expense Claim becomes an Allowed Administrative Expense Claim, or as soon thereafter as is practicable, (ii) upon such other terms as may be mutually agreed upon between such holder of an Allowed Administrative Expense Claim and the Debtors-in-Possession or, on and after the Effective Date, the Reorganized Debtors, or (iii) in accordance with the terms of any applicable administrative procedures order entered by the Bankruptcy Court. All Professional Fees for services rendered in connection with the Chapter 11 Cases and the Plan after the Confirmation Date, including, without limitation, those relating to the occurrence of the Effective Date, the prosecution of Causes of Action preserved hereunder and the resolution of Disputed Claims, shall be paid by the Reorganized Debtors upon receipt of an invoice therefor, or on such other terms as the Reorganized Debtors may agree to, without the need for further Bankruptcy Court authorization or entry of a Final Order. If the Reorganized Debtors and any Professional cannot agree on the amount of post-Confirmation Date fees and expenses to be paid to such Professional, such amount shall be determined by the Bankruptcy Court. (c) Treatment of Claims of DIP Lender. Simultaneously with the closing of the Post-Effective Date Financing Facility, all of the Debtors' obligations to the DIP Lender pursuant to the DIP Loan Documents shall be fully and finally satisfied in accordance with the terms thereof. 2.3 Priority Tax Claims. Allowed Priority Tax Claims shall be paid in full, in Cash, upon the later of (a) the Effective Date, (b) the date upon which there is a Final Order allowing such Claim as an Allowed Priority Tax Claim, (c) the date that such Allowed Priority Tax Claim would have been due if the Chapter 11 Cases had not been commenced, or (d) upon such other terms as may be 13 agreed to between the Debtors and any holder of an Allowed Priority Tax Claim; provided, however, that the Debtors may, at their option, in lieu of payment in full of Allowed Priority Tax Claims on the Effective Date, make Cash payments respecting Allowed Priority Tax Claims deferred to the extent permitted by Section 1129(a)(9) of the Bankruptcy Code and, in such event, interest shall be paid on the unpaid portion of such Allowed Priority Tax Claim at a rate to be agreed to by the Debtors and the appropriate governmental unit or, if they are unable to agree, as determined by the Bankruptcy Court. ARTICLE 3 CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS Claims, other than Administrative Expense Claims and Priority Tax Claims, and Equity Interests are classified for all purposes, including voting on, confirmation of and distribution pursuant to the Plan, as follows: Class Status ----- ------ Class 1 -- Priority Claims.........................................Unimpaired Class 2 -- General Secured Claims..................................Unimpaired (Each General Secured Claim shall constitute a separate Class numbered 2.1, 2.2, 2.3 and so on.) Class 3 -- Old Senior Note Claims....................................Impaired Class 4 -- GPH Claims................................................Impaired Class 5 -- TOPrS Claims..............................................Impaired Class 6 -- General Unsecured Claims ...............................Unimpaired Class 7 -- Debt Securities Recission or Damage Claims................Impaired Class 8 -- Old Preferred Stock Interests.............................Impaired Class 9 -- Old Common Stock Interests................................Impaired Class 10 - Equity Interest Recission or Damage Claims................Impaired Class 11 - Subsidiary Equity Interests.............................Unimpaired 14 ARTICLE 4 TREATMENT OF CLAIMS AND EQUITY INTERESTS 4.1 CLASS 1 -- ALLOWED PRIORITY CLAIMS. (a) Impairment and Voting. Class 1 is unimpaired by the Plan. Consequently, each holder of an Allowed Priority Claim is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan. (b) Distributions. Each holder of an Allowed Priority Claim shall receive Cash in an amount equal to such Allowed Priority Claim on the later of the Effective Date and the date such Priority Claim becomes an Allowed Priority Claim, or as soon thereafter as is practicable, unless the holder of an Allowed Priority Claim and the Reorganized Debtors agree to a different treatment thereof. 4.2 CLASS 2 -- GENERAL SECURED CLAIMS. (a) Impairment and Voting. Class 2 is unimpaired by the Plan. Consequently, each holder of an Allowed General Secured Claim is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan. (b) Distributions. At the option of the Reorganized Debtors, (i) an Allowed General Secured Claim shall be reinstated and rendered unimpaired in accordance with Section 1124(2) of the Bankruptcy Code, (ii) a holder of an Allowed General Secured Claim shall receive Cash in an amount equal to such Allowed General Secured Claim, including any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, on the later of the Effective Date and the date such General Secured Claim becomes an Allowed General Secured Claim, or as soon thereafter as is practicable, or (iii) a holder of an Allowed General Secured Claim shall receive the Collateral securing its Allowed General Secured Claim and any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, in full and complete satisfaction thereof on the later of the Effective Date and the date such General Secured Claim becomes Allowed, or as soon thereafter as is practicable. 4.3 CLASS 3 -- ALLOWED OLD SENIOR NOTE CLAIMS. (a) Allowance of Old Senior Note Claims. On the Effective Date, the Old Senior Note Claims shall be deemed Allowed in the aggregate amount of $150 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. (b) Impairment and Voting. Class 3 is impaired by the Plan. Consequently, each holder of an Allowed Old Senior Note Claim shall be entitled to vote to accept or reject the Plan. 15 (c) Distributions. On the Effective Date, each holder of an Allowed Old Senior Note Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the Old Senior Notes), its Pro Rata Share of (i) the New Senior Notes, and (ii) ______shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed Old Senior Note Claims pursuant to this Section 4.3(c), will represent, in the aggregate, 42.5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. (d) Principal Terms of New Senior Notes. Subject to the occurrence of the Effective Date, the New Senior Notes issued pursuant to the New Senior Note Indenture shall contain the following principal terms: Issuer: Reorganized Publishing Guarantor: Reorganized Parent and Reorganized Video (and their respective direct and indirect subsidiaries and affiliates other than Reorganized Publishing). Principal Amount: $87.0 million Maturity: Fifth anniversary of the Effective Date. Interest: Payable in Cash at a rate of 10% per annum, or at the sole election of the issuer, payable in kind in additional New Senior Notes at a rate of 13.5% per annum, payable semi-annually; provided, however, that commencing three years after the Effective Date, interest on the New Senior Notes shall be payable only in cash at a rate of 10% per annum. Amortization: Mandatory semi-annual amortization payments of $8.33 million commencing three years after the Effective Date, i.e., commencing with the first semi-annual interest payment that is due during the fourth year after the Effective Date, to retire $25.0 million of the principal balance of the New Senior Notes prior to maturity. Collateral: New Senior Notes shall be secured by all collateral securing the Old Senior Notes on the Petition Date as described in the Disclosure Statement (including, without limitation, the 16 proceeds arising under the Distribution Agreement); provided, however, that the liens securing the Old Senior Notes on corporate leasehold improvements sold in connection with Parent's reduction of the office space at its corporate headquarters in New York, New York shall be deemed released.The New Senior Notes shall also be secured by (i) a first lien on (a) the Distribution Agreement, and(b) the Debtors' rights and interests in and to "Lassie", "Felix the Cat", the "Film Library", and "Other Entertainment Works"; and (ii) a blanket second lien on all assets pledged to the lender(s) under the Post-Effective Date Financing Facility. Consistent with the foregoing, upon the Effective Date, the New Senior Notes will be secured by either a first or a second lien on all assets of Reorganized Parent and its direct and indirect subsidiaries. Call Protection: New Senior Notes may be redeemed, in whole or in part, at any time, at the option of the Issuer, at the redemption prices (expressed as percentages of principal amount of New Senior Notes)set forth below, plus accrued and unpaid interest to the date of redemption: Years From Effective Date Redemption Price -------------- ---------------- 1 year 105.00% 2 years 103.33% 3 years 101.25% Thereafter 100.0% Any net proceeds from the sale of any collateral securing the New Senior Notes (excluding sales of inventory or accounts receivable in the ordinary course of business) will be used to pay down the New Senior Notes (subject to the redemption schedule set forth above). Covenants: Normal and customary for secured indebtedness of this nature, to be determined to the reasonable satisfaction of the Informal Senior Note Committee and the Informal TOPrS Committee. (e) Cancellation of Old Senior Notes and Related Instruments. As of the Effective Date, all Old Senior Notes, and all indentures, agreements, instruments and other 17 documents evidencing Old Senior Note Claims and the rights of the holders thereof, shall be cancelled and deemed null and void and of no further force and effect (all without further act or action by any Person), and all obligations of any Person (including, without limitation, the Old Senior Note Indenture Trustee) under such instruments and agreements shall be fully and finally satisfied and released. Notwithstanding the foregoing, such cancellation shall not impair the rights and duties under the Old Senior Note Indenture as between the Old Senior Note Indenture Trustee and the beneficiaries of the trust created thereby. 4.4 CLASS 4 -- GPH CLAIMS. (a) Allowance of GPH Claims. On the Effective Date, the GPH Claims shall be deemed Allowed in the aggregate amount of $10 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. (b) Impairment and Voting. Class 4 is impaired by the Plan. Consequently, each holder of an Allowed GPH Claim shall be entitled to vote to accept or reject the Plan. (c) Distributions. On the Effective Date, the holder of the Allowed GPH Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the GPH Notes) ______ shares of New Parent Common Stock. The New Parent Common Stock issued to the holder of the Allowed GPH Claim pursuant to this Section 4.4(c), will represent, in the aggregate, 5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. (d) Cancellation of GPH Notes and Related Instruments. As of the Effective Date, all GPH Notes, the GPH Note Purchase Agreement, and all agreements, instruments and other documents evidencing the GPH Claims and the rights of the holder thereof (including, without limitation, the Publishing Notes), and all liens and security interests securing the GPH Claims, shall be canceled and extinguished, and deemed null and void and of no force and effect (all without further act or action by any Person), and all obligations of any Person under such instruments and agreements shall be fully and finally satisfied and released. 18 4.5 CLASS 5 -- TOPrS CLAIMS. (a) Allowance of TOPrS Claims. On the Effective Date, the TOPrS Claims shall be deemed Allowed in the aggregate amount of $105 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. (b) Impairment and Voting. Class 5 is impaired by the Plan. Consequently, each holder of an Allowed TOPrS Claim shall be entitled to vote to accept or reject the Plan. (c) Distributions. On the Effective Date, each holder of an Allowed TOPrS Claim shall receive, in full and final satisfaction of such Allowed Claim, its Pro Rata Share of ____ shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed TOPrS Claims pursuant to this Section 4.5(c), will represent, in the aggregate, 50.0% of the outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. (d) Cancellation of TOPrS Certificates and Related Instruments. As of the Effective Date, all TOPrS Certificates and all Convertible Debentures, and all indentures, agreements, instruments and other documents evidencing TOPrS Claims and the rights of the holders thereof, shall be cancelled and extinguished, and deemed null and void and of no further force and effect (all without further act or action by any Person), and all obligations of any Person under such instruments and agreements shall be fully and finally satisfied and released, and the TOPrS Trust shall be deemed dissolved. 4.6 CLASS 6 -- GENERAL UNSECURED CLAIMS. (a) Impairment and Voting. Class 6 is unimpaired by the Plan. Consequently, each holder of an Allowed General Unsecured Claim is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan. (b) Distributions. To the extent not satisfied by the Debtors in the ordinary course of business prior to the Effective Date, in full and final satisfaction of such claim, the legal, equitable, and contractual rights to which an Allowed General Unsecured Claim entitles the holder thereof shall be left unimpaired and, accordingly, shall be satisfied on the latest of (i) the Effective Date, (ii) the date a General Unsecured Claim becomes an Allowed Claim, (iii) the date an Allowed General Unsecured Claim becomes due and payable in the ordinary course of the Debtors' business consistent with the Debtors' ordinary payment practices, and (iv) the date on which the Debtors and the holder of such Allowed General Unsecured Claim otherwise agree in writing. At the option of the Debtors, the treatment provided in this Section 4.6(b) will result in the payment of any Allowed General Unsecured Claim, in Cash, in an amount equal to such Allowed General Unsecured Claim 19 (which payment shall include interest, only to the extent to which the holder of such Claim may be contractually entitled, accrued through the date of payment). 4.7 CLASS 7 -- DEBT SECURITIES RECISSION OR DAMAGE CLAIMS. ----------------------------------------------------- (a) Impairment and Voting. Class 7 is impaired by the Plan. Consequently, each holder of an Allowed Debt Securities Recission or Damage Claim shall be entitled to vote to accept or reject the Plan. (b) Distributions. Subject to the releases contained in Section 9.1 herein, each holder of an Allowed Debt Securities Recission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under this Plan. 4.8 CLASS 8 -- OLD PREFERRED STOCK INTERESTS. (a) Impairment and Voting. Class 8 is impaired by the Plan. Consequently, the holder of the Old Preferred Stock Interests shall be entitled to vote to accept or reject the Plan. (b) Distributions. On the Effective Date, all Old Preferred Stock Interests shall be canceled, annulled and extinguished, and the holder of the Allowed Old Preferred Stock Interests shall receive two-thirds (2/3) of the New Warrants to be issued pursuant to the Plan. 4.9 CLASS 9 -- OLD COMMON STOCK INTERESTS. (a) Impairment and Voting. Class 9 is impaired by the Plan. Consequently, each holder of an Allowed Old Common Stock Interest shall be entitled to vote to accept or reject the Plan. (b) Distributions. On the Effective Date, all Old Common Stock Interests shall be canceled, annulled and extinguished, and each holder of an Allowed Old Common Stock Interest (including any such Interest consisting of accrued and unpaid dividends on the Old Preferred Stock Interests) shall receive its Pro Rata Share of one-third (1/3) of the New Warrants to be issued pursuant to the Plan. 4.10 CLASS 10-- EQUITY INTEREST RECISSION OR DAMAGE CLAIMS. ----------------------------------------------------- (a) Impairment and Voting. Class 10 is impaired by the Plan. Consequently, each holder of an Allowed Equity Interest Recission or Damage Claim shall be entitled to vote to accept or reject the Plan. 20 (b) Distributions. Subject to the releases contained in Section 9.1 herein, each holder of an Allowed Equity Interest Recission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under this Plan. 4.11 CLASS 11 -- SUBSIDIARY EQUITY INTERESTS. (a) Impairment and Voting. Class 11 is unimpaired by the Plan. Consequently, each holder of an Allowed Subsidiary Equity Interest is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan. (b) Distributions. On the Effective Date, record holders of Allowed Subsidiary Equity Interests shall continue to hold such equity interests, which equity interests shall continue to be evidenced by the capital stock held by such record holders in the Subsidiary or Subsidiaries as of the Effective Date. ARTICLE 5 IMPLEMENTATION AND EFFECT OF CONFIRMATION OF PLAN 5.1 Plan Funding. The funds utilized to make Cash payments under the Plan have been and/or will be generated from, among other things, the operation of the Debtors' businesses, asset dispositions, and borrowing under the Post-Effective Date Financing Facility. 5.2 Post-Effective Date Financing Facility. On or prior to the Effective Date, the Debtors or Reorganized Debtors, as the case may be, shall execute the Post-Effective Date Financing Facility Documents. The Post-Effective Date Financing Facility, among other things, shall (i) be effective on the Effective Date, (ii) be a senior secured facility, (iii) provide for aggregate borrowings (including a working capital line of credit) of up to $60 million, provided, that, on the Effective Date, the maximum amount of borrowing availability under the Post-Effective Date Financing Facility shall be $45 million with the remaining $15 million of availability under such facility becoming automatically available for borrowing by the Reorganized Debtors upon their attainment of certain levels of operating performance to be mutually agreed to by the Debtors and the Informal Senior Note Committee in good faith, and (iv) contain terms and conditions in form and substance acceptable to the Debtors. 5.3 Reorganized Debtors' Charters. On the Effective Date, the Reorganized Debtors' Charters will become effective. The Reorganized Debtors' Charters, together with the provisions of the Plan, shall, as applicable, provide for, among other things, the authorization and issuance of the New Parent Common Stock and the New Warrants, and such other provisions as are necessary 21 to facilitate consummation of the Plan, including a provision prohibiting the issuance of non-voting equity securities in accordance with Section 1123(a)(6) of the Bankruptcy Code, all without any further action by the stockholders or directors of the Debtors, Debtors-in-Possession or the Reorganized Debtors. 5.4 Issuance of New Securities; Listing on National Securities Exchange. The Reorganized Debtors shall authorize the issuance, in accordance with the terms of the Plan, of approximately ________ shares of New Parent Common Stock, the New Senior Notes and _______ New Warrants. On the Effective Date, the Debtor will transmit written instructions regarding the surrender of Old Senior Notes, Old Preferred Stock Interests, and Old Common Stock Interests, and the distribution of shares of New Parent Common Stock and New Warrants to those parties entitled to distributions thereof pursuant to this Plan. Reorganized Parent will use its reasonable best efforts to cause the New Parent Common Stock and the New Senior Notes to be listed for trading on a national securities exchange or the NASDAQ National Market System. All shares of New Parent Common Stock to be issued pursuant to this Plan (including, without limitation, upon exercise of the New Warrants), shall be, upon issuance, fully paid and non-assessable, and shall be subject to dilution only as may be expressly set forth in this Plan or in the Plan Documents, and the holders thereof shall have no preemptive or other rights to subscribe for additional shares. 5.5 Management of Reorganized Debtors. On the Effective Date, the management, control and operation of the Reorganized Debtors shall become the general responsibility of the respective boards of directors of the Reorganized Debtors, who shall, thereafter, have responsibility for the management, control and operation of the Reorganized Debtors in accordance with applicable law. 5.6 Directors and Officers of Reorganized Debtors. (a) Boards of Directors of Reorganized Debtors. The initial members of the post-Confirmation board of directors of Reorganized Parent shall consist of the following: (i) Richard E. Snyder, (ii) three (3) members selected by the Informal TOPrS Committee, and (iii) three (3) members selected by the Informal Senior Note Committee; provided, however, that (i) the nominees of each Informal Committee shall be reasonably acceptable to the other Informal Committee, and (ii) each of the nominees of the Informal Committees shall be discussed, prior to formal nomination, among the Informal Committees and current management of the Debtors. The designation of the board members selected by the Informal Committees, along with the designation of the board members for Reorganized Publishing and Reorganized Video, shall be filed with the Bankruptcy Court on or prior to the commencement date of the Confirmation Hearing, or such later date as the Bankruptcy Court may establish. (b) Officers of Reorganized Debtors. The officers of the respective Debtors immediately prior to the Effective Date shall serve as the initial officers of the respective Reorganized Debtors on and after the Effective Date. 22 (c) Employment Contracts. Except as otherwise provided in this Section 5.6(c), on the Effective Date, employment contracts of current employees of the Debtors will be assumed. On the Effective Date, the current employment contract of Richard E. Snyder shall be deemed canceled and terminated, and Reorganized Parent and Mr. Snyder shall enter into a new revised employment contract which shall become automatically effective on the Effective Date. The form of such new employment contract shall be filed with the Bankruptcy Court prior to the hearing to consider approval of the Disclosure Statement. 5.7 Management Stock Option Plan. The Management Stock Option Plan shall be effective immediately upon the Effective Date. The Management Stock Option Plan shall contain the principal terms set forth on Exhibit "A" hereto. 5.8 Cancellation and Surrender of Existing Securities and Agreements. (a) Except as may otherwise be provided in the Plan, on the Effective Date, the promissory notes, share certificates, bonds and other instruments evidencing any Claim or Equity Interest shall be deemed cancelled without further act or action under any applicable agreement, law, regulation, order or rule and the obligations of the Debtors under the agreements, indentures and certificates of designations governing such Claims and Equity Interests, as the case may be, shall be discharged and released. In addition, on the Effective Date, Reorganized Parent and Richard E. Snyder shall enter into an agreement providing for Mr. Snyder's transfer to Parent of his entire interest in certain shares of Old Parent Common Stock in full and complete satisfaction of obligations under a non-recourse promissory note to Parent related thereto. (b) Each holder of a promissory note, share certificate, bond or other instrument evidencing a Claim or Equity Interest, shall surrender such promissory note, share certificate, bond or instrument to the Reorganized Debtors (or their disbursing agent), unless such requirement is waived by the Reorganized Debtors. No distribution of property hereunder shall be made to or on behalf of any such holders unless and until such promissory note, share certificate, bond or instrument is received by the Reorganized Debtors (or their disbursing agent), or the unavailability of such promissory note, share certificate, bond or instrument is established to the reasonable satisfaction of the Reorganized Debtors (or their disbursing agent), or such requirement is waived by the Reorganized Debtors. The Reorganized Debtors may require any holder that is unable to surrender or cause to be surrendered any such promissory notes, share certificates, bonds or instruments to deliver an affidavit of loss and indemnity and/or furnish a bond in form and substance (including, without limitation, with respect to amount) reasonably satisfactory to the Reorganized Debtors. Any holder that fails within the later of one year after the Effective Date and the date of Allowance of its Claim or Equity Interest (i) to surrender or cause to be surrendered such promissory note, share certificate, bond or instrument; (ii) if requested, to execute and deliver an affidavit of loss and indemnity reasonably satisfactory to the Reorganized Debtors (or their disbursing agent), and (iii) if requested, to furnish a bond reasonably satisfactory to the Reorganized Debtors (or their disbursing agent) shall be deemed to have forfeited all rights, Claims and Causes of Action against the Debtors and Reorganized Debtors and shall not participate in any distribution hereunder. 23 5.9 Continuation of Bankruptcy Injunction or Stays. All injunctions or stays provided for in the Chapter 11 Cases under Sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. 5.10 Revesting of Assets. Except as otherwise provided by the Plan, upon the Effective Date, title to all properties and assets dealt with by the Plan shall pass to the Reorganized Debtors free and clear of all Claims, Liens, encumbrances and interests of creditors and of equity security holders (except those Claims, Liens, encumbrances and interests created pursuant to this Plan) and the Confirmation Order shall be a judicial determination of discharge and extinguishment of all Claims, Liens or Equity Interests (except those created pursuant to this Plan). 5.11 General Release of Liens. Except as otherwise provided in the Plan in connection with the New Senior Notes and the Post-Effective Date Financing Facility, or in any contract, instrument, indenture or other agreement or document created in connection with the Plan or the implementation thereof, on the Effective Date, all mortgages, deeds of trust, liens or other security interests against property of the Estates are hereby released and extinguished, and all the right, title and interest of any holder of such mortgages, deeds of trust, liens or other security interests will revert to the Reorganized Debtors as applicable, and the successors and assigns thereof. 5.12 Full and Final Satisfaction. All payments and all distributions hereunder shall be in full and final satisfaction, settlement, release and discharge of all Claims and Equity Interests, except as otherwise provided in the Plan. 5.13 Causes of Action. (a) In General. As of the Effective Date, pursuant to Section 1123(b)(3)(B) of the Bankruptcy Code, any and all Causes of Action accruing to the Debtors and Debtors-in-Possession, including, without limitation, causes of actions under Sections 545, 549 and 551 of the Bankruptcy Code, but excluding Causes of Action under Sections 510, 544, 547, 548, 550 and 553 of the Bankruptcy Code, shall become assets of the Reorganized Debtors, and the Reorganized Debtors shall have the authority to prosecute such Causes of Action for the benefit of the Estates. The Reorganized Debtors shall have the authority to compromise and settle, or otherwise resolve, discontinue, abandon or dismiss all such Causes of Action without approval of the Bankruptcy Court. (b) Avoiding Powers. As of and subject to the occurrence of the Effective Date, the Debtors and the Reorganized Debtors, for and on behalf of themselves and their Estates, hereby waive and release any of the Causes of Action under Sections 510, 544, 547, 548, 550 and 553 of the Bankruptcy Code. 5.14 Indenture Trustee Charging Liens. In full satisfaction of Allowed Claims secured by Indenture Trustee Charging Liens, the Old Senior Note Indenture Trustee and/or the TOPrS Trustee, as the case may be, will receive from the Reorganized Debtors, Cash equal to the amount of such 24 Claims, and upon such payment, in full, the Indenture Trustee Charging Liens will be automatically deemed released. Distributions to be made to holders of Allowed Claims pursuant to the Plan will not be reduced on account of payment of Allowed Claims secured by an Indenture Trustee Charging Lien. 5.15 Termination of Subordination Rights and Settlement of Related Claims and Controversies. The classification and manner of satisfying all Claims and Equity Interests under the Plan take into consideration all contractual, legal and equitable subordination rights, whether arising under general principles of equitable subordination, Sections 510(b) and (c) of the Bankruptcy Code or otherwise, that a holder of a Claim or Equity Interest may have against other Claim or Equity Interest holders with respect to any distribution made pursuant to the Plan. On the Effective Date, all contractual, legal or equitable subordination rights that a holder of a Claim or Equity Interest may have with respect to any distribution to be made pursuant to the Plan shall be discharged and terminated, and all actions related to the enforcement of such subordination rights shall be permanently enjoined and distributions pursuant to the Plan shall not be subject to payment to a beneficiary of such terminated subordination rights, or to levy, garnishment, attachment or other legal process by any beneficiary of such terminated subordination rights. Pursuant to Bankruptcy Rule 9019 and in consideration for the distributions and other benefits provided under the Plan, the provisions of this Section 5.15 shall constitute a good faith compromise and settlement of all claims or controversies relating to the termination of all contractual, legal and equitable subordination rights that a holder of a Claim or Equity Interest may have with respect to any Allowed Claim or Allowed Equity Interest, or any distribution to be made on account of an Allowed Claim or an Allowed Equity Interest. The entry of the Confirmation Order shall constitute the Bankruptcy Court's approval of the compromise or settlement of all such claims or controversies, and the Bankruptcy Court's finding that such compromise or settlement is in the best interests of the Debtors, Reorganized Debtors and their respective property and holders of Claims and Equity Interests and is fair, equitable and reasonable. 5.16 Administration Pending Effective Date. Prior to the Effective Date, the Debtors shall continue to operate their businesses as Debtors-in-Possession, subject to all applicable requirements of the Bankruptcy Code and the Bankruptcy Rules. After the Effective Date, the Reorganized Debtors may operate their businesses, and may use, acquire, and dispose of property free of any restrictions of the Bankruptcy Code or the Bankruptcy Rules, but subject to the continuing jurisdiction of the Bankruptcy Court as set forth in Article 11 hereof. 5.17 Setoffs. Nothing contained in this Plan shall constitute a waiver or release by the Debtors of any rights of setoff the Debtors may have against any Person other than holders of Old Senior Notes, TOPrS Certificates, the GPH Note, the Old Senior Note Trustee and the TOPrS Trustee. 5.18 Corporate Action. Pursuant to Section 303 of the Delaware General Corporation Law, all terms of this Plan may be put into effect and carried out without further action by the directors or shareholders of the Debtors or Reorganized Debtors, who shall be deemed to have 25 unanimously approved the Plan and all agreements and transactions provided for or contemplated herein, including, without limitation: (i) the adoption of the Reorganized Debtors' Charters, (ii) the initial selection of directors and officers of the Reorganized Debtors, (iii) the distribution of Cash and the issuance and distribution of New Parent Common Stock, New Senior Notes and New Warrants pursuant to this Plan. 5.19 Post-Confirmation Fees, Final Decree. The Reorganized Debtor shall be responsible for the payment of any post-confirmation fees due pursuant to 28 U.S.C.ss. 1930(a)(6) and the filing of post-confirmation reports, until a final decree is entered. A final decree shall be entered as soon as practicable after distributions have commenced under this Plan. 5.20 Registration Rights. As soon as practicable following the Effective Date, Reorganized Parent and appropriate holders of New Senior Notes and New Parent Common Stock shall enter into an appropriate registration rights agreement(s). Within thirty (30) days following the Effective Date, the Reorganized Debtors (as applicable) shall file appropriate shelf registration documents as required pursuant to the Restructuring Agreement. 5.21 Section 1145 Exemption. The Confirmation Order shall provide that the issuance of the New Senior Notes, the New Parent Common Stock and the New Warrants shall be exempt from registration requirements in accordance with Section 1145 of the Bankruptcy Code. ARTICLE 6 PROVISIONS REGARDING VOTING AND DISTRIBUTIONS UNDER THE PLAN AND TREATMENT OF DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS AND EQUITY INTERESTS 6.1 Voting of Claims. Each holder of an Allowed Claim or Equity Interest in an impaired Class which retains or receives property under the Plan shall be entitled to vote separately to accept or reject the Plan and indicate such vote on a duly executed and delivered Ballot as provided in such order as is entered by the Bankruptcy Court establishing certain procedures with respect to the solicitation and tabulation of votes to accept or reject the Plan, or any other order or orders of the Bankruptcy Court. 6.2 Nonconsensual Confirmation. If any impaired Class entitled to vote shall not accept the Plan by the requisite statutory majorities provided in Sections 1126(c) or 1126(d) of the Bankruptcy Code, as applicable, or if any impaired class is deemed to have rejected the Plan, the Debtors reserve the right (a) to undertake to have the Bankruptcy Court confirm the Plan under Section 1129(b) of the Bankruptcy Code and (b) to amend the Plan in accordance with Section 12.4 of the Plan to the extent necessary to obtain entry of the Confirmation Order. 26 6.3 Method of Distributions Under the Plan. (a) In General. Subject to Bankruptcy Rule 9010, all distributions under the Plan shall be made by the Reorganized Debtors (or their disbursing agent) to the holder of each Allowed Claim at the address of such holder as listed on the Schedules as of the Distribution Record Date, unless the Debtors or Reorganized Debtors have been notified in writing of a change of address, including, without limitation, by the filing of a proof of claim or notice of transfer of claim filed by such holder that provides an address for such holder different from the address reflected on the Schedules. (b) Distributions of Cash. Any payment of Cash made by the Reorganized Debtors (or their disbursing agent) pursuant to the Plan shall be made by check drawn on a domestic bank. (c) Timing of Distributions. Any payment or distribution required to be made under the Plan on a day other than a Business Day shall be made on the next succeeding Business Day. (d) Fractional Cents. Whenever any payment of a fraction of a cent would otherwise be called for, the actual payment shall reflect a rounding of such fraction to the nearest whole cent (rounding down in the case of .50 or less and rounding up in the case of more than .50). (e) Fractional Shares. No fractional shares of New Parent Common Stock or New Warrants shall be distributed under the Plan. When any distribution on account of an Allowed Claim or Equity Interest pursuant to the Plan would otherwise result in the issuance of a number of shares of New Parent Common Stock or New Warrants that is not a whole number, such fractional interests shall be combined into as many whole shares or warrants, as the case may be, as possible and shall be redistributed to holders of Claims and Equity Interests (as applicable) with fractional interests, in descending order, until all such whole shares or warrants are distributed. (f) Unclaimed Distributions. Any distributions under the Plan that are unclaimed for a period of one year after distribution thereof shall revert and be revested in the Reorganized Debtors, and any entitlement of any holder of any Claim or Equity Interest to such distributions shall be forfeited, extinguished, and forever barred. (g) Distributions to Holders as of the Distribution Record Date. As of the close of business on the Distribution Record Date, the claims register (for Claims) and the transfer ledgers (for Old Senior Notes, TOPrS Certificates and Equity Interests) shall be closed, and there shall be no further changes in the record holders of any Claims or Equity Interests. The Debtors, Reorganized Debtors and the respective indenture trustees for all the Old Senior Notes and TOPrS Certificates, as the case may be, shall have no obligation to recognize any transfer of any Claims or Equity Interests occurring after the close of business on the Distribution Record Date, and shall instead be entitled to recognize and deal for all purposes under the Plan (except as to voting to accept 27 or reject the Plan pursuant to Section 6.1 of the Plan) with only those holders of record as of the close of business on the Distribution Record Date. 6.4 Objections to and Resolution of Administrative Expense Claims, Claims and Equity Interests. Except as to applications for allowances of compensation and reimbursement of expenses under Sections 330 and 503 of the Bankruptcy Code (with respect to which procedures respecting objections shall be governed by Section 2.1(b) hereof and the Confirmation Order or other Final Order), the Debtors or Reorganized Debtors shall have the exclusive right to make and file objections to Administrative Expense Claims, Claims and Equity Interests subsequent to the Confirmation Date. All objections shall be litigated to Final Order; provided, however, that the Reorganized Debtors shall have the authority to compromise, settle, otherwise resolve or withdraw any objections, subject to approval of the Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court, the Debtors or Reorganized Debtors shall file all objections to Administrative Expense Claims that are the subject of proofs of claim or requests for payment filed with the Bankruptcy Court (other than applications for allowances of compensation and reimbursement of expenses), Claims and Equity Interests and serve such objections upon the holder of the Administrative Expense Claim, Claim or Equity Interest as to which the objection is made as soon as is practicable, but in no event later than 60 days after the Effective Date or such later date as may be approved by the Bankruptcy Court. 6.5 Disputed Claims. (a) With respect to any Disputed Claims and Equity Interests, for the purposes of effectuating the provisions of this Section 6.5 and the distributions to holders of Allowed Claims and Equity Interests, the Bankruptcy Court, on or prior to the Effective Date or such date or dates thereafter as the Bankruptcy Court shall set, may fix or liquidate the amount of such Disputed Claims and Equity Interests pursuant to Section 502(c) of the Bankruptcy Code, in which event the amounts so fixed or liquidated shall be deemed the maximum amounts of the Disputed Claims and Equity Interests pursuant to Section 502(c) of the Bankruptcy Code for purposes of distribution under the Plan. (b) When a Disputed Claim or Equity Interest becomes an Allowed Claim or Equity Interest, the Reorganized Debtors shall distribute to the holder of such Allowed Claim or Equity Interest, the property distributable to such holder as provided in this Plan. 6.6 Disputed Payments. In the event of any dispute between and among holders of Claims or Equity Interests and/or the holders of a Disputed Claim or Equity Interest as to the right of any Person to receive or retain any payment or distribution to be made to such Person under the Plan, the Reorganized Debtors may, in lieu, of making such payment or distribution to such Person, instead hold such payment or distribution, without interest, until the disposition thereof shall be determined by a Final Order of the Bankruptcy Court or other court with appropriate jurisdiction. 28 ARTICLE 7 EXECUTORY CONTRACTS AND UNEXPIRED LEASES; INDEMNIFICATION CLAIMS; RETIREE BENEFITS; POST - CONFIRMATION FEES AND FINAL DECREE 7.1 Executory Contracts and Unexpired Leases. Any unexpired lease or executory contract that has not been expressly rejected by the Debtors or treated in this Plan with the Bankruptcy Court's approval on or prior to the Confirmation Date shall, as of the Confirmation Date (subject to the occurrence of the Effective Date), be deemed to have been assumed by the Debtors unless there is pending before the Bankruptcy Court on the Confirmation Date a motion to reject such unexpired lease or executory contract or such executory contract or unexpired lease is otherwise designated for rejection, provided that (a) such lease or executory contract is ultimately rejected, and (b) the filing of the Confirmation Order shall be deemed to be a rejection of all then outstanding unexercised stock options, warrants and similar rights. In accordance with Section 1123(a)(5)(G) of the Bankruptcy Code, on the Effective Date, or as soon as practicable thereafter, the Reorganized Debtors shall cure all defaults under any executory contract or unexpired lease assumed pursuant to this Section 7.1 by making a Cash payment in an amount agreed to between the Reorganized Debtors and the claimant, or as otherwise fixed pursuant to a Final Order. 7.2 Bar Date for Filing Proofs of Claims Relating to Executory Contracts and Unexpired Leases Rejected Pursuant to the Plan. Claims arising out of the rejection of an executory contract or unexpired lease designated for rejection pursuant to the Confirmation Order, must be filed with the Bankruptcy Court and/or served upon the Debtors or Reorganized Debtors or as otherwise may be provided in the Confirmation Order by no later than 30 days after the notice of entry of an order approving such rejection. Any Claims not filed within such time will be forever barred from assertion against the Debtors, their estates, the Reorganized Debtors and their property, and the holders thereof shall not be entitled to any distribution under this Plan or otherwise from the Debtors or Reorganized Debtors. Unless otherwise ordered by the Bankruptcy Court, all Claims arising from the rejection of executory contracts and unexpired leases shall be treated as General Unsecured Claims under the Plan. 7.3 Indemnification Claims. (a) Notwithstanding anything to the contrary contained herein, all Persons holding or asserting Indemnification Claims (whether directly, by subrogation or otherwise) shall be entitled to obtain recovery on account of such Claims solely from the proceeds of any applicable directors' and officers' insurance policy maintained by the Debtors or Reorganized Debtors, as the case may be, and shall not, under any circumstances, be entitled to obtain a recovery in respect of such Indemnification Claims from the Reorganized Debtors; provided, however, that the Reorganized Debtors shall remain responsible for, and shall pay, in respect of any and all Indemnification Claims, all retention amounts and coinsurance obligations arising under, or necessary to maintain, its directors' and officers' insurance policies. The Debtors or Reorganized Debtors, as the case may be, shall continue and maintain all presently existing directors' and officers' insurance policies, and all such policies shall remain in full force and effect following 29 Confirmation. The Debtors shall maintain any prior directors' and officers' insurance policies and renew existing policies as they expire at comparable or greater coverage levels. (b) In the event that: (i) the Bankruptcy Court does not approve any or all of the material provisions of Article 9 herein, and (ii) the Plan is not terminated pursuant to Section 12.5 hereof, then all Indemnification Claims shall be assumed by the Reorganized Debtors without limitation. 7.4 Compensation and Benefit Programs. Except as otherwise provided in the Plan, all employment and severance practices and policies, and all compensation and benefit plans, policies, and programs of the Debtors applicable to their directors, officers or employees, including, without limitation, all savings plans, retirement plans, health care plans, severance benefit plans, incentive plans, workers' compensation programs and life, disability and other insurance plans are treated either as executory contracts pursuant to Section 7.1 of the Plan, or as permitted under applicable non-bankruptcy law. 7.5 Retiree Benefits. Payment of any Retiree Benefits shall be continued solely to the extent, and for the duration of the period, the Debtors are contractually or legally obligated to provide such benefits, subject to any and all rights of the Debtors under applicable law. ARTICLE 8 SUBSTANTIVE CONSOLIDATION 8.1 Substantive Consolidation. Except as expressly provided in the Plan, the Debtors and Reorganized Debtors shall continue to maintain their separate corporate existence for all purposes other than the treatment of Claims under the Plan. Pursuant to the Substantive Consolidation Order, on the Effective Date: (i) all assets (and all proceeds thereof) and liabilities of the Debtors shall be deemed merged or treated as though they were merged into and with the assets and liabilities of Parent, (ii) no distributions shall be made under the Plan on account of intercompany Claims among the Debtors and all such Claims (including, without limitation, Claims based upon the Publishing Notes) shall be eliminated, (iii) all guarantees of the Debtors of the obligations of any other Debtor shall be deemed eliminated and extinguished so that any claim against any Debtor and any guarantee thereof executed by any other Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors, (iv) each and every Claim filed or to be filed in any of the Chapter 11 Cases shall be deemed filed against the consolidated Debtors, and shall be deemed one Claim against and obligation of the consolidated Debtors and (v) for purposes of determining the availability of the right of set-off under Section 553 of the Bankruptcy Code, the Debtors shall be treated as one entity so that, subject to the other provisions of Section 553 of the Bankruptcy Code, debts due to any of the Debtors may be set-off against the debts of any of the other Debtors. Such substantive consolidation shall not (other than for purposes related to the Plan) affect (i) the legal and corporate structures of the Reorganized Debtors, and (ii) Subsidiary Equity Interests. 30 ARTICLE 9 PROVISIONS REGARDING RELEASES, INJUNCTIONS, AND DISCHARGE 9.1 Releases. (a) Release of Released Parties. Without limiting the provisions of Section 9.2 of the Plan and except as otherwise provided in the Plan, as of the Effective Date, in consideration for, and as part of the treatment afforded to, the holders of Claims and Equity Interests under this Plan, and for other valuable consideration, each of the Released Parties shall be deemed forever released from any and all Causes of Action that any Person may have asserted, could have asserted, or could in the future assert, directly or indirectly, against any of the Released Parties relating to the Debtors or the Chapter 11 Cases on or prior to the Effective Date, provided, however, that the foregoing release shall not apply to (i) Causes of Action that arise from obligations or rights created under or in connection with the Plan or any agreement provided for or contemplated in the Plan, and (ii) the rights of holders of Recission or Damage Claims to pursue such Claims against present or former officers and directors of the Debtors as named defendants in litigations respecting such Recission or Damage Claims solely for purposes of preserving or obtaining a right of recovery against any applicable insurance coverage of the Debtors but not to enforce a judgment against any property of any present or former officers and directors of the Debtors except to the extent of such insurance proceeds and any other proceeds made available under the indemnification rights as provided for in Section 7.3 of the Plan. (b) Mutual Releases by Released Parties. Except as, and only to the extent, provided otherwise in the Plan, as of the Effective Date, each of the Released Parties forever releases, waives and discharges all known and unknown Causes of Action of any nature that such Released Party has, had or may have against any other Released Party for all acts and omissions related to the Debtors arising from or related to the Chapter 11 Cases through the Effective Date, other than Causes of Action that arise from obligations or rights created under or in connection with the Plan or any agreement provided for or contemplated in the Plan. 9.2 Discharge. Except as otherwise expressly provided in Section 1141 of the Bankruptcy Code or the Plan, the distributions made pursuant to and in accordance with the applicable terms and conditions of the Plan are in full and final satisfaction, settlement, release and discharge as against the Debtors of any debt that arose before the Effective Date, and any debt of a kind specified in Section 502(g), 502(h), or 502(i) of the Bankruptcy Code, and all Claims and Equity Interests of any nature, including, without limitation, any interest accrued thereon from and after the Petition Date, whether or not (i) a proof of Claim or Equity Interest based on such debt, obligation or equity interest is filed or deemed filed under Section 501 of the Bankruptcy Code, (ii) such Claim or Equity Interest is Allowed under Section 502 of the Bankruptcy Code or (iii) the holder of such Claim or Equity Interest has accepted the Plan; provided, however, that the foregoing 31 discharge shall not apply to rights of holders of Recission or Damage Claims, and Indemnification Claims arising from or related thereto, to pursue such Claims against the Debtors solely to obtain a right of recovery against any applicable insurance coverage of the Debtors or to seek indemnification, all as otherwise provided by Section 7.3 of the Plan (but not to enforce a judgment against any other property of the Debtors or Reorganized Debtors). 9.3 Injunctions. (a) Injunction Related to Claims Released by Released Parties and All Other Persons. As of the Effective Date and subject to its occurrence, all Persons that have held, currently hold or may have asserted a Claim, a Cause of Action or other debt, or liability, or an Equity Interest or other right of a holder of an Equity Interest that is discharged, released or terminated pursuant to the Plan, are hereby permanently enjoined from commencing or continuing, in any manner or in any place, any action or other proceeding, enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order, creating, perfecting or enforcing any lien or encumbrance, asserting a set-off, right or subrogation or recoupment of any kind against any debt, liability or obligation due to any such releasing Person, and from commencing or continuing any action, in any manner or in any place where the foregoing does not comply with or is inconsistent with the provisions hereof, provided, however, that the foregoing injunctions shall not apply to rights of the holders of Recission or Damage Claims, and Indemnification Claims or rising from or related thereto, to pursue such Claims against any Person that is discharged or released pursuant to this Plan solely to obtain a right of recovery against any applicable insurance coverage or to seek indemnification as otherwise provided by Section 7.3 of the Plan but not to enforce a judgment against any property of any Person that is discharged or released pursuant to this Plan except to the extent of insurance proceeds or to seek indemnification as otherwise provided by Section 7.3 of the Plan. (b) Injunction Relating to the Plan. As of the Effective Date, except as otherwise provided in the Plan, all Persons are hereby permanently enjoined from commencing or continuing, in any manner or in any place, any action or other proceeding, whether directly, derivatively or otherwise against any or all of the Released Parties, on account of or respecting any claims, debts, rights, Causes of Action or liabilities released or discharged pursuant to the Plan, except to the extent expressly permitted under the Plan. (c) Consent by Holders of Claims and Interests to Entry of Injunctive Relief. Without limitation to the scope, extent, validity or enforceability of the injunctive relief set forth in the Plan and in the Confirmation Order, by accepting distributions pursuant to the Plan, each holder of an Allowed Claim or Equity Interest receiving distributions pursuant to the Plan is hereby deemed to have specifically conssented to the releases and injunctions set forth in this Plan. 32 ARTICLE 10 EFFECTIVENESS OF THE PLAN 10.1 Conditions Precedent to Effectiveness. The Plan shall not become effective unless and until the following conditions shall have been satisfied or waived pursuant to Section 10.3 of the Plan: (a) the Confirmation Order and the Substantive Consolidation Order, in form and substance reasonably acceptable to the Debtors, GPH, and the Informal Committees, shall have been entered contemporaneously by the Bankruptcy Court and shall have become a Final Order; (b) the Reorganized Debtors shall have credit availability under the Post-Effective Date Financing Facility to provide the Reorganized Debtors with financing sufficient to meet their Cash obligations under the Plan and their business requirements as of and after the Effective Date; (c) each of the Plan Documents and the New Parent Common Stock, New Senior Notes and New Warrants, in form and substance reasonably acceptable to the Debtors, GPH, and the Informal Committees, shall have been effected or executed and delivered, and the New Common Stock, the New Senior Notes and the New Warrants shall be validly issued and outstanding; (d) if the Indemnification Claims are to be assumed by the Reorganized Debtors pursuant to Section 7.3(b) hereof or otherwise, then each of the Informal Committees shall have consented to such assumption; and (e) all actions, other documents and agreements necessary to implement the Plan shall have been effected or executed and delivered. 10.2 Effect of Failure of Conditions. In the event that one or more of the conditions specified in Section 10.1 of the Plan have not occurred on or before 120 days after the Confirmation Date, upon notification submitted by the Debtors to the Bankruptcy Court (a) the Confirmation Order shall be vacated, (b) no distributions under the Plan shall be made, (c) the Debtors and all holders of Claims and Equity Interests shall be restored to the status quo ante as of the day immediately preceding the Confirmation Date as though the Confirmation Date never occurred and (d) the Debtors' obligations with respect to the Claims and Equity Interests shall remain unchanged and nothing contained herein shall constitute or be deemed a waiver or release of any Claims or Equity Interests by or against the Debtors or any other Person or to prejudice in any manner the rights of the Debtors or any Person in any further proceedings involving the Debtors. 10.3 Waiver of Conditions. Upon consent of each of the Informal Committees and GPH, the Debtors may waive, by a writing signed by an authorized representative of the Debtors and subsequently filed with the Bankruptcy Court, one or more of the conditions precedent to effectiveness of the Plan set forth in Section 10.1 above. 33 ARTICLE 11 RETENTION OF JURISDICTION 11.1 Retention of Jurisdiction. The Bankruptcy Court shall have exclusive jurisdiction of all matters arising out of, and related to, the Chapter 11 Cases and the Plan pursuant to, and for the purposes of, Sections 105(a) and 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) to hear and determine any and all objections to the allowance of any Claims or any controversies as to the classification of any Claims, provided that only Debtors may file objections to Claims; (b to hear and determine any and all applications by Professionals for compensation and reimbursement of expenses; (c) to hear and determine any and all pending applications for the rejection and disaffirmance of executory contracts and unexpired leases, and fix and allow any Claims resulting therefrom; (d) to liquidate any Disputed Claim; (e) to enforce the provisions of the Plan, including the injunction, exculpation and releases provided for in the Plan; (f) to enable the Debtors to prosecute any and all proceedings which have been or may be brought prior to the Effective Date to set aside liens or encumbrances and to recover any transfers, assets, properties, or damages to which the Debtors may be entitled under applicable provisions of the Bankruptcy Code or any federal state, or local laws; (g) to correct any defect, cure any omission, or reconcile any inconsistency in the Plan or in the Confirmation Order as may be necessary to carry out its purpose and the intent of the Plan; (h) to determine any Claim or liability to a governmental unit which may be asserted as a result of the transactions contemplated herein; (i) to hear and determine matters concerning state, local, and federal taxes in accordance with Sections 346, 505 and 1146 of the Bankruptcy Code; and (j) to determine such other matters as may be provided for in the Confirmation Order or as may be authorized under the provisions of the Bankruptcy Code. 34 ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1 Effectuating Documents and Further Transactions. Each of the Debtors or Reorganized Debtors, as the case may be, is authorized to execute, deliver, file or record such contracts, instruments, releases, indentures and other agreements or documents and take such actions as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan and any notes or securities issued pursuant to the Plan. 12.2 Exemption from Transfer Taxes. In accordance with Section 1146(c) of the Bankruptcy Code, (a) the issuance, transfer or exchange of any security under the Plan or the making or delivery of any instrument of transfer pursuant to, in implementation of, or as contemplated by the Plan, including any merger agreements or agreements of consolidation, deeds, bills of sale or assignments executed in connection with any of the transactions contemplated under the Plan, or the revesting, transfer or sale of any real or personal property of the Debtors pursuant to, in implementation of, or as contemplated by the Plan, (b) the making, delivery, creation, assignment, amendment or recording of any note or other obligation for the payment of money or any mortgage, deed of trust or other security interest under, in furtherance of, or in connection with the Plan, the issuance, renewal, modification or securing of indebtedness by such means, and (c) the making, delivery or recording of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including, without limitation, the Confirmation Order, shall not be subject to any document recording tax, stamp tax, conveyance fee or other similar tax, mortgage tax, real estate transfer tax, mortgage recording tax or other similar tax or governmental assessment. Consistent with the foregoing, each recorder of deeds or similar official for any county, city or governmental unit in which any instrument hereunder is to be recorded shall, pursuant to the Confirmation Order, be ordered and directed to accept such instrument, without requiring the payment of any documentary stamp tax, deed stamps, stamp tax, transfer tax, intangible tax or similar tax. 12.3 Exculpation. Neither the Debtors, Reorganized Debtors, the Informal Committees, any official committee of creditors appointed in these cases, or GPH, nor any of their respective members, officers, directors, employees, advisors, agents or Professionals shall have or incur any liability to any holder of a Claim or Equity Interest for any act or omission in connection with, related to, or arising out of, the Chapter 11 Cases, the preparation or formulation of the Plan, the pursuit of confirmation of the Plan, the consummation of the Plan or the administration of the Plan or the property to be distributed under the Plan, except for willful misconduct or gross negligence, and, in all respects, the Debtors, Reorganized Debtors and each of their respective members, officers, directors, employees, advisors, agents and Professionals shall be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan; provided, however, that nothing in the Plan shall, or shall be deemed to, release the Debtors or Reorganized Debtors from, or exculpate the Debtors or Reorganized Debtors with respect to, their respective obligations or 35 covenants arising pursuant to this Plan. 12.4 Amendment or Modification of the Plan. Alterations, amendments or modifications of the Plan may be proposed in writing by the Debtors, upon the consent of each of the Informal Committees and GPH, at any time prior to the Confirmation Date, provided that the Plan, as altered, amended or modified, satisfies the conditions of Sections 1122 and 1123 of the Bankruptcy Code, and the Debtors shall have complied with Section 1125 of the Bankruptcy Code. The Plan may be altered, amended or modified at any time before or after the Confirmation Date and before substantial consummation, provided that the Plan, as altered, amended or modified, satisfies the requirements of Sections 1122 and 1123 of the Bankruptcy Code and the Bankruptcy Court, after notice and a hearing, confirms the Plan, as altered, amended or modified, under Section 1129 of the Bankruptcy Code. A holder of a Claim or Equity Interest that has accepted the Plan shall be deemed to have accepted the Plan, as altered, amended or modified, if the proposed alteration, amendment or modification does not materially and adversely change the treatment of the Claim or Equity Interest of such holder. The Debtors may, without notice to holders of Claims or Equity Interests insofar as it does not materially and adversely affect the interests of any such holders, correct any defect or omission in this Plan and any exhibit hereto or in any Plan Document. 12.5 Severability. In the event that the Bankruptcy Court determines, prior to the Confirmation Date, that any provision in the Plan is invalid, void or unenforceable, such provision shall be invalid, void or unenforceable with respect to the holder or holders of such Claims or Equity Interests as to which the provision is determined to be invalid, void or unenforceable. The invalidity, voidness or unenforceability of any such provision shall in no way limit or affect the enforceability and operative effect of any other provision hereof; provided, however, that each Informal Committee and GPH, in their sole, good faith judgment, may cause the Plan to not be confirmed if such determination of the Bankruptcy Court would result in a material adverse effect to the interests of such Informal Committees' constituents (which shall include, without limitation, the invocation of Section 7.3(b) of this Plan unless consented to by each of the Informal Committees) or GPH (and/or any member of GPH or partners of the managing member thereof as of the Petition Date in any capacity), as the case may be. 12.6 Revocation or Withdrawal of the Plan. Subject to the terms of the Restructuring Agreement, the Debtors reserve the right to revoke or withdraw the Plan prior to the Confirmation Date. If the Debtors revoke or withdraw the Plan prior to the Confirmation Date, then the Plan shall be deemed null and void. In such event, nothing contained herein shall constitute or be deemed a waiver or release of any Claims by or against the Debtors or any other Person or to prejudice in any manner the rights of the Debtors or any Person in any further proceedings involving the Debtors. 12.7 Binding Effect. The Plan shall be binding upon and inure to the benefit of the Debtors, the holders of Claims and Equity Interests, and their respective successors and assigns, including, without limitation, the Reorganized Debtors. 36 12.8 Notices. All notices, requests and demands to or upon the Debtors, the Informal Senior Note Committee, or the Informal TOPrS Committee, to be effective, shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when actually delivered or, in the case of notice by facsimile transmission, when received and telephonically confirmed, addressed as follows: If to the Debtors: If to the Informal Senior Note Committee: c/o Golden Books Family Entertainment, Inc. 888 Seventh Avenue c/o Stroock & Stroock & Lavan LLP New York, New York 10106 180 Maiden Lane tel: 212.547.6700 New York, New York 10035-4982 fax: 212.371.1091 tel: 212.806.5642 Attn: Richard E. Snyder fax: 212.806.6006 Attn: Fred S. Hodara, Esq with a copy to: Proskauer Rose LLP If to the Informal TOPrS Committee: Attorneys for the Debtors 1585 Broadway c/o Cleary, Gottlieb, Steen & New York, New York 10036-8299 Hamilton tel: 212.969.3000 One Liberty Plaza fax: 212.962.2900 New York, New York 10006-1470 Attn: Alan B. Hyman, Esq. tel: 212.225.3999 fax: 212.225.3999 Attn: James E. Millstein, Esq. If to GPH: c/o Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 tel: 212.728.8000 fax: 212.728.8111 Attn: Marc Abrams, Esq. 12.9 Termination of Committees. Except as otherwise provided in this Section 12.9, on the Effective Date, the Official Committee, the Informal Senior Note Committee and the Informal TOPrS Committee shall cease to exist and their respective members and employees or agents (including, without limitation, attorneys, investment bankers, financial advisors, accountants and other professionals) shall be released and discharged from any further authority, duties, 37 responsibilities and obligations relating to, arising from or in connection with the Official Committee, Informal Senior Note Committee and the Informal TOPrS Committee, as the case may be. The Official Committee, the Informal Senior Note Committee and the Informal TOPrS Committee shall continue to exist after such date (i) solely with respect to all the applications filed pursuant to Section 330 of the Bankruptcy Code or Claims for fees and expenses by Professionals, (ii) any post-confirmation modifications to the Plan or Confirmation Order, and (iii) any matters pending as of the Effective Date before the Bankruptcy Court to which the Official Committee, the Informal Senior Note Committee and the Informal TOPrS Committee is party, until such matters are resolved. 12.10 Governing Law. Except to the extent the Bankruptcy Code, Bankruptcy Rules or other federal law is applicable, or to the extent the Plan, including documents contained in the Plan Supplement, provides otherwise, the rights and obligations arising under this Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles of conflicts of law of such jurisdiction. 12.11 Withholding and Reporting Requirements. In connection with the consummation of the Plan, the Debtors or the Reorganized Debtors, as the case may be, shall comply with all withholding and reporting requirements imposed by any federal, state, local or foreign taxing authority and all distributions hereunder shall be subject to any such withholding and reporting requirements. 12.12 Plan Supplement. Forms of the Plan Documents shall be contained in the Plan Supplement. Upon its filing with the Bankruptcy Court, the Plan Supplement may be inspected in the office of the Clerk of the Bankruptcy Court during normal court hours. Holders of Claims or Equity Interests may obtain a copy of the Plan Supplement upon written request to the Debtors in accordance with Section 12.8 hereof. The Plan Supplement is incorporated into and a part of the Plan as if set forth in full herein. 12.13 Allocation of Plan Distributions Between Principal and Interest. To the extent that any Allowed Claim entitled to a distribution under the Plan is comprised of indebtedness and accrued but unpaid interest thereon, such distribution shall, for federal income tax purposes, be allocated to the principal amount of the Claim first and then, to the extent the consideration exceeds the principal amount of the Claim, to accrued but unpaid interest. 12.14 Headings. Headings are used in the Plan for convenience and reference only, and shall not constitute a part of the Plan for any other purpose. 12.15 Filing of Additional Documents. On or before substantial consummation of the Plan, the Debtors shall file with the Bankruptcy Court such agreements and other documents as may be necessary or appropriate to effectuate and further evidence the terms and conditions hereof. 38 12.16 Inconsistency. In the event of any inconsistency between the Plan and the Disclosure Statement, any exhibit to the Plan or Disclosure Statement or any other instrument or document created or executed pursuant to the Plan, the Plan shall govern. Dated: New York, New York March 25, 1999 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC., (for itself and on behalf of each of the above captioned Debtors and Debtors-in-Possession) By:/s/ Richard E. Snyder Richard E. Snyder, Chairman of the Board and Chief Executive Officer PROSKAUER ROSE LLP Counsel to the Debtors and Debtors-in-Possession By: /s/ Alan B. Hyman Alan B. Hyman (AH-6655) A Member of the Firm 1585 Broadway New York, New York 10036 (212) 969-3000 39 EXHIBIT "A" TO THE PLAN Principal Terms of Management Stock Option Plan The Management Stock Option Plan shall be a stock incentive program and shall provide for the issuance of up to 10%, on a fully-diluted basis, of the shares of New Parent Common Stock as of the Effective Date of the Plan. Shares of New Parent Common Stock issued pursuant to the Management Stock Option Plan shall be allocated as follows: (i) Richard E. Snyder (Chief Executive Officer) - 2%, on a fully-diluted basis, of the shares of New Parent Common Stock in the form of restricted stock to vest 2/3 on the second anniversary of the Effective Date and 1/3 on the third anniversary of the Effective Date (with vesting fully accelerated upon a termination without cause, a termination for good reason, a termination due to death or disability or a change of control). (ii) Richard K. Collins (Chief Operating Officer), Philip Galanes (Chief Administrative Officer) and Colin Finkelstein (Chief Financial Officer)- Each shall receive 1%, on a fully-diluted basis, of the shares of New Parent Common Stock in the form of at the money stock options with an exercise price based upon the total equity value of Reorganized Parent (as set forth in the Disclosure Statement) to vest ratably over a three year period (with vesting fully accelerated upon a termination without cause, a termination for good reason, a termination due to death or disability or a change of control). (iii) 5%, on a fully-diluted basis, of the shares of New Parent Common Stock shall be reserved for option grants to key employees up to one-half of which is to be determined by the Debtors' current management or board to be issued as part of the Debtors' 1999 bonus plan to management not covered by clauses (i) or (ii) above, with the remainder to be determined by the board of directors of Reorganized Parent. A-1 TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND CONSTRUCTION OF TERMS....................1 1.1 "Administrative Expense Claim"...........................2 1.2 "Allowed"................................................2 1.3 "Ballot".................................................2 1.4 "Bankruptcy Code"........................................2 1.5 "Bankruptcy Court".......................................2 1.6 "Bankruptcy Rules".......................................2 1.7 "Bar Date"...............................................2 1.8 "Business Day"...........................................2 1.9 "Cash"...................................................3 1.10 "Causes of Action".......................................3 1.11 "Chapter 11 Cases".......................................3 1.12 "Claim"..................................................3 1.13 "Class"..................................................3 1.14 "Collateral".............................................3 1.15 "Confirmation Date"......................................3 1.16 "Confirmation Hearing"...................................3 1.17 "Confirmation Order".....................................3 1.18 "Contingent Claim".......................................3 1.19 "Convertible Debenture Claims"...........................4 1.20 "Convertible Debentures".................................4 1.21 "Convertible Debenture Indenture"........................4 1.22 "Debt Securities Recission or Damage Claims".............4 1.23 "Debtors"................................................4 1.24 "Debtors-in-Possession"..................................4 1.25 "DIP Financing Order"....................................4 1.26 "DIP Lender".............................................4 1.27 "DIP Loan Documents".....................................4 1.28 "Disclosure Statement"...................................4 1.29 "Disputed"...............................................5 1.30 "Distribution Agreement".................................5 1.31 "Distribution Record Date"...............................5 1.32 "Effective Date".........................................5 1.33 "Equity Interests".......................................5 1.34 "Equity Interest Recission or Damage Claims".............5 1.35 "Estates"................................................6 1.36 "Final Order"............................................6 1.37 "General Secured Claim"..................................6 1.38 "General Unsecured Claim"................................6 i 1.39 "GPH"....................................................6 1.40 "GPH Claims".............................................6 1.41 "GPH Note Purchase Agreement"............................6 1.42 "GPH Notes"..............................................6 1.43 "Indemnification Claims".................................6 1.44 "Indenture Trustee Charging Lien"........................7 1.45 "Informal Committees"....................................7 1.46 "Informal Senior Note Committee".........................7 1.47 "Informal TOPrS Committee"...............................7 1.48 "Lien"...................................................7 1.49 "Management Stock Option Plan"...........................7 1.50 "New Parent Common Stock"................................7 1.51 "New Senior Notes".......................................7 1.52 "New Senior Note Indenture"..............................7 1.53 "New Senior Note Indenture Trustee"......................7 1.54 "New Senior Note Security Agreement".....................8 1.55 "New Warrants"...........................................8 1.56 "Official Committee".....................................8 1.57 "Old Common Stock Interests".............................8 1.58 "Old Preferred Stock Interests"..........................8 1.59 "Old Senior Notes".......................................8 1.60 "Old Senior Note Claims".................................8 1.61 "Old Senior Note Indenture"..............................8 1.62 "Old Senior Note Indenture Trustee"......................8 1.63 "Parent".................................................8 1.64 "Person".................................................9 1.65 "Petition Date"..........................................9 1.66 "Plan"...................................................9 1.67 "Plan Documents".........................................9 1.68 "Plan Supplement"........................................9 1.69 "Post-Effective Date Financing Facility".................9 1.70 "Post-Effective Date Financing Facility Documents".......9 1.71 "Priority Claims"........................................9 1.72 "Priority Tax Claim"....................................10 1.73 "Professionals".........................................10 1.74 "Pro Rata Share"........................................10 1.75 "Publishing"............................................10 1.76 "Publishing Notes"......................................10 1.77 "Recission or Damage Claims"............................10 1.78 "Registration Rights Agreement".........................10 1.79 "Released Parties"......................................10 1.80 "Reorganized Debtors"...................................10 1.81 "Reorganized Debtors' Charters".........................10 ii 1.82 "Reorganized Parent"....................................11 1.83 "Reorganized Parent Charter"............................11 1.84 "Reorganized Publishing"................................11 1.85 "Reorganized Video".....................................11 1.86 "Restructuring Agreement"...............................11 1.87 "Retiree Benefits"......................................11 1.88 "Schedules".............................................11 1.89 "Secured Claim".........................................11 1.90 "Subsidiary"............................................11 1.91 "Subsidiary Equity Interest"............................11 1.92 "Substantive Consolidation Order".......................12 1.93 "TOPrS Certificates"....................................12 1.94 "TOPrS Claims"..........................................12 1.95 "TOPrS Trust"...........................................12 1.96 "TOPrS Trustee".........................................12 1.97 "Video".................................................12 1.98 "Warrant Agreement".....................................12 ARTICLE 2 TREATMENT OF ALLOWED ADMINISTRATIVE EXPENSE CLAIMS AND ALLOWED PRIORITY TAX CLAIMS..........12 2.1 Non-Classification......................................12 2.2 Administrative Expense Claims...........................12 (a) In General.......................................12 (b) Professional Compensation and Expense Reimbursement Claims.............................13 (c) Treatment of Claims of DIP Lender................13 2.3 Priority Tax Claims.....................................13 ARTICLE 3 CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS...........14 ARTICLE 4 TREATMENT OF CLAIMS AND EQUITY INTERESTS................15 4.1 CLASS 1-- ALLOWED PRIORITY CLAIMS.......................15 (a) Impairment and Voting............................15 (b) Distributions....................................15 4.2 CLASS 2-- GENERAL SECURED CLAIMS........................15 (a) Impairment and Voting............................15 (b) Distributions....................................15 4.3 CLASS 3-- ALLOWED OLD SENIOR NOTE CLAIMS................15 (a) Allowance of Old Senior Note Claims..............15 (b) Impairment and Voting............................15 (c) Distributions....................................16 (d) Principal Terms of New Senior Notes..............16 (e) Cancellation of Old Senior Notes and Related Instruments..............................17 4.4 CLASS 4-- GPH CLAIMS....................................18 iii (a) Allowance of GPH Claims..........................18 (b) Impairment and Voting............................18 (c) Distributions....................................18 (d) Cancellation of GPH Notes and Related Instruments..............................18 4.5 CLASS 5-- TOPrS CLAIMS..................................19 (a) Allowance of TOPrS Claims........................19 (b) Impairment and Voting............................19 (c) Distributions....................................19 (d) Cancellation of TOPrS Certificates and Related Instruments..............................19 4.6 CLASS 6-- GENERAL UNSECURED CLAIMS......................19 (a) Impairment and Voting............................19 (b) Distributions....................................19 4.7 CLASS 7-- DEBT SECURITIES RECISSION OR DAMAGE CLAIMS..................................................20 (a) Impairment and Voting............................20 (b) Distributions....................................20 4.8 CLASS 8-- OLD PREFERRED STOCK INTERESTS.................20 (a) Impairment and Voting............................20 (b) Distributions....................................20 4.9 CLASS 9-- OLD COMMON STOCK INTERESTS....................20 (a) Impairment and Voting............................20 (b) Distributions....................................20 4.10 CLASS 10 -- EQUITY INTEREST RECISSION OR DAMAGE CLAIMS..................................................20 (a) Impairment and Voting............................20 (b) Distributions....................................21 4.11 CLASS 11-- SUBSIDIARY EQUITY INTERESTS..................21 (a) Impairment and Voting............................21 (b) Distributions....................................21 ARTICLE 5 IMPLEMENTATION AND EFFECT OF CONFIRMATION OF PLAN.......21 5.1 Plan Funding............................................21 5.2 Post-Effective Date Financing Facility..................21 5.3 Reorganized Debtors' Charter............................21 5.4 Issuance of New Securities..............................22 5.5 Management of Reorganized Debtors.......................22 5.6 Directors and Officers of Reorganized Debtors...........22 (a) Boards of Directors of Reorganized Debtors.......22 (b) Officers of Reorganized Debtors..................22 (c) Employment Contracts.............................23 5.7 Management Stock Option Plan............................23 5.8 Cancellation and Surrender of Existing Securities and Agreements...............................23 5.9 Continuation of Bankruptcy Injunction or Stays..........24 iv 5.10 Revesting of Assets.....................................24 5.11 General Release of Liens................................24 5.12 Full and Final Satisfaction.............................24 5.13 Causes of Action........................................24 (a) In General.......................................24 (b) Avoiding Powers..................................24 5.14 Indenture Trustee Charging Liens........................24 5.15 Termination of Subordination Rights and Settlement of Related Claims and Controversies..........25 5.16 Administration Pending Effective Date...................25 5.17 Setoffs.................................................25 5.18 Corporate Action........................................25 5.19 Post-Confirmation Fees, Final Decree....................26 5.20 Registration Rights.....................................26 5.21 Section 1145 Exemption..................................26 ARTICLE 6 PROVISIONS REGARDING VOTING AND DISTRIBUTIONS UNDER THE PLAN AND TREATMENT OF DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS AND EQUITY INTERESTS............26 6.1 Voting of Claims........................................26 6.2 Nonconsensual Confirmation..............................26 6.3 Method of Distributions Under the Plan..................27 (a) In General.......................................27 (b) Distributions of Cash............................27 (c) Timing of Distributions..........................27 (d) Fractional Cents.................................27 (e) Fractional Shares................................27 (f) Unclaimed Distributions..........................27 (g) Distributions to Holders as of the Distribution Record Date.........................27 6.4 Objections to and Resolution of Administrative Expense Claims,Claims and Equity Interests..............28 6.5 Disputed Claims.........................................28 6.6 Disputed Payments.......................................28 ARTICLE 7 EXECUTORY CONTRACTS AND UNEXPIRED LEASES; INDEMNIFICATION CLAIMS; RETIREE BENEFITS; POST - CONFIRMATION FEES AND FINAL DECREE......................29 7.1 Executory Contracts and Unexpired Leases................29 7.2 Bar Date for Filing Proofs of Claims Relating to Executory Contracts and Unexpired Leases Rejected Pursuant to the Plan...........................29 7.3 Indemnification Claims..................................29 7.4 Compensation and Benefit Programs.......................30 7.5 Retiree Benefits........................................30 v ARTICLE 8 SUBSTANTIVE CONSOLIDATION...............................30 8.1 Substantive Consolidation...............................30 ARTICLE 9 PROVISIONS REGARDING RELEASES, INJUNCTIONS, AND DISCHARGE..............................31 9.1 Releases................................................31 (a) Release of Released Parties......................31 (b) Mutual Releases by Released Parties..............31 9.2 Discharge...............................................31 9.3 Injunctions.............................................32 (a) Injunction Related to Claims Released by Released Parties and All Other Persons...........32 (b) Injunction Relating to the Plan..................32 (c) Consent by Holders of Claims and Interests to Entry of Injunctive Relief....................32 ARTICLE 10 EFFECTIVENESS OF THE PLAN...............................33 10.1 Conditions Precedent to Effectiveness...................33 10.2 Effect of Failure of Conditions.........................33 10.3 Waiver of Conditions....................................33 ARTICLE 11 RETENTION OF JURISDICTION...............................34 11.1 Retention of Jurisdiction...............................34 ARTICLE 12 MISCELLANEOUS PROVISIONS................................35 12.1 Effectuating Documents and Further Transactions.........35 12.2 Exemption from Transfer Taxes...........................35 12.3 Exculpation.............................................35 12.4 Amendment or Modification of the Plan...................36 12.5 Severability............................................36 12.6 Revocation or Withdrawal of the Plan....................36 12.7 Binding Effect..........................................36 12.8 Notices.................................................37 12.9 Termination of Committees...............................37 12.10 Governing Law...........................................38 12.11 Withholding and Reporting Requirements..................38 12.12 Plan Supplement.........................................38 12.13 Allocation of Plan Distributions Between Principal and Interest..................................38 12.14 Headings................................................38 12.15 Filing of Additional Documents..........................38 12.16 Inconsistency...........................................39 vi EX-2.2 4 EXHIBIT 2.2 PROSKAUER ROSE LLP Counsel for Debtors and Debtors-in-Possession 1585 Broadway New York, New York 10036 (212) 969-3000 Alan B. Hyman (AH-6655) Michael E. Foreman (MF-5802) Scott K. Rutsky (SR-0712) UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -------------------------------------x : In re: : (Chapter 11) : GOLDEN BOOKS FAMILY : ENTERTAINMENT, INC., et al., : Case Nos. 99-10030 : Through 99-10032 (TLB) : Debtors. : (Jointly Administered) : - -------------------------------------x DISCLOSURE STATEMENT PURSUANT TO SECTION 1125 OF THE BANKRUPTCY CODE FOR THE JOINT PLAN OF REORGANIZATION OF THE DEBTORS ----------------------------------------- THIS IS NOT A SOLICITATION OF ACCEPTANCES OR REJECTIONS OF THE PLAN. ACCEPTANCES OR REJECTIONS MAY NOT BE SOLICITED UNTIL A DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. THIS DISCLOSURE STATEMENT IS BEING SUBMITTED FOR APPROVAL BUT HAS NOT BEEN APPROVED BY THE COURT. Dated: March 25, 1999 New York, New York I. INTRODUCTION AND SUMMARY A. Overview Golden Books Family Entertainment, Inc. ("Parent"), Golden Books Publishing Company, Inc. ("Publishing") and Golden Books Home Video, Inc. ("Video" and together with Parent and Publishing, the "Debtors" or "Golden Books") transmit this Disclosure Statement pursuant to Section 1125(b) of Title 11, United States Code, 11 U.S.C. ss.ss. 101 et seq. (the "Bankruptcy Code") and Rule 3017 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules"), in connection with their Joint Plan of Reorganization dated March 25, 1999 (the "Plan") in order to provide adequate information to enable holders of Claims and Equity Interests that are impaired under the Plan to make an informed judgment in exercising their right to vote for acceptance or rejection of the Plan. A copy of the Plan is attached hereto as Exhibit A. All capitalized terms used but not defined in this Disclosure Statement shall have the respective meanings ascribed to them in the Plan unless otherwise noted. THE DEBTORS STRONGLY URGE ACCEPTANCE OF THE PLAN. THE DEBTORS HAVE NEGOTIATED THE TERMS OF THE PLAN WITH AN INFORMAL COMMITTEE OF HOLDERS OF OLD SENIOR NOTES (THE "INFORMAL SENIOR NOTE COMMITTEE") AND AN INFORMAL COMMITTEE OF HOLDERS OF TOPrS CERTIFICATES (THE "INFORMAL TOPrS COMMITTEE"). THE INFORMAL SENIOR NOTE COMMITTEE AND THE INFORMAL TOPrS COMMITTEE ALSO STRONGLY RECOMMEND THAT ALL 1 HOLDERS OF OLD SENIOR NOTES AND TOPrS CERTIFICATES VOTE TO ACCEPT THE PLAN. B. Summary of Classification and Treatment Under the Plan In general, and as more fully described herein, the Plan effectuates a restructuring of the Debtors' pre-petition indebtedness and operations. Among other things, the Plan provides for the exchange of Old Senior Notes for a combination of New Senior Notes and New Parent Common Stock. The Plan also provides for the exchange of TOPrS Certificates for shares of New Parent Common Stock. Holders of General Unsecured Claims, to the extent not previously satisfied, will either be reinstated, paid in full in accordance with their respective terms or otherwise rendered unimpaired. Holders of Old Preferred Stock Interests and Old Common Stock Interests will receive New Warrants to purchase New Parent Common Stock. Set forth in the following section is a summary of the classification and treatment of Claims and Equity Interests under the Plan. The Plan (i) divides Claims and Equity Interests into eleven classes, (ii) sets forth the treatment afforded to each class, and (iii) provides the means by which the Debtors will be reorganized under Chapter 11 of the Bankruptcy Code. The following table sets forth a summary of the treatment of each type of Claim and Equity Interest under the Plan (a more detailed description of the Plan is set forth later in this Disclosure Statement in Section IV entitled "Overview of The Plan").1 - -------- 1 This summary contains only a brief and simplified description of the classification and treatment of Claims and Equity Interests under the Plan. It does not describe every provision of the Plan. Accordingly, reference should be made to the entire Disclosure (continued. . .) 2 Class Type of Claim/Interest Treatment - -------------- ------------------------- -------------------------------------- Not Applicable Allowed Administrative To be paid in full, in Cash, in Expense Claims such amounts as (1) are incurred in the ordinary course of business by the Debtors, (2) are Allowed by the Bankruptcy Court upon the later of the Effective Date, the date of a Final Order allowing such Administrative Expense Claims, or any other date specified in such order, or (3) may be agreed upon between the holders of such Administrative Expense Claims and the Debtors. Not Applicable Allowed Priority Tax To be paid in full, in Cash, upon the Claims later of Claims (1) the Effective Date, (2) the date upon which there is a Final Order allowing such Claim as an Allowed Priority Tax Claim, (3) the date that such Allowed Priority Tax Claim would have been due if the Reorganization Cases had not been commenced, or (4) upon such other terms as may be agreed to between the Debtors and the holder of any Allowed Priority Tax Claim; provided, however, that the Debtors may, at their option, in lieu of payment in full of Allowed Priority Tax Claims on the Effective Date, make Cash payments respecting Allowed Priority Tax Claims deferred in accordance with Section 1129(a)(9) of the Bankruptcy Code. (. . .continued) Statement (including exhibits), the Plan, and the Plan Supplement for a complete description of the classification and treatment of Claims and Equity Interests. 3 Class Type of Claim/Interest Treatment - -------------- ------------------------ -------------------------------- 1 Priority Claims Unimpaired. Each holder of an Allowed Priority Claim shall receive Cash in an amount equal to such Allowed Priority Claim on the later of the Effective Date and the date such Priority Claim becomes an Allowed Priority Claim, or as soon thereafter as is practicable, unless the holder of an Allowed Priority Claim and the Reorganized Debtors agree to a different treatment thereof. 2 General Secured Claims Unimpaired. At the option of the Reorganized Debtors, (i) an Allowed General Secured Claim shall be reinstated and rendered unimpaired in accordance with Section 1124(2) of the Bankruptcy Code, (ii) a holder of an Allowed General Secured Claim shall receive Cash in an amount equal to such Allowed General Secured Claim, including any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, on the later of the Effective Date and the date such General Secured Claim becomes an Allowed General Secured Claim, or as soon thereafter as is practicable, or (iii) a holder of an Allowed General Secured Claim shall receive the Collateral securing its Allowed General Secured Claim and any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, in full and complete satisfaction thereof on the later of the Effective Date and the date such General Secured Claim becomes Allowed, or as soon thereafter as is practicable. 4 Class Type of Claim/Interest Treatment - -------------- ------------------------ -------------------------------- 3 Old Senior Note Claims Impaired. On the Effective Date, each holder of an Allowed Old Senior Note Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the Old Senior Notes), its Pro Rata Share of (i) the New Senior Notes and (ii)____ shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed Old Senior Note Claims pursuant to the Plan will represent, in the aggregate, 42.5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing -------- ------- percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. 5 Class Type of Claim/Interest Treatment - -------------- ------------------------ -------------------------------- 4 GPH Claims Impaired. On the Effective Date, each holder of the Allowed GPH Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the GPH Notes), ______ shares of New Parent Common Stock. The New Parent Common Stock issued to the holder of the Allowed GPH Claim pursuant to the Plan, will represent, in the aggregate, 5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. 5 TOPrS Claims Impaired. On the Effective Date, each holder of an Allowed TOPrS Claim shall receive, in full and final satisfaction of such Allowed Claim, its Pro Rata Share of ____ shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed TOPrS Claims pursuant to the Plan, will represent, in the aggregate, 50.0% of the outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. 6 Class Type of Claim/Interest Treatment - -------------- ------------------------ -------------------------------- 6 General Unsecured Unimpaired.To the extent not satisfied by the Debtors in the ordinary course of business prior to the Effective Date, in full and final satisfaction of such claim, the legal, equitable, and contractual rights to which an Allowed General Unsecured Claim entitles the holder thereof shall be left unimpaired and, accordingly, shall be satisfied on the latest of (a) the Effective Date, (b) the date a General Unsecured Claim becomes an Allowed Claim, (c) the date an Allowed General Unsecured Claim becomes due and payable in the ordinary course of the Debtors' business consistent with the Debtors' ordinary payment practices, and (d) the date on which the Debtors and the holder of such Allowed General Unsecured Claim otherwise agree in writing. At the option of the Debtors, the treatment provided in the Plan will result in the payment of any Allowed General Unsecured Claim, in Cash, in an amount equal to such Allowed General Unsecured Claim (which payment shall include interest, only to the extent to which the holder of such Claim may be contractually entitled, accrued through the date of payment). 7 Class Type of Claim/Interest Treatment - -------------- ------------------------- -------------------------------- 7 Debt Securities Impaired. Subject to the releases con- Rescission or Damage tained in Section 9.1 of the Plan,each Claims holder of an Allowed Debt Securities Rescission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under the Plan. 8 Old Preferred Stock Impaired. On the Effective Date, Interests all Old Preferred Stock Interests shall be canceled, annulled, and extinguished, and the holder of the Allowed Old Preferred Stock Interests shall receive two-thirds (2/3) of the New Warrants. 9 Old Common Stock Impaired. On the Effective Date, Interests all Old Common Stock Interests (including any such Equity Interests consisting of accrued and unpaid dividends on the Old Preferred Stock Interest) shall be canceled, annulled, and extinguished, and each holder of an Allowed Old Common Stock Interest shall receive its Pro Rata Share of one-third (1/3) of the New Warrants. 8 Class Type of Claim/Interest Treatment - -------------- ------------------------- -------------------------------- 10 Equity Interests Impaired.Subject to the releases cont- Rescission or Damage ained in Section 9.1 of the Plan, each Claims holder of an Allowed Equity Interests Rescission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under the Plan. 11 Subsidiary Equity Unimpaired. On the Effective Date, Interests record holders of Allowed Subsidiary Equity Interests shall continue to hold such equity interests, which equity interests shall continue to be evidenced by the capital stock held by such record holders in the Subsidiary or Subsidiaries as of the Effective Date. THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY ORDER OF THE BANKRUPTCY COURT AS CONTAINING INFORMATION OF A KIND, AND IN SUFFICIENT DETAIL, TO ENABLE HOLDERS OF CLAIMS AND EQUITY INTERESTS TO MAKE AN INFORMED JUDGMENT IN VOTING TO ACCEPT OR REJECT THE PLAN. APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT, HOWEVER, CONSTITUTE A DETERMINATION OR RECOMMENDATION BY THE BANKRUPTCY COURT AS TO THE FAIRNESS OR THE MERITS OF THE PLAN. 9 THIS DISCLOSURE STATEMENT CONTAINS A SUMMARY OF CERTAIN PROVISIONS OF THE PLAN, THE PLAN DOCUMENTS, AND CERTAIN FINANCIAL INFORMATION. WHILE THE DEBTORS BELIEVE THAT THESE SUMMARIES ARE FAIR AND ACCURATE AND PROVIDE ADEQUATE INFORMATION WITH RESPECT TO THE DOCUMENTS SUMMARIZED, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS. FURTHERMORE, ALTHOUGH THE DEBTORS HAVE MADE EVERY EFFORT TO BE ACCURATE, THE FINANCIAL INFORMATION CONTAINED HEREIN (WITH THE EXCEPTION OF CERTAIN INFORMATION CONTAINED IN PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION WHICH ARE ATTACHED HERETO AS EXHIBITS "B" AND "C") HAS NOT BEEN THE SUBJECT OF AN AUDIT BY AN OUTSIDE ACCOUNTING FIRM. IN THE EVENT OF ANY CONFLICT, INCONSISTENCY, OR DISCREPANCY BETWEEN THE TERMS AND PROVISIONS IN THIS DISCLOSURE STATEMENT AND THE TERMS AND PROVISIONS IN THE PLAN, THE PLAN DOCUMENTS, OR THE FINANCIAL INFORMATION INCORPORATED THEREIN BY REFERENCE, THE PLAN SHALL GOVERN FOR ALL PURPOSES. ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS SHOULD READ THIS DISCLOSURE STATEMENT, THE PLAN, THE EXHIBITS TO THIS DISCLOSURE STATEMENT, AND THE PLAN DOCUMENTS IN THEIR ENTIRETY BEFORE VOTING ON THE PLAN. 10 THE STATEMENTS AND FINANCIAL INFORMATION CONTAINED HEREIN HAVE BEEN MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED. HOLDERS OF CLAIMS AND EQUITY INTERESTS REVIEWING THIS DISCLOSURE STATEMENT SHOULD NOT INFER AT THE TIME OF SUCH REVIEW THAT THERE HAVE BEEN NO CHANGES IN THE FACTS SET FORTH HEREIN UNLESS SO SPECIFIED. WHILE THE DEBTORS HAVE MADE EVERY EFFORT TO DISCLOSE WHERE CHANGES IN PRESENT CIRCUMSTANCES COULD REASONABLY BE EXPECTED TO AFFECT MATERIALLY THE VOTE ON THE PLAN, THIS DISCLOSURE STATEMENT IS QUALIFIED TO THE EXTENT THAT CERTAIN EVENTS, SUCH AS THOSE MATTERS DISCUSSED IN SECTION VIII BELOW ENTITLED "RISK FACTORS," DO OCCUR. THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAW OR OTHER APPLICABLE NONBANKRUPTCY LAW. PERSONS OR ENTITIES HOLDING OR TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING CLAIMS AGAINST, OR SECURITIES OF, THE DEBTORS SHOULD EVALUATE THIS DISCLOSURE STATEMENT IN LIGHT OF THE PURPOSE FOR WHICH IT WAS PREPARED. IN ACCORDANCE WITH THE BANKRUPTCY CODE, THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY 11 THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. WITH RESPECT TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER PENDING OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT AND THE INFORMATION CONTAINED HEREIN SHALL NOT BE CONSTRUED AS AN ADMISSION OR STIPULATION, BUT RATHER AS STATEMENTS MADE IN SETTLEMENT NEGOTIATIONS. C. Voting and Confirmation Procedures Accompanying this Disclosure Statement are copies of the following documents: (i) the Plan, which is attached hereto as Exhibit "A", (ii) an Order from the Bankruptcy Court (the "Disclosure Statement Approval Order") (a) approving this Disclosure Statement as containing adequate information pursuant to Section 1125 of the Bankruptcy Code; (b) approving the forms of Ballots to be executed by holders of impaired Claims and Equity Interests for voting on the Plan; and (c) approving the notice of and fixing the time for (1) submitting acceptances or rejections to the Plan, (2) the hearing to consider confirmation of the Plan, and (3) filing objections to confirmation of the Plan; and (iii) forms of Ballots to be executed by holders of impaired Claims and Equity Interests for voting to accept or reject the Plan. 12 The forms of Ballots, and the related materials delivered together herewith, are being furnished, for purposes of soliciting votes on the Plan, to holders of (i) Old Senior Notes whose respective names (or the names of whose nominees) appear as of the Voting Record Date (defined below) on the security holder lists maintained by the Old Senior Note Indenture Trustee, (ii) TOPrS Certificates whose respective names (or the names of whose nominees) appear as of the Voting Record Date on the security holder lists maintained by the TOPrS Trustee, (iii) GPH Claims, (iv) Debt Securities Rescission or Damage Claims, (v) Old Preferred Stock Interests, (vi) Old Common Stock Interests and (vii) Equity Interest Rescission or Damage Claims. With regard specifically to the Senior Notes and the TOPrS Certificates held by banks and/or brokers (the "Record Holders") for the beneficial ownership of other entities or individuals (the "Beneficial Holders"), the Debtors or their balloting agent will provide a sufficient number of copies of this Disclosure Statement, the Plan and the Ballots to the Record Holders for transmission to each of the Beneficial Holders. The Debtors shall ask the Record Holders to send copies of the Disclosure Statement, the Plan and the Ballots to the respective Beneficial Holders, and to collect completed Ballots from such Beneficial Holders on the Debtors' behalf. The Record Holders shall be asked to summarize the results of the votes received from the Beneficial Holders on a summary form, i.e., a master ballot, which will be provided to each Record Holder by the Debtors. The Disclosure Statement is also being provided to holders of claims in Classes 1, 2, 6 and 11 (who are deemed to have accepted the Plan), and other entities, solely for informational purposes. 13 1. Who May Vote ------------ Under the Bankruptcy Code, impaired classes of Claims or Equity Interests are entitled to vote to accept or reject a plan of reorganization. A class which is not "impaired" is deemed to have accepted a Plan and does not vote. A class is "impaired" under the Bankruptcy Code unless the legal, equitable, and contractual rights of the holders of Claims or Equity Interests in such class are not modified or altered. For purposes of the Plan, holders of Old Senior Note Claims in Class 3, holders of GPH Claims in Class 4, holders of TOPrS Claims in Class 5, holders of Debt Securities Rescission or Damage Claims in Class 7, holders of Old Preferred Stock Interests in Class 8, holders of Old Common Stock Interests in Class 9, and holders of Equity Interest Rescission or Damage Claims in Class 10 are impaired and are entitled to vote on the Plan. 2. Voting Instructions ------------------- All votes to accept or reject the Plan must be cast by using the form of Ballot, or, in the case of a brokerage firm holding Old Senior Notes, TOPrS Certificates, or Old Common Stock Interests in its own name on behalf of a beneficial owner, the Ballot entitled "Master Ballot" enclosed with this Disclosure Statement. No votes other than ones using such Ballots will be counted except to the extent the Bankruptcy Court orders otherwise. The Bankruptcy Court has fixed ____ __.m., New York City Time, on _______, 1999 (the "Voting Record Date") as the time and date for the determination of holders of record of Claims who are entitled to (a) receive a copy of this Disclosure Statement and all of the related materials, and (b) vote to 14 accept or reject the Plan. After carefully reviewing the Plan and this Disclosure Statement, including the attached exhibits and the Plan Documents, please indicate your acceptance or rejection of the Plan on the appropriate Ballot and return such Ballot in the enclosed envelope to: Golden Books Plan of Reorganization c/o Bankruptcy Services, LLC 70 East 55th Street 6th Floor New York, New York 10022 (212) 376-8494 Attn: Ms. Kathy Gerber BALLOTS MUST BE RECEIVED ON OR BEFORE 4:00 P.M. (NEW YORK CITY TIME) ON _________, 1999 (THE "VOTING DEADLINE"). ANY BALLOT WHICH IS NOT EXECUTED BY A DULY AUTHORIZED PERSON SHALL NOT BE COUNTED. ANY BALLOT WHICH IS EXECUTED BY THE HOLDER OF AN ALLOWED CLAIM BUT WHICH DOES NOT INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN SHALL BE DEEMED TO BE AN ACCEPTANCE. IF YOU ARE A BENEFICIAL HOLDER OF A SECURITY HELD BY A NOMINEE PLEASE NOTE THAT BALLOTS MUST BE RETURNED BY HAND, MAIL, OR OVERNIGHT TRANSMISSION TO YOUR NOMINEE IN SUFFICIENT TIME FOR IT TO BE FORWARDED BY YOUR NOMINEE TO THE DEBTORS' BALLOTING AGENT BY THE VOTING DEADLINE. 15 If you have any questions regarding the procedures for voting on the Plan, please contact the Debtors' balloting agent, Bankruptcy Services, LLC, at the above address and telephone number. 3. Acceptance or Rejection of the Plan ----------------------------------- Under the Bankruptcy Code, a voting Class of Claims is deemed to have accepted the Plan if it is accepted by creditors in such Class who, of those voting on the Plan, hold at least two-thirds in amount and more than one-half in number of the Allowed Claims of such Class. A voting Class of Equity Interests is deemed to have accepted the Plan if it is accepted by holders of Equity Interests who hold at least two-thirds in amount of the Equity Interests of such Class that have actually voted on the Plan. If the Plan is not accepted by all impaired Classes of Allowed Claims, the Plan may still be confirmed by the Bankruptcy Court pursuant to Section 1129(b) of the Bankruptcy Code if (a) the Plan has been accepted by at least one impaired Class of Claims, and (b) the Bankruptcy Court determines, among other things, that the Plan "does not discriminate unfairly" and is "fair and equitable" with respect to each non-accepting impaired Class. If the Plan is not accepted by all impaired Classes of Allowed Claims or Equity Interests, the Debtors reserve the right to ask the Bankruptcy Court to find that the Plan does not discriminate unfairly and is fair and equitable with respect to each impaired Class that has not accepted the Plan. 16 4. Confirmation Hearing -------------------- Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a Confirmation Hearing. Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may object to Confirmation of the Plan. Pursuant to Section 1128 of the Bankruptcy Code and Rule 3017(c) of the Bankruptcy Rules, the Bankruptcy Court has scheduled the Confirmation Hearing before the Honorable Tina L. Brozman, Chief United States Bankruptcy Judge, at the United States Bankruptcy Court, Southern District of New York, One Bowling Green, New York, New York for _________, 1999 at ___ p.m. A notice setting forth the time and date of the Confirmation Hearing has been included along with this Disclosure Statement. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice, except for an announcement of such adjourned hearing date by the Bankruptcy Court in open court at such hearing. 5. Objections ---------- Any objection to Confirmation of the Plan must be in writing, must comply with the Bankruptcy Rules and the Local Rules of the Bankruptcy Court, and must be filed and served as required by the Bankruptcy Court pursuant to the Disclosure Statement Approval Order. A copy of the Disclosure Statement Approval Order accompanies this Disclosure Statement and contains all relevant procedures relating to the submission of objections to Confirmation of the Plan. Parties submitting objections should review such order in its entirety. 17 II. BACKGROUND AND EVENTS PRECIPITATING CHAPTER 11 FILING AND SOLICITATION A. Overview of the Debtors and their Business Operations Golden Books publishes, produces, licenses and markets an extensive range of children's and family-related media and entertainment products. On the Petition Date, the Debtors employed over 1,100 individuals, owned or leased properties in five states, and had operations in Canada (through a non-debtor affiliate) and in the United Kingdom. The Debtors' products and productions are distributed throughout the United States, and worldwide in over 60 countries. On May 8, 1996, Golden Press Holding, L.L.C. ("GPH"), an investment vehicle formed by Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested $65 million in Golden Books through the purchase of the Parent's Old Preferred Stock Interests.2 At that time, the name of the Debtors' parent corporation was changed from Western Publishing Company, Inc. to Golden Books Family Entertainment, Inc. - ------- 2 GPH also purchased $10 million of GPH Notes on or about September 8, 1998. Class 4 under the Plan is made up of the holders of GPH Notes. 18 On the Petition Date, the Debtors operated through the following four business segments: (i) Children's Publishing Division, (ii) Adult Publishing Division, (iii) Golden Books Entertainment Group and (iv) Commercial Printing Division.3 1. Children's Publishing Division ------------------------------ Golden Books is the largest publisher of children's books in the North American retail market, and has published its flagship product line, "Little Golden Books", for over 50 years. The Children's Publishing Division produces storybooks, coloring/activity books, electronic storybooks, puzzles, educational workbooks, reference books, novelty books, chapter books and fiction. The products of the Children's Publishing Division utilize both owned (in whole or in part) characters, such as the Poky Little Puppy and Lassie, and characters licensed by Golden Books from third parties, such as Barney and the Muppets. The Children's Publishing Division's products have traditionally been designed for children up to age seven and have been distributed through mass market channels (which include national discount store chains, such as Wal-mart, K-Mart, Target and Toys "R" Us). Golden Books has also distributed children's products through bookstores and other retailers, special markets and international channels. - -------- 3 For a detailed description of Golden Books and its operations, see Golden Books' Annual Report on Form 10-K for the fiscal year ended 1997, a copy of which is annexed hereto as Exhibit "B." The aforementioned financial information is provided to permit the holders of Claims and Equity Interests to better understand Golden Books' historical business performance. 19 2. Adult Publishing Division ------------------------- The Adult Publishing Division publishes trade books focusing primarily on hobbies, parenting and the family. The products of the Adult Publishing Division are distributed 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.4 3. Entertainment Group Division ---------------------------- The Golden Books Entertainment Group Division (the "Entertainment Division") was established in August 1996 upon the acquisition by Golden Books of an extensive library of character-based family entertainment properties from Broadway Video Entertainment, L.P. The 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. Properties from this library are licensed to third parties, both domestically and internationally, for use in television, home video and other electronic media. Included in the assets of the Entertainment Division are the intellectual property rights relating to a number of well-known television programs, motion pictures and characters including, among others, Christmas Classics, Lassie, Underdog, Lone Ranger and Felix the Cat. - -------- 4 As discussed later in this Disclosure Statement, Golden Books has entered into an agreement to sell the Adult Publishing Division to St. Martin's Press. A hearing to consider this sale is presently scheduled for March 25, 1999. 20 4. Commercial Printing Division ---------------------------- The Commercial Printing Division allows the company, as a leading publisher, to market its surplus manufacturing capabilities to third parties. Customers of the Commercial Printing Division include educational publishers, religious publishers, brand marketers targeting children and families, and other juvenile publishers and entertainment companies. The Commercial Printing Division also engages in commodity printing such as tax instruction booklets and tax forms. B. Pre-Petition Debt Structure of the Debtors Prior to the Filing Date, the Debtors' debt structure included a secured working capital facility, long-term debt consisting primarily of the Senior Notes and the TOPrS Certificates, and short-term debt consisting primarily of the GPH Notes. 1. Pre-Petition Working Capital Facility ------------------------------------- The Debtors' day-to-day operations were primarily financed by a secured, revolving working capital facility with NationsCredit Commercial Funding, a division of NationsCredit Commercial Corp. ("NationsCredit"), pursuant to a Loan and Security Agreement dated as of June 3, 1998 (the "NationsCredit Agreement"), by and between NationsCredit, as lender, and Publishing, as borrower. Publishing's obligations under the NationsCredit Agreement were secured by a first lien and security interest in (i) all Accounts, Chattel Paper, Documents and Inventory (each as defined in the NationsCredit Agreement) relating solely to 21 Publishing's Children's Publishing Division excluding all of the foregoing assets relating to Publishing's Christmas Classics, Lone Ranger and Underdog properties (as such terms are defined in the NationsCredit Agreement), (ii) any and all proceeds and products of the foregoing, and (iii) all books and records relating to any of the foregoing (collectively, the "NationsCredit Collateral"). The NationsCredit Agreement had an initial maximum borrowing capacity of $30 million. Prior to the Petition Date, NationsCredit notified the Debtors of the occurrence of certain alleged events of default under the NationsCredit Agreement. As a result, the Debtors and NationsCredit entered into a series of letter agreements, wherefore in consideration for certain payments and other undertakings by the Debtors, NationsCredit agreed to refrain through February 26, 1999, from exercising its rights under the NationsCredit Agreement with respect to the alleged events of default. Additionally, pursuant to such agreements, the Debtors' maximum borrowing capacity was reduced from time to time. On the Petition Date, the Debtors' maximum borrowing capacity under the NationsCredit Agreement was approximately $16 million and the outstanding balance owed to NationsCredit was approximately $10 million.5 - -------- 5 On March 1, 1999 , the Debtors obtained entry of an Interim Order authorizing them to enter into a debtor-in-possession financing facility of up to $55 million with The CIT Group/Business Credit, Inc. (and allowing for interim borrowing thereunder of up to $30 million), and authorizing the use of a portion of the proceeds of such facility to satisfy fully the Debtors' obligations to NationsCredit. > 22 2. The Old Senior Notes -------------------- Pursuant to the Old Senior Note Indenture, dated September 15, 1992, $150 million of Old Senior Notes due 2002 were issued by Parent's predecessor-in-interest. As part of the series of transactions related to the 1996 investment by GPH (see subsection II.A. above), Parent assigned its obligations in respect of the Old Senior Notes to Publishing. Interest on the Old Senior Notes accrues at the rate of 7.65% per annum and is payable on each March 15 and September 15. As part of the incurrence of the secured working capital facility with NationsCredit, in June 1998, the holders of Old Senior Notes directed the Old Senior Note Indenture Trustee to amend the covenant prohibiting secured indebtedness and certain other provisions of the Old Senior Note Indenture. Parent provided a guaranty of Publishing's obligations under the Old Senior Notes. Publishing also provided the Old Senior Note Indenture with certain collateral described below. Publishing did not make the interest payment due on September 15, 1998. As of the Filing Date, the aggregate amount owed under the Old Senior Notes (including accrued and unpaid interest) was approximately $160 million. The Old Senior Notes are secured obligations of the Debtors pursuant to a security agreement dated as of June 2, 1998 (the "Security Agreement"). In particular, the Debtors believe that the Senior Note Trustee (for the benefit of all holders) holds valid, perfected and unavoidable (i) first priority liens and security interests (subject to certain permitted liens) in and upon (a) inventory, accounts receivable, chattel paper, documents and proceeds of the foregoing relating solely to Publishing's Christmas Classics, Lone Ranger and Underdog properties (as such terms are defined in the Security Agreement), and the copyrights, 23 copyright licenses, trademarks and trademark licenses associated therewith, (b) certain personal property and fixtures owned by Publishing and located at the Debtors' distribution center in Crawfordsville, Indiana, manufacturing facility in Racine, Wisconsin, and corporate headquarters in New York, New York; (ii) junior liens and security interests in and upon the NationsCredit Collateral (subject to the terms and conditions set forth therein); and (iii) a mortgage lien upon Publishing's real property located in Crawfordsville, Indiana. In addition, the Old Senior Note Indenture Trustee and the Informal Senior Note Committee believe that the Senior Notes are entitled to be secured by a first priority lien on and security interest in a certain distribution agreement between Video and Sony Music and a related license agreement between Publishing and Video (collectively, the "Distribution Agreement"), and all rights to receive moneys due and to become due thereunder, and all proceeds thereof. 3. GPH Claims ---------- Pursuant to the GPH Note Purchase Agreement, dated as of September 8, 1998, among GPH, Parent, Publishing and Video, Video issued senior secured promissory notes in the original principal amount of $10 million to GPH. The proceeds from the Note Purchase Agreement were loaned to Publishing in return for senior notes of Publishing in the original principal amount of $10 million (the "Publishing Notes"). The Publishing Notes were pledged to GPH as collateral for the GPH Notes. As additional collateral for the GPH Notes, the Debtors believe that the GPH Notes are secured by first priority liens and security interests (subject in certain instances to permitted liens) in and upon all of Video's assets (including Video's rights under the Distribution 24 Agreement and all rights of Video to receive moneys due and to become due thereunder, and all proceeds thereof). Video's obligations under the Note Purchase Agreement were guaranteed by both Parent and Publishing. In connection therewith, Parent pledged to GPH all of the issued and outstanding capital stock of Publishing and Video, and all dividends, cash and other rights in respect thereof, and all proceeds of any of the foregoing. As of the Filing Date, the aggregate amount owed to GPH under the Note Purchase Agreement (including accrued and unpaid interest) was approximately $10.2 million. 4. TOPrS Certificates ------------------ Prior to the Filing Date, Parent and Publishing issued $118 million in original principal amount of 8.75% Convertible Debentures due 2016 (the "Convertible Debentures") to the Golden Books Financing Trust (the "TOPrS Trust"), a Delaware Statutory Business Trust. In turn, the TOPrS Trust issued $118 million of 8.75% Convertible Trust Originated Preferred Securities due 2016 (the "TOPrS Certificates"), which represent undivided beneficial ownership interests in the assets of the TOPrS Trust (i.e., the Convertible Debentures). Pursuant to the terms of the TOPrS Trust, a bankruptcy filing by Publishing or Parent causes a dissolution of the TOPrS Trust, whereupon the Convertible Debentures are to be distributed to the holders of the TOPrS Certificates on a pro rata basis.6 The Convertible Debentures are joint and several unsecured obligations of Parent and Publishing. - -------- 6 Given the direct interrelationship between the Convertible Debentures and the TOPrS Certificates, they are treated collectively as a single Class of "TOPrS Claims" for purposes of the Plan. 25 The TOPrS Certificates are convertible at the option of the holder into shares of Old Common Stock of Parent at a conversion rate of approximately $13 per share of Common Stock. Interest payments on both the Convertible Debentures and TOPrS Certificates are payable in arrears quarterly, provided, however, that Parent and Publishing have the option to defer the payment of interest for successive periods not exceeding 20 consecutive periods. In November 1998 and February 1999, Golden Books exercised its right to defer interest payments due with respect to the TOPrS Certificates. C. Pre-Petition Capital Structure As of the Petition Date, Parent had approximately 27,899,047 shares of common stock, $.01 par value per share, issued and outstanding. Parent's Old Common Stock is listed for inclusion on the NASDAQ National Market System ("NASDAQ"). In February, 1999, trading of Parent's Old Common Stock was suspended by NASDAQ. As of the Petition Date, Parent also had 13,000 shares of its Series B Preferred Stock, no par value (the "Old Preferred Stock") issued and outstanding. These shares are held by GPH whose aggregate investment for such shares was approximately $65 million. The Old Preferred Stock is convertible into 6,500,000 shares of Old Common Stock at a conversion price of $10 a share. The Old Preferred Stock is entitled to receive as quarterly dividends 195,000 shares of Old Common Stock (together with certain amounts of cash if the market value of the Old Common Stock falls below certain thresholds specified in the certificate of designation relating to the Old Preferred Stock) through May 8, 2000. However, 26 the Debtors have not paid 195,000 shares of Old Common Stock and certain cash amounts due as unpaid dividends on the Old Preferred Stock. D. Events Precipitating Chapter 11 Filing The Debtors' Chapter 11 proceedings were preceded by liquidity difficulties which they experienced after incurring operating losses for the past several years, including restructuring costs related to the implementation of a long-term financial strategic plan centered on the Debtors' core publishing operations. Such difficulties hampered the Debtors' ability to fund day-to-day operations and maintain future business prospects. As a result of the Debtors' insufficient liquidity, Publishing determined that it was in the best interests of its creditors and stockholders for it not to make a September 15, 1998 interest payment in respect of the Old Senior Notes, but rather attempt to pursue long-term strategic financial and capital restructuring options. Publishing's failure to make the September 15, 1998 interest payment on the Old Senior Notes resulted in the reactivation of an unrestricted informal committee of holders of Old Senior Notes, which had originally been formed in connection with the series of transactions related to the incurrence of the pre-petition working capital facility with NationsCredit in June, 1998. Members of this informal committee held, as of September 15, 1998, in the aggregate, approximately 60% of the principal amount of Old Senior Notes. Members of the informal committee included, at that time, the following: AEGON, U.S.A. Investment Management, Inc., Avenue Advisors, LLC, Ohio National Life Insurance Company, Principal Life Insurance Company, Provident Mutual Life Insurance 27 Company, Security Benefit Life Insurance Company, Alliance Capital Management Corporation and Bennett Management Corporation. During the negotiations leading up to the agreed Plan, the first five members of the informal committee listed in the foregoing sentence agreed to become "restricted" in order to receive material non-public information to assist them, in their capacity as members of the Informal Senior Note Committee, in making recommendations regarding the proposed restructuring to all holders of Senior Notes. The Informal Senior Note Committee has retained the law firm of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, as counsel, and the financial advisory firm of Houlihan Lokey Howard & Zukin, 685 Third Avenue, New York, New York 10017, as financial advisor. In November 1998, due to continued liquidity problems, the Debtors deferred a scheduled interest payment due with respect to the TOPrS Certificates pursuant to the terms of such certificates. Thereafter, the Debtors began discussions with a second ad hoc committee, the Informal TOPrS Committee, that had formed earlier. The members of the Informal TOPrS Committee include Deephaven Capital Management, David Matlin, Stephen J. Devoe, III, Oleg Lagetko, Anil Suri, Chris Pechock, Stacy Herman, Mark Patterson, Greyhound Lines, Inc. Amalgamated CNCL Retirement and Disability Trust, P.R. Co., Forest Global Convertible Fund Series B-1, Forest Global Convertible Fund Series A-5, Forest Performance Fund, Forest Alternative Strategies Fund II, LP Series B-3, Forest Strategies Fund III, LP Series A-5M, Forest Alternative Strategies Fund II, LP Series A-5-2, Forest Fulcrum Fund LP, SoundShore Holdings Ltd., SoundShore Opportunity Holding Fund Ltd., and Krista Cowley, which, upon information 28 and belief, hold an aggregate of approximately 32% of the outstanding TOPrS Certificates. The Informal TOPrS Committee is represented by the law firm of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006-1470, as counsel, and Jefferies & Company, Inc., 650 Fifth Avenue, New York, New York 10019, as financial advisors. In February, 1999, the Debtors again exercised their right to defer a scheduled interest payment on the TOPrS Certificates. After failing to make the September 15, 1998 interest payment on the Old Senior Notes, the Debtors were notified of certain alleged events of default under the NationsCredit Agreement. As previously noted, NationsCredit and the Debtors entered into letter agreements pursuant to which, among other things, NationsCredit agreed to refrain from exercising remedies under the NationsCredit Agreement with respect to such events of default and the Debtors' maximum borrowing capacity was reduced from $30 million to approximately $16 million immediately prior to the Petition Date. Such reduced liquidity further hampered the Debtors' pre-petition business operations and their ability to implement their pre-petition operational restructuring plan. Accordingly, in October and November 1998, the Debtors explored the possibility of obtaining a new working capital facility to provide them with greater liquidity to stabilize operations and allow the continued implementation of their operational restructuring plan while they continued to pursue a long-term resolution of their financial difficulties. In particular, the Debtors undertook extensive negotiations with the Informal Senior Note Committee and potential lenders with respect to a replacement working capital facility. Such negotiations were required because any working capital facility which provided 29 rights or borrowing capacity greater than those contained in the NationsCredit Agreement also required an amendment to the Old Senior Note Indenture. In November, 1998, the Debtors believed that they were close to entering into a replacement working capital and term loan facility with The CIT Group/Business Credit, Inc. which would have provided them with greater borrowing capacity. However, despite extensive efforts by all parties, it was determined that a replacement facility could not be implemented at that time, primarily due to complex intercreditor issues and disputes, and efforts to pursue such a transaction ceased. Nonetheless, the parties continued discussions concerning a long-term restructuring of Golden Books' indebtedness. During discussions with its creditor constituencies, Golden Books emphasized the benefits of a consensual transaction, and the potential harm the uncertainties of a protracted, contentious restructuring process could cause to Golden Books' relationships with its suppliers and customers. Ultimately, following months of negotiations with the Informal Senior Note Committee, the Informal TOPrS Committee, GPH, Mr. Richard E. Snyder (the Debtors' Chairman and Chief Executive Officer) and others, the parties reached an agreement in principle on the terms of a restructuring of Golden Books' indebtedness, which the parties determined would be best accomplished through a pre-arranged Chapter 11 proceeding. To memorialize the agreement, the parties negotiated and entered into a "Restructuring Agreement," a copy of which is annexed hereto as Exhibit "D", outlining the terms and provisions by which the Debtors, members of the Informal Senior Note Committee and of the Informal TOPrS Committee and certain other signatory holders of such securities, 30 Mr. Richard E. Snyder and GPH, would support a restructuring of the Debtors through a Chapter 11 plan of reorganization. The Plan, which is described in this Disclosure Statement, embodies the terms and arrangements set forth in the Restructuring Agreement. In general, the Plan provides for, among other things, an exchange of the Old Senior Notes for new senior secured notes and equity interests in Reorganized Parent, and an exchange of TOPrS Certificates and GPH Notes for equity interests in Reorganized Parent. The Debtors' general unsecured trade creditors shall be paid in full under the Plan. The Plan also provides a distribution of New Warrants to holders of Old Preferred Stock Interests and Old Common Stock Interests. Additionally, pursuant to the Restructuring Agreement, the parties thereto agreed inter alia, to: (i) support confirmation of the Plan; (ii) not vote against, object to or support an objection to the Plan; (iii) not vote for, consent to, support or participate in any modification of the Plan or the severance of any provision thereof that is determined to be invalid, void or unenforceable (unless such modification or the severance of such provision has been agreed to in writing by each of the parties thereto); and (iv) not vote for, consent to, support or participate in the formulation of, and shall vote against, any other plan of reorganization for any or all of the Debtors. Furthermore, under the Restructuring Agreement, the Informal Senior Note Committee, the Informal TOPrS Committee, and each of the respective members thereof, Mr. Snyder and GPH each agreed that the distributions under the Plan in respect of such person's claims against, or interests in, the Debtors is fair and equitable under Section 1129(b) of the Bankruptcy Code. 31 Pursuant to its terms, the Restructuring Agreement may terminate upon the occurrence of any of the following events, unless waived in writing by all of the parties thereto: (i) the Plan and the DIP Order are not filed within twenty-one (21) days after the effective date of the Restructuring Agreement; (ii) projections supporting the Plan are not filed within twenty-five (25) days after the filing of the Plan; (iii) the Plan is not confirmed within one hundred and fifty (150) days after the effective date of the Restructuring Agreement (or an order is entered which has the practical effect of preventing confirmation of the Plan within one hundred and fifty (150) days after the effective date of the Restructuring Agreement); (iv) the Plan shall not become effective within two hundred (200) days after the effective date of the Restructuring Agreement; (v) any party fails to perform, in any material respect, any of their obligations under the Restructuring Agreement or to support the terms set forth in the exhibits thereto; (vi) holders of more than 20% in the aggregate principal amount, on a per issue basis, of Old Senior Notes that are not members of the Informal Senior Note Committee or of TOPrS Certificates that are not members of the Informal TOPrS Committee shall take actions which are materially adverse to, and in contravention of, the obligations under the Restructuring Agreement of the respective members of the Informal Senior Note Committee or Informal TOPrS Committee; or (vii) there shall be any material modification to, or severance of any provision of, the Plan which is materially inconsistent with the terms and conditions set forth in the exhibits to the Restructuring Agreement (including, without limitation, a material modification to, or severance of, the release and indemnification provisions set forth in the exhibits to the Restructuring Agreement). 32 E. Pre-Petition Asset Disposition and Expense Reduction Efforts Throughout the entire pre-petition negotiation process, Golden Books continued to implement its pre-petition operational restructuring plan, centering on a rehabilitation around the Debtors' core children's publishing and distribution businesses. In that regard, prior to the Petition Date, the Debtors undertook extensive efforts to reduce overhead and other operating expenses through, among other things, the termination of nonessential employees, the disposition of certain nonessential assets and facilities, and the consolidation of business and administration functions. Among other actions, in 1998, Golden Books sold its distribution center in Coffeyville, Kansas, and a manufacturing and distribution facility in Fayetteville, North Carolina. In addition, the Debtors consolidated their office space in New York City. Such efforts resulted in several million dollars in expense reductions. The Debtors' cost reduction and business consolidation efforts are ongoing. III. SIGNIFICANT POST-PETITION EVENTS A. Commencement Of Chapter 11 Cases On February 26, 1999 (the "Petition Date"), in furtherance of their restructuring efforts, the Debtors filed their Chapter 11 cases in the Bankruptcy Court. The Debtors' cases were assigned to the Honorable Tina L. Brozman, Chief United States Bankruptcy Judge for the Southern District of New York. The Debtors continue to operate their businesses and manage 33 their properties as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. As of the date hereof, no trustee or official committee of unsecured creditors has been appointed in the Debtors' cases. The following sections present a brief description of some of the major events which have occurred since the Petition Date. B. First Day Orders On the Petition Date or shortly thereafter, the Bankruptcy Court entered several orders authorizing the Debtors to pay various pre-petition claims and granting other relief necessary to help the Debtors stabilize their day-to-day business operations. These orders were designed to allow the Debtors to continue business operations with minimum disruptions and dislocations, and to ease the strain on the Debtors' relationships with their employees and other parties. Included among the orders entered by the Court were orders authorizing the Debtors to: (i) pay pre-petition payroll, business expenses and other employee-related obligations; (ii) pay pre-petition royalties in the ordinary course of business; (iii) continue the Debtors' return policy; and (iv) continue and maintain their consolidated cash management system, existing bank accounts, and to use existing business forms. C. Professional Retentions On the Petition Date, the Bankruptcy Court entered orders authorizing the Debtors to retain, among others, (i) the law firm of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, as bankruptcy and reorganization counsel, and (ii) the firm of Conway, 34 Del Genio, Gries & Co., Olympic Tower, 645 Fifth Avenue, New York, New York 10022, as financial advisors. D. Post-Petition Financing As noted above, prior to the Petition Date, the Debtors' operations were hampered by, among other things, significant reductions in their borrowing capacity under their pre-petition working capital facility with NationsCredit. Accordingly, on the Petition Date, one of the most important issues addressed by the Debtors was obtaining access to an adequate post-petition working capital facility to enable them to operate their businesses on a competitive basis and, thus, to successfully reorganize. After due deliberation and consideration of viable alternatives, the Debtors determined that it was in the best interests of their creditors and estates to seek authorization and approval of a $55 million post-petition financing facility from The CIT Group/Business Credit, Inc. ("CITBC"). Accordingly, on the Filing Date, the Debtors filed an application to authorize and approve of such facility pursuant to a Revolving Credit and Term Loan Agreement with CITBC dated as of March 1, 1999 (the "Loan Agreement"). On March 1, 1999, the Bankruptcy Court entered an Interim Order preliminarily approving of the Loan Agreement and authorizing the Debtors to borrow up to $30 million thereunder on an interim basis pending a final hearing presently scheduled for March 25, 1999. Pursuant to the Interim Order, as security for the interim borrowings under the CITBC loan facility, CITBC was granted senior and junior liens on specified assets of the Debtors, and a 35 superpriority administrative expense claim (subject to a carve out for fees of the United States Trustee and specified professional fees). In addition, pursuant to the Interim Order, the Debtors were authorized to use collateral (including cash collateral) in which liens and security interests were held by the Old Senior Note Indenture Trustee and by GPH. Pursuant to the Interim Order, replacement and additional senior and junior liens on specified assets were provided to the Old Senior Note Indenture Trustee, and replacement liens on its pre-petition collateral and a specified superpriority administrative expense claim were provided to GPH. E. Sale of Assets of the Adult Publishing Division As noted above, the Debtors have been implementing a long-term strategic business plan centered on their core children's publishing and distribution operations through, among other things, the divestment of non-core assets. In that regard, on or about March 8, 1999, the Debtors filed a motion seeking authorization to sell the assets comprising their Adult Publishing Division, which had been extensively marketed since the Fall of 1998, to St. Martin's Press, Incorporated for approximately $11 million (subject to certain adjustments). The proposed sale is subject to higher and better offers on terms and conditions contained in an order of the Bankruptcy Court dated March 15, 1999. A hearing to approve of the sale to St. Martin's Press, Incorporated (or to any successful overbidder) is presently scheduled for March 25, 1999. 36 IV. OVERVIEW OF THE PLAN A. General The following is a summary intended as a brief overview of the Plan and is qualified in its entirety by reference to the full text of the Plan, a copy of which is annexed hereto as Exhibit A, and the Plan Supplement. Holders of Claims and Equity Interests are respectfully referred to the relevant provisions of the Bankruptcy Code and are encouraged to review the Plan and this Disclosure Statement with their counsel. In general, a Chapter 11 plan of reorganization must (i) divide Claims and equity interests into separate categories and classes, (ii) specify the treatment that each category and class is to receive under such plan, and (iii) contain other provisions necessary to implement the reorganization of a debtor. A Chapter 11 plan may specify that the legal, equitable, and contractual rights of the holders of Claims or equity interests in certain classes are to remain unchanged by the reorganization effectuated by the plan. Such classes are referred to as "unimpaired" and, because of such favorable treatment, are deemed to vote to accept the plan. Accordingly, it is not necessary to solicit votes from holders of Claims or equity interests in such "unimpaired" classes. Pursuant to Section 1124(1) of the Bankruptcy Code, a class of claims or interest is "impaired," and entitled to vote on a plan, unless the plan "leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest." 37 The Debtors believe that (i) under the Plan holders of impaired Claims and Equity Interests will obtain a greater recovery than they would otherwise obtain if the assets of the Debtors were liquidated under Chapter 7 of the Bankruptcy Code, and (ii) the Plan will enable the Debtors to emerge from Chapter 11 as a viable and competitive enterprise, and enhance the Debtors' ability to effect a return to profitability. B. Classification of Claims and Equity Interests Section 1122 of the Bankruptcy Code provides that a plan of reorganization shall classify the claims and equity interests of a debtor's creditors and equity interest holders. In compliance with Section 1122, the Plan divides the holders of Claims and Equity Interests into two categories and eleven Classes, and sets forth the treatment offered to each Class.7 These Classes take into account the differing nature and priority of Claims against the Debtors. Section 101(5) of the Bankruptcy Code defines "Claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, - -------- 7 A debtor is required under Section 1122 of the Bankruptcy Code to classify the claims and interests of its creditors and interest holders into classes containing claims and interests that are substantially similar to the other claims or interests in such class. While the Debtors believe that their classification of all Claims and Equity Interests is in compliance with the provisions of Section 1122 of the Bankruptcy Code, it is possible that a holder of a Claim or Equity Interest may challenge the Debtors' classification scheme and the Bankruptcy Court may find that a different classification is required for the Plan to be confirmed. In such event, it is the present intent of the Debtors, to the extent permitted by the Bankruptcy Court, to modify the Plan to provide for whatever reasonable classification might be required by the Bankruptcy Court for Confirmation, and to use the acceptances received by the Debtors from any holder of a Claim or Equity Interest pursuant to this solicitation for the purpose of obtaining the approval of the Class or Classes of which such holder of a Claim or Equity Interest is ultimately deemed to be a member. 38 unmatured, disputed, undisputed, legal, equitable, secured or unsecured" or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured." A "Claim" against the Debtors also includes a Claim against property of the Debtors, as provided in Section 102(2) of the Bankruptcy Code. An interest is an equity interest in a debtor. For the holder of a Claim to participate in a reorganization plan and receive the treatment offered to the class in which it is classified, its Claim must be Allowed. Under the Plan, an Allowed Claim is defined as: (a) a Claim that has been listed by the Debtors in their Schedules and (i) is not listed as disputed, contingent or unliquidated, and (ii) is not a Claim as to which a proof of claim has been filed; (b) a Claim as to which a timely proof of Claim has been filed as of the Bar Date and either (i) no objection thereto, or application to estimate, equitably subordinate or otherwise limit recovery, has been made on or before any applicable deadline, or (ii) if an objection thereto, or application to estimate, equitably subordinate or otherwise limit recovery, has been interposed, the extent to which such Claim (whether in whole or in part) has been allowed by a Final Order; (c) a Claim arising from the recovery of property under Section 550 or 553 of the Bankruptcy Code and allowed in accordance with Section 502(h) of the Bankruptcy Code; or (d) any Claim allowed under the Plan. 39 C. Treatment of Claims and Equity Interests Under the Plan The Plan segregates the various Claims against, and Equity Interests in, the Debtors into Administrative Expense Claims, Priority Tax Claims, Class 1 consisting of Priority Claims, Class 2 consisting of General Secured Claims, Class 3 consisting of Old Senior Note Claims, Class 4 consisting of GPH Claims, Class 5 consisting of TOPrS Claims, Class 6 consisting of General Unsecured Claims, Class 7 consisting of TOPrS Securities Litigation Claims, Class 8 consisting of Old Preferred Stock Interests Claims, Class 9 consisting of Old Common Stock Interests Claims, Class 10 consisting of Common Stock Securities Litigation Claims and Class 11 consisting of Equity Interests in Subsidiaries. Under the Plan, Claims in Classes 1, 2, 6 and 11 are unimpaired, and Claims in Classes 3, 4, 5, 7, 8, 9 and 10 are impaired. In the Debtors' opinion, the treatment accorded to the impaired Classes of Claims and Equity Interests under the Plan represents the best treatment which can be provided to such Classes under the circumstances and is superior to the treatment which would be afforded to such Classes in the event of a liquidation of the Debtors. Set forth below is a summary of the Plan's treatment of the various categories and Classes of Claims and Equity Interests. This summary is qualified in its entirety by the full text of the Plan. In the event of an inconsistency between the Plan and the description contained herein, the terms of the Plan shall govern. The Plan is complicated and substantial. Time should be allowed for its analysis; consultation with a legal and/or financial advisor is recommended and should be considered. 40 1. Unclassified Categories of Claims a. Category 1 -- Administrative Expense Claims ------------------------------------------- Administrative Expense Claims include the actual and necessary costs and expenses incurred during the Chapter 11 cases. Under the Plan, all Administrative Expense Claims shall be paid in full, in Cash, in such amounts as (a) are incurred in the ordinary course of business by the Debtors, (b) are Allowed by the Bankruptcy Court upon the later of the Effective Date, the date upon which there is a Final Order allowing such Administrative Expense Claim or any other date specified in such order, or (c) may be agreed upon between the holder of such Administrative Expense Claim and the Debtors. Administrative Expense Claims shall include obligations to CITBC, costs incurred in the operation of the Debtors' businesses after the Petition Date, the fees and expenses of Professionals retained by the Debtors, the Informal Senior Note Committee, the Old Senior Note Indenture Trustee, GPH, the Informal TOPrS Committee, the TOPrS Trustee, any statutory committee appointed to serve in the Chapter 11 Cases, and the fees due to the United States Trustee pursuant to 28 U.S.C. ss. 1930. The reasonable fees and expenses incurred on or before the Effective Date by the members of the Informal Senior Note Committee, the Old Senior Note Indenture Trustee, the Informal TOPrS Committee, and the TOPrS Trustee including the respective counsel and financial advisors to such committees, and the reasonable fees and expenses of counsel to GPH, incurred in connection with the Chapter 11 Cases or the Plan shall be paid by the Reorganized Debtors as Administrative Expense Claims (without application by, 41 or on behalf of, any such Person to the Bankruptcy Court, unless specifically ordered by the Bankruptcy Court or any such Person has been retained by an Official Committee pursuant to Sections 327 or 1103 of the Bankruptcy Code, in which event, the provisions of the next paragraph shall apply). If the Reorganized Debtors and any such Person cannot agree on the amount of fees and expenses to be paid to such Person, such amount shall be determined by the Bankruptcy Court. All entities seeking an award by the Bankruptcy Court of Professional Fees, or of compensation for services rendered or reimbursement of expenses incurred through and including the Confirmation Date under Sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy Code, (a) shall file their respective final applications for allowances of compensation for services rendered and reimbursement of expenses incurred through the Confirmation Date within thirty (30) days after the Confirmation Date, and (b) if granted such an award by the Bankruptcy Court, shall be paid in full in such amounts as are allowed by the Bankruptcy Court (i) on the later of the Effective Date or the date such Administrative Expense Claim becomes an Allowed Administrative Expense Claim, or as soon thereafter as is practicable, (ii) upon such other terms as may be mutually agreed upon between such holder of an Allowed Administrative Expense Claim and the Debtors-in-Possession or, on and after the Effective Date, the Reorganized Debtors, or (iii) in accordance with the terms of any applicable administrative procedures order entered by the Bankruptcy Court. All Professional Fees for services rendered in connection with the Chapter 11 Cases and the Plan after the Confirmation Date, including, without limitation, those relating to the occurrence of the Effective Date, the 42 prosecution of Causes of Action preserved hereunder and the resolution of Disputed Claims, shall be paid by the Reorganized Debtors upon receipt of an invoice therefor, or on such other terms as the Reorganized Debtors may agree to, without the need for further Bankruptcy Court authorization or entry of a Final Order. If the Reorganized Debtors and any Professional cannot agree on the amount of post-Confirmation Date fees and expenses to be paid to such Professional, such amount shall be determined by the Bankruptcy Court. In addition, simultaneously with the closing of the Post-Effective Date Financing Facility, all of the Debtors' obligations to the DIP Lender pursuant to the DIP Loan Documents shall be fully and finally satisfied in accordance with the terms thereof. b. Category 2 -- Priority Tax Claims --------------------------------- Allowed Priority Tax Claims shall be paid in full, in Cash, upon the later of (a) the Effective Date, (b) the date upon which there is a Final Order allowing such Claim as an Allowed Priority Tax Claim, (c) the date that such Allowed Priority Tax Claim would have been due if the Chapter 11 Cases had not been commenced, or (d) upon such other terms as may be agreed to between the Debtors and any holder of an Allowed Priority Tax Claim; provided, however, that the Debtors may, at their option, in lieu of payment in full of Allowed Priority Tax Claims on the Effective Date, make Cash payments respecting Allowed Priority Tax Claims deferred to the extent permitted by Section 1129(a)(9) of the Bankruptcy Code and, in such event, interest shall be paid on the unpaid portion of such Allowed Priority Tax Claim at a rate 43 to be agreed to by the Debtors and the appropriate governmental unit or, if they are unable to agree, as determined by the Bankruptcy Court. 2. Unimpaired Classes of Claims ---------------------------- A Chapter 11 plan may specify that the legal, equitable, and contractual rights of the holders of Claims or equity interests in certain classes are to remain unchanged by the reorganization effectuated by the plan. Such classes are referred to as "unimpaired" and, because of such favorable treatment, are deemed to vote to accept the plan. Accordingly, it is not necessary to solicit votes from holders of Claims or equity interests in such "unimpaired" classes. Under the Debtors' Plan, the Class of Priority Claims (Class 1), the Class of General Secured Claims (Class 2), the Class of General Unsecured Claims (Class 6) and the Class of Equity Interests in Subsidiaries (Class 11) are unimpaired and, therefore, are deemed to have accepted the Plan. a. Class 1 -- Priority Claims -------------------------- Each holder of an Allowed Priority Claim shall receive Cash in an amount equal to such Allowed Priority Claim on the later of the Effective Date and the date such Priority Claim becomes an Allowed Priority Claim, or as soon thereafter as is practicable, unless the holder of an Allowed Priority Claim and the Reorganized Debtors agree to a different treatment thereof. 44 b. Class 2 -- General Secured Claims --------------------------------- At the option of the Reorganized Debtors, (i) an Allowed Gen- eral SecuredClaim shall be reinstated and rendered unimpaired in accordance with Section 1124(2) of the Bankruptcy Code, (ii) a holder of an Allowed General Secured Claim shall receive Cash in an amount equal to such Allowed General Secured Claim, including any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, on the later of the Effective Date and the date such General Secured Claim becomes an Allowed General Secured Claim, or as soon thereafter as is practicable, or (iii) a holder of an Allowed General Secured Claim shall receive the Collateral securing its Allowed General Secured Claim and any interest on such Allowed General Secured Claim required to be paid pursuant to Section 506(b) of the Bankruptcy Code, in full and complete satisfaction thereof on the later of the Effective Date and the date such General Secured Claim becomes Allowed, or as soon thereafter as is practicable. Included in the Class of General Secured Claims are subclasses consisting of secured obligations to (i) the Wisconsin Department of Revenue Division of Economic Development and the Racine County Economic Development Corporation, and (ii) the Wisconsin Department of Revenue Bureau of Business Finance. Specifically, Publishing and Parent have a $1 million joint obligation to the Wisconsin Department of Revenue Division of Economic Development and Racine County Economic Development Corporation, which is secured by certain equipment located in Racine County, Wisconsin. Parent has a $3 million secured obligation to the Wisconsin Department of Revenue Bureau of Business Finance which 45 is secured by specified equipment located in Racine County, Wisconsin. The Debtors intend to maintain such obligations post-Confirmation, and, therefore, to render such claimants unimpaired by providing them with the treatment set forth in clause (i) of the preceding paragraph. c. Class 6 -- General Unsecured Claims ----------------------------------- To the extent not satisfied by the Debtors in the ordinary course of business prior to the Effective Date, in full and final satisfaction of such Claim, the legal, equitable, and contractual rights to which an Allowed General Unsecured Claim entitles the holder thereof shall be left unimpaired and, accordingly, shall be satisfied on the latest of (a) the Effective Date, (b) the date a General Unsecured Claim becomes an Allowed Claim, (c) the date an Allowed General Unsecured Claim becomes due and payable in the ordinary course of the Debtors' business consistent with the Debtors' ordinary payment practices, or (d) the date on which the Debtors and the holder of such Allowed General Unsecured Claim otherwise agree in writing. At the option of the Debtors, the treatment provided in the Plan will result in the payment of any Allowed General Unsecured Claim, in Cash, in an amount equal to such Allowed General Unsecured Claim (which payment shall include interest, only to the extent to which the holder of such Claim may be contractually entitled, accrued through the date of payment). 46 d. Class 11 -- Subsidiary Equity Interests --------------------------------------- On the Effective Date, record holders of Allowed Subsidiary Equity Interests shall continue to hold such equity interests, which equity interests shall continue to be evidenced by the capital stock held by such record holders in the Subsidiary or Subsidiaries as of the Effective Date. 3. Impaired Classes ---------------- Pursuant to Section 1124 of the Bankruptcy Code, a class of Claims or equity interests is impaired unless the legal, equitable, and contractual rights of the holders of Claims or equity interests in such class are not modified or altered. Holders of Allowed Claims and interests in impaired classes are entitled to vote on a debtor's plan of reorganization. Under the Debtors' Plan, the Class of Old Senior Note Claims (Class 3), the Class of GPH Claims (Class 4), the Class of TOPrS Claims (Class 5), the Class of Debt Securities Rescission or Damage Claims (Class 7), the Class of Old Preferred Stock Interests (Class 8), the Class of Old Common Stock Interests (Class 9), and the Class of Equity Interest Rescission or Damage Claims (Class 10) are impaired and, therefore, are entitled to vote on the Debtors' Plan. a. Class 3 -- Old Senior Note Claims --------------------------------- Allowance of Old Senior Note Claims. On the Effective Date, the Old Senior Note Claims shall be deemed Allowed in the aggregate amount of $150 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. 47 Distributions. On the Effective Date, each holder of an Allowed Old Senior Note Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the Old Senior Notes), its Pro Rata Share of (i) the New Senior Notes and (ii)______shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed Old Senior Note Claims as described in clause (ii) of the preceding sentence, will represent, in the aggregate, 42.5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. Principal Terms of New Senior Notes. Subject to the occurrence of the Effective Date, the New Senior Note issued pursuant to the New Senior Note Indenture shall contain the following principal terms: Issuer: Reorganized Publishing Guarantor: Reorganized Parent and Reorganized Video (and their respective direct and indirect subsidiaries and affiliates other than Reorganized Publishing) Principal Amount: $87 million Maturity: Fifth anniversary of the Effective Date Interest: Payable in Cash at a rate of 10% per annum, or at the sole election of the issuer, payable in kind in additional New Senior Notes at a rate of 13.5% per annum, payable semi- 48 annually; provided, however, that commencing three years after the Effective Date, interest on the New Senior Notes shall be payable only in cash at a rate of 10% per annum. Amortization: Mandatory semi-annual amortization payments of $8.33 million commencing three years after the Effective Date, i.e., commencing with the first semi-annual interest payment that is due during the fourth year after the Effective Date, to retire $25.0 million of the principal balance of the New Senior Notes prior to maturity Collateral: New Senior Notes shall be secured by all collateral securing the Old Senior Notes on the Petition Date as described in this Disclosure Statement (including, without limitation, the proceeds arising under the Distribution Agreement); provided, however, that the liens securing the Old Senior Notes on corporate leasehold improvements sold in connection with Parent's reduction of the office space at its corporate headquarters in New York, New York shall be deemed released.8 The New Senior Notes shall also be secured by (i) a first lien on (a) the Distribution Agreement, and (b) the Debtors' rights and interests in and to "Lassie," "Felix the Cat," the "Film Library," and "Other Entertainment Works"; and (ii) a blanket second lien on all assets pledged to the lender(s) under the Post-Effective Date Financing Facility. Consistent with the foregoing, upon the Effective Date, the New Senior Notes will be secured by either a first or second lien on all assets of Reorganized Parent and its direct and indirect subsidiaries. Call Protection: New Senior Notes may be redeemed, in whole or in part, at any time, at the option of the Issuer, at the redemption prices (expressed as percentages of principal amount of New Senior Notes) set forth below, plus accrued and unpaid interest to the date of redemption: - -------- 8 See Section II.B.2. for a general description of the collateral securing the Old Senior Notes on the Petition Date. 49 Years From Effective Date Redemption Price --------------- ---------------- 1 year 105.00% 2 years 103.33% 3 years 101.25% Thereafter 100.0% Any net proceeds from the sale of any collateral securing the New Senior Notes (excluding sales of inventory or accounts receivable in the ordinary course of business) will be used to pay down the New Senior Notes (subject to the redemption schedule set forth above). Covenants: Normal and customary for secured indebtedness of this nature, to be determined to the reasonable satisfaction of the Informal Senior Note Committee and the Informal TOPrS Committee. Cancellation of Old Senior Notes and Related Instruments. As of the Effective Date, all Old Senior Notes, and all indentures, agreements, instruments and other documents evidencing Old Senior Note Claims and the rights of the holders thereof, shall be canceled and deemed null and void and of no further force and effect (all without further act or action by any Person), and all obligations of any Person (including, without limitation, the Old Senior Note Indenture Trustee) under such instruments and agreements shall be fully and finally satisfied and released. Notwithstanding the foregoing, such cancellation shall not impair the rights and duties under the Old Senior Note Indenture as between the Old Senior Note Indenture Trustee and the beneficiaries of the trust created thereby. 50 b. Class 4 -- GPH Claims --------------------- Allowance of GPH Claims. On the Effective Date, the GPH Claims shall be deemed Allowed in the aggregate amount of $10 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. Distributions. On the Effective Date, the holder of the Allowed GPH Claim shall receive, in full and final satisfaction of such Allowed Claim (including any unsecured deficiency Claim in respect of the GPH Notes) ______ shares of New Parent Common Stock. The New Parent Common Stock issued to the holder of the Allowed GPH Claim pursuant to the Plan, will represent, in the aggregate, 5% of the authorized and outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. Cancellation of GPH Notes and Related Instruments. As of the Effective Date, all GPH Notes, the GPH Note Purchase Agreement and all agreements, instruments and other documents evidencing the GPH Claims and the rights of the holder thereof (including, without limitation, the Publishing Notes), and all liens and security interests securing the GPH Claims, shall be canceled and extinguished, and deemed null and void and of no force and effect (all 51 without further act or action by any Person), and all obligations of any Person under such instruments and agreements shall be fully and finally satisfied and released. c. Class 5 -- TOPrS Claims ----------------------- Allowance of TOPrS Claims. On the Effective Date, the TOPrS Claims shall be deemed Allowed in the aggregate amount of $105 million plus accrued and unpaid interest relating to the period up to but not including the Petition Date. Distributions. On the Effective Date, each holder of an Allowed TOPrS Claim shall receive, in full and final satisfaction of such Allowed Claim, its Pro Rata Share of ____ shares of New Parent Common Stock. The New Parent Common Stock issued to holders of Allowed TOPrS Claims pursuant to the Plan, will represent, in the aggregate, 50.0% of the outstanding shares of New Parent Common Stock on the Effective Date; provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued as a result of the exercise of the New Warrants, (ii) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (iii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. Cancellation of TOPrS Certificates and Related Instruments. As of the Effective Date, all TOPrS Certificates and all Convertible Debentures, and all indentures, agreements, instruments and other documents evidencing TOPrS Claims and the rights of the holders thereof, shall be canceled and extinguished, and deemed null and void and of no further force and effect (all without further act or action by any Person), and all obligations of any Person 52 under such instruments and agreements shall be fully and finally satisfied and released, and the TOPrS Trust shall be deemed dissolved. d. Class 7 -- Debt Securities Rescission or Damage Claims ------------------------------------------------------ Subject to the releases contained in Section 9.1 of the Plan, each holder of an Allowed Debt Securities Rescission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under the Plan. Currently, there is a consolidated litigation pending in the United States District Court for the Southern District of New York encaptioned Kevin Lemmer v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 5748 (AGS) and Green Fund and Cynthia Green Colin v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 7072 (AGS) purportedly on behalf of all persons who, during the period between May 13, 1997 and August 4, 1998, purchased Old Common Stock Interests or TOPrS Certificates, alleging damages based on the Debtors' alleged dissemination of materially false and misleading statements regarding, among other things, the Debtors' restructuring program and the effect of the restructuring on the Debtors' financial condition, operations and liquidity. As of the date hereof, a class has not been certified in either action. The Debtors deny the allegations and have filed a motion to dismiss the case. The plaintiffs filed an opposition to the Debtors' motion to dismiss. The 53 plaintiffs are represented by Milberg, Weiss, Bershad, Hynes & Learach LLP, One Pennsylvania Plaza, New York, New York 10119, (212) 594-5300, Attn: Robert Wallner, Esq. e. Class 8 -- Old Preferred Stock Interests ---------------------------------------- On the Effective Date, all Old Preferred Stock Interests shall be canceled, annulled, and extinguished, and the holder of the Allowed Old Preferred Stock Interests shall receive two-thirds (2/3) of the New Warrants to be issued pursuant to the Plan. f. Class 9 -- Old Common Stock Interests ------------------------------------- Impairment and Voting. Class 9 is impaired by the Plan. Consequently, each holder of an Allowed Old Common Stock Interest shall be entitled to vote to accept or reject the Plan. Distributions. On the Effective Date, all Old Common Stock Interests shall be canceled, annulled and extinguished, and each holder of an Allowed Old Common Stock Interest (including any such Interest consisting of accrued and unpaid dividends on the Old Preferred Stock Interests) shall receive its Pro Rata Share of one-third (1/3) of the New Warrants to be issued pursuant to the Plan. 54 g. Class 10 -- Equity Interest Rescission or Damage Claims ------------------------------------------------------- Impairment and Voting. Class 10 is impaired by the Plan. Consequently, each holder of an Allowed Equity Interest Rescission or Damage Claim shall be entitled to vote to accept or reject the Plan. Distributions. Subject to the releases contained in Section 9.1 of the Plan, each holder of an Allowed Equity Interest Rescission or Damage Claim shall retain all proceeds derived from or relating to any litigation instituted by or against any such holder or on his behalf which are payable by any entity other than the Debtors or Reorganized Debtors (but not any proceeds from any of the property or assets of the Debtors except proceeds of insurance policies maintained by the Debtors) but shall receive no other distribution under the Plan. As set forth in more detail in subsection IV.C.3.d. above, currently, there is a consolidated litigation pending in the United States District Court for the Southern District of New York encaptioned Kevin Lemmer v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 5748 (AGS) and Green Fund and Cynthia Green Colin v. Golden Books Family Entertainment, Inc., et al., Case No. 98 CIV 7072 (AGS), alleging an Equity Interest Recession or Damages Claim. 55 D. Description of Transactions to Be Implemented in Connection with the Plan 1. New Senior Notes ---------------- On the Effective Date, the New Senior Notes will be issued pursuant to the New Senior Note Indenture. The New Senior Notes will have the principal terms set forth in Section 4.3(d) of the Plan. In addition, the New Senior Notes will have normal and customary terms for secured indebtedness of this nature and standard financial covenants and, as set forth in Section IV.3.a. above, will be guaranteed. A form of the New Senior Note Indenture is included as an exhibit in the Plan Supplement. 2. New Warrants ------------ On the Effective Date, New Warrants shall be issued pursuant to the Warrant Agreement to purchase that number of shares of New Parent Common Stock constituting 5%, on a fully-diluted basis, of the authorized shares of New Parent Common Stock on the Effective Date, provided, however, that the foregoing percentage is subject to dilution by (i) shares of New Parent Common Stock issued in accordance with the Management Stock Option Plan, and (ii) such other shares as may be authorized and issued pursuant to the Reorganized Parent Charter. The New Warrants shall be exercisable until the third anniversary of the Effective Date at a price of $__________ per share and will have normal and customary terms for a security of this nature. 56 3. Reorganized Debtors' Charters ----------------------------- Upon the Effective Date, the Reorganized Debtors' Charters will become effective. The Reorganized Debtors' Charters, together with the provisions of the Plan, will provide for the authorization and issuance of the New Senior Notes, the New Parent Common Stock and the New Warrants, a prohibition on the issuance of non-voting equity securities in accordance with Section 1123(a)(6) of the Bankruptcy Code, and such other provisions that are necessary to facilitate consummation of the Plan. 4. Management Stock Option Plan ---------------------------- The Management Stock Option Plan shall be effective immediately upon the Effective Date. The Management Stock Option Plan shall be a stock incentive program and shall provide for the issuance of up to 10%, on a fully-diluted basis, of the shares of New Parent Common Stock as of the Effective Date of the Plan. Shares of New Parent Common Stock issued pursuant to the Management Stock Option Plan shall be allocated as follows: a. Richard E. Snyder (Chief Executive Officer) -- 2%, on a fully-diluted basis, of the shares of New Parent Common Stock in the form of restricted stock to vest 2/3 on the second anniversary of the Effective Date and 1/3 on the third anniversary of the Effective Date (with vesting fully accelerated upon a termination without cause, a termination for good reason, a termination due to death or disability or a change of control). 57 b. Richard K. Collins (Chief Operating Officer), Philip Galanes (Chief Administrative Officer) and Colin Finkelstein (Chief Financial Officer)-- Each shall receive 1%, on a fully-diluted basis, of the shares of New Parent Common Stock in the form of at the money stock options with an exercise price based upon the total equity value of Reorganized Parent (as set forth in this Disclosure Statement) to vest ratably over a three year period (with vesting fully accelerated upon a termination without cause, a termination for good reason, a termination due to death or disability or a change of control). c. Other Grants -- 5%, on a fully-diluted basis, of the shares of New Parent Common Stock shall be reserved for option grants to key employees up to one-half of which is to be determined by the Debtors' current management or board to be issued as part of the Debtors' 1999 bonus plan to management not covered by clauses (a) or (b) above, with the remainder to be determined by the board of directors of Reorganized Parent. 5. Cancellation and Surrender of Existing Securities and Agreements ------------------------------------------------------------------ Except as may otherwise be provided in the Plan, on the Effective Date, the promissory notes, share certificates, bonds and other instruments evidencing any Claim or 58 Equity Interest shall be deemed canceled without further act or action under any applicable agreement, law, regulation, order or rule and the obligations of the Debtors under the agreements, indentures and certificates of designations governing such Claims and Equity Interests, as the case may be, shall be discharged and released. In addition, on the Effective Date, Reorganized Parent and Richard E. Snyder shall enter into an agreement providing for Mr. Snyder's transfer to Parent of his entire interest in certain shares of Old Parent Common Stock in full and complete satisfaction of obligations under a non-recourse promissory note to Parent related thereto. Each holder of a promissory note, share certificate, bond or other instrument evidencing a Claim or Equity Interest, shall surrender such promissory note, share certificate, bond or instrument to the Reorganized Debtors (or their disbursing agent), unless such requirement is waived by the Reorganized Debtors. No distribution of property hereunder shall be made to or on behalf of any such holders unless and until such promissory note, share certificate, bond or instrument is received by the Reorganized Debtors (or their disbursing agent), or the unavailability of such promissory note, share certificate, bond or instrument is established to the reasonable satisfaction of the Reorganized Debtors (or their disbursing agent), or such requirement is waived by the Reorganized Debtors. The Reorganized Debtors may require any holder that is unable to surrender or cause to be surrendered any such promissory notes, share certificates, bonds or instruments to deliver an affidavit of loss and indemnity and/or furnish a bond in form and substance (including, without limitation, with respect to amount) reasonably satisfactory to the Reorganized Debtors. Any holder that fails within the 59 later of one year after the Effective Date and the date of Allowance of its Claim or Equity Interest (i) to surrender or cause to be surrendered such promissory note, share certificate, bond or instrument, (ii) if requested, to execute and deliver an affidavit of loss and indemnity reasonably satisfactory to the Reorganized Debtors (or their disbursing agent), and (iii) if requested, to furnish a bond reasonably satisfactory to the Reorganized Debtors (or their disbursing agent), shall be deemed to have forfeited all rights, Claims and Causes of Action against the Debtors and Reorganized Debtors and shall not participate in any distribution hereunder. 6. Employment Contracts. --------------------- Except as otherwise provided in the Plan or as agreed among the Informal Committees, the Debtors and the respective employee, on the Effective Date, employment contracts of current employees of the Debtors will be assumed. On the Effective Date, the current employment contract of Richard E. Snyder shall be deemed canceled and terminated, and Reorganized Parent and Mr. Snyder shall enter into a new revised employment contract which shall become automatically effective on the Effective Date. The form of such new employment contract is attached to the Restructuring Agreement which is annexed hereto as Exhibit D. 60 7. Registration Rights Agreements ------------------------------ On and after the Effective Date, Reorganized Parent and appropriate holders of New Senior Notes and New Parent Common Stock shall enter into an appropriate registration rights agreement(s). 8. Substantive Consolidation ------------------------- Substantive consolidation is an equitable right that may be effectuated in Chapter 11 cases involving affiliated debtors. Substantive consolidation involves the pooling and merging of the assets and liabilities of affiliated debtors. All of the debtors in the substantively consolidated group are treated as if they were a single corporate and economic entity for purposes of a Chapter 11 plan. Consequently, a creditor of one of the substantively consolidated debtors is treated as a creditor of the substantively consolidated group of debtors, and, for purposes of the plan, issues of individual corporate ownership of property and individual corporate liability on obligations are ignored. Substantive consolidation of two or more debtors' estates generally results in the deemed consolidation of the assets and liabilities of such debtors, the deemed elimination of intercompany claims, multiple and duplicative creditor claims, joint and several liability claims and guarantees, and the payment of allowed claims from a common fund. Pursuant to the Plan, contemporaneously with the entry of the Confirmation Order (but subject to the occurrence of the Effective Date), the Debtors' estates shall be substantively consolidated. In particular, except as expressly provided in the Plan, the Debtors 61 and Reorganized Debtors shall continue to maintain their separate corporate existence for all purposes other than the treatment of Claims under the Plan. Thus, on the Effective Date: (i) all assets (and all proceeds thereof) and liabilities of the Debtors shall be deemed merged or treated as though they were merged into and with the assets and liabilities of Parent, (ii) no distributions shall be made under the Plan on account of intercompany Claims among the Debtors and all such Claims (including, without limitation, Claims based upon the Publishing Notes) shall be eliminated, (iii) all guarantees of the Debtors of the obligations of any other Debtor shall be deemed eliminated and extinguished so that any Claim against any Debtor and any guarantee thereof executed by any other Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors, (iv) each and every Claim filed or to be filed in any of the Chapter 11 Cases shall be deemed filed against the consolidated Debtors, and shall be deemed one Claim against and obligation of the consolidated Debtors and (v) for purposes of determining the availability of the right of set-off under Section 553 of the Bankruptcy Code, the Debtors shall be treated as one entity so that, subject to the other provisions of Section 553 of the Bankruptcy Code, debts due to any of the Debtors may be set-off against the debts of any of the other Debtors. Such substantive consolidation shall not (other than for purposes related to the Plan) affect (i) the legal and corporate structures of the Reorganized Debtors, and (ii) Subsidiary Equity Interests. The Debtors believe that substantive consolidation is appropriate in these cases and will facilitate confirmation of the Plan. Specifically, the Debtors' operations and indebtedness are significantly interrelated. The Debtors also share common management and 62 have a centralized cash management system. Therefore, the Debtors believe that the substantive consolidation of their Chapter 11 cases is warranted and in the best interest of the Debtors' creditors, shareholders and estates. E. Funding for the Plan The funds utilized to make Cash payments under the Plan have been and/or will be generated from, among other things, the operation of the Debtors' businesses, asset dispositions, and borrowing under the Post-Effective Date Financing Facility. F. Description of Other Provisions of the Plan 1. Disputed Claims --------------- The Plan provides that with respect to any Disputed Claims and Equity Interests, for the purposes of effectuating the provisions of the Plan and the distributions to holders of Allowed Claims and Equity Interests, the Bankruptcy Court, on or prior to the Effective Date or such date or dates thereafter as the Bankruptcy Court shall set, may fix or liquidate the amount of such Disputed Claims and Equity Interests pursuant to Section 502(c) of the Bankruptcy Code, in which event the amounts so fixed or liquidated shall be deemed the maximum amounts of the Disputed Claims and Equity Interests pursuant to Section 502(c) of the Bankruptcy Code for purposes of distribution under the Plan. 63 When a Disputed Claim or Equity Interest becomes an Allowed Claim or Equity Interest, the Reorganized Debtors shall distribute to the holder of such Allowed Claim or Equity Interest, the property distributable to such holder as provided in the Plan. 2. Disputed Payments ----------------- The Plan provides that in the event of any dispute between and among holders of Claims or Equity Interests and/or the holders of a Disputed Claim or Equity Interest as to the right of any Person to receive or retain any payment or distribution to be made to such Person under the Plan, the Reorganized Debtors may, in lieu of making such payment or distribution to such Person, instead hold such payment or distribution, without interest, until the disposition thereof shall be determined by a Final Order of the Bankruptcy Court or other court with appropriate jurisdiction. 3. Unclaimed Property ------------------ Any distributions under the Plan that are unclaimed for a period of one year after distribution thereof shall revert and be revested in the Reorganized Debtors, and any entitlement of any holder of any Claim or Equity Interest to such distributions shall be forfeited, extinguished, and forever barred. 4. Issuance of New Securities -------------------------- The Reorganized Debtors shall authorize the issuance, in accordance with 1the terms of the Plan, of approximately ________ shares of New Parent Common Stock, the New 64 Senior Notes and _______ New Warrants. On the Effective Date, the Debtor will transmit written instructions regarding the surrender of Old Senior Notes, Old Preferred Stock Interests, and Old Common Stock Interests, and the distribution of shares of New Parent Common Stock and New Warrants to those parties entitled to distributions thereof pursuant to the Plan. Reorganized Parent will use its reasonable best efforts to cause the New Parent Common Stock and the New Senior Notes to be listed for trading on a national securities exchange or the NASDAQ National Market System. All shares of New Parent Common Stock to be issued pursuant to the Plan (including, without limitation, upon exercise of the New Warrants) shall be, upon issuance, fully paid and non-assessable, and shall be subject to dilution only as may be expressly set forth in this Plan or in the Plan Documents, and the holders thereof shall have no preemptive or other rights to subscribe for additional shares. 5. Discharge --------- Except as otherwise expressly provided in Section 1141 of the Bankruptcy Code or the Plan, the distributions made pursuant to and in accordance with the applicable terms and conditions of the Plan are in full and final satisfaction, settlement, release and discharge as against the Debtors of any debt that arose before the Effective Date, and any debt of a kind specified in Section 502(g), 502(h), or 502(i) of the Bankruptcy Code, and all Claims and Equity Interests of any nature, including, without limitation, any interest accrued thereon from and after the Petition Date, whether or not (i) a proof of Claim or Equity Interest based on such debt, obligation or equity interest is filed or deemed filed under Section 501 of the Bankruptcy Code, (ii) such Claim or Equity Interest is Allowed under Section 502 of the Bankruptcy Code or 65 (iii) the holder of such Claim or Equity Interest has accepted the Plan; provided, however, that the foregoing discharge shall not apply to rights of holders of Rescission or Damage Claims, and Indemnification Claims arising from or related thereto, to pursue such claims against the Debtors solely to obtain a right or recovery against any applicable insurance coverage of the Debtors or to seek indemnification, all as otherwise provided by Section 7.3 of the Plan (but not to enforce a judgment on any other property of the Debtors or Reorganized Debtors). 6. Termination of Subordination Rights and Settlement of Related Claims and Controversies ------------------------------------------------------ The classification and manner of satisfying all Claims and Equity Interests under the Plan take into consideration all contractual, legal and equitable subordination rights, whether arising under general principles of equitable subordination, Sections 510(b) and (c) of the Bankruptcy Code or otherwise, that a holder of a Claim or Equity Interest may have against other Claim or Equity Interest holders with respect to any distribution made pursuant to the Plan. On the Effective Date, all contractual, legal or equitable subordination rights that a holder of a Claim or Equity Interest may have with respect to any distribution to be made pursuant to the Plan shall be discharged and terminated, and all actions related to the enforcement of such subordination rights shall be permanently enjoined and distributions pursuant to the Plan shall not be subject to payment to a beneficiary of such terminated subordination rights, or to levy, garnishment, attachment or other legal process by any beneficiary of such terminated subordination rights. 66 Pursuant to Bankruptcy Rule 9019, and in consideration for the distributions and other benefits provided under the Plan, the provisions of the Plan shall constitute a good faith compromise and settlement of all claims or controversies relating to the termination of all contractual, legal and equitable subordination rights that a holder of a Claim or Equity Interest may have with respect to any Allowed Claim or Allowed Equity Interest, or any distribution to be made on account of an Allowed Claim or an Allowed Equity Interest. The entry of the Confirmation Order shall constitute the Bankruptcy Court's approval of the compromise or settlement of all such claims or controversies, and the Bankruptcy Court's finding that such compromise or settlement is in the best interests of the Debtors, Reorganized Debtors and their respective property and holders of Claims and Equity Interests and is fair, equitable and reasonable. 7. Additional Releases ------------------- Without limiting the provisions of Section 9.2 of the Plan and except as otherwise provided in the Plan, as of the Effective Date, in consideration for, and as part of the treatment afforded to, the holders of Claims and Equity Interests under the Plan, and for other valuable consideration, each of the Released Parties shall be deemed forever released from any and all Causes of Action that any Person may have asserted, could have asserted, or could in the future assert, directly or indirectly, against any of the Released Parties relating to the Debtors or the Chapter 11 Cases on or prior to the Effective Date, provided, however, that the foregoing release shall not apply to (i) Causes of Action that arise from obligations or rights created under or in connection with the Plan or any agreement provided for or contemplated in the Plan, and 67 (ii) the rights of holders of Rescission or Damage Claims to pursue such claims against present or former officers and directors of the Debtors as named defendants in litigations respecting such Rescission or Damage Claims solely for purposes of preserving or obtaining a right of recovery against any applicable insurance coverage of the Debtors but not to enforce a judgment against any property of any present or former officers and directors of the Debtors except to the extent of the insurance proceeds of the Debtors and any other proceeds made available under the indemnification rights as provided for in Section 7.3 of the Plan. Except as, and only to the extent provided otherwise in the Plan, as of the Effective Date, each of the Released Parties forever releases, waives and discharges all known and unknown Causes of Action of any nature that such Released Party has, had or may have against any other Released Party for all acts and omissions related to the Debtors arising from or related to the Chapter 11 Cases through the Effective Date, other than Causes of Action that arise from obligations or rights created under or in connection with the Plan or any agreement provided for or contemplated in the Plan. 8. Injunctions ----------- As of the Effective Date and subject to its occurrence, all Persons that have held, currently hold or may have asserted a Claim, a Cause of Action or other debt, or liability, or an Equity Interest or other right of a holder of an Equity Interest that is discharged, released or terminated pursuant to the Plan, are permanently enjoined from commencing or continuing, in any manner or in any place, any action or other proceeding, enforcing, attaching, collecting or 68 recovering in any manner any judgment, award, decree or order, creating, perfecting or enforcing any lien or encumbrance, asserting a set-off, right or subrogation or recoupment of any kind against any debt, liability or obligation due to any such releasing Person, and from commencing or continuing any action, in any manner or in any place where the foregoing does not comply with or is inconsistent with the provisions hereof, provided, however, that the foregoing injunctions shall not apply to rights of the holders of Rescission or Damage Claims, and Indemnification Claims arising from or related thereto, to pursue such claims against any Person that is discharged or released pursuant to this plan solely to obtain a right of recovery against any applicable insurance coverage or to seek indemnification as otherwise provided by Section 7.3 of the Plan but not to enforce a judgment against any property of any Person that is discharged or released pursuant to this Plan except to the extent of insurance proceeds or to seek indemnification as otherwise provided by Section 7.3 of the Plan. As of the Effective Date, except as otherwise provided in the Plan, all Persons are permanently enjoined from commencing or continuing, in any manner or in any place, any action or other proceeding, whether directly, derivatively or otherwise against any or all of the Released Parties, on account of or respecting any claims, debts, rights, Causes of Action or liabilities released or discharged pursuant to the Plan, except to the extent expressly permitted under the Plan. Without limitation to the scope, extent, validity or enforceability of the injunctive relief set forth in the Plan and in the Confirmation Order, by accepting distributions pursuant to the Plan, each holder of an Allowed Claim or Equity Interest receiving distributions pursuant to 69 the Plan is deemed to have specifically consented to the releases and injunc- tions set forth in the Plan. 9. Exculpation ----------- Pursuant to the Plan, neither the Debtors, Reorganized Debtors, the Informal Committees, any official committee of creditors appointed in these cases, or GPH, nor any of their respective members, officers, directors, employees, advisors, agents or Professionals shall have or incur any liability to any holder of a Claim or Equity Interest for any act or omission in connection with, related to, or arising out of, the Chapter 11 Cases, the preparation or formulation of the Plan, the pursuit of confirmation of the Plan, the consummation of the Plan or the administration of the Plan or the property to be distributed under the Plan, except for willful misconduct or gross negligence, and, in all respects, the Debtors, Reorganized Debtors and each of their respective members, officers, directors, employees, advisors, agents and Professionals shall be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan; provided, however, that nothing in the Plan shall, or shall be deemed to, release the Debtors or Reorganized Debtors from, or exculpate the Debtors or Reorganized Debtors with respect to, their respective obligations or covenants arising pursuant to the Plan. 10. Section 1146 Exemption ---------------------- In accordance with Section 1146(c) of the Bankruptcy Code, (a) the issuance, transfer or exchange of any security under the Plan or the making or delivery of any instrument 70 of transfer pursuant to, in implementation of, or as contemplated by the Plan, including any merger agreements or agreements of consolidation, deeds, bills of sale or assignments executed in connection with any of the transactions contemplated under the Plan, or the revesting, transfer or sale of any real or personal property of the Debtors pursuant to, in implementation of, or as contemplated by the Plan, (b) the making, delivery, creation, assignment, amendment or recording of any note or other obligation for the payment of money or any mortgage, deed of trust or other security interest under, in furtherance of, or in connection with the Plan, the issuance, renewal, modification or securing of indebtedness by such means, and (c) the making, delivery or recording of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including, without limitation, the Confirmation Order, shall not be subject to any document recording tax, stamp tax, conveyance fee or other similar tax, mortgage tax, real estate transfer tax, mortgage recording tax or other similar tax or governmental assessment. Consistent with the foregoing, each recorder of deeds or similar official for any county, city or governmental unit in which any instrument hereunder is to be recorded shall, pursuant to the Confirmation Order, be ordered and directed to accept such instrument, without requiring the payment of any documentary stamp tax, deed stamps, stamp tax, transfer tax, intangible tax or similar tax. 11. Full and Final Satisfaction --------------------------- Pursuant to the Plan, all payments and all distributions shall be in full and final satisfaction, settlement, release and discharge of all Claims and Equity Interests, except as otherwise provided in the Plan. 71 12. Cram-Down --------- If any impaired Class entitled to vote shall not accept the Plan by the requisite majorities provided in Sections 1126(c) or 1126(d) of the Bankruptcy Code as applicable, or if any impaired Class is deemed to have rejected the Plan, the Debtors reserve the right (a) to undertake to have the Bankruptcy Court confirm the Plan under Section 1129(b) of the Bankruptcy Code and (b) to amend the Plan in accordance with the Plan to the extent necessary to obtain entry of the Confirmation Order. 13. Disbursement of Funds and Delivery of Distribution --------------------------------------------------------------- Subject to Bankruptcy Rule 9010, all distributions under the Plan shall be made by the Reorganized Debtors (or their disbursing agent) to the holder of each Allowed Claim at the address of such holder as listed on the Schedules as of the Distribution Record Date, unless the Debtors or Reorganized Debtors have been notified in writing of a change of address, including, without limitation, by the filing of a proof of claim or notice of transfer of claim filed by such holder that provides an address for such holder different from the address reflected on the Schedules. Any payment of Cash made by the Reorganized Debtors (or their disbursing agent) pursuant to the Plan shall be made by check drawn on a domestic bank. Any payment or distribution required to be made under the Plan on a day other than a Business Day shall be made on the next succeeding Business Day. 72 Whenever any payment of a fraction of a cent would otherwise be called for, the actual payment shall reflect a rounding of such fraction to the nearest whole cent (rounding down in the case of .50 or less and rounding up in the case of more than .50). No fractional shares of New Parent Common Stock or New Warrants shall be distributed under the Plan. Fractional interests shall be combined into as many whole shares of New Parent Common Stock or New Warrants, as the case may be, as possible and shall be redistributed to holders of Claims and Equity Interests (as applicable) with fractional interests, in descending order, until all such whole shares of New Parent Common Stock or New Warrants are distributed. As of the close of business on the Distribution Record Date, the claims register (for Claims) and the transfer ledgers (for Old Senior Notes, TOPrS Certificates and Equity Interests) shall be closed, and there shall be no further changes in the record holders of any Claims or Equity Interests. The Debtors, Reorganized Debtors and the respective indenture trustees for all the Old Senior Notes and TOPrS Certificates, as the case may be, shall have no obligation to recognize any transfer of any Claims or Equity Interests occurring after the close of business on the Distribution Record Date, and shall instead be entitled to recognize and deal for all purposes under the Plan (except as to voting to accept or reject the Plan pursuant to Section 6.1 of the Plan) with only those holders of record as of the close of business on the Distribution Record Date. 73 Except as to applications for allowances of compensation and reimbursement of expenses under Sections 330 and 503 of the Bankruptcy Code (with respect to which procedures respecting objections shall be governed by Section 2.1(b) of the Plan and the Confirmation Order or other Final Order), the Debtors or Reorganized Debtors shall have the exclusive right to make and file objections to Administrative Expense Claims, Claims and Equity Interests subsequent to the Confirmation Date. All objections shall be litigated to Final Order; provided, however, that the Reorganized Debtors shall have the authority to compromise, settle, otherwise resolve or withdraw any objections, subject to approval of the Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court, the Debtors or Reorganized Debtors shall file all objections to Administrative Expense Claims that are the subject of proofs of claim or requests for payment filed with the Bankruptcy Court (other than applications for allowances of compensation and reimbursement of expenses), Claims and Equity Interests and serve such objections upon the holder of the Administrative Expense Claim, Claim or Equity Interest as to which the objection is made as soon as is practicable, but in no event later than 60 days after the Effective Date or such later date as may be approved by the Bankruptcy Court. 14. Avoidance and Recovery Actions ------------------------------ As of and subject to the occurrence of the Effective Date, the Debtors and the Reorganized Debtors, for and on behalf of themselves and their Estates, will waive and release any of the Causes of Action under Sections 510, 544, 547, 548, 550 and 553 of the Bankruptcy Code. 74 15. Retention of Jurisdiction ------------------------- The Bankruptcy Court shall have exclusive jurisdiction of all matters arising out of, and related to, the Chapter 11 Cases and the Plan pursuant to, and for the purposes of, Sections 105(a) and 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) to hear and determine any and all objections to the allowance of any Claims or any controversies as to the classification of any Claims, provided that only Debtors may file objections to Claims; (b) to hear and determine any and all applications by Pro- fessionals for compensation and reimbursement of expenses; (c) to hear and determine any and all pending applications for the rejection and disaffirmance of executory contracts and unexpired leases, and fix and allow any Claims resulting therefrom; (d) to liquidate any Disputed Claim; (e) to enforce the provisions of the Plan, including the injunction, exculpation and releases provided for in the Plan; (f) to enable the Debtors to prosecute any and all proceed- ings which have been or may be brought prior to the Effective Date to set aside liens or encumbrances and 75 to recover any transfers, assets, properties, or damages to which the Debtors may be entitled under applicable provisions of the Bankruptcy Code or any federal state, or local laws; (g) to correct any defect, cure any omission, or reconcile any inconsistency in the Plan or in the Confirmation Order as may be necessary to carry out its purpose and the intent of the Plan; (h) to determine any Claim or liability to a governmental unit which may be asserted as a result of the transactions contemplated herein; (i) to hear and determine matters concerning state, local, and federal taxes in accordance with Sections 346, 505 and 1146 of the Bankruptcy Code; and (j) to determine such other matters as may be provided for in the Confirmation Order or as may be authorized under the provisions of the Bankruptcy Code. 16. Executory Contracts and Unexpired Leases ---------------------------------------- Any unexpired lease or executory contract that has not been ex- pressly rejected by the Debtors or treated in the Plan with the Bankruptcy Court's approval on or prior to the Confirmation Date shall, as of the Confirmation Date (subject to the occurrence of the Effective Date), be deemed to have been assumed by the Debtors unless there is pending before the Bankruptcy Court on the Confirmation Date a motion to reject such unexpired lease or executory contract or such executory contract or unexpired lease is otherwise designated for rejection; provided that (a) such lease or executory contract is ultimately rejected and (b) the 76 filing of the Confirmation Order shall be deemed to be a rejection of all then outstanding unexercised stock options, warrants and similar rights. In accordance with Section 1123(a)(5)(G) of the Bankruptcy Code, on the Effective Date, or as soon as practicable thereafter, the Reorganized Debtors shall cure all defaults under any executory contract or unexpired lease assumed pursuant to the Plan by making a Cash payment in an amount agreed to between the Reorganized Debtors and the claimant, or as otherwise fixed pursuant to a Final Order. 17. Bar Date for Filing Proofs of Claims Relating to Executory Contracts and Unexpired Leases Rejected Pursuant to the Plan ------------------------------------------------------------ Claims arising out of the rejection of an executory contract or unexpired lease designated for rejection pursuant to the Confirmation Order must be filed with the Bankruptcy Court and/or served upon the Debtors or Reorganized Debtors or as otherwise may be provided in the Confirmation Order by no later than 30 days after the notice of entry of an order approving such rejection. Any Claims not filed within such time will be forever barred from assertion against the Debtors, their estates, the Reorganized Debtors and their property, and the holders thereof shall not be entitled to any distribution under the Plan or otherwise from the Debtors or Reorganized Debtors. Unless otherwise ordered by the Bankruptcy Court, all Claims arising from the rejection of executory contracts and unexpired leases shall be treated as General Unsecured Claims under the Plan. 77 18. Indemnification Claims ---------------------- (a) Notwithstanding anything to the contrary contained herein, all Persons holding or asserting Indemnification Claims (whether directly, by subrogation or otherwise) shall be entitled to obtain recovery on account of such Claims solely from the proceeds of any applicable directors' and officers' insurance policy maintained by the Debtors or Reorganized Debtors, as the case may be, and shall not, under any circumstances, be entitled to obtain a recovery in respect of such Indemnification Claims from the Reorganized Debtors; provided, however, that the Reorganized Debtors shall remain responsible for, and shall pay, in respect of any and all Indemnification Claims, all retention amounts and coinsurance obligations arising under, or necessary to maintain, its directors' and officers' insurance policies. The Debtors or Reorganized Debtors, as the case may be, shall continue and maintain all presently existing directors' and officers' insurance policies, and all such policies shall remain in full force and effect following Confirmation. The Debtors shall maintain any prior directors' and officers' insurance policies and renew existing policies as they expire at comparable or greater coverage levels. (b) As set forth in Section 7.3(b) of the Plan, in the event that: (i) the Bankruptcy Court does not approve any or all of the material provisions of Article 9 of the Plan (i.e., releases and injunctions), and (ii) the Plan is not terminated pursuant to Section 12.5 78 thereof, then all Indemnification Claims shall be assumed by the Reorganized Debtors without limitation.9 19. Compensation and Benefit Programs --------------------------------- Except as otherwise provided in the Plan, all employment and severance practices and policies and all compensation and benefit plans, policies, and programs of the Debtors applicable to their directors, officers or employees, including, without limitation, all savings plans, retirement plans, health care plans, severance benefit plans, incentive plans, workers' compensation programs and life, disability and other insurance plans are treated either as executory contracts pursuant to Section 7.1 of the Plan or as permitted under applicable non-bankruptcy law. Included in the foregoing compensation and benefit plans to be assumed pursuant to the Plan is the Debtors' 1999 Bonus Plan. Pursuant to the Debtors' 1999 Bonus Plan, senior and certain middle level management of the Debtors are eligible to receive a bonus if certain performance targets are obtained by the Debtors. Such participants are classified into one of five groups, based on employment position, and, depending on the group in which they are classified, are eligible to receive bonuses in varying percentages of their base salary depending upon the level of operating performance achieved. - -------- 9 The Informal Committees, under the Plan, have the right to cause the Plan to not become effective if Section 7.3(b) is made relevant and enforceable, and have advised the Debtors that, as of the date hereof, they would cause the Plan to not become effective in such event. 79 20. Retiree Benefits ---------------- Payment of any Retiree Benefits shall be continued solely to the extent, and for the duration of the period, the Debtors are contractually or legally obligated to provide such benefits, subject to any and all rights of the Debtors under applicable law. 21. Post-Confirmation Fees, Final Decree ------------------------------------ The Reorganized Debtor shall be responsible for the payment of any post-confirmation fees due pursuant to 28 U.S.C.ss. 1930(a)(6) and the filing of post-confirmation reports, until a final decree is entered. A final decree shall be entered as soon as practicable after distributions have commenced under the Plan. 22. Continuation of Bankruptcy Injunction or Stays ---------------------------------------------- All injunctions or stays provided for in the Chapter 11 Cases under Sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. 23. Revesting of Assets ------------------- Except as otherwise provided by the Plan, upon the Effective Date, title to all properties and assets dealt with by the Plan shall pass to the Reorganized Debtors free and clear of all Claims, Liens, encumbrances and interests of creditors and of equity security holders (except those Claims, Liens, encumbrances and interests created pursuant to this Plan) and the 80 Confirmation Order shall be a judicial determination of discharge and extinguishment of all Claims, Liens or Equity Interests (except those created pursuant to this Plan). 24. General Release of Liens ------------------------ Except as otherwise provided in the Plan in connection with the New Senior Notes and the Post-Effective Date Financing Facility, or in any contract, instrument, indenture or other agreement or document created in connection with the Plan or the implementation thereof, on the Effective Date, all mortgages, deeds of trust, liens or other security interests against property of the Estates are released and extinguished, and all the right, title and interest of any holder of such mortgages, deeds of trust, liens or other security interests will revert to the Reorganized Debtors as applicable, and the successors and assigns thereof. 25. Conditions to Effective Date of the Plan ---------------------------------------- The Plan shall not become effective unless and until the following conditions shall have been satisfied or waived pursuant to Section 10.3 of the Plan: (a) the Confirmation Order and the Substantive Consolidation Order, in form and substance reasonably acceptable to the Debtors, GPH, and the Informal Committees, shall have been entered contemporaneously by the Bankruptcy Court and shall have become a Final Order; (b) the Reorganized Debtors shall have credit availability under the Post-Effective Date Financing Facility to provide the Reorganized Debtors with financing 81 sufficient to meet their Cash obligations under the Plan and their business requirements as of and after the Effective Date; (c) each of the Plan Documents and the New Parent Common Stock, New Senior Notes and New Warrants, in form and substance reasonably acceptable to the Debtors, GPH, and the Informal Committees, shall have been effected or executed and delivered and the New Common Stock, New Senior Notes and New Warrants shall be validly issued and outstanding; and (d) if the Indemnification Claims are to be assumed by the Reorganized Debtors pursuant to Section 7.3(b) hereof or otherwise, then each of the Informal Committees shall have consented to such assumption; and (e) all actions, other documents and agreements necessary to implement the Plan shall have been effected or executed and delivered. In the event that one or more of the conditions specified in Section 10.1 of the Plan have not occurred on or before 120 days after the Confirmation Date, upon notification submitted by the Debtors to the Bankruptcy Court (a) the Confirmation Order shall be vacated, (b) no distributions under the Plan shall be made, (c) the Debtors and all holders of Claims and Equity Interests shall be restored to the status quo ante as of the day immediately preceding the Confirmation Date as though the Confirmation Date never occurred and (d) the Debtors' obligations with respect to the Claims and Equity Interests shall remain unchanged and nothing contained herein shall constitute or be deemed a waiver or release of any Claims or Equity 82 Interests by or against the Debtors or any other Person or to prejudice in any manner the rights of the Debtors or any Person in any further proceedings involving the Debtors. Upon written consent of each of the Informal Committees and GPH, the Debtors may waive, by a writing signed by an authorized representative of the Debtors and subsequently filed with the Bankruptcy Court, one or more of the conditions precedent to effectiveness of the Plan as set forth above. G. Post-Confirmation Officers and Directors The officers of the respective Debtors immediately prior to the Effective Date shall serve as the initial officers of the respective Reorganized Debtors on and after the Effective Date. Set forth below is the name, compensation and position of Reorganized Parent's key officers on the Effective Date. 83 Post-Confirmation Name Title Base Salary ---- ----- ----------------- Richard E. Snyder Chairman of the Board and $750,000 Chief Executive Officer Philip Galanes Executive Vice President, $350,000 Chief Administrative Officer, General Counsel and Secretary Richard K. Collins Executive Vice President, $350,000 and Chief Operating Officer Colin Finkelstein Executive Vice President and $300,000 Chief Financial Officer In addition to the post-confirmation base salary set forth above, such officers (and certain other employees) will also be entitled to participate in the Debtors' 1999 Bonus Plan as set forth in Section IV.F.19. hereof. The initial members of the post-Confirmation board of directors of Reorganized Parent shall consist of the following: (i) Richard E. Snyder, (ii) three (3) members selected by the Informal TOPrS Committee, and (iii) three (3) members selected by the Informal Senior Note Committee; provided, however, that (i) the nominees of each Informal Committee shall be reasonably acceptable to the other Informal Committee, and (ii) each of the nominees of the Informal Committees shall be discussed, prior to formal nomination, among the Informal Committees and current management of the Debtors. The designation of the board members selected by the Informal Committees, along with the designation of the board members for Reorganized Publishing and Reorganized Video, shall be filed with the Bankruptcy Court on 84 or prior to the commencement date of the Confirmation Hearing, or such later date as the Bankruptcy Court may establish. V. ACCEPTANCE AND CONFIRMATION OF THE PLAN The following is a brief summary of the provisions of the Bankruptcy Code respecting acceptance and confirmation of a plan of reorganization. Holders of Claims and Equity Interests are encouraged to review the relevant provisions of the Bankruptcy Code and/or to consult their own attorneys. A. Acceptance of the Plan This Disclosure Statement is provided in connection with the solicitation of acceptances of the Plan. The Bankruptcy Code defines acceptance of a plan of reorganization by a class of Claims as acceptance by holders of at least two-thirds in dollar amount, and more than one-half in number, of the allowed Claims of that class that have actually voted or are deemed to have voted to accept or reject a plan. The Bankruptcy Code defines acceptance of a plan of reorganization by a class of interests as acceptance by at least two-thirds in amount of the allowed interests of that class that have actually voted or are deemed to have voted to accept or reject a plan. If one or more impaired Classes rejects the Plan, the Debtors may, in their discretion, nevertheless seek confirmation of the Plan if the Debtors believe that they will be 85 able to meet the requirements of Section 1129(b) of the Bankruptcy Code for Confirmation of the Plan (which are set forth below), despite lack of acceptance by all impaired classes. B. Confirmation 1. Confirmation Hearing -------------------- Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of a plan. Notice of the Confirmation Hearing of the Plan has been provided to all known holders of Claims and Equity Interest or their representatives along with this Disclosure Statement. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or any subsequent adjourned Confirmation Hearing. Section 1128(b) of the Bankruptcy Code provides that any party in interest may object to confirmation of a plan. Any objection to Confirmation of the Plan must be in writing, must conform with the Bankruptcy Rules and the Local Rules of the Bankruptcy Court, must set forth the name of the objectant, the nature and amount of Claims or Equity Interests held or asserted by the objectant against the Debtors' Estates or property, and the basis for the objection and the specific grounds in support thereof. Such objection must be filed with the Bankruptcy Court, with a copy forwarded directly to the Chambers of the Honorable Tina L. Brozman, together with proof of service thereof, and served upon (a) counsel to the Debtors, Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, Attn: Alan B. Hyman, Esq.; Scott K. 86 Rutsky, Esq., (b) counsel to the Informal Senior Note Committee, Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038-4982, Attn: Fred S. Hodara, Esq., (c) counsel to the Informal TOPrS Committee, Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006-1470, Attn: James E. Millstein, Esq., and (d) counsel to GPH, Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019, Attn: Marc Abrams, Esq., so as to be received no later than the date and time designated in the notice of the Confirmation Hearing. 2. Statutory Requirements for Confirmation of the Plan --------------------------------------------------- At the Confirmation Hearing, the Debtors will request that the Bankruptcy Court determine that the Plan satisfies the requirements of Section 1129 of the Bankruptcy Code. If so, the Bankruptcy Court shall enter an order confirming the Plan. The applicable requirements of Section 1129 of the Bankruptcy Code are as follows: (a) The Plan must comply with the applicable provisions of the Bankruptcy Code; (b) The Debtors must have complied with the applicable provisions of the Bankruptcy Code; (c) The Plan has been proposed in good faith and not by any means forbidden by law; 87 (d) Any payment made or promised to be made by the Debtors under the Plan for services or for costs and expenses in, or in connection with, these Chapter 11 cases, or in connection with the Plan and incident to the Reorganization Cases, has been disclosed to the Bankruptcy Court, and any such payment made before Confirmation of the Plan is reasonable, or if such payment is to be fixed after Confirmation of the Plan, such payment is subject to the approval of the Bankruptcy Court as reasonable; (e) The Debtors have disclosed the identity and affiliations of any individual proposed to serve, after Confirmation of the Plan, as a director, officer, or voting trustee of each of the Debtors under the Plan. Moreover, the appointment to, or continuance in, such office of such individual, is consistent with the interests of holders of Claims and Equity Interests and with public policy, and the Debtors have disclosed the identity of any insider that the Reorganized Debtors will employ or retain, and the nature of any compensation for such insider; (f) Best Interests of Creditors Test. With respect to each Class of impaired Claims or Equity Interests, either each holder of a Claim or Equity Interest of such Class has accepted the Plan, or will receive or retain under the Plan on account of such Claim or Equity Interest, property of a value, as of the Effective Date of the Plan, that is not less than the amount that such holder would receive or retain if the Debtors were liquidated on such date under Chapter 7 of the Bankruptcy Code. In a Chapter 7 liquidation, creditors and interest holders of a debtor are paid from available assets generally in the following order, with no lower class receiving any payments until all amounts due to senior classes have either been paid in full 88 or payment in full is provided for: (i) first to secured creditors (to the extent of the value of their collateral), (ii) next to priority creditors, (iii) next to unsecured creditors, (iv) next to debt expressly subordinated by its terms or by order of the Bankruptcy Court, and (v) last to holders of equity interests. Attached hereto as Exhibit E is a liquidation analysis prepared by the Debtors. As set forth therein, in light of the foregoing priority, the Debtors believe that if the Chapter 11 cases were converted to a Chapter 7 liquidation, holders of Old Senior Note Claims, TOPrS Claims, GPH Claims, General Unsecured Claims and Equity Interests would receive less than they will receive under the Plan; (g) Each Class of Claims or Equity Interests has either ac- cepted the Plan or is not impaired under the Plan; (h) Except to the extent that the holder of a particular Claim has agreed to a different treatment of such Claim, the Plan provides that Allowed Administrative and Priority Claims (other than Allowed Priority Tax Claims) willbe paid in full on the Effective Date and that Allowed Priority Tax Claims will receive on account of such Claims deferred Cash payments, over a period not exceeding six years after the date of assessment of such Claim, of a value, as of the Effective Date, equal to the Allowed amount of such Claim; (i) At least one impaired class of Claims has accepted the Plan, determined without including any acceptance of the Plan by any insider holding a Claim of such Class; 89 (j) Feasibility. Confirmation of the Plan is not likely to be followed by the liquidation, or the need for further financial reorganization of the Debtors or any successor to the Debtors under the Plan. Attached hereto as Exhibit F are projections for approximately ____ years following confirmation and a pro forma balance sheet as of the Effective Date which demonstrate that, given estimated expenses and income, and taking into account cash reserves, the Reorganized Debtors will be able to satisfy their obligations under the Plan, as well as their obligations arising in connection with their ongoing business operations. 3. Confirmation Without Acceptance by All Impaired Classes ------------------------------------------------------- Section 1129(b) of the Bankruptcy Code allows a Bankruptcy Court to confirm a plan, even if such plan has not been accepted by all impaired classes entitled to vote on such plan, provided that such plan has been accepted by at least one impaired class. If any impaired classes reject or are deemed to have rejected the Plan, the Debtors reserve their right to seek the application of the statutory requirements set forth in Section 1129(b) of the Bankruptcy Code for Confirmation of the Plan despite the lack of acceptance by all impaired classes. Section 1129(b) of the Bankruptcy Code provides that notwithstanding the failure of an impaired class to accept a plan of reorganization, the plan shall be confirmed, on request of the proponent of the plan, in a procedure commonly known as "cram-down," so long as the plan does not "discriminate unfairly" and is "fair and equitable" with respect to each class of Claims or interests that is impaired under and has not accepted the plan. 90 The condition that a plan be "fair and equitable" with respect to a non-accepting class of secured Claims includes the requirements that (a) the holders of such secured Claims retain the liens securing such Claims to the extent of the allowed amount of the Claims, whether the property subject to the liens is retained by the debtor or transferred to another entity under the plan, and (b) each holder of a secured Claim in the class receive deferred cash payments totaling at least the allowed amount of such Claim with a present value, as of the effective date of the plan, at least equivalent to the value of the secured claimant's interest in the debtor's property subject to the liens. The condition that a plan be "fair and equitable" with respect to a non-accepting class of unsecured Claims includes the requirement that either (a) such class receive or retain under the plan property of a value as of the effective date of the plan equal to the allowed amount of such Claim, or (b) if the class does not receive such amount, no class junior to the non-accepting class will receive a distribution under the plan. The condition that a plan be "fair and equitable" with respect to a non-accepting class of equity interests includes the requirements that either (a) the plan provides that each holder of an equity interest in such class receive or retain under the plan, on account of such equity interest, property of a value, as of the effective date of the plan, equal to the greater of (i) the allowed amount of any fixed liquidation preference to which such holder is entitled, (ii) any fixed redemption price to which such holder is entitled, or (iii) the value of such equity interest, or (b) if the class does not receive such amount, no class of equity interests junior to the non-accepting class will receive a distribution under the plan. 91 VI. VALUATION [to be filed with the Bankruptcy Court prior to the hearing to consider approval of the Disclosure Statement] VII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN [to be filed with the Bankruptcy Court prior to the hearing to consider approval of the Disclosure Statement] VIII. RISK FACTORS HOLDERS OF OLD SENIOR NOTES, TOPrS CERTIFICATES, GPH NOTES, HOLDERS OF EQUITY INTERESTS AND ALL OTHER IMPAIRED CREDITORS SHOULD READ AND CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT (AND THE DOCUMENTS DELIVERED TOGETHER HEREWITH AND/OR INCORPORATED BY REFERENCE HEREIN), PRIOR TO VOTING TO ACCEPT OR REJECT THE PLAN. 92 A. Leverage Although the Plan will restructure a significant amount of the Debtors' indebtedness, the Reorganized Debtors will remain leveraged. The degree to which the Reorganized Debtors are leveraged could have important consequences, including the following: (i) the Reorganized Debtors' ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions, general corporate purposes or other purposes may be impaired, (ii) a substantial portion of the Reorganized Debtors' cash flow from operations could be dedicated to the payment of the principal of and interest on its indebtedness, and (iii) the Reorganized Debtors' degree of leverage may make it more vulnerable to economic downturns and may limit its ability to withstand competitive pressures. B. Dependence on Key Personnel The Debtors are dependent on the continued services of certain senior executives, including Richard E. Snyder, Chairman of the Board and Chief Executive Officer of Parent; Philip Galanes, Executive Vice President, Chief Administrative Officer, General Counsel and Secretary of Parent; Colin Finkelstein, Executive Vice President and Chief Financial Officer of Parent; and Richard Collins, Executive Vice President and Chief Operating Officer of Parent. The Debtors believe the loss of the services of one or more of these individuals could have a material adverse effect on the Reorganized Debtors. 93 C. Dependence On and Relationships with Key Customers and Licensors The loss of the sales to any of the Debtors' largest customers would cause a substantial decrease in business and would have a material adverse effect on the Debtors. Additionally, the Debtors believe that the variety and popularity of characters (whether licensed or owned) is among the most important factors that differentiate their products from those of their competitors. The loss of any principal licenses would have a material adverse effect on the Debtors. In addition, the loss of a significant license by the Debtors would impair its distribution capabilities which, in turn, could adversely affect its ability to obtain new licenses and to renew existing licenses on favorable terms, if at all. The Debtors' relationships with a number of its significant customers and licensors have been contentious from time to time because of disputes, in the case of its customers, relating to prior pricing, return and merchandising policies and, in the case of its licensors, alleged non-compliance by the Debtors with certain license terms. While management has taken steps to repair these relationships, there can be no assurance that such relationships, or other relationships with customers and/or licensors, will not again become contentious in the future, which could have a material adverse effect on the Debtors. D. Competitive Conditions The children's publishing market is highly competitive. Competition is based primarily on price, quality, distribution, marketing and licenses. In mass market sales, the Debtors face competition primarily from smaller competitors. In the trade and speciality trade 94 categories, Golden Books' principal competitors are large publishing companies. Golden Books 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 Golden Books. The market for licenses also is highly competitive and Golden Books 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 Golden Books' significant competitors have greater financial resources than Golden Books and, in selected markets, greater experience than Golden Books. E. Risks Relating to Intellectual Properties The value of the materials in Golden Books' library, both to Golden Books as a licensor and as an end user, is subject to consumer taste. There can be no assurance that these properties will be attractive to third-party licensees or that they will be suitable for inclusion in Golden Books' products. If properties that are being exploited cease to be attractive to third-party licensees, licensing revenue from such licenses will decrease. In view of the complex nature of Golden Books' intellectual property rights, there is a risk of third-parties asserting claims of ownership or infringement or asserting a right to payment with respect to the exploitation of such properties. There can be no assurance that Golden Books would prevail in any such claim. In addition, Golden Books' ability to 95 demonstrate, maintain or enforce these rights may be difficult. Impairments or difficulties in demonstrating the Golden Books' ownership or license rights in such properties could adversely affect the ability of Golden Books to generate revenue from or use such properties. In many cases, the rights owned or being acquired by Golden Books are limited in scope, do not extend to exploitation in all present or future media or in perpetuity and may not include the right to create derivative works, such as merchandising and character rights, remakes or sequels. F. Projected Financial Information The Debtors failed to operate profitably for several years preceding the Chapter 11 filing. The financial projections annexed as Exhibit F to this Disclosure Statement are dependent upon the successful implementation of the business plan and the validity of the other assumptions contained therein. These projections reflect numerous assumptions, including Confirmation and consummation of the Plan in accordance with its terms, the anticipated future performance of the Debtors, industry performance, certain assumptions with respect to competitors of the Debtors, general business and economic conditions, and other matters, many of which are beyond the control of the Debtors. In addition, unanticipated events and circumstances occurring subsequent to the preparation of the projections may affect the actual financial results of the Debtors. Although the Debtors believe that the projections are reasonably attainable, variations between the actual financial results and those projected may occur and be material. 96 G. Lack of Market for Securities Issued Pursuant to Plan There is no currently existing market for the New Senior Notes, New Parent Common Stock or New Warrants and there can be no assurance that an active trading market will develop or as to the degree of price volatility in any such particular market. Accordingly, no assurance can be given that a holder of securities issued pursuant to the Plan will be able to sell such securities in the future or as to the price at which any such sale may occur. If such market were to exist, the liquidity of the market for such securities and the prices at which such securities will trade will depend upon many factors, including the number of holders, investor expectations for the Debtors, and other factors beyond the Debtors' control. H. Certain Bankruptcy Related Considerations 1. Risk of Non-Confirmation of the Plan ------------------------------------ Although the Debtors believes that the Plan will satisfy all requirements necessary for Confirmation by the Bankruptcy Court, there can be no assurance that the Bankruptcy Court will reach the same conclusion. There can also be no assurance that modifications of the Plan will not be required for Confirmation, that such negotiations would not adversely affect the holders of the Old Senior Notes, TOPrS Certificates, GPH Notes, or Equity Interests or that such modifications would not necessitate the resolicitation of votes. 97 2. Nonconsensual Confirmation -------------------------- In the event any impaired class of claims or equity interests does not accept a plan of reorganization, a bankruptcy court may nevertheless confirm such plan of reorganization at the proponent's request if at least one impaired class has accepted the plan of reorganization (with such acceptance being determined without including the acceptance of any "insider" in such class) and, as to each impaired class which has not accepted the plan of reorganization, the bankruptcy court determines that the plan of reorganization "does not discriminate unfairly" and is "fair and equitable" with respect to non-accepting impaired classes. In the event that any impaired Class of Claims or Equity Interests fails to accept the Plan in accordance with Section 1129(a)(8) of the Bankruptcy Code, the Debtors reserve the right to request nonconsensual Confirmation of the Plan in accordance with Section 1129(b) of the Bankruptcy Code. I. Dividends The Debtors presently intend to retain earnings, if any, for working capital and to fund capital expenditures. Accordingly, there is no present intention to pay Cash dividends on any shares of New Parent Common Stock. 98 IX. EXEMPTIONS FROM SECURITIES ACT REGISTRATION; REGISTRATION RIGHTS The Plan contemplates the issuance of certain securities to holders of Allowed Claims and Allowed Equity Interests. Section 1145 of the Bankruptcy Code creates certain exemptions from the registration and licensing requirements of federal and state securities laws with respect to the issuance and distribution of securities by a debtor under a plan of reorganization to holders of claims or interests wholly or principally in exchange for those claims or interests. A. Issuance of New Securities Pursuant to the Plan With respect to the New Senior Notes, New Parent Common Stock and New Warrants to be issued on the Effective Date, the Debtors intend to rely upon the exemption from the registration requirements of the Securities Act (and the equivalent state securities or "blue sky" laws) provided by Section 1145(a)(1) of the Bankruptcy Code. Generally, Section 1145(a)(1) of the Bankruptcy Code exempts the issuance of securities from the requirements of the Securities Act and the equivalent state securities and "blue sky" laws if the following conditions are satisfied (i) the securities are issued by a debtor, an affiliate participating in a joint plan of reorganization with the debtor, or a successor of the debtor under a plan of reorganization, (ii) the recipients of the securities hold a claim against, an interest in, or a claim for an administrative expense against, the debtor, and (iii) the securities are issued entirely in 99 exchange for the recipient's claim against or interest in the debtor, or are issued "principally" in such exchange and "partly" for Cash or property. The Debtors believe that the issuance of securities contemplated by the Plan will satisfy the aforementioned requirements and therefore is exempt from federal and state securities law, although as discussed in Section B below, under certain circumstances, subsequent transfers of such securities may be subject to registration requirements under such securities laws. B. Subsequent Transfer of Securities Issued Under the Plan The securities issued pursuant to the Plan may be resold by the holders thereof without restriction unless, as more fully described below, any such holder is deemed to be an "underwriter" with respect to such securities, as defined in Section 1145(b)(1) of the Bankruptcy Code. Generally, Section 1145(b)(1) of the Bankruptcy Code defines an "underwriter" as any person who (1) purchases a claim against, or interest in, a bankruptcy case, with a view towards the distribution of any security to be received in exchange for such claim or interest, (2) offers to sell securities issued under a bankruptcy plan on behalf of the holders of such securities, (3) offers to buy securities issued under a bankruptcy plan from persons receiving such securities, if the offer to buy is made with a view towards distribution of such securities, or (4) is an issuer as contemplated by Section 2(11) of the Securities Act. Although the definition of the term "issuer" appears in Section 2(4) of the Securities Act, the reference (contained in Section 1145(b)(1)(D) of the Bankruptcy Code) to Section 2(11) of the Securities Act purports to include as "underwriters" all persons who, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with, an issuer of 100 securities. "Control" (as such term is defined in Rule 405 of Regulation C under the Securities Act) means the possession, direct or indirect, of the power to direct or cause the direction of the policies of a person, whether through the ownership of voting securities, by contract or otherwise. Accordingly, an officer or director of a reorganized debtor (or its successor) under a plan of reorganization may be deemed to be a "control person," particularly if such management position is coupled with the ownership of a significant percentage of the debtor's (or successor's) voting securities. Moreover, the legislative history of Section 1145 of the Bankruptcy Code suggests that a creditor who owns at least 10% of the voting securities of a reorganized debtor may be presumed to be a "control person." C. Registration Rights As discussed above, although upon their issuance pursuant to Section 1145(a)(1) of the Bankruptcy Code the New Senior Notes, New Warrants and shares of New Parent Common Stock may generally be resold by the holders thereof without registration under the Securities Act (or under equivalent state securities or "blue sky" laws), a holder may be unable to resell his or its securities if such holder is deemed to be (a) an "underwriter" within the meaning of Section 1145(b)(1) of the Bankruptcy Code, or (b) an "affiliate" or "control person" of the Debtors within the meaning of the Securities Act. In order to enable holders of New Parent Common Stock, New Warrants and New Senior Notes to sell their securities without restriction (and to obviate the need to satisfy the requirements relating to applicable exemptions from federal and state securities law registration), the Debtors have agreed to provide certain holders of New Parent Common Stock, New Warrants and New Senior Notes with certain 101 registration rights under an agreement which will be entered into among such holders and the Reorganized Debtors on and after the Effective Date. THE FOREGOING SUMMARY DISCUSSION IS GENERAL IN NATURE AND HAS BEEN INCLUDED IN THIS DISCLOSURE STATEMENT SOLELY FOR INFORMATIONAL PURPOSES. THE DEBTORS MAKE NO REPRESENTATIONS CONCERNING, AND DO NOT HEREBY PROVIDE ANY OPINION OR ADVICE WITH RESPECT TO, THE SECURITIES LAW AND BANKRUPTCY LAW MATTERS DESCRIBED ABOVE. IN LIGHT OF THE COMPLEX AND SUBJECTIVE INTERPRETIVE NATURE OF WHETHER A PARTICULAR RECIPIENT OF SECURITIES UNDER THE PLAN MAY BE DEEMED TO BE AN "UNDERWRITER" WITHIN THE MEANING OF SECTION 1145(b)(1) OF THE BANKRUPTCY CODE AND/OR AN "AFFILIATE" OR "CONTROL PERSON" UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND, CONSEQUENTLY, THE UNCERTAINTY CONCERNING THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND EQUIVALENT STATE SECURITIES AND "BLUE SKY" LAWS, GOLDEN BOOKS ENCOURAGES POTENTIAL RECIPIENTS OF NEW SENIOR NOTES, NEW WARRANTS AND NEW PARENT COMMON STOCK TO CONSIDER CAREFULLY AND CONSULT WITH HIS, HER, OR ITS OWN LEGAL ADVISOR(S) WITH RESPECT TO SUCH (AND ANY RELATED) MATTERS. 102 X. ALTERNATIVES TO THE PLAN AND CONSEQUENCES OF REJECTION Among the possible consequences if the Plan is rejected or if the Bankruptcy Court refuses to confirm the Plan are the following: (1) an alternative plan could be proposed or confirmed; or (2) the Chapter 11 Cases could be converted to liquidation cases under Chapter 7 of the Bankruptcy Code. A. Alternative Plans As previously mentioned, with respect to an alternative plan, the Debtors and their professional advisors have explored various alternative scenarios and believe that the Plan enables the holders of Claims and Equity Interests to realize the maximum recovery under the circumstances. The Debtors believe the Plan is the best plan that can be proposed and serves the best interests of the Debtors and other parties-in-interest. B. Chapter 7 Liquidation For a discussion of a Chapter 7 liquidation, see Section V(B)(2) above entitled "Acceptance and Confirmation of the Plan -- Confirmation -- Statutory Requirement for Confirmation of the Plan." 103 XI. RECOMMENDATION AND CONCLUSION The Debtors, the Informal Senior Note Committee and the Informal TOPrS Committee, and their respective professional advisors, have analyzed different scenarios and believe that the Plan will provide for a larger distribution to holders of Claims and Equity Interests than would otherwise result if an alternative restructuring plan were proposed or the assets of the Debtors were liquidated. In addition, any alternative other than Confirmation of the Plan could result in extensive delays and increased administrative expenses resulting in potentially smaller distributions to the holders of Claims and Equity Interests. Accordingly, the Debtors, the Informal Senior Note Committee and the Informal TOPrS Committee recommend confirmation of the Plan and urge all holders of impaired Claims and Equity Interests to vote to 104 accept the Plan, and to evidence such acceptance by returning their Ballots so that they will be received by no later than the Voting Deadline. Date: New York, New York March 25, 1999 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC., (for itself and on behalf of each of the above-captioned Debtors and Debtors-in-Possession) By: /s/ Richard E. Snyder --------------------- Richard E. Snyder Chairman of the Board and Chief Executive Officer PROSKAUER ROSE LLP Counsel to the Debtors and Debtors-in-Possession By: /s/ Alan B. Hyman ----------------- Alan B. Hyman (AH-6655) A Member of the Firm 1585 Broadway New York, New York 10036 (212) 969-3000 105 TABLE OF CONTENTS Page I. INTRODUCTION AND SUMMARY..................................................1 A. Overview.............................................................1 B. Summary of Classification and Treatment Under the Plan...............2 C. Voting and Confirmation Procedures..................................12 1. Who May Vote...................................................14 2. Voting Instructions............................................14 3. Acceptance or Rejection of the Plan............................16 4. Confirmation Hearing...........................................17 5. Objections.....................................................17 II. BACKGROUND AND EVENTS PRECIPITATING CHAPTER 11 FILING AND SOLICITATION......................................18 A. Overview of the Debtors and their Business Operations...............18 1. Children's Publishing Division.................................19 2. Adult Publishing Division......................................20 3. Entertainment Group Division...................................20 4. Commercial Printing Division...................................21 B. Pre-Petition Debt Structure of the Debtors..........................21 1. Pre-Petition Working Capital Facility..........................21 2. The Old Senior Notes...........................................23 3. GPH Claims.....................................................24 4. TOPrS Certificates.............................................25 C. Pre-Petition Capital Structure......................................26 D. Events Precipitating Chapter 11 Filing..............................27 E. Pre-Petition Asset Disposition and Expense Reduction Efforts........33 III. SIGNIFICANT POST-PETITION EVENTS.....................................33 A. Commencement Of Chapter 11 Cases................................33 B. First Day Orders................................................34 C. Professional Retentions.........................................34 D. Post-Petition Financing.........................................35 E. Sale of Assets of the Adult Publishing Division.................36 IV. OVERVIEW OF THE PLAN.................................................37 A. General.........................................................37 B. Classification of Claims and Equity Interests...................38 C. Treatment of Claims and Equity Interests Under the Plan.........40 1. Unclassified Categories of Claims.........................41 a. Category 1 -- Administrative Expense Claims...............41 i b. Category 2-- Priority Tax Claims..........................43 2. Unimpaired Classes of Claims...................................44 a. Class 1-- Priority Claims..............................44 b. Class 2-- General Secured Claims.......................45 c. Class 6-- General Unsecured Claims.....................46 d. Class 11-- Subsidiary Equity Interests.................47 3. Impaired Classes.......................................47 a. Class 3--Old Senior Note Claims........................47 b. Class 4--GPH Claims....................................51 c. Class 5--TOPrS Claims..................................52 d. Class 7--Debt Securities Rescission or Damage Claims...53 e. Class 8--Old Preferred Stock Interests.................54 f. Class 9--Old Common Stock Interests....................54 g. Class 10--Equity Interest Rescission or Damage Claims..55 D. Description of Transactions to Be Implemented in Connection with the Plan...............................................56 1. New Senior Notes...................................56 2. New Warrants.......................................56 3. Reorganized Debtors' Charters......................57 4. Management Stock Option Plan.......................57 a. Richard E. Snyder (Chief Executive Officer)........57 b. Richard K. Collins (Chief Operating Officer), Philip Galanes (Chief Administrative Officer) and Colin Finkelstein (Chief Financial Officer)........58 c. Other Grants.......................................58 5. Cancellation and Surrender of Existing Securities and Agreements.....................................58 6. Employment Contracts...............................60 7. Registration Rights Agreements.....................61 8. Substantive Consolidation..........................61 E. Funding for the Plan........................................63 F. Description of Other Provisions of the Plan.................63 1. Disputed Claims....................................63 2. Disputed Payments..................................64 3. Unclaimed Property.................................64 4. Issuance of New Securities.........................64 5. Discharge..........................................65 6. Termination of Subordination Rights and Settlement of Related Claims and Controversies................66 7. Additional Releases................................67 8. Injunctions........................................68 9. Exculpation........................................70 10. Section 1146 Exemption.............................70 11. Full and Final Satisfaction........................71 12. Cram-Down..........................................72 ii 13. Disbursement of Funds and Delivery of Distribution.......................................72 14. Avoidance and Recovery Actions.....................74 15. Retention of Jurisdiction..........................75 16. Executory Contracts and Unexpired Leases...........76 17. Bar Date for Filing Proofs of Claims Relating to Executory Contracts and Unexpired Leases Rejected Pursuant to the Plan...............................77 18. Indemnification Claims.............................78 19. Compensation and Benefit Programs..................79 20. Retiree Benefits...................................80 21. Post-Confirmation Fees, Final Decree...............80 22. Continuation of Bankruptcy Injunction or Stays.....80 23. Revesting of Assets................................80 24. General Release of Liens...........................81 25. Conditions to Effective Date of the Plan...........81 G. Post-Confirmation Officers and Directors....................83 V. ACCEPTANCE AND CONFIRMATION OF THE PLAN..............................85 A. Acceptance of the Plan......................................85 B. Confirmation................................................86 1. Confirmation Hearing...............................86 2. Statutory Requirements for Confirmation of the Plan...........................................87 3. Confirmation Without Acceptance by All Impaired Classes............................................90 VI. VALUATION............................................................92 VII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN..................92 VIII. RISK FACTORS.........................................................92 A. Leverage....................................................93 B. Dependence on Key Personnel.................................93 C. Dependence On and Relationships with Key Customers and Licensors...............................................94 D. Competitive Conditions......................................94 E. Risks Relating to Intellectual Properties...................95 F. Projected Financial Information.............................96 G. Lack of Market for Securities Issued Pursuant to Plan.......97 H. Certain Bankruptcy Related Considerations...................97 1. Risk of Non-Confirmation of the Plan...............97 2. Nonconsensual Confirmation.........................98 I. Dividends...................................................98 IX. EXEMPTIONS FROM SECURITIES ACT REGISTRATION; REGISTRATION RIGHTS....................................99 A. Issuance of New Securities Pursuant to the Plan.............99 iii B. Subsequent Transfer of Securities Issued Under the Plan....100 C. Registration Rights........................................101 X. ALTERNATIVES TO THE PLAN AND CONSEQUENCES OF REJECTION..............103 A. Alternative Plans..........................................103 B. Chapter 7 Liquidation......................................103 XI. RECOMMENDATION AND CONCLUSION.......................................104 iv EXHIBITS A - Plan of Reorganization B - Form 10-K dated December 27, 1997 C - Form 10-Q dated September 26, 1998 D - Restructuring Agreement E - Liquidation Analysis F - Pro Forma balance sheet and financial projections v EXHIBITS [Exhibit A to the Disclosure Statement (the Plan) has been filed separately with the Bankruptcy Court. All other exhibits will be filed with the Bankruptcy Court prior to the hearing to approve the Disclosure Statement.] vi EX-10.21 5 EXHIBIT 10.21 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT by and between Golden Books Family Entertainment, Inc. (the "Company"), and Philip Galanes (the "Executive"), effective as of May 7, 1998 (the "Effective Date"). 1. Employment Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to enter the employ of the Company, commencing on the Effective Date and continuing through and including May 6, 2002, unless terminated earlier in accordance with Section 4 below. 2. Title, Reporting and Duties. (a) Commencing on the Effective Date and for the remainder of the Employment Term, the Executive shall serve as the Company's General Counsel and Senior Vice President of Legal Affairs, with such duties, responsibilities and authority in such capacities as shall be consistent therewith. The Executive shall be based in New York City. (b) In the Executive's capacity as General Counsel and Senior Vice President of Legal Affairs, he shall report to the Company's Chairman and Chief Executive Officer. (c) 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 an annual base salary ("Annual Base Salary") of $350,000 for the first year of the term, $375,000 for the second year of the term, $400,000 for the third and fourth years of the term, provided that the Company agrees to consider in good faith an increase of the Annual Base Salary in the fourth year of the term. The Annual Base Salary will be reviewed by the Company's Compensation Committee at the end of each year of the term and may be increased at the discretion of the Compensation Committee. The Annual Base Salary shall be paid in equal biweekly installments. (b) Annual Bonus. In addition to 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"). The Executive shall have a target annual bonus of 100% of his Annual Base Salary (the "Target Bonus") and a maximum level Annual Bonus of 200% of his Annual Base Salary, subject in each case to attainment of the performance goals set forth in the Annual Plans. Bonuses 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 (the "Code") 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 200,000 shares of the Company's common stock ("Stock"). Executive acknowledges that certain action will need to be taken by the Board of Directors and the Compensation Committee 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-quarter of the shares of Stock subject thereto on the first anniversary of the date of grant, as to an additional one-quarter of such shares on the second anniversary of the date of grant, as to an additional one-quarter of such shares on the third anniversary of the date of grant and as to an additional one-quarter of such shares on the fourth 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 reason of Disability (as such term is defined in Section 4 below), the Option shall become fully and immediately exercisable and the Executive (or, following his death, his estate) may exercise the Option until the earlier of one year following the Date of Termination (as such term is defined in Section 4 below) or the end of the Option Term, following which time the Option shall terminate and be no longer exercisable; (3) by the Company for "cause" other than for Disability (as each 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; (4) by the Executive without "Good Reason" (as such term is defined in Section 4 below), the Option, to the extent exercisable on the Date of Termination, shall remain exercisable by the Executive (or, following his death, his estate) until the earlier of 90 days following such date or the end of the Option Term, following which time the Option shall terminate and be no longer exercisable; or 2 (5) by the Company without Cause or by the Executive with Good Reason, 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 senior executives of the Company are eligible to participate generally commensurate with his position as may be determined by the Compensation Committee. The Executive will be entitled to pay the exercise price of the Option with shares of Stock previously acquired by the Executive and may elect to have any withholding taxes required to be withheld as a result of the exercise of the Option taken out of Stock issuable to the Executive as a result of such exercise. 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 senior 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. (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 senior executives of the Company and its affiliated companies. 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's industry. (f) Expenses. During the Employment Term, the Company shall pay or promptly reimburse the Executive for all reasonable business and professional expenses upon presentation of receipts therefor in accordance with the normal practices of the Company. It is acknowledged that the Executive will incur expenses consistent with an executive of his stature in the Company's industry and in connection with his membership and participation in bar associations and other professional organizations. 3 (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. Additionally, 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 financial planning services. (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 given to employees of the Company. 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, (ii) the Executive's suspension or disqualification from the practice of law in the State of New York, or (iii) the willful failure of the Executive to perform, in any material respect, his obligations under this Agreement after a written demand for such performance is delivered to the Executive by the Board, which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not performed the Executive's duties; or (iv) 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 ("Disability"). For purposes of this provision, no act or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, by the Executive based upon authority given to the Executive pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Termination of the Executive's employment for Cause shall be effective upon receipt of notice pursuant to Section 4(d). For purposes of this provision, termination of the Executive's employment on account of the Disability of the Executive shall be by written notice to the Executive, effective 30 days after receipt thereof by the Executive, provided that, within 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. (b) Good Reason. The Executive's employment may be terminat- ed 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 4 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 within twenty (20) days after receipt of 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 within twenty (20) days after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside New York City; (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 occur-ring in bad faith or any action not taken in bad faith and which is remedied by the Company within twenty (20) days after receipt of notice thereof given by the Executive; or (v) the occurrence of a "Change of Control", which shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company, an employee benefit plan of the Company, or any of the Company's direct or indirect affiliates (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of the securities of the Company representing 33% or more (on a fully-diluted basis) of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors of the Company or (ii) all or substantially all of the assets of the Company are acquired by a Third Party. All references in this Agreement to "Good Reason" shall be deemed to include a reference to termination upon a Change of Control. (c) Death. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. (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 13 (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 5 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 Company shall pay to the Executive the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, and (3) any Annual Bonus for the fiscal year of the Company terminating prior to the Date of Termination, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"). All Accrued Obligations shall be paid in a lump sum in cash within 30 days of the Date of Termination; and B. an amount equal to (i) two times the Annual Base Salary payable to the Executive under this Agreement, at the annual rate in effect as of the Termination Date as provided in Section 3(a), plus (ii) two times the Target Bonus which would have been paid or payable to Executive (assuming such Target 6 Bonus had been earned), under Section 3(b) based upon the Annual Base Salary which would have been in effect as of the Termination Date, in each case to be paid in a lump sum within 30 days after the Date of Termination. The Executive shall have no duty or obligation to mitigate the amounts or obligations provided in this Section 5(a)(i), even in the event the Executive becomes reemployed by another employer. (ii) all stock options, restricted stock and other stock-based compensation shall become exercisable or vested in the manner provided for Options in Section 3(c)(5) herein; (iii) for two years after the Executive's Date of Termination, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(e) of this Agreement if the Executive's employment had not been terminated, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the corresponding medical and other welfare benefits described herein shall be terminated. Those welfare benefits not offered by the new employer shall continue until termination of the above-described two-year period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the later of two years after the Date of Termination or the end of the Employment Term and to have retired on the last day of such period; (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided to the Executive or which the Executive is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies, to the extent payment of any such amounts or benefits are not already provided for under this Agreement (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). The Executive shall have the right to approve, such approval not to be unreasonably withheld by the Company, any written announcement, if any, of the termination of the Executive's employment with the Company. 7 (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 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; Legal Fees. 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. Certain Reductions. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to this Agreement or otherwise, a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the payments pursuant to this Agreement shall be reduced to the extent that such reduction would result in after-tax payments and benefits to the Executive that exceed the after-tax payments and benefits to which the Executive would be entitled without such reduction. In the event of any such reduction, the Executive shall be entitled to designate the specific payments or benefits reduced. 8 (b) All determinations required to be made under this Section 8 shall be made by such certified public accounting firm as may be designated by the Executive. Such accounting firm shall provide detailed supporting calculations to either party hereto upon request therefore. All fees and expenses of such accounting firm shall be borne solely by the Company. Any determination by such accounting firm shall be binding upon the Company and the Executive, and such parties agree not to take any position (in any tax return or otherwise) inconsistent with such determination. (c) As a result of potential uncertainty in the application of Section 4999 of the Code, it is possible that a payment will be made to Executive which should not have been made. In the event of determination by the IRS or a court that the Excise Tax applies to any Payment which is not appealable or which the Executive chooses not to appeal, the Executive shall return to the Company all or any portion of the payments or benefits provided pursuant to this Agreement (without interest) that the Executive determines would result in the Excise Tax ceasing to apply to any Payment. 9. 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 9 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 (included for this purpose the contracting with any person who was an independent contractor of the Company during such period), without the prior written consent of the Company's Board of Directors. 10. Employment Renewal. At least six months prior to expiration of the Employment Term, the Company and the Executive shall enter into good-faith negotiations for a new employment agreement. If the Company fails to offer the Executive a new agreement 9 with terms no less favorable to Executive than those in effect at the scheduled termination of this Agreement (i.e., May 6, 2002), or if such offer is subsequently revoked, the Executive shall be entitled to the benefits described in Section 5(a) hereof. 11. Indemnification; Directors and Officers Insurance. During the Employment Period and thereafter, the Company shall indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive's performance as an officer, director or employee of the Company, or any of its respective subsidiaries or in any other capacity, including any fiduciary capacity, in which Executive serves at the request of the Company to the maximum extent permitted by applicable law. The Company agrees to provide Executive with coverage under a directors and officers liability insurance policy providing coverage at least equal to the coverage provided by the Company to its other directors and officers. 12. 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 Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly in writing and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure to do so shall constitute Good Reason for the Executive to terminate his employment. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, 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. 10 (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. Philip Galanes 26 East 10th Street #5-F New York, New York 10003 If to the Company: Golden Books Family Entertainment, Inc. 888 Seventh Avenue New York, NY 10106 Attention: Senior Vice President, Human Resources 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. (f) This Agreement supersedes and replaces in its entirety the Employment Agreement, dated as of October 9, 1996, between the Executive and the Company; provided that the stock option grant to Executive set forth in Paragraph 3(c) of such Employment Agreement shall survive. 11 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. PHILIP GALANES /s/ --------------------------------------------------- GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. By: /s/ --------------------------------------------------- Name: Michael Bruno Title: SVP, Human Resources 12 EX-10.23 6 EXHIBIT 10.23 REAL ESTATE PURCHASE AGREEMENT THIS REAL ESTATE PURCHASE AGREEMENT ("Agreement") is made to be effective as of the Effective Date (as hereinafter defined), between Golden Books Publishing Company, Inc. (hereinafter the "Seller"), with a notice address c/o Squire, Sanders & Dempsey, L.L.P., 350 Park Ave., New York, NY 10022, fax no. 212-872-9815, ATTN: Arnold S. Lehman, Esq., and ABLAH ENTERPRISES, INC. (hereinafter the "Buyer"), with a notice address of 3101 North Rock Road, Suite 125, Wichita, Kansas 67226, fax no. 316-636-2380, ATTN: George J. Ablah. W I T N E S S E T H: 1. Sale of the Real Property. Subject to the other provisions of this Agreement, Seller agrees to sell and Buyer agrees to purchase, on the terms hereafter stated, certain real property located near Fayetteville, North Carolina ("Real Property"), which Real Property is described on Exhibit "A" hereto, together with (a) all buildings thereon and all related improvements and all equipment and fixtures appurtenant thereto, (b) any current service and supply contracts, if any, pertaining to the Real Property; (c) any unexpired warranties and guaranties relating to the Real Property and improvements and fixtures thereon, if any; and (d) the Lease (as defined in Section 3.E. below)related to the Property (with the items referenced in sub-paragraphs (a), (b), (c), and (d) hereafter collectively the "Property". The date the Seller delivers a fully-executed counterpart of this Agreement to the Title Company is referred to herein as the "Effective Date". 2. Purchase Price. The purchase price ("Purchase Price") shall be $7,250,000.00. Buyer shall deposit $50,000 (the "Earnest Money Deposit") as earnest money with a mutually agreed upon title company (the "Title Company"), within three (3) business days following the Effective Date, to be applied against the Purchase Price payable on the Closing Date, or otherwise to be dealt with as provided herein. The Earnest Money Deposit shall be increased as provided in paragraph 7 below. 3. Title; Survey; Environmental Information; Lease, Etc. A. Within twenty (20) days following the Effective Date, Buyer will endeavor to obtain a preliminary binder for issuance of an owner's title insurance policy ("Title Report") issued by the Chicago Title Insurance Company through its agent, The Security Abstract Title Company, Inc., 434 North Main Street, Wichita, Kansas 67202, phone no. (316) 267-8371, facsimile no. (316) 267-8115 (the "Title Company"), showing Buyer as the prospective named insured, showing the policy amount as the Purchase Price, showing the status of Seller's title to the Property, and containing legible copies of all documents referred to in the Title Report. Within the same time, Buyer shall obtain reports of searches made of the Uniform Commercial Code Records of the county in which the Real Property is located and those maintained in the Office of the Secretary of State of North Carolina (the "U.C.C. Searches"). On the Closing Date (as defined in paragraph 4.A. below), Seller will cause to be issued to Buyer a policy of owner's title insurance in an amount equal to the Purchase Price, insuring fee simple title to the Property in Buyer, subject only to those title exceptions contained in the Title Report (as corrected pursuant to the mutual agreements of Seller and Buyer) and U.C.C. Searches. B. Within twenty (20) days following the Effective Date, Buyer will endeavor to obtain a survey of the Real Property, prepared and certified by a licensed surveyor, which survey shall be certified subsequent to the Effective Date and shall be in conformity with ALTA As-Built Survey of Property requirements in accordance with ALTA/ACSM Land Title Surveys. C. Within ten (10) days following the Effective Date, Seller shall provide Buyer copies of all plans, specifications, structural reports, floor and roof reports, reports of any inspections of the mechanical and electrical systems of the buildings located on the Real Property, environmental reports and audits in the possession or under the control of Seller concerning the Property, along with all communications to and from environmental agencies or authorities. D. Within ten (10) days following the Effective Date, Seller shall provide Buyer an accurate copy of any management, service and supply contracts to which Seller is a party concerning the Property. E. Within twenty (20) days following the Effective Date, Seller shall provide Buyer with a complete and accurate copy of the only lease ("Lease") encumbering the Property, and an estoppel certificate, in form and substance satisfactory to Buyer, from each tenant thereunder which: (1) ratifies such lease; (2) expresses the commencement and termination dates thereof; (3) certifies that the lease is in full force and effect and has not been assigned, modified, supplemented or amended (except by such written documents as shall be stated); (4) states that all conditions under the lease to be performed by the landlord have been satisfied; (5) states that there are no defenses or offsets against the enforcement of the lease by the landlord, or stating those claimed by the tenant; (6) states the amount of advance rent, if any (or none if such is the case), paid by tenant; (7) states the date to which rent has been paid; and (8) states the amount of security deposited with the landlord, if any. 4. Closing. Buyer and Seller agree that the purchase of the Property will be consummated as follows: A. Closing Date. Subject to the satisfaction of any contingencies contained herein and to prior termination hereof as otherwise permitted hereunder, this transaction shall close (the "Closing") on the fifteenth day following the expiration of Buyer's Feasibility Period (the "Closing Date"); provided, however, that in the event such fifteenth day is a weekend day or holiday, the Closing Date shall be the next succeeding business day. The Closing will take place at an office of the Title Company, with the exact time for Closing to be designated by Buyer and approved by Seller. B. Seller's Deliveries. At the Closing, Seller shall cause to be delivered to Buyer the following items (all documents will be duly executed and acknowledged where required): (1) A General Warranty Deed conveying to Buyer the Property; (2) Affidavits in form acceptable to the Title Company concerning Seller's payment in full of all costs for labor and materials delivered to, or in connection with, the Property and related matters; (3) An updated certificate of the representations of Seller indicating whether the same remain true and correct in all material respects to the time of Closing, or, if such representations are no longer accurate, a statement indicating the changes thereto; (4) An assignment of the Lease related to the Property; (5) An assignment of all service and supply contracts disclosed to Buyer hereunder; (6) An assignment of all warranties and guarantees required to be disclosed to Buyer hereunder; (7) Originals or true copies of building permits and certificates of occupancy for the buildings; (8) An affidavit of non-foreign status in compliance with Section 1445 of the Internal Revenue Code; and (9) A Closing statement. C. Buyer's Deliveries. Buyer shall pay the Purchase Price by wire transfer of funds, subject to any adjustments provided herein, and less the Earnest Money Deposit, which shall become the property of Seller. Buyer shall execute such documents as are reasonably acceptable to Seller in order that Buyer assume for the period from and after the Closing the Seller's obligations under the Lease and the service and supply contracts hereunder transferred. D. Costs. Seller shall pay the entire premium associated with the standard owner's title insurance policy; the cost for the survey; and one-half of the Closing fee and cost reimbursement charged by the Title Company. Buyer shall pay the costs of recording the deed conveying title to the Property to Buyer and one-half of the Closing fee and cost reimbursement charged by the Title Company. 5. Possession; Prorations. Possession of the Property will be delivered to Buyer on the Closing Date, subject to the Lease. All utilities; payments under service and supply contracts to be assigned hereunder; rent and other payments under the Lease; real property taxes; and installments of special assessments, if any, pertaining to the Real Property for the calendar year in which the Closing occurs, shall be prorated to the Closing Date; provided, if the taxes or assessments for such calendar year are not known as of the Closing Date, the proration shall be computed using the best evidence and information available and, when actual figures are available, a cash settlement shall be made between Seller and Buyer. Seller shall be responsible for all operating expenses applicable to the Property prior to Closing and Buyer shall be responsible for the same applicable following the Closing. 6. Representations, Warranties and Covenants of Seller. Seller hereby represents, warrants, and covenants to Buyer as follows, which representations and warranties shall be true and correct as of the Closing Date and shall survive the Closing: A. The management, service and supply contracts delivered to Buyer by Seller pursuant to paragraph 3.D. above are true, correct and complete, and, to the best of Seller's knowledge, there are no defaults, or events which with the passage of time will mature into defaults, thereunder. B. The Lease delivered to Buyer by Seller pursuant to paragraph 3.E. above is true, correct and complete, and, to the best of Seller's knowledge, there are no defaults, or events which with the passage of time will mature into defaults, thereunder. C. Seller has full right, power, and authority to enter into this Agreement and to perform its obligations hereunder. D. There are no pending claims, arbitrations, regulatory, legal or other proceedings or, to the best of Seller's knowledge, threatened, against Seller, or any basis therefor, that arises out of the use or ownership of the Property or that might detrimentally affect the use or operation of the Property for its intended purpose, the value of the Property, or adversely affect the ability of Seller to perform its obligations under this Agreement, and Seller is not aware of any contemplated condemnation, eminent domain or similar proceedings relating to the Property. E. To the best of Seller's knowledge, except as disclosed within the Phase I environmental report previously provided to Buyer by Seller concerning the Property: (i) none of the Property, including subsurface soil and groundwater, contains any substance, including, but not limited to, any radioactive substance, hydrocarbons, industrial solvents, oil, petroleum, oil byproducts, petroleum byproducts, metals, flammables, or other hazardous substances or toxic materials, which could presently, or at any time in the future, cause a health, safety or environmental hazard on the Property or to any person who may enter or use the Property or which may require remediation at the request of any governmental authority (collectively, "Hazardous Materials"); (ii) the ownership, operation, use or condition of all of the Property is not in violation of any federal, state or local law, ordinance or regulation relating to the Hazardous Materials, industrial hygiene, hazardous or toxic materials (or similarly defined substances, materials or wastes or environmental protection); (iii) no person has generated, manufactured, stored, treated or disposed of Hazardous Materials on, into or under the Property or transported any Hazardous Materials to, from or across the Property; and (iv) none of the Property contains any underground treatment or storage tanks. F. Seller has not received any notice of any violation of any laws, ordinances, rules or administrative or judicial orders affecting or regarding the Property. G. So long as this Agreement is in effect, Seller shall not modify the terms of the Lease, management, service or supply contracts referenced herein and shall not enter into any new lease, management, service or supply contracts which extend beyond the Closing Date, without Buyer's prior written consent. H. As of the Effective Date, all of the mechanical systems and electrical systems, including, without limitation, all HVAC equipment and systems, fire sprinkler systems, boilers, heaters, and doors of any building comprising a portion of the Property (collectively "Systems") are in good working condition and repair, except to the extent referenced on Exhibit "B" hereto, which Exhibit shall be attached by Seller prior to the Effective Date. Additionally, from the Effective Date to the Closing Date, Seller shall maintain, repair and replace the improvements comprising the Property, and Systems therein, so that as of the Closing, such improvements and equipment are in the same condition as of the date hereof, reasonable wear and tear excepted. 7. Feasibility Period, Termination Rights, and Additional Earnest Money. A. Buyer shall have a period of thirty (30) days following the Effective Date (the "Feasibility Period") to enter onto the Property and to inspect and investigate the Property, at its sole cost and expense; to make such studies thereof as it deems appropriate to consider and evaluate the suitability of the Property for Buyer's purposes. Buyer agrees to indemnify and hold Seller harmless and free from all claims, proceedings, actions, liens, costs, expenses, liabilities, and damages incurred on or arising in connection with any work done or performed by Buyer or its contractors, representatives, or agents on the Property. Notwithstanding the foregoing, in the event Buyer has not received the Title Report, UCC searches and survey, in accordance with subparagraph 3.A. and B. above, on or before the 20th day following the Effective Date hereof, the Feasibility Period shall be extended for the number of days which elapse following such 20th day until Buyer has received all the documents required by subparagraphs 3.A. and B. For example, if Buyer does not actually receive the survey referenced in subparagraph 3.B. until the 25th day following the Effective Date, the Feasibility Period shall extend 35 days rather than 30. B. Buyer shall have the right to terminate this Agreement without any excuse or reason at any time prior to the expiration of the Feasibility Period upon written notice to the Seller. In the event of such termination, the Earnest Money Deposit, with accrued interest thereon, less $100.00, shall be returned to Buyer and neither party shall have any further obligation hereunder. The remaining $100.00 of the Earnest Money Deposit shall be paid to Seller. Seller acknowledges that the $100.00 shall constitute good, valid and sufficient consideration for this Agreement. C. In the event Buyer does not exercise its right of termination under subparagraph B above, Buyer shall increase the Earnest Money Deposit from $50,000 to $100,000 on the first day following the expiration of the Feasibility Period. 8. Default; Remedy. In the event that either party fails to perform such party's obligations hereunder (except as excused by the other's default), the party claiming default will make written demand for performance upon the defaulting party. If the defaulting party fails to comply with such written demand within five (5) days after receipt of such notice to perform, the non-defaulting party shall have the option to (a) waive such default; (b) terminate this Agreement and, in the event the terminating party is (i) the Buyer, the Earnest Money Deposit, together with accrued interest thereon, shall be returned to Buyer, and Buyer shall have the right to seek specific performance of Seller's obligations hereunder, or (ii) the Seller, the Earnest Money Deposit shall be delivered to Seller by the Title Company, together with accrued interest thereon as Seller's sole remedy. The rights and remedies specified in this paragraph shall be the exclusive rights and remedies available to the parties hereunder. 9. Damage or Destruction. In the event any buildings and/or related improvements that are a part of the Property are damaged or destroyed prior to the Closing, Seller shall give Buyer prompt notice thereof. Unless Seller shall repair and restore the same in a good and workmanlike manner prior to the Closing Date; agrees in writing to complete the same within thirty (30) days following the Closing Date; or unless the insurance in effect with respect to the Property will cover the entire cost of restoration (less any deductible which Seller shall pay) to the satisfaction of Buyer and Seller assigns its rights to the insurance proceeds to Buyer as part of the Closing, then, except as otherwise agreed by the parties, this Agreement shall terminate automatically and Buyer's Earnest Money Deposit, together with accrued interest thereon, shall be returned to Buyer. 10. Condition of Real Property. Except as specifically provided herein and in Sellers representations and warranties contained above, Seller makes no representation or warranty of any kind, express or implied, with respect to the Property, the same, except as specifically provided herein, being sold "AS IS, WHERE IS, WITH ALL FAULTS." 11. Miscellaneous. It is further agreed as follows: A. Time. Time is of the essence of this Agreement. B. Fees and Expenses. Each party shall be responsible for and shall pay their own attorneys fees incurred in connection with this transaction. Additionally, Buyer and Seller each represent and warrant to each other that they have not engaged the services of any broker in connection with this Agreement or the transaction contemplated hereby and that no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee, or other real estate brokerage type compensation (collectively "Real Estate Compensation") based upon the acts of that party with respect to the transaction contemplated by this Agreement, except for the Hart Corporation, whose fees shall be paid by Seller. Each party hereto agrees to indemnify and defend the other against and to hold the other harmless from any and all costs, loss, liability or expense (including, but not limited to, attorneys fees and return commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such party's acts. The indemnity contained in this provision shall survive the Closing of the transaction contemplated by this Agreement. C. Notices. Any notice pursuant hereto shall be given in writing by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States Mail, postage prepaid, registered or certified mail, return receipt requested, or (d) telefacsimile transmission (provided that such telefacsimile transmission is confirmed by expedited delivery service or by mail in the manner previously described), sent to the intended addressee at the address set forth above, and shall be deemed to have been given either at the time of personal delivery or, in the case of expedited delivery service or mail, as of the date of first attempted delivery at the address or, in the case of telefacsimile transmission, upon receipt. Any such notices may be under the signature of the Seller's or Buyer's (as the case may be) agent, attorney, or representative. D. Entire Agreement; Amendment; Survival. This Agreement constitutes the entire understanding between Buyer and Seller, and there are no agreements, understandings, warranties or representations between Buyer and Seller except as set forth herein. This Agreement cannot be amended except in writing executed by Buyer and Seller. The representations, warranties and covenants contained herein shall survive the Closing. E. Binding Effect. This Agreement will inure to the benefit of and bind the respective successors and assigns of the parties hereto. F. Execution. This Agreement has been executed by the parties on the dates set forth below their respective signatures. G. Governing Law. This Agreement is to be governed by the laws of the state in which the Property is located. H. Assignment. Buyer may assign its rights and obligations hereunder to an entity owned entirely or controlled by Buyer; however such assignment shall not release Buyer hereunder. I. Acceptance. Seller must accept this Agreement on or before 5 o'clock p.m. C.D.S.T. on October 23, 1998, by delivering a fully executed copy of this Agreement to the Title Company no later than said date. Should Seller fail to timely accept this Agreement, then Buyer's offer herein contained shall be null and void. IN WITNESS WHEREOF, this instrument has been executed by the parties to be effective as of the Effective Date. "BUYER": "SELLER": ABLAH ENTERPRISES, INC. GOLDEN BOOKS PUBLISHING COMPANY, INC. By: /s/ By: /s/ ----------------------------- --------------------------------- George J. Ablah, President Name: Title: Date: October 12, 1998 Date: October __, 1998 EX-10.26 7 EXHIBIT 10.26 Licensed Book Publishing Agreement Between Disney Licensed Publishing and Golden Books Publishing Company, Inc. Dated December 12, 1998 Note: Portions of this Agreement have been intentionally omitted pursuant to a confidential treatment request and are separately filed with the Commission. INDEX Page Number 1. DEFINITIONS.......................................................... 1 1.1 "Licensed Property"......................................... 1 1.2 "Book"...................................................... 1 1.3 "Term"...................................................... 1 1.4 "Distribution Period"....................................... 1 1.5 "Territory"................................................. 1 1.6 "Royalties"................................................. 2 1.7 "Royalty Payment Period".................................... 4 1.8 [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]................................................. 4 1.9 "Guarantee"................................................. 4 1.10 "Promotion Commitment"...................................... 5 1.11 "Affiliate"................................................. 6 1.12 "Laws"...................................................... 6 1.13 "Suppliers"................................................. 7 1.14 [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]........................................ 7 2. GRANT OF RIGHTS...................................................... 7 3. ADVANCE............................................................. 10 4. GUARANTEE........................................................... 10 5. PUBLICATION, PRESS RUN & FREE COPIES................................ 11 6. CONTENT............................................................. 11 7. PRE-PRODUCTION APPROVALS............................................ 12 8. APPROVAL OF PRODUCTION SAMPLES...................................... 13 9. THIRD PARTY APPROVALS............................................... 15 10. COMPLIANCE WITH APPLICABLE LAWS AND STANDARDS....................... 15 11. PRINTING AND/OR MANUFACTURING BY THIRD PARTIES...................... 18 12. ADVERTISING......................................................... 20 13. PROMOTION COMMITMENT................................................ 20 14. COMMON MARKETING FUND............................................... 20 15. OWNERSHIP........................................................... 21 16. COPYRIGHT NOTICE.................................................... 23 17. REGISTRATIONS....................................................... 24 18. UNLICENSED USE OF LICENSED PROPERTY................................. 24 19. WARRANTIES AND INDEMNITIES.......................................... 25 20. INSURANCE........................................................... 27 21. STATEMENTS AND PAYMENT OF ROYALTIES................................. 27 22. INTEREST............................................................ 31 23. AUDITS AND MAINTAINING RECORDS...................................... 32 24. WITHDRAWAL OF LICENSED MATERIAL..................................... 33 25. TERMINATION......................................................... 33 26. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION............... 35 27. NON-ASSIGNABILITY................................................... 37 28. NOTICES............................................................. 39 29. MUSIC............................................................... 40 30. GOODWILL............................................................ 40 31. RELATIONSHIP........................................................ 41 32. CONSTRUCTION........................................................ 41 33. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT....................... 41 34. RESERVATION OF RIGHTS............................................... 41 35. WAIVERS............................................................. 41 36. SEVERABILITY........................................................ 41 37. CHOICE OF LAW AND FORUM............................................. 42 38. EQUITABLE RELIEF.................................................... 42 39. POWER TO SIGN....................................................... 42 40. CONFIDENTIALITY..................................................... 42 41. PREVIOUS AGREEMENTS................................................. 43 42. SURVIVAL OF OBLIGATIONS............................................. 44 LICENSED BOOK PUBLISHING AGREEMENT This book publishing license agreement (the "Agreement") dated December 12, 1998, is made by and between Buena Vista Books, Inc., doing business as Disney Licensed Publishing ("Licensor") located at 500 S. Buena Vista Street, Burbank, California 91521 and Golden Books Publishing Company, Inc., a wholly-owned subsidiary of Golden Books Family Entertainment, Inc. ("Licensee") located at 888 Seventh Avenue, New York, NY 10019. 1. DEFINITIONS 1.1 "Licensed Property" means the characters set forth in Schedule A, which is attached hereto and incorporated herein by this reference. It is hereby mutually acknowledged and agreed that the Licensed Property shall not include any characters the publishing rights to which Licensor does not own and that Licensee's use of the Licensed Property is subject to Licensor's rights of approval as more fully set forth in this Agreement. 1.2 "Book" means the book(s) described in Schedules B and C, which are attached hereto and incorporated herein by this reference, in the English language as developed by Licensee. For purposes of this Agreement, the term "Book" shall not include educational books or educational workbooks. 1.3 "Term" means the period commencing December 12, 1998, and ending September 30, 2000. Subject to Subparagraph 2.7 below, the Term shall not be extended or continued beyond such date, by implication or otherwise, than by a separate written agreement newly entered into. 1.4 "Distribution Period" means the following period during which the Book shall be distributed and available for purchase in the distribution channels authorized pursuant to Subparagraph 2.3 below: December 12, 1998 through the end of the Term, and any extension thereof. Without limiting the foregoing, Licensee agrees to use its best efforts to distribute any Book the publication of which is tied to the release (or re-release) in any medium (e.g., home video and motion picture) of a Disney- branded feature animation or live action movie on or about the official release date for the overall licensing program established for that movie, but in no event prior to such official release date. 1.5 "Territory" means Canada, the United States, United States PX's wherever located, and United States territories and possessions, excluding Puerto Rico, Guam, Commonwealth of Northern Mariana Islands and Palau. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 2 1.6 "Royalties" means a royalty in the amounts set forth below: (i) The royalty rates set forth in Schedule C, which is attached hereto and incorporated herein by this reference. (ii) On sublicenses (all sublicenses are subject to Licensor's prior written approval pursuant to Subparagraph 27.4 below), Licensee shall pay Licensor a royalty rate of [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] of Licensee's Net Invoiced Billings for such sales of the Book; (iii) For sales of the Book to book clubs, book fairs, schools, libraries and other educational outlets (all of which are subject to Licensor's prior written approval) and "special" sales (i.e., sales of the Book outside of the distribution channels set forth herein for which Licensee must obtain Licensor's prior written approval), a royalty rate of [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] of Licensee's Net Invoiced Billings if the sales are based on a sublicense sale, or [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] of the applicable royalty rate for sales made on an "inventory/all-in basis" (i.e., when the Book is sold directly from Licensee's inventory stock to the purchaser). (iv) For sales of "Golden Value" versions of the Book, for which Licensee must obtain Licensor's prior written approval, a royalty rate of [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] of the applicable royalty rate as set forth in Schedule C hereto. (v) "Net Invoiced Billings" means the following: actual invoiced billings (i.e., gross sales quantity multiplied by Licensee's selling price) for copies of the Book sold, and all other receivables of any kind whatsoever, received in payment for the Book, whether received by Licensee or any of Licensee's Affiliates, except as provided in Subparagraph 1.6(vi) below, less "Allowable Deductions" as hereinafter defined. The following are not part of Net Invoiced Billings: invoiced charges for transportation of the Book within the Territory which are separately identified on the sales invoice, and sales taxes. (vi) "Allowable Deductions" means the following: volume discounts, and other discounts from the invoice price (or post-invoice credits) unilaterally imposed Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 3 in the regular course of business by Licensee's customers, so long as Licensee documents such discounts (or credits) to Licensor's satisfaction. In the event a documented unilateral discount (or credit) is taken with respect to combined sales of the Book and other products not licensed by Licensor, and Licensee cannot document the portion of the discount (or credit) applicable to the Book, Licensee may apply only a pro rata portion of the discount (or credit) to the Book. Unilateral discounts or credits are never deductible if they represent items listed hereinbelow. Without limiting the generality of the foregoing, the following are not Allowable Deductions, whether granted on sales invoices or unilaterally imposed as discounts or as post-invoice credits: cash discounts granted as terms of payment; early payment discounts; allowances or discounts relating to advertising; costs incurred in manufacturing, importing, selling or advertising the Book; freight costs incorporated in the selling price; uncollectible accounts; mark down allowances, new store allowances, and defective goods allowances or allowances taken by customers in lieu of returning goods. (vi) Licensee shall pay Royalties for sales of the Book based on the royalty rates set forth in this Subparagraph 1.6. (viii) No Royalties will be payable on copies of the Book that are provided gratis for review, promotion, advertising, sample, or similar purposes intended to promote the Book, which copies are not intended for sale, up to a maximum of five hundred (500) copies of each title of the Book. In addition, no Royalties will be payable on free copies provided to Licensor pursuant to Subparagraph 5.3 of this Agreement. (ix) It is intended that the royalty on sales of the Book covered by Subparagraphs 1.6 (ii), (iii), and (iv) above which require the approval of Licensor shall be agreed in writing when such sale is approved. If it is not so agreed in writing, the royalty payable shall be the same as would be payable if the Book had been sold through the distribution channels authorized in Subparagraph 2.3 below. Licensee shall submit all requests for approval for proposed sales of the Book covered by Subparagraphs 1.6(ii), (iii), and (iv) to the Vice-President of Disney Licensed Publishing (or his or her designee) on the form attached hereto as Exhibit 5, which form may change from time to time. Licensor shall endeavor to indicate its approval or disapproval of such requests in a timely manner, but such approvals should be sought as early as possible. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 4 (x) With respect to copies of the Book sold in Canada, the foregoing Royalties shall be computed based on the corresponding price of the Book as sold in the United States. (xi) Royalties reported on sales of the Book which have been returned to Licensee for credit or refund and on which a refund has been made or credit memo issued may be credited against Royalties due. The credit shall be taken in the Royalty Payment Period in which the refund is given or credit memo issued. Unused credits may be carried forward, but in no event shall Licensee be entitled to a refund of Royalties. 1.7 "Royalty Payment Period" means each calendar monthly period during the Term, and during the Sell-off Period, if any. 1.8 "Advance"[Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] 1.9 "Guarantee" [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 5 1.10 "Promotion Commitment" means the following promotional and marketing support which Licensee agrees to provide for the Book: (i) Licensee shall include the Book in its catalog, if any, in accordance with the following: the catalogs shall have a separate page or pages showing all new formats and titles. The Book shall in addition to being included in the main index of the catalog be separately indexed in an index listing all formats and titles of the Book. All such catalog pages are subject to Licensor's prior written approval. (ii) Licensee shall make available point-of-purchase marketing support materials for all new theatrical and video releases and, as it deems appropriate, for Disney-animated television programs and brand programs covered by the Book. All such marketing support materials are subject to Licensor's prior written approval. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 6 (iii) Licensee shall endeavor to conduct two (2) major Territory-wide in-store marketing promotions for any of the character(s) included in the Licensed Property, at Licensee's sole discretion, during each year of the Term, and any extension thereof, and Licensor will contribute without charge creative and marketing direction assistance for such annual promotions. Notwithstanding the foregoing, Licensee acknowledges the importance to Licensor of supporting the Disney-animated feature releases. All such promotions are subject to Licensor's prior written approval. (iv) Twice each calendar year, Licensee agrees to provide Licensor with a detailed sales, marketing, and creative program (the "Program") specifying how Licensee intends to support and promote each of the character classes in the Licensed Property (i.e., the "A" , "B" and "C" Properties as set forth in Schedule A hereto). Licensee shall use its best efforts to implement the Program presented to Licensor, with the goal of meeting Licensor's expectation and intention that Licensee will actively and mutually support each of the character classes in the Licensed Property in approximately the following ratios: [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] License shall provide Licensor with complete copies of all materials utilized in presenting the Program. (v) All requests for approval required under this Subparagraph 1.10 shall be sought by Licensee as early as possible and should include all information necessary to allow Licensor to make an informed decision. Licensor shall endeavor to indicate its approval or disapproval of such requests in a timely manner. 1.11 "Affiliate" means, with regard to Licensee, any corporation or other entity which directly or indirectly controls, is controlled by, or is under common control with Licensee; with regard to Licensor, "Affiliate" means any corporation or other entity which directly or indirectly controls, or is controlled by, or is under common control with, Disney Enterprises, Inc. "Control" of an entity shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies of such entity, whether through ownership of voting securities, by contract or otherwise. 1.12 "Laws" means any and all applicable laws, rules, and regulations, including but not limited to, local and national laws, rules and regulations, treaties, voluntary industry standards, association laws, codes or other obligations pertaining to any of Licensee's Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 7 activities under this Agreement, including but not limited to those applicable to the manufacture, pricing, sales and/or distribution of the Book. 1.13 "Suppliers" means any of Licensee's third-party manufacturers and suppliers (and their sub- manufacturers and suppliers) which reproduce or use the Licensed Property in the Book, or components of the Book, and/or which assemble the Book. 1.14 [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] 2. GRANT OF RIGHTS 2.1 Subject to the terms and conditions of this Agreement, and in consideration for Licensee's promise to pay and Licensee's payment of all Royalties, Fees, Advances, Guarantees, and Common Marketing Fund payments required hereunder, Licensor hereby grants to Licensee, during the Term, the non- exclusive right throughout the Territory, to create, print, bind, market, advertise, publish, and sell the English language version(s) of the Book. Licensee shall have the right to publish Licensee's existing backlist of "Sturdy Shape" titles of the Book, plus up to six (6) new "Sturdy Shape" versions of the Book per each year of the Term; provided, however, that no "Sturdy Shape" versions of the Book (including backlist titles) may utilize the Licensed Property "WINNIE THE POOH". For purposes of the preceding sentence, "backlist titles" shall include all "Sturdy Shape" titles being published by Licensee as of the date of this Agreement. The Licensed Property shall include Licensee's backlist of titles to the Book; provided, however, that prior to such publication, Licensor shall have the opportunity to review the backlist and may require Licensee to update the artwork and/or any other creative aspects of the Book (including, but not limited to, the interior art and covers) so as to be fresh and current, to conform to all new or updated publishing reference material guidelines, to comply with any material changes in character art styles or standards introduced by Licensor, to conform with all material branding initiatives of Licensor, or to maintain all art quality standards as required by Licensor, to be determined solely at Licensor's discretion, so long as such creative aspect(s) of the Book were not previously approved by Licensor within the preceding twenty-four (24) months. During the first twelve (12) months of the Term, the parties hereby agree to conduct a review of the backlist of those titles of the Book which Licensee intends to seek approval for publication pursuant to this Agreement. Licensor shall not unreasonably withhold its approval of backlist titles submitted by Licensee. Notwithstanding the foregoing, Licensee may continue to publish those backlist titles or group of backlist titles which Licensee is actively publishing as of the date of this Agreement until such time as Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 8 Licensor notifies Licensee of its desire to exercise the approval rights set forth hereinabove with respect to a title or group of titles. 2.2 Licensee shall use its reasonable best efforts to maximize sales of the Book in the Territory during the Term (or any renewal thereof), and to support the Licensed Property and each of the properties contained therein in a focused, substantive, and meaningful way and Licensor agrees to accord due consideration to Licensee in connection with Licensor's marketing and promotional planning and efforts and to assess and consult with Licensee regarding the impact Licensor's other licensed publishing plans may have on Licensee's activities under this Agreement. [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. Further, Licensor shall not be obligated to offer to Licensee, any color and activity or storybook concepts or ideas to the extent such disclosure violates any applicable Laws, professional obligations customary in the publishing industry, and/or based on a reasonable and good faith determination by Licensor, constitutes confidential proprietary information or trade secrets of Licensor or a third party. 2.3 The Book may be sold only to department stores, gift stores, specialty retail stores, mass market stores, discount stores, supermarkets, drug stores, convenience stores, toy stores, airport stores, warehouse clubs, major and independent book stores and book store chains, wholesalers and jobbers, and book wholesalers and jobbers who may sell to schools, libraries and other educational outlets. If there is a question as to whether a particular customer falls within any of the categories specified above, Licensor's determination shall be binding. Licensee may not sell the Book to retailers that sell the Book on a duty-free basis, or to wholesalers for resale to such retailers, unless such retailer or wholesaler has a then-current license agreement with Licensor or an Affiliate of Licensor permitting it to make such duty-free sales. In addition, the Book may not be sold by direct marketing methods, which include, but are not limited to, computer on-line selling, home shopping television programs, direct mail and door-to-door solicitation. Licensee shall make all solicitations, sales and collections solely in its own name and in accordance with all applicable Laws. Licensee agrees not to sell the Book, including any part or adaptation thereof, otherwise than as herein provided without Licensor's prior written approval. 2.4 The Book shall not be used or sold to others for use as a giveaway, fundraiser, or to customers for inclusion in another product, or for lotteries, premiums, promotions, sweepstakes, or advertising purposes in connection with other publications or articles, or to sell other products, without the prior written consent of Licensor. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 9 2.5 The prohibition of computer on-line selling referenced in Subparagraph 2.3 above includes, but is not limited to, the display, promotion or offering of the Book in or on any on-line venues (e.g. Websites), except as specifically permitted in the following two sentences. With Licensor's prior written permission, the Book approved by Licensor may be displayed and promoted on Disney-controlled on- line venues, only within the Territory. Licensee may sell the Book to retailers, within the channels of distribution authorized pursuant to Subparagraph 2.3, who sell the Book in or on such retailer's own Website. In the event any such retailer is displaying and/or selling the Book in an unauthorized manner, Licensee agrees to cooperate with Licensor in Licensor's efforts to prohibit such unauthorized activity. 2.6 Licensee recognizes and acknowledges the vital importance to Licensor of the characters and other proprietary material owned and created by The Walt Disney Company and its Affiliates (collectively referred to herein as "Disney") and the association of the Disney name with them. In order to prevent the denigration of Disney's products and the value of their association with the Disney name, and in order to ensure the dedication of Licensee's best efforts to preserve and maintain that value, Licensee agrees that, during the Term and any extension thereof, Licensee will neither itself manufacture, advertise, promote, merchandise, display, package, sell and/or distribute (nor permit any sublicensee, distributor or other person or entity to do so) (a) any non-Disney product, in such a manner as to imply an association with Disney and/or its proprietary material, (b) any published product which contains any artwork or other representation not owned by Disney, but which Licensor determines, in its reasonable discretion, is confusingly similar to Disney characters or other Disney proprietary material, (c) any book which contains any non-Disney owned images of a character for which there is a Disney-owned image, or (d) any product containing material which Licensor determines, in its sole discretion, is lewd, lascivious, obscene, offensive, defamatory or otherwise injurious to Disney or the Disney name, business, products, or proprietary material. [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 2.7 Provided that all of the following conditions are met: (i) Licensee has complied with all terms and conditions of this Agreement, including without limitation Subparagraph 1.10(iv) above, and its Guarantee obligation, as set forth in Subparagraph 1.9 above, for the period commencing October 1, 1999, and ending September 30, 2000, (ii) Licensee or Licensee's parent company has consummated a pre-packaged plan of reorganization on terms acceptable to Licensor on or before June 30, 1999 -- then this Agreement shall renew for an additional twelve (12) month period commencing on October 1, 2000, and ending September 30, 2001, unless Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 10 either party advises the other in writing before April 15, 2000, that it determines not to renew. 2.8 Licensor may during the Term of this Agreement determine to license a new category of educational workbooks. In the event Licensor agrees to do so, prior to licensing the publication of such books, Licensor shall provide Licensee with the opportunity to present proposals to become a licensed publisher for this new product category . For purposes of clarity, any educational workbooks licensed to Licensee by Licensor under this Subparagraph shall be subject to a separate written agreement to be mutually negotiated by the parties, and shall not be included within the meaning of "Book" under this Agreement and shall not apply towards meeting Licensee's Advance and Guarantee obligations under this Agreement. 2.9 Nothing contained herein shall affect any of the rights and obligations of the rates under that certain Warrant Agreement dated September 26, 1997 (the "Warrant Agreement"). 3. ADVANCE 3.1 Licensee agrees to pay to Licensor the Advance, which shall be on account of Royalties accruing during the Term only, and only with respect to sales in the Territory; provided, however, that if any part of the Advance is specified in Subparagraph 1.8 above as applying to any period less than the Term, such part shall be on account of Royalties accruing during such lesser period only. If said Royalties should be less than the Advance, no part of the Advance shall be refundable. 3.2 Royalties accruing during the Sell-off Period, if any, or any extension of the Term shall not be offset against the Advance, unless otherwise agreed in writing. Subject to Subparagraph 1.9 above, Royalties accruing during any extension of the Term or any other term shall be offset only against an advance paid with respect to such extended term. 3.3 Licensee shall pay the Fee on the date(s) set forth in Paragraph 1.14 hereof. 4. GUARANTEE 4.1 Licensee shall, with Licensee's statement of account for the last Royalty Payment Period of each Guarantee period set forth in Subparagraph 1.9 above, pay Licensor the amount, if any, by which Royalties paid with respect to sales in the Territory during the Guarantee period fall short of the amount of the Guarantee for that period. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 11 In addition, Licensee shall, with Licensee's statement of account for the last Royalty Payment Period of the Term, or immediately upon termination if the Agreement is terminated prior to the expiration of the Term, pay Licensor the amount, if any, by which Royalties paid with respect to sales in the Territory during the Term fall short of the amount of the cumulative Guarantee. 4.2 Advances, if any, applicable to Royalties due on sales in the period to which the Guarantee relates shall apply towards meeting the respective Guarantees for those periods set forth in Subparagraph 1.9. 5. PUBLICATION, PRESS RUN & FREE COPIES 5.1 Licensee agrees to exercise actively the rights granted herein. Licensee shall publish the Book and shall keep a sufficient quantity and selection of titles of the Book in print and available for purchase in the distribution channels authorized pursuant to Subparagraph 2.3 above, during the Term of this Agreement, in order to, at a minimum, comply with Licensee's obligations as set forth in Subparagraphs 1.10 and 2.2 above. Licensee shall notify Licensor in writing of the publication date(s) of the Book ninety (90) days prior to such publication date(s). 5.2 Licensee agrees to print a minimum number of copies of the Book during the Term sufficient to meet the requirements of the Program. 5.3 Licensee agrees to furnish to Licensor, free of charge, one hundred (100) copies of each title of the Book from the first shipment of the Book, and to sell to Licensor at fifty percent (50%) below the published retail price any reasonable quantities of additional copies which Licensor requires for purposes other than resale; provided, however, that if Licensor desires to purchase more than five hundred (500) copies of any title of the Book, Licensor shall advise Licensee of the reasons for such purchase. Licensor agrees not to purchase more than five hundred (500) copies of any title of the Book solely for purposes of giving away such copies to the public for free, without Licensee's prior written consent. Two (2) of the free copies shall be delivered by Licensee directly to Licensor's legal department for copyright registration purposes, attention Copyright Paralegal, The Walt Disney Company, 500 South Buena Vista Street, Burbank, California 91521-6365. 6. CONTENT All creative costs for the Book shall be borne by Licensee. Notwithstanding the foregoing, Licensor agrees to cooperate with Licensee in the preparation of the artwork and text for the Book. To that Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 12 end, Licensor agrees to make a good faith attempt to provide Licensee such pre-existing artwork, textual, reproduction materials, and reference materials in Licensor's possession as may be available and which Licensor and Licensee deem suitable for inclusion in the Book. Licensee acknowledges that Licensor may charge Licensee for the cost of the foregoing materials or other costs incurred in connection with the preparation of the Book. Licensor shall make reasonable, good faith attempts to provide Licensee with prior notice of any such charges, including the estimated amounts thereof. Estimates of the charges for such materials are available upon request. 7. PRE-PRODUCTION APPROVALS 7.1 All aspects of the Book and its contents (the "Materials"), including without limitation, concepts, format and size, quality of paper, textual, artistic and photographic content, printing, cover, notices (e.g., copyright, trademark, logos), dust jacket (if any), slip case (if any), audio elements (if any), non- printed components (e.g., PVCs, toys) (if any), and title, shall be subject to Licensor's prior review and written approval. Approval or disapproval of the Materials shall lie in Licensor's sole discretion. Licensee shall endeavor to submit the Materials and requests for approval or other action by Licensor early enough to avoid unnecessary time pressure on Licensor. Requests for approvals of the Materials must be accompanied by an approval form provided by Licensor. Licensor shall indicate the reasons for disapprovals and the changes needed to obtain approval. Any approval Licensor may give will not constitute or imply a representation or belief by Licensor that such materials comply with any applicable Laws. Without limiting Licensor's right to approve the Materials under this Subparagraph 7.1, Licensor hereby recognizes and acknowledges that Licensor's timely processing of the Materials is important to Licensee's ability to perform its obligations under this Agreement. Licensee hereby recognizes and acknowledges that Licensor's ability to process the Materials is often dependent on, and subject to, extenuating factors, including, but not limited to, when Licensee submits materials, the quality of the materials submitted, the volume of materials submitted (including by other licensees), and the need or requirement for Licensor to consult with third parties to obtain certain approvals. In order to facilitate and expedite the process of submitting and approving the Materials so as to meet the concerns of both parties, Licensor and Licensee have agreed upon, a set of detailed written artwork submission and approval policies and guidelines (the "Policy"). Licensor and Licensee shall periodically review and, as necessary, revise the Policy to ensure it is properly functioning. Licensor and Licensee shall also give priority to establishing computer links to facilitate and improve upon the submission and approval of the Materials. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 13 7.2 Subject to the provisions set forth in the Policy, as early as possible, and in any case before commercial production of the Book, Licensee shall submit to Licensor for Licensor's review and written approval all aspects of the Book, at each stage of creation, including, but not limited to, any concepts (covers and interiors), story outlines, layouts, rough pencils, tight pencils, final art, mechanicals, pre-press proofs (digital proof for mechanicals plus a film proof), manuscript drafts, finished manuscripts and sample of paper stock and sound/electronics (if any), and shall supply from the first print run, and each subsequent print run, samples for Licensor's written approval. Licensee shall ensure that each copy thereafter printed shall conform in all respects to what has been approved by Licensor and shall not ship or deliver copies of the Book which do not so conform. If any nonconforming Book is sold by Licensee, Licensor may, in addition to any other remedies available to Licensor (including, but not limited to, termination of this Agreement), by written notice require such Book to be immediately withdrawn from the market. Licensee acknowledges that Licensor may not approve concepts or artwork submitted near the end of the Term. Licensee further acknowledges that the fact that artwork has been created by an artist recommended by Licensor or by an artist who has worked in the past on a Disney publication does not mean that any such artwork will necessarily be approved in connection with the Book licensed hereunder. 8. APPROVAL OF PRODUCTION SAMPLES 8.1 Before shipping the Book to any customer, Licensee agrees to furnish to Licensor, from the first production run of each supplier of the Book, for Licensor's approval of all aspects thereof, samples, with packaging, if any, which shall conform to the approved pre-production samples. Approval or disapproval of the artwork as it appears in the Book, as well as of the quality of the Book, shall lie in Licensor's sole discretion and may, among other things, be based on unacceptable quality of the artwork or of any part of the Book as manufactured. Any part not so approved shall be deemed unlicensed, shall not be sold and, unless otherwise agreed by Licensor in writing, shall be destroyed. Such destruction shall be attested to in a certificate signed by one of Licensee's officers. Production samples of the Book for which Licensor has approved a pre-production sample shall be deemed approved, unless within twenty (20) days of Licensor's receipt of such production sample Licensor notifies Licensee to the contrary. Any approval of a production sample attributable to Licensor shall not constitute or imply a representation or belief by Licensor that such production sample complies with applicable Laws. 8.2 Licensee agrees to make available at no charge such additional samples of the Book as Licensor may from time to time reasonably request for the purpose of comparison Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 14 with earlier samples or for Licensor's anti-piracy efforts, or to test for compliance with applicable Laws, and to permit Licensor to inspect Licensee's manufacturing operations and testing records (and those of Licensee's Suppliers) of the Book. 8.3 Licensee acknowledges that Licensor may disapprove any part of the Book or a production run of the Book because the quality is unacceptable to Licensor, and accordingly, Licensor recommends that Licensee submit production samples to Licensor for approval before committing to a large original production run or to purchase a large shipment from a new supplier. 8.4 No modification of an approved production sample shall be made without Licensor's further prior written approval. The Book must conform in all respects to the approved production samples. It is understood that if in Licensor's reasonable judgment the quality of the Book as originally approved has deteriorated in later production runs, or if the Book has otherwise been altered, Licensor may, in addition to other remedies available to Licensor, by written notice require such Books to be withdrawn immediately from the market. 8.5 Any part of the Book not meeting the standard of approved samples shall be destroyed or all Licensed Property shall be removed or obliterated therefrom. 8.6 Licensee is responsible for the consistent quality and safety of the Book and its compliance with applicable Laws, Licensor will not unreasonably object to any change in the design of the Book or in the materials used in the manufacture of the Book or in the process of manufacturing the Book which Licensee advises Licensor in writing is intended to make the Book safer or more durable. 8.7 Licensor shall have the right, by written notice to Licensee, to require modification of any part of the Book approved by Licensor under this or any previous agreement between Licensee and Licensor pertaining to the Licensed Property. Likewise, if the Term of this Agreement is extended by mutual agreement, or pursuant to Subparagraph 2.7, Licensor shall have the right, by written notice to Licensee, to require modification of any part of the Book approved by Licensor under this Agreement. It is understood that there is no obligation upon either party to extend the Agreement, except as may be provided in Subparagraph 2.7. 8.8 If Licensor notifies Licensee of a required modification under Subparagraph 8.7 above, such notification shall advise Licensee of the nature of the changes required. If the required modification is material to the integrity of the Book, the Licensed Property in the Book, and/or the Disney Property (as defined below), then Licensee Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 15 shall not accept any order for the Book until it has been resubmitted to Licensor with such changes and Licensee has received Licensor's written approval of the Book as modified. However, Licensee may continue to distribute Licensee's inventory of the previously approved Book until such inventory has been exhausted (unless the Book is dangerously defective, as determined by Licensor, 8.9 Without limiting Licensor's approval rights under this Paragraph 8, the Policy referenced in Subparagraph 7.1 shall include provisions governing all submissions and approvals which are the subject of this Paragraph 8. 9. THIRD PARTY APPROVALS 9.1 No material which is owned by a third party or in which a third party has rights shall be embodied in the Book or used in conjunction with the Book, unless Licensor has given knowing prior approval in writing, such approval to be granted or withheld within Licensor's sole discretion. In the event that Licensor does so approve, Licensee shall obtain all necessary licenses (and all other licenses required by Licensor) for the use of such material (including but not limited to all audio elements, if any) in or in conjunction with the Book. 9.2 Except with respect to material supplied by Licensor, Licensee shall pay and be solely responsible for the payment of all obligations to third parties arising from the manufacture, distribution, advertising and sale of the Book, including, but not limited to, payments to designers, printers, recording artists, musicians and applicable unions and guilds, and shall pay or cause to be paid to the copyright proprietors of the material referenced in Subparagraph 9.1 above, or to their duly authorized agents, all royalties and other sums (including the full statutory mechanical royalty rate if required for audio material) which may become due under and in accordance with said licenses and all applicable Laws. 9.3 Licensee understands that Licensor's interim and final approvals or disapprovals of the Book or any part of the contents of the Book may depend on whether necessary permissions from third parties have been obtained. 10. COMPLIANCE WITH APPLICABLE LAWS AND STANDARDS 10.1 Licensee covenants that the Book and any component thereof distributed hereunder shall be of good quality and free of defects in design, materials and workmanship, and shall comply with all applicable Laws, and such specifications, if any, as may have been specified in connection with this Agreement and shall conform to the Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 16 sample thereof approved by Licensor. Licensee covenants that it will comply with all applicable Laws in performing this Agreement, including but not limited to, those pertaining to the manufacture, pricing, sale and distribution of the Book. 10.2 Without limiting the foregoing, Licensee covenants on behalf of Licensee's own company, and agrees to require all Suppliers to covenant by signing the Supplier's Agreement (referenced in Paragraph 11 below), as follows: (i) Licensee and the Suppliers agree not to use child labor in the manufacturing, packaging or distribution of the Book. The term "child" refers to a person younger than the local legal minimum age for employment or the age for completing compulsory education, but in no case shall any child younger than fifteen (15) years of age (or fourteen (14) years of age where local law allows) be employed in the manufacturing, packaging or distribution of the Book. Licensee and the Suppliers employing young persons who do not fall within the definition of "children" agree also to comply with any Laws applicable to such persons. (ii) Licensee and the Suppliers agree only to employ persons whose presence is voluntary. Licensee and the Suppliers agree not to use any forced or involuntary labor, whether prison, bonded, indentured or otherwise. (iii) Licensee and the Suppliers agree to treat each employee with dignity and respect, and not to use corporal punishment, threats of violence, or other forms of physical, sexual, psychological or verbal harassment or abuse. (iv) Licensee and the Suppliers agree not to discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination, or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability. (v) Licensee and the Suppliers recognize that wages are essential to meeting employees' basic needs. Licensee and the Suppliers agree to comply, at a minimum, with all applicable wage and hour Laws, including minimum wage, overtime, maximum hours, piece rates and other elements of compensation, and to provide legally mandated benefits. If local Laws do not provide for overtime pay, Licensee and the Suppliers agree to pay at least regular wages for overtime work. Except in extraordinary business circumstances, Licensee and the Suppliers will not require employees to work Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 17 more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law, or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period. Licensee and the Suppliers agree that, where local industry standards are higher than applicable legal requirements, they will meet the higher standards. (vi) Licensee and the Suppliers agree to provide employees with a safe and healthy workplace in compliance with all applicable Laws, ensuring, at a minimum, reasonable access to potable water and sanitary facilities, fire safety and adequate lighting and ventilation. Licensee and the Suppliers also agree to ensure that the same standards of health and safety are applied in any housing they provide for employees. Licensee and the Suppliers agree to provide Licensor with all information Licensor may request about manufacturing, packaging and distribution facilities for the Book. (vii) Licensee and the Suppliers agree to respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference, in accordance with applicable Laws. (viii) Licensee and the Suppliers agree to comply with all applicable environmental Laws. (ix) Licensee and the Suppliers agree to comply with all applicable Laws, including those pertaining to the manufacture, pricing, sale and distribution of the Book. (x) Licensee and the Suppliers agree that Licensor and its designated agents (including third parties) may engage in monitoring activities to confirm compliance with this Paragraph 10, including unannounced on-site inspections of manufacturing, packaging and distribution facilities, and employer-provided housing, such inspections to include reviews of books and records relating to employment matters and private interviews with employees. Licensee and the Suppliers agree to maintain on site all documentation necessary to demonstrate compliance with this Paragraph 10. Licensee agrees to promptly reimburse Disney for the actual costs of inspections performed pursuant to this Paragraph 10 when any of Licensee's manufacturing facilities or any Suppliers do not pass the inspection(s). Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 18 (xi) Licensee and the Suppliers agree to take appropriate steps to ensure that the provisions of this code of conduct (the "Code of Conduct") are communicated to employees, including the prominent posting of a copy of the Code of Conduct for Suppliers and Licensees, (copies of which are attached hereto as Exhibits 3 and 4, respectively), as may be applicable, in the local language and in a place readily accessible to employees at all times. 10.3 Licensee agrees to take appropriate steps, in consultation with Licensor, to develop, implement and maintain procedures to evaluate and monitor the Suppliers it uses to manufacture the Book or any components thereof, and to ensure compliance with this Paragraph 10, including but not limited to, unannounced on-site inspections of manufacturing, packaging and distribution facilities and employer-provided housing, reviews of books and records relating to employment matters and private interviews with employees. 10.4 Both before and after Licensee puts the Book on the market, Licensee shall follow reasonable and proper procedures for testing that the Book complies with all applicable product safety Laws, and shall permit Licensor's designees to inspect testing, manufacturing and quality control records and procedures and to test the Book for compliance with product safety and other applicable Laws. Licensee agrees to promptly reimburse Licensor for the actual costs of such testing if the Book fails to comply with such Laws. Licensee shall also give due consideration to any recommendations by Licensor that the Book exceeds the requirements of applicable Laws. Books not manufactured, packaged or distributed in accordance with applicable Laws shall be deemed unapproved, even if previously approved by Licensor, and shall not be shipped unless and until they have been brought into full compliance therewith. 11. PRINTING AND/OR MANUFACTURING BY THIRD PARTIES 11.1 All film positives/negatives and other reproduction material used in the manufacture of the Book shall be prepared only by Licensee, or by a third party under Licensee's control and who has been approved by Licensor and who has executed and delivered to Licensor the Supplier's Agreement in the form attached hereto as Exhibit 1, and the Book shall be printed only by Licensee or by a printer approved by Licensor who has executed and delivered to Licensor the said Supplier's Agreement. Licensor hereby approves the Suppliers and printers identified on the list attached hereto as Exhibit 6. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 19 11.2 Licensee shall, upon Licensor's request, deliver to Licensor, or to publishers designated by Licensor, one or more duplicate sets of all film positives, film negatives and other reproduction material used in the manufacture of the Book, and Licensor or such publishers, as the case may be, shall reimburse Licensee for the actual cost of duplicating any such materials delivered as well as for the actual cost of removing Licensee's trade dress from any such materials. In no case shall the charge for such material exceed the lowest price Licensee charges other publishers for similar material. Without limiting the foregoing, Licensor shall not authorize any publisher who is licensed by Licensor to publish in the United States or Canada to repurpose any covers of the Book or to repurpose substantial quantities of artwork or text from the Book without Licensee's prior consent. The foregoing sentence shall apply only to books published during the Term and in the Territory which are similar in format, price point, and distribution channel to the Book. 11.3 Licensee agrees to supply Licensor with the names and addresses of all of its own manufacturing facilities for the Book. If Licensee at any time desires to have any non-printed components of the Book containing Licensed Property manufactured by a third party, whether the third party is located within or outside the United States, Licensee must, as a condition to the continuation of this Agreement, notify Licensor of the accurate name and complete address of such Supplier and the Book or components involved and obtain Licensor's prior written permission to do so. If Licensor is prepared to grant permission, Licensor will do so if Licensee and each of Licensee's Suppliers sign a Consent/Manufacturer's Agreement in a form which Licensor will furnish to Licensee and Licensor receives all such agreements properly signed. 11.4 Licensor shall use reasonable efforts not to disclose the names of Licensee's Suppliers to third parties, including Affiliates of Licensor, except as may be necessary to enforce Licensor's contract rights or protect Licensor's trademarks, copyrights, and intellectual property. 11.5 If any such Supplier utilizes the Licensed Property or trademarks for any unauthorized purpose, Licensee shall cooperate fully in bringing such utilization to an immediate halt. If, by reason of Licensee's not having supplied the above-mentioned agreements to Licensor or not having given Licensor the name of any Supplier, Licensor makes any representation or takes any action and is thereby subjected to any penalty or expense, Licensee will fully compensate Licensor for any cost or loss Licensor sustains (in addition to any other legal or equitable remedies available to Licensor). Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 20 12. ADVERTISING 12.1 Licensee may, subject to receiving Licensor's prior written approval in each case, advertise the Book in newspapers, periodicals, magazines and other publications and, in catalogs, on billboards, radio, television or by other advertising or promotional techniques; provided, however, that all photography, artwork, text, scripts and storyboards for all advertising shall be submitted to Licensor for its prior review and written approval as to the content of such advertising. Licensor's approval or lack thereof will be given in a timely fashion. As a condition to the right of public distribution licensed hereunder, appropriate and legally sufficient copyright notice in the name of Disney Enterprises, Inc. (hereinafter referred in this Agreement as "Disney Enterprises") shall be included in all advertising for the Book in which any of Disney's characters or other copyrighted materials appear. 12.2 Following the expiration or termination of this Agreement, and the Sell-off Period, if any, Licensee will not advertise or promote the Book in any manner or issue any offering literature or material with respect thereto. 12.3 Licensee warrants that all advertising and promotions for the Book shall comply with all applicable Laws and shall not infringe the rights of any person or entity. Licensor's approval for the use or manner of use of any proposed advertising or promotion hereunder shall not constitute an opinion as to the legal appropriateness or adequacy of such use or manner of use, and Licensee shall be solely responsible for any liability or risk of liability arising out of, or connected with, the use of any such proposed advertising or promotion. 13. PROMOTION COMMITMENT Licensee agrees to carry out the Promotion Commitment set forth in Subparagraph 1.10 above. 14. COMMON MARKETING FUND 14.1 Licensee shall pay to Licensor an amount equal to [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] (the "Common Marketing Fund Payment"), which amount Licensee agrees to pay Licensor concurrently with Royalties due each Royalty Payment Period as detailed in Paragraph 21 hereof. Licensee further agrees to pay Licensor the following sums as a guarantee of such minimum payment (the "CMF Guarantee") on Licensee's cumulative sales in the following periods and as non-refundable installments of such Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 21 guarantee payments (the "CMF Advances"), due and payable on the dates indicated below: [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 14.2 The Common Marketing Fund Payment as defined hereinabove shall be placed in a general fund for use in promoting the Licensed Property, Disney characters, Disney's copyrights, and trademarks (which may include the Licensed Property) and licensee activities generally, all as Licensor deems appropriate in Licensor's sole discretion. Such funds shall be expended by Licensor and/or Licensor's designees (but not paid to Licensor's own employees for services they render) in the amounts and in the manner Licensor deems most appropriate in order to provide national, territorial, regional or local advertising, marketing and promotion, and market research related thereto, of the License Property licensed hereunder or other Disney properties in the same property classification. [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 14.3 Licensee agrees to pay in full the CMF Advances on account of the CMF Guarantee to accrue during the Term only and only with respect to sales in the Territory. In addition, with Licensee's statement for each Royalty Payment Period ending on a date indicated hereinabove with respect to the CMF Guarantee, Licensee shall pay Licensor the amount, if any, by which cumulative payment made with respect to sales in the Territory during any period or periods covered by such provision fall short of the amount of the CMF Guarantee specified for that period. 15. OWNERSHIP 15.1 Licensee acknowledges that the copyrights and all other proprietary rights in and to the Licensed Property are exclusively owned by and reserved to Disney Enterprises. Licensee shall neither acquire nor assert any proprietary right, interest, or title to any character used in the Book, to the title of the Book, or to any other material prepared for or contained on or in the Book, or to any copy, reproduction, translation, or derivative work thereof (collectively referred to herein as "Disney Property") in any format or media, now existing or hereafter developed, through the exercise of any rights granted to Licensee hereunder. All copyrights and trademarks, service marks, trade dress, and tradenames pertaining to the Book, as well as all rights of every kind in and to the Disney Property, shall be Disney Enterprises' exclusive property, except such trademarks, tradenames or service marks as do not relate to any Disney material and do relate to the business name of the Licensee or the name of any line of books Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 22 heretofore published by Licensee. No part of the Book or excerpt therefrom may be used by or under the authority of Licensee in any way separate from the Book without Licensor's prior written consent. Licensor acknowledges Licensee's exclusive rights in and to Licensee's trademarks, tradenames, service marks, and trade dress used in connection with Licensee's own publishing activities, including, without limitation, Licensee's distinctive differentiated book spine treatment (collectively, the "Golden Marks). Licensor agrees that it will not use, or knowingly allow the use by a publishing licensee (in connection with that licensee's publishing activities authorized by Licensor), any such Golden Marks or any marks that are confusingly similar in the reasonable judgment of Licensee without Licensee's prior written consent. If Licensee becomes aware of any such unauthorized use before Licensor does, then Licensee shall promptly notify Licensor and provide Licensor with an opportunity to take reasonable corrective action. 15.2 If Licensee creates or acquires material for use in the Book, whether or not based on or using Disney Enterprises' characters, and whether or not actually used in the Book or published, such material shall be deemed a work-for-hire for Disney Enterprises and all ownership rights (including but not limited to the copyright therein) shall belong to Disney Enterprises. Licensee agrees that prior to the creation of any such material by third parties, Licensee shall cause the artists and/or writers who create such material, or the owners of the rights thereto, to execute the work for hire/copyright assignment agreement in the form attached hereto as Exhibit 2, agreeing that all such material shall be considered a work-made-for-hire for Disney Enterprises and fully releasing or assigning to Disney Enterprises all rights in such material, including but not limited to all copyrights, so that all such rights shall inure to Disney Enterprises and become a part of Disney Enterprises' copyright and other rights in and to the Book. Licensee shall provide Licensor with a copy of every work for hire/copyright assignment agreement, and any other agreement entered into with respect to the ownership of the Book. Licensee agrees that it will not give, or agree to give, credit of any kind to any such artists or writers without the prior written approval of Licensor. 15.3 Subject to the rights granted hereunder, title (including copyright and physical ownership) to all material objects incorporating the Disney Property (including without limitation, original drawings and illustrations used in the Book or in promotional or advertising material which portray the Disney Property as well as all photographs and reproductions of the originals), whether supplied by Licensor or prepared by or for Licensee, shall be in Disney Enterprises, and in no event shall Licensee sell or lease the use of any such material objects or otherwise part with control thereof. Such material objects shall be delivered to Licensor in good Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 23 condition (subject to normal wear and tear) upon request, at Licensee's sole expense. If Licensee advises Licensor that any such material objects requested to be returned are being utilized by Licensee for the current development of any title to the Book, then Licensor shall allow Licensee ninety (90) days to create films or other reproduction material necessary for the manufacture of the Book, after which the requested materials must be immediately returned. 15.4 Licensee hereby assigns to Disney Enterprises all right, title and interest (including but not limited to all copyright(s) and any extensions and renewals thereof) throughout the universe in perpetuity which Licensee may have acquired relating to any and all material prepared or published hereunder or contemplated hereby, or relating to the Disney Property or its use of the same hereunder. Licensee hereby appoints Licensor to act as Licensee's attorney-in-fact to execute any documents in Licensee's name and/or on Licensee's behalf necessary to grant or assign such copyrights or other rights to Disney Enterprises. 16. COPYRIGHT NOTICE As a condition to the grant of rights hereunder, each copy of the Book, and any other matter containing Licensed Property, shall bear a properly located permanently affixed copyright notice comprised of c in a circle, plus a yeardate of publication, plus "Disney Enterprises, Inc.", and for those versions of the Book containing Disney-stylized Winnie The Pooh characters, "Based on the Pooh stories by A.A. Milne (copyright the Pooh Properties Trust)" or such other notices as Licensor specifies to Licensee in writing, together with such other notice of copyright or trademark as may be prescribed or required by Laws applicable to the Territory in order to establish, protect, and preserve Disney Enterprises' copyrights and trademarks. If, through inadvertence or otherwise, a copyright notice on the Book or other such matter should appear in Licensee's name or the name of a third party, Licensee hereby agrees to assign to Disney Enterprises the copyright represented by any such copyright notice in Licensee's name and, upon request, cause the execution and delivery to Licensor of whatever documents are necessary to convey to Disney Enterprises that copyright represented by any such copyright notice. If, by inadvertence, a proper copyright notice is omitted from the Book or any other matter containing Licensed Property, Licensee agrees at Licensee's expense to use all reasonable efforts to correct the omission on the Book or other matter in the process of manufacture or in distribution. Licensee agrees to advise Licensor promptly and in writing of the steps being taken to correct any such omission and to make the corrections on existing copies of the Book which can be located. Licensee shall also include such credit lines in the Book as Licensor may require by written notice to Licensee, provided that Licensor shall not require such credit lines to interfere with the Licensee's line look or to be obtrusive. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 24 17. REGISTRATIONS Except with Licensor's written consent, neither Licensee nor any Affiliate of Licensee will register or attempt to register in any country copyright in the Book and/or in any part of the Disney Property, and/or any trademark which is identical with any mark used by Disney or which is so similar thereto as to present, within the reasonable judgment of Licensor, a likelihood of confusion. In the event of a breach of the foregoing, Licensee agrees, at Licensee's expense and at Licensor's request, immediately to terminate the unauthorized registration activity and promptly to execute and deliver, or cause to be delivered, to Licensor such assignments and other documents as Licensor may require to transfer to Disney Enterprises all rights to the registrations or applications involved. 18. UNLICENSED USE OF LICENSED PROPERTY 18.1 Licensee agrees that Licensee will not use the Licensed Property, or the trademarks, or any other material the copyright to which is owned by Disney Enterprises in any way other than as herein authorized (or as is authorized in any other written contract in effect between the parties). In addition to any other remedy Licensor may have, Licensee agrees that all revenues from any use thereof on products other than the Book (unless authorized by Licensor in writing), and all revenues from the use of any other copyrighted material of Disney Enterprises' without written authorization, shall be immediately payable to Licensor. 18.2 Licensee agrees to give Licensor prompt written notice of any unlicensed use by third parties of the Licensed Property or trademarks of which Licensee becomes aware, and that Licensee will not, without Licensor's written consent, bring or cause to be brought any criminal prosecution, lawsuit or administrative action for infringement, interference with or violation of any rights to the Book, its contents and/or the characters. Because of the need for and the high costs of an effective anti-piracy enforcement program, Licensee agrees to cooperate with Licensor and, if necessary, to be named by Licensor as a sole complainant or co-complainant in any action against an infringer of the Licensed Property and, notwithstanding any right of Licensee to recover same, legal or otherwise, Licensee agrees to pay to Licensor, and hereby waives all claims to, all damages or other monetary relief recovered in such action by reason of a judgment or settlement whether or not such damages or other monetary relief, or any part thereof, represent or are intended to represent injury sustained by Licensee as a licensee hereunder; in any such action against an infringer, Licensor agrees to reimburse Licensee for reasonable expenses incurred at Licensor's request, including reasonable attorney's fees and disbursements if Licensor has requested Licensee to retain separate counsel. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 25 19. WARRANTIES AND INDEMNITIES 19.1 Licensee hereby represents and warrants that any material used in the Book, other than material supplied by Licensor, shall not infringe upon or interfere with any common law right, or any other right, of any person or entity, and that the creation, manufacture, publishing, marketing, pre-pricing, pricing, sale and distribution of the Book shall be in compliance with all applicable Laws and shall not infringe the rights of any person or entity. Without limiting the foregoing, Licensee represents and warrants that no such material shall infringe any copyright or defame or invade the rights of privacy or publicity of any person or entity. Licensee further represents and warrants that it will not use or allow the use of the name "Walt Disney" or the name "Disney", or the name or likeness of the fanciful characters of Disney or any name, mark, emblem, logo or designation that suggests or implies an association with Disney, for any purpose other than as specified in this Agreement, unless explicitly authorized by Licensor in writing to do so. 19.2 Licensee hereby indemnifies and holds Disney harmless, during and after the Term hereof, against all claims, demands, suits, judgments, losses, liabilities (including settlements entered into in good faith with Licensee's consent, not to be unreasonably withheld) and expenses of any nature (including reasonable attorneys' fees and disbursements) arising out of Licensee's activities under this Agreement, including but not limited to, any actual or alleged: (1) negligent acts or omissions on Licensee's part, (2) defect (whether obvious or hidden and whether or not present in any sample approved by Licensor) in the Book, (3) personal injury, (4) infringement of any rights of any other person by the manufacture, sale, possession or use of the Book, (5) breach on Licensee's part of any covenant, representation or warranty contained in this Agreement or (6) failure of the Book, or by Licensee, to comply with applicable Laws. The parties indemnified hereunder shall include Licensor, and its parent, successors and subsidiaries, and their officers, directors, employees and agents. The indemnity shall not apply to any claim or liability relating to any infringement of the copyright of a third party caused by Licensee's utilization of the Licensed Property in accordance with the provisions hereof, unless such claim or liability arises out of Licensee's failure to obtain the full assignment of rights referenced in Paragraph 15 above. 19.3 Licensor hereby represents and warrants that the Disney Property supplied by Licensor hereunder shall not infringe the copyright of any third party or any right granted by Licensor to such third party. Licensor hereby indemnifies and holds Licensee harmless during and after the Term hereof against all claims, demands, suits, judgments, losses, liabilities, (including settlements entered into in good faith Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 26 with Licensor's consent, not to be unreasonably withheld), and expenses of any nature (including reasonable attorney's fees and disbursements) arising out of any claim that Licensee's use of any representation of the Licensed Property approved in accordance with the provisions of this Agreement infringes the copyright of any third party or infringes any right granted by Licensor to such third party, except for claims arising out of Licensee's failure to obtain the full assignment of rights referenced in Paragraph 15 above. In no event shall Licensor be liable for lost profits. Without limiting the generality of this Subparagraph 19.3, if during the term of this Agreement Licensor enters into another licensed publishing agreement for the Territory in which Licensor agrees to provide representations and warranties which exceed the scope of this Subparagraph 19.3, then such additional representations and warranties shall be included in the representations and warranties provided by Licensor herein. 19.4 If by reason of any claims referred to in Subparagraph 19.3 above, Licensee is precluded from selling any stock of the Book or utilizing any materials in Licensee's possession or which come into Licensee's possession by reason of any required recall, Licensor shall be obligated to purchase such Books and materials from Licensee at the out-of-pocket cost to Licensee, excluding overhead, but Licensor shall have no other responsibility or liability with respect to such Books or materials, except that the Advance and Guarantee shall be adjusted to correspond to the time remaining in the Term at the date of the purchase by Licensor. 19.5 Licensor gives no warranty or indemnity with respect to any liability or expense arising from any claim that use of the Licensed Property or the trademarks on or in connection with the Book hereunder or any packaging, advertising or promotional material infringes on any trademark right of any third party or otherwise constitutes unfair competition by reason of any prior rights acquired by such third party, other than rights acquired from Disney Enterprises. It is expressly agreed that it is Licensee's responsibility to carry out such investigations as Licensee may deem appropriate to establish that the Book, packaging, and promotional and advertising material which are manufactured or created hereunder, including any use made of the Licensed Property and the trademarks therewith, do not infringe such right of any third party, and Licensor shall not be liable to Licensee if such infringement occurs. 19.6 Licensee and Licensor agree to give each other prompt written notice of any claim or suit which may arise under the indemnity provisions set forth above. Without limiting the foregoing, Licensee agrees to give Licensor written notice of any product liability claim made or suit filed with respect to the Book, any investigations or directives regarding the Book issued by the Consumer Product Safety Commission Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 27 ("CPSC") or other federal, state or local consumer safety agency, and any notices sent by Licensee to, or received by Licensee from, the CPSC or other consumer safety agency regarding the Book within seven (7) days of Licensee's receipt or promulgation of the claim, suit, investigation, directive, or notice. 20. INSURANCE Licensee shall maintain in full force and effect at all times while this Agreement is in effect, and for three (3) years thereafter, commercial general liability insurance on a per occurrence form, including broad form coverage for contractual liability, property damage, products liability and personal injury liability (including bodily injury and death), waiving subrogation, with minimum limits of no less than two million United States Dollars (U.S. $2,000,000.00) per occurrence, and naming as additional insureds those indemnified in Subparagraph 19 hereof. Licensee also agrees to maintain in full force and effect at all times while this Agreement is in effect such Worker's Compensation Insurance as is required by applicable law and Employer's Liability Insurance with minimum limits of one million United States Dollars (U.S. $1,000,000.00) per occurrence. All insurance shall be primary and not contributory. Licensee shall deliver to Licensor a certificate(s) of insurance evidencing satisfactory coverage and indicating that Licensor shall receive thirty (30) days unrestricted prior written notice of cancellation, non-renewal, or material change in coverage. Licensee's insurance shall be carried by an insurer with a Best Guide rating of B + VII or better. Compliance herewith in no way limits Licensee's indemnity obligations, except to the extent that Licensee's insurance company actually pays Licensor amounts which Licensee would otherwise pay Licensor. 21. STATEMENTS AND PAYMENT OF ROYALTIES 21.1 Licensee agrees to pay and shall pay to Licensor all Royalties required under this Agreement. Licensee shall submit to Licensor statements of account so as to be received by Licensor no later than twenty-five (25) days after the end of each Royalty Payment Period during the Term. Licensee shall submit such statements of account regardless of whether any sales have taken place and/or any Royalties are payable to Licensor. Licensee's statements shall be on forms substantially similar to those designated by Licensor for Licensee's use (a sample copy of the current form is attached hereto as Exhibit 7), showing all information requested by such forms (subject to Subparagraph 21.8 below), including but not limited to the following: If Licensee's Royalty calculation is based on a percentage of the suggested retail price ("SRP") of the Book: (i) Licensee's product number, ISBN, and title; Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 28 (ii) the Royalty rate code as provided by Licensor; (iii) the applicable SRP Royalty rate; (iv) the applicable Net Invoiced Billings ("NIB") Royalty rate; (v) the gross quantities by title of the Book sold (a sale of the Book shall be deemed to have occurred on the date the Book is shipped to the customer); (vi) the SRP(s) on which the Royalty is calculated; (vii) the sum of the units sold multiplied by the applicable SRP ("Gross SRP Dollars) (viii) Net Invoiced Billings ("NIB Dollars"); (ix) the applicable SRP Royalty rate multiplied by Gross SRP Dollars; (x) the applicable NIB Royalty rate multiplied by NIB Dollars; (xi) the Royalty payment due; and (xii) a separate report for each item number (i) through (xi) above as they apply to returns. If Licensee's Royalty calculation is based on Net Invoiced Billings: (i) Licensee's product number, ISBN, and title; (ii) the Royalty rate code as provided by Licensor; (iii) the applicable NIB Royalty rate; (iv) the gross quantities by title of the Book sold (a sale of the Book shall be deemed to have occurred on the date the Book is shipped to the customer); (v) NIB Dollars; (vi) the Royalty payment due; and Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 29 (vii) a separate report for each item number (i) through (vi) above as they apply to returns. Sales to countries other than the United States, if any such are permitted, shall be reported separately by country. Royalty payments shown as due shall be delivered to Licensor with such statements; provided, however, that Licensee shall deliver directly to Licensor's Canadian office, at the address listed below in Subparagraph 21.4, Royalties payable on sales of the Book in Canada and a separate statement of account for such sales. GST applicable to Royalties or to any other payments due to Licensor shall be indicated on Licensee's statements of account for Canada and paid to Licensor along with the Royalty or other payment. Royalties are also payable, and due with such statements, on inventory shrinkage that exceeds [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] (excluding free copies authorized pursuant to Subparagraph 1.6(viii) above). Inventory shrinkage means the reduction in Licensee's inventory of the Book not caused by sales or damaged copies. To the extent that Royalties are not paid, Licensor may offset Royalties due hereunder against any sums which Licensor or any of its Affiliates may owe to Licensee or any of its Affiliates. No deduction or withholding from Royalties payable to Licensor shall be made by reason of any tax. Any applicable tax on the manufacture, distribution and sale of the Book shall be borne by Licensee. 21.2 The statement forms Licensor designates for Licensee's use may be changed from time to time, and Licensee agrees to use the most current form Licensor provides to Licensee. Licensee shall fully comply with all of Licensor's instructions for completing such forms. Licensee shall submit, concurrently with Licensee's written statement of account for each Royalty Payment Period, an electronic version (e.g., computer diskette or electronic transmission) of such statement of account. Licensee shall continue to submit, in electronic or written form, the "Supplemental Schedule" which Licensee has heretofore been submitting to Licensor in conjunction with Licensee's statements of account, identifying the new titles being sold for each Royalty Payment Period. 21.3 Sales of books licensed under contracts with Licensor other than this Agreement shall not be reported on the same statement as sales of the Book under this Agreement. 21.4 Licensee's payments, including all Royalties (excluding Royalties payable to Canada), shall be delivered to the attention of the Disney Publishing Group, P.O. Box 101947, Atlanta, Georgia 30392. A copy of each statement and payment must be Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 30 sent to The Disney Publishing Group, 500 South Buena Vista Street, Burbank, California 91521-6311, to the attention of Disney Licensed Publishing. If Licensee wishes to send statements and payments by overnight courier, please use the following address: The Disney Publishing Group, 3800 West Alameda Avenue, 17th Floor, Burbank, California 91505-6311, Attention Disney Licensed Publishing. Any Advances should be mailed directly to The Disney Publishing Group, 3800 West Alameda Avenue, 16th Floor, Burbank, California 91505-6292, to the attention of the Contract Administrator. Statements and Royalties payable to Canada shall be delivered to Disney Worldwide Services, Inc. - T6071, P.O. Box 6100, Postal Station "F", Toronto, Ontario M4Y 2Z2. 21.5 Licensee shall indicate on Licensee's statement of account the amount of any reserve for returns maintained. Licensee shall not maintain an unreasonable reserve for returns. In no event shall Licensee's reserve for returns exceed [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] of the Royalties due in the Royalty Payment Period being reported, unless Licensee has obtained the prior written consent of Licensor. In the event that actual returns exceed the reserve for returns and cannot be recouped out of Royalties otherwise due in the relevant Royalty Payment Period, or any subsequent Royalty Payment Period, Licensor shall refund at the end of the Term unearned Royalties previously paid in excess of any Advances, and subject to payment by Licensee when due of any guarantee obligation. Such refund may be applied by Licensor against any late charges that may be due by Licensee hereunder. In the event that reserves exceed actual returns, Licensee shall pay Royalties on the difference with Licensee's final statement of account for the Term. Licensee may report returns during the Term of the Agreement only. In no event may Licensee report returns which occur during the Sell-off Period, if granted. For purposes of clarity, in no event shall Licensee be entitled to offset any returns against Licensee's Guarantee obligations. Without limiting the generality of the foregoing, once Licensee has attained the capability to report actual returns on a consistent basis and can demonstrate to Licensor the need to increase the allowable reserve for returns percentage, Licensor shall in good faith consider permitting a reasonable increase. 21.6 Within thirty (30) days prior to the beginning of each Royalty Payment Period and within ninety (90) days prior to the beginning of each Guarantee period, Licensee shall submit to Licensor a forecast of the expected Net Invoiced Billings, projected unit volumes to be sold, unit volumes to be returned, reserve percentages, suggested retail prices, and Royalties for each title of the Book for each respective time period. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 31 21.7 Licensee shall take all necessary steps to ensure that its information systems, including without limitation, all its proprietary and all third party hardware and software, process dates correctly prior to, during and after the calendar year 2000 ("Year 2000 Compliance"). Year 2000 Compliance shall include, without limitation, correct century recognition, calculations that properly accommodate same century and multi-century formulas and date values, and interface values that reflect the appropriate century. Necessary steps to ensure Year 2000 Compliance shall include, without limitation, analysis of all components of Licensee's information systems and, as necessary, development, installation and testing of software fixes, patches and/or updates. In a timely manner, but no later than December 31, 1998, Licensee shall advise Licensor in writing whether or not its information systems are Year 2000 Compliant. If Licensee advises Licensor that Licensee's information systems are not Year 2000 Compliant, Licensee shall endeavor to ensure that its information systems are substantially Year 2000 Compliant on or before June 30, 1999. 21.8 Without limiting the generality of this Paragraph 21, Licensor recognizes and acknowledges that Licensee's current automated accounting system may not have the capability to report all of the information required by Licensor, including the information required under Subparagraphs 21.1 and 21.6 above. Licensee represents that it is currently working to improve its automated accounting system so as to be in a position to provide Licensor with all of the information requested by Licensor for reporting purposes under those Subparagraphs by January 1, 2000. Until such time, Licensee shall not be deemed to be in breach of Subparagraphs 21.1 or 21.6 if Licensee (a) uses its best efforts to report to Licensor the maximum amount of information required under Subparagraphs 21.1 and 21.6 which Licensee is reasonably capable of reporting and (b) Licensee provides Licensor any such additional information required, if reasonably available and whether or not contained in Licensee's automated accounting system, on an as-needed basis when requested by Licensor, including, but not limited to, in connection with Licensor's audit rights under Paragraph 23 below. 22. INTEREST Royalties, audit findings or any other payments due to Licensor hereunder which are received after the due date shall bear interest at the rate of [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] per annum from the due date, or at the maximum rate permissible by law if less than [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 32 23. AUDITS AND MAINTAINING RECORDS 23.1 Licensee agrees to keep and preserve accurate records, during the Term hereof and for two (2) years after the expiration or termination of this Agreement, of all transactions relating to this Agreement and any prior agreement with Licensor regarding the Licensed Property, including, without limitation, print runs, shipments to Licensee of the Book and any components thereof, inventory records, records of sales and shipments by Licensee, and records of returns. Licensor, and/or a representative of Licensor, shall have the right at any time, during the Term hereof and for two (2) years after the expiration or termination of this Agreement, during reasonable business hours upon a prior request made by Licensor, to examine and make extracts from all such records, including the general ledger, invoices, and any other records which Licensor reasonably deems appropriate to verify the accuracy of Licensee's statements of account or Licensee's performance under this Agreement. Licensee acknowledges that Licensor may furnish Licensee with an audit questionnaire, and Licensee agrees to fully and accurately complete such questionnaire, and return it to Licensor within the designated time. Licensor's use of an audit questionnaire shall not limit Licensor's ability to conduct any on-site audit(s) as provided above. Licensee acknowledges that an audit conducted by Licensor or its representatives, may involve one or more license agreements at a time. 23.2 If in any audit of Licensee's records it is determined that there is a shortfall of five percent (5%) or more in Royalties reported for any Royalty Payment Period, Licensee shall, upon request from Licensor, reimburse Licensor for the full out-of-pocket costs of the audit, including the costs of employee auditors calculated at their then current hourly rate per person for travel time during normal working hours and actual working time. 23.3 If Licensee has failed to keep accurate records for one or more Royalty Payment Periods, Licensor will assume that the Royalties owed to Licensor for such Royalty Payment Period(s) are equal to a reasonable amount, determined in Licensor's absolute discretion, which may be up to, but will not exceed, the highest Royalties owed to Licensor in a Royalty Payment Period for which Licensee has kept accurate records. If Licensee has failed to keep adequate records for any Royalty Payment Period, Licensor will assume a reasonable amount of Royalties which Licensee will owe to Licensor, based on the records Licensee has kept and other reasonable assumptions Licensor deems appropriate. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 33 24. WITHDRAWAL OF LICENSED MATERIAL Licensor may require Licensee to withhold and/or withdraw the Licensed Property, or any part thereof, the use or sale of which under this Agreement would infringe or reasonably be claimed to infringe the rights of a third party, other than rights granted by Disney Enterprises, in which case Licensor's obligations to Licensee shall be limited to the purchase at cost of the Books and other materials utilizing such withdrawn Licensed Property which cannot be used or sold. In the case of any withdrawal under the preceding sentence, the Advance and Guarantee shall be adjusted to correspond to the time remaining in the Term at the date of withdrawal. 25. TERMINATION Without prejudice to any other right or remedy available to it, Licensor shall have the right at any time to terminate this Agreement, by giving written notice thereof, in the event of the occurrence of one (1) or more of the following: 25.1 If Licensee delivers to any customer without Licensor's written authorization anything containing representations of the Licensed Property or other material the copyright or other proprietary rights to which are owned by Disney Enterprises, other than the Book described herein and approved in accordance with the provisions hereof and such breach is not cured within thirty (30) days after notification by Licensor of the breach (or, in the event of a breach which cannot be corrected within thirty (30) days, if Licensee fails to commence such correction within such thirty (30) day period and thereafter diligently prosecute it to completion); or 25.2 If Licensee delivers the Book outside the Territory (unless the Book is destined for ultimate delivery in the Territory) or sells the Book to a third party if Licensee knows, or in the exercise of prudent business judgment should know, that such sale will result in delivery of the Book outside the Territory and such breach is not cured within thirty (30) days after notification by Licensor of the breach (or, in the event of a breach which cannot be corrected within thirty (30) days, if Licensee fails to commence such correction within such thirty (30) day period and thereafter diligently prosecute it to completion); or 25.3 If Licensee fails to make any payment and/or furnish any statement as herein provided, and if such failure is not corrected within thirty (30) days following the date said statement or payment was due; or 25.4 If Licensee shall breach any other terms of this Agreement and if any such breach is not corrected within thirty (30) days after notification by Licensor of the breach (or, Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 34 in the event of a breach which cannot be corrected within thirty (30) days, if Licensee fails to commence such correction within such 30 day period and thereafter diligently prosecute it to completion); or 25.5 If Licensee breaches any material term of any other agreement between the parties to this Agreement, and Licensor terminates such other agreement for cause; or 25.6 If Licensee shall make any assignment for the benefit of creditors, or file a petition in bankruptcy, or be adjudged bankrupt, or become insolvent, or be placed in the hands of a receiver. The equivalent of any of the proceedings or acts referred to in this Subparagraph, though known and/or designated by some other name or term in any part of the Territory shall likewise constitute a ground for termination of this Agreement by Licensor; or 25.7 If Licensee is not permitted or is unable to operate its business in the usual manner, or is not permitted or is unable to provide Licensor with assurances satisfactory to Licensor that Licensee will so operate Licensee's business, as debtor in possession or its equivalent, or is not permitted, unable to otherwise meet Licensee's obligations under this Agreement or to provide Licensor with assurance satisfactory to Licensor that Licensee will meet such obligations; or 25.8 If [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] during the Term of this Agreement (and any extension thereof) Licensee breaches any material provision of this Agreement which is of the same nature, and which violates the same provision of this Agreement, as a breach of which Licensor has previously given Licensee written notice; or 25.9 If Licensee transfers or attempts to transfer this Agreement in contravention of Paragraph 27 below; or 25.10 If [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] during the Term of this Agreement (and any extension thereof) Licensee breaches any covenant set forth in Paragraph 10 of this Agreement after Licensor has previously given Licensee written notice of a breach of any covenant set forth in such Paragraph 10; or 25.11 If [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] Consent/Manufacturer's Agreements or Supplier's Agreements, either combined or separately, are terminated in any twelve-month Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 35 period by Licensor for the Suppliers' failure to pass compliance inspections as referenced in Paragraphs 10 and 11 above; and/or 25.12 If Licensee materially breaches any provision of the Warrant, and such breach is not cured within thirty (30) days after notification by Licensor of the breach (or, in the event of a breach which cannot be corrected within thirty (30) days, if Licensee fails to commence such correction within such thirty (30) day period and thereafter diligently prosecute it to completion). 26. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION 26.1 Upon the expiration or termination of this Agreement, all rights granted herein to Licensee shall revert to Licensor, any unpaid portion of the Guarantee shall be due and payable in accordance with the provisions set forth in Subparagraph 4.1 below, and Licensor shall be entitled to retain any and all consideration paid to Licensor and other things of value paid or delivered to Licensor. 26.2 Licensee agrees that the Book shall be manufactured during the Term in quantities consistent with anticipated demand therefor so as not to result in an excessive inventory build-up immediately prior to the end of the Term. Licensee agrees that from the expiration or termination of this Agreement, Licensee shall neither manufacture nor have manufactured for Licensee the Book, and that except as hereinafter may be provided, Licensee will cease selling the Book. Any unauthorized distribution of the Book after the expiration or termination of this Agreement shall constitute copyright infringement. 26.3 If Licensee has any unsold copies of the Book in inventory on the expiration or termination date, Licensee shall provide Licensor with a full itemized statement, certified by an authorized accredited officer of Licensee, of all unsold copies of the Book remaining in stock. If such statement has been provided to Licensor and if Licensee has complied with the material terms of this Agreement, including the payment of all Royalties due and the Guarantee, upon notice from Licensor, Licensee shall have the right to fill orders, as authorized under Paragraph 2 above, from its then remaining stocks of the Book for a limited period of twelve (12) calendar months following the expiration of the Term by the passage of time (the "Sell-off Period"). Licensee shall consult with Licensor regarding its sell-off plan and sell off remaining stocks of the Book only pursuant to such plan and in such distribution channels as are mutually acceptable to the parties. Licensee shall furnish Licensor with statements of account covering such sales and pay Licensor Royalties upon such sales. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 36 Such Royalties shall not be applied against the Advance or towards meetingthe Guarantee. All rights and remedies available to Licensor during the Term shall be equally available to Licensor during the Sell- off Period. 26.4 Following the expiration of the Sell-off Period, Licensee shall provide Licensor with an itemized statement of all unsold copies of the Book remaining in stock. All unsold copies of the Book shall, at the end of the Sell-off Period (or, if there is no Sell-off Period, upon the expiration or earlier termination of the Term), at Licensor's option, be sold to Licensor at Licensee's actual cost of manufacture, excluding overhead, or shall be destroyed, and Licensee shall furnish Licensor with an affidavit of such destruction signed by a principal officer of Licensee. 26.5 Licensee agrees that all pre-pricing and pricing of the Book shall be in compliance with any and all Laws applicable thereto. In recognition of Licensor's interest in maintaining a stable and viable market for the Book during and after the Term and any Sell-off Period, Licensee agrees to refrain from "dumping" the Book in the market during the Term and any Sell-off Period granted to Licensee. [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 26.6 Except as otherwise agreed by Licensor in writing, any inventory of the Book in Licensee's possession or control after the expiration or termination of this Agreement, and any Sell-off Period granted hereunder, shall be destroyed, or all Licensed Property removed or obliterated therefrom. 26.7 At the expiration or earlier termination of this Agreement, Licensee agrees to deliver to Licensor, without charge to Licensor, any and all artwork, including without limitation, reference materials, mechanicals, digital files, original manuscripts and paintings, film and film positives/negatives, four- color separations, photographs, transparencies, film proofs, and any other reproduction material used in the creation, development, and manufacture of the Book, whether furnished by Licensor, created by Licensee or otherwise acquired by Licensee (the property rights in all of which such materials shall remain vested in Disney Enterprises at all times). If Licensee should for any reason fail to deliver such materials, or any part thereof, and Licensor thereafter must recreate such material, Licensee agrees to reimburse Licensor for the reasonable costs incurred by Licensor in so doing. 26.8 Notwithstanding any provision to the contrary, in the case of termination under Subparagraphs 25.6 or 25.7 above, in order to protect the value of the Book and to avoid any disparagement of the Book which would occur as a result of the circumstances of termination, Licensor shall have the option, in Licensor's absolute Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 37 discretion, to purchase any or all unsold copies of the Book in Licensee's inventory on the termination date at [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 27. NON-ASSIGNABILITY 27.1 This license and the rights granted and obligations undertaken hereunder are personal to Licensee. Licensee shall not voluntarily or by operation of law assign, sub-license, transfer, encumber or otherwise dispose of all or any part of Licensee's interest in this Agreement (including, but not limited to, any encumbrance of the Book) without Licensor's prior written consent, to be granted or withheld in Licensor's absolute discretion. Any attempted assignment, sub-license, transfer, encumbrance or other disposal without such consent shall be void and shall constitute a material default and breach of this Agreement. "Transfer" within the meaning of this Paragraph 27 shall include (1) any merger or consolidation involving Licensee or Golden Books Family Entertainment, Inc. ("GBFE"); (2) any sale or transfer of all or substantially all of Licensee's or GBFE's assets; (3) any transfer of Licensee's rights or duties hereunder to a division, business segment or other entity different from the one specifically referenced on page 1 hereof (or any sale or attempted sale of the Book under a trademark or trade name of such division, business segment or other entity); (4) any public offering, or series of public offerings, whereby a cumulative total of thirty-three and one-third percent (33 1/3%) or more of the voting stock (or any other capital stock cumulatively convertible into the right to vote such percentage) of Licensee or GBFE is offered for purchase; and (5) any acquisition, or series of acquisitions, by any person or entity, or group of related persons or entities, of a cumulative total of thirty-three and one-third percent (33-1/3%) or more of the voting stock (or any other capital stock cumulatively convertible into the right to vote such percentage) or the Beneficial Ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of Licensee or GBFE. 27.2 Licensee hereby represents that, as of the date of this Agreement, Golden Press Holdings, L.L.C. ("GPH") holds all Series "B" Preferred Shares in GBFE (the "Series B Shareholder"). For purposes of clarification, "transfer" within the meaning of this Paragraph 27 shall not include (i) any conversion of Series "B" Preferred Shares into Common Shares by the Series B Shareholder or (ii) any actions described in the definition of "transfer" in Subparagraph 27.1 if such actions occur between or among E.M. Warburg Pincus & Company and its Affiliates. Licensee further represents that, as of the date of this Agreement, E.M. Warburg Pincus & Company, Warburg, Pincus & Co., Warburg Pincus Ventures, L.P., and their respective Affiliates are the Beneficial Owners (as defined above) of thirty-three and one-third percent (33-1/3%) Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 38 or more of the voting stock (or other capital stock cumulatively convertible into the right to vote such percentage) of GBFE (the "Warburg Pincus Shares"). The following shall apply with respect to any transfer of the Warburg Pincus Shares which requires the consent of Licensor pursuant to Subparagraph 27.1 above: (1) Licensor hereby consents to the transfer by a widely-distributed public offering of the Warburg Pincus Shares to individual investors [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. (2) [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. (3) [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. 27.3 Licensee agrees to provide Licensor with at least thirty (30) days prior written notice of any desired assignment of this Agreement or other transfer as defined in this Paragraph 27. At the time Licensee gives such notice, Licensee shall provide Licensor with the information and documentation necessary to evaluate the contemplated transaction. Except as otherwise provided in Subparagraph 27.2 above, Licensor's consent (if given) to any assignment of this Agreement or other transfer as defined in this Paragraph 27 shall be subject to such terms and conditions as Licensor deems appropriate, including but not limited to, payment of a transfer fee, provided however that no such transfer fee shall be applicable to a desired assignment of this Agreement or other transfer as defined in this Paragraph 27 effectuated in connection with a pre-packaged plan of reorganization consummated on or before June 30, 1999. The amount of the transfer fee shall be determined by Licensor based upon the circumstances of the particular assignment or transfer, taking into account such factors as the estimated value of the license being assigned or otherwise transferred; the risk of business interruption or loss of quality, production or control Licensor may suffer as a result of the assignment or other transfer; the identity, reputation, creditworthiness, financial condition and business capabilities of the proposed assignee or other entity involved in the transfer; and Licensor's internal costs related to the assignment or other transfer; provided, however, in no event shall the transfer fee be less than [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] for any license between Licensor and Licensee involved in an assignment or other transfer. The foregoing transfer fee shall not apply if this Agreement is assigned to one or more of Licensee's Affiliates as part of a corporate Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 39 reorganization exclusively among some or all of the entities existing in Licensee's corporate structure when this Agreement is signed; provided, however, that Licensee must give Licensor written notice of such assignment and a description of the reorganization. The provisions of this Subparagraph 27 shall supersede any conflicting provisions on this subject in any publishing license agreements previously entered into between Licensee and Licensor for this Territory. 27.4 Notwithstanding Subparagraphs 27.1 and 27.3 above, Licensee may, upon Licensor's prior written consent sublicense Licensee's rights and/or obligations hereunder to any of Licensee's Affiliates, provided that each such Affiliate agrees to be bound by all of the terms and conditions of this Agreement, and provided that each such Affiliate agrees to guarantee Licensee's full performance of this Agreement (including, but not limited to, Paragraph 19) and to indemnify Licensor for any failure of such performance, and further provided that Licensee and each such Affiliate agree to provide Licensor with satisfactory documentation of such agreement(s), guarantee(s), and indemnification upon Licensor's request therefor. Licensee hereby irrevocably and unconditionally guarantees that any and all Affiliates sublicensed hereunder will observe and perform all of Licensee's obligations under this Agreement, including, but not limited to, the provisions governing approvals, and compliance with approved samples, applicable Laws, and all other provisions hereof, and that such companies will otherwise adhere strictly to all of the terms hereof and act in accordance with Licensee's obligations hereunder. Any involvement of an Affiliate in the activities which are the subject of this Agreement shall be deemed carried on pursuant to such a sublicense and thus covered by such guarantee; however, unless Licensee has obtained Licensor's consent to sublicense an Affiliate in each instance, such Affiliate shall be deemed to be included in the term "Licensee" for all purposes under this Agreement, and Licensor may treat such unapproved involvement of the Affiliate as a breach of the Agreement. In the event of any sublicense to an Affiliate hereunder, the reference in Subparagraph 27.1 to Licensee shall include such Affiliate sublicensee. 27.5 Licensor's rights and obligations hereunder may be assigned, delegated or otherwise transferred by Licensor. 28. NOTICES All notices which either party is required or may desire to serve upon the other party hereunder shall be in writing and addressed to the party to be served at the address set forth below, or to such other address as either party may hereafter designate: Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 40 To Licensor: Disney Licensed Publishing 500 S. Buena Vista Street Burbank, California 91521 Attention: Vice-President With a copy to: The Walt Disney Company 500 Park Avenue New York, NY 100221 Attention: Kenneth E. Newman Senior Vice President - Eastern Regional Counsel To Licensee: Golden Books Publishing Company, Inc. 888 Seventh Avenue New York, NY 10019 Attention: Richard Snyder With a copy to: Golden Books Publishing Company, Inc. 888 Seventh Avenue New York, NY 10019 Attention: Philip Galanes, Esq. Any notice, served by either party, may be served personally or by depositing the same addressed as herein provided (unless and until otherwise notified), postage prepaid, in the official mail of the country in which deposited, or by documented overnight delivery service. Such notice shall be deemed to have been served upon personal delivery or upon the date of mailing. However, Licensor shall be deemed to have been served with a notice of a request for approval of materials under this Agreement only upon Licensor's actual receipt of the request and of any required accompanying materials. 29. MUSIC Music is not licensed hereunder. Any charges, fees or royalties payable for music rights or any other rights not covered by this Agreement shall be additional to the Royalties and covered by separate agreement. 30. GOODWILL Licensee hereby acknowledges that the rights and powers retained by Licensor hereunder are necessary to protect Disney Enterprises' copyrights and property rights, and, specifically, to conserve the goodwill and good name of Licensor's products and Licensor's Affiliates, the Disney Property Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 41 and the name "Disney", and therefore Licensee agrees that Licensee will not allow the same to become involved in matters which will, or could, detract from or impugn the public acceptance and popularity thereof, or impair their legal status. 31. RELATIONSHIP This Agreement does not provide for a joint venture, partnership, franchise, agency or employment relationship between the parties, or any other relationship than that of licensor and licensee. 32. CONSTRUCTION The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning and not strictly for or against any of the parties. Headings of paragraphs herein are for convenience of reference only and are without substantive significance. 33. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT Except as otherwise provided herein, this Agreement can only be extended or modified by a writing signed by both parties executed after the effective date hereof; provided, however, that certain modifications shall be effective if signed by the party to be charged and communicated to the other party. The parties agree to execute such further documents as may be necessary to implement or make effective the terms of this Agreement. 34. RESERVATION OF RIGHTS All rights not specifically granted and licensed to Licensee hereunder are reserved to Licensor. 35. WAIVERS A waiver by either party at any time of a breach of any provision of this Agreement shall not apply to any breach of any other provision of this Agreement, or imply that a breach of the same provision at any other time has been or will be waived, or that this Agreement has been in any way amended, nor shall any failure by either party to object to conduct of the other be deemed to waive such party's right to claim that a repetition of such conduct is a breach hereof. 36. SEVERABILITY In the event any provision contained herein is held to be unlawful or unenforceable, such provision shall be severable from the remaining provisions of this Agreement, which shall remain in full force and effect. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 42 37. CHOICE OF LAW AND FORUM This Agreement shall be deemed to be entered into in California and shall be governed and interpreted according to the laws of the State of California applicable to contracts made and to be fully performed in California. Any legal actions pertaining to this Agreement shall be commenced within the State of California and within either Los Angeles or Orange Counties, and Licensee hereby consents to the jurisdiction of the courts located in Los Angeles or Orange Counties. 38. EQUITABLE RELIEF Licensee acknowledges that Licensor will have no adequate remedy at law if Licensee continues to manufacture, sell, advertise, promote or distribute the Book upon the expiration or termination of this Agreement. Licensee acknowledges and agrees that, in addition to any and all other remedies available to Licensor, Licensor shall have the right to have any such activity by Licensee restrained by equitable relief, including, but not limited to, a temporary restraining order, a preliminary injunction, a permanent injunction, or such other alternative relief as may be appropriate, without the necessity of Licensor posting any bond. 39. POWER TO SIGN The parties warrant and represent that their respective representatives signing this Agreement have full power and proper authority to sign this Agreement and to bind the parties. 40. CONFIDENTIALITY 40.1 Licensee represents and warrants that Licensee did not trade on the prospect of a license from Licensor, prior to full execution of this Agreement. Licensee agrees to keep the terms and conditions of this Agreement confidential, and Licensee shall not disclose such terms and conditions to any third party without obtaining Licensor's prior written consent; provided, however, that the terms and conditions of this Agreement may be disclosed on a need-to-know basis to Licensee's outside attorneys and accountants who agree to be bound by this confidentiality provision. In addition, Licensee may have access to information concerning Licensor's and/or its Affiliates' business and operations, and/or information concerning works in progress, artwork, plots, characters or other matters relating to Licensor's and/or its Affiliates' artistic creations, which information may not be accessible or known to the general public. Licensee agrees not to use or disclose such information to any third party without obtaining Licensor's prior written consent. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 43 40.2 Licensor agrees to use reasonable care to keep confidential those terms and conditions of this Agreement which are not standard terms and conditions contained in Licensor's licensed publishing agreements with other licensees, and Licensor shall not disclose such terms and conditions to any third party without obtaining Licensee's prior written consent; provided, however, that the terms and conditions of this Agreement may be disclosed on a need-to-know basis to Licensor's outside attorneys and accountants who agree to be bound by this confidentiality provision. In addition, Licensor may have access to information concerning Licensee's and/or its Affiliates' business and operations which information may not be accessible or known to the general public. Licensor agrees not to use or disclose such information to any third party without obtaining Licensee's prior written consent. 40.3 In the event either party is required to disclose the information deemed confidential in Subparagraphs 40.1 and 40.2 above, pursuant to any law, court order or process, the rules and regulations of any governmental department, agency or authority (including, but not limited to, the Securities and Exchange Commission) or any generally accepted accounting rules mandating disclosure in the disclosing party's financial statements, the disclosing party agrees to give the non-disclosing party prior written notice and the disclosing party shall use its best efforts to obtain confidential treatment of the information required to be disclosed. Upon the non-disclosing party's request, the disclosing party agrees to incorporate, to the extent reasonably possible, the non-disclosing party's comments into the disclosing party's request for confidential treatment, provided such request and comments are received by the disclosing party within five (5) business days after receipt the notice referred to in the preceding sentence. 40.4 Licensor and Licensee shall consult with each other before issuing any press release or making any public statement with respect to the execution, termination, expiration or terms and conditions of this Agreement. and, except as may be required by law, shall not issue any such press release or make any public statement unless the text of such statement shall first have been agreed upon by the parties. Golden Books Publishing Company, Inc. Agreement dated December 12, 1998 Page 44 41. PREVIOUS AGREEMENTS Effective as of December 11, 1998, the Licensed Book Publishing Agreement dated September 26, 1997 has been terminated. This Agreement, and any confidentiality agreement Licensee may have signed pertaining to any of the Licensed Property, contains the entire agreement between the parties concerning the subject matter hereof and supersedes any pre-existing or contemporaneous agreement and any oral or written communications between the parties. 42. SURVIVAL OF OBLIGATIONS The respective obligations of the parties under this Agreement, which by their nature would continue beyond the termination, cancellation or expiration of this Agreement, including but not limited to indemnification, insurance, payment of Royalties, and Paragraph 26 above, shall survive termination, cancellation or expiration of this Agreement. ACCEPTED AND AGREED: GOLDEN BOOKS PUBLISHING BUENA VISTA BOOKS, INC. COMPANY, INC. DBA DISNEY LICENSED PUBLISHING By: /s/ By: /s/ --------------------------- --------------------------- Title:___________________________ Title:__________________________ Date:____________________________ Date:___________________________ GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED DECEMBER 12, 1998 SCHEDULE A "A" PROPERTIES [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] (18) Characters from each new major children-oriented Disney-branded feature animation film, animation video, and Disney-branded live action film released or re-released during the Term; (19) Children-oriented television properties which Licensor has previously licensed to Licensee as well as new properties which are derived from the non-television Properties listed above and are developed by Disney for a children- oriented television series; and (20) New children-oriented television properties originally developed by Disney or acquired by Disney, but only if Licensor and Licensee mutually agree to a program whereby Licensee shall provide sufficient publishing support for such new television property. *Tentative title Licensor shall determine the classification of any given property into "A", "B" or "C" Properties, in good faith, in Licensor's absolute discretion, and consistent with existing property classifications. GOLDEN BOOKS PUBLISHING COMPANY, INC. GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED DECEMBER 12, 1998 SCHEDULE A "B" PROPERTIES [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] (24) Children-oriented television properties which Licensor has previously licensed to Licensee as well as new properties which are derived from the non-television Properties listed above and which are developed by Disney for a children-oriented television series; and (25) New children-oriented television properties originally developed by Disney or acquired by Disney, but only if Licensor and Licensee mutually agree to a program whereby Licensee shall provide sufficient publishing support for such new television property. *Tentative title GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED DECEMBER 12, 1998 SCHEDULE A "C" PROPERTIES [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] (19) Children-oriented television properties which Licensor has previously licensed to Licensee as well as new properties which are derived from the non-television Properties listed above and which are developed by Disney for a children-oriented television series; and (20) New children-oriented television properties originally developed by Disney or acquired by Disney, but only if Licensor and Licensee mutually agree to a program whereby Licensee shall provide sufficient publishing support for such new television property. GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED DECEMBER 12, 1998 SCHEDULE B FORMATS [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] Color & Activity Activity pads [Intentionally omitted pursuant to a Color-by-Number confidential treatment request and separately Color Surprise (magic) filed with the Commission] Easy Peel Sticker books " Foil sticker books " Magic slates* " Mark & See Magic " Match & Color " My Coloring book " My First Activity book " Paint with water " Paint box books " Paint 'N' Marker " Paper doll book " Posters to color " Press-out activity book " Scented sticker book " Shaped coloring book " Special edition coloring book " Sticker by Number " Sticker fun " Super coloring book " Super paint with water " Tell-a-Story sticker book " Trace & Color " For purposes of this Agreement, the term "Book," as it applies to the color and activity format, shall include, in addition to those color and activity formats listed hereinabove, the following: (a) Licensee's color and activity books, in which the Licensed Property is used, existing as of the date of this Agreement in the format specifications (e.g., trim size and page count) previously approved by Licensor under any prior license agreements between Licensor and Licensee (or their predecessors); (b) New color and activity formats developed by Licensee which meet each of the following criteria: (i) Derivative of any color and activity formats approved by Licensor under this Agreement or under any prior license agreement between Licensor and Licensee (or their predecessors); (ii) Similar in price point to any color and activity formats approved by Licensor under this Agreement or under any prior license agreement between Licensor and Licensee (or its predecessors); and (iii) Subject to the same distribution channels authorized in Subparagraph 2.3 of this Agreement. For purposes of this Agreement, the term "Book," as it applies to the color and activity format, shall not include the following: (a) Any product which is or could be reasonably construed as an entirely new category of product (e.g., educational workbooks or foreign language teaching products); (b) Any product which includes any new or substantially new technology, or a key component of which, was not contemplated by the scope of the authorized color and activity formats licensed hereunder (e.g., a talking coloring book or a color and activity book with a toy or audiocassette); (c) Any product which has been licensed by Licensor to another licensee as of the date of this Agreement, but only for the duration of the term of such license(s); and (d) Any product which, in whole or in part, falls outside of Licensor's customary licensed publishing business or which is published, manufactured or licensed or being published, manufactured or licensed by Licensor's Affiliates. GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED DECEMBER 12, 1998 SCHEDULE B FORMAT [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission] Storybook Deluxe Super Shape book [Intentionally omitted pursuant to a Little Golden book confidential treatment request and separately Look Look book filed with the Commission] Super Shape book " First Little Golden book " Sturdy Shape book** " Little Look Look book " Little Little Golden book (2-pack) " Little Super Shape " Little Golden Storybook " *Books are to be of a type and quality designed to sell for the suggested retail prices, provided, however, that Licensee has the absolute discretion to price the books as Licensee deems appropriate. **Subject to Subparagraph 2.1 of this Agreement. For purposes of this Agreement, the term "Book" as it applies to the storybook format shall include, in addition to those storybook formats listed above, storybooks developed by Licensee which contain minor modifications (e.g., trim size and page count) to the specifications of the storybook formats listed hereinabove and which are subject to the same distribution channels authorized in Subparagraph 2.3 of this Agreement. Nothing in this Agreement shall preclude Licensee from submitting for Licensor's consideration new storybook opportunities. GOLDEN BOOKS PUBLISHING COMPANY, INC. AGREEMENT DATED SEPTEMBER 26, 1997 SCHEDULE C [Intentionally omitted pursuant to a confidential treatment request and separately filed with the Commission]. SUPPLIER'S AGREEMENT EXHIBIT 1 ________________________________________________________________________________ SUPPLIER: _____________ _____________ _____________ Reference is made to the license agreement dated ________ between Disney Licensed Publishing ("Licensor") and ___________ ("Licensee") in which Licensor has licensed the publication by Licensee of ________________________________ (the "publication"). Licensor hereby authorizes you to prepare, from material supplied to you by Licensee and/or Licensor, reproduction material, including as applicable film positives, four color separations, photographs, transparencies, film negatives, black separations, black keyplate proofs and other reproduction material used in the manufacture of the publication, upon the condition that the Supplier shall sign and fully comply in all respects with this agreement. Failure of said condition shall entitle Licensor to terminate this agreement forthwith. The property rights (including but not limited to copyright and physical ownership) in all such materials shall remain vested in Disney Enterprises, Inc., at all times. Said reproduction material will be delivered by you to no one other than Licensee, or as Licensor may otherwise direct. Licensor shall be under no obligation to you with respect to such charges as may be incurred in connection with reproduction material prepared at the request of Licensee. The Supplier signing below agrees that (except as may be authorized under a separate agreement with Licensor): 1. The Supplier will not manufacture the publication or components thereof to the order of anyone but the Licensee, will invoice only the Licensee, will not ship to anyone other than the Licensee or Licensee's designees and will not ship after the expiration date of the License Agreement. 2. The Supplier will not subcontract production of the publication or components thereof without Licensor's written consent. 3. The Supplier will not (without Licensor's written consent) manufacture the publication or components thereof listed above, other than in accordance with this agreement. 4. From time to time, the Supplier will permit Licensor's authorized representatives to inspect its activities and premises, accounting books and invoices relevant to its manufacture and supply of the publication. 5. The Supplier will not publish or cause the publication of pictures from the publication in any other publication or promotional material, nor advertise the fact that it is permitted to manufacture the publication or components thereof, nor use the name "Disney" or any variant thereof without Licensor's prior written consent. 6. In manufacturing the publication, the Supplier will comply with all applicable laws, regulations, voluntary industry standards, codes, or other obligations (collectively "Laws"), including but not limited to, applicable health and safety standards and labor laws for manufacturing operations. Specifically, the Supplier covenants that: (a) The Supplier agrees not to use child labor in the manufacturing or packaging of the publication or components thereof. The term "child" refers to a person younger than the age for completing compulsory education, but in no case shall any child younger than fourteen (14) years of age be employed in the manufacturing or packaging of the publication or components thereof. (b) The Supplier agrees to provide employees with a safe and healthy workplace in compliance with all applicable Laws. The Supplier agrees to provide Licensor with all information Licensor may request about manufacturing or packaging facilities for the publication or components thereof. (c) The Supplier agrees only to employ persons whose presence is voluntary. The Supplier agrees not to use prison labor, or to use corporal punishment or other forms of mental or physical coercion as a form of discipline of employees. (d) The Supplier agrees to comply with all applicable wage and hour Laws, including minimum wage, overtime, and maximum hours. The Supplier agrees to utilize fair employment practices as defined by applicable Laws. (e) The Supplier agrees not to discriminate in hiring and employment practices on grounds of race, religion, national origin, political affiliation, sexual preference, or gender. (f) The Supplier agrees to comply with all applicable environmental Laws. (g) The Supplier agrees that Licensor may engage in activities such as unannounced on-site inspections of manufacturing or packaging facilities in order to monitor compliance with applicable Laws. 7. Upon expiration or termination of the License Agreement, or upon notification by Licensor or Licensee, you will immediately cease manufacturing the publication and deliver to Licensor or its authorized representative such reproduction materials as are necessary for printing, and shall deliver to Licensee, or to Licensor if Licensor so requests, all artwork, textual and reproduction materials for the publication which Licensor or Licensee may have caused to be furnished to you, and all original and reproduction material prepared by you hereunder, unless Licensee has engaged you to do the printing, in which case you will deliver such original and reproduction material at such other time as Licensor may direct, or in the absence of such direction, upon completion of your use of such original and reproduction materials for the printing of the publication. Said materials shall be so delivered without charge other than the expense of delivery, and shall be complete and in reproduction condition. You agree to provide Licensor upon request, a statement and/or a duplicate invoice as to all materials provided to Licensee hereunder. DISNEY LICENSED PUBLISHING ACCEPTED AND AGREED BY: By: ______________________________ By: __________________________ (to be signed by Supplier) Title: ____________________________ Title: _________________________ Company:___________________________ EXHIBIT 2 WORK FOR HIRE AGREEMENT/COPYRIGHT ASSIGNMENT The undersigned agrees that for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, all literary and/or artistic Work (collectively the "Work") written or otherwise created by the undersigned in connection with the publication tentatively entitled ___________________________________ (the "Publication") was written and/or otherwise created by the undersigned as a work made for hire for Disney Enterprises, Inc. ("Disney") pursuant to an agreement between the undersigned and _________________ ("Publisher") dated ________________________. The undersigned acknowledges that the Work was specially ordered or commissioned for use as a contribution to the Publication, that Disney owns throughout the universe in perpetuity all right, title and interest in the Work and the results and proceeds of the undersigned's services, that Disney shall be deemed the author of the Work for purposes of copyright and that Disney is entitled to the copyright(s) therein (and all renewals and extensions thereof), with the right to make such changes in the Work and uses thereof as Disney may from time to time determine within its sole discretion. The undersigned also assigns to Disney all now known and hereafter existing rights of every kind (including the copyright and all renewals and extensions thereof), throughout the universe in perpetuity and in all languages, pertaining to the Work for all now known and hereafter existing uses, media, and forms. The undersigned hereby waives any claims that the undersigned may now or hereafter have in any jurisdiction to so-called "moral rights" or rights of "droit moral" with respect to the Work. The undersigned represents and warrants that, except as to any material provided to the undersigned by Publisher and/or Disney and incorporated in the Work, the Work is wholly original with the undersigned who is the sole creator thereof, the Work does not violate the rights of any third party, the Work is not the subject of any litigation or claim that might give rise to litigation, and that the undersigned has all rights necessary to convey the rights granted to Disney herein. The undersigned agrees to indemnify and hold harmless Publisher and Disney, their respective parent and affiliated companies, successors, licensees, and assigns against any breach of any of the foregoing representations and warranties. The undersigned agrees to execute such further documents and do such other acts as may be required by Disney to evidence or effectuate Disney's rights hereunder. Failure to do so shall automatically empower Disney as the undersigned's attorney-in-fact to execute such documents and do such acts in the place and stead of the undersigned. Disney's rights in the Work may be assigned, licensed, or otherwise transferred by Disney, and this Agreement shall inure to the benefit of Publisher's and Disney's respective successors, licensees, and assignees. Print Name:_____________________________ Signature:______________________________ Address:________________________________ ________________________________________ Date:___________________________________ EXHIBIT 3 Code of Conduct for Suppliers At The Walt Disney Company, we are committed to: - - a standard of excellence in every aspect of our business and in every corner of the world; - - ethical and responsible conduct in all of our operations; - - respect for the rights of all individuals; and - - respect for the environment. We expect these same commitments to be shared by all suppliers of Disney publications. At a minimum, we require that all suppliers of Disney publications meet the following standards: Child Labor Suppliers will not use child labor. The term "child" refers to a person younger than 15 (or 14 where local law allows) or, if higher, the local legal minimum age for employment or the age for completing compulsory education. Suppliers employing young persons who do not fall within the definition of "children" will also comply with any laws and regulations applicable to such persons. Involuntary Labor Suppliers will not use any forced or involuntary labor, whether prison, bonded, indentured or otherwise. Coercion and Harassment Suppliers will treat each employee with dignity and respect, and will not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse. Nondiscrimination Suppliers will not discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability. Association Suppliers will respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference. Health and Safety Suppliers will provide employees with a safe and healthy workplace in compliance with all applicable laws and regulations, ensuring at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation. Suppliers will also ensure that the same standards of health and safety are applied in any housing that they provide for employees. Compensation We expect suppliers to recognize that wages are essential to meeting employees' basic needs. Suppliers will, at a minimum, comply with all applicable wage and hour laws and regulations, including those relating to minimum wages, overtime, maximum hours, piece rates and other elements of compensation, and provide legally mandated benefits. If local laws do not provide for overtime pay, suppliers will pay at least regular wages for overtime work. Except in extraordinary business circumstances, suppliers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period. Where local industry standards are higher than applicable legal requirements, we expect suppliers to meet the higher standards. Protection of the Environment Suppliers will comply with all applicable environmental laws and regulations. Other Laws Suppliers will comply with all applicable laws and regulations, including those pertaining to the manufacture, pricing, sale and distribution of publications. All references to "applicable laws and regulations" in this Code of Conduct include local and national codes, rules and regulations as well as applicable treaties and voluntary industry standards. Subcontracting Suppliers will not use subcontractors for the manufacture of Disney publications or components thereof without Disney's express written consent, and only after the subcontractor has entered into a written commitment with Disney to comply with this Code of Conduct. Monitoring and Compliance Suppliers will authorize Disney and its designated agents (including third parties) to engage in monitoring activities to confirm compliance with this Code of Conduct, including unannounced on- site inspections of manufacturing facilities and employer-provided housing; reviews of books and records relating to employment matters; and private interviews with employees. Suppliers will maintain on site all documentation that may be needed to demonstrate compliance with this Code of Conduct. Publication Suppliers will take appropriate steps to ensure that the provisions of this Code of Conduct are communicated to employees, including the prominent posting of a copy of this Code of Conduct, in the local language and in a place readily accessible to employees, at all times. EXHIBIT 4 Code of Conduct for Licensees At The Walt Disney Company, we are committed to: - - a standard of excellence in every aspect of our business and in every corner of the world; - - ethical and responsible conduct in all of our operations; - - respect for the rights of all individuals; and - - respect for the environment. We expect these same commitments to be shared by all Disney licensees and the suppliers with which they work in the production of Disney publications. At a minimum, we require that all Disney licensees meet the following standards: Conduct of Manufacturing Licensees that engage directly in the manufacturing of Disney publications will comply with all of the standards set forth in Disney's Code of Conduct for Suppliers, a copy of which is attached. Licensees will ensure that each manufacturer other than the licensee also enters into a written commitment with Disney to comply with the standards set forth in Disney's Code of Conduct for Suppliers. Licensees will prohibit suppliers from subcontracting the manufacture of Disney publications or components thereof without Disney's express written consent, and only after the subcontractor has entered into a written commitment with Disney to comply with Disney's Code of Conduct for Suppliers. Monitoring and Compliance Licensees will take appropriate steps, in consultation with Disney, to develop, implement and maintain procedures to evaluate and monitor suppliers of Disney publications and ensure compliance with Disney's Code of Conduct for Suppliers, including unannounced on-site inspections of manufacturing facilities and employer-provided housing; review of books and records relating to employment matters; and private interviews with employees. Licensees will authorize Disney and its designated agents (including third parties) to engage in similar monitoring activities to confirm Licensees' compliance with this Code of Conduct. Licensees will maintain on site all documentation that may be needed to demonstrate such compliance. EXHIBIT 5 [To Be Supplied] EXHIBIT 6 [To Be Supplied] EXHIBIT 7 [To Be Supplied] EX-21.1 8 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997 AND THE ELEVEN MONTHS ENDED DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 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 Enterprises, Inc. (California) o Golden Books Home Video, Inc. (Delaware) o McSpadden-Smith, Inc. (Tennessee) o McSpadden-Smith Music, LLC (Tennessee) o McSpadden Music LLC (Tennessee) o Chunky Monkey Music LLC (Tennessee) o Magnolia Hill Music LLC (Tennessee o Summerdawn Music LLC (Tennessee) o McSpadden-Smith Publishing LLC (Tennessee) o SLE Productions, Inc. (California) S-5 EX-23.1 9 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 April 7, 1999 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 26, 1998. ERNST & YOUNG LLP New York, New York April 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----