SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period ended December 27 , 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Commission file number 0-14399
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1104930
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
888 Seventh Avenue, New York, New York 10106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 547-6700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $ .01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on March 20 , 1998 , was approximately $ 306,566,646.
As of March 16, 1998 27,099,814 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 annual meeting of
stockholders to be held on May 12 , 1998 are incorporated by reference into
Part III of this Form 10-K.
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GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
DECEMBER 27, 1997
INDEX
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PART I
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Item 1. Business...................................................................................1
Item 2. Properties.................................................................................8
Item 3. Legal Proceedings..........................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.......................................10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................11
Item 6. Selected Financial Data...................................................................12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................................13
Item 7A Quantitative and Qualitative Disclosures About Market Risk................................19
Item 8. Financial Statements and Supplementary Data...............................................20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................20
PART III
Item 10. Directors and Executive Officers of the Registrant........................................21
Item 11. Executive Compensation....................................................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management............................21
Item 13. Certain Relationships and Related Transactions............................................21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................21
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made in
good faith by the Company pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. In connection with these
"safe harbor" provisions, the Company has identified important factors that
could cause actual results to differ materially from those contained in any
forward looking statements made by the Company. Any such statement is
qualified by reference to the following cautionary statements.
The Company's businesses operate in highly competitive markets and are subject
to changes in general economic conditions, intense competition, changes in
consumer preferences, loss of key licenses, adverse changes in relationships
with key retailers and/or wholesalers, the degree of acceptance of new product
introductions, the uncertainties of litigation, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
Developments in any of these areas, which are more fully described elsewhere
in Part I, Item 1-Business, and Item 3-Legal Proceedings, and in Part II,
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, could cause the Company's results to differ materially from
results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward looking
statements contained herein or that may be made from time to time by or on
behalf of the Company.
PART I.
ITEM 1. BUSINESS
GENERAL
Golden Books Family Entertainment, Inc. (including its subsidiaries, the
"Company" or "Golden Books"), publishes, produces, licenses and markets an
extensive range of children's and family related entertainment products
throughout all media through its Children's and Adult Publishing, Golden Books
Entertainment Group ("GBEG") and Commercial Printing divisions.
RECENT HISTORY/BUSINESS STRATEGY
On May 8, 1996, Golden Press Holding, L.L.C., an investment vehicle formed by
Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested
$65 million in the Company. At that time, the Company's name was changed to
Golden Books Family Entertainment, Inc., and Mr. Snyder, the former Chairman
and Chief Executive Officer of Simon & Schuster, Inc., was appointed Chairman
and Chief Executive Officer of the Company. Since such time, and in connection
with the August 20, 1996 acquisition of an extensive library of
character-based properties which constituted substantially all of the family
entertainment assets of Broadway Video Entertainment, L.P. (the "Broadway
Video Acquisition"), Mr. Snyder has assembled a new senior management team to
implement a new business strategy: to build a leading family entertainment
company that publishes, produces, markets and licenses children's and family
related entertainment products, utilizing the strength of the Golden Books
brand, to provide family-oriented content through multiple media. In
furtherance of this goal, the Company took the following strategic actions
during 1997:
o The Children's Publishing division's sales organization was
restructured, with a renewed emphasis on strengthening the Company's
relationships with its customers, including assisting customers with
sales strategies through category management initiatives, as well as
a focus on expanding sales efforts into new retail channels;
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o The Company launched new publishing initiatives, including an
agreement to publish R.L. Stine's Fear Street books beginning in
March 1998, the launch in September 1997 of the Company's Adult
Publishing list, featuring Stephen Covey's The 7 Habits of Highly
Effective Families, and the reorganization and relaunching of its
price competitive value publishing line under the Merrigold Press
imprint;
o The Company took steps to strengthen relationships with existing
licensors, including signing a new, five-year license agreement with
The Walt Disney Company ("Disney");
o The GBEG division expanded its library, as well as its television
production operations, through the acquisition of Shari Lewis
Enterprises, Inc. (the "Shari Lewis Acquisition"). In addition, GBEG
expanded its licensing operations through agreements with Eden, LLC
("Eden"), a leading creator and manufacturer of infant toys, and
Swat-Fame, Inc. ("Swat-Fame"), a leading manufacturer of children's
wear, to manufacture products based on characters from the Company's
library, including Pat the Bunny and The Poky Little Puppy. The GBEG
division established a presence in the manufacture, production and
distribution of children's home video and audio products through its
strategic alliance with Sony Wonder, a division of Sony Music;
o Construction began on a new, more efficient manufacturing and
administrative facility in Racine, Wisconsin in July 1997, pursuant
to an agreement with a developer which is building the facility to
the Company's specifications and leasing it to the Company on a
long-term basis. The Company began manufacturing at the new facility
in February 1998, and expects the new facility to be fully
operational by May 1998;
o The Company continued its disposition of non-core assets with the
sale of its printing operations in Cambridge, Maryland for
approximately $20.2 million, as well as the sale of the building
which had housed its main plant in Racine for approximately $2.4
million. In addition, in February 1998, in an effort to further
simplify its supply chain, the Company announced that it would be
closing its distribution center in Coffeyville, Kansas by June 1998
and consolidating its distribution facility in Crawfordsville,
Indiana.
BUSINESS SEGMENT INFORMATION
The Company has three business segments, which it operates through its
principal operating subsidiary, Golden Books Publishing Company, Inc. ("Golden
Books Publishing"): (1) Consumer Products, which includes its Children's and
Adult Publishing divisions, (2) Entertainment, which includes its Golden Books
Entertainment Group division, and Commercial Products, which includes its
Commercial Printing division. For certain information with respect to net
sales, operating profits and identifiable assets attributable to the Company's
business segments, see note 20 to the Company's Consolidated Financial
Statements herein.
CHILDREN'S AND ADULT PUBLISHING
CHILDREN'S PUBLISHING. Golden Books is the largest publisher of children's
books in the North American retail market, and through its Children's
Publishing division, produces storybooks, coloring/activity books, electronic
storybooks, puzzles, educational workbooks, reference books, novelty books,
chapter books and fiction. The Company has published its flagship product
line, "Little Golden Books", for over 50 years. The Company's Children's
Publishing products utilize both owned characters, such as The Poky Little
Puppy and Lassie, and characters licensed by the Company from third parties,
such as Barney and the Muppets. Many of the Company's products, particularly
its coloring/activity books, use licenses from Children's Television Workshop
(Sesame Street), Mattel, Inc. (Barbie), Mercer Mayer (Little Critters) and
Disney. On September 26, 1997, the Company signed a new, five year license
agreement with Disney (the Company's previous main license agreement with
Disney was to have expired on December 31, 1997). The Disney character license
allows the Company to use, in selected product categories, all of Disney's
animated characters, including Mickey Mouse, Winnie the Pooh and Pinocchio and
characters from The Little Mermaid, The Lion King, Aladdin, The Hunchback of
Notre Dame and Toy Story, as well as characters from more recent releases such
as Hercules and future releases such as the upcoming Mulan and A Bug's Life.
The Company also had
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licensing agreements in connection with the animated feature film Anastasia
and has licensing agreements in connection with the educational television
series Between the Lions, anticipated to debut on PBS in November 1999. In
July, 1997, the Company acquired the right to publish 65 Fear Street books by
R.L. Stine, extending the Company's core age group from 0-7 to 0-14 and
representing the Company's first venture into chapter books aimed at older
children. The Company began publishing the Fear Street series in March, 1998.
Golden Value Books and Special Markets. In July 1997, the Company established
the Golden Value Books and Special Markets business unit within its Children's
Publishing division. The goal of the new business unit is twofold: to develop
more competitively priced value product for all retail channels and to
continue to pursue other specialty publishing opportunities outside of
traditional retail channels, such as premium, book clubs and fairs, continuity
and direct mail, electronic retailing and television shopping. Product in the
Golden Value Books and Special Markets business unit will be published under
the Merrigold Press imprint.
Fear Street Publishing Agreement. In July 1997, the Company extended the core
age group for which its Children's Publishing products are designed from 0-7
to 0-14 by acquiring the right to publish 65 Fear Street books by R.L. Stine,
the Company's first venture into books aimed at older children. The Company
began publishing three Fear Street related series in March 1998, under the
Gold Key imprint: Fear Street, R.L. Stine's original series for young adult
readers (ages 13 and up), Fear Street Sagas, another young adult spin-off and
Ghosts of Fear Street for mid-grade readers (ages 8-12). The Company intends
to publish a young adult series based on its Turok the Dinosaur Hunter
character in the Fall of 1998, and has agreements in principle to publish
Barbie and other young adult, mid-grade and chapter books aimed at younger
readers (ages 5-7).
The Company's Children's Publishing products, which generally are designed to
be appropriate for children up to age seven, fall into four broad categories:
(i) "Classic Format," (ii) electronic storybooks, (iii) education and
reference, and (iv) trade and novelty. Historically, the Company has
distributed its children's publishing products primarily through mass market
channels (which include national discount store chains, such as Wal- Mart, K
Mart, Target and Toys "R" Us), and to a lesser extent, the Company has sold
children's products through bookstores and other retailers (children's
educational specialty retailers, other toy stores, supermarkets, drugstores
and warehouse clubs), special markets (such as school book clubs, school book
fairs, paperback jobbers, catalogue sales and educational institutions) and
international channels. In 1997, the Children's Publishing division's sales
organization was restructured, with a renewed emphasis on strengthening the
Company's relationships with its customers as well as a focus on expanding
sales efforts into new retail channels. See "--Distribution and Sales."
CLASSIC FORMAT PRODUCTS
The Company's Classic Format category of products consists of storybooks and
coloring/activity books and products, as described below. This category of
products accounts for the largest share of the Company's children's publishing
revenues and unit sales. Most products in the Classic Format category are high
volume products that carry a retail price under $5.00. The volume and price
point of these products makes them particularly attractive to mass market
retailers, although Classic Format products are distributed through other
channels to a lesser extent. In 1997, the Company introduced new Classic
Format products with higher price points which were sold through mass market
channels, in bookstores and in specialty retail stores.
Storybooks are published principally under the Golden Books, Little Golden
Books and Golden Look Look trademarks. In addition to storybooks in the
foregoing formats, the Company also publishes paperback books and touch and
feel books for babies. The Company's storybook products, in particular those
bearing the Golden Books brand, stress "classic" themes such as self-esteem,
friendship, family values and general issues associated with growing up.
Typical storylines involve topics such as dealing with a new school, family
dynamics and the pressures and rewards of friendships.
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Coloring/activity books and products include coloring books, paint books,
sticker books, paper doll books, crayons and boxed activity products. The
Company markets these products under the Golden Books and Merrigold Press
trademarks.
The Company's coloring/activity books and products generally are designed to
be appropriate for children ages three to five and are designed to encourage
age-appropriate activities, particularly the development of artistic and motor
skills. They contain less thematic material than the Company's storybooks and
focus primarily on images and scenes utilizing licensed or owned characters.
The Company utilizes selected properties and characters in the GBEG library in
its children's publishing products, in particular in the storybook and
coloring/activity book categories.
ELECTRONIC STORYBOOKS
The Company believes that it was the first to release electronic storybook
products and was at one time the leading manufacturer and distributor of
interactive children's books incorporating electronically produced audio
effects. However, in recent years, the Company's products in this category
have not been cost competitive with those of other manufacturers and the
Company's market share has declined substantially.
The Company's products in the electronic storybook category have a higher
price point than the Company's Classic Format products, with a retail price
between $5.00 and $20.00. Products in this category are sold primarily to mass
market accounts and independent distributors.
EDUCATION AND REFERENCE
The Company's education and reference products consist of workbooks,
flashcards and reference books. The Company's workbook and flashcard products
have price points between $2.00 and $3.50 and its reference books have price
points between $4.00 and $5.00. All such products are sold primarily through
mass market outlets, although the Company continues to take advantage of sales
opportunities for these products through bookstores, specialty retail and
special markets distribution channels.
The Company intends to increase its product offerings in this category,
marketing workbooks that utilize both licensed and proprietary characters and
that contain enhanced characteristics such as full color interiors. The
Company intends to begin publishing leveled reading series using its existing
characters and titles, as well as licensed characters, in the fall of 1998.
TRADE AND NOVELTY PRODUCTS
The Company's current product offerings in this category consist of flap
books, pop-up books, book plus products, multiple format books and treasuries.
Products in this category are primarily in the $5.00 to $10.00 retail price
range and are primarily distributed through bookstores and specialty retail
stores and special markets.
The Company's product offerings in this category are at present limited due to
the Company's historical focus on products suitable primarily for mass market
distribution. However, the Company continues to expand its product offerings
in the trade and novelty category, with an emphasis on products featuring the
Company's proprietary characters. Products in this category that the Company
introduced in 1997 include a number of novelty book and book plus formats with
retail price points under $10.00. The Company believes that significant sales
opportunities for both its existing and proposed trade and novelty products
exist through bookstores, mass market, special market and international
distribution channels.
ADULT BOOKS
In 1997, the Company expanded the Golden Books brand into trade books focusing
primarily on parenting and the family with the launch of the Adult Publishing
division. The Adult Publishing division's first list in
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September 1997 included Stephen Covey's The 7 Habits of Highly Effect
Families, which hit the New York Times best-seller list. The Adult Publishing
division has published a total of 14 titles through the first quarter of 1998,
including Christina Ferrare's Family Entertaining, a cookbook by the
television personality, and I've Been Rich. I've Been Poor. Rich is Better. by
Judy Resnick, the investment advisor. The Adult Publishing division intends to
publish an additional 17 titles through 1998, including books by Maria Shriver
on discussing death with children and by Richard and Linda Eyre on talking to
your children about sex. Additionally, the Adult Publishing Division expects
to publish The Parents Answer Book, the first title of three planned
co-branded series, comprising a total of 17 books, based on Parents magazine
editorial contents, in the fall of 1998.
The Company distributes its family-oriented adult trade book line primarily
through bookstores, although the line includes books published in formats
suitable for mass market distribution. In February 1998, the Adult Publishing
division signed an agreement with St. Martin's Press, Incorporated to
distribute its books in the United States and Canada.
GOLDEN BOOKS ENTERTAINMENT GROUP DIVISION
The Company's GBEG division was established in August 1996, upon the
acquisition by the Company of an extensive library of character-based family
entertainment properties through the Broadway Video Acquisition. The GBEG
division's library is comprised of copyrights, distribution rights, trademarks
and licenses relating to characters, television programs and motion pictures,
both animation and live action, and includes individual specials and multiple
episode series. Among the library titles are Rudolph the Red-Nosed Reindeer,
Frosty the Snowman, Santa Claus Is Coming to Town, Lassie, 26 half-hour
episodes of Felix the Cat, Underdog, 52 half-hour episodes of Abbott and
Costello, The Lone Ranger and Tennessee Tuxedo.
The Company generates revenues from the GBEG division by licensing properties
from the library to third parties, both domestically and internationally, for
use on television, on home video and in ancillary media. The Company also,
where its rights so permit, licenses specific characters in the GBEG division
library (rather than the entire property) for use in new television programs,
theatrical films and home video. In addition, the GBEG division licenses
merchandising rights in its characters and owned or controlled characters of
the Children's Publishing division for use in a variety of products. In August
1997, GBEG entered into a licensing arrangement with Eden, a leading creator
and manufacturer of infant toys, to develop and market products based on
characters in the Company's library, including a line of soft toys based on
Pat the Bunny which was introduced in December 1997. Additionally, in
September 1997, GBEG announced a licensing arrangement with Swat-Fame, a
leading children's wear manufacturer, to produce apparel featuring Pat the
Bunny, The Poky Little Puppy and Little Lulu, to be introduced in the Spring
of 1998.
The existing licenses granted to third parties in respect of the GBEG
division's properties generally cover a limited time period, usually of two to
three years in duration. GBEG's licenses are typically narrow, allowing the
same property to be simultaneously licensed to multiple parties for different
purposes and enhancing the ability of the GBEG division to maximize license
revenue from the properties in its library.
Shari Lewis Acquisition/ Sony Wonder Venture. In July, 1997, the GBEG division
acquired Shari Lewis Enterprises, Inc., expanding its library with the
addition of the Lamb Chop, Charlie Horse and Hush Puppy characters, books,
television specials, films and home video titles. GBEG began distribution of a
new 40-episode series for children by Shari Lewis, The Charlie Horse Music
Pizza, which premiered on PBS in January 1998. In December 1997, the GBEG
division announced the formation of a long-term strategic alliance with Sony
Wonder, a division of Sony Music, for the manufacture, production and
distribution of children's home video and audio products. The Company believes
that the GBEG division's library, combined with the distribution capabilities
of Sony Wonder, will allow the Company to meaningfully compete in the home
video market with Golden Books branded content. Through transactions such as
the Shari Lewis Acquisition and the formation of a joint venture with Sony
Wonder, the GBEG division intends not only to add to its library and enhance
its licensing operations but also to expand its role as not only a licensor of
but also a creator, producer, manufacturer and distributor of children's
related entertainment products.
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COMMERCIAL PRINTING DIVISION
The Company's manufacturing capabilities as a leading producer of coloring and
activity books, picture books and educational and supplemental materials allow
it to market these capabilities to third parties through its Commercial
Printing Division. In 1997, the Company manufactured products for its
Commercial Printing Division at factories located in Racine, Wisconsin and
Cambridge, Maryland. Customers of the Commercial Printing Division include
educational publishers, religious publishers, brand marketers targeting
children and families, and other juvenile publishers and entertainment
companies. Additionally, the Commercial Printing division engages in commodity
printing (such as tax instruction booklets and tax forms), generally during
periods of excess production capacity.
Cambridge Sale. As part of the Company's effort to streamline its printing
operations in order to focus on its core publishing and entertainment
businesses, the Company sold its commercial printing operations in Cambridge,
Maryland to Mail-Well, Inc. on December 1, 1997 for approximately $20.2
million.
DISTRIBUTION AND SALES
The Company's children's publishing products are distributed through (i) mass
market, both directly and through independent distributors, (ii) bookstores
and specialty retail stores, (iii) special markets, and (iv) international
distribution channels. Historically, mass market distribution has accounted
for, and continues to account for, the largest portion of children's
publishing product sales. Among the Company's largest customers in 1997 were
Wal-Mart, Toys "R" Us, K Mart and Target. To a lesser extent, the Company has
distributed its children's publishing products through other domestic
distribution channels. In 1997, the Children's Publishing division's sales
organization was restructured. The Children's Publishing division's new sales
organization emphasizes strengthening its relationships with its traditional
retail customers, including assisting customers with sales strategies through
new category management and in-store display initiatives, as well as a focus
on expanding sales efforts into new retail channels, such as supermarkets,
drugstores, airports and zoos.
Closing of Coffeyville Distribution Center. In February 1998, the Company
announced that it would be closing its distribution center in Coffeyville,
Kansas by June 1998 and consolidating into its distribution facility in
Crawfordsville, Indiana. The Company believes this consolidation will allow it
to further simplify its supply chain and improve its inventory management
function.
Internationally, the Company's children's publishing products are marketed in
approximately 80 countries and are published in English, Spanish, Japanese,
Korean and Portuguese. Books produced under subsidiary rights licensing are
issued in 23 languages, including Finnish, Indonesian and Mandarin. The
Company has the largest market share in the children's book category in
Canada. The Company's sales in Canada, and to a lesser extent the United
Kingdom, account for a majority of its international sales revenues.
The Adult Publishing division distributes its book line primarily through
bookstores, although the line also includes books published in formats
suitable for mass market distribution. In February 1998, the Adult Publishing
division signed an agreement with St. Martin's Press, Incorporated to
distribute its books in the United States and Canada.
The GBEG division exploits its library assets in all media and territories
worldwide directly or through sub-distributors. GBEG's series, specials, and
features are licensed directly to domestic and international broadcasters
(terrestrial, cable and satellite) and home video distributors through an
internal program distribution staff. Sub-agents have been appointed in
specific territories on a case-by-case basis. Similarly, product licensing and
merchandising is conducted by an internal department with occasional use of
outside agents.
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COMPETITION
The children's publishing market is highly competitive. Competition is based
primarily on price, quality, distribution, marketing and licenses. In mass
market sales, the Company faces competition primarily from smaller
competitors, including, but not limited to, Landoll, Inc., in the
coloring/activity category, Publications International, Ltd., in the
electronic storybook category, and School Zone Publishing Co., in the
educational workbook category. In the trade and specialty trade categories,
the Company's principal competitors are Random House, Inc., Simon & Schuster,
Inc., Scholastic Corp. and HarperCollins Publishers, Inc. The Company also
competes for a share of consumer spending on children's entertainment and
educational products against companies that market a broad range of products
utilizing a broad range of technologies that are unrelated to those marketed
by the Company.
The market for licenses is also highly competitive and the Company competes
against many other licensees for significant licenses. In recent years,
licensors have fragmented licenses, which has reduced the cost of purchasing a
license. As a result, smaller bidders have been able to enter the market for
licenses, which has resulted in increased competition in this market.
Many of the Company's current competitors have greater financial resources
than the Company and, in selected markets, greater experience than the
Company. Many of the markets which the Company intends to enter each contain a
number of competing entities, many of which may have greater financial
resources and experience with respect to these markets than the Company.
The licensing industry is highly competitive, and the GBEG division faces
strong competition from other independent licensing agencies and from the
in-house licensing divisions of motion picture and television studios.
Additionally, as the division expands its efforts to produce, manufacture and
distribute home video products, it will face intense competition for available
creative personnel, distribution channels and financing including from motion
picture studios, television networks and independent production companies,
many of which have greater financial resources than the Company.
MANUFACTURING
During 1997, the Company manufactured the majority of its Children's
Publishing products from its plants in Racine, Wisconsin and Cambridge,
Maryland, with additional components and services obtained from third party
vendors in the United States and abroad. The Company's electronic products
typically contain a higher portion of outsourced content than its printed
products, particularly the software and electrical components. In an effort to
streamline the Company's printing business, the Company sold its printing
operations plant in Cambridge, Maryland on December 1, 1997.
NEW MANUFACTURING FACILITY. The Company had previously announced that it would
continue to manufacture certain of its core children's publishing products in
a new, more efficient manufacturing and administrative facility in Racine,
Wisconsin, and outsource all other printing and manufacturing. Construction
began on the new facility on July 2, 1997, pursuant to an agreement with a
developer which is building the facility to the Company's specifications and
will lease it to the Company on a long-term basis upon completion. The Company
began manufacturing at the new facility in February 1998, and expects the new
facility to be fully operational by May 1998. In connection with its move to
the new facility, on October 31, 1997, the Company sold the building which had
housed its main plant in Racine for net proceeds of approximately $2.4
million.
EMPLOYEES
The Company and its subsidiaries have approximately 1,200 employees,
calculated on a full-time equivalent basis. Approximately 420 employees are
represented by labor unions. The Company negotiated and signed new agreements
with its labor unions in the first quarter of 1998. The Company's contracts
with (i) the Graphic Communications International Union, Local 223B, (ii) the
Graphic Communications International Union, Local 254M, (iii) the
International Union of Operating Engineers, Local 309, (iv) the International
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Brotherhood of Teamsters, Local 43, and (v) the United Auto Workers Local
1007, expire on December 31, 2002. The Company's Canadian subsidiary signed a
new contract in January 1998 with Local 1024 of the United Rubber, Cork,
Linoleum and Plastic Workers of America AFL-CIO, CLC, which expires on
December 31, 2000. The Company believes that its relations with its employees
generally are good.
In connection with the production of storybooks and coloring/activity books,
the Company typically hires writers, illustrators and other creative talent on
a freelance, work-for-hire basis to complete its projects. Similarly, to
manufacture electronic storybooks, the Company generally outsources tasks such
as electrical design and software programming while retaining artistic
supervision and control.
ITEM 2. PROPERTIES
Certain information as to the significant properties used by the Company in
the conduct of its business is set forth in the following table:
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LOCATION SQUARE FEET TYPE OF USE
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New York, NY 112,000 Corporate offices; publishing offices; sales offices
Racine, WI 498,300 Printing facilities and administrative offices
Crawfordsville, IN 403,000 Warehousing and distribution
Cambridge, Ontario, Canada 148,000 Corporate offices; sales offices; warehousing and distribution
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In addition to the properties described above, the Company owns or rents
various other properties that are used for administration, sales offices and
warehousing.
Construction began on the Company's new, more efficient manufacturing and
administrative facility in Racine, Wisconsin on July 2, 1997, pursuant to an
agreement with a developer which is building the facility to the Company's
specifications and leasing it to the Company on a long-term basis. The Company
began manufacturing at the new facility in February 1998, and expects the new
facility to be fully operational by May 1998. In connection with its move to
the new facility, on October 31, 1997, the Company sold the building which had
housed its main plant in Racine for approximately $2.4 million, and is leasing
such building until June 1998, as it completes its move to the new facility.
The Company moved into its new, 112,000 square foot corporate headquarters in
New York City in August 1997.
In February, 1998, the Company announced that it would be closing its
distribution center in Coffeyville, Kansas by June 1998 and consolidating into
its distribution facility in Crawfordsville, Indiana. The Company's 547,000
square foot warehouse and distribution center in Coffeyville is classified as
an asset held for sale.
In addition to the foregoing properties, the Company also owns a 702,000
square foot facility in Fayetteville, North Carolina which was primarily used
in connection with the manufacture and distribution of games and puzzles.
During August 1994, the Company sold its game and puzzle operation to Hasbro,
Inc., although this facility was not included in the sale. The Company intends
to accelerate the sale of this facility. This facility currently is classified
as an asset held for sale.
The Company sold its printing operations in Cambridge, Maryland, which
included a 231,000 square foot printing and warehousing facility, in December
1997.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Golden Books Publishing and Penn Corporation ("Penn") have been informed by
the Environmental Protection Agency (the "EPA") and/or state regulatory
agencies that they may be potentially responsible parties ("PRPs") and face
liabilities under the Comprehensive Environmental Response, Compensation, and
Liability Act (commonly known as "CERCLA" or "Superfund") or similar state
laws. In all cases except those described below, the Company has resolved its
liability or is in the process of resolving its liability for amounts not
material. Although the Company divested Penn in December 1996, the Company has
agreed to indemnify Contempo Colours, Inc. ("Contempo") against certain of
Penn's environmental liabilities, including the Cork Street Landfill and
Fulford Street Property discussed herein.
The Wisconsin Department of Natural Resources (the "WDNR") alleges that the
Company is a responsible party for drums found at a site located in
unincorporated Racine County. The WDNR and the Company have entered into an
agreement which requires the Company to remove drums and soil from the site.
The disposal of these drums dates back almost 30 years. The Company did not
authorize disposal of its waste drums at the site. The Company has completed
the removal of drums and soil from the site.
At the Hunt's Landfill site in Racine County, Wisconsin, the Company's
liability pursuant to the terms of a consent decree is limited to
approximately 4% of the total remedial costs. Although the last phase of
construction activities was completed in 1996, Golden Books Publishing and the
other PRPs are obligated to fund the operation and maintenance of the site for
the next 20-30 years. The current estimate of the total costs of such
operation and maintenance is in the range of $14 million. In accordance with
the consent decree, the Company has established a reserve for its share of the
probable clean-up costs.
At the Hertel Landfill in Plattekill, New York, the Company is one of five
PRPs sued by the EPA in 1994 for recovery of past EPA response costs of
approximately $2.5 million. In September 1991, the EPA approved a remedial
action for the Hertel Landfill site that currently is estimated to cost $4.1
million other than groundwater remediation costs, if any are required. One of
the site's non-defendant PRPs has been complying with an EPA unilateral
administrative order requiring investigation and clean-up of the site and is
now seeking contribution towards its cost from the Company and more than 20
other PRPs. At the time the 1991 order was issued, the Company did not comply.
As of June 26, 1996, representatives of the Company reached agreement with the
EPA to come into compliance with the order and pay a penalty of $625,000 for
previous non-compliance. Additionally, during 1997, the Company paid a total
of $1,701,000 for the remediation of the Hertel site, including settlement
payments to other PRPs. The Company, other PRPs and the government have
reached an interm allocation and are in the process of negotiating a consent
decree which will establish the Company's future responsibilities at the site.
The Company also has been identified as a PRP at another site located in
Poughkeepsie, New York. The Company and eight other PRPs received a notice
letter in 1995 from the State of New York regarding this site. New York State
will be seeking recovery of its past oversight costs of more than $600,000
plus future oversight and maintenance costs associated with this site,
currently estimated by the State at $830,000. There has been no attempt made
to develop an allocation or to identify all PRPs to date, but the construction
phase of the remedy has been completed by other parties without Company
involvement.
On October 2, 1996, the Company received notice from the City Attorney of
Kalamazoo, Michigan that Beach Products, a division of Penn, will be asked to
participate in the remediation of the Cork Street Landfill site located in the
city which was allegedly used by Beach Products in the past. Current cost
estimates for the remediation required at the site are as high as $24,000,000.
More than 70 entities will be requested to provided financial contribution to
the remediation.
On November 14, 1996, the Michigan Department of Environmental Quality
requested that corrective actions be taken as a result of the discovery of a
leaking underground storage tank system at the Fulford Street Property of the
Company on November 8, 1996. An initial site assessment is being completed by
the Company's outside consultant. Current estimates indicate that the costs
associated with this release should
9
<PAGE>
not exceed $200,000. However, in the event that the contamination has migrated
off the Company's property, these costs could increase.
In addition to these environmental matters, the Company filed an
action in 1994 in the United States District Court, Eastern District of
Wisconsin captioned as Western Publishing Company, Inc. v. MindGames, Inc.
seeking a declaration of rights in regard to the Company's alleged
breach of various of its obligations under its licensing agreement with the
defendant for distribution through 1994 of the adult board game known as
"Clever Endeavor." This case involves the Company's now-discontinued adult and
children's game division. The defendant, believing its board game had the
potential to become one of the most popular of all time, has maintained that
certain of the alleged breaches entitle it to damages of as much as $40
million resulting from lost profits and unpaid royalties. The Court recently
granted the Company's partial motion for summary judgment and held
that the defendant is precluded from recovering lost profits. Accordingly, the
defendant's damage claim is now limited to its unpaid royalties of $1.2
million. The Company denies that it has any liability to defendant.
On December 19, 1997, Contempo Colours, Inc. filed suit against the Company in
the circuit court for the County of Kalamazoo, Michigan, alleging damages
arising out of a dispute between Contempo and the Company relating to the sale
to Contempo of Penn on December 23, 1996. The Company and Contempo entered
into a standstill agreement with respect to the suit on January 7, 1998,
whereby Contempo has agreed to suspend the suit while the parties attempt to
negotiate a settlement of all claims. The Company is adequately reserved with
respect to this matter.
The Company is actively pursuing resolution of the aforementioned matters or,
in the case of environmental matters, is awaiting further government response.
While it is not feasible to predict or determine the outcomes of these
proceedings, it is the opinion of management that these outcomes have been
adequately reserved for and will not have a materially adverse effect on the
Company's financial position or future results of operations.
The Company and its subsidiaries are parties to certain other legal
proceedings which are incidental to their ordinary business, none of which the
Company believes are material to the Company and its subsidiaries taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCKHOLDERS' INFORMATION
COMMON STOCK PRICES
The Company's Common Stock, par value $.01 per share ("Common Stock") is
traded over-the-counter and is quoted on the NASDAQ National Market System
(symbol GBFE). Common stockholders of record at December 27, 1997 numbered
approximately 7,000 . The following table sets forth the range of prices
(which represent actual transactions), by quarter, as provided by the National
Association of Securities Dealers, Inc.
FISCAL YEAR ENDED DECEMBER 27, 1997
- -------------------------------------------------------------------------------
High Low
First Quarter 12 1/4 8 11/16
Second Quarter 12 7/8 7 7/8
Third Quarter 12 5/8 9 1/2
Fourth Quarter 11 3/4 9 1/8
FISCAL YEAR ENDED DECEMBER 28, 1996 (1)
- -------------------------------------------------------------------------------
High Low
First Quarter 10 7/8 7 7/8
Second Quarter 15 1/8 10 3/8
Third Quarter 12 1/2 10 3/8
Fourth Quarter 12 1/4 10 3/4
(1) On November 30, 1996, the Company changed its Fiscal year end so as to
end on the last Saturday in December. Accordingly, the quarterly range of
prices has been restated to reflect the Company's revised quarters as
follows:
1996
----
First Quarter March 30th
Second Quarter June 29th
Third Quarter September 28th
Fourth Quarter December 28th
DIVIDEND POLICY
Holders of Common Stock are entitled to receive such dividends as may be
lawfully declared by the Board of Directors. Since its organization in 1984,
the Company has not paid a cash dividend on the its Common Stock and
management does not currently anticipate the payment of cash dividends on the
Common Stock in the foreseeable future. The ability of the Company to pay cash
dividends may be limited by the indenture governing the Company's 7.65% Senior
Notes due 2002, which restricts the ability of Golden Books Publishing to pay
cash dividends or make other cash distributions to the Company. In addition,
the ability of the Company to pay cash dividends may be limited by the
indenture governing the Company's 8 3/4 % Convertible Debentures due 2016
(which Debentures are held by Golden Books Financing Trust, the issuer of the
8 3/4 % Convertible Trust Originated Preferred Securities due 2016), which
restricts, under certain circumstances, the ability of the Company to pay cash
dividends and make other distributions on Common Stock.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below is derived from the
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto included elsewhere herein. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Consolidated
Financial Statements". In 1996 the Company changed it's fiscal year end so as
to end on the last Saturday of December in each year. As a result the current
fiscal period ended on December 27, 1997. The Fiscal 1996 results from
operations are not necessarily comparable to other periods as presented. The
earnings per share amounts have been presented as required to comply with
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"). For further discussion of Statement No. 128, see the notes
to the consolidated financial statements beginning on page F-10.
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS YEAR ENDED
----------- ENDED ------------------------------------
DECEMBER 27, DECEMBER 28, FEBRUARY 3, JANUARY 28, JANUARY 29,
1997 1996 1996 1995 1994
-------------------------------------------------------------
INCOME STATEMENT DATA: (In Thousands, Except Per Share Data)
REVENUES
<S> <C> <C> <C> <C> <C>
Net sales $ 242,481 $ 254,046 $ 369,572 $ 398,354 $ 613,464
Royalties and other income 1,080 959 1,722 2,207 2,404
-------------------------------------------------------------
Total Revenues 243,561 255,005 371,294 400,561 615,868
-------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales 176,238 231,792 281,392 297,421 432,503
Selling, general and administrative 111,307 142,721 129,020 124,128 203,042
Restructuring plan, net of gains on sale of assets (10,786) 65,741 6,701 (20,352) -
Provision for write-down of Division - - - (1,100) 28,180
-------------------------------------------------------------
Total costs and expenses 276,759 440,254 417,113 400,097 663,725
-------------------------------------------------------------
(LOSS) INCOME BEFORE DISTRIBUTIONS ON GUARANTEED
PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND
GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES,
INTEREST EXPENSE, PROVISION (BENEFIT) FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (33,198) (185,249) (45,819) 464 (47,857)
DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES 10,282 3,597 - - -
INTEREST EXPENSE, net of interest income 6,163 6,764 9,896 15,573 15,463
-------------------------------------------------------------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (49,643) (195,610) (55,715) (15,109) (63,320)
PROVISION (BENEFIT) FOR INCOME TAXES 37 1,893 11,332 2,470 (22,295)
-------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (49,680) (197,503) (67,047) (17,579) (41,025)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - - - (14,800)
-------------------------------------------------------------
NET LOSS $ (49,680) $(197,503) $ (67,047) $ (17,579) $ (55,825)
=============================================================
LOSS PER COMMON SHARE - BASIC:
Before cumulative effect of change in accounting principle $ (2.18) $ (8.73) $ (3.23) $ (0.88) $ (1.99)
Cumulative effect of change in accounting principle - - - - (0.71)
-------------------------------------------------------------
NET LOSS PER COMMON SHARE - BASIC $ (2.18) $ (8.73) $ (3.23) $ (0.88) $ (2.70)
=============================================================
BALANCE SHEET DATA (AT PERIOD END):
Working Capital $ 95,780 $ 168,210 $ 165,309 $ 228,240 $ 332,979
Total assets 323,164 367,235 321,965 428,806 505,116
Long-term debt 149,897 149,862 149,845 149,828 229,812
Guaranteed preferred beneficial interests in the Company's and
Golden Books Publishing Company, Inc.'s Convertible Debentures 110,707 110,488 - - -
Convertible Preferred Stock - Series A - - 9,985 9,985 9,985
Common stockholders' (deficit) equity (61,309) (19,637) 74,368 140,794 158,673
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As part of the Company's plan to return its core publishing business to
profitability and to re-deploy assets, the Company incurred approximately
$11.5 million in one-time transition costs during 1997 in connection with the
Company's strategic plan, consisting of: (i) $3.1 million of moving costs
associated with new facilities, (ii) $3.5 million for outsourcing of the
information technology department, (iii) $4.5 million in consulting services
associated with implementing the strategic plan, and (iv) $0.4 million in
other costs. The Company anticipates that it will incur additional one-time
transition costs of approximately $13.0 million in 1998. The Company's return
to profitability is dependent in part on the successful implementation of
management's new strategy. As the Company's new strategy has not yet been
fully implemented, the Company does not expect to generate positive net income
until 1999 at the earliest.
For the year ended December 27, 1997, the Company reported results under three
segments: (i) the Consumer Products Segment, (ii) the Commercial Products
Segment and (iii) Entertainment Segment. Historically, the Company has
reported operating results under two segments: (i) the Consumer Products
Segment and (ii) the Commercial Products Segment. The following discussion has
been revised to reflect these new reporting segments. The Consumer Products
Segment ("Publishing") includes the Children's and Adult Publishing Divisions
and, during the eleven months ended December 28, 1996 and the year ended
February 3, 1996, Penn Corporation, which was sold on December 23, 1996. The
Commercial Products Segment includes the Commercial Printing division. The
Golden Books Entertainment Group, which was formed following the Broadway
Video Aquisition, is reported as the Entertainment Segment and includes home
video, television program licensing, merchandising and other character
licensing. In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131
changes the way companies report segment information in financial statements.
The Company has not yet determined the impact of the implementation of FAS 131
on the Company's segment reporting but its adoption will not have a material
effect on the Company's statement of position or revenues, only on the
composition of its reportable segments.
On November 30, 1996, the Company changed its fiscal year so as to end on the
last Saturday of December in each year. As a result, the Company's current
fiscal period of the twelve months ended December 27, 1997 (Fiscal 1997) is
compared to the eleven months ended December 28, 1996 (Fiscal 1996), and
Fiscal 1996 is compared to the twelve months ended February 3, 1996 (Fiscal
1995). Due to the change in year end, the results of these fiscal periods are
not necessarily comparable. Additionally, certain prior year's amounts have
been reclassified to conform with the current year's presentation.
FISCAL YEAR ENDED DECEMBER 27, 1997 (FISCAL 1997)
COMPARED TO ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996)
Revenues for Fiscal 1997 decreased $14.9 million (5.8%) to $243.5 million, as
compared to $258.4 million (before consideration of $3.4 million of one time
charges to establish reserves to resolve differences with customers), for
Fiscal 1996.
Consumer Products Segment revenues decreased $40.2 million (19.0%) to $171.7
million for Fiscal 1997, compared to $211.9 million (before consideration of
$3.4 million of one time charges to establish reserves to resolve differences
with customers) for Fiscal 1996. The decrease in revenue for the Consumer
Products Segment for Fiscal 1997 resulted principally from the sale of Penn,
which was sold in December of 1996 (revenues of $40.7 million) along with a
sales decline in electronic storybooks, offset by a sales increase in
classics.
Commercial Products Segment revenues were $42.4 million for both Fiscal 1997
and Fiscal 1996. During 1997 the Company has focused on internal production
requirements as inventory levels have been built in preparation for the move
to the Company's manufacturing facility early in 1998.
13
<PAGE>
Entertainment Segment revenues increased $25.3 million to $29.4 million for
Fiscal 1997 compared to $4.1 million for Fiscal 1996. The increase in revenues
for 1997 was due to the fact that the Entertainment Segment was active for
only four months in 1996 compared to the full year during 1997. Gross profit
increased $15.7 million (30.4%) for Fiscal 1997 to $67.3 million, compared to
$51.6 million (before consideration of $28.4 million in one-time revenue and
cost of sales charges associated with the strategic redirection of the
Company, comprised of $3.4 million in revenue reserves established to resolve
differences with customers, $17.6 million relating to the discontinuance or
replacement of certain product lines and $7.4 million of other inventory
related costs) for Fiscal 1996. As a percentage of revenues, the gross profit
margin increased to 27.6% for Fiscal 1997 from 20.0% for Fiscal 1996 (before
consideration of one time charges associated with the strategic redirection of
the Company).
In the Consumer Products Segment, gross profit increased $1.1 million (2.3%)
to $48.2 million for Fiscal 1997, compared to $47.1 million for Fiscal 1996
(before consideration of one time charges of $28.4 million described above).
As a percentage of revenues, the gross profit margin for the Consumer Products
Segment increased to 28.1% for Fiscal 1997 from 22.2% for Fiscal 1996. The
increase in Consumer Products Segment gross profit for Fiscal 1997, compared
to Fiscal 1996, resulted from lower manufacturing costs.
Commercial Products Segment gross profit decreased $0.4 million (10.3%) to
$3.5 million for Fiscal 1997, compared to $3.9 million for Fiscal 1996. As a
percentage of revenues, the gross profit margin for the Commercial Products
Segment decreased to 8.2% for Fiscal 1997, compared to 9.1% for Fiscal 1996.
The Entertainment Segment gross profit increased $15.0 million to $15.6
million for Fiscal 1997 compared to $0.6 million for Fiscal 1996. As a
percentage of revenues, the gross profit margin was 53.3% for Fiscal 1997
compared to 15.8% for Fiscal 1996. The increase in the Entertainment gross
profit margin was primarily due to higher levels of home video sales activity
with higher gross margins in Fiscal 1997, compared to Fiscal 1996.
Selling, general and administrative expenses (before consideration of $11.5
million of one time transition costs associated with the redirection of the
Company, which are comprised of consulting costs of $4.5 million, information
systems changeover costs of $3.5 million, costs associated with the move to
the Company's new manufacturing facility in Racine, Wisconsin of $2.4 million,
costs associated with the move of the Company's New York corporate
headquarters of $0.6 million and other costs of $0.5 million), were $99.9
million for Fiscal 1997, a decrease of $4.6 million from $104.5 million
(before giving consideration to one time charges of $38.2 million, comprised
of $11.0 million relating to costs associated with new management's plans to
resolve certain legal and contractual matters, $9.5 million in consulting fees
and other costs, and $17.7 million of expenses related to the acquisition of
an equity interest by GP Holding). These reductions were primarily
attributable to reductions in selling expenses due to lower sales levels.
Interest income for Fiscal 1997 increased $1.4 million to $5.6 million from
$4.2 million for Fiscal 1996. The increase results from higher average cash
balances during 1997 due to cash generated towards the end of 1996 which has
subsequently been reduced during 1997 to fund operations, previous period
restructure expenses and one time transition costs necessary to implement
management's plans to change the strategic direction of the Company. The cash
increases during 1996 were generated as follows (1) the sale of the Company's
Series B Convertible Preferred Stock to GP Holding for an aggregate purchase
price of $65.0 million in May 1996, (2) the issuance of Preferred Securities
for $115.0 million in August 1996, (3) the sale of the Company's Common Stock
for $25.0 million to HC Crown Corporation, an affiliate of Hallmark Cards,
Incorporated, in September 1996 and (4) the sale of Penn Corporation for
consideration including approximately $14.0 million in cash, partially offset
by the Broadway Video Acquisition for $81.0 million in cash in August 1996 and
the redemption of the Company's Series A Preferred Stock for $10.0 million in
May 1996.
Interest expense (including the distributions on the Preferred Securities),
for Fiscal 1997 increased by $7.4 million to $22.0 million, as compared to
$14.6 million for Fiscal 1996. The increase in interest expense was primarily
due to higher average debt outstanding resulting from the issuance of the
Preferred Securities in August 1996. Total average outstanding debt (including
the Preferred Securities) increased to $265.0 million for Fiscal 1997,
compared to $194.4 million for Fiscal 1996.
The Company did not incur a significant provision or benefit for income taxes
in the fiscal period ending December 27, 1997. As such, operations for Fiscal
1997 did not include an income tax benefit from domestic operations as no tax
benefit was provided on operating losses. Profitable operating results in
subsequent periods will benefit from an income tax rate which will be lower
than the statutory rate due to the reinstatement of deferred tax assets for
which a valuation allowance was established. The provision for Fiscal 1996
pertained principally to anticipated resolution of outstanding issues from
prior years. At December 27, 1997, the
14
<PAGE>
Company had available net operating loss carryforwards of approximately $207.7
million for Federal income tax purposes. In addition the Company had tax
credit carryforwards of approximately $4.3 million.
The net loss for Fiscal 1997 was $(49.7) million, or $(2.18) per basic common
share, compared to a net loss of $(197.5) million, or $(8.73) per basic common
share for Fiscal 1996. Results for Fiscal 1997 include one time transition
costs of $11.5 million, and a gain on the disposal of assets of $10.8 million
as follows: (i) $10.2 million on the sale of the Cambridge facility, (ii) $0.3
million on the sale of the old Racine plant, and (iii) $0.3 million on the
sale of other assets. Results for the eleven months ended December 28, 1996
included one time writedowns and other charges in the consolidated financial
statements totaling approximately $132.3 million as follows:
(i) a restructuring charge totaling $65.7 million including a:
o $21.5 million loss on sale of disposal of a business
resulting from the Company's decision to exit non-core
business activities;
o $24.3 million non-cash charge consisting of: (i) $10.2
million for the write-down of the commercial printing
operation to net realizable value to be disposed of in
connection with the Company's plan to exit non-core business
activities, (ii) $9.6 million for the loss on sale of assets
associated with the Company's strategic decision to
outsource its information technology department and (iii)
$4.5 million for the write-down of assets to net realizable
value which have been identified as nonproductive assets as
a result of the Company's strategic plan to operate in a new
efficient manufacturing facility;
o $8.0 million charge for severance related to the above;
o $3.0 million net realizable value adjustment related to idle
facility associated with the Company's game business, which
was previously sold;
o $7.6 million write-off of non-productive assets associated
with the termination of customer program initiatives in
connection with the strategic redirection of the Company; and
o $1.3 million for facility exit costs related to a lease
termination which were paid in December 1996.
(ii) a cost of sales adjustment of $25.0 million comprised of:
o $17.6 million of costs pertaining to the Company's decision
to discontinue or replace certain product lines and
expeditiously liquidate related inventory and slow moving
product; and
o $7.4 million of other inventory related costs, consisting
primarily of licensing and prepublication costs.
(iii) a selling, general and administrative charge of $11.0 million relating to
costs associated with management's revised plans to resolve certain legal
and contractual matters.
(iv) adjustments totaling $5.7 million consisting of:
o $3.4 million in revenue adjustments; and
o $2.3 million in operating expenses to establish reserves to
resolve differences with customers with a view toward
mending and improving the Company's relationships with its
customers.
(v) approximately $17.7 million of charges in connection with the sale of
a significant equity interest to GP Holding.
(vi) $7.2 million of other one time charges consisting primarily of:
o $3.8 million in consulting fees incurred in relation to new
management's review of the operations of the Company;
o $1.7 million of facility costs; and
o other one time miscellaneous charges of $1.7 million.
As of December 27, 1997, $1.6 million of the facility related costs and $4.2
million of the severance have been paid.
15
<PAGE>
ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996)
COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995)
Revenues for Fiscal 1996 decreased $112.9 million (30.4%) to $258.4 million
(before giving effect to a $3.4 million reserve adjustment to resolve
differences with customers with a view towards mending and improving the
Company's relationships with its customers), as compared to $371.3 million for
Fiscal 1995. Consumer Products Segment revenues decreased $96.4 million
(31.3%) to $211.9 million for Fiscal 1996 (before giving effect to the $3.4
million reserve adjustment described above) from $308.3 million for Fiscal
1995. Sales volume declines were experienced across the board with the fourth
quarter decreases being consistent with these in the earlier part of the year.
Electronic storybook products were sold at significantly reduced prices from
Fiscal 1995 resulting in overall price reductions from the prior year.
Excluding the impact of electronic storybooks, sales prices increased by 14.4%
with the largest increases in the activity books and picture books.
Discontinued product lines accounted for $16.0 million in the reduction of
sales. Sales at Penn were down $12.3 million, resulting from the continuing
decline in popularity of licensed characters which had been introduced in
earlier years, the pending loss of the Disney license and increased
competition in the marketplace.
Commercial Products segment revenues, comprised of printing services,
decreased $20.6 million (32.7%) to $42.4 million for Fiscal 1996 from $63.0
million for Fiscal 1995. The decline is largely attributable to the
historically high levels of January revenue which are not included in Fiscal
1996 but were included in Fiscal 1995, and certain reclassifications between
business segments.
The Entertainment Segment revenues were $4.1 million since the date of
acquisition, August 20, 1996.
Gross Profit decreased $38.3 million (42.6%) to $51.6 million for Fiscal 1996
(before giving consideration to $28.4 million of revenue and cost of sales
adjustments described above) from $89.9 million for Fiscal 1995. As a
percentage of revenues, the gross profit margin decreased to 20.0% for Fiscal
1996 (before giving consideration to $28.4 million of revenue and cost of
sales adjustments described above) as compared to 24.2% for Fiscal 1995. In
the Consumer Products Segment, gross profit decreased $34.3 million (42.1%) to
$47.1 million for Fiscal 1996 (before giving consideration to $28.4 million of
revenue and cost of sales adjustments described above) from $81.4 million for
Fiscal 1995. As a percentage of revenues, the Consumer Products Segment gross
profit margin decreased to 22.2% for Fiscal 1996 (before giving consideration
to $28.4 million of revenue and cost of sales adjustments described above)
from 26.4% for Fiscal 1995. The decline in the Consumer Products Segment gross
profit margin is mainly attributable to increased levels of royalty cost
resulting from changes in the sales mix towards the higher royalties
associated with licensed characters' products, and a deterioration in the
gross profit margins at Penn which decreased to 12.0% from 22.1%. The
liquidation of last-in, first-out ("LIFO") inventory resulted in a decrease to
cost of goods sold of $5.2 million which was offset by charges to cost of
goods sold of $4.6 million relating to slow moving and obsolete inventory. The
Commercial Products Segment gross profit decreased $4.6 million (54.1%) to
$3.9 million for Fiscal 1996 from $8.5 million for Fiscal 1995. As a
percentage of revenues, the Commercial Products Segment gross profit margin
decreased to 9.1% for Fiscal 1996 as compared to 13.5% for Fiscal 1995,
primarily due to continuing unfavorable manufacturing variances. The newly
established Entertainment Segment had little impact on the consolidated gross
profit margin during this period. In Fiscal 1996, as a percentage of revenues,
the Entertainment Segment gross profit margin was 15.8%.
Selling, general and administration expenses for Fiscal 1996 decreased $24.4
million (18.9%) to $104.5 million (before giving consideration to one time
charges of $38.2 million comprised of $11.0 million relating to costs
associated with new management's plans to resolve certain legal and
contractual matters, $9.5 million in consulting fees and other costs as
described above and $17.7 million of expenses related to the acquisition of an
equity interest by GP Holding) from $129.0 million for Fiscal 1995. These
reductions were primarily attributable to the shorter fiscal period,
reductions in selling expenses due to lower sales levels and the Company's
workforce reduction program.
Interest expense for Fiscal 1996 increased by $1.7 million (including $3.6
million related to the distributions on the Preferred Securities) to $14.6
million as compared to $12.9 million for Fiscal 1995. The increase in interest
expense for Fiscal 1996 was primarily due to higher average debt outstanding,
as the Company completed its private placement of the Preferred Securities on
September 9, 1996. Total average outstanding debt increased to $194.4 million
in Fiscal 1996 from $152.8 million in Fiscal 1995.
16
<PAGE>
The Company's provision for income taxes decreased from $11.3 million to $1.9
million for Fiscal 1996 compared to Fiscal 1995. The provision for Fiscal 1996
pertained principally to anticipated resolution of outstanding issues from
prior years. The Company has established an additional valuation allowance for
the future tax benefits associated with the current year increase in the
deductible temporary difference items since the future realization of such
benefits is uncertain. The Fiscal 1995 provision includes a non-cash charge of
$13.9 million, reflecting an increase in the income tax valuation allowance as
the future realization of existing deductible temporary differences is
uncertain. The effective income tax rates from operations of (1.0%) in Fiscal
1996 and (20.3%) in Fiscal 1995 are significantly below the Federal statutory
rate due to losses incurred during each period for which no tax benefit has
been recognized. Profitable operating results in subsequent years will benefit
from an income tax provision rate which will be lower than the statutory rate
due to the reinstatement of deferred tax assets for which valuation allowances
have been established. At December 28, 1996, the Company had available net
operating loss carryforwards of approximately $138.7 million for Federal
income tax purposes. In addition the Company had tax credit carry forwards of
approximately $4.4 million.
The loss for Fiscal 1996 was $197.5 million, or $(8.73) per basic common share
compared to a net loss of $67.0 million or $(3.23) per basic common share for
fiscal 1995. Results for Fiscal 1996 include restructuring and other charges
of a one time nature aggregating $132.3 million, as discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 27, 1997, the Company had approximately $95.8 million in
working capital, including approximately $57.4 million in cash. Based upon
current projections, the continued implementation of management's plan to
return the Company's core publishing business to profitability and to
re-deploy assets during the next twelve months may require financial resources
greater than the Company's current cash position and future cash flow.
Accordingly, the Company is currently seeking additional financing. In
connection therewith, the Company is presently negotiating for a three year
$25 million line of credit ("Line of Credit"), which requires approval from a
majority (over 50%) of the holders of the Company's $150 million 7.65% Senior
Notes. In the alternative, the Company is also presently negotiating an
accounts receivable purchase program for the purchase of up to $30 million of
qualified receivables ("Accounts Receivable Purchase Program") at any one
time. Management believes that it will be successful in obtaining both the
Line of Credit and the Accounts Receivable Purchase Program on acceptable
terms. However, there can be no assurance that either the Line of Credit or
the Accounts Receivable Purchase Program will be obtained by the Company on
acceptable terms. If the Company does not consummate the aforementioned
financing arrangements, it may be required to seek equity or other sources of
financing. To the extent that the Company finances its requirements through
the issuance of additional equity securities, any such issuance would result
in dilution of the Common Stock.
Operations for Fiscal 1997, including one time transition costs of $11.5
million associated with the strategic redirection of the Company and payments
of restructuring costs accrued during Fiscal 1996 of $4.2 million, utilized
cash of approximately $82.3 million compared to cash provided of $94.5 million
for Fiscal 1996.
Acquisitions of property, plant and equipment were $20.4 million during Fiscal
1997, as compared to $5.7 million during Fiscal 1996. Additions to the
Company's film library were $6.3 million in Fiscal 1997.
Working capital at December 27, 1997 was $95.8 million, as compared to $168.2
million at December 28, 1996. The decrease resulted primarily from cash
reductions associated with investment in property, plant and equipment,
funding the loss from operations and transition costs associated with the
strategic redirection of the Company during Fiscal 1997.
The Company incurred $11.5 million attributable to transition costs in
connection with the strategic redirection of the Company during 1997. The
Company's plan to change its strategic direction in order to return the core
publishing business to profitability originally anticipated incurring $20.5
million in one time transition costs during 1997. Since this announcement the
Company has made additional decisions (as described below) which made it
impractical for all such transition costs to be incurred during 1997. As a
result, the Company expects that approximately $13.0 million of one time
transition costs will be incurred during 1998. The major factor impacting this
change in timing is management's decision to delay the construction and move
of the Company's main operating facility in Racine, Wisconsin, which it
expects to be fully operational by May 1998. As of December 27, 1997, the
Company maintained sufficient accruals for restructuring costs which are
expected to be paid out during 1998. In connection with its move to the new
facility, on October 31, 1997, the Company sold the building which had housed
its main plant in Racine for net proceeds of approximately $2.4 million.
17
<PAGE>
In connection with the construction of the new manufacturing facility, the
Company was awarded low interest loans and other financial incentives valued
at $5.0 million by the State of Wisconsin and the City and County of Racine,
$3.0 million of which were received during Fiscal 1997.
The Company continued its disposition of non-core assets with the December 1,
1997 sale of its printing operations in Cambridge, Maryland for approximately
$20.2 million, the sale of the Racine plant for $2.4 million (described
above), and the sale of other assets for approximately $0.1 million.
The Company believes that, based on the carrying value of both certain assets
held for sale and inventory to be discontinued or replaced in connection with
the Company's strategic actions, it will realize cash proceeds in excess of
$10.0 million on the sale of such assets. Such proceeds and cash attributable
to the Company's cost savings will be used in connection with the Company's
change in strategic focus and other strategic measures.
On September 26, 1997, the Company signed a new license agreement with Disney
(the "New Disney License Agreement") (the Company's previous main license
agreement with Disney was to have expired on December 31, 1997). The New
Disney License Agreement commenced on October 1, 1997 and runs through
December 31, 2001, and can be extended under certain conditions for an
additional year through December 31, 2002. The book formats covered under the
New Disney License Agreement include: coloring books, activity books, Little
Golden Books, First Little Golden Books, Look/Look Books, Super Shape Books
and Sturdy Shape Books. New formats approved by Disney also may be covered
under the New Disney License Agreement. Properties covered under the New
Disney License Agreement include Disney classic characters as well as
characters from major new Disney branded films released during the term
thereof.
Royalty rates under the New Disney License Agreement vary by product covered.
The New Disney License Agreement contains minimum royalty guarantees of
$7,370,000 for the nine-month period commencing January 1, 1998 and ending
September 30, 1998, $11,670,000 for the second year of the term, $13,340,000
for the third year of the term, $15,340,000 for the fourth year of the term
and $5,280,000 for the period commencing October 1, 2001 and ending December
31, 2001; provided that if the New Disney License Agreement is extended for an
additional year, the minimum royalty guaranty for the year commencing October
1, 2001 shall be $16,670,000, and for the period commencing October 1, 2002
and ending December 31, 2002 shall be $5,610,000. In addition, upon the
execution and delivery thereof, Disney received warrants to purchase 1.1
million shares of the Company's common stock at a per share price of $11.375
(subject to certain adjustments), exercisable beginning on the earlier of i)
90 days after the expiration of the New Disney License Agreement or ii) 30
days after the announcement by either Disney or the Company that they will a)
be entering into a new license agreement or b) that they will not be entering
into a new licensing agreement, and expiring on March 31, 2008.
LEGAL PROCEEDINGS
The Company is currently involved in various litigation as described under
"Item 3. Legal Proceedings". The Company is actively pursuing resolution to
those matters or is awaiting further government response. While it is not
feasible to predict or determine the outcome of the proceedings, it is the
opinion of Management that their outcomes have been adequately reserved for
and will not have a materially adverse effect on the Company's financial
position or future results of operations.
INDENTURE RESTRICTIONS
The indenture governing the 7.65% Senior Note restricts, under certain
circumstances, distributions from Golden Books Publishing to the Company. In
addition, the indenture restricts, with customary exceptions, the ability of
Golden Books Publishing to place liens on its assets.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. Any computer program that
has date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or other
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Since early 1997, the Company has been
pursuing a strategy of replacing and updating its information systems in
connection with its change in strategic focus. The Company believes that the
costs of modifying and replacing those systems which are not Year 2000
18
<PAGE>
compliant will be approximately $10.3 million, of which approximately $5.3
million represents new systems development, which will be capitalized, and
approximately $5.0 million represents making existing systems Year 2000
compliant, which will be expensed as incurred. In addition, the Company is
discussing with its vendors and customers the possibility of any interface
difficulties which may affect the Company. The project is estimated to be
completed prior to any anticipated impact on its operating systems. The
Company believes that with a modification and replacement strategy the
Year 2000 issue will not pose significant conversion problems for its computer
systems. However, if this strategy is not completed on a timely basis, the
Year 2000 issue could have a material impact on the operations of the
Company.
SEASONALITY
The Company has historically experienced significant fluctuations in quarterly
operating results. The children's publishing business in general is seasonal
and depends to a significant extent on the Christmas selling season, generally
resulting in a disproportionately higher percentage of revenues in the
Company's third fiscal quarter. The Company's quarterly operating results also
will fluctuate based on the timing of the introduction of products that
utilize licensed characters, which, in the case of characters appearing in
movies, will be dependent upon the period in which costs and expenses
attributable to the development and introduction of such products are
incurred.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rates of inflation over the
last three years have not had a significant impact on the profitability of the
Company. In general, the Company believes the effects of inflation are offset
through increases in sales prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which is effective for years beginning after December 15, 1997. FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components. FAS 130 requires the Company's foreign currency
translation adjustments, which are currently reported in stockholders'
(deficit) equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. FAS 130 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Company will adopt the new requirements in 1998. Management has not
completed its review of FAS 130, but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not yet completed its review of FAS 131 but its adoption will not have a
material effect on the Company's statement of position or revenues, only on
the composition of its reportable segments.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions
and Other Post-Retirement Benefits" ("FAS 132"), which is effective for years
beginning after December 15, 1997. FAS 132 standardizes the disclosure
requirements for pension and other post-retirement benefits to the extent
practicable, requires additional information on charges in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain disclosure. FAS 132 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not completed its review of FAS 132 but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
19
<PAGE>
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)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER (1) QUARTER (1) QUARTER (1) QUARTER (1)
<S> <C> <C> <C> <C>
1997
Net sales $ 65,624 $ 50,445 $ 52,805 $ 73,607
Gross profit 20,815 15,135 15,599 15,774
Net loss (2) (8,872) (11,292) (17,899) (11,617)
Net loss per common share - basic (.41) (.52) (.76) (.51)
Weighted average number of common shares - basic 25,983 26,139 26,489 26,814
1996
Net sales $ 67,314 $ 72,317 $ 67,308 $ 75,246
Gross profit (loss) 20,750 18,749 (11,341) 6,038
Net loss (3) (10,700) (24,464) (96,815) (70,072)
Net loss per common share - basic (.50) (1.19) (4.29) (2.80)
Weighted average number of common shares - basic 21,669 21,980 23,098 25,750
</TABLE>
(1) On November 30, 1996, the Company changed its Fiscal year end so as
to end on the last Saturday in December. Accordingly, the
consolidated quarterly financial information has been restated to
reflect the Company's revised quarters follows:
1996
----
First Quarter March 30th
Second Quarter June 29th
Third Quarter September 28th
Fourth Quarter December 28th
(2) Includes gain on disposal of a number of items, mainly the Cambridge
facility of $10,209 during the fourth quarter.
(3) Includes a total provision for restructuring and closure of
operations of $65,741, of which $40,680 and $25,061 were recognized
in the third and fourth quarters, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None noted.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1 and 2) Financial Statements. See Index to Consolidated
Financial Statements and Schedules which appears on Page F-1
herein.
(a)(3) Exhibits
3.1* Restated Certificate of Incorporation of the Registrant dated March
25, 1998.
3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.4
to the 1988 Form 10-K).
4.1 Form of certificate for shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.4 to Registration Statement
No. 33-4127).
4.2 Certificate of Designation of the Series B Convertible Preferred
Stock dated May 8, 1996 (included in Exhibit 3.1 filed herewith).
4.3 Indenture governing the Golden Books Publishing Company's 7.65%
Senior Notes due 2002 (incorporated by reference to Registration
Statement 33-51568).
4.4 Certificate of Trust of Golden Book Financing Trust (incorporated by
reference to Exhibit 10.1 to the Registrant's Registration Statement
No. 333-14335).
4.5 Amended and Restated Declaration of Trust of Golden Books Financing
Trust, dated as of August 20, 1996, among Golden Books Family
Entertainment, Inc., as Sponsor, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee and
Willa M. Perlman and Philip E. Rowley, as Trustees (Incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
quarterly period ended August 3, 1996 (the "August 3, 1996 10-Q")).
21
<PAGE>
4.6 Indenture for the 8 3/4% Convertible Debentures, dated as of August
20, 1996, among Golden Books Family Entertainment, Inc., Golden Books
Publishing Company, Inc. and The Bank of New York, as Indenture
Trustee (incorporated by reference to Exhibit 10.2 of the August 3,
1996 Form 10-Q).
4.7 Form of 8 3/4% Preferred Securities (included in Exhibit A-1 to
Exhibit 4.4 above).
4.8 Form of 8 3/4% Convertible Debentures (included in Exhibit A to
Exhibit 4.5 above).
4.9 Preferred Securities Guarantee Agreement, dated as of August 20,
1996, between Golden Books Family Entertainment, Inc., as Guarantor,
and The Bank of New York, as Guarantee Trustee (incorporated by
reference to Exhibit 10.3 of the August 3, 1996 Form 10-Q).
10.01 Golden Comprehensive Security Program, as amended and restated,
effective January 1, 1993 (incorporated by reference to Exhibit 10.40
to the Registrant's Annual Report on Form 10-K for Fiscal year 1993
(the "1993 Form 10-K")).
10.02 Golden Retirement Savings Program, as amended and restated, effective
as of January 1, 1993 (incorporated by reference to Exhibit 10.53 to
the 1993 Form 10-K).
10.03 Amended and Restated 1986 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.40 to the 1988 Form 10-K).
10.04 Amendment dated April 11, 1989 to the Amended and Restated 1986
Employee Stock Option Plan (incorporated by reference to Exhibit
10.56 to the 1990 Form 10-K).
10.05* Golden Books Family Entertainment, Inc. Amended and Restated 1995
Stock Option Plan.
10.06 Western Publishing Company, Inc.'s Executive Medical Reimbursement
Plan dated January 1, 1991 (incorporated by reference to Exhibit
10.73 to the 1991 Form 10-K).
10.07 Registration Rights Agreement, dated August 20, 1996, among Golden
Books Financing Trust, Golden Books Family Entertainment, Inc.,
Golden Books Publishing Company, Inc., Merrill Lynch & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation and SBC Warburg
Inc. (incorporated by reference to Exhibit 10.4 to the August 3, 1996
Form 10-Q).
10.08 Registration Rights Agreement, dated as of September 6, 1996, between
Golden Books Family Entertainment, Inc. and H C Crown Corp.
(incorporated by reference to Exhibit 10.6 to the August 3, 1996 Form
10-Q).
10.09 Asset Purchase Agreement dated as of July 30, 1996 among Broadway
Video Entertainment, L.P., Broadway Video Enterprises, Inc., Lone
Ranger Music, Inc., Palladium Limited Partnership, Golden Books
Family Entertainment, Inc., Golden Books Publishing Company, Inc.,
and LRM Acquisition Corp. (incorporated by reference to the
Registrant's current report on Form 8-K dated August 29, 1996).
10.10 Amendment No. 1 to Asset Purchase Agreement, dated as of August 20,
1996 among Broadway Video Entertainment, L.P., Broadway Video
Enterprises, Inc., Lone Ranger Music, Inc., Palladium Limited
Partnership, Golden Books Family Entertainment, Inc., Golden Books
Publishing Company, Inc. and LRM Acquisition Corp. (incorporated by
reference to Exhibit 10.7 to the August 3, 1996 Form 10-Q).
10.11 Registration Rights Agreement, dated August 20, 1996, between Golden
Books Family Entertainment, Inc. and Broadway Video Entertainment,
L.P. (incorporated by reference to Exhibit 10.8 the August 3, 1996
Form 10-Q).
10.12 Amended and Restated Non-Recourse Promissory Note, dated as of August
20, 1996, executed by Richard E. Snyder in favor of Golden Books
Family Entertainment, Inc. (incorporated by reference to Exhibit
10.16 to the August 3, 1996 Form 10-Q).
22
<PAGE>
10.13 Amended and Restated Pledge Agreement, dated as of August 20, 1996,
executed by Richard E. Snyder (incorporated by reference to Exhibit
10.18 to the August 3, 1996 Form 10-Q).
10.14 Golden Books Family Entertainment, Inc. Executive Officer Bonus Plan
(incorporated by reference to Appendix VII to the 1996 Proxy).
10.15 Amended and Restated Employment Agreement, dated as of August 20,
1996, between Golden Books Family Entertainment, Inc. and Richard E.
Snyder (incorporated by reference to Exhibit 10.16 to the August 3,
1996 Form 10-Q).
10.16* Amendment No. 1 to Richard E. Snyder's Amended and Restated
Employment Agreement, dated as of September 9, 1997.
10.17 Employment Agreement, dated July 30, 1996, between Golden Books
Family Entertainment, Inc. and Eric Ellenbogen (incorporated by
reference to Exhibit 10.19 to the August 3, 1996 Form 10-Q).
10.18 Employment Agreement, dated as of July 1, 1996, between Golden Books
Family Entertainment, Inc. and Philip E. Rowley (incorporated by
reference to Exhibit 10.20 to the August 3, 1996 Form 10-Q).
10.19 Employment Agreement, dated as of May 28, 1996, between Golden Books
Family Entertainment, Inc. and Willa M. Perlman (incorporated by
reference to Exhibit 10.21 to the August 3, 1996 Form 10-Q).
10.20* Employment Agreement, dated as of July 28, 1997 between Golden Books
Publishing Company, Inc. and Richard Collins.
10.21* Industrial Building Lease Agreement dated as of June 23, 1997 between
Golden Books Family Entertainment, Inc., and First Industrial
Development Services Group, L.P.
10.22 Licensed Book Publishing Agreement between Disney Licensed Publishing
and Golden Books Publishing Company, Inc., dated September 26, 1997
(incorporated by reference to exhibit 10.01 to the 10-Q/A filed on
November 17, 1997).
10.23 Warrant Agreement between Golden Books Family Entertainment, Inc. and
Disney Enterprises, Inc., dated September 26, 1997 (incorporated by
reference to exhibit 10.02 to the 10-Q/A filed on November 17, 1997).
21.1* List of Subsidiaries.
23.1* Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Deloitte & Touche LLP, Independent Auditors
27.1* Financial Data Schedule.
99.1 Undertaking incorporated by reference into certain registration
statements on Form S-8 of the Registrant (incorporated by reference
to Exhibit 99.4 to the 10-K for the year February 3, 1996).
* Filed electronically herewith.
(b) Reports on Form 8-K filed during the last two months ended December
28, 1996:
Form 8-K, dated October 1, 1997.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 24, 1998 GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
/s/ Richard. E. Snyder
---------------------------
Richard E. Snyder
Chairman of the Board of Directors and
Chief Executive Officer
/s/ Philip E. Rowley
---------------------------
Philip E. Rowley
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Richard E. Snyder Chairman of the Board and Chief Executive Officer March 24, 1998
- --------------------
Richard E. Snyder
/s/ Eric Ellenbogen Executive Vice President and Director March 24, 1998
- --------------------
Eric Ellenbogen
/s/ Shahara Ahmad-Llewellyn Director
- ---------------------------
Shahara Ahmad-Llewellyn March 24, 1998
/s/ Linda L. Janklow Director March 24, 1998
- --------------------
Linda L. Janklow
24
<PAGE>
Director
/s/ Marshall Rose March 24, 1998
- ---------------------------
Marshall Rose
/s/ John L. Vogelstein Director March 24, 1998
- ---------------------------
John L. Vogelstein
/s/ David A. Tanner Director March 24, 1998
- ---------------------------
David A. Tanner
/s/ H. Brian Thompson Director March 24, 1998
- ---------------------------
H. Brian Thompson
</TABLE>
25
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................................................ F-2
Independent Auditors' Report .......................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets at December 27 , 1997 and December 28, 1996................ F-4
Consolidated Statements of Operations for the year ended December 27, 1997,
the eleven months ended December 28, 1996 and the year ended February 3, 1996.......... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year ended
February 3, 1996 ...................................................................... F-7
Consolidated Statements of Cash Flows for the year ended December 27, 1997,
the eleven months ended December 28, 1996 and the year ended February 3, 1996 ......... F-8
Notes to Consolidated Financial Statements ............................................ F-10
Schedule I - Condensed Financial Information of Registrant ............................ S-1
Schedule II - Valuation and Qualifying Accounts ....................................... S-4
</TABLE>
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
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
Golden Books Family Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Golden Books
Family Entertainment, Inc. and Subsidiaries as of December 27, 1997 and
December 28, 1996, and the consolidated statements of operations,
stockholders' (deficit) equity and cash flows for the year ended December
27, 1997 and the period from February 4, 1996 to December 28, 1996. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Golden Books Family Entertainment, Inc. and Subsidiaries at December 27,
1997 and December 28, 1996, and the consolidated results of their operations
and their cash flows for the year ended December 27, 1997 and the period from
February 4, 1996 to December 28, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
March 24, 1998
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
Golden Books Family Entertainment, Inc.
We have audited the consolidated statement of operations, stockholders' equity
(deficit) and cash flows of Golden Books Family Entertainment, Inc. and
Subsidiaries (formerly Western Publishing Group, Inc. and Subsidiaries) for
the year ended February 3, 1996. Our audit also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects results of their operations and their cash flows for the
year ended February 3, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly in all material respects the information required to be
set forth therein.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 2, 1996
F-3
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 27, DECEMBER 28,
CURRENT ASSETS 1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 57,411 $139,686
Accounts receivable 51,153 41,415
Inventories 34,659 27,608
Royalty advances 10,416 5,239
Refundable income taxes 1,781 1,781
Net assets held for sale 9,873 19,779
Other current assets 5,053 5,365
-------- --------
Total current assets 170,346 240,873
-------- --------
OTHER ASSETS
Deposits 3,497 -
Accounts receivable - long term 3,207 1,001
Other noncurrent assets 13,629 8,102
-------- --------
Total other assets 20,333 9,103
-------- --------
PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
of $39,620 as of December 27, 1997 and $40,672 as of December 28, 1996 38,256 27,504
FILM LIBRARY, net of accumulated amortization of $4,364 as of December 27, 1997
and $1,082 as of December 28, 1996 63,638 60,668
GOODWILL, net of accumulated amortization of $1,605 as of December 27, 1997
and $405 as of December 28, 1996 30,591 29,087
-------- --------
TOTAL ASSETS $323,164 $367,235
======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 21,454 $ 15,655
Accrued compensation and fringe benefits 5,887 5,787
Other current liabilities 47,225 51,221
--------- ---------
Total current liabilities 74,566 72,663
--------- ---------
NONCURRENT LIABILITIES
Long term debt 149,897 149,862
Accumulated post-retirement benefit obligation 29,365 28,787
Deferred compensation and other deferred liabilities 19,938 25,072
--------- ---------
Total noncurrent liabilities 199,200 203,721
--------- ---------
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING
COMPANY, INC.'S CONVERTIBLE DEBENTURES 110,707 110,488
STOCKHOLDERS' DEFICIT:
Convertible Preferred Stock - Series B, 13,000 shares authorized,
no par value, 13,000 shares issued and outstanding; 65,000 65,000
Common Stock, $.01 par value, 60,000,000 shares authorized,
26,887,313 and 25,964,711 shares issued as of
December 27, 1997 and December 28, 1996, respectively 269 259
Additional paid in capital 128,533 120,376
Accumulated deficit (250,791) (201,111)
Cumulative translation adjustments (1,498) (1,339)
--------- ---------
(58,487) (16,815)
Less cost of Common Stock in treasury - 208,800 shares 2,822 2,822
--------- ---------
Total common stockholders' deficit (61,309) (19,637)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 323,164 $ 367,235
========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 27, DECEMBER 28, FEBRUARY 3,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net sales $ 242,481 $ 254,046 $ 369,572
Royalties and other income 1,080 959 1,722
--------- --------- ---------
Total revenues 243,561 255,005 371,294
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 176,238 231,792 281,392
Selling, general and administrative 111,307 142,721 129,020
Restructuring plan, net of gains on sale of assets (10,786) 65,741 6,701
--------- --------- ---------
Total costs and expenses 276,759 440,254 417,113
--------- --------- ---------
LOSS BEFORE INTEREST INCOME,
DISTRIBUTIONS ON GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN THE COMPANY'S
AND GOLDEN BOOKS PUBLISHING COMPANY,
INC.'S CONVERTIBLE DEBENTURES, INTEREST
EXPENSE, AND PROVISION FOR INCOME TAXES (33,198) (185,249) (45,819)
INTEREST INCOME 5,579 4,235 2,963
DISTRIBUTIONS ON GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN THE COMPANY'S
AND GOLDEN BOOKS PUBLISHING COMPANY,
INC.'S CONVERTIBLE DEBENTURES (10,282) (3,597) -
INTEREST EXPENSE (11,742) (10,999) (12,859)
--------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (49,643) (195,610) (55,715)
PROVISION FOR INCOME TAXES 37 1,893 11,332
--------- --------- ---------
NET LOSS $ (49,680) $(197,503) $ (67,047)
========= ========= =========
NET LOSS PER BASIC COMMON SHARE $ (2.18) $ (8.73) $ (3.23)
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
TWO YEARS AND ELEVEN MONTHS ENDED DECEMBER 27, 1997
(In Thousands Except for Shares and Per Share Data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK - SERIES B
-------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------- ------------- ----------------
<S> <C> <C> <C>
Balances, January 28, 1995 21,232,074 $ 212 - $ -
Net loss - - - -
Dividends on Preferred Stock - Series A - $42.50 per share - - - -
Exercise of stock options 44,000 1 - -
Issuance of Common Stock 599,465 6 - -
Translation adjustments - - - -
-------------- ----------- ------------- ----------------
Balances, February 3, 1996 21,875,539 219 - -
Net loss - - - -
Issuance of Preferred Stock - Series B - - 13,000 65,000
Dividends on Preferred Stock - Series A - $42.50 - - - -
Common Stock issued as dividend on Preferred Stock - Series B 390,000 4 - -
Exercise of stock options 356,599 3 - -
Issuance of Common Stock 3,342,573 33 - -
Translation Adjustment - - - -
-------------- ----------- ------------- ----------------
Balances, December 28, 1996 25,964,711 259 13,000 65,000
Net loss - - - -
Common Stock issued as dividend on Preferred Stock - Series B 780,000 8 - -
Exercise of stock options 142,602 2 - -
Issuance of Warrants - - - -
Translation Adjustment - - - -
-------------- ----------- ------------- ----------------
Balances, December 27, 1997 26,887,313 $ 269 13,000 $ 65,000
============== =========== ============= ================
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL NOTE RECEIVABLE RETAINED CUMULATIVE
PAID-IN FROM SALE OF EARNINGS TRANSLATION
CAPITAL COMMON STOCK (DEFICIT) ADJUSTMENTS
----------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Balances, January 28, 1995 $ 80,914 $ - $ 64,287 $ (1,797)
Net loss - - (67,047) -
Dividends on Preferred Stock - Series A - $42.50 per share - - (848) -
Exercise of stock options 516 - - -
Issuance of Common Stock 5,614 (4,796) - -
Translation adjustments - - - 128
----------------- ----------------- -------------- -------------
Balances, February 3, 1996 87,044 (4,796) (3,608) (1,669)
Net loss - - (197,503)
Issuance of Preferred Stock - Series B (6,248) - - -
Dividends on Preferred Stock - Series A - $42.50 (221) - - -
Common Stock issued as dividend on Preferred Stock - Series B (4) - - -
Exercise of stock options 3,883 - - -
Issuance of Common Stock 35,922 4,796 - -
Translation Adjustment - - - 330
----------------- ----------------- -------------- -------------
Balances, December 28, 1996 120,376 0 (201,111) (1,339)
Net loss - - (49,680) -
Common Stock issued as dividend on Preferred Stock - Series B (8) - - -
Exercise of stock options 1,554 - - -
Issuance of Warrants 6,611 - - -
Translation Adjustment - - - (159)
----------------- ----------------- -------------- -------------
Balances, December 27, 1997 $ 128,533 $ - $ (250,791) $ (1,498)
================= ================= ============== =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TREASURY STOCK
---------------------------
SHARES AMOUNT
-------------- ------------
<S> <C> <C>
Balances, January 28, 1995 208,800 $ 2,822
Net loss - -
Dividends on Preferred Stock - Series A - $42.50 per share - -
Exercise of stock options - -
Issuance of Common Stock - -
Translation adjustments - -
-------------- ------------
Balances, February 3, 1996 208,800 2,822
Net loss
Issuance of Preferred Stock - Series B - -
Dividends on Preferred Stock - Series A - $42.50 - -
Common Stock issued as dividend on Preferred Stock - Series B - -
Exercise of stock options - -
Issuance of Common Stock - -
Translation Adjustment - -
-------------- ------------
Balances, December 28, 1996 208,800 2,822
Net loss - -
Common Stock issued as dividend on Preferred Stock - Series B - -
Exercise of stock options - -
Issuance of Warrants - -
Translation Adjustment - -
-------------- ------------
Balances, December 27, 1997 208,800 $ 2,822
============== ============
</TABLE>
See notes to consolidated financial
statements.
F-7
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 27, DECEMBER 28, FEBRUARY 3,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (49,680) $(197,503) $ (67,047)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 6,732 12,534 13,963
Amortization of intangibles 4,482 1,487 2,032
Provision for losses on accounts receivable 3,608 5,719 1,440
Restructuring, net of gains on sale of assets (10,786) 63,917 (46)
Other non-cash charges associated with the
redirection of the Company - 39,450 -
Non-cash compensation expenses - 14,335 -
Gains on sale of equipment - (98) (339)
Other - 1,439 2,935
Changes in assets and liabilities, net
of effect of acquisition and dispositions:
(Increase) decrease in accounts receivable (15,392) 1,001 20,451
(Increase) decrease in inventories (7,051) 27,432 22,550
Decrease in net assets held for sale 1,755 1,628 -
Decrease in refundable income taxes - 1,463 2,614
(Increase) decrease in other current assets and
royalty advances (3,215) (3,600) 2,125
Increase (decrease) in accounts payable 3,199 (5,916) 539
Increase (decrease) in accrued compensation and
fringe benefits 100 143 (696)
Increase in deferred income taxes - - 13,886
Other (12,970) 17,149 (13,552)
--------- --------- ---------
Net cash (used in) provided by operating
activities
(79,218) (19,420) 855
CASH FLOWS FROM INVESTING ACTIVITIES:
Broadway Video acquisition - (81,000) -
Investment in joint venture - (2,250) -
Deposits (3,497) - -
Acquisitions of property, plant and equipment (20,386) (5,739) (17,921)
Additions to Film Library (6,348) - -
Proceeds from streamlining plan - 661 8,252
Proceeds from sale of assets 22,712 14,535 -
Other - 229 916
--------- --------- ---------
Net cash used in investing activities (7,519) (73,564) (8,753)
</TABLE>
F-8
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 27, DECEMBER 28, FEBRUARY 3,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Guaranteed
Preferred Beneficial Interests in
the Company's and Golden Books
Publishing Company, Inc.'s
Convertible Debentures - 115,000 -
Issuance costs of Guaranteed Preferred
Beneficial Interests in the Company's
and Golden Books Publishing Company,
Inc.'s Convertible Debentures - (4,579) -
Proceeds from Municipal Government Grants 3,000 - -
Repayments under Credit Agreement - - (32,000)
Proceeds from issuance of Preferred Stock - Series B - 65,000 -
Issuance costs of Preferred Stock - Series B - (6,248) -
Redemption of Preferred Stock - Series A - (9,985) -
Proceeds from sale of Common Stock 1,556 28,886 517
Dividends paid on Preferred Stock - Series A - (646) -
Other - (74) (768)
--------- --------- ---------
Net cash provided by (used in) financing activities 4,556 187,354 (32,251)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (94) 93 (34)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (82,275) 94,463 (40,183)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 139,686 45,223 85,406
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 57,411 $ 139,686 $ 45,223
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest and distribution on Guaranteed Preferred
Beneficial Interests in the Company's and
Golden Books Publishing Company, Inc.'s
Convertible Debentures $ 21,553 $ 13,992 $ 11,893
========= ========= =========
Income taxes, net of refunds received $ (416) $ (319) $ (5,465)
========= ========= =========
Non-cash activity:
Issuance of warrants in connection with Disney
License Agreement $ 6,611 $ - $ -
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
1. Nature of Business and Organization
Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company")
publishes, produces, licenses and markets an extensive range of children's and
family related entertainment products throughout all media through its
Children's and Adult Publishing, Golden Books Entertainment Group and
Commercial Printing Divisions.
The Company, through its Children's and Adult Publishing divisions, creates,
publishes and markets an extensive range of children's and family entertainment
products, including "Little Golden Books" and other storybooks,
coloring / activity books, electronic storybooks, puzzles, educational
workbooks, reference books and novelty book formats. The Company has published
its flagship product line, "Little Golden Books", for over 50 years.
The Company, through the Commercial Printing Division of its wholly owned
subsidiary, Golden Books Publishing Company, Inc. ("Golden Books Publishing"),
provides creative, printing and publishing services to third parties. The
Company groups these activities into three business categories: graphic art
services and commercial printing; educational kit manufacturing; and custom
publishing services.
The Company's Golden Books Entertainment Group ("Golden Books Entertainment")
division was established in August 1996, upon the acquisition from Broadway
Video Entertainment, L.P. ("BVELP") of an extensive library of character-based
family entertainment properties. The Golden Books Entertainment division's
library is comprised of copyrights, distribution rights, trademarks and
licenses relating to characters, television programs and motion pictures, both
animation and live action, and includes individual specials and multiple
episode series.
On May 8, 1996, the Company effected a reorganization of certain of its
subsidiaries (the "Reorganization"). First, the Company conveyed to Golden
Books, Inc. ("GB"), a Delaware corporation and wholly owned subsidiary of the
Company, (i) all of the issued and outstanding shares of capital stock of Penn
Corporation ("Penn") and (ii) all of the issued and outstanding shares of
capital stock of Western Publishing. Immediately thereafter, the Company
caused GB to merge with and into Western Publishing. In connection with the
Reorganization, the Company, Western Publishing and GB entered into a First
Supplemental Indenture, dated as of May 8, 1996, with Marine Midland Bank, a
New York banking and trust company, as Successor Trustee, pursuant to which
Western Publishing (the name of which was subsequently changed to Golden Books
Publishing) was substituted for the Company as obligor with respect to the
7.65% Senior Notes due 2002 originally issued by the Company (see Note 11).
2. LIQUIDITY
As of December 27, 1997, the Company had approximately $95.8 million in
working capital, including approximately $57.4 million in cash. The continued
implementation of management's plan to return the Company's core publishing
business to profitability and to re-deploy assets (the "Plan") during the next
twelve months may require financial resources greater than the Company's
current cash position and future cash flow. Accordingly, the Company is
currently seeking additional financing. In connection therewith, the Company
is presently negotiating for a three year $25 million line of credit ("Line of
Credit"), which requires approval from 50% of the holders of the Company's
$150 million 7.65% Senior Notes. In the alternative, the Company is also
presently negotiating an accounts receivable purchase program for the purchase
of up to $30 million of receivables ("Accounts Receivable Purchase Program")
at any one time. Management believes that they will be successful in obtaining
both the Line of Credit and the Accounts Receivable Purchase Program. However,
there can be no assurance that the Line of Credit or the Accounts Receivable
Purchase Program will be obtained on acceptable terms. If the Company does not
consummate the aforementioned financing arrangements, it may be required to
seek equity or other sources of financing. To the extent
F-10
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
2. Liquidity (cont'd)
that the Company finances its requirements through the issuance of additional
equity securities, any such issuance would result in dilution of the Common
Stock.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
all its wholly owned subsidiaries. The consolidated financial statements of
the Company include the operations of Golden Books Entertainment from the date
of its acquisition on August 20, 1996. The results of Golden Books Financing
Trust (the "Trust") are included in the Company's consolidated financial
statements since its inception on August 20, 1996. The Trust, which is the
issuer of 8 3/4% Guaranteed Preferred Beneficial Interests in the Company's
and Golden Books Publishing's Convertible Debentures (the "Preferred
Securities"), is wholly owned by the Company, has no independent operations
and its assets consist solely of the 8 3/4% Convertible Debentures due 2016 of
the Company and Golden Books Publishing (see Note 12). All material
intercompany items and transactions have been eliminated.
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
CHANGE IN YEAR END
On November 30, 1996, the Company changed its Fiscal year so as to end on the
last Saturday of December in each year. Accordingly, the accompanying
consolidated financial statements present the financial position of the
Company as of December 27, 1997 and December 28, 1996, and the results of its
operations, stockholders' (deficit) equity and cash flows for the year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year
ended February 3, 1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
consist of investments in high grade commercial paper. Accordingly, these
investments are subject to minimal credit and market risk. At December 27 ,
1997 and December 28, 1996, all of the Company's cash equivalents are
classified as held to maturity and their carrying amounts approximate fair
value.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability method.
Under this method, deferred income taxes are provided for differences between
the book and tax bases of the Company's assets and liabilities.
F-11
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The principal areas of
judgment relate to provision for returns and other sales allowances, doubtful
accounts, slow moving and obsolete inventories, reserve for royalty guarantees
and advances, film forecast ultimates, long-term asset impairments, net assets
held for sale and taxes.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated / amortized
on the straight-line method over the following estimated useful lives:
CLASSIFICATION ESTIMATED LIFE (YEARS)
- -------------- ----------------------
Buildings and improvements 10 - 40
Machinery and equipment 3 - 10
Expenditures which significantly increase the value or extend the useful lives
of assets are capitalized, while maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation / amortization of
assets, replaced, retired or disposed of are eliminated from their respective
property, plant and equipment accounts, and any gain or loss is reflected in
consolidated statements of operations.
Costs related to the development of information systems that are expected to
benefit future periods are capitalized and amortized over the estimated useful
lives of the systems.
REVENUE RECOGNITION
Sales are recorded upon shipment of products. Sales made on a returnable basis
are recorded net of provisions for estimated returns and allowances. These
estimates are revised, as necessary, to reflect actual experience and market
conditions. Revenue from the sale of film rights, principally for the home
video and domestic and foreign syndicated television markets, is recognized
when the film is available for showing or exploitation. Income from licensing
is recorded at the time characters are available to the licensee and
collections are reasonably assured. Receivables due more than one year beyond
the balance sheet date are discounted to their present value.
PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the FAS 128 requirements.
F-12
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net loss per common share for the year ended December 27, 1997, the eleven
months ended December 28, 1996 and the year ended February 3, 1996 is based on
the net loss for the period plus preferred dividend requirements divided by
the weighted average number of basic common shares outstanding. Shares
issuable upon the exercise of all common stock equivalents consisting
primarily of stock options and warrants are not included in the computations
since their effect is antidilutive (see Note 21).
INVENTORIES
Inventories are valued at the lower of cost or market value. Cost is
determined by the last-in, first-out ("LIFO") method for substantially all
domestic inventories. Inventories of international operations are valued using
the first-in, first-out method. At December 27, 1997 and December 28, 1996,
approximately 89% and 85%, respectively, of total inventories were valued
under the LIFO method.
DEPOSITS
The Company has placed approximately $3.5 million in Certificates of Deposit
to collateralize lease obligations associated with the Company's new corporate
headquarters located in New York City.
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated into United States
dollars at end of period rates of exchange, and income and expense accounts
are translated at the weighted average rates of exchange for the period. The
gains and losses resulting from the translation adjustments have been
accumulated as a separate component of common stockholders' (deficit) equity.
ADVERTISING COSTS
The Company expenses advertising costs related to its publishing operations as
they are incurred. Advertising expenses for the year ended December 27, 1997,
the eleven month period ended December 28, 1996, and the year ended February
3, 1996, amounted to approximately $3.6 million, $1.0 million and $4.1
million, respectively.
FILM LIBRARY
Film library consists of the costs of acquiring the film library, costs of
additional licenses and television production costs, which are stated at the
lower of unamortized costs or net realizable value. The costs are being
amortized using the film-forecast method which amortizes such costs in the
same ratio that current revenues bear to anticipated total revenues. Under
this method, the useful lives do not exceed 20 years in duration. The
liabilities for various profit participations and residuals are accrued in the
proportion which revenue for a period bears to ultimate revenue.
GOODWILL AND LONG LIVED ASSETS
Goodwill at December 27, 1997 and December 28, 1996, consists of the cost in
excess of net assets acquired in connection with the acquisition of
substantially all the assets of BVELP, which is being amortized on a
straight-line basis over a 25-year period (see Note 14).
F-13
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
It is the Company's policy to account for goodwill at the lower of amortized
cost or estimated realizable value. As part of an ongoing review of the
valuation and amortization of goodwill and long lived assets of the Company
and its subsidiaries, management assesses the carrying value of goodwill and
long lived assets if facts and circumstances suggest that there may be
impairment. If this review indicates that goodwill and long lived assets will
not be recoverable as determined by a non-discounted cash flow analysis of the
operating results over the remaining amortization period, the carrying value
of the goodwill and long lived assets would be reduced to estimated realizable
value.
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which is effective for years beginning after December 15, 1997. FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components. FAS 130 requires the Company's foreign currency
translation adjustments, which are currently reported in stockholders'
(deficit) equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. FAS 130 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Company will adopt the new requirements in 1998. Management has not
completed its review of FAS 130, but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not yet completed its review of FAS 131 but its adoption will not have a
material effect on the Company's statement of position or revenues, only on
the composition of its reportable segments.
EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions
and Other Post-Retirement Benefits" ("FAS 132"), which is effective for years
beginning after December 15, 1997. FAS 132 standardizes the disclosure
requirements for pension and other post-retirement benefits to the extent
practicable, requires additional information on charges in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain disclosure. FAS 132 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not completed its review of FAS 132 but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.
F-14
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
4. STRATEGIC DIRECTION OF THE COMPANY
On May 8, 1996, the Company completed the sale of a significant equity
interest to Golden Press Holding LLC ("GP Holding"), a Delaware limited
liability company owned by Richard E. Snyder, Barry Diller and Warburg, Pincus
Ventures, L.P. The Company issued to GP Holding, for an aggregate purchase
price of $65.0 million, (i) 13,000 shares of the Company's Series B
Convertible Preferred Stock, no par value (the "Series B Preferred Stock"),
each of which shares is convertible into shares of the Company's common stock,
par value $.01 per share ("Common Stock"), at an initial conversion price of
$10 per share, and (ii) a warrant to purchase 3,250,000 shares of Common Stock
at an initial exercise price of $10 per share (the "GPH Transaction"). Net
proceeds associated with the transaction were $58.8 million, after giving
effect to $6.2 million of transaction costs. Net proceeds were partially used
to retire approximately $10.0 million of Series A Preferred Stock, no par
value (the "Series A Preferred Stock"), at its face amount plus $0.7 million
of related accrued dividends, in addition to payments of approximately $3.4
million of severance and transition costs.
On January 31, 1996, the Company entered into an interim employment agreement
(the "Interim Employment Agreement") with Richard E. Snyder, whereby Mr.
Snyder became President of the Company. Pursuant to the Interim Employment
Agreement, the Company issued 599,465 shares of Common Stock (the "Snyder
Incentive Stock") to Mr. Snyder at a price of $8 per share in exchange for a
non-recourse note in the amount of the purchase price secured by a pledge of
the shares. On May 8, 1996, the Interim Employment Agreement was superseded by
a five-year employment agreement (the "Employment Agreement") pursuant to
which Mr. Snyder was entitled to receive annual compensation of $500,000 and
received options to acquire 1,113,293 shares of Common Stock at a price of
$12.81 per share (the "Snyder Option"), as well as special bonuses based on
the market price of the Common Stock, supplemental retirement benefits,
post-retirement medical benefits and certain other benefits. Accordingly, the
Company recorded a charge of approximately $12.8 million in costs associated
with the Employment Agreement which is included in the consolidated statements
of operations for the eleven months ended December 28, 1996. In connection
with the offering of the Preferred Securities (see Note 12), the Broadway
Video Acquisition (as hereinafter defined, see Note 14) and the Hallmark
Transaction (as hereinafter defined, see Note 16), and in accordance with the
anti-dilution provisions of the Employment Agreement, the Company issued
84,987 additional shares of Snyder Incentive Stock in exchange for a non
recourse note in the amount of the purchase price, increased by 157,796 the
number of shares exercisable under the Snyder Option and adjusted the special
bonuses provided for in the Employment Agreement. Accordingly, the Company
recorded an additional charge of approximately $1.5 million which is included
in the consolidated statements of operations for the eleven months ended
December 28, 1996. On September 9, 1997, the Employment Agreement was
subsequently amended whereby Mr. Snyder's annual compensation was increased
and his term of employment was extended to May 8, 2003.
During 1997, the Company continued its disposition of non-core assets with the
sale of its printing operations in Cambridge, Maryland, the sale of the
building which had housed its main plant in Racine, and disposals of other
assets. On December 1, 1997, the Cambridge commercial printing operation was
sold to Mail-Well Inc. ("Mail-Well") for approximately $20.2 million in cash,
subject to a working capital adjustment which resulted in a gain of
approximately $10.2 million recorded in the consolidated statement of
operations for the year ended December 27, 1997. Additionally, the sales of
the Racine plant and other assets each resulted in gains of $0.3 million for
the year ended December 27, 1997. In connection with the Company's strategic
plan, the Company incurred approximately $11.5 million in one time transition
costs during 1997 consisting of: (i) $3.1 million of moving costs associated
with new facilities, (ii) $3.5 million for outsourcing of the information
F-15
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED)
technology department, (iii) $4.5 million in consulting services associated
with implementing the strategic plan, and (iv) $0.4 million in other costs.
As part of management's plan to return the Company's core publishing business
to profitability and to re-deploy assets, new management took a number of
strategic actions and accordingly, made decisions with respect to certain of
the Company's assets, writedowns and other charges in the consolidated
financial statements for the eleven months ending December 28, 1996 totaling
approximately $132.3 million as follows:
(i) a restructuring charge totaling $65.7 million including a:
o $21.5 million loss on sale of disposal of a business
resulting from the Company's decision to exit non-core
business activities;
o $24.3 million non-cash charge consisting of: i) $10.2 million
for the write-down of the commercial printing operation to
net realizable value to be disposed of in connection with
the Company's plan to exit non-core business activities, ii)
$9.6 million for the loss on sale of assets associated with
the Company's strategic decision to outsource its
information technology department, and iii) $4.5 million for
the write-down of assets to net realizable value which have
been identified as nonproductive assets as a result of the
Company's strategic plan to operate in a new efficient
manufacturing facility;
o $8.0 million charge for severance related to the above;
o $3.0 million net realizable value adjustment related to an
idle facility associated with the Company's game business,
which was previously sold;
o $7.6 million write-off of non-productive assets associated
with the termination of customer program initiatives in
connection with the strategic redirection of the Company;
and
o $1.3 million for facility exit costs related to lease
terminations which were paid in December 1996.
(ii) a cost of sales adjustment of $25.0 million comprised of:
o $17.6 million of costs pertaining to the Company's decision
to discontinue or replace certain product lines and
expeditiously liquidate related inventory and slow moving
product;
o $7.4 million of other inventory related costs, consisting
primarily of licensing and prepublication costs.
(iii) a selling, general and administrative charge of $11.0 million relating to
costs associated with management's revised plans to resolve certain legal
and contractual matters
(iv) adjustments totaling $5.7 million consisting of:
o $3.4 million in revenue adjustments; and
o $2.3 million in operating expenses to establish reserves to
resolve differences with customers with a view toward
mending and improving the Company's relationships with its
customers.
(v) approximately $17.7 million of charges in connection with the sale of a
significant equity interest to GP Holding.
F-16
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED)
(vi) $7.2 million of other one time charges consisting primarily of:
o $3.8 million in consulting fees incurred in relation to new
management's review of the operations of the Company;
o $1.7 million of facility costs;
o other one time miscellaneous charges of $1.7 million.
As of December 27, 1997, $1.6 million of the facility related costs and $4.2
million of the severance have been paid.
5. PRIOR PERIOD'S RESTRUCTURING
During the year ended February 3, 1996, the Company recorded an approximate
$6.7 million provision for restructuring and closure of operations in a
further effort to reduce its operating cost structure and improve future
operating results, and to reflect the costs incurred in connection with the
termination of a previously announced transaction to sell a significant
interest in the Company. The provision includes a non-cash charge of
approximately $2.0 million and consists of the following components:
o Severance costs of approximately $3.6 million associated
with the Company's previously announced workforce reductions
of salaried and hourly personnel. These reductions were
completed in the quarter ended February 3, 1996.
o Unrecoverable assets and costs of approximately $3.2 million
to be incurred in connection with the Company's decision to
close certain of its retail store locations.
o Transaction costs of approximately $1.9 million resulting
from the Company's October 17, 1995 announcement of the
termination of its initial agreement in principle to sell a
significant interest in the Company to Warburg, Pincus
Ventures, L.P. and Richard E. Snyder.
o A plan designed to improve the Company's competitive
position and reduce its cost structure through the sale,
divestiture, consolidation or phase out of certain
operations, properties and products, and a workforce
reduction were less than originally anticipated. A gain of
approximately $2.0 million as certain costs and expenses of
the Plan were less than originally anticipated.
6. NET ASSETS HELD FOR SALE AND DISPOSITIONS
As of December 27, 1997, net assets held for sale totaling approximately $9.9
million included the Company's (i) Fayetteville facility, which was closed in
conjunction with the sale of the Company's game and puzzle business, (ii)
Creative Center, a facility of Golden Books Publishing, and (iii) Coffeyville
Distribution Center, a facility of Golden Books Publishing.
As of December 28, 1996, net assets held for sale totaling approximately $19.8
million included the Company's (i) Fayetteville facility, which was closed in
conjunction with the sale of the Company's game and puzzle business (a $3.0
million revision to the estimated net realizable value of this facility was
recorded in the consolidated statements of operations during the eleven months
ended December 28, 1996), (ii) Cambridge facility, which was a part of the
commercial printing group and was subsequently sold in
F-17
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
6. NET ASSETS HELD FOR SALE AND DISPOSITIONS (CONTINUED)
December 1997 to Mail-Well, (iii) Fulford Street facility, a facility of Penn
which was not sold to Peacock Papers, Inc. ("Peacock") and (iv) the Creative
Center, a facility of Golden Books Publishing.
During 1997, the Company continued its disposition of non-core assets with the
sale of its printing operations in Cambridge, Maryland, the sale of the
building which had housed its main plant in Racine, and disposals of other
assets. On December 1, 1997, the Cambridge commercial printing operation was
sold to Mail-Well for approximately $20.2 million in cash, (subject to a
working capital adjustment) which resulted in a gain of approximately $10.2
million recorded in the consolidated statement of operations for the year
ended December 27, 1997 (see Note 4). The results of operations of the
Cambridge facility are included in the Company's consolidated results of
operations until its date of disposition. The facilities results of
operations for the year ended December 27, 1997, the eleven months ended
December 28, 1996 and the year ended February 3, 1996 were as follows:
<TABLE>
<CAPTION>
Period from December 29, Eleven months
1996 to Decembver 1,1997 Ended Year Ended
(date of disposition) December 28, 1996 February 3, 1996
--------------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Revenues $ 25,552 $ 26,962 $34,488
Gross profit 3,656 1,694 2,962
Income (loss) before
interest expense
and provision for
income taxes 1,952 (223) 993
</TABLE>
During the year ended December 28, 1996, new management determined that Penn,
formerly a wholly owned subsidiary of Golden Books Publishing that designed,
produced and distributed decorated paper tableware, party accessories and
giftware, did not fit into the Company's future strategic direction and,
accordingly, decided to divest Penn (see Note 17). As a result, on December
23, 1996 Golden Books Publishing sold the stock of Penn to Peacock for
approximately $14.5 million in cash plus Notes, subject to a working capital
adjustment. The results of operations of Penn are included in the Company's
consolidated results of operations until its date of disposition. Penn's
results of operations for the eleven months ended December 28, 1996 and the
year ended February 3, 1996 were as follows:
<TABLE>
<CAPTION>
Period from February 4, 1996
to December 23, 1996 Year Ended
(date of disposition) February 3, 1996
--------------------- ----------------
(In thousands)
<S> <C> <C>
Revenues $ 40,660 $ 52,955
Gross profit 4,930 11,733
Loss before interest expense and provision for income taxes (7,152) (3,395)
</TABLE>
F-18
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
7. Accounts Receivable
Accounts receivable consisted of the following:
December 27, December 28,
1997 1996
---- ----
(In thousands)
Accounts receivable $ 78,609 $ 63,542
Allowance for doubtful accounts (7,208) (4,379)
Allowance for sales discount and returns
(17,041) (16,747)
-------- --------
54,360 42,416
Less long term portion (3,207) (1,001)
-------- --------
$ 51,153 $ 41,415
======== ========
On September 29, 1995, Golden Books Publishing, a wholly owned subsidiary of
the Company entered into an extendible one-year Receivables Purchasing
Agreement, which included a letter of credit facility, with a financial
institution to sell in pools, trade accounts receivable on a revolving basis,
up to a maximum of $62.5 million outstanding at any one time. The pools were
sold on a non-recourse basis for credit losses and were subjected to a
discount fee. During the year ended February 3, 1996, the Company sold
approximately $19.0 million of receivables of which approximately $1.5 million
were outstanding at February 3, 1996. The Company did not sell any receivables
during the eleven month period ending December 28, 1996 and the year ended
December 27, 1997. The proceeds from the sale of receivables are reported as
providing operating cash flow in the accompanying consolidated statements of
cash flows. The costs associated with this program of $505,000 and $571,000
for the eleven months ended December 28, 1996 and the year ended February 3,
1996, respectively, are included as a component of interest expense in the
accompanying consolidated statements of operations. There were no costs
associated with this program for the year ended December 27, 1997. In
accordance with the terms of this agreement, the Receivable Purchasing
Agreement terminated on September 29, 1996.
8. INVENTORIES
Inventories consisted of the following:
December 27, December 28,
1997 1996
---- ----
(In thousands)
Raw materials $ 2,373 $ 2,810
Work-in-process 3,819 1,829
Finished goods 25,121 19,719
Film library 3,346 3,250
------- -------
$34,659 $27,608
======= =======
At December 27, 1997 and December 28, 1996, the replacement cost of
inventories valued using LIFO exceeded the net carrying amount of such
inventories by approximately $2.5 million and $3.5 million, respectively. For
the eleven months ended December 28, 1996, the liquidation of LIFO inventories
decreased cost of sales by $5.2 million. For the year ended December 27, 1997,
there was no LIFO liquidation and therefore, no impact on the consolidated
financial statements.
F-19
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
December 27, December 28,
1997 1996
---- ----
(In thousands)
Land $ 393 $ 356
Building and improvements 13,393 13,607
Machinery and equipment 55,381 54,013
Machinery and equipment in the process of installation 8,709 200
-------- --------
77,876 68,176
Less accumulated depreciation and amortization (39,620) (40,672)
-------- --------
$ 38,256 $ 27,504
======== ========
10. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
December 27, December 28,
1997 1996
---- ----
(In thousands)
Royalties payable $12,841 $ 8,789
Accrued interest 4,388 4,388
Accrued worker's compensation 3,221 4,396
Accrued video duplication costs - 3,704
Restructuring costs 4,559 8,538
Other 22,216 21,406
------- -------
$47,225 $51,221
======= =======
11. LONG TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
7.65% Senior Notes ($150,000,000 face
amount) due 2002 $149,897 $ 149,862
======== ===========
</TABLE>
Golden Books Publishing Company is obligor with respect to $150.0 million of
7.65% Senior Notes, which were originally issued on September 17, 1992 and are
due September 15, 2002. Interest is payable semiannually on March 15th and
September 15th. There is no obligation to redeem, purchase or repay the Senior
Notes prior to maturity.
F-20
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
11. LONG TERM DEBT (CONTINUED)
The Indenture covering the Senior Notes contains certain provisions limiting
subsidiary indebtedness, guarantees, liens and the payment of cash dividends
on Preferred and Common Stock. At December 27, 1997, there were no retained
earnings available to pay dividends on Common Stock.
The Company's 7.65% Senior Notes had a fair value of approximately $147.0
million and $135.0 million at December 27, 1997 and December 28, 1996,
respectively, based on market interest rates.
12. PREFERRED SECURITIES
During the eleven months ended December 28, 1996, the Company raised a total
of $115.0 million through a private placement of Preferred Securities under
Rule 144A under the Securities Act of 1933, as amended (the "Preferred
Securities"). The Preferred Securities were issued by the Trust, a Delaware
business trust financing vehicle. The Company owns all of the common
securities of the Trust. The net proceeds of such offering, after commissions
and expenses, were approximately $110.8 million. The Preferred Securities pay
quarterly distributions at an annual distribution rate of 8 3/4% (subject to
any deferral of interest payments on the Preferred Securities by the Company
and Golden Books Publishing), have an aggregate liquidation preference of
$115.0 million and are convertible at the option of their holders into
Convertible Debentures, which are immediately convertible into Common Stock at
an initial conversion price of $13.00 per share. The Convertible Debentures
will mature on August 20, 2016, and may be redeemed, in whole or in part, at
any time after the occurrence of a Tax Event or on Investment Company Event
(both as defined). The carrying amount of the Preferred Securities
approximates its fair value. Effective January 10, 1997, the Company
registered the Preferred Securities with the Securities and Exchange
Commission.
The Company and its subsidiary, Golden Books Publishing, are joint and several
obligor's of the Preferred Securities and they have fully and unconditionally
guaranteed the Trust's obligations under the Preferred Securities. Separate
financial statements of Golden Books Publishing are not presented in their
entirety as the separate financial statements would not be materially
different from the consolidated financial statements of the Company.
Summarized financial statements of Golden Books Publishing for the year ended
December 27, 1997 and the eleven months ended December 28, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---- ----
<S> <C> <C>
Current assets $ 150,837 $ 175,387
Non current assets 134,560 126,253
--------- ---------
Total Assets $ 285,397 $ 301,640
========= =========
Current liabilities $ 149,452 $ 104,918
Noncurrent liabilities 188,290 191,939
--------- ---------
Total Liabilities 337,742 296,857
Preferred Securities 110,707 110,488
Stockholders' Deficit (163,052) (105,705)
--------- ---------
Total Liabilities and Stockholders' Deficit $ 285,397 $ 301,640
========= =========
Revenues $ 243,561 $ 255,005
Gross profit 67,323 23,213
Loss before interest expense and
provision for income taxes (32,136) (169,594)
Net loss (57,347) (186,417)
</TABLE>
F-21
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
12. PREFERRED SECURITIES (CONTINUED)
The Indenture covering the Senior Notes (see Note 11) restricts the ability of
Golden Books Publishing to pay cash dividends or make other cash distributions
to the Company.
13. PREFERRED STOCK
Prior to May 8, 1996, the Company had 100,000 authorized preferred shares, no
par value, including 20,000 shares of Convertible Preferred Stock, Series A.
The Series A Convertible Preferred Stock had a dividend rate of 8.5% per
annum. The conversion price was $24 per share. The stock was redeemable at the
option of the Company at any time for $500 a share plus all dividends (whether
or not earned or declared) accrued and unpaid to the date fixed for
redemption.
On May 8, 1996, in connection with the GPH Transaction (see Note 4) the Series
A Convertible Preferred Stock was retired at its face value plus accrued
dividends and the Company issued to GP Holding, for an aggregate purchase
price of $65.0 million, (i) 13,000 shares of the Company's Series B Preferred
Stock, no par value, each of which shares is convertible into shares of the
Company's Common Stock at an initial conversion price of $10 per share, and
(ii) a warrant to purchase 3,250,000 shares of Common Stock at an initial
exercise price of $10 per share (the "Warrant"). The Series B Preferred Stock
votes on an as-converted basis with the Common Stock on all matters submitted
to a vote of the stockholders of the Company, including the election of
directors. The Warrant will be exercisable beginning on May 8, 1998, subject
to acceleration upon certain circumstances. The Warrant will be exercisable
until May 8, 2003.
The Series B Preferred Stock entitles GPH to receive a 12% annual dividend
payable (i) during each of the first four years following issuance in an
amount equal to approximately 195,000 shares of the Company's Common Stock per
Fiscal quarter of the Company, subject to certain adjustments, and (ii)
thereafter, when and as declared out of legally available funds, in cash at
the rate of $150 per share, compounded quarterly, all of which dividends shall
be cumulative from the initial issuance. At December 27, 1997, the Company had
cumulative preferred dividends payable of 130,000 shares of Common Stock
(approximately $1.4 million). In addition, the Certificate of Designation
governing the Series B Preferred Stock prevents the Company from paying
dividends or making other distributions on the Common Stock until all
dividends owed on the Series B Preferred Stock have been paid in full.
The holders of the Series B Preferred Stock have the right to receive $5,000
per share, plus accrued and unpaid dividends, in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company. Such
liquidation preference shall rank senior to any liquidation rights of the
Company's Common Stock. The merger or sale of the Company or the sale of all
or substantially all its assets shall not be deemed to be a liquidation,
dissolution or winding up of the Company for this purpose.
The Series B Preferred Stock is subject to optional redemption by the Company
at a redemption price of $5,000 per share, plus an amount equal to any accrued
and unpaid dividends, at any time on or after May 8, 2000. The Company is not
required to madatorily redeem the Series B Preferred Stock and the Series B
Preferred Stock is not the subject of any sinking fund requirement.
F-22
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
13. PREFERRED STOCK (CONTINUED)
The Series B Preferred Stock is convertible, at the option of the holders of
the Series B Preferred Stock, into shares of Company Common Stock, at the
exchange rate of 500 shares of Company Common Stock for each share of Series B
Preferred Stock, representing a conversion price of $10.00 per share of Series
B Preferred Stock. The number of shares of Company Common Stock for which the
Series B Preferred Stock may be converted is subject to antidilution
adjustments pursuant to the Certificate of Designations to prevent dilution on
the occurrence of certain events as described in the Certificate of
Designations.
14. ACQUISITION
On August 20, 1996, pursuant to an Asset Purchase Agreement, dated as of July
30, 1996, among BVELP, the Company and certain of the Company's subsidiaries,
the Company acquired, among other things, substantially all of BVELP's
television and film library properties, and assumed payables and all
liabilities incurred in connection with the exploitation of such assets after
the closing for an aggregate purchase price of approximately $81.0 million in
cash and $10.0 million in Common Stock (901,408 shares), as provided for in
the Asset Purchase Agreement (the "Broadway Video Acquisition"). On November
22, 1996, the Company paid an additional amount of approximately $900,000 to
BVELP in satisfaction of the Company's obligations under the working capital
adjustment provided for in the Asset Purchase Agreement. Additionally, the
Company initially recorded approximately $4.1 million in additional costs
associated with the Broadway Video Transaction. The Broadway Video Acquisition
has been accounted for under the purchase method of accounting. Based on the
Company's final allocation of purchase price, goodwill, consisting of the
excess of the net assets and film library acquired, amounted to approximately
$32.2 million and is being amortized on a straight-line basis over a 25-year
period (see Note 3). The results of operations of the Broadway Video
Acquisition are included in the Company's consolidated results of operations
from the date of its acquisition.
Unaudited pro forma results from operations for the eleven months ended
December 28, 1996 and the year ended February 3, 1996 assume that the issuance
of the Preferred Securities and the Broadway Video Acquisition had occurred on
January 29, 1995. The pro forma information is not necessarily indicative
either of the results of operations that would have occurred had these
transaction been made on January 29, 1995 or of future results of operations.
<TABLE>
<CAPTION>
Eleven Months
Ended Year Ended
December 28, February 3,
1996 1996
------------- ----------
(In thousands, except per share data)
<S> <C> <C>
Revenues $ 265,324 $ 380,830
Net loss $(203,400) $ (69,349)
Net loss per basic common share $ (8.78) $ (3.20)
</TABLE>
F-23
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
15. EMPLOYEE STOCK OPTIONS
In December 1995, the Company adopted a stock option plan, which as amended
and restated as of March 11, 1997 (the "1995 Plan"), provides for the
granting of options to purchase up to 5,750,000 shares of Common Stock to
employees of the Company and its subsidiaries. As of December 27, 1997
options to purchase 4,292,310 shares of Common Stock have been granted under
the 1995 Plan. In March 1986, the Company adopted a stock option plan, which
as amended, provides for the granting of options to purchase up to 2,100,000
shares of Common Stock through 1996 to employees of the Company and its
subsidiaries.
Prior to February 3, 1990, options granted generally become exercisable with
respect to one-half of the options granted two years after the date of grant
and with respect to the remaining one-half of such options three years after
the date of grant. Options granted between February 4, 1990 and January 29,
1994 generally become exercisable in their entirety five years after the date
of grant. Options granted between January 30, 1994 and February 28, 1995
generally become exercisable with respect to one-third of the options granted
on the date of grant, with respect to an additional one-third such options one
year after the date of grant and with respect to the remaining one-third of
such options two years after the date of grant. Options granted subsequent to
February 28, 1995 generally become exercisable over various periods in
accordance with the terms of the individual awards.
The following table of data is presented in connection with the stock option
plans:
<TABLE>
<CAPTION>
Option Price Weighted Average
Shares Per Share Exercise Price
------------------------ ------------------------ -------------------------------
<S> <C> <C> <C>
Outstanding at January 28, 1995 1,376,700
Exercised (44,000) $10.00-$11.75
Canceled (539,600) $ 9.50-$20.00
Granted 771,000 $ 8.25-$13.50
------------------------
Outstanding at February 3, 1996 1,564,100
Exercised (356,579) $ 9.25-$12.00 $10.90
Canceled (547,221) $ 9.25-$20.00 $15.84
Granted 2,851,089 $10.44-$14.25 $12.34
------------------------
Outstanding at December 28, 1996 3,511,389
Exercised (47,500) $8.25-$11.75 $10.61
Canceled (441,300) $9.88-$16.75 $12.79
Granted 1,559,721 $8.50-$12.75 $ 9.64
------------------------
Outstanding at December 27, 1997 4,582,310
========================
Weighted average fair value of
options granted during the year $ 5.90
</TABLE>
F-24
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
15. EMPLOYEE STOCK OPTIONS (CONTINUED)
Options to purchase 1,174,869 shares and 532,636 shares were exercisable at
December 27, 1997 and December 28, 1996, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Weighted
Number Average Number
Outstanding at Remaining Weighted Exercisable at Weighted
Range of Exercise December 27, Contractual Average December 27, Average Exercise
Prices 1997 Life Exercise Price 1997 Price
------ ---- ---- -------------- ---- -----
<S> <C> <C> <C> <C> <C>
$ 8.50 - $10.00 1,365,721 6.6 $ 9.33 70,672 $ 9.91
$10.01 - $12.00 1,183,250 5.8 $10.99 425,167 $11.19
$12.01 - $14.50 1,978,839 5.6 $12.72 624,530 $12.76
$15.50 - $16.75 54,500 4.2 $15.64 54,500 $15.64
--------- --- ------ --------- ------
4,582,310 6.0 $11.31 1,174,869 $12.15
========= === ====== ========= ======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 ("SFAS 123"). Pro forma information regarding net income and earnings per
share is required by SFAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value of that
statement. For purposes of SFAS 123 pro forma disclosures, the estimated fair
value of the options is amortized to expense over the option's vesting period.
Had compensation cost for the stock option plans been determined based on the
fair value at the grant date for awards under the stock option plans
consistent with the methodology prescribed under SFAS 123, the Company's net
loss and net loss per basic common share would have been increased by
approximately $10.1 million or $0.38 per basic common share, and $5.3 million
or $.23 per basic common share for the year ended December 27, 1997 and the
eleven months ended December 28, 1996, respectively. If the Company was to
implement SFAS 123, the pro forma net loss and net loss per basic common share
would have been approximately $67.6 million or $2.56 per basic common share,
and $208.9 million or $8.96 per basic common share for the year ended December
27, 1997 and the eleven months ended December 28, 1996, respectively. Because
SFAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect is not fully reflected until Fiscal 1997.
The fair value for each option grant was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
various grants made during 1997 and 1996: risk-free interest rate of 6.5% and
5.12%; expected volatility of 50.1% and 55.8%; no dividend yield; no
forfeiture rate and expected lives of seven to ten years. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable.
In addition, the option valuation models require input of highly subjective
assumptions including the expected stock price volatility. Because changes in
the subjective input assumptions can materially affect the fair value estimate
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options.
F-25
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
16. STOCKHOLDERS' (DEFICIT) EQUITY
On September 26, 1997, the Company entered into a new licensed book publishing
agreement (the "Agreement") with Disney Licensed Publishing ("Disney"). In
connection with the Agreement, Disney received warrants to purchase 1.1
million shares of the Company's Common Stock (valued at approximately $6.6
million) at a per share price of $11.375 exercisable beginning on the earlier
of (i) 90 days after the expiration of the Agreement or (ii) 30 days after the
announcement by either Disney or the Company that they will (a) be entering
into a new license agreement or (b) that they will not be entering into a new
license agreement, and expiring on March 31, 2008.
On May 8, 1996, pursuant to the sale of a significant equity interest in the
Company to GP Holding, and the requisite vote of the stockholders of the
Company, an amendment to increase the authorized number of shares of the
Company's Common Stock, $.01 par value from 40.0 million shares to 60.0
million shares was approved.
In connection with the GPH Transaction, 13,000 shares of the Company's Series
B Preferred Stock was issued for an aggregate purchase price of $65.0 million.
Net proceeds associated with the transaction was approximately $58.8 million,
after giving effect to approximately $6.2 million of transaction costs. For
the first four years, the Series B Preferred Stock remits dividends equal to
approximately 195,000 shares of the Company's Common Stock per Fiscal quarter
of the Company.
On January 31, 1996, in accordance with his Interim Employment Agreement, the
Company issued 599,465 shares of Common Stock to Mr. Snyder at a price of
$8.00 per share in exchange for a non-recourse note in the amount of the
purchase price, secured by a pledge of the shares. The non-recourse note was
shown as a separate component of consolidated stockholders' (deficit) equity
at February 3, 1996. During the year ended December 28, 1996, the Company
exchanged another non-recourse note of approximately $1.0 million in connection
with the 84,987 additional shares issued to Mr. Snyder under the antidilution
provisions of his Employment Agreement.
On September 6, 1996, the Company completed the sale to H.C. Crown
Corporation, a wholly owned subsidiary of Hallmark Cards Incorporated
("Hallmark"), of 2,356,198 shares of Common Stock for approximately $25.0
million (the "Hallmark Transaction"). Hallmark and the Company continue to
discuss a strategic relationship between the two companies, premised on the
good faith efforts to develop constructive working relationships across
appropriate lines of business.
As of December 27, 1997, the Company has reserved 24,283,214 shares of common
stock for the conversion of the (i) Series B Preferred Stock (see Note 4),
(ii) warrants issued in connection with the GPH Transaction (see Note 4),
(iii) Preferred Securities (see Note 12), (iv) warrants issued in connection
with the Disney Agreement and (v) the exercise of outstanding options (see
Note 15).
F-26
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, machinery and vehicles under various
noncancellable operating lease agreements over periods of one to ten years.
Future minimum lease payments required under such leases in effect at December
27, 1997 and thereafter are as follows:
AMOUNT
(IN THOUSANDS)
--------------
1998 $5,467
1999 7,046
2000 6,455
2001 6,378
2002 6,192
and thereafter 64,752
Total rent expense charged to operations was approximately $5.7 million, $4.7
million and $6.1 million for the year ended December 27, 1997, the eleven
months ended December 28, 1996 and for the year ended February 3, 1996,
respectively.
The Company is required to meet certain contractual payments under contracts
in effect at December 27, 1997 and thereafter, as follows:
AMOUNT
(IN THOUSANDS)
--------------
1998 $11,105
1999 14,064
2000 13,856
2001 20,620
2002 -
and thereafter -
Contingencies
Golden Books Publishing and Penn have been informed by the Environmental
Protection Agency (the "EPA") and/or state regulatory agencies that they may
be potentially responsible parties ("PRPs") and face liabilities under the
Comprehensive Environmental Response, Compensation, and Liability Act
(commonly known as "CERCLA" or "Superfund") or similar state laws. In all
cases except those described below, the Company has resolved its liability or
is in the process of resolving its liability for amounts not material.
Although the Company divested Penn in December 1996, the Company has agreed to
indemnify Contempo Colours, Inc. against certain of Penn's environmental
liabilities, including the Cork Street Landfill and Fulford Street Property
discussed herein.
F-27
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Wisconsin Department of Natural Resources (the "WDNR") alleges that the
Company is a responsible party for drums found at a site located in
unincorporated Racine County. The WDNR and the Company have entered into an
agreement which requires the Company to remove drums and soil from the site.
The disposal of these drums dates back almost 30 years. Golden Books
Publishing did not authorize disposal of its waste drums at the site. The
Company has completed the removal of drums and soil from the site.
At the Hunt's Landfill site in Racine County, Wisconsin, Golden Books
Publishing's liability pursuant to the terms of a consent decree is limited to
approximately 4% of the total remedial costs. Although the last phase of
construction activities was completed in 1996, Golden Books Publishing and the
other potentially responsible parties are obligated to fund the operation and
maintenance of the site for the next 20-30 years. The current estimate of the
total costs of such operation and maintenance is in the range of $14 million.
In accordance with the consent decree, the Company has established a reserve
for its share of the probable clean-up costs.
At the Hertel Landfill in Plattekill, New York, Golden Books Publishing is one
of five PRPs sued by the EPA in 1994 for recovery of past EPA response costs
of approximately $2.5 million. In September 1991, the EPA approved a remedial
action for the Hertel Landfill site that currently is estimated to cost $4.1
million other than groundwater remediation costs, if any are required. One of
the site's non-defendant PRPs has been complying with an EPA unilateral
administrative order requiring investigation and clean-up of the site and is
now seeking contribution towards its cost from Golden Books Publishing and
more than 20 other PRPs. At the time the 1991 order was issued, Golden Books
Publishing did not comply. As of June 26, 1996, representatives of Golden
Books Publishing reached agreement with the EPA to come into compliance with
the order and pay a penalty of $625,000 for previous non-compliance.
Additionally, during 1997, Golden Books Publishing paid a total of $1,701,000
for the remediation of the Hertel site, including settlement payments to other
PRPs. The Company, other PRPs and the government have reached an interm
allocation and are in the process of negotiating a consent decree which will
establish the Company's future responsibilities at the site.
Golden Books Publishing also has been identified as a PRP at another site
located in Poughkeepsie, New York. Golden Books Publishing and eight other
PRPs received a notice letter in 1995 from the State of New York regarding
this site. New York State will be seeking recovery of its past oversight costs
of more than $600,000 plus future oversight and maintenance costs associated
with this site, currently estimated by the State at $830,000. There has been
no attempt made to develop an allocation or to identify all PRPs to date, but
the construction phase of the remedy has been completed by other parties
without Company involvement.
On October 2, 1996, the Company received notice from the City Attorney of
Kalamazoo, Michigan that Beach Products, a division of Penn, will be asked to
participate in the remediation of the Cork Street Landfill site located in the
city which was allegedly used by Beach Products in the past. Current cost
estimates for the remediation required at the site are as high as $24,000,000.
More that 70 entities will be requested to provided financial contribution to
the remediation.
On November 14, 1996, the Michigan Department of Environmental Quality
requested that corrective actions be taken as a result of the discovery of a
leaking underground storage tank system at the Fulford Street Property of the
Company on November 8, 1996. An initial site assessment is being completed by
the Company's outside consultant. Current estimates indicate that the costs
associated with this release should not exceed $200,000. However, in the event
that the contamination has migrated off the Company's property, these costs
could increase.
F-28
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition to these environmental matters, Golden Books Publishing filed an
action in 1994 in the United States District Court, Eastern District of
Wisconsin captioned as Western Publishing Company, Inc. v. MindGames, Inc.
seeking a declaration of rights in regard to Golden Books Publishing's alleged
breach of various of its obligations under its licensing agreement with the
defendant for distribution through 1994 of the adult board game known as
"Clever Endeavor." This case involves the Company's now-discontinued adult and
children's game division. The defendant, believing its board game had the
potential to become one of the most popular of all time, has maintained that
certain of the alleged breaches entitle it to damages of as much as $40
million resulting from lost profits and unpaid royalties. The Court recently
granted Golden Books Publishing's partial motion for summary judgment and held
that the defendant is precluded from recovering lost profits. Accordingly, the
defendant's damage claim is now limited to its unpaid royalties of $1.2
million. Golden Books Publishing denies that it has any liability to
defendant.
In consideration of the aforementioned matters, the Company has recorded
accruals in the deferred compensation and other deferred liabilities account
of approximately $6.5 million in the consolidated balance sheet.
On December 19,1997, Contempo Colours, Inc. ("Contempo") filed suit against
Golden Books Publishing in the circuit court for the County of Kalamazoo,
Michigan, alleging damages arising out of a dispute between Contempo and
Golden Books Publishing relating to the sale to Contempo of Penn on December
23, 1996. The Company and Contempo entered into a standstill agreement with
respect to the suit on January 7, 1998, whereby Contempo has agreed to suspend
the suit while the parties attempt to negotiate a settlement of all claims.
The Company is adequately reserved with respect to this matter.
The Company is actively pursuing resolution of the aforementioned matters or,
in the case environmental matters, is awaiting further government response.
While it is not feasible to predict or determine the outcomes of these
proceedings, it is the opinion of management that these outcomes have been
adequately reserved for and will not have a materially adverse effect on the
Company's financial position or future results of operations.
The Company and its subsidiaries are parties to certain other legal
proceedings which are incidental to their ordinary business, none of which the
Company believes are material to the Company and its subsidiaries taken
together as a whole.
Effective December 1996, the Company entered into a five-year outsourcing
agreement to manage its information technology services department. The amount
of annual service fees will vary with the cost of living adjustment and is
dependent upon the services provided, which services depend upon the Company's
volume of business and system needs.
F-29
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
18. INCOME TAXES
Income tax expense calculated in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", consisted of the
following:
<TABLE>
<CAPTION>
Year Eleven Months Year
Ended Ended Ended
December 27, December 28, February 3,
1997 1996 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current payable (benefit):
Federal $ - $2,051 $(2,092)
State 59 (53) 78
Foreign (22) (105) (540)
---------- -------- --------
37 1,893 (2,554)
---------- -------- --------
Deferred:
Federal - - 11,281
State - - 2,615
Foreign - - (10)
---------- -------- --------
- - 13,886
---------- -------- --------
$37 $1,893 $11,332
========== ======== ========
</TABLE>
Loss before income tax expense of Golden Books Publishing's Canadian
subsidiary was approximately $(669,000), $(577,000) and $(920,000) for the
year ended December 27, 1997, the eleven months ended December 28, 1996 and
the year ended February 3, 1996, respectively.
F-30
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
18. INCOME TAXES (CONTINUED)
A reconciliation of the statutory United States Federal income tax rate to the
Company's effective income tax rate follows:
<TABLE>
<CAPTION>
Eleven Months
Year Ended Ended Year Ended
December 27, December 28, February 3,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 5.0 4.2 (.2)
Valuation allowance, net of refundable amounts (38.5) (33.7) (56.8)
Permanent differences relating to the sale of
Divisions/Subsidiaries (0.6) (4.1) -
Other - net (1.0) (2.4) 1.7
----- ----- ---
(0.1)% (1.0)% (20.3)%
===== ===== =====
</TABLE>
The income tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 27, 1997 and
December 28, 1996 are as follows:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
--------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts & returns $ 9,950 $ 9,881
Inventories 1,368 2,896
Property, plant & equipment - 4,413
Accrued expenses 24,450 24,898
Post retirement benefits 11,746 11,515
Net operating loss carryforwards 87,991 60,015
Other - net 133 561
--------- ---------
Total deferred tax assets 135,638 114,179
Valuation allowance (133,569) (112,481)
--------- ---------
Deferred tax assets, net of valuation
allowance 2,069 1,698
--------- ---------
Deferred tax liabilities:
Property, plant & equipment 397 -
Pension contributions 1,672 1,698
Other - net - -
--------- ---------
Total deferred tax liabilities 2,069 1,698
--------- ---------
Net deferred tax assets / (liabilities) $ - $ -
========= =========
</TABLE>
F-31
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
18. INCOME TAXES (CONTINUED)
The current balance of the total deferred tax assets less total deferred tax
liabilities ("Net Deferred Tax Asset") was $31.2 million and $32.8 million at
December 27, 1997 and December 28, 1996, respectively. The noncurrent
balance of the Net Deferred Tax Asset was $102.4 million and $79.7 million at
December 27, 1997 and December 28, 1996, respectively. The entire Net
Deferred Tax Asset was offset by a valuation allowance at both December 27,
1997 and December 28, 1996, due to the uncertainty of realizing the Federal
and state income tax benefits associated with the Net Deferred Tax Asset .
At December 27, 1997, the Company had available net operating loss
carryforwards of approximately $207.7 million for Federal income tax purposes
of which approximately $71.9 million, $75.4 million and $60.4 million expire
in the years 2011, 2012 and 2013, respectively. The Company has tax credit
carryforwards at December 27, 1997 of approximately $4.3 million.
19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
Golden Books Publishing and its Canadian subsidiary have noncontributory
defined benefit retirement plans covering substantially all domestic hourly
and Canadian salaried and hourly employees. The benefits are generally based
on a unit amount at the date of termination multiplied by the participant's
credited service. The Company's funding policy is to contribute amounts within
the limits which can be deducted for income tax purposes.
The following tables set forth the plans' funded status and amounts recognized
in the consolidated financial statements at December 27, 1997 and December 28,
1996, and for the year ended December 27, 1997, the eleven months ended
December 28, 1996 and the year ended February 3, 1996 :
<TABLE>
<CAPTION>
December 27, 1997 December 28, 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $17,097 and $15,937 in 1997 and 1996,
respectively $17,224 $16,109
========= ========
Projected benefit obligations for services rendered $17,735 $16,656
Plan assets at fair value (primarily U.S. government
securities, corporate bonds and equity mutual funds) 21,721 18,684
--------- --------
Projected benefit obligations less than plan assets 3,986 2,028
Unrecognized net (gain)/loss (1,648) 120
Unrecognized prior service cost 1,843 2,129
Unamortized portion of unrecognized net asset at January 31, 1987 - (32)
--------- --------
Prepaid pension costs recognized in accompanying consolidated
balance sheets $ 4,181 $ 4,245
========= ========
</TABLE>
F-32
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended Eleven Months Ended Year Ended
December 27, December 28, February 3,
1997 1996 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net pension (income) expense, included in the following components:
Service cost - benefits earned during the period $ 490 $ 498 $ 441
Interest cost on projected benefit obligations
1,164 1,084 1,054
Actual return on plan assets (3,803) (2,268) (3,437)
Net amortization and deferral 2,213 734 2,070
Net settlement gain - - (3)
-------- --------- --------
Net pension expense $ 64 $ 48 $ 125
======== ========= ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.0% for both the year ended
December 27, 1997 and the eleven months ended December 28, 1996. The expected
long-term rate of return on assets was 10%.
Pension expense charged to operations for these plans and for other
multi-employer plans in which certain union employees of the Company's
subsidiaries participate was approximately $326,000, $349,000 and $503,000 for
the year ended December 27, 1997, the eleven months ended December 28, 1996
and for the year ended February 3, 1996, respectively.
Subsidiaries of the Company also maintain defined contribution contributory
retirement plans for substantially all domestic employee groups. Under the
plans, the subsidiaries make contributions based on employee compensation and
in certain cases based upon specified levels of voluntary employee
contributions. Golden Books Publishing and its Canadian subsidiary also
maintain a profit sharing plan for certain salaried employees. Expense for
these plans was approximately $2.0 million, $2.5 million and $3.1 million for
the year ended December 27, 1997, the eleven months ended December 28, 1996
and the year ended February 3, 1996, respectively.
Post-retirement Benefits
Golden Books Publishing provides certain health care and life insurance
benefits for substantially all of its retired employees. The Company accrues
the estimated cost of retiree benefit payments during the years the employee
provides services.
F-33
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The post-retirement benefit obligation recorded in the consolidated balance
sheets consisted of the following amounts:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Retirees currently receiving benefits $17,865 $18,487
Current employees eligible to receive benefits 4,200 4,500
Current employees not yet eligible to receive benefits 8,000 8,300
Unrecognized net gain from past experience (3,200) (5,800)
Unrecognized prior service cost 2,500 3,300
------------ ------------
$29,365 $28,787
============ ============
</TABLE>
The net post-retirement benefit cost, which is not currently funded, consisted
of the following components:
<TABLE>
<CAPTION>
Eleven Months Ended
Year Ended Year Ended
December 27, December 28, February 3,
1997 1996 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 560 $ 550 $ 500
Interest cost on accumulated post-retirement
benefit obligation 1,980 1,925 2,000
Net amortization and deferral of unrecognized amounts (210) - (100)
------- ------- -------
Net post-retirement benefit expense $ 2,330 $ 2,475 $ 2,400
======= ======= =======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation as of January 1, 1997 was 7.5% for 1997
decreasing linearly to 5% in 2010; and remaining level thereafter.
If the healthcare cost trend rate were increased one percentage point in each
year, the accumulated post-retirement benefit obligation as of January 1, 1998
and the net post-retirement cost would have been increased by approximately
9.8 %. The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation as of December 27, 1997 and January 1,
1997 was 7.0%.
F-34
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
20. INDUSTRY SEGMENTS
The Company has three industry segments: Consumer Products, Commercial
Products and Entertainment.
The Company's Consumer Products Segment is engaged in the creation,
publication, manufacturing, printing and marketing of story and picture books,
interactive electronic books and games, coloring books and other activity
books and products for children as well as multimedia "edutainment" products.
The Company's foreign operations within the Consumer Products Segment consist
of a marketing subsidiary in Canada and a marketing branch in the United
Kingdom.
The Company's Commercial Products Segment provides printing, graphic, creative
and distribution services.
The Company's Entertainment Segment includes the Golden Books Entertainment
division which was established in August 1996, upon the acquisition by the
Company from Broadway Video Entertainment, L.P. of an extensive library of
character-based family entertainment properties. The Golden Books
Entertainment division's library is comprised of copyrights, distribution
rights, trademarks or licenses relating to characters, television programs and
motion pictures, both animation and live action, and includes individual
specials and multiple episode series.
Operating profit represents income before income taxes, interest expense and
general corporate income and expense. Identifiable assets are those assets
used specifically in the operations of each industry segment or which are
allocated when used jointly. Corporate assets are principally comprised of
cash and cash equivalents, refundable income taxes, deferred income taxes,
prepaid pension costs and certain other assets. Domestic sales to foreign
markets were less than 10% of total consolidated sales for the year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year
ended February 3, 1996.
Information by industry segment is set forth below:
<TABLE>
<CAPTION>
Year Ended Eleven Months Ended Year Ended
December 27, 1997 December 28, 1996 February 3, 1996
------------------- -------------------- -----------------
(In thousands)
<S> <C> <C> <C>
Net sales:
Consumer Products $ 170,637 $ 207,590 $ 306,543
Commercial Products 42,446 42,404 63,029
Entertainment 29,398 4,052 -
------------ ------------- ----------
$ 242,481 $ 254,046 $ 369,572
============ ============= ==========
Operating income/(loss):
Consumer Products $ (23,994) $ (66,114) $ (23,887)
Commercial Products (2,848) (18,051) 805
Entertainment 4,422 (4,930) -
------------ ------------- ----------
(22,420) (89,095) (23,082)
Interest and other income 5,579 4,235 3,386
General corporate expense (21,564) (30,413) (16,459)
Restructuring plan 10,786 (65,741) (6,701)
</TABLE>
F-35
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
20. INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest expense and distributions on
Guaranteed Preferred Beneficial
Interests in the Company's and
Golden Books Publishing
Convertible Debentures (22,024) (14,596) (12,859)
-------- --------- --------
Loss before income taxes $(49,643) $(195,610) $(55,715)
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Consumer Commercial
Products Products Entertainment Corporate Total
-------- ---------- ------------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Identifiable assets:
Year ended December 27, 1997 $146,969 $29,846 $113,334 $33,015 $323,164
Eleven months ended December 28, 1996 181,256 25,923 99,527 60,529 367,235
Year ended February 3, 1996 213,792 33,521 - 74,652 321,965
Depreciation and amortization:
Year ended December 27, 1997 2,959 3,175 4,591 489 11,214
Eleven months ended December 9,891 1,550 1,523 1,057 14,021
28, 1996
Year ended February 3, 1996 12,816 1,734 - 1,445 15,995
Capital expenditures:
Year ended December 27, 1997 5,797 4,653 50 9,886 20,386
Eleven months ended December 28, 1996 3,890 1,275 116 458 5,739
Year ended February 3, 1996 12,540 5,202 - 179 17,921
</TABLE>
For the year ended December 27, 1997 and eleven months ended December 28,
1996, revenues from one single customer did not exceed more than 10% of the
Company's net sales. For the year ended February 3, 1996, revenues from the
Company's two largest customers, Wal-Mart Stores, Inc. and Toys 'R' Us, Inc.
totaled approximately $78.4 million or 21% of net sales. The Company's
products are primarily sold to mass market retailers throughout the United
States, Canada and the United Kingdom.
F-36
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
21. NET LOSS PER BASIC COMMON SHARE
Loss per basic common share was computed as follows:
<TABLE>
<CAPTION>
Eleven Months
Year Ended Ended Year Ended
December 27, December 28, February 3,
1997 1996 1996
---- ---- ----
(In thousands except for per share data)
<S> <C> <C> <C>
Net loss $ (49,680) $ (197,503) $ (67,047)
Preferred dividend requirements (7,849) (6,136) (848)
------------------- ----------------------------------
Loss applicable to basic common stock $ (57,529) $ (203,639) $ (67,895)
=================== =================== =================
Weighted average basic common shares outstanding 26,357 23,317 21,047
=================== =================== =================
Loss per basic common share $ (2.18) $ (8.73) $ (3.23)
=================== =================== =================
</TABLE>
22. RELATED PARTY TRANSACTIONS
GEORGETOWN TRANSACTION
Pursuant to a letter agreement (the "Georgetown Agreement") dated as of August
1, 1996, The Georgetown Company ("Georgetown"), a corporation of which
Marshall Rose (a director of the Company) is the Managing Partner, has acted
as a real estate advisor to the Company. Pursuant to the Georgetown Agreement,
the Company is obligated to make the following payments to Georgetown: (i)
$25,000 per month for the period beginning August 1, 1996 and ending July 1,
1999; and (ii) an incentive fee, payable in cash or Common Stock, for each
completed real estate transaction during the period beginning August 1, 1996
and ending July 3, 2000, in an amount equal to one-half of each commission
that would be paid to an outside broker representing the Company. To date, the
Company has paid to Georgetown (i) $75,000 in respect of a property located at
630 Fifth Avenue, New York, New York, (ii) approximately $580,000 in respect
of a property located at 888 Seventh Avenue, New York, New York, (iii)
approximately $108,000 in respect of a property located at 850 Third Avenue,
New York, New York, and (iv) approximately $217,000 in respect of a property
located in Fayetteville, North Carolina.
TRIBECA TRANSACTION
Pursuant to a letter agreement (the "Tribeca Agreement") dated as of July 1,
1996, the Company agreed to pay to Tribeca Technologies LLC ("Tribeca"),
a limited liability company in which Philip E. Rowley (an officer of the
Company) is a member, as compensation for the loss by Tribeca of the exclusive
services of Mr. Rowley following his employment by the Company, the sum of
$200,000 on each of the following dates (provided that Mr. Rowley is in the
employ of the Company at such time); (1) July 1, 1996; (ii) July 1, 1997; and
(iii) July 1, 1998. In consideration for such payments, Tribeca agreed
to pay the Company one-third of the aggregate amount of any
F-37
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)
22. RELATED PARTY TRANSACTIONS (CONTINUED)
and all distributions otherwise to be made by Tribeca to Mr. Rowley and
the President of Tribeca on or before June 30, 1999 (or such earlier time as
Mr. Rowley's employment with the Company ceases), provided, that the maximum
amount payable to the Company is the lesser of (i) $600,000 and (ii) the amount
paid by the Company to Tribeca pursuant to the previous sentence. As of
December 27, 1997, the Company has fulfilled its obligation and made payments
totaling $570,000 as follows: $200,000 in Fiscal 1996, $200,000 during June
1997, and $170,000 (paid in advance at a discounted rate) during November 1997.
On November 25, 1997, the Company and Tribeca entered into a settlement
agreement and release whereby the Company paid $170,000 in advance at a
discount rate as final payment for all obligations of the Company to Tribeca.
POWERHOUSE TRANSACTION
On May 8, 1996, the Company and Powerhouse Entertainment Company, Inc.,
("Powerhouse"), a corporation affiliated with Richard A. Bernstein, the former
Chairman and Chief Executive Officer of the Company, entered into a software
development agreement (the "Development and Licensing Agreement") relating to
the development by Powerhouse of six interactive PC CD-ROM storybooks under
the Little Golden Books Interactive name and logo (the "Powerhouse Products")
and certain other computer software products.
Under the terms of the Development and Licensing Agreement, Powerhouse
received a fee in the amount of $1.0 million for the development of the
Powerhouse Products. All development costs were incurred by Powerhouse with the
Powerhouse Products' content, packaging and design subject to the Company's
approval. Separately, Powerhouse is paid a royalty based upon the net proceeds
of sales of the Powerhouse Products and such royalty obligation continues for
the term of copyright. To date, the Company has paid approximately $75,000 to
Powerhouse in royalties.
There is also an agreement (the "Support Agreement") of even date between the
parties wherein, Powerhouse, on behalf of Company and at the Company's sole
cost and expense, performed all services relating to the manufacturing,
marketing, distribution, sales and licensing of the Powerhouse Products. To
date, the Company has paid approximately $615,000 to Powerhouse in connection
with such services.
F-38
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 27, 1997 December 28, 1996
----------------- -----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 19,155 $ 59,995
Refundable income taxes 637 637
Other current assets 1,375 -
--------- ---------
Total current assets 21,167 60,632
OTHER ASSETS 8,963 10
PROPERTY, PLANT AND EQUIPMENT 9,985 99
Less allowances for depreciation and amortization (489) -
--------- ---------
9,496 99
INVESTMENT AND ADVANCES IN SUBSIDIARIES (83,335) (64,097)
--------- ---------
$ (43,709) $ (3,356)
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation and fringe benefits $ 20 $ 299
Other current liabilities 6,671 8,023
----- -------
6,691 8,322
DEFERRED COMPENSATION 7,909 7,759
OTHER NONCURRENT LIABILITIES 3,000 200
----- ---
10,909 7,959
STOCKHOLDERS' DEFICIT
Convertible preferred stock - series B 65,000 65,000
Common stock 269 259
Additional paid in capital 128,533 120,376
Accumulated deficit (250,791) (201,111)
Cumulative translation adjustment (1,498) (1,339)
------- --------
(58,487) (16,815)
Less common stock in treasury (2,822) (2,822)
------- -------
(61,309) (19,637)
--------- --------
$(43,709) $(3,356)
========= ========
</TABLE>
S-1
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 27, DECEMBER 28, FEBRUARY 3,
1997 1996 1996
---------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES (PRINCIPALLY INTERCOMPANY INTEREST INCOME) $ 8,730 $ 8,736 $ 27,473
COSTS AND EXPENSES:
Selling, general and administrative 1,063 14,335 -
Restructuring charges - 1,072 1,870
Interest expense (primarily intercompany) - 4,143 12,494
-----------------------------------------------------
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
7,667 (10,814) 13,109
PROVISION (BENEFIT) FOR INCOME TAXES - 272 (431)
-----------------------------------------------------
7,667 (11,086) 13,540
DEFICIT IN NET LOSS OF SUBSIDIARY (57,347) (186,417) (80,587)
-----------------------------------------------------
NET LOSS $ (49,680) $ (197,503) $ (67,047)
=====================================================
</TABLE>
S-2
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 27, DECEMBER 28, FEBRUARY 3,
1997 1996 1996
---------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 6,254 $ 6,366 $ 10,596
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (9,885) (99) (19)
Deposits (3,497) - -
-------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,383) (99) (19)
FINANCING ACTIVITIES:
Proceeds from issuance of Preferred Stock - Series B - 65,000 -
Issuance costs of Preferred Stock - Series B - (6,248) -
Redemption of Preferred Stock - Series A - (9,985) -
Dividends paid on Preferred Stock - Series A - (646) -
Proceeds from sale of Common Stock 1,556 28,886 517
Proceeds from Municipal Government Grants 3,000 - -
Net decrease in borrowings of revolving credit facility - - (32,000)
Net loans to subsidiaries (38,109) (23,208) 17,905
Other (159) (85) (509)
-------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (33,712) 53,714 (14,087)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,840) 59,981 (3,510)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 59,995 14 3,524
-------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,155 $ 59,995 $ 14
=======================================================
</TABLE>
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
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 27, 1997, THE ELEVEN MONTHS ENDED DECEMBER 28, 1996
AND THE YEAR ENDED JANUARY 3, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
ALLOWANCE
ALLOWANCE FOR DOUBTFUL FOR SALES DISCOUNTS
ACCOUNTS AND RETURNS TOTAL
---------------------- ------------------- -----------------------
<S> <C> <C> <C>
BALANCES, JANUARY 28, 1995 $ 4,067 $ 7,472 $ 11,539
Additions charged to costs and expenses 1,440 16,712 18,152
Deductions - amounts written off (2,989) (19,708) (22,697)
Foreign currency conversion 4 6 10
----------------------- ------------------- -----------------------
BALANCES, FEBRUARY 3, 1996 2,522 4,482 7,004
Additions charged to costs and expenses 5,719 21,742 27,461
Deductions - amounts written off (3,865) (9,480) (13,345)
Foreign currency conversion 3 3 6
----------------------- ------------------- -----------------------
BALANCES, DECEMBER 28, 1996 4,379 16,747 21,126
Additions charged to costs and expenses 3,608 13,736 17,344
Deductions - amounts written off (776) (13,426) (14,202)
Foreign currency conversion (3) (16) (19)
----------------------- --------------------- -----------------------
BALANCES, DECEMBER 27, 1997 $ 7,208 $ 17,041 $ 24,249
======================= ===================== =======================
</TABLE>
S-4
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
GOLDEN BOOKS FAMILY ENTERTAINMENT,INC.
PURSUANT TO SECTION 245 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
The undersigned, the Chairman and Chief Executive Officer of Golden Books
Family Entertainment, Inc. (the "Corporation"), certifies that:
1. The Corporation was originally incorporated under the name of R.A.B.
Holdings, Inc. and the Corporation's original certificate of incorporation was
filed with the Delaware Secretary of State on January 4, 1984.
2. The restated certificate of incorporation has been duly adopted by the
Corporation's Board of Directors in accordance with Section 245 of the General
Corporation Law of the State of Delaware, and only restates and integrates and
does not further amend the provisions of the Corporation's Certificate of
Incorporation as heretofore amended and supplemented, and there is no
discrepancy between such provisions and the provisions of the restated
certificate as set forth herein.
3. The certificate of incorporation as heretofore amended is hereby
restated to read in its entirety as set forth below:
FIRST: The name of the corporation (the "Corporation") is Golden Books
Family Entertainment, Inc.
SECOND: The registered office of the Corporation is c/o United Corporate
Services, Inc., 15 East North Street in the city of Dover, County of Kent,
State of Delaware. The name of its registered agent at that address is United
Corporate Services, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The Corporation shall have the authority to issue 60,100,000
shares, consisting of 60,000,000 shares of common stock, par value $.01, and
100,000 shares of preferred stock, without par value. The board of directors
may authorize the issuance from time to time of the preferred stock in one or
more series and with such designations, preferences, relative,
<PAGE>
participating, optional and other special rights, and qualifications,
limitations or restrictions (which may differ with respect to each series) as
the board may fix by resolution.
FIFTH: The Corporation shall have the authority to issue a series of
13,000 shares of preferred stock, with the designations and preferences,
rights, qualifications, limitations and restrictions as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated
"Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the
number of shares constituting such series shall be 13,000.
2. DIVIDENDS.
(a) The holders of Series B Preferred Stock (i) shall receive on the first
day of February, May, August and November (each a "Dividend Date") of each
twelve-month period following the date of initial issuance of the Series B
Preferred Stock (the "Initial Issuance Date") through the fourth anniversary of
the Initial Issuance Date, a stock dividend per share of Series B Preferred
Stock equal to a number of shares of Common Stock of the Corporation ("Common
Stock") determined by multiplying the Conversion Rate (as determined pursuant
to Sections 5 and 6 below) by .03 (such that at the initial Conversion Rate the
holders of the Series B Preferred Stock shall receive in the aggregate 195,000
shares of Common Stock on a quarterly basis, resulting in the receipt of an
aggregate of 780,000 shares of Common Stock in each of the first four years
after the Initial Issuance Date, subject to adjustment in the event of any
dividend, stock split, stock distribution or combination with respect to any
such shares), provided, however, that (x) in the event that the product of the
number of shares of Common Stock per share of Series B Preferred Stock to be
distributed in any quarter and the Market Price (as defined below) (the
"Dividend Value") is less than $93.75, then, in addition to such shares of
Common Stock, the holders shall receive on such date, out of legally available
funds of the Corporation, cash per share of Series B Preferred Stock in an
amount equal to the excess of $93.75 over the Dividend Value, compounded
quarterly, and (y) in the event that the Dividend Value exceeds $187.50, then
the number of shares of Common Stock to be so distributed shall be reduced by
an amount sufficient to cause the Dividend Value to equal $187.50 (subject in
each case to adjustment in the event of any dividend, stock split, stock
distribution or combination with respect to any such shares), and (ii) shall be
entitled to receive thereafter, beginning on the first to occur of the first
day of February, May, August or November after the fourth anniversary of the
Initial Issuance Date, when and as declared, out of legally available funds of
the Corporation, cash dividends (computed on the basis of a 360-day year of
twelve 30-day months) at the rate of $150 per share (subject to adjustment in
the event of any dividend, stock split, stock distribution or combination with
respect to any such shares), compounded quarterly, payable quarterly on the
first day of February, May, August and November
-2-
<PAGE>
of each twelve month period after the fourth anniversary of the Initial
Issuance Date, on a pari passu basis with the Series A Preferred Stock of the
Corporation (the "Series A Preferred Stock") (such stock and any other class or
series of the preferred stock of the Corporation which shall rank with respect
to the payment of dividends on a parity with the Series B Preferred Stock being
referred to hereinafter, collectively, as "Parity Stock") and before any
dividends shall be set apart for or paid upon the Common Stock or any other
stock ranking with respect to the payment of dividends junior to the Series B
Preferred Stock (such stock being referred to hereinafter collectively as
"Junior Stock") in any year. All dividends declared upon Series B Preferred
Stock shall be declared pro rata per share.
For purposes of this Section 2, the term "Market Price" shall mean the
average closing price of a share of Common Stock for the ten consecutive
trading days immediately preceding the Dividend Date or the conversion date, as
the case may be, as reported on the principal national securities exchange on
which the shares of Common Stock or securities are listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, the average of the closing bid and asked prices during such ten
trading day period in the over-the-counter market as reported by the Nasdaq
National Market or any comparable system, or, if no such firm is then engaged
in the business of reporting such prices, as reported by The Wall Street
Journal, or, if not so reported, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Corporation or, if the
shares of Common Stock or securities are not publicly traded, the Market Price
for such date shall be the fair market value thereof determined jointly by the
Corporation and the holders of record of a majority of the Series B Preferred
Stock then outstanding; provided, however, that if such parties are unable to
reach agreement within a reasonable period of time, the Market Price shall be
determined in good faith by an independent investment banking firm selected
jointly by the Corporation and the holders of record of a majority of the
Series B Preferred Stock then outstanding or, if that selection cannot be made
within ten days, by an independent investment banking firm selected by the
American Arbitration Association in accordance with its rules, and provided
further, that the Corporation shall pay all of the fees and expenses of any
third parties incurred in connection with determining the Market Price.
(b) Dividends on the Series B Preferred Stock shall be cumulative, whether
or not in any fiscal year there shall be net profits or surplus available for
the payment of dividends in such fiscal year, so that if in any fiscal year or
years, dividends in whole or in part are not paid upon the Series B Preferred
Stock, (i) unpaid dividends shall accumulate and no sums in any years shall be
paid to the holders of the Junior Stock until all dividends payable on the
Series B Preferred Stock have been paid in full, and (ii) no full dividends
shall be declared or paid or set apart for payment on any Parity Stock for any
period unless
-3-
<PAGE>
full cumulative dividends have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment on the Series B Preferred Stock for all dividend payment periods
terminating on or prior to the date of payment of such full cumulative
dividends. If at any time the Corporation shall have failed to pay full
dividends which have accrued (whether or not earned or declared) on the shares
of the Series B Preferred Stock and any other Parity Stock, all dividends
(other than Series B Preferred Stock dividends paid in shares of Common Stock)
declared upon shares of the Series B Preferred Stock and any other Parity Stock
shall be declared pro rata so that the amount of dividends declared per share
on the Series B Preferred Stock and such other Parity Stock shall in all cases
bear to each other the same ratio that accrued dividends per share on the
Series B Preferred Stock and other such Parity Stock bear to each other.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the holders of shares of Series B Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders, after and subject
to the payment in full of all amounts required to be distributed to the holders
of any other Preferred Stock of the Corporation ranking on liquidation prior
and in preference to the Series B Preferred Stock (such Preferred Stock being
referred to hereinafter as "Senior Preferred Stock") upon such liquidation,
dissolution or winding up, but before any payment shall be made to the holders
of Junior Stock, an amount equal to $5,000 per share plus any dividends thereon
cumulated or accrued but unpaid, whether or not declared (subject to adjustment
in the event of any stock dividend, stock split, stock distribution or
combination with respect to such shares). If upon any such liquidation,
dissolution or winding up of the Corporation the remaining assets of the
Corporation available for the distribution to its stockholders after payment in
full of amounts required to be paid or distributed to holders of Senior
Preferred Stock shall be insufficient to pay the holders of shares of Series B
Preferred Stock the full amount to which they shall be entitled, the holders of
shares of Series B Preferred Stock and shares of Parity Stock shall share
ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amounts which would otherwise be
payable in respect to the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid in full.
(b) After the payment of all preferential amounts required to be paid to
the holders of Senior Preferred Stock, Series B Preferred Stock and Parity
Stock and any other series of Preferred Stock upon the dissolution, liquidation
or winding up of the Corporation, the holders of shares of Common Stock then
outstanding shall be entitled to receive the remaining assets and
-4-
<PAGE>
funds of the Corporation available for distribution to its stockholders.
(c) The merger or consolidation of the Corporation into or with another
corporation, the merger or consolidation of any other corporation into or with
the Corporation, or the sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Corporation shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 3.
4. VOTING.
(a) Each issued and outstanding share of Series B Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which each such share of Series B Preferred Stock is convertible (as
adjusted from time to time pursuant to Section 5 thereof), at each meeting of
stockholders of the Corporation with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration,
including, without limitation, the election of all directors (the "Non-Series B
Directors") other than those as to which the Series B Preferred Stock has
rights voting separately as a class as set out in paragraphs (b) and (c) below.
Except as provided by law, by the provisions of paragraphs (b), (c) and (d)
below or by the provisions establishing any other series of Preferred Stock,
holders of Series B Preferred Stock, and of any other outstanding Preferred
Stock that is entitled to vote together with the holders of Common Stock as a
single class, shall vote together with the holders of Common Stock as a single
class.
(b) In addition to the right of the holders of Series B Preferred Stock to
vote together with the holders of Common Stock as a single class with respect
to the election of the Non-Series B Directors, for as long as at least (i) 40%
of the shares of Series B Preferred Stock issued on the Initial Issuance Date
(after taking into account any adjustments provided for hereunder)(the "Initial
Series B Shares") are owned by Golden Press Holding, L.L.C. ("GP Holding"), any
of its members, any Affiliates (as defined below) of such members (other than
of Warburg, Pincus Ventures, L.P. ("WPV")) and the general partnership that
acts as a general partner of WPV (GP Holding, its members, such Affiliates, WPV
and such general partnership being herein collectively referred to as the "GP
Holding Parties"), the holders of Series B Preferred Stock shall have the
exclusive right, voting separately as a class, to elect one-third of the
members of the Corporation's Board of Directors (herein referred to as the
"Series B Directors"), (ii) 30% of the Initial Series B Shares are owned by GP
Holding Parties, the holders of Series B Preferred Stock shall have the
exclusive right, voting separately as a class, to elect two Series B Directors,
and (iii) 20% of the Initial Series B Shares are owned by GP Holding Parties,
the holders of Series B Preferred Stock shall have the exclusive right, voting
separately as a class, to elect one Series B Director. In case such number of
members calculated
-5-
<PAGE>
pursuant to clause (i) of the immediately preceding sentence is not an integer,
the number of Series B Directors shall be rounded up to the next integer. All
such Series B Directors shall be elected by the affirmative vote of the holders
of record of a majority of the outstanding shares of Series B Preferred Stock
either at meetings of stockholders at which directors are elected, a special
meeting of holders of Series B Preferred Stock or by written consent without a
meeting in accordance with the General Corporation Law of Delaware. Each Series
B Director so elected shall serve for a term of one year and until his
successor is elected and qualified, provided, however, that promptly upon any
decrease in the number of Series B Directors that the holders of the Series B
Preferred Stock are entitled to elect pursuant to the first sentence of this
paragraph (b), the appropriate number of Series B Directors shall resign from
the Corporation's Board of Directors. Any vacancy in the position of a Series B
Director, other than pursuant to the proviso in the immediately preceding
sentence, may be filled only by the holders of the Series B Preferred Stock.
Each Series B Director may, during his term of office, be removed at any time,
with or without cause, by and only by the affirmative vote, at a special
meeting of holders of Series B Preferred Stock called for such purpose, or the
written consent, of the holders of record of a majority of the outstanding
shares of Series B Preferred Stock. Any vacancy created by such removal may
also be filled at such meeting or by such consent. On the Initial Issuance
Date, the Board of Directors of the Corporation shall consist of nine members.
For purposes hereof, "Affiliates" shall include persons included under the
definition thereof in Rule 405 under the Securities Act of 1933, as amended,
immediate family members and trusts, 25% or more of the beneficial interests of
which are owned by such persons or one or more of their immediate family
members.
(c) In addition to any other rights provided by law, for as long as at
least one-half (1/2) of the Initial Series B Shares are owned by GP Holding
Parties, the Corporation shall not (nor shall it, in the case of clauses (ii),
(iii), (iv) and (v), permit any of its subsidiaries to), without first
obtaining the affirmative vote or written consent of the holders of record of a
majority of the shares of the Series B Preferred Stock, voting as a separate
class:
(i) amend or repeal any provision of the Corporation's Certificate of
Incorporation or By-Laws, including without limitation a change in the
number of members of the Board of Directors of the Corporation;
(ii) authorize or effect the incurrence or issuance of any
Indebtedness (as defined below) (other than pursuant to an agreement to
incur the same which has been approved in writing by holders of a majority
of outstanding shares of Series B Preferred Stock, and other than pursuant
to that certain Credit Agreement, dated September 29, 1995, between
Western Publishing Company, Inc. and Heller Financial, Inc.) or shares of
capital stock or rights to acquire capital
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stock other than, in the case of shares of Common Stock, (x) options to
acquire up to 1,874,300 shares of Common Stock issued to employees of the
Corporation pursuant to the Amended and Restated 1986 Employee Stock
Option Plan of the Corporation (the "Stock Option Plan") or (y) thereafter
approved with the consent of the holders of record of a majority of the
then outstanding shares of Series B Preferred Stock; provided, however,
that the incurrence of Indebtedness among the Corporation and its
subsidiaries shall not require such consent;
(iii) authorize or effect (A) in one or in a series of two or more
related transactions, any sale, lease, license, transfer or other
disposition of assets for consideration in excess of $5,000,000 (other
than in the ordinary course of business or among the Corporation and its
subsidiaries); (B) any merger or consolidation or other reorganization
involving the Corporation or any of its subsidiaries (other than with one
another or in respect of which the aggregate consideration paid to or
received by the Corporation or its subsidiaries is less than $5,000,000)
or (C) a liquidation, winding up, dissolution or adoption of any plan for
the same other than the liquidation, winding up, dissolution or adoption
of any plan for the same of a subsidiary into the Corporation or another
subsidiary thereof;
(iv) authorize or effect, in one or in a series of two or more
related transactions, (A) any acquisition or lease of assets or (B) any
license of patent, trademark or other rights relating to any intellectual
property, in each case, that involves by its terms a per annum payment in
excess of $5,000,000 as determined in good faith by the Corporation's
Board of Directors, other than among the Corporation and its subsidiaries
or in the ordinary course of business; or
(v) terminate the employment of the chief executive officer of the
Corporation.
For purposes of this Section 4(c), "Indebtedness" means liability for borrowed
money or the deferred purchase price of property or services (except payables
arising in the ordinary course of business) and including any guaranties
thereof.
Notwithstanding anything in paragraphs (b) or (c) to the contrary, in the
event that the shares of Series B Preferred Stock are held by more than 10
holders, then (i) the right of the holders of Series B Preferred Stock to vote
separately as a class to elect the Series B Directors shall terminate, and the
holders of the Series B Preferred Stock shall have the right to vote together
with the holders of Common Stock with respect to the election of all directors
as set forth in paragraph (a) above and (ii) the restrictions on the
Corporation set forth in this paragraph (c) shall terminate, provided that for
purposes of this sentence, each member of GP Holding (other than WPV) together
with the Affiliates of such member shall be deemed to be one holder (if such
member or Affiliate directly owns shares of
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Sries B Preferred Stock) and WPV and the general partnership that acts as a
general partner of WPV together shall be deemed to be one holder (if any such
entity directly owns shares of Series B Preferred Stock).
(d) The Corporation shall not amend, alter or repeal the preferences,
special rights or other powers of the Series B Preferred Stock so as to affect
adversely the Series B Preferred Stock, without the written consent or
affirmative vote of the holders of record of at least a majority of the then
outstanding aggregate number of shares of such adversely affected Series B
Preferred Stock, given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a class. For this purpose, without limiting
the generality of the foregoing, the authorization or issuance of any series of
Preferred Stock with preference or priority over, or being on a parity with,
the Series B Preferred Stock as to the right to receive either dividends or
amounts distributable upon liquidation, dissolution or winding up of the
Corporation shall be deemed so to affect adversely the Series B Preferred
Stock.
5. OPTIONAL CONVERSION. Each share of Series B Preferred Stock may be
converted at any time from and after the Initial Issuance Date, at the option
of the holder thereof, in the manner hereinafter provided, into fully-paid and
nonassessable shares of Common Stock, provided, however, that on any redemption
of any Series B Preferred Stock or any liquidation of the Corporation, the
right of conversion shall terminate at the close of business on the date fixed
for such redemption or for the payment of any amounts distributable on
liquidation to the holders of Series B Preferred Stock, as the case may be
(unless the Corporation defaults upon the payment due upon such redemption or
liquidation).
(a) The applicable conversion rate ("Conversion Rate") and conversion
price ("Conversion Price") of the Series B Preferred Stock from time to time in
effect is subject to adjustment as hereinafter provided. The initial Conversion
Rate shall be 500 shares of Common Stock for each one share of Series B
Preferred Stock surrendered for conversion representing an initial Conversion
Price (for purposes of Section 6) of $10.00 per share of Common Stock. Exercise
of the conversion right set forth herein by the exercising holder shall not
extinguish such holder's right to receive, and of the Corporation's obligation
to pay, any and all accrued but unpaid dividends, whether or not declared, up
to and including the time of conversion in respect of any shares of Series B
Preferred Stock then being converted. In the event any such accrued but unpaid
dividends are not paid at the time of such conversion, interest on the unpaid
amount of such dividends shall continue to accrue at the rate of 12% per annum,
compounded quarterly, until such amount is paid.
(b) The Corporation shall not issue fractions of shares of Common Stock
upon conversion of Series B Preferred Stock or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
paragraph (b), be
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issuable upon conversion of any Series B Preferred Stock, the Corporation shall
in lieu thereof pay to the person entitled thereto an amount in cash equal to
such fraction multiplied by the Market Price of one share of Common Stock,
calculated to the nearest one-hundredth (1/100) of a share.
(c) Whenever the Conversion Rate and Conversion Price shall be adjusted as
provided in Section 6 hereof, the Corporation shall forthwith file at each
office designated for the conversion of Series B Preferred Stock, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Corporation, showing in reasonable detail the facts requiring
such adjustment and the Conversion Rate that will be effective after such
adjustment. The Corporation shall also cause a notice setting forth any such
adjustments to be sent by mail, first class, postage prepaid, to each holder of
record of Series B Preferred Stock at his or its address appearing on the stock
register. If such notice relates to an adjustment resulting from an event
referred to in paragraph 6(g), such notice shall be included as part of the
notice required to be mailed and published under the provisions of paragraph
6(g) hereof.
(d) In order to exercise the conversion privilege, the holder of record of
any Series B Preferred Stock to be converted shall surrender his or its
certificate or certificates therefor to the principal office of the transfer
agent for the Series B Preferred Stock (or if no transfer agent is at the time
appointed, then the Corporation at its principal office), and shall give
written notice to the Corporation at such office that the holder elects to
convert the Series B Preferred Stock represented by such certificates, or any
number thereof. Such notice shall also state the name or names (with address)
in which the certificate or certificates for shares of Common Stock which shall
be issuable on such conversion shall be issued, subject to any restrictions on
transfer relating to shares of the Series B Preferred Stock or shares of Common
Stock upon conversion thereof. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly authorized in writing. The date of receipt by the transfer agent (or by
the Corporation if the Corporation serves as its own transfer agent) of the
certificates and notice shall be the conversion date. As soon as practicable
after receipt of such notice and the surrender of the certificate or
certificates for Series B Preferred Stock as aforesaid, the Corporation shall
cause to be issued and delivered at such office to such holder, or on his or
its written order, a certificate or certificates for the number of full shares
of Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in paragraph (b) of this Section 5 in respect of
any fraction of a share of Common Stock otherwise issuable upon such
conversion.
(e) The Corporation shall at all times when the Series B Preferred Stock
shall be outstanding reserve and keep available
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out of its authorized but unissued stock, for the purposes of effecting the
conversion of the Series B Preferred Stock, such number of its duly authorized
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding Series B Preferred Stock. Before taking any
action which would cause an adjustment reducing the Conversion Price below the
then par value of the shares of Common Stock issuable upon conversion of the
Series B Preferred Stock, the Corporation will take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully-paid and nonassessable shares of such
Common Stock at such adjusted Conversion Price.
(f) All shares of Series B Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall forthwith cease and terminate
except the right of the holder thereof to receive payment of any accrued but
unpaid dividends thereon and shares of Common Stock in exchange therefor. Any
shares of Series B Preferred Stock so converted shall be retired and canceled
and shall not be reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series B
Preferred Stock accordingly.
6. ANTI-DILUTION PROVISIONS.
(a) In order to prevent dilution of the right granted hereunder, the
Conversion Price shall be subject to adjustment from time to time in accordance
with this paragraph 6(a). At any given time the Conversion Price, whether as
the initial price of $10.00 per share or as last adjusted, shall be that dollar
(or part of a dollar) amount the payment of which shall be sufficient at the
given time to acquire one share of Common Stock upon conversion of shares of
Series B Preferred Stock. Upon each adjustment of the Conversion Price pursuant
to Section 6, the Conversion Rate shall be adjusted such that the registered
holders of shares of Series B Preferred Stock shall thereafter be entitled to
acquire upon exercise, at the Conversion Price resulting from such adjustment,
the number of shares of Common Stock obtainable by multiplying the Conversion
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Conversion Price resulting from such adjustment. For
purposes of this Section 6, the term "Number of Common Shares Deemed
Outstanding" at any given time shall mean the sum of (x) the number of shares
of Common Stock outstanding at such time, (y) the number of shares of Common
Stock issuable assuming conversion at such time of the Corporation's Series A
Preferred Stock and Series B Preferred Stock and (z) the number of shares of
Common Stock deemed to be outstanding under subparagraphs 6(b)(1) to (9),
inclusive, at such time.
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<PAGE>
(b) Except as provided in paragraph 6(c) or 6(f) below, if and whenever on
or after the Initial Issuance Date, the Corporation shall issue or sell, or
shall in accordance with subparagraphs 6(b)(1) to (9), inclusive, be deemed to
have granted, issued or sold, any shares of its Common Stock for a
consideration per share less than the Conversion Price in effect immediately
prior to the time of such grant, issue or sale, then forthwith upon such grant,
issue or sale (the "Triggering Transaction"), the Conversion Price shall,
subject to subparagraphs (1) to (9) of this paragraph 6(b), be reduced to the
Conversion Price (calculated to the nearest tenth of a cent) determined by
dividing:
(i) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Conversion Price then in
effect, plus (y) the consideration, if any, received by the Corporation
upon consummation of such Triggering Transaction, by
(ii) an amount equal to the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction, plus
(y) the number of shares of Common Stock granted, issued or sold (or
deemed to be granted, issued or sold in accordance with subparagraphs
6(b)(1) to (9) hereof) in connection with such Triggering Transaction;
provided, however, that the Conversion Price shall not be so reduced if (A)
for so long as the holders of the Series B Preferred Stock have the right to
elect one or more Series B Directors pursuant to Section 4(b) hereof or to
approve certain transactions by the Corporation pursuant to Section 4(c)
hereof, such Triggering Transaction involves a grant, issuance or sale of
Common Stock to any GP Holding Party other than ratably to all holders of the
Common Stock, and such Triggering Transaction has not been approved by a
majority of the Non-Series B Directors (other than natural persons who are GP
Holding Parties or officers, directors or employees of entities that are GP
Holding Parties) or (B) the Triggering Transaction involves a grant, issuance
or sale of Common Stock that has not been registered pursuant to the
Securities Act of 1933, as amended, and an investment bank of national
standing and reputation, engaged for a fee by the Corporation pursuant to a
written engagement letter, has not been consulted by the Corporation with
respect to the structure of such Triggering Transaction and participated in
the negotiation of such Triggering Transaction.
For purposes of determining the adjusted Conversion Price under this
paragraph 6(b), the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Corporation at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, (A)
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Common Stock or (B) any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being
herein called "Convertible Securities" ), whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which the Common
Stock is issuable upon exercise, conversion or exchange (determined by
dividing (x) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration, if any, payable to
the Corporation upon the exercise of all such Options, plus, in the case
of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities) shall be less than the Conversion
Price in effect immediately prior to the granting of such Option, then the
total maximum amount of Common Stock issuable upon the exercise of such
Options or in the case of Options which relate to Convertible Securities,
upon the conversion or exchange of such Convertible Securities, shall (as
of the date of granting of such Options) be deemed to be outstanding and
to have been issued and sold by the Corporation for such price per share.
No adjustment of the Conversion Price shall be made upon the actual issue
of such shares of Common Stock or such Convertible Securities upon the
exercise of such Options, except as otherwise provided in subparagraph (3)
below.
(2) In case the Corporation at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable
to the Corporation upon the conversion or exchange thereof, by (y) the
total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such
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<PAGE>
Convertible Securities) shall be less than the Conversion Price in respect
of such issue or sale, then the total maximum number of shares of Common
Stock issuable upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued and sold
by the Corporation for such price per share. No adjustment of the
Conversion Price shall be made upon the actual issue of such Common Stock
upon exercise of the rights to exchange or convert under such Convertible
Securities, except as otherwise provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options referred to in
subparagraph (1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraphs (1) or (2), or the rate at which any Convertible Securities
referred to in subparagraph (1) or (2) are convertible into or
exchangeable for Common Stock shall change at any time (other than under
or by reason of provisions designed to protect against dilution of the
type set forth in paragraphs 6(b) or 6(d)), the Conversion Price in effect
at the time of such change shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold. If the purchase
price provided for in any Option referred to in subparagraph (1) or the
rate at which any Convertible Securities referred to in subparagraphs (1)
or (2) are convertible into or exchangeable for Common Stock, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Stock upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Security, the Conversion Price then in
effect hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never
been issued as to such Common Stock and had adjustments been made upon the
issuance of the shares of Common Stock delivered as aforesaid, but only if
as a result of such adjustment the Conversion Price then in effect
hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any right
to convert or exchange any Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never
been issued.
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<PAGE>
(5) In case any Options shall be issued in connection with the issue or
sale of other securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued without
consideration (but shall otherwise be deemed issued for the specific
consideration allocated thereto).
(6) In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor less any underwriting discounts, selling
commissions and other expenses paid or incurred in respect of such issuance or
sale, shall be deemed to be the amount received by the Corporation therefor. In
case any shares of Common Stock, Options or Convertible Securities shall be
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Corporation. In case any shares of Common Stock, Options or
Convertible Securities shall be issued in connection with any merger in which
the Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the value attributable to such shares in such
merger, provided that, to the extent such value is not readily ascertainable,
such value shall be the fair value of such consideration as determined in good
faith by the Board of Directors of the Corporation.
(7) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the
Corporation, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Stock for the purpose of this paragraph
6(b).
(8) In case the Corporation shall declare a dividend or make any other
distribution upon the stock of the Corporation (other than dividends payable on
the Series B Preferred Stock pursuant to Section 2 hereof) payable in Common
Stock, Options, or Convertible Securities (other than a dividend or
distribution payable in Common Stock covered by subparagraph 6(c) or 6(d)),
then in such case any Common Stock, Options or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
(9) For purposes of this paragraph 6(b), in case the Corporation shall
take a record of the holders of its Common Stock for the purpose of entitling
them (x)
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to receive a dividend or other distribution payable in Common Stock,
Options or in Convertible Securities, or (y) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date
shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of the
granting of such right or subscription or purchase, as the case may be.
(c) In the event the Corporation shall declare a dividend upon the Common
Stock payable otherwise than out of earnings or earned surplus, determined in
accordance with generally accepted accounting principles, including the making
of appropriate deductions for minority interests, if any, in subsidiaries but
without increasing the same as a result of any write-up of assets related to
such dividend or any gain from the sale of any capital assets related to such
dividend (herein referred to as "Liquidating Dividends"), then, the Corporation
shall pay to the holders of the Series B Preferred Stock (in respect of each
share of Class B Preferred Stock), at the time such dividend is paid to holders
of the Common Stock and in addition to any other dividend required to be paid
to the holders of the Series B Preferred Stock, an amount equal to the product
of the Conversion Rate then in effect and the aggregate value at such time of
all Liquidating Dividends paid in respect of one share of Common Stock. For the
purposes of this paragraph 6(c), a dividend shall be considered payable out of
earnings or earned surplus only if paid in cash and to the extent that such
earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Corporation.
(d) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision shall be proportionately reduced,
and, conversely, in case the outstanding shares of Common Stock of the
Corporation shall be combined into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination shall be proportionately
increased.
(e) If any capital reorganization or reclassification of the capital stock
of the Corporation, or consolidation or merger of the Corporation with another
corporation, or the sale of all or substantially all of its assets to another
corporation (other than pursuant to a liquidation subject to Section 3 hereof)
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities, cash or other property with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holders of the Series B Preferred Stock shall have
the right to acquire and receive upon conversion of the Series B Preferred
Stock, which right shall be pari passu
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with the rights of holders of Parity Stock and prior to the rights of the
holders of Junior Stock (but after and subject to the rights of holders of
Senior Preferred Stock, if any), such shares of stock, securities, cash or
other property issuable or payable (as part of the reorganization,
reclassification, consolidation, merger or sale) with respect to or in exchange
for such number of outstanding shares of Common Stock as would have been
received upon conversion of the Series B Preferred Stock at the Conversion
Price then in effect. The Corporation will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof the successor
corporation (if other than the Corporation) resulting from such consolidation
or merger or the corporation purchasing such assets shall assume by written
instrument (in form and substance reasonably satisfactory to the holders of a
majority of the outstanding Series B Preferred Stock) mailed or delivered to
the holders of the Series B Preferred Stock at the last address of each such
holder appearing on the books of the Corporation, the obligation to deliver to
each such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to purchase.
(f) The provisions of this Section 6 shall not apply to any Common Stock
issued or issuable to any person or entity, or deemed outstanding, under
subparagraphs 6(b)(1) to (9) inclusive: (i) on exercise of options outstanding
as of the Initial Issuance Date to acquire up to 1,874,300 shares of Common
Stock issued to employees of the Corporation pursuant to the Stock Option Plan
or any options approved by the holders of record of a majority of the
outstanding shares of Series B Preferred Stock pursuant to Section 4(c)(ii)(y)
hereof, (ii) pursuant to options granted to Richard E. Snyder under the Stock
Option Plan, as amended by the Corporation's Board of Directors on January 31,
1996, (iii) on conversion of the Series B Preferred Stock or Series A Preferred
Stock, (iv) as a dividend on the Series B Preferred Stock, or (v) on exercise
of the Warrant issued to GP Holding on the Initial Issuance Date.
(g) In the event that:
(1) the Corporation shall declare any cash dividend upon its Common
Stock, or
(2) the Corporation shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock, or
(3) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights, or
(4) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, including any subdivision or
combination of its outstanding shares of Common Stock, or consolidation or
merger of the
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Corporation with, or sale of all or substantially all of its assets to,
another individual or entity, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the Series B Preferred Stock:
(i) at least ten (10) days' prior written notice of the date on
which the books of the Corporation shall close or a record shall
be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding
up, at least twenty (20) days' prior written notice of the date
when the same shall take place. Such notice in accordance with
the foregoing clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (ii) shall
also specify the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written
notice shall be given by first class mail, postage prepaid,
addressed to the holders of the Series B Preferred Stock at the
address of each such holder as shown on the books of the
Corporation.
(h) If at any time or from time to time on or after the Initial Issuance
Date, the Corporation shall grant, issue or sell any Options, Convertible
Securities, rights to purchase property or evidences of indebtedness (the
"Purchase Rights") pro rata to the record holders of any class of Common Stock
and such grants, issuances or sales do not result in an adjustment of the
Conversion Price under paragraph 6(b) hereof, then each holder of record of
Series B Preferred Stock shall be entitled to acquire (within thirty (30) days
after the later to occur of the initial exercise date of such Purchase Rights
or receipt by such holder of the notice concerning Purchase Rights to which
such holder shall be entitled under paragraph 6(g)) and upon the terms
applicable to such Purchase Rights either:
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(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock
acquirable upon conversion of the Series B Preferred Stock
immediately before the grant, issuance or sale of such Purchase
Rights; provided that if any Purchase Rights were distributed to
holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights
shall be distributed to the exercising holders of the Series B
Preferred Stock as soon as possible after such exercise and it
shall not be necessary for the exercising holders of the Series
B Preferred Stock specifically to request delivery of such
rights; or
(ii) in the event that any such Purchase Rights shall have expired or
shall expire prior to the end of said thirty (30) day period,
the number of shares of Common Stock or the amount of property
which such holder could have acquired upon such exercise at the
time or times at which the Corporation granted, issued or sold
such expired Purchase Rights.
(i) If any event occurs as to which, in the opinion of the Board of
Directors of the Corporation, the provisions of this Section 6 are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
holders of the Series B Preferred Stock in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the Conversion
Price as otherwise determined pursuant to any of the provisions of this Section
6 except in the case of a combination of shares of a type contemplated in
paragraph 6(d) and then in no event to an amount larger than the Conversion
Price as adjusted pursuant to paragraph 6(d).
7. REDEMPTION.
(a) The Corporation, at its option, may redeem (to the extent that such
redemption shall not violate any applicable provisions of the laws of the State
of Delaware) all or a portion of the shares of Series B Preferred Stock at a
price of $5,000 per share (subject to adjustment in the event of any stock
dividend, stock split, stock distribution or combination with respect to such
shares), plus an amount equal to any dividends thereon cumulated or accrued but
unpaid, whether or not declared (such amount is hereinafter referred to as the
"Redemption Price"), from time to time after the fourth anniversary of the
Initial Issuance Date (any such date of redemption is hereafter referred to as
a "Redemption Date"), if prior to such redemption all accrued but unpaid
dividends on all outstanding shares of
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<PAGE>
Series B Preferred Stock have been paid, provided, however, that, without the
written consent of the holders of a majority of the outstanding shares of Class
A Preferred Stock, the Corporation shall not redeem any shares of Class B
Preferred Stock so long as any shares of Class A Preferred Stock remain
outstanding.
(b) In the event of any redemption of only a part of the then outstanding
Series B Preferred Stock, the Corporation shall effect such redemption pro rata
among the holders thereof (based on the number of shares of Series B Preferred
Stock held on the date of notice of redemption).
(c) At least thirty (30) days prior to any proposed Redemption Date,
written notice shall be mailed, postage prepaid, to each holder of record of
Series B Preferred Stock to be redeemed, at his or its post office address last
shown on the records of the Corporation, notifying such holder of the number of
shares so to be redeemed, specifying the Redemption Date and the date on which
such holder's conversion rights (pursuant to Section 5 hereof) as to such
shares terminate and calling upon such holder to surrender to the Corporation,
in the manner and at the place designated, his or its certificate or
certificates representing the shares to be redeemed (such notice is hereinafter
referred to as the "Redemption Notice"). On or prior to each Redemption Date,
each holder of record of Series B Preferred Stock to be redeemed shall
surrender his or its certificate or certificates representing such shares to
the Corporation, in the manner and at the place designated in the Redemption
Notice, and thereupon the Redemption Price of such shares shall be payable to
the order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate shall be canceled. In the
event less than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
From and after the Redemption Date, unless there shall have been a default in
payment of the Redemption Price, all rights of the holders of the Series B
Preferred Stock designated for redemption in the Redemption Notice as holders
of Series B Preferred Stock of the Corporation (except the right to receive the
Redemption Price upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever.
(d) Except as provided in paragraph (a) above, the Corporation shall have
no right to redeem the shares of Series B Preferred Stock. Any shares of Series
B Preferred Stock so redeemed shall be permanently retired, shall no longer be
deemed outstanding and shall not under any circumstances be reissued, and the
Corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the amount of authorized Series B Preferred Stock
accordingly. Nothing herein contained shall prevent or restrict the purchase by
the Corporation, from time to time either at public or private sale, of the
whole or any part of the Series B Preferred Stock at such
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<PAGE>
price or prices as the Corporation and the selling holders of the Series B
Preferred Stock may mutually determine, subject to the provisions of applicable
law.
SIXTH: Unless, and except to the extent that, the by-laws of the
corporation shall so require, the election of directors of the corporation need
not be by written ballot.
SEVENTH: The Board of Directors may from time to time adopt, amend or
repeal the by-laws of the corporation, subject to the power of the stockholders
to adopt any by-laws or to amend or repeal any by-laws adopted, amended or
repealed by the Board of Directors.
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
Dated: March 25, 1998
By: /s/ Richard E. Snyder
-----------------------
Name: Richard E. Snyder
Title: Chairman and Chief
Executive Officer
By: /s/ Philip E. Rowley
-----------------------
Name: Philip E. Rowley
Title: Executive Vice President
-20-
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
1995 STOCK OPTION PLAN, AS AMENDED
Section 1. Purpose
The Plan authorizes the Committee to provide Employees and
Consultants of the Corporation and its Subsidiaries and Non-Employee Directors
of the Corporation, who are in a position to contribute materially to the
long-term success of the Corporation, with options to acquire Common Stock,
par value $.0l per share, of the Corporation. The Corporation believes that
this incentive program will cause those persons to increase their interest in
the Corporation's welfare, and aid in attracting and retaining Employees,
Consultants and Non-Employee Directors of outstanding ability.
Section 2. Definitions
Unless the context clearly indicates otherwise, the following terms,
when used in this Plan, shall have the meanings set forth in this Section:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Cause" shall mean failure to comply with any agreements with, or
policies of, the Corporation concerning disclosure of confidential or
proprietary information or competition with, or employment by, a competitor of
the Corporation; fraud or misappropriation with respect to the business of the
Corporation or intentional material damage to the property or business of the
Corporation; wilful failure to perform reasonable duties and responsibilities
consistent with the Grantee"s position; breach of fiduciary duty or wilful
material misrepresentation to the Corporation; wilful failure to act in
accordance with any specific, reasonable and lawful instructions consistent
with Grantee"s position; conviction of a felony or crime involving moral
turpitude; habitual abuse of alcohol, drugs or controlled substances; or other
proper cause as determined in the sole discretion of the Committee; provided,
however, that the Committee may in its sole discretion provide for a different
definition of Cause with respect to any particular Option grant and set forth
such definition in the related Stock Option Agreement.
(c) "Code" shall mean the Internal Revenue Code of 1986 as it may be
amended from time to time.
(d) "Committee" shall mean the Board, or any Committee of two or more
Directors that may be designated by the Board to administer the Plan.
(e) "Consultant" shall mean any person who is engaged to perform
services for the Corporation or its Subsidiaries, other than as an Employee or
Director.
(f) "Control Person" shall mean any person who, as of the date of
grant of an Option, owns (within the meaning of Section 422(b)(6) of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
or value of all classes of stock of the Corporation or of an y parent or
Subsidiary.
(g) "Corporation" shall mean Golden Books Family Entertainment, Inc.,
a Delaware corporation.
<PAGE>
(h) "Director" shall mean any member of the Board.
(i) "Employee" shall mean any full-time employee of the Corporation or
its Subsidiaries (including Directors who are otherwise employed on a full-time
basis by the Corporation or its Subsidiaries).
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934 as
it may be amended from time to time.
(k) "Fair Market Value" of stock on a given date shall be based upon:
(i) if the Stock is listed on a national securities exchange or quoted in an
interdealer quotation system, the last sales price or, if unavailable, the
average of the closing bid and asked prices per share of the Stock on such
date (or, if there was not trading or quotation in the Stock on such date, on
the next preceding date on which there was trading or quotation) as provided
by one of such organizations; or (ii) if the Stock is not listed on a national
securities exchange or quoted in an interdealer quotation system, as
determined by the Committee in good faith in its sole discretion.
(1) "Grantee" shall mean a person granted an option under the Plan.
(m) "ISO" shall mean an Option granted pursuant to the Plan to
purchase shares of the Stock and intended to qualify as an incentive stock
option under Section 422 of the Code, as now or hereafter constituted.
(n) "Non-Employee Director" shall mean a member of the Board who is
not an Employee of the Corporation, its Parent or any Subsidiaries.
(o) "NQSO" shall mean an option granted pursuant to the Plan to
purchase shares of the Stock that is not an ISO.
(p) "Options" shall refer collectively to ISOs and NQSOs issued under
and subject to the Plan.
(q) "Parent" shall mean any parent corporation as defined in Section
424 of the Code.
(r) "Plan" shall mean this 1995 Stock Option Plan as set forth herein
and as amended from time to time.
(s) "Stock" shall mean shares of the Common Stock of the Corporation.
(t) "Stock Option Agreement" shall mean a written agreement between
the Corporation and the Grantee, or a certificate accepted by the Grantee,
evidencing the grant of an Option hereunder and containing such terms and
conditions, not inconsistent with the Plan, as the Committee shall a pprove.
(u) "Subsidiary" shall mean any corporation with respect to which the
Corporation owns, directly or indirectly, 50% or more of the total combined
voting power of all classes of stock of such corporation.
Section 3. Shares of Stock Subject to the Plan
<PAGE>
Subject to the provisions of Section 9, the total amount of Stock with
respect to which options may be granted under the Plan shall not exceed
5,750,000. Stock issuable under the Plan may be authorized but unissued shares
or reacquired shares of Stock. If, prior to exercise, any options are
forfeited, lapse or terminate for any reason, the Stock covered thereby may
again be available for Option grants under the Plan.
Section 4. Administration of the Plan
The Plan shall be administered by the Committee. Subject to the
express provisions of the Plan, the Committee shall have the authority to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine the terms and provisions of Stock Option
Agreements thereunder and to make all other determinations necessary or
advisable for the administration of the Plan. Any controversy or claim arising
out of or related to this Plan or the Options granted thereunder shall be
determined unilaterally by, and at the sole discretion of, the Committee. Any
action of the Committee with respect to the Plan shall be final, conclusive,
and binding on all persons, including the Corporation, subsidiaries of the
Corporation, Grantees, any person claiming any rights under the Plan from or
through any Grantee, and stockholders. The express grant of any specific power
to the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee. To the extent
necessary to comply with Rule 16b-3 under the Exchange Act, determinations
concerning Options granted to any person who is subject to Section 16(b) of
the Exchange Act shall be made by the Committee, all of whose members shall be
"disinterested persons" within the meaning of Rule 16b-3 under the Exchange
Act. The Committee may delegate to officers or managers of the Corporation or
any Subsidiary the authority, subject to such terms as the Committee shall
determine, to perform administrative functions and, with respect to persons
not subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, to the extent permitted under Rule 16b-3, if
applicable, and other applicable law.
Section 5. Types of Options
Options granted under the Plan may be of two types: ISOs or NQSOs. The
Committee shall have the authority and discretion to grant to an eligible
Employee either ISOs, NQSOs or both, but shall clearly designate the nature of
each Option at the time of grant in the Stock Option Agreement. Grantees who
are not Employees of the Corporation or a Subsidiary on the date an Option is
granted shall only receive NQSOs.
Section 6. Grant of Options to Employees, Consultants and Non-Employee
Directors
(a) Employees and Consultants of the Corporation and its Subsidiaries
and Non-Employee Directors of the Corporation shall be eligible to receive
Options under the Plan.
(b) The exercise price per share of Stock subject to an Option
granted to an Employee or Consultant shall be determined by the Committee and
specified in the Stock Option Agreement, provided, however, that the exercise
price of each share subject to an Option shall be not less than (i) in the
case of an NQSO, 85%, (ii) in the case of an ISO granted to other than a
Control Person, 100%, and (iii) in the case of an ISO granted to a Control
Person, 110%, of the Fair Market Value of a share of the Stock on the date
such Option is granted.
<PAGE>
(c) The term of each Option granted to an Employee or Consultant shall
be determined by the Committee and specified in a Stock Option Agreement,
provided that no Option shall be exercisable more than ten years from the date
such Option is granted, and provided further that no ISO gran ted to a Control
Person shall be exercisable more than five years from the date of Option grant.
(d) Each Non-Employee Director who is elected or appointed as a
member of the Board on or after May 8, 1996, upon the date of such election or
appointment, shall receive an NQSO to purchase 5,000 shares of Stock, subject
to adjustment as provided in Section 9. Each year on the date of the annual
meeting of the stockholders of the Corporation subsequent to such election or
appointment, each Non-Employee Director shall automatically receive an NQSO to
purchase 3,000 shares of Stock, subject to adjustment as provided in Section
9. The exercise price per share of Stock subject to each NQSO granted under
this Section 6(d) shall equal 100% of the Fair Market Value of the Stock on
the date such NQSO is granted. No NQSO granted under this Section 6(d) shall
be exercisable after the expiration of ten years from the date such NQSO is
granted.
(e) The Committee shall determine and designate from time to time
Employees or Consultants who are to be granted options, and shall specify in
the Stock Option Agreement the nature of each Option granted and the number of
shares of Stock subject to each such Option, provided, however, that in any
calendar year, no Employee or Consultant may be granted an Option to purchase
more than 1,500,000 shares of Stock (determined without regard to when such
Option is exercisable), subject to adjustment pursuant to Section 9.
(f) Notwithstanding any other provisions hereof, the aggregate Fair
Market Value (determined at the time the ISO is granted) of the Stock with
respect to which ISOs are exercisable for the first time by any Employee during
any calendar year under all plans of the Corporation and any P arent or
Subsidiary corporation shall not exceed $100,000. To the extent the limitation
set forth in the preceding sentence is exceeded, the Options with respect to
such excess all be treated as NQSOs.
(g) The Committee shall determine whether any Option granted to an
Employee or Consultant shall become exercisable in one or more installments
and specify the installment dates in the Stock Option Agreement and, with
respect to any outstanding option, the Committee may, at any time or upon the
occurrence of any event, accelerate the exercisability of any such
installment. The Committee may also specify in the Stock Option Agreement such
other provisions, not inconsistent with the terms of this Plan, as it may deem
desirable, including such provisions as it may deem necessary to qualify any
ISO under the provisions of Section 422 of the Code.
(h) The Committee may, at any time, grant new or additional options
to any eligible Employee or Consultant who has previously received options
under this Plan, or options under other plans, whether such prior options or
other options are still outstanding, have been exercised previously in whole
or in part, or have been canceled. The exercise price of such new or
additional options may be established by the Committee, subject to Section
6(b) hereof, without regard to such previously granted Options or other
options.
Section 7. Exercise of Options
(a) A Grantee shall exercise an Option by delivery of written notice
to the Corporation setting forth the number of shares with respect to which the
Option is to be exercised, together with cash, certified check, bank draft,
wire transfer, or postal or express money order payable to the order of the
Corporation
<PAGE>
for an amount equal to the Option price of such shares and any income tax
required to be withheld. The Committee may, in its sole discretion, permit a
Grantee to pay all or a portion of the exercise price by delivery of Stock or
other property (including notes or other contractual obligations of Grantees to
make payment on a deferred basis, such as through "cashless exercise"
arrangements, to the extent permitted by applicable law), and the methods by
which Stock will be delive red or deemed to be delivered to Grantees.
(b) Except as provided pursuant to Section 8(a), no option granted to
an Employee or Consultant shall be exercised unless at the time of such
exercise the Grantee is then an Employee or Consultant of the Corporation or a
Subsidiary.
(c) The number of shares of Stock which are issued pursuant to the
exercise of an Option shall be charged against the maximum limitation on shares
set forth in Section 3 hereof.
Section 8. Exercise of Options upon Termination
(a) Unless otherwise determined by the Committee and specified in the
Stock Option Agreement, upon the termination of a Grantee"s relationship with
the Corporation and its Subsidiaries, the period during which such Grantee may
exercise any outstanding and then exercisable installments of his Options
shall not exceed: (i) if such termination is due to death, 90 days from the
date of such termination, and (ii) in all other cases, 30 days from the date
of such termination, provided, however, that in no event shall the period
extend beyond the expiration of the Option term. Notwithstanding the
foregoing, all Options shall immediately terminate upon a termination of a
Grantee"s employment if the Committee determines, in its sole discretion, that
such termination is for Cause.
(b) Unless otherwise determined by the Committee and specified in the
Stock Option Agreement, in no event shall any Option be exercisable for more
than the maximum number of shares that the Grantee was entitled to purchase at
the date of termination of the relationship with the Corpor ation and its
Subsidiaries.
(c) The sale of any Subsidiary shall be treated as a termination of
employment with respect to any Grantee employed by such Subsidiary.
(d) Subject to the foregoing, in the event of death, Options may be
exercised by a Grantee"s legal representative.
Section 9. Adjustment Upon Changes in Capitalization
In the event of any dividend or other distribution (whether in the
form of cash, Stock, or other property), recapitalization, forward or reverse
split, reorganization, merger, consolidation, spin-off, combination,
repurchase, or share exchange, or other similar corporate transaction or
event, affects the Stock such that an adjustment is appropriate in order to
prevent dilution or enlargement of the rights of Optionees under the Plan,
then the Committee shall, in such manner as it may deem equitable, adjust any
or all of (i) the number and kind of shares of Stock deemed to be available
thereafter for grants of Options under Section 3, (ii) the number and kind of
shares of Stock that may be delivered or deliverable in respect of outstanding
Options, (iii) the number of shares with respect to which Options may be
granted to a given Grantee in the specified period as set forth in Section
6(e), and (iv) the exercise price (or, if deemed appropriate, the Committee
may make provision for a cash payment with respect to any outstanding Option).
In addition, the Committee is authorized to make adjustments in the terms and
conditions of, and
<PAGE>
the criteria included in, Options (including, without limitation, cash payments
in exchange for an Option or substitution of Options using stock of a successor
or other entity) in recognition of unusual or nonrecurring events (including,
without limitation, events described in the preceding sentence) affecting the
Corporation or any Subsidiary or the financial statements of the Corporation or
any Subsidiary, or in response to changes in applicable laws, regulations, or
accounting principles.
Section 10. Restrictions on Issuing Shares
The Corporation shall not be obligated to deliver Stock upon the
exercise or settlement of any Option or take other actions under the Plan until
the Corporation shall have determined that applicable federal and state laws,
rules, and regulations have been complied with and such approvals o f any
regulatory or governmental agency have been obtained and contractual
obligations to which the option may be subject have been satisfied. The
Corporation, in its discretion, may postpone the issuance or delivery of Stock
under any Option until completion of such stock exchange listing or
registration or qualification of such Stock or other required action under any
federal or state law, rule, or regulation as the Corporation may consider
appropriate, and may require any Grantee to make such repres entations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of Stock under the Plan.
Section 11. Tax Withholding
The Corporation shall have the right to require that the Grantee make
such provision, or furnish the Corporation such authorization, necessary or
desirable so that the Corporation may satisfy its obligation, under applicable
laws, to withhold or otherwise pay for income or other taxes of the Grantee
attributable to the grant or exercise of Options granted under the Plan or the
sale of Stock issued with respect to Options. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Grantee"s tax obligations.
Section 12. Transferability
No Option shall be subject to anticipation, sale, assignment, pledge,
encumbrance, charge or transfer except by will or the laws of descent and
distribution, and an Option shall be exercisable during the Grantee"s lifetime
only by the Grantee, provided, however, that the Committee may perm it a
Grantee to transfer an Option to a family member or a trust created for the
benefit of family members. In the case of such a transfer, the transferee"s
rights and obligations with respect to the Option shall be determined by
reference to the Grantee and the Grantee"s rights and obligations with respect
to the Option had no transfer been made. Notwithstanding such transfer, the
Grantee shall remain obligated pursuant to Section 11 if required by applicable
law.
Section 13. General Provisions
(a) Each Option shall be evidenced by a Stock Option Agreement. The
terms and provisions of such Stock Option Agreements may vary among Grantees
and among different Options granted to the same Grantee.
(b) The grant of an Option in any year shall not give the Grantee any
right to similar grants in future years, any right to continue such Grantee"s
employment relationship with the Corporation or its Subsidiaries, or, until
such Option is exercised and share certificates are issued, any rights as a
Stockholder
<PAGE>
of the Corporation. All Grantees shall remain subject to discharge to the same
extent as if the Plan were not in effect.
(c) No Grantee, and no beneficiary or other persons claiming under or
through the Grantee shall have any right, title or interest by reason of any
Option to any particular assets of the Corporation or its Subsidiaries, or any
shares of Stock allocated or reserved for the purposes of t he Plan or subject
to any Option except as set forth herein. The Corporation shall not be required
to establish any fund or make any other segregation of assets to assure the
payment of any option.
(d) The issuance of shares of Stock to Grantees or to their legal
representatives shall be subject to any applicable taxes and other laws or
regulations of the United States or of any state having jurisdiction thereof.
Section 14. Amendment or Termination
The Board may, at any time, alter, amend, suspend, discontinue or
terminate this Plan; provided, however, that no such action shall adversely
affect the rights of Grantees to Options previously granted hereunder and,
provided further, however, that any shareholder approval necessary or
desirable in order to comply with Rule 16b-3 under the Exchange Act or with
Section 422 of the Code (or other applicable law or regulation) shall be
obtained in the manner required therein. The Committee may waive any
conditions or rights under, or amend, alter, suspend, discontinue, or
terminate, any Option theretofore granted and any Stock Option Agreement
relating thereto; provided, however, that, without the consent of an affected
Grantee, no such action may materially impair the rights of such Grantee under
such Option. Notwithstanding anything to the contrary herein, the provisions
of Section 6(d) shall not be amended more than once every six months other
than to comport with changes in the Code, ERISA, or the rules thereunder.
Section 15. Effective Date of Plan
This Plan is effective upon its adoption by the Board, conditional
upon approval of the Corporation"s stockholders. No ISO may be granted more
than ten years after such date.
<PAGE>
AMENDMENT NO. 1
TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDMENT to the Amended and Restated Employment dated as of the 20th day
of August, 1996 between Golden Books Family Entertainment, Inc., a Delaware
Corporation (the "Company") and Richard E. Snyder (the "Executive").
WHEREAS, the Company and the Executive entered into an employment agreement
on May 8, 1996, which employment agreement was amended and restated pursuant to
the Amended and Restated Employment Agreement dated as of the 20th day of
August, 1996 (the "Employment Agreement"); and
WHEREAS, the Company and the Executive now desire to enter into this
Amendment to amend the Employment Agreement upon the terms, and subject to the
conditions, set forth herein;
NOW, THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:
1. Employment Period. Executive's employment period as set forth in Section
2 of the Employment Agreement is hereby extended, and will end on the seventh
anniversary of the Closing Date.
2. Compensation. Executive's Annual Base Salary, as set forth in Section
3(b)(i) of the Employment Agreement, is hereby increased to $950,000,
retroactive to January 1, 1997. In addition, upon the execution of this
Amendment, Executive shall receive a signing bonus of $500,000, payable on the
date hereof.
3. Exchange Option Agreement. Notwithstanding anything to the contrary in
the Executive Officer Bonus Plan (the "Plan"), Section 4 of The Exchange Option
Agreement between the Executive and the Company dated as of May 13, 1997 is
hereby amended to provide that the Exchange Options granted thereu under, once
vested pursuant to Section 4 of the Exchange Option Agreement and the terms of
the Plan, will remain exercisable after Executives death or Retirement, or the
termination of his employment by reason of Disability or Change of Control,
until May 13, 2007.
4. Certain Terms. All capitalized terms used herein and not defined shall
have the meanings given to them in the Employment Agreement, except that
capitalized terms used in paragraph 3 above and not defined shall have the
meanings given to them in the Exchange Option Agreement.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunder set the Executive's hand and
the Company has caused these presents to be executed in its name on its
behalf, all as of this 9th day of September, 1997.
RICHARD E. SNYDER
/s/ Richard E. Snyder
----------------------
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
/s/ Philip E. Rowley
---------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT by and between Golden Books Publishing Company,
Inc. (the "Company"), and Richard K. Collins (the "Executive"), effective as
of July 28, 1997 (the "Effective Date").
1. Employment Term.
The Company hereby agrees to employ the Executive, and the
Executive hereby agrees to continue within the employ of the Company,
commencing on the Effective Date and continuing through and including December
31, 2000, unless terminated earlier in accordance with Section 4 below (the
"Employment Term").
2. Title, Reporting and Duties.
(a) As of the Effective Date and for the remainder
of the Employment Term, the Executive shall serve as the
Company's Executive Vice President, Director of Sales and
Retail Marketing, Golden Books Children's Publishing Group,
with such duties, responsibilities and authorities as shall
be consistent therewith in the reasonable judgment of the
Company. The Executive shall report to the President of
Golden Books Children's Publishing Group. The Executive
shall be based in New York, New York.
(b) During the Employment Term, and excluding any
periods of vacation, holiday and sick leave to which the
Executive is entitled, the Executive agrees to devote full
time during normal business hours to the business and
affairs of the Company and to use the Executive's best
efforts to perform faithfully and efficiently such
responsibilities.
3. Compensation and Benefits.
(a) Base Salary. During the Employment Term, the
Executive shall receive a minimum annual base salary
("Annual Base Salary") of $212,000. The Annual Base Salary
shall be paid in equal biweekly installments. The Company
and the Executive agree to meet on an annual basis, at a
date mutually convenient to both on or around the
anniversary of this Agreement, to review Executive's Annual
Base Salary; provided that this agreement to meet shall
create no additional obligation or duty on the part of
either party hereto with respect to Executive's Annual Base
Salary.
(b) Annual Bonus. In addition to the Annual Base
Salary, the Executive shall be awarded, for each fiscal year
during the Employment Term, an annual bonus (the "Annual
Bonus") pursuant to the Company's annual incentive plans
(the "Annual Plans", which term includes, as of the date
hereof, the Company's Executive Officer Bonus Plan). The
Executive shall have a target Annual Bonus of 100% of his
Annual Base Salary earned in such year (the "Target Bonus"),
subject in each case to attainment of the performance goals
set forth in the Annual Plans (provided that the Executive's
target Annual Bonus for 1997 shall be computed pro rata
based on his actual salary earned during the year).
1
<PAGE>
Each such Annual Bonus shall be paid no later than the end
of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless
the Executive shall elect to defer the receipt of such
Annual Bonus. Notwithstanding the above, it is the intent of
the parties hereto that the Annual Plans meet all applicable
requirements for the exemption of the payments thereunder
from the limitations of Section 162(m) of the Internal
Revenue Code of 1986, as amended, including the requirement
that the Annual Plans be approved by the shareholders of the
Company prior to the payment of any bonuses thereunder. The
Board may award the Executive bonuses other than pursuant to
the Annual Plans in its discretion.
(c) Stock Options. The Executive will be granted,
as of the Effective date hereof, a stock option (the
"Option") to purchase 25,000 shares of the common stock
("Stock") of Golden Books Family Entertainment, Inc. The
parties agree that the Company's Board of Directors and the
Compensation Committee shall take all action necessary to
effectuate such Option grant. The exercise price with
respect to each share of Stock subject to the Option will be
the last transaction price of the Stock on the NASDAQ market
on the Effective Date. The Option will become exercisable as
to one-third of the shares of Stock subject thereto on the
first anniversary of the date of grant, as to an additional
one-third of such shares on the second anniversary of the
date of grant and as to an additional one-third of such
shares on the third anniversary of the date of grant. The
Option will have a term of seven years (the "Option Term").
Upon the termination of Executive's employment:
(1) by reason of death, the Executive's
estate may exercise the Option (to the extent
exercisable at the time of death) until the
earliest of one year following the Executive's
death or the end of the Option Term, following
which time the Option shall terminate and be no
longer exercisable;
(2) by the Company for "cause" (except the
Executive's disability) or by the Executive
voluntarily without "good reason" (as each such
term is defined in Section 4 below), the Option
shall terminate and no longer be exercisable on the
date the Executive is advised by the Board that he
is being terminated for cause, or the effective
date of the Executive's voluntary termination
without good reason, as applicable; or
(3) by the Company without Cause or by the
Executive with good reason, or because of the
Executive's disability, the entire Option shall
become fully and immediately exercisable and the
Executive may exercise the Option until the
earliest of one year following the Executive's
termination or the end of the Option Term,
following which time the Option shall terminate and
be no longer exercisable.
The Executive shall be entitled to
participate in other Company stock option grants or
other equity plans or programs, if any, in which
comparable executives of the Company are eligible
to participate generally as may be determined by
the Compensation Committee, including, without
2
<PAGE>
limitation, the Exchange Option Program pursuant to
the Executive Officer Bonus Plan.
Other than as stated above, the Option
will be governed by the terms and conditions of the
Company's Stock Option Plan and the standard Stock
Option Agreement thereunder to be executed by the
Executive and the Company.
(d) Incentive, Savings and Retirement Plans. During
the Employment Term, the Executive shall be eligible to
participate in all incentive, savings and retirement plans,
practices, policies and programs, if any, that are
applicable generally to other comparable executives of the
Company and its affiliated companies. The Company intends to
establish incentive, savings and retirement plans that are
comparable in level of benefits to such plans as generally
exist in the Company's industry. It is acknowledged that the
Executive's participation in these plans shall be consistent
with an executive of his stature in the Company and in the
Company's industry.
(e) Welfare Benefit Plans. During the Employment
Term, the Executive and/or the Executive's family, as the
case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and
its affiliated companies (including, without limitation,
medical, prescription, dental, disability, salary
continuance, employee term life, group life, accidental
death and travel accident insurance plans and programs, if
any) that are applicable generally to other comparable
executives of the Company and its affiliated companies
(including, without limitation, the Company's 1997 Executive
Benefit Program). The Company intends to establish new
welfare benefit plans that are comparable in level of
benefits to such plans as generally exist in the Company's
industry. It is acknowledged that the Executive's level of
participation in these plans shall be consistent with an
executive of his stature in the Company and in the Company's
industry.
(f) Expenses. During the Employment Term, the
Company shall pay or promptly reimburse the Executive for
all reasonable business expenses upon presentation of
receipts therefor in accordance with the normal practices of
the Company.
(g) Fringe Benefits. During the Employment Term,
the Executive shall be entitled to fringe benefits
appropriate to an executive of Executive's stature in the
Company's industry. The Company shall pay the Executive's
reasonable legal fees for preparation and review of this
Employment Agreement, and shall reimburse the Executive, up
to $7,500.00 per year, for personal tax and legal counsel in
connection with the Company stock option plan. Furthermore,
the Company shall pay the Executive an annual car and
parking allowance of $15,000.00 per year, such amount to be
paid with Executive's salary.
(h) Vacation and Holidays. During the Employment
Term, the Executive shall be entitled to four weeks of paid
vacation per year and all other paid holidays, sick and
personal days given to employees of the Company.
3
<PAGE>
4. Termination of Employment.
(a) Cause. The Company may terminate the
Executive's employment during the Employment Period for
Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the conviction of, or pleading guilty to, a felony or
crime involving moral turpitude, or (ii) the Executive's
failure to perform, in any material respect, his obligations
under this Agreement unless said failure is remedied by the
Executive to the Company's satisfaction within twenty (20)
days after notice by the Company, which specifically
identifies the manner in which the Board or Chief Executive
Officer believes that the Executive has not performed the
Executive's duties (provided that upon such notice, the
Executive shall be given an opportunity to meet with the
President of Golden Books Publishing Group or other senior
management of the Company to discuss the substance thereof);
or (iii) a disability that prohibits the Executive from
substantially meeting his responsibilities as a senior
executive of the Company on a full-time basis for 90 out of
120 consecutive business days.
(b) Good Reason. The Executive's employment may be
terminated by the Executive for Good Reason. For purposes of
this Agreement, "Good Reason" shall mean in each case,
without the Executive's prior written consent:
(i) the assignment to the Executive of any
duties materially inconsistent with the Executive's
position (including status, offices, titles and
reporting requirements), authority, duties or
responsibilities as contemplated by Section 2 of
this Agreement, or any other action by the Company
which results in a diminution in such position,
authority, duties or responsibilities, excluding
for this purpose any action not taken in bad faith
and which is remedied by the Company to the
Executive's satisfaction within twenty (20) days
after receipt of written notice thereof given by
the Executive;
(ii) any failure by the Company, in any
material respect, to comply with any of the
compensation and benefits provisions of Section 3
of this Agreement, other than failure not occurring
in bad faith and which is remedied by the Company
to the Executive's satisfaction within twenty (20)
days after receipt of written notice thereof given
by the Executive;
(iii) the Company's requiring the
Executive to be based at any office or location
outside a twenty-five mile radius of New York, New
York;
(iv) any failure by the Company to comply
with and satisfy any covenant or agreement
contained in this Agreement, excluding for this
purpose any failure or omission not occurring in
bad faith or any action not taken in bad faith and
which is remedied by the Company to the Executive's
satisfaction within twenty (20) days after receipt
of written notice thereof given by the Executive.
(c) Death. The Executive's employment shall
terminate automatically upon the Executive's death during
the Employment Period.
4
<PAGE>
(d) Notice of Termination. Any termination by the
Company for Cause, or by the Executive for Good Reason,
shall be communicated by Notice of Termination to the other
party hereto given in accordance with Section 11(b) of this
Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination
date (which date shall be not more than thirty days after
the giving of such notice). The failure by the Executive or
the Company to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive
or the Company, respectively, hereunder or preclude the
Executive or the Company, respectively, from asserting such
fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination"
means (i) if the Executive's employment is terminated by the
Company for Cause, or by the Executive for Good Reason, the
date of receipt of the Notice of Termination or any later
date specified therein, as the case may be (although such
Date of Termination shall retroactively cease to apply if
the circumstances providing the basis of termination for
Cause or Good Reason are cured in accordance with Section
4(a) or 4(b) of this Agreement, respectively), (ii) if the
Executive's employment is terminated by the Company other
than for Cause, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination
and (iii) if the Executive's employment is terminated by
reason of death, the Date of Termination shall be the date
of death of the Executive.
5. Obligations of the Company Upon Termination.
(a) Good Reason; Other Than for Cause. If, during
the Employment Term, the Company shall terminate the
Executive's employment other than for Cause or the Executive
shall terminate employment for Good Reason:
(i) The Executive shall (a) continue to
receive his Annual Base Salary for the balance of
the term of this Agreement (the "Continuation
Period") and (b) receive a payment, no later than
30 days following the Date of Termination, equal to
any compensation previously deferred by the
Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid.
Further, during the Continuation Period the Company
shall continue to provide the Executive with
medical and life insurance benefits at the level
such benefits would have been provided to him had
his employment not been terminated, subject to the
Executive's making any required contributions to
the cost thereof at a rate no less favorable than
that applicable to active employees of the Company.
If within the Continuation Period the Executive
obtains other employment, (i) the Company's
obligation to pay the Executive's salary will be
reduced by 100% of the new compensation earned over
the balance of that period, and
5
<PAGE>
(ii) the Company's obligation to provide the
Executive with medical and life insurance benefits
shall be suspended during the period that the
Executive is eligible to obtain such benefits from
his new employer. Nothing in this paragraph 5 shall
be deemed a waiver by Executive of any rights he
has or may have under COBRA or ERISA. The Executive
agrees to promptly report to the Company any such
other employment and the compensation earned by him
thereunder during the Continuation Period. In the
event of the Executive's death, the Company shall
continue to pay his estate his salary at the time
of death, through the anniversary of the Effective
Date next following the date of death;
(ii) on the Date of Termination, all of
the Executive's stock options, restricted stock and
other stock-based compensation shall become
exercisable or vested pursuant to Section 3(c)(3)
herein;
(iii) the Company shall provide to the
Executive six (6) months of executive outplacement
service, which service shall be mutually agreed
upon by the parties, to assist the Executive in
securing employment; and
(iv) The Executive shall have the right to
approve, such approval not be unreasonably
withheld, any written announcement, if any, of the
termination of the Executive's employment with the
Company.
(b) Death. If the Executive's employment is
terminated by reason of the Executive's death during the
Employment Period, this Agreement shall terminate without
further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued
Obligations, the right to exercise the Executive's Stock
Option under Section 3(c)(1) herein, and the timely payment
or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date
of Termination.
(c) Cause; Other Than for Good Reason. If, during
the Employment Term, the Executive's employment shall be
terminated by the Company for Cause or by the Executive
without Good Reason, this Agreement shall terminate without
further obligations to the Executive other than the payment
of Accrued Obligations, and the payment or provision of
Other Benefits. All Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date
of Termination. Upon a termination of the Executive's
employment for Cause by the Company or by the Executive
without Good Reason, the Executive shall forfeit all stock
options that are not vested on the Date of Termination. If
the Executive's employment is terminated for Cause, nothing
in this Agreement shall prevent the Company from pursuing
any other available remedies against the Executive.
6. Non-Exclusivity of Rights.
Nothing in this Agreement shall prevent or limit the
Executive's continuing or future participation in any plan, program, policy or
practice provided by the Company or any of its affiliated companies and for
which the Executive may qualify nor shall anything herein limit or
6
<PAGE>
otherwise affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any plan, policy, practice or program of or any contract or agreement
with the Company or any of its affiliated companies at or subsequent to the
Date of Termination shall be payable in accordance with such plan, policy,
practice or program or contract or agreement except as explicitly modified by
this Agreement.
7. Full Settlement.
The Company's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder shall not
be affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive or others.
8. Confidential Information; Non-Solicitation.
(a) The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the
Company or any of its affiliated companies, and their
respective businesses, which shall have been obtained by the
Executive during the Executive's employment by the Company
or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by the Executive
or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment
with the Company, the Executive shall not, without the prior
written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the
Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 8
constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
(b) For a period of one year following the
termination of the Executive's employment for any reason,
the Executive shall not, directly or indirectly, employ or
seek to employ any person who is at the Date of Termination,
or was at any time within the six-month period preceding the
Date of Termination, an employee of the Company or any of
its subsidiaries or affiliates or otherwise cause or induce
any employee of the Company or any of its subsidiaries or
affiliates to terminate such employee's employment with the
Company or such subsidiary or affiliate for the employment
of another company.
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<PAGE>
9. Successors.
(a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not
be assignable by the Executive otherwise than by will or the
laws of descent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Executive's
executors, successors and legal representatives.
(b) This Agreement shall inure to the benefit of
and be binding upon the Company and its successors and
assigns.
(c) The Agreement shall not be assignable in the
event of insolvency by the Company.
10. Pre-Termination Meeting.
(a) On or before June 1, 2000, the Company and the
Executive agree to meet to discuss each others intentions
with respect to Executive's employment with the Company
after the termination of this Agreement; provided, however,
that this paragraph shall create no duty or obligation on
behalf of either the Company or the Executive with respect
to such discussion.
11. Miscellaneous.
(a) This Agreement shall be governed by and
construed in accordance with the laws of the State of
Delaware, without reference to principles of conflict of
laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a
written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to
the other party or by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Mr. Richard K. Collins
41 Georgian Road
Morristown, NJ 07960
If to the Company:
Golden Books Family Entertainment, Inc.
850 Third Avenue
New York, New York 10022
Attention: General Counsel
8
<PAGE>
or to such other address as either party shall have
furnished to the other in writing in accordance herewith.
Notice and communications shall be effective when actually
received by the addressee.
(c) The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts
payable under this Agreement such Federal, state, local or
foreign taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
(e) The Executive's or the Company's failure to
insist upon strict compliance with any provision hereof or
any other provision of this Agreement or the failure to
assert any right the Executive or the Company may have
hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant
to Section 4 (b) of this Agreement, shall not be deemed to
be a waiver of such provision or right or any other
provision or right of this Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of
Directors, the Company has caused these presents to be executed in its name on
its behalf, all as of the day and year first above written.
GOLDEN BOOKS PUBLISHING COMPANY, INC.
By: /s/ Willa Perlman
--------------------------------------
/s/ Richard K. Collins
-----------------------------------------
Richard K. Collins
INDUSTRIAL BUILDING LEASE
(BUILD-TO-SUIT)
SECTION 1: BASIC TERMS
This Section 1 contains the Basic Terms of this Lease between Landlord and
Tenant, named below. Other Sections of the Lease referred to in this Section 1
explain and define the Basic Terms and are to be read in conjunction with the
Basic Terms.
1.1 Date of Lease: June 23, 1997 (the "Commencement Date")
1.2 Landlord: First Industrial Development Services Group, L.P., a
Delaware limited partnership, its successors or assigns
1.3 Tenant: Golden Books Family Entertainment, Inc., a Delaware
corporation
1.4 Premises: See Exhibit "A"
1.5 Lease Term: 15 years 0 months ("Initial Term"), commencing on, with
respect to each Building, the date of Substantial Completion of the
Improvements as defined in Lease Exhibit C hereto and ending fifteen (15)
years after the date of Substantial Completion of the later of such two
Buildings or on the expiration date of one or two Renewal Terms (as
defined in Section 2.2 below) if properly exercised by Tenant ("Expiration
Date"). The Initial Term as it may be extended by the applicable Renewal
Term(s) is the "Term".
1.6 Rent Commencement: Tenant's obligation to pay Rent (as defined in
Section 2.3 below), under this Lease shall commence on the date on which,
pursuant to Exhibit "C", the Printing Facility is deemed Substantially
Completed which amount of Rent shall be increased to include the square
footage of the Office Facility due to the Substantial Completion of the
Office Building which increase shall be effective on the date on which,
pursuant to Exhibit "C" the Office Building is deemed Substantially
Complete. The calculation and determination of Rent is set forth in
Exhibit B and elsewhere in the Lease.
1.7 Permitted Uses: (See Section 4) light manufacturing, assembly,
warehousing, printing and distribution and general office use, all as
consistent with applicable laws, rules, codes and regulations.
1.8 Tenant's Guarantor: (if none, so state) None
1.9 Brokers: (See Section 22; if none, so state)
(A) Tenant's Broker: The Georgetown Group ("Georgetown").
(B) Landlord's Broker: Mooney LeSage Group.
1.10 Security Deposit: (See Section 4) None
1.11 Rent Payable by Tenant: See Exhibit "B" and Section 2.3 hereof
1.12 Riders to Lease: The following riders are attached to and made a part
of this Lease. (If none, so state) Exhibits A, A-1, A-2, B, C, C-1, C-2,
C-3, C-4, C-5, D, E, F, G, H and I.
SECTION 2: LEASE OF PREMISES; RENT
2.1 Lease of Premises for Lease Term. Landlord hereby leases the Premises
to Tenant, and Tenant hereby rents the Premises from Landlord, for the Term and
subject to the conditions of this Lease.
2.2 Renewal Term. Provided that this Lease is in full force and effect and
Tenant is not in default (beyond any applicable notice and cure periods) under
the terms of this Lease, and the Premises are occupied by the original Tenant
named herein (or Landlord has approved the entity to whom this Lease has been
assigned or sublet or any other entity for which Landlord's approval is not
required ), Landlord hereby grants to Tenant the option to extend the Term of
this Lease on the same terms, conditions and provisions as contained in this
Lease, except as otherwise provided herein, for two (2) periods of five (5)
years (each, a "Renewal Term"). In order to exercise said option Tenant must
give Landlord written notice (an "Extension Notice") of such renewal not less
than 270 days prior to the Expiration Date of the Initial Term, or first
Renewal Term, as the case may be. The annual Net Base Rent (as hereinafter
defined) of the Premises during the Renewal Term(s) shall be equal to the
greater of (a) ninety-five percent (95%) of the Market Rental Rate (as
hereinafter defined) and (b) ninety-five percent (95%) of the annual Net Base
Rent in effect for the 12 month period immediately preceding the commencement
of applicable Renewal Term. "Market Rental Rate" shall mean the annual rate of
Net Base Rent then prevailing in the market as reasonably determined by
Landlord, for premises comparable in square footage, location and type to the
Premises being leased for a duration comparable to the applicable period for
which the Premises is then to be leased. The Market Rental Rate shall be
determined by taking into consideration comparable relevant fact situations
involving arm's length negotiations in new and renewal leases during the twelve
(12) month period, or more recent relevant period prior to the applicable
Renewal Term. Within sixty (60) days following Tenant's notice to Landlord of
the exercise of its option to extend the Term for the applicable Renewal Term,
Landlord shall notify Tenant of Landlord's determination of the Market Rental
Rate for the Premises for the applicable Renewal Term. Tenant shall have
fifteen (15) days following receipt of Landlord's determination in which to
accept or reject such determination. If Tenant does not notify Landlord of its
acceptance of the determination within
<PAGE>
such fifteen (15) day period, Tenant shall be deemed conclusively to have
accepted the Market Rental Rate set forth therein. If Tenant timely notifies
Landlord that g Tenant rejects Landlord's determination which notice from
Tenant shall set forth Tenant's determination of Market Rental Rate and if
Landlord and Tenant in good faith cannot agree upon the Market Rental Rate
within ten (10) days following Tenant's rejection of Landlord's determination,
then such dispute shall be determined by arbitration as hereinafter provided.
Landlord and Tenant will each select an arbitrator who shall be disinterested
and shall be a person that has been actively engaged in the development or
leasing of industrial and manufacturing buildings for a period not less than
seven (7) years immediately preceding his or her appointment. Landlord and
Tenant shall each simultaneously submit to the arbitrators a determination of
Market Rental Rate (if no submittal is made, the parties shall be deemed to
have submitted their original determinations). The arbitrators shall be
directed as promptly as possible to select from the two determinations
submitted by Landlord and Tenant the one that is closer to the Market Rental
Rate as determined by the arbitrators, and said selection shall thereafter be
deemed the Market Rental Rate. In determining the appropriate Market Rental
Rate, the arbitrators shall be entitled to rely on such factors as they deem
appropriate in determining the relevant geographic market, if any, and what
constitutes comparable premises or circumstances. If the two arbitrators so
appointed fail to agree as to which of the determinations submitted by Landlord
and Tenant is closest to the actual Market Rental Rate, the two arbitrators
shall appoint a third arbitrator, using the criteria described above, to decide
upon which of the two determinations submitted is closest to the actual Market
Rental Rate. The cost of the foregoing arbitration process shall be borne by
the losing party. If no determination is made prior to the date for
commencement of payment of rent for which Market Rental Rate must be
determined, then Landlord's determination shall be used until the arbitration
is completed. If Tenant's determination is later selected, Landlord shall
promptly refund any overpayments to Tenant together with interest thereon at 6%
per annum.
2.3 Types of Rental Payments. Commencing on the Rent Commencement Date,
Tenant shall pay rents of (a) net base rent ("Net Base Rent") payable (1) in
monthly installments of the rent determined pursuant to the terms set forth in
Exhibit "B" attached hereto with respect to the Initial Term, and (2) in
monthly installments of the Net Base Rent as determined pursuant to Paragraph
2.2 hereof with respect to the applicable Renewal Term, if appropriate, in
advance, on the first day of each and every calendar month during the Term; (b)
except as otherwise specifically provided herein, all costs, expenses and
charges of every nature relating to, or incurred in connection with the
ownership and operation of the Premises and that are attributable to the Term
("Additional Rent"); and (c) in the event that any two monthly installment[S]
of Net Base Rent per 12 month period during the Term are not paid within five
(5) days of the date when due, a late charge in an amount equal to four percent
(4%) of each subsequent delinquent installment of Net Base Rent that occurs in
a two (2) year period after the later of such two delinquencies (the "Late
Charge") and (d) an administrative fee (the "Administrative Fee") payable with
each installment of Net Base Rent, equal to one percent (1%) of the Net Base
Rent due and payable for such month. The Net Base Rent, the Additional Rent,
the Late Charge, the Administrative Fee, and any other amounts due and owing by
Tenant under this Lease shall collectively be referred to herein as "Rent").
All Rent shall be paid to Landlord c/o First Industrial, L.P., P.O. Box 75631,
Chicago, Illinois 60675-5631, or if sent by overnight courier, The Northern
Trust Company, 801 South Canal, 4th Floor, Receipt and Dispatch, Chicago,
Illinois 60607 Attention: First Industrial, L.P., Lockbox #75631 (or to such
other entity designated in writing as Landlord's management agent, if any, and
if Landlord so appoints such a management agent, the "Agent"), or pursuant to
such other written directions as Landlord shall designate in this Lease or
otherwise. Notwithstanding anything contained herein to the contrary, Tenant
shall not be obligated to pay as Additional Rent those costs expenses and
charges that are specifically designated herein as payable by Landlord, which
costs, expenses and charges are specifically defined as the Total Project
Costs, the items set forth in Section 13.3 to the extent Landlord is solely
responsible therefor, the cost of Landlord's warranty obligations pursuant to
Section 7 of Exhibit C hereto and costs to Landlord for Landlord's income taxes
or payments due on mortgage and other non-operating related debts of Landlord
and income and franchise taxes of Landlord.
<PAGE>
2.4 Covenants Concerning Rental Payments. Tenant shall pay the Rent
promptly when due, without notice or demand, and without any abatement,
deduction or setoff. No payment by Tenant, or receipt or acceptance by Agent or
Landlord, of a lesser amount than the correct Rent shall be deemed to be other
than a payment on account, nor shall any endorsement or statement on any check
or letter accompanying any payment be deemed an accord or satisfaction, and
Agent or Landlord may accept such payment without prejudice to its right to
recover the balance due or to pursue any other remedy available to Landlord. If
the Rent Commencement Date occurs on a day other than the first day of a
calendar month, the Rent due for the partial calendar months occurring at the
commencement and the expiration of the Term shall be prorated on a per diem
basis. It is intended that the Net Base Rent provided in this Lease shall be an
absolute net return to Landlord throughout the Term, unless otherwise expressly
set forth in this Lease, free of any and all expenses or charges with respect
to the Premises. All costs, expenses and charges of every nature relating to or
incurred in connection with, the ownership and operation of the Premises that
may be attributable to the Term to Landlord or third parties, as the case may
be, will be paid, on a timely basis, by the Tenant, subject only to Landlord's
obligations as set forth in Sections 13.3, 17, 18 and Section 7 of Exhibit C
(as indicated) hereunder. Tenant hereby indemnifies and holds Landlord and all
Landlord Affiliates (defined below) harmless from and against the consequences
(excluding consequential and speculative damages) resulting from Tenant's
failure, at any time or from time to time, to comply with the preceding
obligation.
2.5 Expansion Option. Landlord and Tenant acknowledge that under the
Purchase Contract between Landlord and the current owner of the Property (the
"Purchase Contract"), Landlord has an option to purchase the Expansion Parcel
(hereinafter defined) subject to certain terms and conditions. Provided that
this Lease is in full force and effect and Tenant is not in default under the
terms of this Lease beyond applicable notice and cure periods, at (a) the date
on which Tenant delivers an Expansion Notice (defined below) and (b) at all
times prior to, and during, Landlord's construction of improvements on the
Expansion Parcel (defined below), and the Premises are occupied by the original
Tenant named herein (or a Landlord approved entity to whom this Lease has been
assigned or sublet or an entity for which Landlord's approval is not required),
Landlord hereby grants to Tenant an option (the "Expansion Option") to expand
the Premises onto the parcel adjacent to the Premises described on Exhibit
"A-2" attached hereto (the "Expansion Parcel") by directing Landlord to
exercise the Expansion Option under the Purchase Contract. The
2
<PAGE>
Expansion Option must be exercised by Tenant by written notice to Landlord not
less than 270 days prior to November 1, 2000 (the "Expansion Notice"). The
terms of the Expansion Option, the respective rights and obligations of Tenant
and Landlord with respect thereto and the additional conditions precedent to
the development on the Expansion Parcel are set forth on Exhibit "E" hereto.
SECTION 3: TAXES AND ASSESSMENTS; ASSOCIATION DUES
3.1 Taxes. Tenant agrees to pay for the Premises (i) all governmental
taxes, assessments, fees, penalties and charges of every kind or nature (other
than Landlord's income taxes, franchise taxes, mortgage recording taxes and
property transfer taxes ), whether general, special, ordinary or extraordinary,
due at any time, or from time to time, for any period during the Term and any
extensions thereof, in connection with the ownership, leasing or operation of
the Premises or of the personal property and equipment located therein or in
connection therewith, (ii) all general and special assessments arising under
the Declaration (hereinafter defined) or any other document or instrument of
record for any period during the Term or any extensions thereof, and (iii) any
expenses incurred by Landlord in contesting such taxes or assessments and/or
the assessed value of the Premises (the "Taxes"). All such Taxes shall be paid
by Tenant directly to the taxing authority, and, to the extent Landlord has
supplied Tenant with copies of the tax bills not less than twenty (20) days
prior to any delinquency date, before they become delinquent. The Taxes for the
first and last year of the Term, will be appropriately prorated. If any general
or special assessments, whether ordinary or extraordinary, levied against the
Premises are payable in installments, Tenant shall be responsible only for
those installments that are attributable to the Term (and any period during
which Tenant has possession of the Premises prior to the Term pursuant to
Section 4 of Exhibit C). For purposes hereof, Taxes for any year shall be Taxes
that are due for payment or paid in that year, rather than taxes that are
assessed or become a lien or accrue during such year. If at any time during the
Term, the methods of taxation prevailing on the date hereof shall be altered,
such additional or substitute tax, assessment, levy, charge or imposition shall
be deemed to be included within the term "Taxes" for the purposes hereof. In
the event that Tenant shall desire in good faith to contest or otherwise review
by appropriate legal or administrative proceeding any Taxes that are not yet
due and payable, Tenant shall, at least sixty (60) days prior to the due date
of such Taxes, give Landlord written notice of its intention to do so. Tenant
may withhold payment of the Tax being contested if, but only if, both (i)
nonpayment is permitted during the pendency of such proceedings without the
foreclosure of any tax lien or the imposition of any fine or penalty and
without prejudice to any rights of Landlord, and (ii) Tenant shall obtain and
furnish Landlord with a bond or other security sufficient to protect Landlord's
interest in the Premises. Tenant may contest any Taxes that it has previously
paid provided that it gives Landlord not less than thirty (30) day prior
written notice of such contest. Any such contest shall be prosecuted at
Tenant's sole expense. Tenant shall protect, hold harmless and indemnify
Landlord against any and all liabilities, cost, penalties, fines, fees, expense
or damage (except for consequential and speculative damages) resulting from
such contest or other proceeding. At the request of Tenant, Landlord shall join
in any tax contest or other tax proceedings which Tenant may desire to bring
pursuant to this Section. Tenant shall pay all of Landlord's actual
out-of-pocket expenses arising out of such joinder. Within ten (10) days after
the final determination of the amount due from Tenant with respect to the Taxes
contested, Tenant shall (if not paid previously) pay the amount so determined
to be due, together with all costs, expenses and interest, whether or not this
Lease shall have then expired or terminated. If such Taxes that were contested
were paid by Tenant and any refund is applicable thereto, such refund shall be
paid to the Tenant and if the taxing authority issues the refund check to
Landlord, Landlord shall promptly pay over such refund to Tenant, after
deducting therefrom any costs owed to Landlord hereunder which were not
otherwise reimbursed from Tenant.
SECTION 4: USE OF PREMISES
4.1 Use of Premises. The Premises shall be used for the purpose(s) set
forth in Section 1.7 above and for no other purpose. Tenant shall not, at any
time, use or occupy, or suffer or permit anyone to use or occupy, the Premises,
or do or permit anything to be done in the Premises, in any manner that may (a)
violate any Certificate of Occupancy for the Premises; (b) cause, or be liable
to cause, injury to the Premises or any equipment, facilities or systems
therein; (c) constitute a violation of the laws and requirements of any public
authority, the requirements of insurance bodies or the rules and regulations of
the Premises or the requirements set forth in any document or instrument of
record, including, without limitation that certain Declaration of Protective
Covenants for The Renaissance, as amended (the "Declaration"); (d) impair or
tend to impair the character, reputation or appearance of the Premises as a
first-class property (it being acknowledged that the publishing, reproduction,
distribution, storage or assembly and construction of pornographic materials
shall be deemed to impair the character and reputation of the Premises); and
(e) impair or tend to impair the proper and economic maintenance, operation,
and repair of the Premises and its equipment, facilities or systems. Tenant
shall not, at any time, use or occupy, or suffer or permit anyone to use or
occupy all or any portion of the Premises as a tannery, brewery, bottling
facility, waste disposal plant, food processing, packaging or storage facility
or hard manufacturing facility.
4.2 Signage. Landlord and Tenant shall agree to Tenant's signage for the
Premises subject to any approvals required by laws, rules, regulations or the
Declaration. Tenant shall not modify such signage or affix any additional sign
of any size or character to any portion of the Premises without the prior
written approval of Landlord, which approval shall not be unreasonably withheld
subject to any approvals required by laws, rules, regulations or the
Declaration. Except to the extent that such logo fails to comply with any laws,
ordinances, regulations or restrictions applicable thereto, Landlord hereby
pre-approves the use of Tenant's corporate logo in any signage otherwise
approved for use on the Premises or the Property. Tenant's signage shall comply
with all applicable laws, ordinances, rules, regulations or restrictions
applicable thereto. Tenant shall remove all signs of Tenant upon the expiration
or earlier termination of this Lease and immediately repair any damage to the
Premises caused by, or resulting from, such removal.
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SECTION 5: CONDITION AND DELIVERY OF PREMISES
5.1 Condition of Premises. Landlord shall deliver the applicable portion
of the Premises to Tenant in a Substantially Completed condition, substantially
consistent with the Final Plans and Specifications (excluding any Tenant's Work
described therein) as revised by change orders or Tenant's Extra Work, subject
to Tenant's "punch list" (all as defined and further described in Exhibit C
attached hereto). Except as otherwise expressly provided herein, neither
Landlord nor Agent shall be obligated to make any repairs, replacements or
improvements (whether structural or otherwise) of any kind or nature to the
Premises in connection with, or in consideration of, this Lease.
5.2 Delay in Commencement. Except as otherwise provided in Exhibit C,
Landlord shall not be liable to Tenant if Landlord does not deliver possession
of the Printing Facility or the Office Building to Tenant on or before the
Printing Facility Delivery Date and the Office Building Delivery Date,
respectively (as such terms are defined in Lease Exhibit C) therefor. The
obligations of Tenant under the Lease shall not thereby be affected, except
that the Rent Commencement Date shall be delayed until Landlord satisfies the
requirements for the Rent Commencement Date pursuant to the terms of Exhibit C
hereof.
SECTION 6: SUBORDINATION; NOTICES TO SUPERIOR LESSORS AND MORTGAGEES;
ATTORNMENT
6.1 Subordination of Lease. This Lease, and all rights of Tenant
hereunder, are subject and subordinate to all ground leases of the Premises now
or hereafter existing and to all mortgages or trust deeds or deeds of trust
(all of which are hereafter referred to collectively as "Mortgages"), that may
now or hereafter affect or encumber all or any portion of Landlord's interest
in the Premises; provided, however, that no such subordination shall apply to
Tenant unless and until a reasonable nondisturbance agreement, has been
executed by the holder(s) of any such Mortgages in recordable form and
delivered to Tenant in form acceptable for recordation, together with any
reasonable documentation required to place third parties on notice thereof
(including, without limitation, a memorandum of lease, if necessary). Landlord
represents and warrants that, at the time of the commencement of the Term, no
Mortgages which are superior to this Lease will encumber the Premises unless
such a nondisturbance agreement has been so executed and delivered to Tenant in
form acceptable for recordation, together with any reasonable documentation
required to place third parties on notice thereof (including, without
limitation, a memorandum of lease, if necessary). This subordination shall
apply to each and every advance made, or to be made, under such Mortgages; to
all renewals, modifications, replacements and extensions of such Mortgages; and
to "spreaders" and consolidations of such Mortgages. Without limitation on
Landlord's obligation to provide a nondisturbance agreement in form reasonably
acceptable to Tenant as a pre-condition of the effectiveness of any
subordination of this Lease, this Section 6.1 shall be self-operative and no
further instrument of subordination shall be required; however, in confirmation
of such subordination, Tenant shall from time to time, and in any event within
twenty (20) days after Landlord's request therefor, execute, acknowledge and
deliver any instrument that Landlord may from time to time reasonably require
in order to evidence or confirm such subordination; provided, that such
instrument shall include a provision, reasonably satisfactory to Tenant, that
Tenant's possession under this Lease shall not be disturbed in the event of a
foreclosure of the Mortgage as long as Tenant is not in default under the Lease
beyond applicable notice and cure periods. Tenant acknowledges that this Lease
may be assigned by Landlord to a superior mortgagee as additional collateral
security for the loans secured by the Superior Mortgage (defined below) held by
such Superior Mortgagee. Any ground lease to which this Lease is subject and
subordinate is hereinafter referred to as a "Superior Lease," the lessor under
a Superior Lease is hereinafter referred to as a "Superior Lessor," and the
lessee thereunder, a "Superior Lessee"; and any Mortgage to which this Lease is
subject and subordinate is hereinafter referred to as a "Superior Mortgage,"
and the holder of a Superior Mortgage is hereinafter referred to as a "Superior
Mortgagee." Notwithstanding the foregoing, this Lease may be made senior to the
lien of any Superior Mortgage, if and only if the Superior Mortgagee thereunder
so requests.
6.2 Notice in the Event of Default. In the event that Landlord breaches or
otherwise fails to timely perform any of its obligations under this Lease,
Tenant shall give written notice of such alleged breach or default to Landlord
and to each Superior Mortgagee and Superior Lessor whose name and address shall
previously have been furnished, in writing, to Tenant, whereupon any or all of
Landlord, a Superior Mortgagee or Superior Landlord may remedy or cure such
breach or default within thirty (30) days following the giving of such notice;
provided, however, that said thirty (30)-day cure period shall be automatically
extended in the event that the breach or default cannot, by its nature, be
cured within thirty (30) days and one or more of Landlord, the Superior
Mortgagee or the Superior Lessor is diligently proceeding to cure said default.
6.3 Successor Landlord. If any Superior Lessor or Superior Mortgagee shall
succeed to the rights of Landlord hereunder, then, at the request of such party
(hereinafter referred to as "Successor Landlord"), Tenant shall attorn to and
recognize each Successor Landlord as Tenant's landlord under this Lease and
shall promptly execute and deliver any instrument such Successor Landlord may
reasonably request to further evidence such attornment, provided that any such
Successor Landlord provides Tenant with a nondisturbance agreement as described
in Section 6.1 hereto. Tenant hereby acknowledges that in the event of such
succession, then from and after the date on which the Successor Landlord
acquires Landlord's rights and interest under this Lease (the "Succession
Date"), the rights and remedies available to Tenant under this Lease with
respect to any obligations of any Successor Landlord shall be limited to the
equity interest of the Successor Landlord in the Premises; and the Successor
Landlord shall not (a) be liable for any act, omission or default of Landlord
or other prior lessor under this Lease if and to the extent that such act,
omission or default occurs prior to the Succession Date; (b) except as
otherwise expressly required hereunder, be required to make or complete any
tenant improvements or capital improvements, or to repair, restore, rebuild or
replace the Premises or any part thereof in the event of damage, casualty or
condemnation, provided that Successor Landlord shall be liable for obligations
of Landlord arising prior to the Substantial Completion of the Printing
Facility and the Office Building, as such terms are defined on Exhibit C
hereto; or (c) be required to pay any amounts to Tenant that are due and
payable, under the express terms of this Lease, prior to the Succession Date.
Additionally, from and after the Succession Date,
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Tenant's obligation to pay Rent (as provided in Sections 2 and 3 hereof) shall
not be subject to any abatement, deduction, set-off or counterclaim against the
Successor Landlord that arises as a result of, or due to, a default of Landlord
or any other lessor that occurs prior to the Succession Date. Moreover, no
Successor Landlord shall be bound by any advance payments of Rent made prior to
the calendar month in which the Succession Date occurs, nor by any Security
that is not actually delivered to, and received by, the Successor Landlord.
SECTION 7: QUIET ENJOYMENT
Subject to the provisions of this Lease, so long as Tenant is not in
default hereunder beyond applicable notice and cure periods, Tenant shall not
be disturbed in its possession of the Premises by Landlord, Agent or any other
person lawfully claiming through or under Landlord. This covenant shall be
construed as a covenant running with the land of the Premises and is not a
personal covenant of Landlord.
SECTION 8: ASSIGNMENT, SUBLETTING AND MORTGAGING
8.1 Prohibition. Tenant acknowledges that this Lease and the Rent due
under this Lease have been agreed to by Landlord in reliance upon Tenant's
reputation and creditworthiness and upon the continued operation of the
Premises by Tenant for the particular use set forth in Section 4 above;
therefore, Tenant shall not, whether voluntarily, or by operation of law, or
otherwise: (a) assign or otherwise transfer this Lease (except to an entity
having a net worth at least equal to Tenant's net worth, as of the date hereof,
a certification as to which was provided by Tenant in favor of Landlord as of
the date hereof, ("Tenant's Net Worth") and which entity proposes to engage in
a use allowed pursuant to Section 1.7, in which case Tenant shall provide
Landlord with not less than thirty (30) days prior written notice of such
assignment including, a certification as to such assignee's net worth and
proposed use executed by Tenant and assignee, but need not obtain Landlord's
consent); (b) sublet the Premises or any part thereof, or allow the same to be
used or occupied by anyone other than Tenant; provided, however, that Tenant
may, without the necessity of Landlord's consent and upon not less than thirty
(30) days prior written notice to Landlord identifying the sublessee and terms
of the sublease, sublet (i) up to twenty-five percent (25%) of the Premises to
not more than two (2) sublessees who propose(s) to engage in a use allowed
pursuant to Sections 1.7 and 4.1; or (ii) to a single entity with a net worth
at least equal to Tenant's Net Worth provided that Tenant provides a written
certification executed by Tenant and the sublessee together with its notice of
its intention to sublet certifying as to such sublessee's net worth; or (c)
mortgage, pledge, encumber, or otherwise hypothecate this Lease or the
Premises, or any part thereof, in any manner whatsoever, without in each
instance obtaining the prior written consent of Landlord, which consent may be
withheld for any or no reason to the extent that an assignee or sublessee's
proposed use of the Premises is not a permitted use pursuant to Section 1.7 or
prohibited by Section 4.1, but shall not otherwise be unreasonably withheld.
Any purported assignment, mortgage, transfer, pledge or sublease made without
the prior written consent of Landlord shall be absolutely null and void and of
no legal force or effect. No assignment of this Lease shall be effective and
valid unless and until the assignee executes and delivers to Landlord any and
all documentation reasonably required by Landlord in order to evidence
assignee's assumption of all obligations of Tenant hereunder. Any consent by
Landlord to a particular assignment, sublease or mortgage shall not constitute
consent or approval of any subsequent assignment, sublease or mortgage, and
Landlord's written approval shall be required in all such instances. Any
consent by Landlord to any assignment or sublease shall not be deemed to
release Tenant from its obligation hereunder and Tenant shall remain fully
liable for performance of all obligations under this Lease. Landlord shall not
be deemed to have unreasonably withheld its consent to a proposed assignment of
this Lease or to a proposed sublease of part or all of the Premises if its
consent is withheld because: (i) Tenant is then in default hereunder beyond
applicable notice and cure periods; (ii) either the portion of the Premises
which Tenant proposes to sublease, or the remaining portion of the Premises, or
means of ingress or egress to either the portion of the Premises which Tenant
proposes to sublease or the remaining portion of the Premises, or the proposed
use of the Premises or any portion thereof by the proposed assignee or
subtenant, (A) will violate any laws or (B) will impose any obligation upon
Landlord or increase Landlord's obligations under any laws to the extent that
the cost of such increased obligation is not passed through to Tenant or such
subtenant or assignee; (iii) the proposed assignee or subtenant is not
sufficiently financially responsible to perform its obligations under the
proposed assignment or sublease; or (iv) the proposed assignee or subtenant is
a government (or subdivision or agency thereof); provided, however, that the
foregoing are merely examples of reasons for which Landlord may withhold its
consent and shall not be deemed exclusive of any permitted reasons for
reasonably withholding consent, whether similar or dissimilar to the foregoing
examples.
8.2 Rights of Landlord. If this Lease is assigned, or if the Premises (or
any part thereof) are sublet or used or occupied by anyone other than Tenant,
if Tenant is in violation of this Lease, Landlord or Agent may (without
prejudice to, or waiver of its rights), collect rent from the assignee,
subtenant or occupant. If Landlord or Agent collects such rent, Landlord or
Agent may apply the net amount collected to the Rent herein reserved, but no
such assignment, subletting, occupancy or collection shall be deemed a waiver
of any of the provisions of this Section 8. With respect to the allocable
portion of the Premises sublet, in the event that the total rent and any other
considerations (whether cash or non-cash) received under any sublease by Tenant
is greater than the total Rent required to be paid, from time to time, under
this Lease, Tenant shall pay to Agent 50% of such excess as received from any
subtenant and such amount shall be deemed a component of the Additional Rent
due under this Lease. In determining the amount of such excess, there shall be
deducted, any and all reasonable costs of Tenant directly incurred in
connection with that sublease, including, but not limited to, leasing
commissions, advertising costs, attorney's fees and build-out and improvement
costs.
8.3 Permitted Transfers. The provisions of Section 8.1(a) shall apply to a
transfer of a majority of the voting stock of Tenant or to any other change in
voting control of Tenant (if Tenant is a corporation), or to a transfer of a
majority of the general partnership interests in Tenant or managerial control
of Tenant (if Tenant is a partnership), or to any comparable transaction
involving any other form of business entity, whether effectuated in one (1) or
more transactions, as if such transfer were an assignment of this Lease; but
said provisions shall not apply to a transfer to a corporation into or with
which Tenant is merged or consolidated, or to which substantially all of
Tenant's assets are
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transferred, or to any corporation that controls or is controlled by Tenant,
or is under common control with Tenant, provided in any of such events (a) the
successor to Tenant has a net worth (computed in accordance with generally
accepted accounting principles), at least equal to the greater of (i) the net
worth of Tenant immediately prior to such merger, consolidation or transfer or
(ii) Tenant's Net Worth and (b) proof satisfactory to Landlord of such net
worth shall have been delivered to Landlord at least ten (10) days prior to
the effective date of any such transaction to the extent reasonably
practicable, but in no event less than ten (10) days after the effective date
of such transaction. Tenant may assign this Lease or sublet all or some
portion of the premises to a subsidiary or affiliate of Tenant or an entity
controlled by or under common control with Tenant (a "Tenant's Affiliate")
without the necessity of obtaining Landlord consent so long as it provides
Landlord with not less than thirty (30) days prior written notice; provided,
however, that Tenant shall remain liable hereunder and the provisions of
Section 8.1(a) shall continue to apply to a transfer of a majority of the
voting stock of Tenant or to any other change in voting control of Tenant,
whether effectuated in one (1) or more comparable transactions, as if such
transfer were an assignment of this Lease; but the provisions of Section 8.1(a)
shall not apply to a corporation into or with which Tenant is merged or
consolidated, or to which substantially all of Tenant's assets are
transferred, or to any corporation that controls or is controlled by Tenant, or
is under common control with Tenant, provided that the conditions set forth in
items (a) and (b) of the preceding sentence are satisfied. The provisions of
this Section 8.3 shall not restrict a transfer of the voting stock of Tenant
when Tenant is a corporation, the outstanding stock of which is listed on a
recognized security exchange. Any such permitted transferee shall execute and
deliver to Landlord any and all documentation reasonably required by Landlord
in order to evidence assignee's assumption of all obligations of Tenant
hereunder.
SECTION 9: COMPLIANCE WITH LAWS
If any license or permit is required for the conduct of Tenant's business
in the Premises, Tenant, at its expense, shall procure such license or permit,
and shall maintain in good standing and renew such license or permit,
including, without limitation, those relating to compliance with environmental
regulations or laws. Tenant shall give prompt notice to Landlord of any notice
it receives of the violation of any law or requirement of any governmental or
administrative authority with respect to the Premises or the use or occupation
thereof. Tenant shall, at Tenant's expense, comply with all laws and
requirements of any governmental or administrative authorities and any
requirements imposed by any document or instrument of record, including the
Declaration, that impose any duty on Landlord, Agent or Tenant arising from
Tenant's actions regarding its business operations or use of the Premises, and
Tenant shall pay all expenses, fines and damages that are imposed upon any or
all of Landlord, Agent, any Superior Lessee, Superior Lessor or Superior
Mortgagee, by reason or arising out of Tenant's failure to fully and promptly
comply with and observe the provisions of this Section. In the course of
construction of the Landlord's Improvements (exclusive of Tenant's
Improvements), Landlord shall perform its obligations pursuant to Section 13.3
hereof and Section 7 of Exhibit C in accordance with all applicable statutes,
ordinances and building codes, governmental rules, regulations and orders;
provided, however, that Landlord shall have no liability, responsibility or
obligation with respect to compliance with statutes, ordinances and building
codes, restrictions, governmental rules, regulations and orders applicable to
Tenant's Improvements or Tenant's Work Items. In no event shall Landlord be
required to obtain on behalf of Tenant any license or permit required for the
conduct of Tenant's business and operations in the Premises, including, but not
limited to, any air, waste water discharge or any other permits and approvals
required to be obtained by Tenant by any governmental authority as a result of
the proposed use by Tenant of the Premises or the Tenant's operations at the
Premises. In the event that any law or requirement of governmental authority of
general applicability requires (i) a change in the structural or mechanical
systems of the buildings other than as a result of Tenant's business operations
or use of the Premises or (ii) any repairs, additions or improvements in or to
the Premises other than as a result of Tenant's business operations or use of
the Premises, Landlord shall, at its sole expense, comply with such law or
requirement; provided, however, that, upon completion of such changes, Tenant
shall reimburse Landlord in equal monthly installments of Additional Rent over
the remaining portion of the Term (inclusive of any renewals) for that portion
of any and all such costs incurred by Landlord in connection with such changes
that are incurred during the Term based upon a reasonable amortization of such
costs over their useful life at an interest rate of twelve percent (12%). It is
acknowledged and agreed by the parties that to the extent that any changes,
repairs, alterations, additions or improvements in or to the Premises,
including, but not limited to, the structural and mechanical systems thereof,
are required under any law or requirement or any governmental or administrative
authority as a result of Tenant's use and occupation of the Premises, such
changes, repairs, alterations, additions or improvements shall be made at
Tenant's sole cost and expense and in strict accordance with the terms and
conditions of this Lease and all such laws and requirements.
SECTION 10: INSURANCE
10.1 Tenant Activities. Tenant shall not violate, or permit the violation
of, any condition imposed by any insurance policy issued in respect of the
Premises and shall not do, or permit anything to be done, or keep or permit
anything to be kept in the Premises, that would: (a) unreasonably subject any
or all of Landlord, Agent, any Superior Lessor, any Superior Lessee or any
Superior Mortgagee to any liability or responsibility for personal injury or
death or property damage; (b) result in insurance companies of good standing
refusing to insure (or imposing special conditions on insuring for which Tenant
does not pay) any or all of the Premises or the property therein, in amounts
reasonably satisfactory to Landlord; or (c) result in the cancellation of (or
the assertion of any defense by the insurer, in whole or in part, to claims
under) any policy of insurance with respect to any or all of the Premises or
the property therein.
10.2 Insurance to be Maintained by Tenant. Tenant shall, at its sole
cost and expense, at all times during the Term (and any extensions thereof)
obtain and pay for and maintain in full force and effect the insurance policy
or policies described in Exhibit D attached hereto. Certificates of insurance
for all insurance policies required pursuant to this Lease shall be delivered
to Landlord not less than ten (10) days after the Commencement Date. If Tenant
fails to submit such certificates to Landlord within the specified time, or
otherwise fails to obtain and maintain insurance coverages in accordance with
this Section 10.2, then Landlord, at Landlord's sole option, may, but shall
not be obligated
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to, procure such insurance on behalf of, and at the expense of, Tenant. Tenant
shall reimburse Landlord for such amounts upon demand which amounts shall
constitute Additional Rent.
SECTION 11: ALTERATIONS
11.1 Procedural Requirements. Tenant may, from time to time, at its
expense, make alterations or improvements in and to the Premises (hereinafter
collectively referred to as "Alterations"), provided that Tenant first obtains
the written consent of Landlord in each instance. Landlord's consent to
Alterations shall not be unreasonably withheld, provided that: (a) the
structural integrity of the Premises shall not be adversely affected; (b) the
Alterations are to the interior of the Premises; (c) the proper functioning of
the mechanical, electrical, heating, ventilating, air-conditioning ("HVAC"),
sanitary and other service systems of the Premises shall not be adversely
affected; (d) Tenant shall have appropriate insurance coverage reasonably
satisfactory to Landlord regarding the performance and installation of the
Alterations; (e) the Alterations shall conform with all other requirements of
this Lease; (f) Tenant shall have provided Landlord with detailed plans (the
"Plans") for such Alterations in advance of requesting Landlord's consent, and
(g) Tenant complies with the terms of the Declaration with respect to the
Alterations and timely obtains any consents required thereunder. Landlord's
consent shall not be required for Alterations satisfying clauses (a) through
(g) above and costing $75,000 or less in any one instance (up to a maximum
aggregate of $75,000 over any consecutive twelve (12) month period); provided,
however, that the maximum aggregate amount of Alterations not requiring
Landlord's consent during the Initial Term shall not exceed $750,000 and
$250,000 during any Renewal Term. Landlord shall not be deemed to have acted
unreasonably if it withholds its consent to Alterations because, in Landlord's
reasonable opinion, such Alterations could adversely affect the safety of the
Premises or its occupants; would materially increase Landlord's cost of
satisfying its obligations hereunder or Landlord's ability to furnish services
to other future tenants; involves toxic or hazardous materials; would
materially and adversely impact Landlord's ability to sell the Premises or
lease the Premises to other tenants; or is prohibited by any mortgage on the
Building(s). The foregoing reasons, however, shall not be exclusive of the
reasons for which Landlord may withhold consent to proposed Alterations,
whether or not such other reasons are similar or dissimilar to the foregoing.
Landlord hereby consents to the Alteration described in Exhibit G hereto
relating to the erection of certain interior walls so long as Tenant (x)
performs such Alteration not later than the third anniversary of the
Commencement Date; (y) complies with terms, conditions and limitations with
respect to the performance of Alterations contained in this Article 11 other
than the requirement of Landlord's consent, and (z) the actual work performed
in connection with such Alteration is substantially consistent with the
narrative description of such Alteration contained in Exhibit G. Additionally,
after obtaining Landlord's preliminary consent to the Plans, but before
proceeding with any Alterations, Tenant shall, at its expense, obtain all
necessary governmental permits and certificates for the commencement and
prosecution of Alterations and shall submit to Landlord, for Landlord's written
approval, working drawings, plans and specifications, and all permits for the
work to be done and Tenant shall not proceed with such Alterations until it has
received said approval. After obtaining Landlord's approval to the Alterations
(to the extent required hereunder), Tenant shall give Landlord at least twenty
(20) days prior written notice of the commencement of any Alterations at the
Premises, and Landlord may elect to record and post notices of
non-responsibility at the Premises. If and to the extent that any Alterations
(whether permitted or deemed approved hereunder) impact on any structural
element of the Premises or the HVAC, utilities, sanitary or other systems
serving the Premises, Tenant shall (w) cause all such Alterations to be
performed in strict accordance with the terms, conditions and limitations of
any and all guaranties and warranties provided for the benefit of Landlord in
connection with its construction of the Improvements or otherwise, including,
but not limited, any requirement that any work thereon be performed by the
contractor that originally provided the guaranty and warranty to Landlord; (x)
be deemed to have waived any warranty provided by Landlord to Tenant hereunder
with respect to such structural elements or systems, including, but not limited
to, any warranty contained in Section 7 of Exhibit C, to the extent that any
such Alterations cause damage to such structural elements or systems,
invalidate any warranty provided to Landlord with respect thereto or can
reasonably be expected to or do materially increase the costs to Landlord of
satisfying such warranty with respect to such structural elements or systems;
and (y) shall be obligated to provide any replacements to such structural
elements of systems notwithstanding the requirements of Section 13.3 hereof to
the extent of any damage thereto caused by such Alterations or to the extent
that such Alterations can reasonably be expected to or do materially increase
the cost of such a replacement.
11.2 Performance of Alterations. Tenant shall cause the Alterations to be
performed in compliance with all applicable permits, laws and requirements of
public authorities. Tenant shall cause the Alterations to be diligently
performed in a good and workmanlike manner, using new materials and equipment
at least equal in quality and class to the standards for the Premises
established by Landlord or Agent. Alterations shall be performed by contractors
first approved by Landlord (except to the extent performed by Tenant's
employees, who shall be appropriately trained to perform the same and licensed
to the extent required by law), and Tenant's agents, contractors, workmen,
mechanics, suppliers and invitees shall work in harmony, and not interfere
with, Landlord and its agents and contractors (if any). Tenant shall obtain all
necessary permits and certificates for final governmental approval of the
Alterations and shall provide Landlord with "as built" plans, copies of all
construction contracts, governmental permits and certificates and proof of
payment for all labor and materials, including, without limitation, copies of
paid invoices and final lien waivers. To the extent any of the Alterations
affect any portion of the roof, Tenant shall use the contractor who provided
the warranty for the roof in connection with the performance of such
Alteration, so as not to invalidate or limit any roof-related warranty obtained
pursuant to the construction of the Improvements.
11.3 Lien Prohibition. Tenant shall pay when due all claims for labor and
material furnished to the Premises in connection with the Alterations. Tenant
shall not permit any mechanics or materialmen's liens to attach to the Premises
or Tenant's leasehold estate. Tenant, at its expense, shall procure the
satisfaction or discharge of record of all such liens and encumbrances within
sixty (60) days after the filing thereof. In the event Tenant has not so
performed, Landlord may, at its option, pay and discharge such liens, but only
to the extent that Tenant has failed to do so after Landlord gives Tenant
written notice of its intention to do so (which notice may be delivered on or
prior to the expiration of such sixty (60) day period), and Tenant shall be
responsible to reimburse Landlord, on demand, for all
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costs and expenses incurred in connection therewith, together with interest
thereon at the rate set forth in Section 21.3 below, which expenses shall
include reasonable fees of attorneys of Landlord's choosing, and any costs in
posting bond to effect discharge or release of the lien as an encumbrance
against the Premises. Any sums due from Tenant pursuant to the preceding
sentence shall constitute Additional Rent under this Lease.
SECTION 12: LANDLORD'S AND TENANT'S PROPERTY
12.1 Landlord's Property. Subject to Section 12.2 below, all fixtures,
machinery, equipment, improvements and appurtenances attached to, or built
into, the Premises at the commencement of this Lease, including, but not
limited to, the Tenant Funded Improvements and certain of the Tenant's Work
Items, or during the Term, whether or not placed there by or at the expense of
Tenant, shall become and remain a part of the Premises; shall be deemed the
property of Landlord (the "Landlord's Property"), without compensation or
credit to Tenant; and shall not be removed by Tenant unless Landlord permits
their removal. Further, any personal property in the Premises on the Rent
Commencement Date, movable or otherwise, unless installed and paid for by
Tenant, shall be and shall remain the property of Landlord and shall not be
removed by Tenant. In no event shall Tenant remove any of the following
materials or equipment without Landlord's prior written consent: any power
wiring or power panels, lighting or lighting fixtures, the primary power
source, wall or window coverings, attached carpets or other floor coverings,
air conditioners or any other heating or air conditioning equipment (but
excluding any special heating, ventilation or air conditioning systems not part
of the HVAC systems serving the Premises generally that are used in Tenant's
archive, library, and paper seasoning areas, or the electronic pre-press
control, or otherwise in its printing operations to the extent that Tenant paid
for all of the cost thereof), permanent fencing or security gates, or other
similar building operating equipment and decorations. Notwithstanding anything
contained herein to the contrary, upon the expiration or earlier termination of
this Lease, Tenant shall not be required to remove any of the items noted on
Exhibit I hereto as "Tenant will not remove."
12.2 Tenant's Property. All movable non-structural partitions, business
and trade fixtures, machinery and equipment, communications equipment and
office equipment, whether or not attached to, or built into, the Premises,
which are installed in the Premises by, or for the account of, Tenant without
expense to Landlord and that can be removed without structural damage to the
Premises (except to the extent that Tenant restores such damage), and all
furniture, furnishings and other articles of movable personal property owned by
Tenant and located in the Premises (collectively, the "Tenant's Property")
shall be and shall remain the property of Tenant and may be removed by Tenant
at any time during the Term, provided Tenant repairs or pays the cost of
repairing any damage to the Premises resulting from the installation and/or
removal thereof.
12.3 Removal of Tenant's Property. At or before the Expiration Date, or
the date of any earlier termination, Tenant, at its expense, shall remove from
the Premises all of Tenant's Property and any other property or fixtures which
Landlord may require in writing that Tenant remove (except such items thereof
as Landlord shall have expressly permitted, in writing, to remain, which
property shall become the property of Landlord), and Tenant shall repair any
damage to the Premises resulting from any installation and/or removal of
Tenant's Property. Any other items of Tenant's Property that shall remain in
the Premises after the Expiration Date, or following an earlier termination
date, may, at the option of Landlord, be deemed to have been abandoned, and in
such case, such items may be retained by Landlord as its property or be
disposed of by Landlord, in Landlord's sole and absolute discretion and without
accountability, at Tenant's expense. Notwithstanding the foregoing, if Tenant
is in default under the terms of this Lease, it may remove Tenant's Property
from the Premises only upon the express written direction of Landlord.
Notwithstanding anything contained herein to the contrary, upon the expiration
or earlier termination of this Lease, Tenant shall remove all of the items
noted on Exhibit I hereto as "Tenant will remove".
SECTION 13: REPAIRS AND MAINTENANCE
13.1 Tenant Repairs and Maintenance. Tenant shall, at its expense,
throughout the Term, maintain and preserve, in good working condition, the
Premises and the fixtures and appurtenances therein, subject to ordinary wear
and tear and fire and casualty. Except as otherwise specifically provided in
Exhibit "C" and Section 13.3 hereof, Tenant shall also be responsible for all
repairs and maintenance and all non-structural replacements, interior and
exterior, ordinary and extraordinary, in and to the Premises and the facilities
and systems thereof (including the electrical, mechanical, HVAC, and plumbing
systems, roof and the exterior sidewalks, parking lots, driveways, dock areas
and landscaped areas). Tenant shall enter into preventative maintenance and
service contracts with reputable service providers for maintenance of the HVAC
systems serving the Premises. Any repairs or replacements required to be made
by Tenant to the mechanical, electrical, sanitary, HVAC, or other systems of
the Premises shall be performed by appropriately licensed contractors approved
by Landlord, which approval shall not be unreasonably withheld; provided that
such preventative maintenance and repairs may be done by Tenant's employees to
the extent duly licensed, and Landlord's approval shall not be required in such
instances. Tenant shall maintain, during the period of the General Contractor's
warranty, reasonably detailed maintenance logs describing repairs and
maintenance programs and activities undertaken by Tenant pursuant to its
obligations under this Section 13.1, which maintenance log will be made
available to Landlord and the General Contractor upon reasonable prior notice.
Tenant shall promptly forward to Landlord and General Contractor (x) copies of
any maintenance and service contracts entered into for the HVAC systems to the
extent that Tenant elects to enter into such service and maintenance contracts
rather than to cause such repairs and maintenance to be performed by its duly
licensed employees and (y) copies of any and all service records with respect
to such systems (or to the extent that Tenant elects to cause such repairs and
maintenance to be performed by its duly licensed employees, to make available
upon demand by Landlord copies of Tenant's maintenance logs with respect to the
HVAC systems, which maintenance logs shall be maintained with reasonable
specificity and detail). All such repairs or replacements shall be subject to
the supervision and control of Landlord or Agent, and all repairs and
replacements shall be made with materials of equal or better quality than the
items being repaired or replaced. Without limiting the generality of the
foregoing, Tenant, at its expense, shall promptly replace or repair all
scratched, damaged, or broken
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doors and glass in and about the Premises and floor coverings in the Premises
and repair and maintain all sanitary and electrical fixtures therein.
13.2 Tenant Equipment. Tenant shall not place a load upon any floor of the
Premises that exceeds either the load per square foot that such floor was
designed to carry pursuant to the Final Plans and Specifications or that which
is allowed by law. Business machines and mechanical equipment belonging to
Tenant that cause noise or vibrations that may be transmitted to the structure
of the Premises to such a degree as to be objectionable or of concern to
Landlord shall, at Tenant's expense, be placed and maintained by Tenant in
settings or cork, rubber or spring-type vibration eliminators sufficient to
eliminate such noise or vibration; provided, however, that Tenant's printing
and other equipment shall not be deemed objectionable except to the extent that
it causes materially more noise or vibration than the equipment described to
Landlord in connection with the formulation of the Final Plans and
Specifications (defined below).
13.3 Landlord Replacements. Notwithstanding anything contained herein to
the contrary, except as otherwise provided in Section 11.1 hereof and Exhibit C
and this Section 13.3, but limited by the extent to which any act, omission or
neglect of Tenant in any way adversely affects any warranties relating to the
structural elements of the Premises, Landlord (and not Tenant) shall be
responsible for any replacement due to structural defects of the foundation,
exterior load bearing walls, roof structure and roof covering and tuckpointing
of the Buildings (as defined in Exhibit C) and no other replacements
whatsoever; provided, however, Tenant shall reimburse Landlord for that portion
of the costs and expenses of any replacement required to be performed hereunder
by Landlord that results (in whole or in part) from (a) the performance by
Tenant or existence of any Alterations, (b) the installation, use or operation
of Tenant's Property in the Premises, (c) the moving of Tenant's Property in or
out of the Premises and/or the Building(s), or (d) any act, omission, or
neglect of Tenant, its employees, agent, contractors, invitees, or others
entering into the Premises by act or omission of Tenant, and such reimbursement
shall be paid, in full, within ten (10) days after Landlord's delivery of
demand therefor.
SECTION 14: UTILITIES
14.1 Purchasing Utilities. Tenant shall purchase all utility services from
the utility or municipality providing such service; shall provide for
scavenger, cleaning and extermination services; and shall pay for such services
when payments are due. Tenant shall be solely responsible for the repair and
maintenance of any meters necessary in connection with such services. Landlord
represents and warrants that the utility capacities specified in the Final
Plans and Specifications shall be available as of the Substantial Completion of
the Improvements; provided, however, that Landlord makes no representation and
warranty with respect to electrical capacity. Tenant represents and warrants
that the utility services proposed to be provided to the Premises pursuant to
the Final Plans and Specifications and including the proposed water pressure,
are adequate for its proposed operations and use of the Premises, including any
contemplated potential expansion of Tenant's operations at the Premises.
14.2 Use of Electrical Energy by Tenant. Tenant's use of electrical energy
in the Premises shall not, at any time, exceed the capacity of (i) any of the
electrical conductors and equipment in or otherwise servicing the Premises; or
(ii) the Premises' HVAC systems.
SECTION 15: LANDLORD'S RIGHTS
15.1 Landlord's Rights of Access. Landlord, Agent and their respective
agents, employees and representatives shall have the right to enter and/or pass
through the Premises at any time or times (a) to examine and inspect the
Premises and to show them to actual and prospective mortgagees or ground
lessees ("Superior Parties") or prospective purchasers or mortgagees of the
Premises or providers of capital to Landlord and its affiliates and all
consultants and advisors relating thereto; and (b) to make such repairs,
alterations, additions and improvements in or to the Premises or its facilities
and equipment as Landlord is required to make. Landlord and Agent shall be
allowed to take all materials into and upon the Premises that may be required
in connection therewith, without any liability to Tenant and without any
reduction or modification of Tenant's covenants and obligations hereunder.
During the period of six (6) months prior to the Expiration Date (or at any
time, if Tenant has vacated or abandoned the Premises or is otherwise in
default under this Lease beyond applicable notice and cure periods ), Landlord
and its agents may exhibit the Premises to prospective tenants. In the exercise
of each of the foregoing rights, Landlord shall give Tenant reasonable prior
notice of its entry and use reasonable efforts to avoid interference with
Tenant's business operations, except in the case of emergency. Nothing set
forth above implies obligations of improvement beyond the Improvements
described in Exhibit C.
SECTION 16: NON-LIABILITY AND INDEMNIFICATION
16.1 Non-Liability. Except as otherwise provided in Section 16.4, and
without limitation on Landlord's liability for breach of this Lease (as such
liability may otherwise be limited hereunder), none of Landlord, Agent, any
affiliates of Landlord ("Landlord Affiliates"), any other managing agent,
Superior Parties, or their respective affiliates, owners, partners, directors,
officers, agents and employees shall be liable to Tenant for any loss, injury,
or damage, to Tenant or to any other person, or to its or their property,
irrespective of the cause of such injury, damage or loss, unless caused by, or
resulting from, the gross negligence or willful misconduct of Landlord, Agent
or their respective agents, servants or employees in the operation or
maintenance of the Premises (subject, however, to the doctrine of comparative
negligence in the event of negligence on the part of Tenant or any of its
contractors). Further, none of Landlord, Agent, any other managing agent,
Superior Parties, or their respective partners, directors, officers, agents and
employees shall be liable (a) for any such damage caused by other persons in,
upon or about the Premises, or caused by operations in construction of any
private, public or quasi-public work; or (b) with respect to matters for which
Landlord is liable, for
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consequential or indirect damages purportedly arising out of any loss of use of
the Premises or any equipment or facilities therein by Tenant or any person
claiming through or under Tenant.
16.2 Indemnification. Tenant hereby indemnifies, defends, and holds
Landlord and all Landlord Affiliates harmless from and against any and all
claims, judgments, liens, causes of action, liabilities, damages (except for
consequential or speculative damages unless specifically provided for
hereunder), costs, losses and expenses (including, but not limited to
reasonable legal, engineering and consulting fees of engineers, attorneys and
consultants selected by Landlord) arising from or in connection with (a) the
conduct or management of the Premises by Tenant or its employees, agents,
invitees, contractors, or representatives or any business therein by Tenant or
its employees, agents, invitees, contractors, or representatives, or any work
or Alterations done by Tenant or its employees, agents, invitees, contractors,
or representatives, or any condition created in or about the Premises by Tenant
or its employees, agents, invitees, contractors or representatives during
either or both of the Term and the period of time, if any, prior to the Rent
Commencement Date that Tenant may have been given access to the Premises,
including any and all mechanics and other liens and encumbrances in connection
with the Tenant's Work (as defined in Exhibit C) or resulting from a failure by
Tenant to make a payment that it is required to make hereunder; (b) any act,
omission or negligence of Tenant or any of its subtenants or licensees or their
partners, directors, officers, agents, employees, invitees or contractors,
including, but not limited to, any act or omission in connection with the
performance of the Tenant's Work; (c) any accident, injury or damage whatsoever
(unless caused by Landlord's, or its agent's servants or employees, willful
misconduct or gross negligence) occurring in, at or upon the Premises; (d) any
breach or default by Tenant in the full and prompt payment and performance of
Tenant's obligations under this Lease; (e) any breach by Tenant of any of its
warranties and representations under this Lease; and (f) any actions necessary
to protect Landlord's interest under this Lease in a bankruptcy proceeding or
other proceeding under the Bankruptcy Code involving Tenant, or its permitted
successors heirs or assigns, as the bankrupt entity. In case any action or
proceeding is brought against Landlord or any Landlord Affiliate by reason of
any such claim, Tenant, upon notice from any or all of Landlord, Agent or any
Superior Party, shall resist and defend such action or proceeding by counsel
reasonably satisfactory to, or selected by, Landlord or such Superior Party.
Landlord's and Tenant's obligations under this Section 16.2 shall survive the
termination of this Lease for any reason.
16.3 Force Majeure. The obligations of Tenant hereunder shall not be
affected, impaired or excused, and Landlord shall have no liability whatsoever
to Tenant, with respect to any act, event or circumstance arising out of (a)
Landlord's failure to fulfill, or delay in fulfilling any of its obligations
under this Lease by reason of strikes, lockouts, labor disputes, governmental
preemption of property in connection with a public emergency, inability to
obtain labor or materials, or reasonable substitutes therefore, inclement
weather which delays or precludes activities relating to construction, or
shortages of fuel, supplies, or labor, or any other cause, whether similar or
dissimilar, beyond Landlord's reasonable control; or (b) any failure or defect
in the supply, quantity or character of utilities furnished to the Premises, or
by reason of any requirement, act or omission of any public utility or others
serving the Premises, in each case beyond Landlord's reasonable control.
Landlord covenants and agrees to use reasonable efforts (without cost and
expense to Landlord) to mitigate the adverse effects of the circumstances
described in items (a) and (b) of the preceding sentence. Except as otherwise
expressly provided in Exhibit "C", Tenant shall not hold Landlord or Agent
liable for any latent defect in the Premises, nor, except as otherwise
expressly provided in Section 16.4, shall Landlord be liable for injury or
damage to person or property caused by fire, or theft, or resulting from the
operation of heating or air conditioning or lighting apparatus, or from falling
plaster, or from steam, gas, electricity, water, rain, snow, ice, or dampness,
that may leak or flow from any part of the Premises, or from the pipes,
appliances or plumbing work of the same. Except to the extent of Landlord's
gross negligence or willful misconduct, Tenant agrees that under no
circumstances shall Landlord or Agent be liable to Tenant or any third party
for any loss of, destruction of, damage to or shortage of any property;
including, but not limited to, Tenant's Property.
16.4 Limitation of Liability. Notwithstanding anything to the contrary
contained in this Lease, the liability of Landlord (and of any Successor
Landlord hereunder) to Tenant shall be limited to the interest of Landlord in
the Premises, and Tenant agrees to look solely to Landlord's interest in the
Premises for the recovery of any judgment or award against Landlord, it being
intended that Landlord shall not be personally liable for any judgment or
deficiency; provided, however, that if Tenant obtains a final, nonappealable
judgment against Landlord due to a breach of Landlord's obligations under this
Lease (the "Judgment") and the amount of such Judgment exceeds the value of
Landlord's equity interest in the Property as of the date on which the order
entering such final, nonappealable order is entered (the "Equity Interest"),
then Tenant shall be entitled to seek recourse directly against Landlord for an
amount equal to the positive difference, if any, between the amount of the
Judgment and the Equity Interest (the "Deficiency"); provided, further,
however, that the maximum amount of Deficiency for which Landlord shall be
liable is equal to (i) the product of (x) fifteen percent (15% ) and (y) the
fair market value of the Property as of the date of such Judgment less (ii) the
Equity Interest. In addition, Tenant acknowledges that Agent is acting solely
in its capacity as agent for Landlord and, shall not be liable for any
obligations, liabilities, losses or damages arising out of or in connection
with this Lease, all of which are expressly waived by Tenant, except to the
extent of Agent's gross negligence or willful misconduct.
16.5 Waiver of Subrogation. None of Landlord, Agent or Tenant shall be
liable to one another or to any insurance company (by way of subrogation or
otherwise) insuring any such party for any loss or damage to the Premises, the
structure of the buildings located thereon, other tangible property located on
the Premises, or any resulting loss of income, or losses under workers'
compensation laws and benefits, despite the fact that such loss or damage might
have been occasioned by the negligence or misconduct of such party, its agents
or employees, provided and to the extent that any such loss or damage would be
covered by insurance that the party suffering the loss is required to maintain
pursuant to the terms of this Lease. Each of Landlord, Agent and Tenant shall
secure an appropriate clause in, or an endorsement upon, each insurance policy
obtained by it and covering or applicable to the Premises and the personal
property, fixtures, and equipment located therein or thereon, pursuant to which
the insurance company consents to such waiver of right of recovery. The waiver
of right of recovery set forth above in this Section 16.5 shall extend to
Landlord, Agent,
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Tenant, and their respective agents and employees, Superior Parties and to
other appropriate parties designated by Landlord.
SECTION 17: DAMAGE OR DESTRUCTION
17.1 Notification. Tenant shall give prompt notice to Landlord and Agent
of (a) any occurrence in or about the Premises for which Landlord or Agent
might be liable, (b) any fire or other casualty in the Premises, (c) any damage
to, or defect in, the Premises, for the repair of which Landlord or Agent might
be responsible, and (d) any damage to, or defect in any part or appurtenance of
the Premises' sanitary, electrical, HVAC, elevator or other systems located in
or passing through the Premises or any part thereof.
17.2 Repair Provisions. Subject to the provisions of Section 17.4 below,
if the Premises are damaged by fire or other insured casualty, to the extent
insurance proceeds are adjusted, Landlord shall repair or cause Agent to repair
the damage and restore and rebuild the Premises (inclusive of Tenant's Funded
Items (as defined in Exhibit C) and those items of Tenant's Property and that
were part of Total Project Costs but exclusive of any other Tenant's Property
or improvements relating to Tenant's Work) with reasonable dispatch after (a)
notice to it of the damage or destruction and (b) the collection of the
insurance proceeds attributable to such damage, and Tenant shall repair the
damage to and restore and repair Tenant's Property, with reasonable dispatch
after such damage or destruction. Landlord shall use reasonable efforts to
collect such insurance proceeds as expeditiously as possible.
17.3 Rental Abatement. If (a) the Premises are damaged by fire or other
casualty thereby causing the Premises to be inaccessible or (b) the Premises
are partially damaged by fire or other casualty, the Rent shall be abated in
the amount of any rent loss insurance proceeds actually collected by Landlord
from Tenant's insurer on account of such damage.
17.4 Total Destruction. If the Premises shall be totally destroyed by fire
or other casualty, or if the Premises shall be so damaged by fire or other
casualty that (in the reasonable opinion of a reputable contractor or architect
designated by Landlord) (i) its repair or restoration requires more than one
hundred eighty (180) days or (ii) such repair or restoration requires the
expenditure of more than fifty percent (50%) of the full insurable value of the
Premises immediately prior to the casualty or (iii) except as hereinafter
provided, the damage is less than the amount stated in (i) and (ii) above but
is reasonably anticipated to require in excess of three months to repair or
cost more than twenty-five percent (25%) of the full insurable value of the
Premises to repair, but occurs during the last two (2) years of Lease Term,
Landlord and Tenant shall each have the option to terminate this Lease within
five (5) days after said contractor or architect delivers written notice of its
opinion to Landlord and Tenant, but in all events prior to the commencement of
any restoration of the Premises by Landlord. Notwithstanding item (iii) of the
preceding sentence, except as otherwise provided in this Section 17.4, if and
to the extent a casualty occurs in the final two (2) years of the Initial Term
or the first Renewal Term, as the case may be, Landlord shall be obligated to
restore the Premises if and to the extent that Tenant either has previously
delivered or timely delivers an Extension Notice with respect to the first
Renewal Term or the second Renewal Term, as the case may be, with its notice to
Landlord of such casualty. Nothing in the preceding sentence shall be construed
to relieve Tenant of its obligation to provide to Landlord a timely Extension
Notice pursuant to Section 2.2 of this Lease to properly extend the Term of
this Lease. In the event either party elects to terminate this Lease pursuant
to this Section 17.4, the termination shall be effective as of the 120th date
after the date on which the casualty occurs. If (A) any Superior Party or other
party entitled to the insurance proceeds fails to make such proceeds available
to Landlord in an amount sufficient for restoration of the Premises, or (B) the
issuer of any casualty insurance policies on the Premises fails to make
available to Landlord sufficient proceeds for restoration of the Premises
(except to the extent that Tenant unconditionally agrees to pay the entire
shortfall) then Landlord may not later than thirty (30) days after Landlord
receives written notice of a final determination that such proceeds will not be
made available from Superior Party or the issuer of any casualty insurance
policy, as the case may be, at Landlord's sole option, terminate this Lease,
effective as of the one hundred twentieth (120th) day after such casualty, by
giving Tenant written notice to such effect within one hundred twenty (120)
days after the date of the casualty. For purposes of this Section 17.4 only,
"full insurable value" shall mean replacement cost, less the cost of footings,
foundations and other structures below grade to the extent undamaged.
17.5 Repair or Restoration. Subject to the provisions of Section 17.4
above, Tenant shall not be entitled to terminate this Lease and no damages,
compensation or claim shall be payable by Landlord for purported inconvenience,
loss of business or annoyance arising from any repair or restoration of any
portion of the Premises pursuant to this Section. Landlord shall use its
diligent, good faith efforts to make such repair or restoration promptly and in
such manner as not to unreasonably interfere with Tenant's use and occupancy of
the Premises, but Landlord or Agent shall not be required to do such repair or
restoration work except during normal business hours of business days unless
the cost of any after hours work is covered by insurance or Tenant is willing
to pay the additional cost of such work.
17.6 Liability of Tenant. Notwithstanding any of the foregoing provisions
of this Section, if by reason of any act or omission on the part of Tenant or
any of its subtenants or its or their partners, directors, officers, servants,
employees, agents, or contractors, Landlord shall be unable to collect all of
the insurance proceeds (including, without limitation, rent insurance proceeds)
applicable to damage or destruction of the Premises by fire or other casualty
(the "Insurance Proceeds"), then, without prejudice to any other remedies that
may be available against Tenant, the abatement or reduction of the Rent
provided for herein shall be reduced to the extent resulting therefrom,
notwithstanding lack of usability. Further, and only to the extent that, as a
result of or due to or because of any negligent act or omission by any or all
of Tenant, its agents, employees, invitees and representatives, Landlord is
unable to collect all of the Insurance Proceeds (other than rent insurance
proceeds), then Tenant shall be liable to Landlord for the payment of an amount
equal to that portion of the Insurance Proceeds (other than rent insurance
proceeds) that Landlord is unable to collect.
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SECTION 18: EMINENT DOMAIN
18.1 Total Condemnation. If, in the reasonable opinion of Landlord, the
whole of the Premises, or if any part of the Premises that materially affects
Tenant's use and occupancy of the Premises, shall be taken by condemnation or
in any other manner for any public or quasi-public use or purpose, this Lease
and the term and estate hereby granted shall terminate as of the date of
vesting of title on such taking (herein called "Date of the Taking"), and the
Rent shall be prorated and adjusted as of such date.
18.2 Award. Landlord shall be entitled to receive the entire award or
payment in connection with any taking of the Premises; provided, however, that
if the condemning authority allocates any portion of the award specifically to
Tenant's Property, Tenant shall be entitled to that portion of the award.
Additionally, Tenant shall have the right to separately pursue, against the
condemning authority, an award in respect of the loss, if any, to Tenant's
Property (including, but not limited to, the Tenant's Improvements that Tenant
is entitled to remove) and to the leasehold improvements or other interest of
Tenant in the Premises paid for by Tenant, without any credit or allowance from
Landlord, provided that such separate award does not diminish or interfere with
Landlord's pursuit of its own award.
18.3 Compensation to Tenant for Temporary Use. If the temporary use or
occupancy of all or any part of the Premises shall be taken by condemnation or
in any other manner for any public or quasi-public use or purpose during the
Term, Tenant shall be entitled, except as hereinafter set forth, to receive
that portion of the award or payment for such taking which represents
compensation for the use and occupancy of the Premises, for the taking of
Tenant's Property, leasehold improvements or other interests of Tenant in the
Premises paid for by Tenant (other than Tenant Funded Improvements) and for
moving expenses, and Landlord shall be entitled to receive that portion that
represents reimbursement for the cost of restoration of the Premises (including
Tenant Funded Improvements). This Lease shall be and remain unaffected by such
taking, and Tenant shall continue to be responsible for all of its obligations
hereunder insofar as such obligations are not affected by such taking and shall
continue to pay, in full, the Rent when due. If the period of temporary use or
occupancy shall extend beyond the Expiration Date, that part of the award that
represents compensation for the use and occupancy of the Premises (or a part
thereof) shall be prorated between Landlord and Tenant so that Tenant shall
receive so much thereof as represents the period up to and including such
Expiration Date and Landlord shall receive so much thereof as represents the
period after such Expiration Date. All monies paid as, or as part of, an award
for temporary use and occupancy for a period beyond the date to which the Rent
have been paid shall be received, held and applied by Landlord as a trust fund
for payment of the Rent becoming due.
18.4 Partial or Temporary Taking. Subject to the rights of any Superior
Mortgagee or Superior Lessor, and other parties having rights to condemnation
proceeds, in the event of any taking of less than the whole of the Premises,
which taking does not result in termination of this Lease, or in the event of a
taking for a temporary use or occupancy of all or any part of the Premises, or
other partial taking of the Premises, that in any such case does not result in
a termination of this Lease: (a) Landlord, at its expense, and to the extent
that a condemnation award or awards shall be sufficient for the purpose, shall
proceed with reasonable diligence to repair the remaining parts of the Premises
(inclusive of that portion of the Premises that represents Tenant Funded
Improvements, but other than those parts of the Premises that are Tenant's
Property and Tenant's Improvements that Tenant is entitled to remove) to
substantially their former condition, to the extent that the same is feasible
(subject to those changes which Landlord reasonably deems desirable and Tenant
reasonably accepts, and to building and other governmental codes and
regulations) and so as to constitute a complete and tenantable Premises, and
(b) Tenant, at its expense, and to the extent any award or awards shall be
sufficient for the purpose, shall proceed with reasonable diligence to repair
Tenant's Property and Tenant's Improvements, to substantially its former
condition, to the extent feasible, subject to such reasonable changes as
Landlord and Tenant shall agree upon, in writing. Such work by Tenant shall be
deemed Alterations (the approval for which Alterations shall not be
unreasonably withheld by Landlord). Furthermore, in the event of a partial
taking of the Premises that does not result in a termination of this Lease, the
Net Base Rent due hereunder shall be reduced in a proportionate amount, based
upon the proportion that the area that has been taken bears to the total area
of the Premises. Such reduction shall be effective from the date on which the
partial taking occurs until the date, if any, on which the partial taking
terminates and the Premises have been restored in accordance with the terms of
this Lease.
SECTION 19: SURRENDER AND HOLDOVER
On the last day of the Term, or upon any earlier termination of this
Lease, or upon any re-entry by Landlord upon the Premises, (a) Tenant shall
quit and surrender the Premises to Landlord "broom-clean" and in good order,
condition and repair, except for ordinary wear and tear and such damage or
destruction as Landlord is required to repair or restore under this Lease, and
(b) Tenant shall remove all of Tenant's Property therefrom, except as otherwise
expressly provided in this Lease. The obligations imposed under the preceding
sentence shall survive the termination or expiration of this Lease. If Tenant
retains possession of the Premises or any part thereof after the Expiration
Date hereof or after any earlier termination date of this Lease by lapse of
time or otherwise, or termination of Tenant's right to possession: Tenant shall
pay to Landlord one hundred fifty percent (150%) of the Rent last prevailing
hereunder computed on a per-month basis, for each month or part hereof that
Tenant thus remains in possession, and, in addition thereto, Tenant shall pay
all direct and consequential damages sustained by Landlord, by reason of
Tenant's retention of possession; provided, however, that Tenant shall not be
liable to Landlord for consequential damages in connection with a holdover by
Tenant unless such holdover extends beyond thirty (30) days after the
Expiration Date or other earlier termination date of this Lease. There shall be
no renewal or extension of this Lease by operation of law. The provisions of
this Section 19 shall not constitute a waiver by Landlord of any re-entry
rights of Landlord provided hereunder or by law.
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SECTION 20: EVENTS OF DEFAULT
20.1 Bankruptcy of Tenant. It shall be an "Event of Default" by Tenant
under this Lease if Tenant makes an assignment for the benefit of creditors, or
files a voluntary petition under any state or federal bankruptcy or insolvency
law, or an involuntary petition alleging an act of bankruptcy or insolvency is
filed against Tenant under any state or federal bankruptcy or insolvency law
that is not vacated within ninety (90) days, or whenever a petition is filed by
or against (and, to the extent of any such involuntary filing, not vacated
within ninety (90) days) Tenant under the reorganization provisions of the
United States Bankruptcy Code or under the provisions of any law or like
import, or whenever a petition shall be filed by Tenant under the arrangement
provisions of the United States Bankruptcy Code or similar law, or whenever a
receiver of Tenant, or of, or for, the property of Tenant shall be appointed,
or Tenant admits it is insolvent or is not able to pay its debts as they
mature.
20.2 Default Provisions. Each of the following shall constitute an "Event
of Default" by Tenant under this Lease: (a) if Tenant fails to pay Net Base
Rent within five (5) days after written notice from Landlord of the delinquency
thereof; or (b) if Tenant fails to pay Additional Rent or any other sum due to
Landlord within fifteen (15) days after written notice from Landlord with
respect to the delinquency thereof, provided, however, that if and to the
extent that Tenant fails to pay Rent or any other payment required hereunder
when due hereunder more than twice in any consecutive twelve (12) month period,
Landlord shall have no obligation whatsoever for a period of two (2) years
after the latter of such two delinquencies to provide (x) any written notice to
Tenant of any further delinquency or (y) any grace period with respect to Net
Base Rent, Additional Rent or any other sum due hereunder, and, after the
expiration of any such two (2) year period, Tenant shall again be entitled to
written notice and the above described grace period for up to two (2)
delinquencies in any consecutive twelve (12) month period; or (c) if Tenant
fails, whether by action or inaction, to timely comply in any material respect
with, or satisfy, any or all of the obligations imposed on Tenant under this
Lease for a period of thirty (30) days after Landlord's delivery to Tenant of
written notice of such default under this subsection 20.2(c); provided,
however, that if the default cannot, by its nature, be cured within such thirty
(30) day period, but Tenant commences and diligently pursues a cure of such
default promptly within the initial thirty (30) day cure period and thereafter
continues to diligently pursue a cure, then Landlord shall not exercise its
remedies under Section 21 unless such default remains uncured for more than one
hundred eighty (180) days after Landlord's initial delivery to Tenant of notice
of such default.
SECTION 21: REMEDIES
21.1 Landlord's Cure Rights Upon Default of Tenant. If Tenant defaults in
the performance of any of its obligations under this Lease, Landlord, without
thereby waiving such default, may (but shall not be obligated to) perform the
same for the account, and at the expense of, Tenant, in compliance with any
notice requirements and cure periods set forth in Section 20.
21.2 Landlord's Remedies. If any Event of Default by Tenant under this
Lease remains uncured after applicable notice and cure periods, Landlord, at
its option, without further notice or demand to Tenant, may, in addition to all
other rights and remedies provided in this Lease, or otherwise at law or in
equity: (a) terminate this Lease and Tenant's right of possession of the
Premises, and recover all damages to which Landlord is entitled under law,
specifically including, without limitation, accelerated Rent attributable to
the balance of the Term, and all Landlord's reasonable expenses of reletting
the Premises (including reasonable repairs, alterations, improvements,
additions, decorations, legal fees and brokerage commissions), or (b) terminate
Tenant's right of possession of the Premises without terminating this Lease;
provided, however, that Landlord shall use its reasonable efforts, whether
Landlord elects to proceed under Subsections (a) or (b) above, to relet the
Premises, or any part thereof for the account of Tenant, for such rent and term
and upon such terms and conditions as are reasonably acceptable to Landlord. If
Landlord shall elect to pursue its rights and remedies under Subsection (b),
then Landlord shall at any time have the further right and remedy to rescind
such election and pursue its rights and remedies under Subsection (a),
including but not limited to such time as Landlord has obtained a tenant to
relet the Premises, which, in Landlord's reasonable judgment, is a suitable
tenant. For purposes of such reletting, Landlord is authorized to decorate,
repair, alter and improve the Premises to the extent deemed reasonably
necessary by Landlord. If the Premises are relet and a sufficient sum is not
realized therefrom, after payment of all Landlord's reasonable expenses of
reletting (including reasonable repairs, alterations, improvements, additions,
decorations, legal fees and brokerage commissions), to satisfy the payment,
when due, of Base Rent and Additional Rent reserved under the Lease for any
monthly period, then Tenant shall, in Landlord's sole judgment, either (i) pay
any such deficiency monthly or (ii) pay such deficiency on an accelerated
basis, which accelerated deficiency shall be discounted at a rate of six
percent (6%) per annum. If Landlord fails to relet the Premises, then Tenant
shall pay to Landlord the sum of (i) the projected costs of Landlord's
reasonable expenses of reletting (including the reasonably anticipated costs of
repairs, alterations, improvements, additions, legal fees and brokerage
commissions) as reasonably estimated by Landlord and (ii) the accelerated
amount of Net Base Rent and Additional Rent due under the Lease attributable to
the balance of the Term discounted at a rate of six percent (6%) per annum.
Tenant agrees that Landlord may file suit to recover any sums due to Landlord
hereunder from time to time and that such suit or recovery of any amount due
Landlord hereunder shall not be any defense to any subsequent action brought
for any amount not theretofore reduced to judgment in favor of Landlord. In the
event Landlord elects, pursuant to Subsection (b) of this Section 21.2, to
terminate Tenant's right of possession only, without terminating this Lease,
Landlord may, at Landlord's option, enter into the Premises, remove Tenant's
Property, Tenant's signs and other evidences of tenancy, and take and hold
possession thereof as provided in Section 19 hereof; provided, however, that
such entry and possession shall not terminate this Lease or release Tenant, in
whole or in part, from Tenant's obligation to pay the Rent reserved hereunder
for the full Term, or from any other obligation of Tenant under this Lease
(except to the extent Landlord shall be able to mitigate its damages as
described above). Any and all property that may be removed from the Premises by
Landlord pursuant to the authority of the Lease or of law, to which Tenant is
or may be entitled, may be handled, removed or stored by Landlord at the risk,
cost and expense of Tenant, and in no event or circumstance shall Landlord be
responsible for the value, preservation or safekeeping thereof. Tenant shall
pay to Landlord, upon
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demand, any and all expenses incurred in such removal and all storage charges
against such property so long as the same shall be in Landlord's possession or
under Landlord's control. Any such property of Tenant not retaken from storage
by Tenant within forty-five (45) days after the end of the Term, however
terminated, shall be conclusively presumed to have been conveyed by Tenant to
Landlord under this Lease as in a bill of sale, without further payment or
credit by Landlord to Tenant. Upon default and expiration of all cure periods,
Tenant hereby grants to Landlord a first lien upon the interest of Tenant under
this Lease to secure the payment of moneys due under this Lease, which lien may
be enforced in equity; and Landlord shall be entitled as a matter of right to
have a receiver appointed to take possession of the Premises and relet the same
under order of court.
21.3 Additional Rights of Landlord. Any and all reasonable costs, expenses
and disbursements, of any kind or nature, incurred by Landlord in connection
with the enforcement of any and all of the terms and provisions of this Lease,
including reasonable attorneys' fees (through all appellate proceedings), shall
be due and payable upon Landlord's submission of an invoice therefor. All sums
advanced by Landlord or Agent on account of Tenant under this Section, or
pursuant to any other provision of this Lease, and all Rent, if delinquent or
not paid by Tenant and received by Landlord when due hereunder, shall bear
interest at the rate of five percent (5%) per annum above the "prime" or
"reference" or "base" rate of interest publicly announced as such, from time to
time, by The First National Bank of Chicago, from the due date thereof until
paid, and such interest shall be and constitute Additional Rent and be due and
payable upon Landlord's or Agent's submission of an invoice therefor. Suit or
suits for the recovery of such damages, or any installments thereof, may be
brought by Landlord from time to time at its election, and nothing contained
herein shall be deemed to require Landlord to postpone suit until the
Expiration Date, nor limit or preclude recovery by Landlord against Tenant of
any sums or damages to which, in addition to the damages particularly provided
above, Landlord may lawfully be entitled by reason of any default hereunder by
Tenant. The various rights, remedies and elections of Landlord reserved,
expressed or contained herein are cumulative and no one of them shall be deemed
to be exclusive of the others or of such other rights, remedies, options or
elections as are now or may hereafter be conferred upon Landlord by law.
21.4 Event of Bankruptcy. In addition to, and in no way limiting the
other remedies set forth herein, Landlord and Tenant agree that if Tenant ever
becomes the subject of a voluntary or involuntary bankruptcy, reorganization,
composition, or other similar type proceeding under the federal bankruptcy
laws, as now enacted or hereinafter amended, then:
(a) "Adequate assurance of future performance" by Tenant
and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365
will include (but not be limited to) payment of a security deposit in
the amount of three (3) times the then-current Rent payable
hereunder.
(b) Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code, shall be deemed,
without further act or deed, to have assumed all of the obligations
of Tenant arising under this Lease on and after the effective date of
such assignment. Any such assignee shall, upon demand by Landlord,
execute and deliver to Landlord an instrument confirming such
assumption of liability.
(c) Notwithstanding anything in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord
under this Lease, whether or not expressly denominated as "Rent",
shall constitute "rent" for the purposes of Section 502(b)(6) of the
Bankruptcy Code.
(d) If this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies
or other considerations payable or otherwise to be delivered to
Landlord or Agent (including Rent and other amounts hereunder), shall
be and remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the bankruptcy estate of Tenant.
Any and all monies or other considerations constituting Landlord's
property under the preceding sentence not paid or delivered to
Landlord or Agent shall be held in trust by Tenant or Tenant's
bankruptcy estate for the benefit of Landlord and shall be promptly
paid to or turned over to Landlord.
SECTION 22: BROKER
Tenant covenants, warrants and represents that the broker set forth in
Section 1.9(A) was the only broker to represent Tenant in the negotiation of
this Lease ("Tenant's Broker"). Landlord covenants, warrants and represents
that the broker set forth in Section 1.9(B) was the only broker to represent
Landlord in the negotiation of this Lease ("Landlord's Broker"). Landlord shall
be solely responsible for paying the commissions of Landlord's Broker and
Tenant's Broker. Each party agrees to and hereby does defend, indemnify and
hold the other harmless against and from any brokerage commissions or finder's
fees or claims therefor by a party (other than Tenant's Broker and Landlord's
Broker) claiming to have dealt with the indemnifying party and all costs,
expenses and liabilities in connection therewith, including, without
limitation, reasonable attorneys' fees and expenses, for any breach of the
foregoing. The foregoing indemnification shall survive the termination of this
Lease for any reason.
SECTION 23: ESTOPPEL CERTIFICATES
Tenant shall, from time to time and within twenty (20) days after any
request by Landlord, execute and deliver to Landlord (and to any existing or
prospective mortgage lender, ground lessor, or purchaser designated by
Landlord), a statement: (i) certifying that this Lease is unmodified and in
full force and effect (or if there have been modifications, that the same is in
full force and effect as modified and stating the modifications); (ii)
certifying the dates to which the Rent has been paid; (iii) stating whether
Landlord is in default in performance of any of its obligations under this
Lease, and, if so, specifying each such default; (iv) stating whether any event
has occurred which, with the giving of notice or
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passage of time, or both, would constitute such a default, and, if so,
specifying each such event; and (v) stating whether any rights of Tenant (e.g.,
options) have been waived. Any such statement delivered pursuant hereto shall
be deemed a representation and warranty to be relied upon by the party
requesting the certificate and by others with whom Landlord may be dealing,
regardless of independent investigation. Tenant also shall include in any such
statements such other information concerning this Lease as Landlord or Agent
may reasonably request including, but not limited to, the amount of Rent under
this Lease, and whether Landlord has completed all (if any) improvements to the
Premises required under this Lease. Notwithstanding the foregoing, Landlord
shall deliver to Tenant a proposed document for Tenant's approval and
signature.
SECTION 24: HAZARDOUS MATERIALS
24.1 Definitions.
(i) "ENVIRONMENTAL LAW" or "ENVIRONMENTAL LAWS" shall
mean all past, present or future federal, state and local
statutes, laws, regulations, directives, ordinances, rules,
codes, policies, guidelines, court orders, decrees, arbitration
awards and the common law, which govern, regulate or impose
liability or standards of conduct concerning the use,
treatment, generation, storage, disposal or other handling or
release of any Hazardous Material or Materials or health and
safety matters, as such have been amended, modified or
supplemented from time to time (including all present and
future amendments thereto and re-authorizations thereof).
Environmental Laws include, without limitation, those relating
to: (i) the manufacture, processing, use, distribution,
treatment, storage, disposal, generation or transportation of
Hazardous Materials; (ii) air, soil, surface, subsurface,
groundwater, odor or noise pollution; (iii) Releases; (iv)
protection of wildlife, endangered species, wetlands,
environmentally sensitive areas or natural resources; (v)
health and safety of employees and other persons; and (vi)
notification requirements relating to the foregoing. Without
limiting the above, Environmental Law also includes the
following: (i) the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. ss.ss. 9601 et seq.),
as amended ("CERCLA"); (ii) the Solid Waste Disposal Act, as
amended by the Resource Conservation and Recovery Act (42
U.S.C. ss.ss. 6901 et seq.), as amended ("RCRA"); (iii) the
Emergency Planning and Community Right to Know Act of 1986 (42
U.S.C. ss.ss. 11001 et seq.), as amended; (iv) the Clean Air
Act (42 U.S.C. ss.ss. 7401 et seq.), as amended; (v) the Clean
Water Act (33 U.S.C. ss.ss. 1251 et seq.), as amended; (vi) the
Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.),
as amended; (vii) the Hazardous Materials Transportation Act
(49 U.S.C. ss.ss. 1801 et seq.), as amended; (viii) the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.ss. 136
et seq.), as amended; (ix) the Federal Safe Drinking Water Act
(42 U.S.C. ss.ss. 300f et seq.), as amended; (x) the Federal
Radon and Indoor Air Quality Research Act (42 U.S.C. ss.ss.
7401, et seq.); (xi) the Occupational Safety and Health Act (29
U.S.C. ss.ss. 651 et seq.), as amended; (xii) any other
statute, rule, regulation or order of any governmental
authority having jurisdiction of Hazardous Materials or health
and safety, including, but not limited to, the USEPA, Wisconsin
Department of Natural Resources and the US Nuclear Regulatory
Agency; (xiii) Environmental Permits; (xiv) any state, county,
municipal or local statutes, laws or ordinances similar or
analogous to (including counterparts of) any of the statutes
listed above; and (xv) any rules, regulations, guidelines,
directives, orders or the like adopted pursuant to or
implementing any of the above.
(ii) "ENVIRONMENTAL PERMIT" or "ENVIRONMENTAL PERMITS"
shall mean licenses, certificates, permits, directives,
requirements, registrations, government approvals, agreements,
authorizations, and consents which are required under or are
issued pursuant to an Environmental Law or are otherwise
required by Governmental Authorities.
(iii) "GOVERNMENTAL AUTHORITY" shall mean any agency,
commission, department or body of any municipal, township,
county, local, state or Federal governmental or
quasi-governmental regulatory unit, entity or authority having
jurisdiction or authority over all or any portion of the
Project or the management, operation, use or improvement
thereof.
(iv) "HAZARDOUS CONDITIONS" refers to the existence or
presence, release or threatened release of any Hazardous
Materials on, in, under, at, near, from or about the Property
or any portion thereof (including groundwater) or any other
adverse public health effect.
(v) "HAZARDOUS MATERIAL" or "HAZARDOUS MATERIALS" shall
mean:
(A) any chemical, pollutant, contaminant,
pesticide, petroleum or petroleum product or by product,
radioactive substance, solid waste (including hazardous
or extremely hazardous), special, dangerous or toxic
waste, substance, chemical or material regulated,
listed, limited or prohibited under any Environmental
Law, including without limitation: (i) asbestos,
asbestos-containing material, presumed
asbestos-containing material, polychlorinated biphenyls
("PCBS"), solvents and waste oil; (ii) any "hazardous
materials" or "hazardous substances" as defined under
CERCLA; (iii) any "hazardous waste" as defined under
RCRA; (iv) any hazardous air pollutant or criteria
pollutant as defined under the CAA; and (v) any
hazardous substance defined or regulated under Wisconsin
law; and
(B) even if not prohibited, listed, limited or
regulated by an Environmental Law, all pollutants,
contaminants, hazardous, dangerous or toxic chemical
materials, wastes or any other substances, including
without limitation, any industrial process or pollution
control waste
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(whether or not hazardous within the meaning of RCRA or
Wisconsin law) which could pose a hazard to the
environment, or the health and safety of any person or
impair the use or value of any portion of the Property.
(vi) "RELEASE" means any spill, discharge, leak,
migration, emission, escape, injection, dumping or other
release or threatened release of any Hazardous Material into
the environment, whether or not notification or reporting to
any governmental agency was or is required. Release includes,
without limitation, historical releases and the meaning of
Release as defined under CERCLA and the meaning of discharges
or spills under the laws of the State of Wisconsin.
(vii) "REMEDIAL ACTION" shall mean any and all
corrective or remedial action, preventative measures, response,
removal, transport, disposal, clean-up, abatement, treatment
and monitoring of Hazardous Materials or Hazardous Conditions,
whether or not at the direction or request of a governmental
authority, and includes all studies, assessments, reports,
analyses or investigations performed in connection therewith to
determine if such actions are necessary or appropriate
(including investigations performed to determine the progress
or status of any such actions).
(viii) "REMEDIAL COSTS" shall include all costs,
liabilities expenses and fees incurred in connection with
Remedial Action, including but not limited to: (i) the fees of
environmental consultants and contractors; (ii) reasonable
attorneys' fees (including compensation for in-house and
corporate counsel provided such compensation does not exceed
customary rates for comparable services); (iii) the costs
associated with the preparation of reports, and laboratory
analysis (including charges for expedited results if reasonably
necessary); (iv) regulatory, permitting and review fees; (v)
costs of soil and/or water treatment (including groundwater
monitoring) and/or transport and disposal; and (iv) the cost of
supplies, equipment, material and utilities used in connection
with Remedial Action.
For purposes of this Section 24, "Landlord's Environmental Liability"
means: any and all losses, liabilities, obligations, penalties, claims, fines,
demands, litigation, actions, expenses, injuries, administrative order,
defenses, costs (including Remedial Costs), judgments, suits, proceedings,
damages (including punitive and exemplary damages), disbursements or expenses
of any kind or nature whatsoever (including attorneys' fees at trial and
appellate levels and experts' fees and disbursements and expenses incurred in
investigating, defending against, settling or prosecuting any suit,
litigation, claim or proceeding) which may at any time be either directly or
indirectly imposed upon, incurred by or asserted or awarded against Landlord
or any of Landlord's parent and subsidiary corporations and their affiliates,
shareholders, directors, officers, employees, and agents in connection with or
arising from: (i) any Hazardous Materials used, exposed, emitted, released,
discharged, generated, manufactured, sold, transported, handled, stored,
treated, reused, presented, disposed of or recycled on, in, at, near, from or
under all or any portion of the Property, or any surrounding areas resulting
therefrom; (ii) any Hazardous Condition and/or Remedial Action to the extent
caused or contributed to by Tenant or any party acting by, through or under
Tenant, including any licensees or invitees of Tenant or such parties; (iii)
any misrepresentation, inaccuracy or breach of any warranty, covenant or
agreement contained or referred to in this Section 24; (iv) any violation,
liability or claim or notice of a violation or liability under any
Environmental Laws or Environmental Permits to the extent caused or
contributed to by Tenant or any party acting by, through or under Tenant,
including any licensees or invitees of Tenant or such parties; or (v) the
imposition of any lien for damages caused by, or the recovery of any costs
incurred for the cleanup of, any release or threatened release of a Hazardous
Materials to the extent caused or contributed to by Tenant or any party acting
by, through or under Tenant, including any licensees or invitees of Tenant or
such parties.
24.2 Prohibition. (i) Tenant shall not use any Hazardous Materials,
as defined herein, except those ordinarily used in the normal course of
Tenant's business, and provided that Tenant shall use such Hazardous Materials
in accordance with their intended use and comply with all applicable
Environmental Laws with respect to their use, storage, transportation and
disposal and (ii) Tenant shall comply and operate its business in accordance
with all applicable Environmental Laws, and will make all improvements,
repairs, alterations and install all pollution control equipment, including
any equipment necessary to monitor such pollution control equipment, in
accordance with all applicable Environmental Laws. Tenant acknowledges that as
the sole operator of the Premises, Tenant will be in possession and control of
the Premises for the term of the Lease. Tenant may use and store reasonable
quantities of the substances listed on Exhibit H attached hereto (the
"Permitted Substances"), all in accordance with (and to the extent permitted
by) all Environmental Laws and according to normal and ordinary business
practices of similar entities engaged in the same or similar operations.
24.3 Tenant's Duties. Tenant shall promptly provide Agent with copies
of all communications, permits or agreements with any Governmental Authority
or any private entity relating in any way to the presence, Release, threat of
Release, placement on, at or in the Premises, or the generation,
transportation, storage, use, treatment, or disposal at, in or on the
Premises, of any Hazardous Materials, except that Tenant shall not be
obligated to provide copies to Landlord of its routine correspondence
regarding Permitted Substances used in its day to day use and operation of the
Premises. Landlord, Agent and their respective agents and employees shall have
the right to enter the Premises and/or conduct appropriate tests, at any time
and from time to time, for the purposes of ascertaining Tenant compliance with
all Environmental Laws. If and to the extent that Landlord reasonably believes
that Tenant's use and operation of the Premises are not in compliance with all
Environmental Laws in any material respect or any of Tenant's acts or
omissions (or the acts or omissions of Tenant's employees, agents,
representatives or invitees) at the Premises have resulted in a material
breach of Environmental Laws, Tenant shall provide Landlord with the results
of appropriate tests of air, water or soil to demonstrate that Tenant complies
with all Environmental Laws upon written request by Landlord or Agent.
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24.4 Remedial Action. If the presence, Release, threat of Release,
emissions from, placement on, at or in the Premises or Property or any portion
thereof, or the generation, transportation, storage, use, treatment, or
disposal at or from the Premises or Property or any portion thereof of any
Hazardous Materials gives rise to a Landlord's Environmental Liability, then
Tenant, at its sole cost and expense, shall promptly take any and all Remedial
Action with respect to the Premises or any portion thereof, and shall mitigate
any and all exposure to liability arising from the Hazardous Materials and/or
the Hazardous Conditions, regardless whether required by Environmental Law.
24.5 Indemnity and Release. Except as otherwise provided in Section
2(b)(i) of Exhibit C, Tenant shall and does hereby protect, indemnify, defend
(at trial and appellate levels and with counsel, experts and consultants
acceptable to Landlord and at Tenant's sole cost) and hold Landlord and each
Landlord Affiliate free and harmless from and against any Landlord's
Environmental Liability (collectively, "Tenant's Indemnification
Obligations"). Except as otherwise provided in Section 2(b)(i) of Exhibit C,
Tenant and its successors and assigns hereby waive, release and agree not to
make any claim or bring any cost recovery action against Landlord under or
with respect to any Environmental Law, except to the extent of any gross
negligence or willful misconduct by Landlord or its agent and their employees.
Tenant's obligation to Landlord under this indemnity shall likewise be without
regard to fault on the part of Tenant or Landlord with respect to the
violation or condition which results in liability to Landlord. The foregoing
indemnity and Tenant's other obligations under this Section 24 shall
indefinitely survive the expiration or termination of this Lease.
SECTION 25: MISCELLANEOUS
25.1 Merger. All prior understandings and agreements between the
parties are merged in this Lease, which alone fully and completely expresses
the agreement of the parties. No agreement shall be effective to modify this
Lease, in whole or in part, unless such agreement is in writing, and is signed
by the party against whom enforcement of said change or modification is
sought.
25.2 Notices. Any notice required to be given by either party
pursuant to this Lease, shall be in writing and shall be deemed to have been
properly given, rendered or made only if personally delivered or if sent by
Federal Express or other comparable commercial overnight delivery service,
addressed to the other party at the addresses set forth below (or to such
other address as Landlord or Tenant may designate to each other from time to
time by written notice), and shall be deemed to have been given, rendered or
made on the day so delivered or on the first business day after having been
deposited with the courier service:
If to Landlord: First Industrial Development Services Group, L.P.
150 North Wacker Drive, Suite 150
Chicago, Illinois 60606
Attn: Anthony Muscatello
First Industrial, L.P.
150 North Wacker Drive, Suite 150
Chicago, Illinois 60606
Attn: Michael W. Brennan
With a copy to: Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Attn: Howard Nagelberg, Esq.
If to Tenant: Golden Books Family Entertainment Inc.
850 3rd Avenue, 7th Floor
New York, New York 10022
Attn: General Counsel
With a copy to: Becker, Glynn, Melamed & Muffy, LLP
299 Park Avenue, 16th Floor
New York, New York 10171
Attn: Bruce A. Rich, Esq.
Golden Books Family Entertainment, Inc.
1220 Mound Avenue
Racine, Wisconsin 53404
Attn: Mr. Owen Mitchell
25.3 Non-Waiver. The failure of either party to insist, in any one or
more instances, upon the strict performance of any one or more of the
obligations of this Lease, or to exercise any election herein contained, shall
not be construed as a waiver or relinquishment for the future of the
performance of such one or more obligations of this Lease or of the right to
exercise such election, but the Lease shall continue and remain in full force
and effect with respect to any subsequent breach, act or omission. The receipt
and acceptance by Landlord or Agent of Rent with knowledge of breach by Tenant
of any obligation of this Lease shall not be deemed a waiver of such breach.
25.4 Legal Costs. Any party in breach or default under this Lease
(the "Defaulting Party") shall reimburse the other party (the "Nondefaulting
Party") upon demand for any costs or expenses that the Nondefaulting
17
<PAGE>
Party incurs in connection with the breach or default, regardless whether suit
is commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, in the event of litigation, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as attorneys' fees and costs, which sum shall be paid by the losing party.
Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection
with Tenant's request for Landlord's consent under provisions of this Lease
governing assignment and subletting, or in connection with any other act which
Tenant proposes to do and which requires Landlord's consent.
25.5 Parties Bound. Except as otherwise expressly provided for in
this Lease, this Lease shall be binding upon, and inure to the benefit of, the
successors and assignees of the parties hereto. Tenant hereby releases
Landlord named herein from any obligations of Landlord for any period
subsequent to the conveyance and transfer of Landlord's ownership interest in
the Premises. In the event of such conveyance and transfer, Landlord's
obligations shall thereafter be binding upon each transferee (whether
Successor Landlord or otherwise). No obligation of either party shall rise
under this Lease until the instrument is signed by, and delivered to, both
Landlord and Tenant.
25.6 Recordation of Lease. Tenant shall not record or file this Lease
(or any memorandum hereof) in the public records of any county or state,
except as may be required in connection with the recording or filing of any
nondisturbance agreement relating hereto.
25.7 Survival of Obligations. Upon the expiration or other
termination of this Lease, neither party shall have any further obligation or
liability to the other except as otherwise expressly provided in this Lease
and except for such obligations as, by their nature or under the
circumstances, can only be, or by the provisions of this Lease, may be
performed after such expiration or other termination. Without limitation of
the foregoing, the provisions of Sections 2, 3, 12, 16, 17.3, 18.3, 19, 22,
and 24 shall survive any termination of this Lease.
25.8 Governing Law; Construction. This Lease shall be governed by and
construed in accordance with the laws of the state in which the Premises are
located. If any provision of this Lease shall be invalid or unenforceable, the
remainder of this Lease shall not be affected but shall be enforced to the
extent permitted by law. The captions, headings and titles in this Lease are
solely for convenience of reference and shall not affect its interpretation.
This Lease shall be construed without regard to any presumption or other rule
requiring construction against the party causing this Lease to be drafted.
Each covenant, agreement, obligation, or other provision of this Lease to be
performed by Tenant, shall be construed as a separate and independent covenant
of Tenant, not dependent on any other provision of this Lease. All terms and
words used in this Lease, regardless of the number or gender in which they are
used, shall be deemed to include any other number and any other gender as the
context may require.
25.9 Time. Time is of the essence of this Lease. If the time for
performance hereunder falls on a Saturday, Sunday or a day that is recognized
as a holiday in the state in which the Premises are located, then such time
shall be deemed extended to the next day that is not a Saturday, Sunday or
holiday in said state.
25.10 Authority of Tenant. If Tenant is a corporation, partnership,
association or any other entity, it shall deliver to Landlord, concurrently
with the delivery to Landlord of an executed Lease, certified resolutions of
Tenant's directors or other governing person or body (i) authorizing execution
and delivery of this Lease and the performance by Tenant of its obligations
hereunder and (ii) certifying the authority of the party executing the Lease
as having been duly authorized to do so. Landlord represents and warrants to
Tenant that (a) the execution and delivery of this Lease and the performance
by Landlord of its obligations hereunder has been duly authorized by all
necessary corporate and partnership action and (b) the party affixing his or
her signature hereto has been duly authorized to execute this Lease on behalf
of Landlord's general partner.
25.11 Joint and Several Liability. All parties signing this Lease as
Tenant shall be jointly and severally liable for all obligations of Tenant
hereunder.
25.12 Counterpart Execution. This Lease may be executed in
counterpart and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument.
25.13 Riders. All Riders and Exhibits attached hereto shall be deemed
to be a part hereof and hereby incorporated herein.
25.14 WAIVER OF TRIAL BY JURY. THE LANDLORD AND THE TENANT, TO THE
FULLEST EXTENT THAT THEY MAY LAWFULLY DO SO, HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION OR PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY COURT ACTION BROUGHT
BY ANY PARTY TO THIS LEASE WITH RESPECT TO THIS LEASE, THE PREMISES, OR ANY
OTHER MATTER RELATED TO THIS LEASE OR THE PREMISES.
25.15 Lease Contingency. The terms and provisions of this Lease shall
be contingent upon the closing by Landlord of the purchase of fee simple title
to the Land on or before August 4, 1997 (the "Contingency Date"). If Landlord
does not close on the purchase of the Land, for whatever reason, on or before
such date, this Lease shall automatically terminate and neither party shall
have any further obligations, except as may be specifically provided
hereunder. Landlord agrees to use best efforts to promptly close upon Land as
soon as reasonably practicable after the Tenant's Permitting Date. In the
event that Landlord is unable to purchase the Land on or prior to the
Contingency Date, and Tenant is not in default hereunder (beyond any
applicable notice and cure periods), Tenant shall purchase, and Landlord shall
make a quit claim conveyance to Tenant, of all assignable plans, permits,
materials, specifications, rights to purchase the Land and the Option Parcel,
and agreements relating to the Project at such time as Tenant has
18
<PAGE>
reimbursed Landlord for any costs and expenses incurred by Landlord in
connection with this Lease as of the effective date of such conveyance.
25.16 Right of First Refusal. Tenant shall have the Right of First
Refusal to purchase the Property subject to the terms and conditions set forth
in Exhibit F.
25.17 Landlord's Assignment of this Lease. Within a reasonable period
of time after the later to occur of the Office Building Rent Commencement Date
or the execution of an Acceptance Agreement by Landlord and Tenant with
respect to the Office Building, Landlord covenants and agrees to either (x)
sell, transfer, convey and assign all of its right, title and interest in and
to this Lease to First Industrial, L.P., a Delaware limited partnership
("FILP") or any other Landlord's Affiliate (such assignee being hereinafter
referred to as "Landlord's Transferee") to the extent such Landlord's
Affiliate's liabilities and obligations are guaranteed by FILP (subject to all
of the limitations herein set forth with respect to Landlord's liability),
which guarantee shall be in form reasonably acceptable to Tenant, or (y) cause
FILP to guarantee all of Landlord's liabilities and obligations pursuant to
the Lease (as such liabilities and obligations may be limited by the terms of
this Lease), which guarantee shall be in a form reasonably acceptable to
Tenant. Notwithstanding anything contained herein to the contrary, in the
event that such Landlord's Transferee sells, transfers, conveys or assigns its
right, title, interest, liability and obligation pursuant to this Lease on or
prior to the expiration of the Warranty Period, Landlord's Transferee shall
remain secondarily liable for the satisfaction of only Landlord's obligations
pursuant to Section 7 of Exhibit C. Nothing contained herein shall limit or
affect the provisions of Section 16 of this Lease and nothing contained herein
shall limit or restrict Landlord, FILP or any other successor or assign from
transferring its interest under this Lease.
19
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease
as of the day and year first above written.
LANDLORD: First Industrial Development Services Group, L.P.,
a Delaware limited partnership
By: FI Development Services Corporation,
a Maryland corporation, its general partner
By: /s/ Anthony Muscatello
----------------------------
Its: President
TENANT: Golden Books Family Entertainment, Inc.,
a Delaware corporation
By: /s/ Mitchell Grossman___________________
Its: Senior Vice President___________________
Acknowledged and agreed by First Industrial, L.P. for the limited
purpose of acknowledging its agreement and acceptance of
Section 25.17:
First Industrial, L.P., a Delaware limited partnership
By: First Industrial Realty Trust, Inc., a Maryland
corporation
By: /s/ Michael Brennan__________________________
Its: Chief Operating Officer______________________
<PAGE>
LEASE EXHIBIT A
PREMISES
The Premises shall consist of that certain parcel of land located in
Sturtevant, Wisconsin, and legally described on the attached Exhibit A-1 (the
"Land") together with all infrastructure and utilities (if any) currently
located on the Land (together with the Land, the "Property") and the
"Improvements" defined in Lease Exhibit C attached hereto.
<PAGE>
LEASE EXHIBIT B
RENTAL PAYMENTS
B.1 NET BASE RENT. Net Base Rent for both of the Printing Facility and the
Office Building portions of the Premises shall be determined based on Landlord
earning a cash-on-cash "all-in" yield of 11.05% of Total Project Costs (as
defined in Exhibit C); provided, however, that to the extent that any
Additional Landlord Funding Amounts (as defined in Exhibit C) have been
included by Landlord in the Total Project Costs, then Landlord shall be
entitled to earn (and Net Base Rent on such Additional Landlord Funding Amounts
shall be calculated on the basis of) a cash-on-cash all-in yield of 12.05% on
such Additional Landlord Funding Amounts and such amounts shall be amortized
over the initial Term of the Lease. By way of illustration, if the Total
Project Costs were to equal the Maximum Total Project Costs, Landlord would be
entitled to receive annual Net Base Rent of $2,372,918.55 ($5.09 per square
foot), which amount is equal to the product of (x) the Maximum Total Project
Costs and (y) 11.05%. The foregoing example is a hypothetical based upon
current estimates of the Project Budget, and shall in no event be deemed
binding as either a calculation of Net Base Rent or a determination of Total
Project Costs. Landlord will disclose to Tenant its Total Project Costs
(including, without limitation, any net increase or decrease in projected Total
Project Costs that occurs after completion of the Final Plans and
Specifications), it being the intention of the parties that Net Base Rent will
be calculated pursuant to verification of Total Project Costs under an "open
book" procedure. The parties anticipate that Landlord will receive $1,200,000
in proceeds of tax increment financing ("TIF Proceeds") from the Village of
Sturtevant ("Village"), subject to certain requirements with which the parties
will attempt to comply. It is acknowledged and agreed by the parties that (x)
the proposed Developer's Agreement by and between the Village, Landlord and the
Community Development Authority of the Village of Sturtevant provides that such
TIF Proceeds shall not be delivered to Landlord until the satisfaction of
certain contingencies following the Substantial Completion of the Improvements;
and (y) the TIF Proceeds shall be deducted from Total Project Costs only when,
as, if, and to the extent actually received by Landlord, and, prior to such
receipt, if any, the Total Project Costs used to determine Net Base Rent shall
exclude the TIF Proceeds. Total Project Costs shall include, without
limitation, the costs of all carrying costs accruing in connection with any
funds advanced by Landlord towards Total Project Costs that are later recovered
by Landlord in the form of TIF Proceeds.
It is acknowledged by the parties that the Printing Facility is projected
to be completed approximately 1 month in advance of the Office Building, and
that Tenant shall be obligated to commence paying Net Base Rent allocable to
the Printing Facility as of the Printing Facility Rent Commencement Date. As of
the Printing Facility Rent Commencement Date (and until the final determination
of Net Base Rent pursuant to this Exhibit B on or about the date of the
Substantial Completion of the Office Building), Tenant shall pay as annual Net
Base Rent allocable to the Printing Facility $5.09 per square foot of the
Printing Facility (the "Estimated Net Base Rent"). If and to the extent that
the estimated Total Project Costs referred to in the preceding paragraph are
greater or less than actual Total Project Costs (as the same may be increased
by Additional Landlord Funding Amounts on which Additional Landlord Funding
Amounts Landlord shall be entitled to earn a cash-on-cash "all-in" yield of
12.05% and such amounts shall be amortized over the initial Term of the Lease)
as determined following Substantial Completion of the Improvements, Net Base
Rent payable for the period between the Printing Facility Rent Commencement
Date and the Office Building Rent Commencement Date (the "Interim Period")
shall be recomputed by substituting such actual Total Project Costs for
estimated Total Project Costs in the formula set forth in the preceding
paragraph, and either (x) Landlord shall credit against the next installment(s)
of Net Base Rent due following such recomputation the amount, if any, by which
Net Base Rent for the Interim Period was overpaid, together with interest
thereon at the annual rate of 8%, or (y) Tenant shall pay to Landlord with the
next installment of Net Base Rent due following such recomputation the amount,
if any, by which Net Base Rent for the Interim Period was underpaid, together
with interest thereon at the annual rate of 8%. Landlord and Tenant shall
determine the amount of such difference simultaneously with the determination
(and, if applicable, any redetermination) of Net Base Rent pursuant to Section
B-3 hereof.
B.2 RENT ESCALATIONS. The Net Base Rent shall increase annually,
commencing with the second (2nd) anniversary of the Rent Commencement Date
through the end of the initial Term in the amount of 05/100s Dollars ($.05) per
square foot, but not during any
<PAGE>
Renewal Term, except as otherwise determined pursuant to the market rent
calculation for the Renewal Term.
B.3 DETERMINATION AND RECONCILIATION OF NET BASE RENT. Net Base Rent shall
be determined as of the Rent Commencement Date based on actual Total Project
Costs. To the extent that the amounts of any items to be included in or
credited against Total Project Costs are not then finally ascertainable, Net
Base Rent shall be determined using Landlord's best estimates of the amounts of
such items, except that no TIF Proceeds shall be credited against Total Project
Costs until actually received by Landlord. When the actual amounts of such
estimated items are finally ascertained and/or when Landlord actually receives
the TIF Proceeds, Net Base Rent shall be redetermined based on the actual
amounts thereof. If Net Base Rent as so redetermined is greater than or less
than Net Base Rent as previously determined, either: (i) Tenant shall pay to
Landlord with the next installment of Net Base Rent due following such
redetermination the amount, if any, by which Net Base Rent for any prior period
was underpaid, together with interest thereon at the annual rate of 8% or (ii)
Landlord shall credit against the next installment(s) of Base Rent due
following such redetermination the amount, if any, by which Net Base Rent for
any prior period was overpaid, together with interest thereon at the annual
rate of 8%.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
o Golden Books Publishing Company, Inc. (Delaware)
o LRM Acquisition Corp. (Delaware)
o Western Publishing Limited (Hong Kong)
o Golden Books Publishing (Canada), Inc.
o Golden Showcase Stores, Inc. (Delaware)
o Shari Lewis Enterprise, Inc. (California)
o Golden Books Home Video, Inc. (Delaware)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-18430, 33-18692, 33-18693 and 33-28019) and in the
Registration Statement (Form S-3 No. 333-34051) of Golden Books Family
Entertainment, Inc. and Subsidiaries of our report dated March 24, 1998, with
respect to the consolidated financial statements and schedules of Golden Books
Family Entertainment, Inc. included in this Annual Report (Form 10-K) for the
year ended December 27, 1997.
ERNST & YOUNG LLP
New York, New York
March 24, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-18430, 33-18692, 33-18693 and 33-28019 of Golden Books Family
Entertainment, Inc. and Subsidiaries (formerly Western Publishing Group, Inc.
and Subsidiaries) on Form S-8 of our report dated April 2, 1996, appearing in
the Annual Report on Form 10-K of Golden Books Family Entertainment, Inc. and
Subsidiaries for the year ended February 3, 1996.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000790706
<NAME> GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 57,411
<SECURITIES> 0
<RECEIVABLES> 78,609
<ALLOWANCES> 24,249
<INVENTORY> 34,659
<CURRENT-ASSETS> 170,346
<PP&E> 77,876
<DEPRECIATION> 39,620
<TOTAL-ASSETS> 323,164
<CURRENT-LIABILITIES> 74,566
<BONDS> 149,897
269
110,707
<COMMON> 65,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 323,164
<SALES> 242,481
<TOTAL-REVENUES> 243,561
<CGS> 176,238
<TOTAL-COSTS> 276,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,024
<INCOME-PRETAX> (49,643)
<INCOME-TAX> 37
<INCOME-CONTINUING> (49,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,680)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> 0<F1>
<FN>
<F1> For the attached financials, the value EPS-DILUTED is not applicable
</TABLE>
