<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997.
REGISTRATION NO. 333-33377
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
<TABLE>
<S> <C>
HEDSTROM HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0329830
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3944
(Primary Standard Industrial
Classification Code Number)
DAVID F. CROWLEY
585 SLAWIN COURT 585 SLAWIN COURT
MOUNT PROSPECT, ILLINOIS 60056 MOUNT PROSPECT, ILLINOIS 60056
(847) 803-9200 (847) 803-9200
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone
Number,
Including Area Code of Registrant's Including Area Code, of Agent for Service)
Principal Executive Offices)
</TABLE>
Copies to:
GLENN D. WEST
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT
SUITE 1300
DALLAS, TEXAS 75201
(214) 746-7700
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share....... 2,705,896 shares $1.25 $3,382,370 $1,024.96
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
HEDSTROM HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN
THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors;
Unaudited Pro Forma Consolidated Financial
Information; Selected Consolidated
Historical Financial Data of Holdings;
Selected Consolidated Historical Financial
Data of ERO; Business
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Selling Securityholders and Plan of
Distribution
8. Plan of Distribution................................. Front Cover Page of Prospectus; Selling
Securityholders and Plan of Distribution
9. Description of Securities to be Registered........... Description of Capital Stock
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Cover Page of Registration Statement;
Prospectus Summary; Risk Factors; Dividend
Policy; Unaudited Pro Forma Consolidated
Financial Information; Selected
Consolidated Historical Financial Data of
Holdings; Management's Discussion and
Analysis of Financial Condition and
Results of Operations of Hedstrom and
Holdings; Selected Consolidated Financial
Data of ERO; Management's Discussion and
Analysis of Financial Condition and
Results of Operations of ERO; Business;
Management; Stock Ownership and Certain
Transactions; Description of the Senior
Credit Facilities; Description of the
Senior Subordinated Notes; Description of
the Discount Notes; Legal Matters
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1997
PROSPECTUS
2,705,896 SHARES
OF
COMMON STOCK
OF
HEDSTROM HOLDINGS, INC.
This Prospectus relates to 2,705,896 shares (the "Shares") of common stock,
par value $.01 per share ("Holdings Common Stock") of Hedstrom Holdings, Inc., a
Delaware corporation ("Holdings"), which are being registered under the
Securities Act of 1933, as amended (the "Securities Act"), on behalf of the
holders thereof (the "Selling Securityholders") in order to permit their public
sale or other distribution. See "Selling Securityholders and Plan of
Distribution."
The Shares may be sold from time to time by the Selling Securityholders
through underwriters or dealers, through brokers or other agents, or directly to
one or more purchasers, at market prices prevailing at the time of sale or at
prices otherwise negotiated. Holdings will receive no portion of the proceeds of
the sale of the Shares and, except as described herein, will bear all expenses
incident to the registration of the Shares. The Selling Securityholders and any
broker-dealers, agents or underwriters that participate with the Selling
Securityholders in the distribution of the securities to which this Prospectus
relates may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of such
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Selling Securityholders and Plan of
Distribution" herein for indemnification arrangements between Holdings and the
Selling Securityholders.
Certain insiders, including Hicks, Muse, Tate & Furst Equity Fund III,
L.P., the directors and management of Holdings, and their respective affiliates,
will retain control of more than 90% of the Holdings Common Stock (on a fully
diluted basis), and thereby will directly control the election of the Board of
Directors and the outcome of all other matters requiring a vote and
consequently, the direction of the affairs of Holdings.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SHARES.
---------------------
There currently is no public market for the Shares. Holdings presently has
no intention of applying for listing of the Shares on any securities exchange or
for inclusion of any of the Shares in any automated quotation system. No
assurance can be given that an active market for the Shares will develop.
Holdings has not taken any action to register or qualify the Shares for
offer and sale under the securities or "blue sky" laws of any state of the
United States. However, pursuant to a Common Stock Registration Rights Agreement
dated June 9, 1997 among Holdings and the initial purchasers of the Shares (the
"Common Stock Registration Rights Agreement"), Holdings has agreed to register
or qualify or cooperate with the Selling Securityholders and their respective
counsel in connection with the registration or qualification of the Shares for
offer and sale under the securities or "blue sky" laws of such states of the
United States as any Selling Securityholder reasonably requests in writing and
to do any and all other acts or things necessary or advisable to enable the
offer and sale of the Shares in such jurisdictions; provided, however, that
Holdings shall not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified or (ii) take any action which
would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject. Unless and until such times as
offers and sales of the Shares by Selling Securityholders are registered or
qualified under applicable state securities or "blue sky" laws, or are otherwise
entitled to an exemption therefrom, initial resales by Selling Securityholders
will be materially restricted. Selling Securityholders are advised to consult
with their respective legal counsel prior to offering or selling any of their
Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1997.
<PAGE> 4
AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass any
amendments thereto) on Form S-1 under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all information set
forth in the Registration Statement and the exhibits thereto, to which reference
is hereby made. Although the Issuers believe that statements made in this
Prospectus as to the contents of any contract, agreement, or other document
describe all material elements of such documents, such statements are not
necessarily complete. With respect to each such contract, agreement, or other
document filed as an exhibit to the Registration Statement, reference is hereby
made to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
Upon the effectiveness of its Registration Statement on Form S-1 (File No.
333-32385) relating to, among other things, an exchange offer for its 12% Senior
Discount Notes due 2009, Holdings will become subject to the informational
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will be required to file reports
and other information with the Commission. Such reports and other information
can be inspected and copied at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
following Regional Offices of the Commission: Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611 and New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.
Holdings will furnish holders of the securities offered hereby with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year. The Issuers will also furnish such other reports as it may
determine or as may be required by law.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, such statements under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations Hedstrom and Holdings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of ERO," and
"Business" and located elsewhere herein are forward-looking statements. Although
the Issuers believe that the expectations reflected in such forward-looking
statements are reasonable, they can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus and/or under "Risk
Factors." All subsequent written or oral forward-looking statements attributable
to an Issuer or persons acting on behalf of an Issuer are expressly qualified in
their entirety by the Cautionary Statements.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus. As used in
this Prospectus, unless otherwise indicated or unless the context otherwise
requires, references herein to (i) the "Transactions" refer collectively to the
Acquisition (as defined) and the Financings (as defined), (ii) "Holdings" refer
to Hedstrom Holdings, Inc. and, where appropriate, its subsidiaries, (iii)
"Hedstrom" refer to Hedstrom Corporation and, where appropriate, its
subsidiaries, (iv) "ERO" refer to ERO, Inc. and, where appropriate, its
subsidiaries, and (v) the "Operating Company" refer to Hedstrom and its
subsidiaries and ERO and its subsidiaries on a combined basis after completion
of the Transactions, including the businesses conducted by Hedstrom and ERO
prior to the Transactions. Unless otherwise specified, all financial,
statistical and other data regarding the Operating Company contained herein is
presented on a pro forma basis after giving effect to the Transactions. Market
and market share data used throughout this Prospectus are estimates provided by
the management of the Operating Company. Such estimates are based on
management's internal research and experience in the Operating Company's
markets. Such estimates, while believed by management to be accurate, have not
been verified by any independent source.
HOLDING COMPANY STRUCTURE
Holdings is a holding company whose only material asset is the stock of
Hedstrom. Except for the performance of its obligations with respect to the
Discount Notes (as defined), the Senior Credit Facilities (as defined) and the
Holdings Guaranty (as defined), Holdings currently conducts all of its business
through the Operating Company.
THE OPERATING COMPANY
The Operating Company (consisting of the businesses of Hedstrom and ERO) is
a leading North American manufacturer and marketer of well-established
children's leisure and activity products. The Operating Company's diversified
product lines are in such "evergreen" product categories as outdoor gym sets,
wood gym kits and slides, spring horses, playballs, arts and crafts kits, game
tables, and licensed indoor sleeping bags, play tents and wall decorations. The
Operating Company considers such product categories to be "evergreen" in nature
because each is characterized by proven longevity, demonstrated market demand
and consistent sales over time. For example, the Operating Company believes
products such as outdoor gym sets and playballs have been marketed and sold in
the United States for over 30 years.
The Operating Company believes that in the U.S. markets for nine of its ten
principal product categories, it enjoys the competitive advantage of being the
market share leader, the low-cost producer or both. For the twelve-month period
ended December 31, 1996, approximately half of the Operating Company's pro forma
net sales were derived from product categories for which the Operating Company
believes it has a market share of approximately 75% or greater. As a result of
the Operating Company's leading market shares, the Operating Company enjoys
favorable relationships with its customers and suppliers and with licensors of
popular characters that decorate certain of the Operating Company's products.
The Operating Company believes its focus on evergreen product categories in
which it has competitive advantages provides consistent sales and cash flows.
The Operating Company's products are sold primarily through national retailers,
mass merchants, home improvement centers, sporting goods stores, drug store
chains and supermarkets.
COMPETITIVE STRENGTHS
The Operating Company believes that the following characteristics
contribute to the Operating Company's position as a leading manufacturer and
marketer of children's leisure and activity products:
- Leading Share in Selected Niche Markets. The Operating Company believes
its outdoor gym sets, spring horses, playballs, ball pits and licensed
sleeping bags and play tents each command market shares of approximately
75% or greater. Sales from these product categories accounted for
approximately half of
3
<PAGE> 6
the Operating Company's pro forma net sales for the twelve-month period
ended December 31, 1996. In addition, the Operating Company believes it
is one of the leading suppliers in the U.S. markets for wood gym kits and
slides, children's arts and crafts kits, game tables and wall
decorations. The Operating Company believes its position as a market
share leader in selected niche markets (i) provides the Operating Company
with certain advantages over existing competitors and prospective
entrants in such markets, (ii) creates the strong relationships with
retailers that are critical to securing and maintaining valuable retail
shelf space for existing and new products and (iii) provides a platform
for introducing new products.
- Stable and Established Product Categories. Substantially all of the
Operating Company's products are in evergreen categories within the
children's leisure and activity products industry. For example, the
Operating Company believes products such as outdoor gym sets and
playballs have been marketed and sold in the United States for over 30
years. The Operating Company believes its diverse portfolio of evergreen
products will contribute to stable revenues and cash flows, providing
resources for the Operating Company to implement its business strategies.
See "-- Business Strategy."
- Low-Cost Manufacturing Capabilities. The Operating Company believes that
it is the low-cost manufacturer in the markets for each major product
category which the Operating Company manufactures internally. The
Operating Company believes its leading market share in such niche markets
as outdoor gym sets, spring horses, playballs and ball pits provides it
with a significant cost advantage relative to smaller competitors in such
markets due to the Operating Company's greater sales volume and resultant
operating leverage and efficiencies. With respect to the Operating
Company's children's arts and crafts kits and game tables, the Operating
Company is able to realize cost advantages from the low labor rates, low
overhead and extensive vertical integration of its Canadian manufacturing
facility. The Operating Company believes its position as a low-cost
manufacturer will enable it to (i) maintain operating profit margins,
(ii) respond to competitive pressures through flexibility in pricing
strategies, (iii) realize sales growth by offering superior quality
products at competitive prices and (iv) expand its existing product lines
and enter new product categories.
BUSINESS STRATEGY
The Operating Company's strategy is to enhance its operating margins and
strengthen its position as a leading manufacturer and marketer of children's
leisure and activity products. The Operating Company plans to improve its
profitability by rationalizing its cost structure and utilizing the Operating
Company's excess capacity at certain of its facilities through, among other
things, pursuing counter-seasonal sales opportunities. Furthermore, the
Operating Company has identified several opportunities for revenue growth,
including enhancing existing products, introducing complementary products,
focusing its licensed products on traditional characters and pursuing
international sales opportunities.
- Achieve Cost Savings. Management believes it will realize annual cost
savings in excess of $6 million as a result of cost saving initiatives
implemented or being implemented as a result of the Acquisition, such as
rationalizing sales, marketing and general administrative functions,
consolidating purchases of raw materials and eliminating less profitable
product lines. Independent of the Acquisition, the Operating Company
expects to realize in excess of $9 million of permanent cost savings in
1997 and thereafter as a result of cost reduction programs implemented at
Hedstrom in the second half of 1996. See "-- Hedstrom 1996 Cost Reduction
Plan," "Unaudited Pro Forma Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Hedstrom and Holdings."
- Utilize Excess Capacity. The Operating Company produces its outdoor gym
sets, wood gym kits and slides at its facility in Bedford, Pennsylvania,
primarily in the period from December through April. During the balance
of the year, the Bedford facility remains relatively inactive. The
Operating Company believes it can enhance sales and profitability by
identifying products that it can manufacture during the May through
November period, either for itself or for original equipment
manufacturers ("OEMs"). The Operating Company has already identified
several products that it will begin producing in the second half
4
<PAGE> 7
of 1997. In addition, management is pursuing opportunities to increase
the utilization of its low-cost plastic molding operations at its
Ashland, Ohio facility, which already supplies a variety of components to
OEMs of industrial and consumer products.
- Enhance Existing Products and Develop Complementary Products. The
Operating Company has maintained sales growth and its leading market
shares by continuously enhancing its principal products and designing and
developing complementary products and accessories. Management believes
that by pursuing this strategy it can continue growth within its core
product lines with minimal economic risk. In addition, the Operating
Company will evaluate opportunities to expand its product lines, increase
its market shares and acquire complementary products through strategic
acquisitions.
- Focus Licensed Products on Traditional Characters. The Operating Company
believes that it can differentiate certain of its products and stimulate
sales more effectively and inexpensively through the licensing of
recognized traditional characters rather than the development and
promotion of its own brand names. For the Operating Company's products
lines that feature licensed characters, such as sleeping bags, play tents
and wall decorations, the Operating Company intends to emphasize
traditionally popular characters such as the classic Disney and Looney
Tunes(TM) characters, although the Operating Company will also complement
such characters by obtaining licenses for event-driven characters. The
Operating Company estimates that products featuring licensed traditional
characters (including products featuring the 101 Dalmatians characters,
which experienced increased sales in 1996 as a result of the release of a
new version of the 101 Dalmatians movie) accounted for approximately 14%
of the Operating Company's pro forma net sales for the twelve-month
period ended December 31, 1996, while products based on licensed
event-driven characters also accounted for approximately 14% of the
Operating Company's pro forma net sales for such period.
- Pursue International Sales Opportunities. To date, the Operating Company
has not focused a significant amount of resources toward the development
of an international customer base. For the twelve-month period ended
December 31, 1996, the Operating Company's pro forma net sales outside
the United States and Canada totaled less than 4% of the Operating
Company's total pro forma net sales. The Operating Company believes there
are significant sales opportunities for the Operating Company's products
in Europe and Latin America, particularly its children's arts and crafts
kits, outdoor gym sets, playballs and ball pits.
ACQUISITION RATIONALE
Hedstrom and ERO are leading manufacturers and marketers of children's
leisure and activity products. Hedstrom's principal products include outdoor gym
sets, wood gym kits and slides, spring horses, playballs and ball pits. ERO's
principal products include children's arts and crafts kits, game tables and
licensed indoor sleeping bags, play tents and wall decorations. The acquisition
of ERO by Hedstrom created one of the largest North American manufacturers and
marketers of children's evergreen leisure and activity products and provides
Hedstrom with (i) a more diverse portfolio of products, (ii) significant growth
potential through ERO's Amav division ("Amav"), (iii) decreased seasonality as a
result of more balanced sales throughout the year, (iv) significant cost savings
and operating efficiencies and (v) additional advantages resulting from
increased scale.
- Product Diversity in Well-Established Markets. The combination of
Hedstrom and ERO significantly reduces the Operating Company's dependence
on any particular product line while expanding the Operating Company's
overall presence in children's evergreen leisure and activity product
categories. With the combination of Hedstrom and ERO, the Operating
Company has ten principal product categories, with its largest product
line (outdoor gym sets) accounting for approximately 20% of the Operating
Company's pro forma net sales for the twelve-month period ending December
31, 1996.
- Growth Potential at Amav. In October 1995, ERO established its Amav
division through the acquisition of Amav Industries, Ltd., a
Canadian-based manufacturer of children's arts and crafts kits and game
tables. Amav has grown rapidly over the four-year period ended December
31, 1996, with sales increasing
5
<PAGE> 8
at a compound annual rate in excess of 40% over such period. Management
attributes Amav's success to its strategy of targeting large, established
product lines in which it can apply its design, engineering and
manufacturing expertise to produce a high-quality product at a lower cost
than its competitors. Management believes Amav's low-cost manufacturing,
design and engineering capabilities will enable the Operating Company to
continue to increase sales of its existing products lines as well as to
add complementary product lines.
- Reduced Seasonality. The combination of Hedstrom and ERO significantly
reduces the effect of seasonality on the Operating Company's business.
The peak selling season for Hedstrom's products is the first half of the
calendar year whereas the peak selling season for ERO's products is the
second half of the calendar year. As a result of the Acquisition, the
Operating Company's sales throughout the year will be relatively
balanced. Pro forma net sales for the Operating Company for each calendar
quarter during the twelve months ended December 31, 1996 were 24.6%,
26.5%, 22.8% and 26.1%, respectively, of total pro forma net sales for
such twelve-month period. Balanced sales throughout the year will reduce
seasonal fluctuations in working capital and will enable the Operating
Company to generate more consistent cash flow.
- Cost Savings. As discussed under "-- Business Strategy," management
believes that the cost saving initiatives which have been or which are
being implemented as a result of the combination of Hedstrom and ERO will
allow the Operating Company to realize cost savings in excess of $6
million per year.
- Additional Advantages Resulting from Increased Scale. With over $280
million in pro forma net sales for the twelve-month period ending
December 31, 1996, management believes the Operating Company will have
significantly more clout with retailers, suppliers and licensors than
either Hedstrom or ERO individually. In addition, management anticipates
that the Operating Company's size also will enable it to pursue
international sales opportunities more effectively.
HEDSTROM 1996 COST REDUCTION PLAN
From fiscal 1992 through fiscal 1995, Hedstrom's operating income increased
at a compound annual rate of approximately 33.5%. In fiscal 1996, Hedstrom's
operating income declined 52% relative to fiscal 1995. In addition, from fiscal
1992 through fiscal 1995, Hedstrom's EBITDA increased at a compound annual rate
of approximately 25%. In fiscal 1996, Hedstrom's EBITDA declined modestly. In
order to improve Hedstrom's profitability in 1997 and thereafter, management
implemented a plan in the second half of 1996 (the "1996 Cost Reduction Plan")
to reduce costs by over $9 million in 1997 and thereafter as compared with
fiscal 1996 levels. Important elements of the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. Through the
first six months of 1997, Hedstrom has successfully manufactured outdoor
gym sets on a just-in-time basis, resulting in significantly lower
warehouse and material handling expense as compared to the same period in
1996. The implementation of just-in-time manufacturing of outdoor gym
sets has enabled Hedstrom to carry a lower level of outdoor gym set
inventory and, as a result, to eliminate the need for utilizing third
party warehouses for outdoor gym sets. Management believes the Operating
Company will save approximately $2.1 million of warehouse and material
handling expense in 1997 and thereafter as a result of implementing
just-in-time manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product
6
<PAGE> 9
offerings, (ii) redesigned certain outdoor gym set components to reduce
the cost of such components and (iii) further standardized many of the
components among its various outdoor gym set product offerings.
Management believes these actions will improve profitability by
approximately $2.0 million in 1997 and thereafter over fiscal 1996
levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally is currently
providing annual cost savings of approximately $1.5 million as compared
to fiscal 1996 levels.
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand
over time. The total cost for this advertising program was approximately
$1.5 million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable return on investment
and elected to discontinue it. Therefore, such costs will not be incurred
in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
The implementation of the 1996 Cost Reduction Plan has resulted in marked
improvement in Hedstrom's profitability in 1997 and management expects that such
initiatives will continue to contribute to enhanced profitability during the
remainder of 1997. For the six months ended June 30, 1997, which includes the
results of ERO for the month of June 1997, Hedstrom recorded net sales and
operating income of $104.1 million and $14.2 million, respectively, as compared
with net sales and operating income for the comparable period in 1996 of $96.1
million and $8.1 million, respectively. Operating income as a percentage of net
sales increased to 14% for the six-month period ended June 30, 1997 from 8% for
the comparable period in 1996. The enhanced profitability of Hedstrom has
resulted in EBITDA of $17.0 million for the six-months ended June 30, 1997, as
compared with EBITDA for the comparable period in 1996 of $10.4 million. EBITDA
as a percentage of net sales increased to 16% for the six-months ended June 30,
1997 from 11% for the comparable period in 1996. Management believes the results
of operations of ERO for the period from June 1, 1997 through June 11, 1997,
prior to the tender, are not significant to Holdings results of operations for
the six-months ended June 30, 1997.
After giving pro forma effect to the Transactions, the Operating Company's
pro forma net sales and operating income for the twelve-month period ended
December 31, 1996 would have been $283.3 million and $24.2 million,
respectively. Also, after giving pro forma effect to the Transactions, pro forma
EBITDA for the twelve-month period ended December 31, 1996 would have been $38.7
million. Also, assuming the Transactions occurred and assuming implementation of
the 1996 Cost Reduction Plan at the beginning of the twelve-month period ended
December 31, 1996, pro forma net sales and operating income would have been
$283.3 million and $30.0 million, respectively. Also, assuming the Transactions
occurred and the 1996 Cost Reduction Plan was implemented at the beginning of
the twelve-month period ended December 31, 1996, pro forma EBITDA would have
been $44.5 million.
7
<PAGE> 10
THE TRANSACTIONS
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom ("Acquisition Co."), entered into an Agreement and Plan
of Merger with ERO (the "Merger Agreement") to acquire ERO for a total
enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, Acquisition Co. commenced a tender offer for all of the outstanding
shares of the common stock of ERO at a purchase price of $11.25 per share (the
"Tender Offer"). The Tender Offer was consummated on June 12, 1997. On that
date, subsequent to the consummation of the Tender Offer, (i) Acquisition Co.
was merged with and into ERO (the "Merger") with ERO surviving the Merger as a
wholly owned subsidiary of Hedstrom, (ii) certain of ERO's outstanding
indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and (iii)
Hedstrom refinanced (the "Hedstrom Refinancing") its then existing revolving
credit facility (the "Old Revolving Credit Facility") and term loan facility
(the "Old Term Loan Facility"). The Tender Offer, the Merger, the ERO
Refinancing and the Hedstrom Refinancing are collectively referred to herein as
the "Acquisition".
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to consummate the Acquisition were provided by (i)
$75.0 million of term loans (the "Tranche A Term Loans") under a new six-year
senior secured term loan facility (the "Tranche A Term Loan Facility"), (ii)
$35.0 million of term loans (the "Tranche B Term Loans" and, together with the
Tranche A Term Loans, the "Term Loans") under a new eight-year senior secured
term loan facility (the "Tranche B Term Loan Facility" and, together with the
Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1 million
of borrowings under a new $70.0 million senior secured revolving credit facility
(the "Revolving Credit Facility" and, together with the Term Loan Facilities,
the "Senior Credit Facilities"), (iv) $110.0 million of gross proceeds from the
offering (the "Original Senior Subordinated Notes Offering") by Hedstrom of its
10% Senior Subordinated Notes (the "Old Senior Subordinated Notes"), (v) $25.0
million of gross proceeds from the offering (the "Units Offering" and, together
with the Original Senior Subordinated Notes Offering, the "Original Offerings")
by Holdings of 44,612 units (the "Units") consisting of its 12% Senior Discount
Notes (the "Old Discount Notes") and 2,705,896 shares (the "Shares") of Common
Stock, $.01 par value per share, of Holdings ("Holdings Common Stock") and (vi)
$40.0 million of gross proceeds from the private placement (the "Equity Private
Placement" and, together with the Original Offerings and the borrowings under
the Senior Credit Facilities, the "Financings") of 31,520,000 shares of
Non-Voting Common Stock, $.01 par value per share, of Holdings ("Holdings
Non-Voting Common Stock") and 480,000 shares of Holdings Common Stock.
The following table sets forth the sources and uses of funds in connection
with the Transactions.
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS AMOUNT
---------------- ------ ------------- ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Revolving Credit Facility........ $ 16.1 Tender Offer/Merger.............. $122.6
Tranche A Term Loans............. 75.0 ERO Refinancing(a)............... 82.6
Tranche B Term Loans............. 35.0 Hedstrom Refinancing(a).......... 74.9
Original Senior Subordinated
Notes Fees and expenses(b)............. 21.0
------
Offering....................... 110.0
Units Offering................... 25.0
Equity Private Placement......... 40.0
------
Total Sources............... $301.1 Total Uses....................... $301.1
====== ======
</TABLE>
- ---------------
(a) Includes accrued interest expense.
(b) Fees and expenses include Initial Purchasers' discount, bank fees, financial
advisory fees, legal and accounting fees, printing costs and other expenses
related to the Transactions.
8
<PAGE> 11
ORGANIZATIONAL CHART
The following chart depicts (i) the summary organizational structure of
Holdings and the Operating Company and its material subsidiaries after
consummation of the Transactions and (ii) the sources of financing for the
Transactions.
[Flow-Chart]
DESCRIPTION OF ORGANIZATIONAL CHART
(FOR EDGAR PURPOSES ONLY)
The chart provided in the prospectus is a vertical flow-chart. The first (i.e.,
the top box of the flow chart) represents Holdings. It indicates that Holdings
received $25 million pursuant to the Units Offering and $40 million pursuant to
the Equity Private Placement. The second box in the flow chart represents
Hedstrom, and shows that Hedstrom is a direct, wholly owned subsidiary of
Holdings. It also indicates that Hedstrom received (i) $16.1 million pursuant to
borrowings under the Revolving Credit Facility(1), (ii) $75.0 million pursuant
to the Tranche A Term Loans, (iii) $35.0 million pursuant to the Tranche B Term
Loans and (iv) $110.0 million pursuant to the Original Senior Subordinated Notes
Offering. The third box of the flow chart represents ERO and shows that ERO is a
direct, wholly owned subsidiary of Hedstrom. The fourth and final box of the
flow chart represents all of the operating subsidiaries of ERO and shows that
such operating subsidiaries are direct or indirect wholly owned subsidiaries of
ERO.
- ---------------
(1) The Revolving Credit Facility provides for borrowings of up to $70 million
(subject to certain borrowing base requirements). See "Description of the
Senior Credit Facilities."
9
<PAGE> 12
MANAGEMENT AND OWNERSHIP
The principal shareholders of Holdings are Hicks, Muse, Tate & Furst Equity
Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse"), and certain members of Hedstrom's senior
management. Hicks Muse is a private investment firm based in Dallas, New York,
St. Louis and Mexico City that specializes in acquisitions, recapitalizations
and other principal investing activities. Since Hicks Muse's inception in 1989,
the firm has completed or has pending over 70 transactions having a combined
transaction value of approximately $19 billion. Hedstrom's senior management
team, led by Arnold E. Ditri, its President and Chief Executive Officer, has
extensive and diverse experience in managing consumer and industrial products
companies, especially within the confines of a leveraged capital structure.
In October 1995, HM Fund II, together with certain other investors (the "HM
Group"), acquired an 82% common equity interest in Holdings in a transaction
that was accounted for as a recapitalization (the "1995 Recapitalization"). The
total enterprise value of Hedstrom at the time of the 1995 Recapitalization,
including the assumption and refinancing of certain indebtedness, was
approximately $75 million. The HM Group paid approximately $27 million for its
common equity interest, which, together with Hedstrom senior management's 18%
retained common equity ownership, implied a total equity value of Holdings at
that time of approximately $33 million. Pursuant to the Equity Private
Placement, HM Fund II and certain affiliates thereof purchased an additional $40
million of Holdings' common equity.
PLAN OF DISTRIBUTION
As of June 30, 1997, there were 36,127,395 shares of Holdings Common Stock
and 31,520,000 shares of Holdings Non-Voting Common Stock (which may be
converted into shares of Holdings Common Stock at any time on a one-for-one
basis) outstanding. This Prospectus relates to 2,705,896 shares of Holdings
Common Stock, which are being registered under the Securities Act on behalf of
the Selling Securityholders in order to permit their public sale or other
distribution. See "Selling Securityholders and Plan of Distribution."
The Shares may be sold from time to time by Selling Securityholders through
underwriters or dealers, through brokers or other agents, or directly to one or
more purchasers, at market prices prevailing at the time of sale or at prices
otherwise negotiated. The Selling Securityholders and any broker-dealers, agents
or underwriters that participate with the Selling Securityholders in the
distribution of the securities to which this Prospectus relates may be deemed to
be "underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of such securities purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
There is currently no established public market for the Shares. Holdings
presently has no intention of applying for listing of the Shares on any
securities exchange or for inclusion of any of the Shares in any automated
quotation system. No assurance can be given that an active market for the Shares
will develop.
Holdings has not taken any action to register or qualify the Shares for
offer and sale under the securities or "blue sky" laws of any state of the
United States. However, pursuant to the Common Stock Registration Rights
Agreement, Holdings has agreed to register or qualify or cooperate with the
Selling Securityholders and their respective counsel in connection with the
registration or qualification of the Shares for offer and sale under the
securities or "blue sky" laws of such states of the United States as any Selling
Securityholder reasonably requests in writing and to do any and all other acts
or things necessary or advisable to enable the offer and sale of the Shares in
such jurisdictions; provided, however, that Holdings shall not be required to
(i) qualify generally to do business in any jurisdiction where it is not then so
qualified or (ii) take any action which would subject it to general service of
process or to taxation in any jurisdiction where it is not then so subject.
Unless and until such times as offers and sales of the Shares by Selling
Securityholders are registered or qualified under applicable state securities or
"blue sky" laws, or are otherwise entitled to an exemption therefrom, initial
resales by Selling Securityholders will be materially restricted. Selling
Securityholders are advised to consult with their respective legal counsel prior
to offering or selling any of their Shares.
10
<PAGE> 13
USE OF PROCEEDS
The Selling Securityholders will receive all proceeds from the sale of the
Shares. The Operating Company has agreed to pay all expenses related to the
registration of the Shares, except as described herein. Such expenses are
estimated at $216,024.96.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under "Risk Factors" for risks involved with an investment in
the New Notes.
11
<PAGE> 14
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma consolidated
financial data for Holdings and the Operating Company. The pro forma information
is derived from the "Unaudited Pro Forma Consolidated Financial Information"
contained elsewhere herein that gives pro forma effect to the Transactions. The
pro forma income statement and other financial data give effect to the
Transactions as if they were consummated on January 1, 1996. The pro forma
financial data do not purport to represent what the results of operations of the
Operating Company and Holdings and its subsidiaries would actually have been had
the Transactions in fact been consummated on the assumed date or to project the
results of operations of Holdings and its subsidiaries for any future period.
The pro forma information presented below is based on assumptions which
management believes are reasonable and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Hedstrom and Holdings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of ERO" and the consolidated
financial statements and the notes thereto for each of Holdings and ERO included
elsewhere herein.
<TABLE>
<CAPTION>
OPERATING COMPANY HOLDINGS
------------------------------- -------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1997 1996
---------------- ------------ ---------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $142,355 $283,307 $142,355 $283,307
Cost of sales..................... 102,315 198,846 102,315 198,846
-------- -------- -------- --------
Gross profit...................... 40,040 84,461 40,040 84,461
Selling, general and
administrative expenses........ 25,233 60,284 25,233 60,284
-------- -------- -------- --------
Operating income.................. 14,807 24,177 14,807 24,177
======== ======== ======== ========
Net income (loss)................. $ 1,102 $ (1,298) $ (26) $ (3,552)
======== ======== ======== ========
Net income (loss) per share(a).... $ .00 $ (.05)
======== ========
OTHER FINANCIAL DATA:
EBITDA(b)......................... $ 20,721 $ 38,694 $ 20,721 $ 38,694
EBITDA, as adjusted(c)............
Depreciation and
amortization(d)................ 5,914 11,967 5,914 11,967
Capital expenditures.............. 5,258 10,397 5,258 10,397
Cash interest expense(e).......... 11,498 22,969 11,623 23,219
Ratio (deficiency) of earnings to
fixed charges(f)............... 1.2x (680) 1.0x (4,316)
Ratio of EBITDA to cash interest
expense(g)..................... -- 1.7x -- 1.7x
Ratio of EBITDA to interest
expense(g)..................... -- 1.6x -- 1.4x
Ratio of debt to EBITDA(g)(h)..... -- 6.0x -- 6.6x
</TABLE>
footnotes on following page
12
<PAGE> 15
- ---------------
(a) Net income (loss) per share is based on the number of common shares
outstanding immediately after the Transactions, including the common shares
associated with the Units Offering and the Equity Private Placement.
Average common equivalent shares (stock options) have not been included in
the calculation of weighted average shares outstanding since their
inclusion would not be significant during these periods.
(b) EBITDA represents operating income plus depreciation, amortization, and,
for the twelve months ended December 31, 1996, certain other one-time
charges aggregating approximately $2.55 million, as follows: (i) $0.8
million related to a one-time design adjustment to one of Hedstrom's
outdoor gym set accessories to address certain alleged defects, (ii) a
non-cash inventory write-down of $0.75 million related to the mix shift in
Hedstrom's outdoor gym set product line, and (iii) a $1.0 million non-cash
write-off of advertising barter credits by Hedstrom in connection with its
decision to discontinue its trial advertising campaign. Management believes
EBITDA for the twelve months ended December 31, 1996, as adjusted for these
one-time charges, provides a more meaningful comparison of historical
results. EBITDA as determined by Holdings may not be comparable to the
EBITDA measure as reported by other companies. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow or operating income (as measured by GAAP) or as a measure of
liquidity. In addition, this measure does not represent funds available for
discretionary use. It is included herein to provide additional information
with respect to the ability of Holdings to meet its future debt service,
capital expenditures and working capital requirements. Cash flows provided
by operating activities, as measured by GAAP, plus interest expense, does
not materially differ from EBITDA as reported.
(c) EBITDA, as adjusted represents the following for the year ended December
31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING
COMPANY HOLDINGS
--------- --------
<S> <C> <C>
EBITDA as defined in (b) above........................... $38,694 $38,694
1996 Cost Reduction Plan................................. 5,800 5,800
------- -------
EBITDA, as adjusted...................................... $44,494 $44,494
======= =======
</TABLE>
Management of Hedstrom implemented the 1996 Cost Reduction Plan in the fall
of 1996 to reduce costs of Hedstrom in 1997 and thereafter as compared with
1996 levels. Important elements of the plan include reductions in
manufacturing costs, elimination of certain full-time employees, the
discontinuation of certain advertising programs and the reduction of
warehouse and shipping costs. Refer to Note (i) of the "Unaudited Pro Forma
Consolidated Financial Information" contained elsewhere herein for a
detailed description of the 1996 Cost Reduction Plan.
(d) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
(e) Excludes non-cash interest expense on the Discount Notes and non-cash
amortization of debt issuance costs.
(f) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of (i) interest, whether expensed or capitalized;
(ii) amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be one-
third). Due to the seasonal nature of Hedstrom's business, the ratio of
earnings to fixed charges for the six months ended June 30, 1996 and June
30, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
(g) A significant portion of the Operating Company's EBITDA is generated by its
Amav division in the second half of the Operating Company's fiscal year. As
a result, the ratios of EBITDA to cash interest expense, EBITDA to interest
expense, and total debt to EBITDA for the six months ended June 30, 1997
are not accurate representations of full-year results.
(h) Calculated using pro forma debt as of December 31, 1996 and pro forma
EBITDA for the year ended December 31, 1996 for Hedstrom and Holdings.
13
<PAGE> 16
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HOLDINGS
The summary information below represents financial information of Holdings
and its subsidiaries for each of the fiscal years indicated in the three-year
period ended July 31, 1996, for the five-month periods ended December 31, 1995
and December 31, 1996, and for the six-month periods ended June 30, 1996 and
June 30, 1997, which information was derived from the audited consolidated
financial statements of Holdings for each of the fiscal years in the three-year
period ended July 31, 1996, from the audited consolidated financial statements
of Holdings for the five-month period ended December 31, 1996, and from the
unaudited consolidated financial statements of Holdings for the five-month
period ended December 31, 1995 and the six-month periods ended June 30, 1996 and
June 30, 1997. Income statement and other financial data for the six months
ended June 30, 1997 reflects the operations of ERO for the month of June 1997
and the balance sheet data as of June 30, 1997 includes the Transactions.
Holdings historically had a fiscal year ending July 31 but switched its fiscal
year to December 31, effective in 1997.
<TABLE>
<CAPTION>
FIVE MONTHS
SIX MONTHS ENDED ENDED
JUNE 30, DECEMBER 31, FISCAL YEAR ENDED JULY 31,
-------------------- ------------------- ------------------------------
1997 1996 1996 1995 1996 1995 1994
--------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $ 104,051 $ 96,059 $ 23,994 $ 31,792 $133,194 $133,862 $108,655
Cost of sales......................... 73,579 72,897 21,973 26,000 105,068 107,312 87,170
--------- -------- -------- -------- -------- -------- --------
Gross profit.......................... 30,472 23,162 2,021 5,792 28,126 26,550 21,485
Selling, general and administrative
expenses............................ 16,242 15,107 7,546 7,067 24,603 19,207 18,181
--------- -------- -------- -------- -------- -------- --------
Operating income (loss)............... 14,230 8,055 (5,525) (1,275) 3,523 7,343 3,304
OTHER FINANCIAL DATA:
Net cash provided by (used for):
Operating activities................ $ (6,968) $(12,725) $ 2,978 $(19,209) $(17,744) $ 396 $ 1,344
Investing activities................ (126,046) (4,792) (1,309) (1,342) (6,490) (2,574) (2,988)
Financing activities................ 135,646 17,706 (9,134) 19,842 31,135 2,899 1,060
EBITDA(a)............................. 16,997 10,377 (3,549) (393) 9,420 10,088 5,529
Depreciation and amortization(b)...... 2,767 2,322 1,976 882 3,347 2,745 2,225
Capital expenditures.................. 3,446 4,792 1,376 1,342 6,738 2,574 2,988
Ratio (deficiency) of earnings to
fixed charges(c).................... 3.0x 2.2x (7,640) (12,648) (11,973) 1.6x 1.1x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $ 349,962 $100,206 $ 72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005
Total debt (including current
maturities)......................... 255,389 77,956 60,171 57,750 69,306 32,710 29,811
Stockholders' equity (deficit)........ 44,332 4,556 (3,097) 2,055 1,674 15,392 14,647
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation and amortization and,
for the twelve months ended July 31, 1996, certain other one-time charges
aggregating $2.55 million (see "Unaudited Pro Forma Consolidated Financial
Information"). Management believes EBITDA for the twelve months ended
December 31, 1996, as adjusted for these one-time charges, provides a more
meaningful comparison of historical results. EBITDA as determined by
Holdings may not be comparable to the EBITDA measure as reported by other
companies. EBITDA is not intended to represent cash flow from operations as
defined by GAAP and should not be considered as an indicator of operating
performance or an alternative to cash flow or operating income (as measured
by GAAP) or as a measure of liquidity. In addition, this measure does not
represent funds available for discretionary use. It is included herein to
provide additional information with respect to the ability of Holdings to
meet its future debt service, capital expenditures and working capital
requirements.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred financing costs that is included in interest
expense.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of (i) interest, whether expensed or capitalized;
(ii) amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be one-
third). Due to the seasonal nature of Hedstrom's business, the ratio of
earnings to fixed charges for the six months ended June 30, 1996 and June
30, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
14
<PAGE> 17
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF ERO
The summary information below represents financial information of ERO and
its subsidiaries for each of the fiscal years indicated in the three-year period
ended December 31, 1996, and for the three-month periods ended March 31, 1996
and March 31, 1997, which information was derived from the audited consolidated
financial statements of ERO for each of the fiscal years in the three-year
period ended December 31, 1996, and from the unaudited consolidated financial
statements of ERO for the three-month periods ended March 31, 1996 and March 31,
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $ 19,939 $ 18,883 $157,913 $128,722 $126,734
Cost of sales......................... 13,814 13,264 97,802 80,693 79,776
-------- -------- -------- -------- --------
Gross profit.......................... 6,125 5,619 60,111 48,029 46,958
Selling, general and administrative
expenses........................... 7,763 7,553 38,896 33,183 34,078
-------- -------- -------- -------- --------
Operating income (loss)............... (1,638) (1,934) 21,215 14,846 12,880
OTHER FINANCIAL DATA:
Net cash provided by (used for):
Operating activities............... $ 12,708 $ 4,793 $ (1,277) $ 5,582 $ 8,832
Investing activities............... (289) (448) (3,619) (56,867) (6,442)
Financing activities............... (16,149) (3,628) 9,836 51,239 (2,515)
EBITDA(a)............................. (315) (590) 26,504 18,411 15,949
Depreciation and amortization(b)...... 1,323 1,344 5,289 3,565 3,069
Capital expenditures.................. 289 448 3,625 1,772 1,287
Ratio (deficiency) of earnings to
fixed charges(c)................... (3,648) (3,780) 2.2x 5.9x 5.5x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $136,381 $131,353 $159,994 $144,138 $ 56,792
Total debt (including current
maturities)........................ 79,431 82,041 95,640 84,998 11,875
Stockholders' equity.................. 40,649 32,789 43,014 36,064 27,997
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
EBITDA as determined by ERO may not be comparable to the EBITDA measure as
reported by other companies. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow or
operating income (as measured by GAAP) or as a measure of liquidity. In
addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect
to the ability of ERO to meet its future debt service, capital expenditures
and working capital requirements.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred financing costs that is included in interest
expense.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of the total of (i) interest, whether expensed or
capitalized; (ii) amortization of debt expense and discount or premium
relating to any indebtedness, whether expensed or capitalized; and (iii)
that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of ERO's business,
the ratio of earnings to fixed charges for the three months ended March 31,
1996 and March 31, 1997 are not accurate representations of full year
results. If the ratio is less than 1.0x, the deficiency is shown.
15
<PAGE> 18
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the Shares offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Operating Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the risk factors set forth below.
RECENT NET LOSSES
For the fiscal years ended July 31, 1994 and July 31, 1996, and for the
five-month period ended December 31, 1996, Holdings had net losses of
approximately $3.0 million, $8.1 million and $4.8 million, respectively. For the
fiscal year ended July 31, 1995, Holdings had net income of $745,000. After
giving pro forma effect to the Transactions, Holdings would have had a net loss
of approximately $3.6 million, or less than $0.05 per share, for the twelve
months ended December 31, 1996 and a net loss of $26,000 for the six months
ended June 30, 1997.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
Holdings and Hedstrom incurred a substantial amount of indebtedness in
connection with the Transactions. As of June 30, 1997, Holdings had $255.4
million of consolidated indebtedness and $44.3 million of consolidated
shareholders' equity, and Hedstrom had $231.3 million of consolidated
indebtedness and $67.5 million of consolidated shareholder's equity. For the
twelve months ended December 31, 1996, Holdings and Hedstrom had deficiencies of
earnings to fixed charges of $7.0 million and $6.7 million, respectively. After
giving pro forma effect to the Transactions, Holdings' deficiency of earnings to
fixed charges would have been $4.3 million for the twelve months ended December
31, 1996, and Hedstrom's deficiency of earnings to fixed charges would have been
$0.7 million for the twelve months ended December 31, 1996. See
"Capitalization", "Summary Historical Consolidated Financial Data of Holdings"
and "Unaudited Pro Forma Consolidated Financial Information." Holdings and
Hedstrom may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments and documents governing their
respective indebtedness. See "Description of Senior Credit Facilities,"
"Description of the Senior Subordinated Notes" and "Description of the Discount
Notes." Accordingly, Holdings and Hedstrom will have significant debt service
obligations.
Holdings' and Hedstrom's high degree of leverage could have important
consequences to holders of the Shares, including the following: (i) a
substantial portion of Hedstrom's cash flow from operations will be dedicated to
the payment of principal of, premium (if any) and interest on its indebtedness,
thereby reducing the funds available for operations, distributions to Holdings
for payments with respect to the Discount Notes, future business opportunities
and other purposes and increasing the vulnerability of Hedstrom to adverse
general economic and industry conditions; (ii) the ability of Holdings and
Hedstrom to obtain additional financing in the future may be limited; and (iii)
certain of Hedstrom's borrowings (including, without limitation, amounts
borrowed under the Senior Credit Facilities) will be at variable rates of
interest, which will expose Hedstrom to increases in interest rates.
Holdings' and Hedstrom's ability to make scheduled payments of the
principal of, or to pay interest on, or to refinance their respective
indebtedness will depend on Hedstrom's future performance, which to a certain
extent will be subject to economic, financial, competitive and other factors
beyond its control. Notwithstanding Holdings' and Hedstrom's deficiencies of
earnings to fixed charges for the twelve months ended December 31, 1996,
management believes that based upon Hedstrom's current operations and
anticipated growth, future cash flow from operations, together with Hedstrom's
available borrowings under the Revolving Credit Facility, will be adequate to
meet Holdings' and Hedstrom's respective anticipated requirements for capital
expenditures, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Hedstrom and Holdings -- Results of Operations" and "-- Liquidity
and Capital Resources." There can be no assurance, however, that Hedstrom's
business will continue to generate sufficient cash flow from operations in the
future to service its and Holdings' respective indebtedness and make necessary
capital expenditures. If unable to do so, Holdings and Hedstrom may be required
to refinance all or a
16
<PAGE> 19
portion of their respective indebtedness, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing would be
possible, that any assets could be sold (or, if sold, of the timing of such
sales and the amount of proceeds realized therefrom) or that additional
financing could be obtained.
ABSENCE OF PUBLIC TRADING MARKET
There is currently no established public market for the Shares. Holdings
presently has no intention of applying for listing of the Shares on any
securities exchange or for inclusion of any of the Shares in any automated
quotation system. No assurance can be given that an active market for the Shares
will develop.
ABSENCE OF REGISTRATION OR QUALIFICATION UNDER STATE SECURITIES OR BLUE SKY LAWS
Holdings has not taken any action to register or qualify the Shares for
offer and sale under the securities or "blue sky" laws of any state of the
United States. However, pursuant to a Common Stock Registration Rights Agreement
dated June 9, 1997 among Holdings and the initial purchasers of the Shares,
Holdings has agreed to register or qualify or cooperate with the Selling
Securityholders and their respective counsel in connection with the registration
or qualification of the Shares for offer and sale under the securities or "blue
sky" laws of such states of the United States as any Selling Securityholder
reasonably requests in writing and to do any and all other acts or things
necessary or advisable to enable the offer and sale of the Shares in such
jurisdictions; provided, however, that Holdings shall not be required to (i)
qualify generally to do business in any jurisdiction where it is not then so
qualified or (ii) take any action which would subject it to general service of
process or to taxation in any jurisdiction where it is not then so subject.
Unless and until such times as offers and sales of the Shares by Selling
Securityholders are registered or qualified under applicable state securities or
"blue sky" laws, or are otherwise entitled to an exemption therefrom, initial
resales by Selling Securityholders will be materially restricted. Selling
Securityholders are advised to consult with their respective legal counsel prior
to offering or selling any of their Shares.
HOLDING COMPANY STRUCTURE
Holdings is a holding company whose only material asset is the stock of
Hedstrom. Except for the performance of its obligations with respect to Discount
Notes, the Senior Credit Facilities and the Holdings Guaranty, Holdings
currently conducts all of its business through the Operating Company. Holdings
will depend on distributions from Hedstrom to meet its debt service obligations
and to make any distributions to its stockholders. Because of the substantial
leverage of both Hedstrom and Holdings and the dependence of Holdings upon the
operating performance of the Operating Company to generate cash for distribution
to Holdings, there can be no assurance that any such distributions will be
adequate to fund all of Holdings' debt service obligations or to permit it to
make any distributions to its stockholders. In addition, the Credit Agreement
(as defined), the Senior Subordinated Notes Indenture (as defined) and
applicable federal and state law will impose restrictions on the payment of
dividends and the making of loans by Hedstrom to Holdings.
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Credit Agreement (as defined), the Senior Subordinated Notes Indenture
(as defined) and the Discount Notes Indenture (as defined) contain numerous
restrictive covenants, including, but not limited to, covenants that restrict
Holdings' and Hedstrom's ability to incur indebtedness, pay dividends, create
liens, sell assets, engage in certain mergers and acquisitions and refinance
indebtedness. In addition, the Credit Agreement will also require Hedstrom to
maintain certain financial ratios. The ability of Holdings and Hedstrom to
comply with the covenants and other terms of the Credit Agreement, the Senior
Subordinated Notes Indenture and the Discount Notes Indenture, and to satisfy
their other respective debt obligations (including, without limitation,
borrowings and other obligations under the Credit Agreement) will depend on the
future operating performance of Hedstrom. In the event Holdings or Hedstrom
fails to comply with the various covenants contained in the Credit Agreement,
the Senior Subordinated Notes Indenture or the Discount Notes Indenture, as
applicable, it would be in default thereunder, and in any such case, the
maturity of substantially all of its long-term indebtedness could be
accelerated. See "Description of the Senior Credit Facilities," "Description of
the Senior Subordinated Notes"
17
<PAGE> 20
and "Description of the Discount Notes." Holdings and Hedstrom currently are in
compliance with all covenants contained in the Credit Agreement, the Senior
Subordinated Notes Indenture and the Discount Notes Indenture.
RELIANCE ON KEY CUSTOMERS
After giving pro forma effect to the Transactions, the Operating Company's
pro forma net sales to Toys "R" Us, Wal-Mart, Kmart and Target (its four largest
customers) during the twelve-month period ended December 31, 1996 would have
accounted for 16%, 17%, 10% and 7%, respectively, of the Operating Company's pro
forma net sales during such period. Although the Operating Company has
well-established relationships with its key customers, the Operating Company
does not have long-term contracts with any of them. A decrease in business from
any of its key customers could have a material adverse effect on the Operating
Company's results of operations and financial condition. See
"Business -- Customers."
DEPENDENCE ON KEY LICENSES AND ON OBTAINING NEW LICENSES
After giving pro forma effect to the Transactions, approximately 28% of the
Operating Company's pro forma net sales for the twelve months ended December 31,
1996 would have been derived from sales of licensed products. Approximately 67%
of such net sales would have been attributable to licenses covering ten licensed
characters and approximately 44% of such net sales would have been derived from
licenses with Disney Enterprises, Inc. and its affiliates. Although the
Operating Company intends to renew key existing licenses and to obtain new
licenses, there can be no assurance that the Operating Company will be able to
do so. The failure to renew key existing licenses or obtain new licenses could
inhibit the Operating Company's ability to effectively compete in the licensed
product market, which could in turn have a material adverse effect on the
Operating Company. A significant segment of the Operating Company's business is
dependent on obtaining new licenses for its products. The Operating Company
believes that the introduction of products with new licenses and the
introduction of new licenses for existing products are material to its continued
growth and profitability. In addition, the success of the Operating Company's
products bearing a particular licensed character is based on the popularity of
the character, the level of which changes from year to year. Consequently, the
success of the Operating Company's licensed products business is dependent upon
obtaining new licenses for popular characters. No assurance can be given that
the Operating Company will be able to acquire new licenses for popular
characters. See "Business -- Technology and Licensing."
RAW MATERIALS PRICES
The principal raw materials in most of the Operating Company's products are
plastic resins, plastic components, steel and corrugated cardboard. The prices
for such raw materials are influenced by numerous factors beyond the control of
the Operating Company, including general economic conditions, competition, labor
costs, import duties and other trade restrictions and currency exchange rates.
Changing prices for such raw materials may cause the Operating Company's results
of operations to fluctuate significantly. Although the Operating Company has not
experienced material adverse effects from price changes in the past, a large,
rapid increase in the price of raw materials could have a material adverse
effect on the Operating Company's operating margins unless and until the
increased cost can be passed along to customers.
INTEGRATION OF ERO AND IMPLEMENTATION OF BUSINESS STRATEGY
Hedstrom has no previous experience acquiring and integrating a business as
large as ERO. Successful integration of ERO's operations will depend primarily
on Hedstrom's ability to manage ERO's manufacturing facilities and to eliminate
redundancies and excess costs. There can be no assurance that Hedstrom can
successfully integrate ERO's operations and any failure or inability to do so
may have a material adverse effect on the Operating Company's results of
operations.
In addition, the Operating Company intends to continue the implementation
of its business strategy, an element of which is to achieve significant annual
cost savings. The Operating Company's ability to successfully implement its
business strategy, and to achieve the estimated cost savings, is subject to a
number of factors, many of which are beyond the control of the Operating
Company. There can be no assurance that the Operating
18
<PAGE> 21
Company will be able to continue to successfully implement its business strategy
or that the Operating Company will be able to achieve the estimated cost
savings. A failure to successfully implement its business strategy or to achieve
the estimated cost savings may have a material adverse effect on the Operating
Company's results of operations. See "Prospectus Summary -- Business Strategy."
COMPETITION AND IMPORTANCE OF NEW PRODUCT INTRODUCTIONS AND ENHANCEMENTS
The children's leisure and activity product market is highly competitive.
Notwithstanding the competitive nature of the market, the Operating Company has
been able to establish itself as the market share leader in certain niche
markets within the overall children's leisure and activity product market by
introducing innovative new products and regularly enhancing existing products.
The Operating Company believes that new product introductions and enhancements
of existing products are material to its continued growth and profitability. No
assurance can be given that the Operating Company will continue to be successful
in introducing new products or further enhancing existing products. See
"Business -- Competition."
INVENTORY MANAGEMENT; DISTRIBUTION
The Operating Company's key customers use inventory management systems to
track sales of particular products and rely on reorders being rapidly filled by
suppliers, rather than maintaining large on-hand inventories to meet consumer
demand. While these systems reduce a retailer's investment in inventory, they
increase pressure on suppliers like the Operating Company to fill orders
promptly and shift a portion of the retailer's inventory risk onto the supplier.
Production of excess products by the Operating Company to meet anticipated
demand could result in increased inventory carrying costs for the Operating
Company. In addition, if the Operating Company fails to anticipate the demand
for its products, it may be unable to provide adequate supplies of popular
products to retailers in a timely fashion and may consequently lose potential
sales. Moreover, disruptions in shipments from the Operating Company's vendors
or from the Operating Company's warehouse facilities could have a material
adverse effect on the business, financial condition and results of operations of
the Operating Company.
GOVERNMENT REGULATIONS
The Operating Company is subject to the provisions of, among other laws,
the Federal Hazardous Substances Act and the Federal Consumer Product Safety
Act. Those laws empower the Consumer Product Safety Commission (the "CPSC") to
protect consumers from hazardous products and other articles. The CPSC has the
authority to exclude from the market products which are found to be unsafe or
hazardous and can require a manufacturer to recall such products under certain
circumstances. Similar laws exist in some states and cities in the United States
and in Canada and Europe. While the Operating Company believes that it is, and
will continue to be, in compliance in all material respects with applicable
laws, rules and regulations, there can be no assurance that the Operating
Company's products will not be found to violate such laws, rules and
regulations, or that more restrictive laws, rules or regulations will not be
adopted in the future which could make compliance more difficult or expensive or
otherwise have a material adverse effect on the Operating Company's business,
financial condition and results of operations.
PRODUCT LIABILITY RISKS
The Operating Company's products are used for and by small children. The
Operating Company carries product liability insurance in amounts which
management deems adequate to cover risks associated with such use; however,
there can be no assurance that existing or future insurance coverage will be
sufficient to cover all product liability risks. See "Business -- Legal
Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Operating Company's success will depend largely on the efforts and
abilities of, among others, Arnold E. Ditri, David F. Crowley, Alastair
McKelvie, John Dellos and Alfred C. Carosi, its executive officers. There can be
no assurance that the Operating Company will be able to retain all of such
executive officers. The failure of
19
<PAGE> 22
such executive officers to remain active in the Operating Company's management
could have a material adverse effect on the Operating Company's operations. See
"Management."
SEASONALITY
Historically, Hedstrom and ERO each experienced a significant seasonal
pattern in sales and cash flow. During each of the twelve-month periods ended
July 31, 1994, July 31, 1995 and July 31, 1996, approximately 67%, 74% and 76%,
respectively, of Hedstrom's net sales were realized during the first and second
calendar fiscal quarters. During each of the twelve month periods ended December
31, 1994, December 31, 1995, and December 31, 1996, approximately 59%, 59% and
69%, respectively, of ERO's net sales were realized during the third and fourth
calendar quarters. Although one of the Operating Company's business strategies
is to pursue opportunities for counter-seasonal sales (including new product and
OEM sales) and the Operating Company expects decreased exposure to seasonality
as a result of the Acquisition, the Operating Company expects that its business
will continue to experience a seasonal pattern for the foreseeable future.
Because of such seasonality, the sales of a substantial portion of each of the
Operating Company's product categories are concentrated in relatively short
periods of time during the year. As a result, a failure by the Operating Company
to ship any such product to the marketplace within the limited selling period
would have a material adverse effect on sales of such product and could in turn
have a material adverse effect on the Operating Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Hedstrom and
Holdings -- Seasonality" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of ERO -- Seasonality."
FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS
As part of the Operating Company's business strategy, it is seeking to
expand its international sales base. International operations and exports to
foreign markets are subject to a number of special risks, including currency
exchange rate fluctuations, trade barriers, exchange controls, national and
regional labor strikes, political risks and risks of increases in duties, taxes
and governmental royalties, as well as changes in laws and policies governing
operations of foreign-based companies. In addition, earnings of foreign
subsidiaries and intercompany payments are subject to foreign income tax rules
that may reduce cash flow available to meet required debt service and other
obligations of the Operating Company.
In 1996, ERO's sales to customers outside the United States were
approximately $21.3 million, or approximately 13% of ERO's total sales. However,
$25.8 million, or 26.5% of ERO's cost of sales were denominated in Canadian
dollars. Foreign denominated selling, general and administrative expenses and
interest expense were $5.8 million and $0.5 million, respectively. Accordingly,
the Operating Company's revenues, cash flows and earnings may be affected by
fluctuations in certain foreign exchange rates, principally between the United
States dollar and the Canadian dollar, which may also have adverse tax effects.
In addition, because a portion of the Operating Company's sales, costs of goods
sold and other expenses are denominated in Canadian dollars, the Operating
Company has a translation exposure to fluctuations in the Canadian dollar
against the U.S. dollar. Although the Operating Company has not experienced
material adverse consequences from currency fluctuations in the past, there can
be no assurance that currency fluctuations would not have a material impact on
the Operating Company in the future as increases in the value of the Canadian
dollar have the effect of increasing the U.S. dollar equivalent of cost of goods
sold and other expenses with respect to the Operating Company's Canadian
production facilities. The Operating Company does not have any hedging programs
in place that would reduce its exposure to currency fluctuations.
CONTROL BY EXISTING STOCKHOLDERS
Hicks Muse and certain of its affiliates control approximately 68% of the
outstanding shares of Holdings Common Stock (approximately 80% on a
fully-diluted basis) and thereby directly control the election of the Board of
Directors and the outcome all other matters requiring a vote and consequently,
the direction of the affairs of Holdings. Pursuant to the Stockholder's
Agreement (as defined), Hicks Muse and its affiliates have preemptive rights
with respect to certain offerings by Holdings of Holdings Common Stock (or
equivalents thereof), as well as tag-along and drag-along rights with respect to
sales of Holdings Common Stock by the other
20
<PAGE> 23
parties to the Stockholders Agreement. As a result, Hicks Muse and its
affiliates will be entitled to maintain, and possibly increase, their ownership
percentage of Holdings Common Stock. See "Stock Ownership and Certain
Transactions."
USE OF PROCEEDS
This Prospectus has been prepared for use by Selling Securityholders in
sales of Shares. Holdings will receive no proceeds from the sales of Shares by
Selling Securityholders, but will bear all expenses related to the registration
of the Shares, except as described herein. Such expenses are estimated at
$216,024.96.
DIVIDEND POLICY
Holdings has not paid any dividends on the Holdings Common Stock and does
not anticipate paying dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of Holdings' Board of Directors and
will depend upon, among other things, future earnings, capital requirements,
general business conditions and legal restrictions on the payment of dividends.
In addition, the Credit Agreement, the Senior Subordinated Notes Indenture and
the Discount Notes Indenture restrict Holdings' ability to pay cash dividends to
its stockholders. See "Description of the Senior Credit Facilities,"
"Description of the Senior Subordinated Notes" and "Description of the Discount
Notes."
21
<PAGE> 24
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the capitalization
of Hedstrom and (ii) the capitalization of Holdings. The information set forth
below should be read in conjunction with "Unaudited Pro Forma Consolidated
Financial Information" and the consolidated financial statements and the notes
thereto of each of Holdings and ERO included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------
HEDSTROM HOLDINGS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total debt:
Revolving Credit Facility................................. $ 2,700 $ 2,700
Tranche A Term Loans...................................... 75,000 75,000
Tranche B Term Loans...................................... 35,000 35,000
Senior Subordinated Notes................................. 110,000 110,000
Senior Discount Notes..................................... -- 21,618
Other debt(a)............................................. 8,571 11,071
-------- --------
Total debt........................................ 231,271 255,389
-------- --------
Stockholders' equity(b)..................................... 67,471 44,332
-------- --------
Total capitalization......................... $298,742 $299,721
======== ========
</TABLE>
- ---------------
(a) Other debt of Holdings consists of a $3.5 million Industrial Revenue Bond,
$2.5 million of notes issued in connection with the 1995 Recapitalization
(the "1995 Recapitalization Notes"), a $1.6 million mortgage loan on an ERO
facility, $3.5 million of ERO equipment loans and capital leases and
miscellaneous other debt. Other debt of Hedstrom consists of the other debt
of Holdings other than the 1995 Recapitalization Notes.
(b) Holdings stockholders' equity includes the $27 million investment by the HM
Group as part of the 1995 Recapitalization less certain accounting
adjustments related to the 1995 Recapitalization (see "Prospectus
Summary -- Management and Ownership"), plus $40 million from the Equity
Private Placement, less certain transaction expenses. Holdings
stockholders' equity also reflects the $3.4 million ascribed to the Shares
issued in connection with the Units Offering (although no assurance can be
given that the value allocated to the Shares is indicative of the price at
which the Shares may actually trade). Hedstrom stockholders' equity
includes Holdings stockholders' equity plus $21.6 million in proceeds from
the Units Offering ascribed to the Old Discount Notes, as adjusted to
account for certain transaction expenses, and $2.5 million related to a
note payable issued by Holdings related to the 1995 Recapitalization.
22
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") include the unaudited pro forma consolidated
income statements for the six months ended June 30, 1997 and for the year ended
December 31, 1996 (the "Pro Forma Consolidated Income Statements").
The Pro Forma Consolidated Income Statements give effect to the
Transactions and the cost reduction items described in the following paragraph
as if they occurred on January 1, 1996.
Management is implementing a plan that is expected to result in annual cost
savings of approximately $6 million as a result of the Acquisition, which plan
includes rationalizing sales, marketing and general administrative functions,
closing of duplicate facilities and reductions in external administrative
expenditures as a result of operating as a consolidated group (i.e., legal,
insurance, tax, audit and public relations expenditures). The Pro Forma
Consolidated Income Statements include the cost savings Hedstrom expects to
realize as a result of personnel terminations that have occurred or that have
been formally communicated to the employees, closings of duplicative facilities
that have occurred and reductions in external administrative expenses that have
been negotiated.
The Acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price for the Acquisition was allocated to the tangible
and intangible assets and liabilities acquired based upon their respective fair
values.
The Pro Forma Financial Statements are based on the historical financial
statements of Holdings, Hedstrom and ERO and the assumptions and adjustments
described in the accompanying notes. The Pro Forma Financial Statements do not
purport to represent what the Operating Company's results of operations actually
would have been had the Transactions and the cost reduction items described
herein in fact occurred on the dates indicated or to project the results of
operations for any future period or date. The Pro Forma Financial Statements are
based upon assumptions that management believes are reasonable and should be
read in conjunction with the consolidated financial statements and the notes
thereto of each of Holdings and ERO included elsewhere herein.
Management implemented the 1996 Cost Reduction Plan in the second half of
1996 to reduce costs by over $9 million in 1997 and thereafter as compared with
fiscal 1996 levels. See "Prospectus Summary -- Hedstrom 1996 Cost Reduction
Plan." EBITDA, as adjusted for the year ended December 31, 1996 includes a
portion of the cost savings Hedstrom expects to realize from the 1996 Cost
Reduction Plan in 1997 and thereafter. EBITDA, as adjusted does not reflect
certain other cost savings and operating efficiencies or the cost of achieving
such other cost savings and operating efficiencies that management also expects
to achieve in 1997 and thereafter. See "Prospectus Summary -- Hedstrom 1996 Cost
Reduction Plan."
23
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA/
HEDSTROM ERO PRO FORMA HEDSTROM CONSOLIDATION HOLDINGS
HISTORICAL(A) HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $125,394 $157,913 $ -- $283,307 $ -- $283,307
Cost of sales................... 101,044 97,802 -- 198,846 -- 198,846
-------- -------- ------- -------- ------- --------
Gross profit.................... 24,350 60,111 -- 84,461 -- 84,461
Selling, general and
administrative expenses....... 25,083 38,896 2,305(b) 60,284 -- 60,284
(6,000)(c)
-------- -------- ------- -------- ------- --------
Operating income (loss)......... (733) 21,215 3,695 24,177 -- 24,177
Interest expense................ 5,986 9,062 9,809(d) 24,857 3,386(d) 28,493
250(e)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes......................... (6,719) 12,153 (6,114) (680) (3,636) (4,316)
Income tax benefit (expense).... 2,158 (4,395) 1,619(f) (618) 1,382(f) 764
-------- -------- ------- -------- ------- --------
Net income (loss)............... $ (4,561) $ 7,758 $(4,495) $ (1,298) $(2,254) $ (3,552)
Net income (loss) per
share(g)...................... $ (.05)
Weighted average shares
outstanding(g)................ -- -- -- -- -- 67,647
======== ======== ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA:
Operating income (loss)..... $ (733) $ 21,215 $ 3,695 $ 24,177 $ -- $ 24,177
Depreciation and
amortization.............. 4,373 5,289 2,305 11,967 -- 11,967
Product and inventory
charge.................... 1,550 -- -- 1,550 -- 1,550
Barter credit writedown..... 1,000 -- -- 1,000 -- 1,000
-------- -------- ------- -------- ------- --------
EBITDA(h)................... $ 6,190 $ 26,504 $ 6,000 $ 38,694 $ -- $ 38,694
======== ======== ======= ======== ======= ========
EBITDA, as adjusted(i)..........
Pro forma deficiency of earnings
to fixed charges(j)........... -- -- -- $ (680) -- $ (4,316)
======== ======== ======= ======== ======= ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA/
HEDSTROM ERO PRO FORMA HEDSTROM CONSOLIDATION HOLDINGS
HISTORICAL(K) HISTORICAL(K) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $104,051 $ 38,304 $ -- $142,355 $ -- $142,355
Cost of sales................. 73,579 28,736 -- 102,315 -- 102,315
-------- -------- ------- -------- ------- --------
Gross profit.................. 30,472 9,568 -- 40,040 -- 40,040
Selling, general and
administrative expenses..... 16,242 11,031 960(b) 25,233 -- 25,233
(3,000)(c)
-------- -------- ------- -------- ------- --------
Operating income (loss)....... 14,230 (1,463) 2,040 14,807 -- 14,807
Interest expense.............. 4,584 3,267 4,591(d) 12,442 1,693(d) 14,260
125(e)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes....................... 9,646 (4,730) (2,551) 2,365 (1,818) 547
Income tax benefit
(expense)................... (3,584) 1,940 381(f) (1,263) 690(f) (573)
-------- -------- ------- -------- ------- --------
Net income (loss)............. $ 6,062 $ (2,790) $(2,170) $ 1,102 $(1,128) $ (26)
Net income (loss) per
share(g).................... $ .00
Weighted average shares
outstanding(g).............. -- -- -- -- -- 67,647
======== ======== ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA:
Operating income (loss)... $ 14,230 $ (1,463) $ 2,040 $ 14,807 $ -- $ 14,807
Depreciation and
amortization............ 2,767 2,187 960 5,914 -- 5,914
-------- -------- ------- -------- ------- --------
EBITDA(h)................. $ 16,997 $ 724 $ 3,000 $ 20,721 $ -- $ 20,721
Pro forma ratio of earnings to
fixed charges(j)............ -- -- -- 1.2x -- 1.0x
======== ======== ======= ======== ======= ========
</TABLE>
24
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
(a) The historical balances for Hedstrom are derived from the unaudited
accounting records of Hedstrom for the twelve-month period ended December
31, 1996. Hedstrom historically had a fiscal year ending July 31 but
switched its fiscal year end to December 31, effective in 1997.
Accordingly, Hedstrom's last complete fiscal year was the twelve months
ended July 31, 1996, and Hedstrom's next complete fiscal year will be the
twelve months ended December 31, 1997.
(b) Reflects the incremental change in amortization expense due to purchase
accounting and adjustments to intangible assets in connection with the
Acquisition consistent with the amortization policies utilized by the
Operating Company.
(c) Reflects estimated cost savings as a result of the Acquisition from the
elimination of overlapping and duplicative selling, general and
administrative functions, the closing of certain duplicate facilities and
reductions in external administrative expenses such as insurance, legal,
tax, audit and public relations expenses. The estimated cost savings below
reflect personnel terminations that have occurred or that have been
formally communicated to the employees, closings of duplicate facilities
that have occurred and reductions in external administrative expenses that
have been negotiated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Selling, general and administrative expense
adjustment:
Acquisition related:
Salaries and benefits from personnel
terminations.............................. $3,700 $1,850
Duplicative facilities that have been
closed.................................... 900 450
External administrative expenses that have
been reduced.............................. 1,400 700
------ ------
$6,000 $3,000
====== ======
</TABLE>
(d) Reflects interest expense (at assumed rates as indicated below) associated
with the borrowings under the Senior Credit Facilities, the Senior
Subordinated Notes and the Discount Notes, the amortization of deferred
financing costs and the elimination of historical interest expense relating
to debt of Hedstrom and ERO refinanced in connection with the Acquisition:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
HEDSTROM:
Revolving Credit Facility at 8.5%................ $ 1,369 $ 684
Tranche A Term Loans at 8.5%..................... 6,375 3,188
Tranche B Term Loans at 9.0%..................... 3,150 1,575
Senior Subordinated Notes at 10.0%............... 11,000 5,500
Amortization of deferred financing costs......... 1,888 944
Other fees....................................... 396 197
Elimination of historical interest expense for
related debt................................... (14,369) (7,497)
-------- -------
Total Hedstrom......................... $ 9,809 $ 4,591
======== =======
HOLDINGS:
Discount Notes at 12.0%.......................... $ 3,000 $ 1,500
Amortization of deferred financing costs and debt
discount....................................... 386 193
-------- -------
Total Holdings......................... $ 3,386 $ 1,693
======== =======
</TABLE>
25
<PAGE> 28
A 0.125% change in the interest rate payable on the outstanding
balance would change annual interest expense as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility........................ $ 20 $10
Tranche A Term Loans............................. 94 47
Tranche B Term Loans............................. 44 22
---- ---
Total.................................. $158 $79
==== ===
</TABLE>
(e) Represents a consolidation adjustment to reflect interest expense on a $2.5
million note payable at Holdings.
(f) Reflects the adjustment to federal and state income taxes resulting from
the pro forma adjustments, and to recognize federal and state income taxes
at an assumed effective tax rate of approximately 38%, plus the impact of
amortizing the goodwill for book purposes but not tax purposes.
(g) Net income (loss) per share is based on the number of common shares
outstanding immediately after the Transactions, including the common shares
associated with the Units Offering and the Equity Private Placement.
Average common equivalent shares (stock options) have not been included in
the calculation of weighted average shares outstanding since their
inclusion would not be significant during these periods.
(h) EBITDA represents operating income plus depreciation, amortization, and,
for the twelve months ended December 31, 1996, certain other one-time
charges aggregating approximately $2.55 million, as follows: (i) $0.8
million related to a design adjustment to one of Hedstrom's outdoor gym set
accessories to address certain alleged defects, (ii) a non-cash inventory
write-down of $0.75 million related to the mix shift in Hedstrom's outdoor
gym set product line, and (iii) a $1.0 million non-cash write-off of
advertising barter credits by Hedstrom in connection with its decision to
discontinue its trial advertising campaign. EBITDA as determined by the
Operating Company may not be comparable to the EBITDA measure as reported
by other companies. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity. In addition, this measure does
not represent funds available for discretionary use, it is included herein
to provide additional information with respect to the ability of the
Operating Company to meet its future debt service, capital expenditures and
working capital requirements.
(i) EBITDA, as adjusted represents the following for the year ended December
31, 1996:
<TABLE>
<CAPTION>
HEDSTROM HOLDINGS
PRO FORMA PRO FORMA
--------- ---------
<S> <C> <C>
EBITDA as defined in (h) above......................... $38,694 $38,694
1996 Cost Reduction Plan............................... 5,800 5,800
------- -------
EBITDA, as adjusted.................................... $44,494 $44,494
======= =======
</TABLE>
EBITDA, as adjusted reflects a portion of the cost savings from the 1996
Cost Reduction Plan implemented by Hedstrom in the second half of 1996
relating to reductions in manufacturing costs, elimination of certain
full-time employees, the discontinuation of certain advertising programs
and the reduction of warehouse and shipping costs, as more fully described
below.
Hedstrom periodically evaluates the economics of producing internally
certain plastic components used in the production and assembly of its
outdoor gym sets versus purchasing such components externally. In 1996,
Hedstrom invested approximately $3.0 million in new plastic blow-molding
equipment to manufacture many of the plastic slides that it had previously
purchased from third-party vendors. Management believes that producing
these slides internally is currently providing annual cost savings of
approximately $1.5 million.
Hedstrom reduced its number of full-time employees by approximately 30
persons in a variety of departments in the second half of 1996. Management
believes that such personnel reductions will result in savings of
approximately $0.7 million in 1997 and thereafter.
26
<PAGE> 29
In late 1996, Hedstrom restructured certain of its manufacturing operations
to increase its daily production capacity of outdoor gym sets. This
restructuring has enabled Hedstrom to manufacture outdoor gym sets to
specific customer orders rather than producing outdoor gym sets in
anticipation of customer orders, which Hedstrom had done in the past
because of capacity constraints. In fiscal 1996, prior to implementing this
restructuring, Hedstrom experienced a significant and unexpected change in
its sales mix of outdoor gym sets, requiring Hedstrom to use third-party
warehouses to store many of the outdoor gym sets it had produced in
anticipation of customer demand. As a result, Hedstrom incurred
approximately $2.1 million of higher warehouse and material handling costs.
The implementation of just-in-time manufacturing of outdoor gym sets has
enabled Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, eliminate the need for third-party warehouses for outdoor gym
sets. Management believes it will save over $2.1 million of warehouse and
material handling expense in 1997 and thereafter as a result of
implementing just-in-time manufacturing of outdoor gym sets.
Hedstrom historically has advertised its products in cooperation with its
retail customers, principally through print media sponsored by its
customers such as newspaper circulars and free-standing inserts. In fiscal
1996, Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand over
time. The total cost for this advertising program was approximately $1.5
million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable return on investment
and elected to discontinue it. Therefore, such cost will not be incurred in
1997 and thereafter.
(j) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent pro forma income (loss) before income taxes and fixed
charges. Fixed charges consist of the total of (i) interest, whether
expensed or capitalized; (ii) amortization of debt expense and discount or
premium relating to any indebtedness, whether expensed or capitalized; and
(iii) that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of Hedstrom's
business, the ratio of earnings to fixed charges for the six months ended
June 30, 1997 is not an accurate representation of full year results. If
the ratio is less than 1.0x, the deficiency is shown.
(k) Hedstrom's historical results of operations for the six months ended June
30, 1997 include ERO's results of operations for the month of June 1997.
ERO's historical results of operations for the six months ended June 30,
1997 include the period from January 1, 1997 through May 31, 1997.
27
<PAGE> 30
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF HOLDINGS
The selected consolidated historical financial data presented below (i) as
of and for the years in the three-year period ended July 31, 1996 and the
five-month period ended December 31, 1996, were derived from the consolidated
financial statements of Holdings, which have been audited by Arthur Andersen
LLP, independent auditors, and (ii) as of and for the two years ended July 31,
1993, were derived from audited financial statements of Hedstrom. The selected
historical consolidated financial data presented below as of and for the
five-month period ended December 31, 1995 and the six-month periods ended June
30, 1996 and 1997 have not been audited, but, in the opinion of management,
include all the adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly, in all material respects, such information in
accordance with GAAP applied on a consistent basis. Income Statement and other
financial data for the six months ended June 30, 1997 reflects the operations of
ERO for the month of June 1997 and the balance sheet data as of June 30, 1997
includes the Transactions. Interim results are not necessarily indicative of
Holdings' results for the full fiscal year, principally because of the seasonal
nature of Hedstrom's business. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Hedstrom and Holdings" and the consolidated
financial statements of Holdings and the notes thereto contained elsewhere
herein. Holdings historically had a fiscal year ending July 31 but switched its
fiscal year to December 31, effective in 1997.
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31, FISCAL YEAR ENDED JULY 31,
-------------------- ------------------ --------------------------------------------------
1997 1996 1996 1995 1996 1995 1994 1993 1992
--------- -------- ------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................... $ 104,051 $ 96,059 $23,994 $ 31,792 $133,194 $133,862 $108,655 $93,891 $87,529
Cost of sales................... 73,579 72,897 21,973 26,000 105,068 107,312 87,170 75,592 68,632
--------- -------- ------- -------- -------- -------- -------- ------- -------
Gross profit.................... 30,472 23,162 2,021 5,792 28,126 26,550 21,485 18,299 18,897
Selling, general and
administrative
expenses...................... 16,242 15,107 7,546 7,067 24,603 19,207 18,181 16,890 15,816
--------- -------- ------- -------- -------- -------- -------- ------- -------
Operating income (loss)......... 14,230 8,055 (5,525) (1,275) 3,523 7,343 3,304 1,409 3,081
Recapitalization expenses(a).... -- -- -- 9,600 9,600 -- -- -- --
Restructuring expense(b)........ -- -- -- -- -- -- -- 1,476 --
Interest expense................ 4,709 3,545 2,115 1,773 5,896 4,573 2,982 2,512 2,728
--------- -------- ------- -------- -------- -------- -------- ------- -------
Income (loss) before income
taxes......................... 9,521 4,510 (7,640) (12,648) (11,973) 2,770 322 (2,579) 353
Income tax benefit (expense).... (3,536) (1,812) 2,869 4,074 3,857 (1,440) (103) 663 (257)
--------- -------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations.................... 5,985 2,698 (4,771) (8,574) (8,116) 1,330 219 (1,916) 96
Loss from discontinued
operations(c)................. -- -- -- -- -- (585) (3,180) -- --
--------- -------- ------- -------- -------- -------- -------- ------- -------
Net income (loss)............... $ 5,985 $ 2,698 $(4,771) $ (8,574) $ (8,116) $ 745 $ (2,961) $(1,916) $ 96
========= ======== ======= ======== ======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
Net cash provided by (used in):
Operating activities.......... $ (6,968) $(12,725) $ 2,978 $(19,209) $(17,744) $ 396 $ 1,344 $(3,540) $ 2,481
Investing activities.......... (126,046) (4,792) (1,309) (1,342) (6,490) (2,574) (2,988) (4,594) (3,358)
Financing activities.......... 135,646 17,706 (9,134) 19,842 31,135 2,899 1,060 8,539 740
EBITDA(d)....................... 16,997 10,377 (3,549) (393) 9,420 10,088 5,529 3,651 5,111
Depreciation and
amortization(e)............... 2,767 2,322 1,976 882 3,347 2,745 2,225 2,242 2,030
Capital expenditures............ 3,446 4,792 1,376 1,342 6,738 2,574 2,988 3,010 1,858
Ratio (deficiency) of earnings
to fixed charges(f)........... 3.0x 2.2x (7,640) (12,648) (11,973) 1.6x 1.1x (2,579) 1.1x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................... $ 349,962 $100,206 $72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005 $55,607 $48,116
Total debt (including current
maturities)................... 255,389 77,956 60,171 57,750 69,306 32,710 29,811 28,351 19,812
Stockholders' equity
(deficit)..................... 44,332 4,556 (3,097) 2,055 1,674 15,392 14,647 15,228 17,144
</TABLE>
- ---------------------
(a) In connection with the 1995 Recapitalization, Holdings incurred
approximately $9.6 million in costs, all of which were expensed.
(b) During fiscal 1993, Holdings restructured its manufacturing processes at its
Bedford division, incurring costs associated with consultants, equipment
reorganization, training and temporarily idle facilities.
(c) During fiscal 1995, Holdings discontinued the operations of its Hedstrom
Holdings II subsidiary. Hedstrom Holdings II was involved in the
manufacturing of traffic control devices. The sole customer of Hedstrom
Holdings II was a related party with which Holdings no longer has an ongoing
relationship.
(d) EBITDA represents operating income plus depreciation, and amortization and,
for the twelve months ended July 31, 1996, certain other one-time charges
aggregating $2.55 million (see "Unaudited Pro Forma Consolidated Financial
Information"). EBITDA as determined by Holdings may not be comparable to the
EBITDA measure as reported by other companies. While EBITDA is not intended
to represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow or operating income (as measured by GAAP) or as a measure of
liquidity. In addition, this measure does not represent funds available for
discretionary use. It is included herein to provide additional information
with respect to the ability of Holdings to meet its future debt service,
capital expenditures and working capital requirements.
(e) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(f) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of the total of (i) interest, whether expensed or
capitalized; (ii) amortization of debt expense and discount or premium
relating to any indebtedness, whether expensed or capitalized; and (iii)
that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of Holdings'
business, the ratio of earnings to fixed charges for the six months ended
June 30, 1996 and 1997 and for the five months ended December 31, 1996 and
1995 are not accurate representations of full-year results. If the ratio is
less than 1.0x, the deficiency is shown.
28
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HEDSTROM AND HOLDINGS
The following discussion generally relates to the historical consolidated
results of operations and financial condition of Holdings and Hedstrom and,
accordingly, does not reflect the significant impact of the Transactions. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements of Holdings, and the notes thereto, included
elsewhere herein. For purposes of this discussion, references to "Hedstrom",
where appropriate, include Holdings and Hedstrom and its subsidiaries
(including, with respect to periods after the consummation of the Acquisition,
ERO and its subsidiaries).
For information regarding the pro forma results of operations of the
Operating Company, see the "Unaudited Pro Forma Consolidated Financial
Information".
GENERAL
Hedstrom is a leading United States manufacturer and marketer of children's
leisure and activity products. Hedstrom has two principal divisions -- the
Bedford Division in Bedford, Pennsylvania (the "Bedford Division"), which
principally manufacturers and markets in the United States painted metal and
composite metal and plastic outdoor gym sets, wood gym kits and slides, spring
horses and gym accessories, and the Ashland Division in Ashland, Ohio (the
"Ashland Division"), which manufactures and markets in the United States a wide
variety of children's playballs and ball pit products. Through its International
Division, Hedstrom sells products manufactured by both the Bedford Division and
the Ashland Division outside of the United States.
FISCAL YEAR CHANGE
Hedstrom historically had a fiscal year ending July 31 but switched its
fiscal year-end to December 31, effective in 1997. Accordingly, Hedstrom's last
historical fiscal year was the twelve months ending July 31, 1996, and
Hedstrom's next complete fiscal year will be the twelve months ending December
31, 1997. Management implemented this change primarily to improve the accuracy
of Hedstrom's annual budgeting process. Hedstrom's retail customers generally do
not determine outdoor gym set product placements for the upcoming peak Spring
selling season until the preceding Fall. In the past, Hedstrom prepared its
budgets without the benefit of knowing what its outdoor gym set placements would
be for the upcoming fiscal year. Management believes that the adoption of a
December 31 fiscal year will improve the accuracy of its budgeting process.
As a result of the change in Hedstrom's fiscal year, Hedstrom has presented
financial statements for the five-month period ended December 31, 1996 and for
the comparable period in 1995. Management does not believe that the year over
year comparison for such period is meaningful because, given the concentration
of Hedstrom's net sales in the first and second calendar quarters, overall
changes in production levels in the comparably less active period from August to
December can have a significant impact on stated profitability for such period
due to the absorption of fixed manufacturing costs. This is especially true when
comparing the above-mentioned five-month period in 1996 versus the same
five-month period in 1995. In the last few months of calendar 1995, due to
capacity constraints, Hedstrom manufactured a significant number of outdoor gym
sets in anticipation of the Spring 1996 selling season. This production activity
resulted in absorption of overhead expenses of approximately $1.4 million (these
costs were capitalized into inventory) that otherwise would have been expensed
during the period had there been no production of gym sets. In late 1996,
management took several steps to increase the daily production capacity of
outdoor gym sets in an effort to increase its capacity during peak production
periods, thereby reducing inventory levels and related material and warehouse
expense. As a result of these efforts, Hedstrom is now able to manufacture gym
sets on a just-in-time basis in response to specific customer orders. The move
to just-in-time manufacturing in late calendar 1996 precluded the need to begin
manufacturing gym sets in 1996 for sale in 1997 and thus, unlike in late 1995,
Hedstrom expensed the fixed overhead incurred at its idle outdoor gym set
operations. As a result of the switch to just-in-time manufacturing, Hedstrom's
operating results were significantly better in the second calendar quarter of
1997 versus the second calendar quarter of 1996 because, among other things, it
produced outdoor gym sets in the second calendar quarter of 1997, whereas in the
same period of 1996, Hedstrom met consumer demand for outdoor gym sets out of
inventory. Hedstrom's
29
<PAGE> 32
discontinuation in 1996 of sales of certain low-margin juvenile products (such
as tricycles) that had been sold in 1995 also makes the year over year
comparison less meaningful.
NET SALES
Hedstrom computes net sales by deducting sales allowances, including
allowances for returns, volume discounts and co-operative advertising
("promotions"), from its gross sales. Where information concerning net sales by
product line is provided in this Prospectus, Hedstrom has estimated net sales by
attributing sales allowances to each product line in proportion to the
individual product line's percentage of gross sales.
In 1996, Hedstrom revised certain of its promotional policies, effectively
increasing the sales thresholds at which Hedstrom's customers earn certain
promotional discounts, which management believes will contribute to increasing
Hedstrom's profitability in 1997.
RESULTS OF OPERATIONS
The following table sets forth net sales and gross profit for each of
Hedstrom's three operating divisions and Hedstrom's total selling, general and
administrative expenses and total operating income (loss) for the periods
indicated:
<TABLE>
<CAPTION>
FIVE MONTHS
SIX MONTHS ENDED
ENDED JUNE 30, DECEMBER 31, YEAR ENDED JULY 31,
--------------- ------------- ------------------------
1997 1996 1996 1995 1996 1995 1994
------ ------ ----- ----- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Bedford Division.......................... $58.7 $63.0 $12.0 $13.5 $ 79.3 $ 80.9 $ 71.4
Ashland Division.......................... 24.8 27.2 10.4 16.7 46.0 44.8 30.4
International Division.................... 6.6 5.9 1.6 1.6 7.9 8.2 6.9
ERO....................................... 14.0 -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------
Total net sales................... 104.1 96.1 24.0 31.8 133.2 133.9 108.7
----- ----- ----- ----- ------ ------ ------
Gross profit:
Bedford Division.......................... 16.1 14.3 (.2) 0.8 13.7 11.7 12.2
Ashland Division.......................... 7.7 8.0 1.9 4.6 13.1 13.4 8.3
International Division.................... 1.6 .9 .3 .4 1.3 1.5 1.0
ERO....................................... 5.1 -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------
Total gross profit................ 30.5 23.2 2.0 5.8 28.1 26.6 21.5
----- ----- ----- ----- ------ ------ ------
Total selling, general and administrative
expenses.................................. 16.3 15.1 7.5 7.1 24.6 19.3 18.2
----- ----- ----- ----- ------ ------ ------
Total operating income (loss)............... $14.2 $ 8.1 $(5.5) $(1.3) $ 3.5 $ 7.3 $ 3.3
===== ===== ===== ===== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
A comparison of Hedstrom's results of operations for the six months ended
June 30, 1997 with the same period in 1996 is necessarily affected by the impact
of the consummation of the Transactions on June 12, 1997. Due to the inclusion
of 30 days of combined operations of Hedstrom and ERO in the six months ended
June 30, 1997, management does not believe the comparison of total net sales and
total gross profit with the same period in 1996 is meaningful.
Net Sales. Hedstrom's total net sales increased to $104.1 million in the
first six months of 1997 from $96.1 million in the first six months of 1996, an
increase of $8.0 million, or 8.3%. Such increase was attributable to the
inclusion of ERO, certain selling price increases and the restructuring of
several promotional allowances, offset by a decline in sales at the Bedford and
Ashland Divisions. June net sales of ERO, included in the first six months of
Hedstrom's results, were $14.0 million. Net sales of the Bedford Division
decreased by $4.3 million, or 6.8%, in the first six months of 1997 from the
first six months in 1996, primarily as a result of (i) a shift in product mix to
lower-priced outdoor gym sets and (ii) a decline in sales of Hedstrom's wood
kits to home centers
30
<PAGE> 33
which accounted for decreases of $5.7 million and $1.8 million, respectively.
This decline in sales was partially offset by a $1.9 million increase
attributable to selling price increases and $1.1 million attributable to the
restructuring of certain promotional allowances. Selling prices of products sold
by the Bedford Division increased approximately 3.2% in the first six months of
1997 over the first six months in 1996. Net sales of the Ashland Division
decreased by $2.4 million, or 8.8%, in the first six months of 1997 from the
first six months of 1996, primarily as a result of a $3.8 million decrease in
sales of certain undecorated playballs and a $0.2 million decrease in sales of
O.E.M. products. These decreases were partially offset by the successful
introduction of "goofballs" and the increase in market share of ball pits which
accounted for $0.9 million and $0.2 million of sales, respectively. Selling
prices of the Ashland Division increased approximately $0.6 million, or 2.5%, in
the first six months of 1997 over the first six months in 1996. Net sales of the
International Division increased by $.7 million, or 11.9%, in the first six
months of 1997 over the first six months of 1996, due primarily to an increase
in playball sales in Canada.
Gross Profit. As a result of the increase in Hedstrom's total net sales,
total gross profit increased to $30.5 million in the first six months of 1997
from $23.2 million in the first six months of 1996. As a percentage of net
sales, gross profit increased to 29.3% in the first six months of 1997 from
24.1% in the first six months of 1996 due primarily to (i) the inclusion of the
June 1997 results of ERO, which had a higher gross profit margin than the other
divisions of Hedstrom, (ii) the implementation of the 1996 Cost Reduction Plan
and (iii) a shift in mix to higher-margin playballs, the effects of which were
partially offset by a reduction in production volume resulting from the
implementation of just-in-time manufacturing and reduced sales. ERO's June 1997
gross profit was $5.0 million, or 35.7% of ERO's net sales, and is included in
the first six months of Hedstrom's results. The Bedford Division's gross profit
margin in the first six months of 1997 increased to 27.4% from 22.7% in the
first six months of 1996, primarily as a result of the benefits of the 1996 Cost
Reduction Plan, selling price increases and improvements in promotional
programs, which accounted for increases of 3.0%, 3.2% and 1.8%, respectively,
which benefits were partially offset by a 3.1% decrease in net sales
attributable to sales of lower-priced and lower-margin outdoor gym sets. Gross
profit margin in the Ashland Division increased to 31.0% in the first six months
of 1997 from 29.4% in the first six months of 1996 primarily as a result of (i)
an increase in selling prices, and (ii) the favorable effects of the 1996 Cost
Reduction Plan, which accounted for increases of 2.5% and 2.5%, respectively.
These increases were partially offset by (i) a reduction in production volume
and (ii) a change in product mix, which accounted for decreases of 2.0% and
1.4%, respectively. Gross profit margin in the International Division increased
to 24.2% in the first six months of 1997 from 15.3% in the first six months of
1996 primarily as a result of sales price increases and a shift to higher-margin
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.3 million in the first six months of
1997 from $15.1 million in the first six months of 1996, an increase of 7.9%. As
a percentage of net sales, selling, general and administrative expenses
decreased to 15.6% in the first six months of 1997 from 15.7% in the first six
months of 1996, due principally to a reduction in warehouse and shipping costs
resulting from Hedstrom's implementation of just-in-time manufacturing of
outdoor gym sets and the discontinuation of certain print advertising programs,
which reduced expenses by 1.4% as a percentage of sales. This reduction was
partially offset by the inclusion of ERO's relatively high selling, general and
administrative expenses in June 1997, which increased expenses by 1.3% as a
percentage of net sales.
Interest Expense. Interest expense increased by 32.8% as a result of the
incurrence of Acquisition-related indebtedness and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for the six months
ended June 30, 1997 was 37.1% as compared with an effective income tax rate of
40.1% in the first six months of 1996. The decrease was attributable to the
inclusion of ERO's operations, a large portion of which is derived from Amav
Canada and has a lower combined effective federal and provincial tax rate than
Holdings.
FIVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Net Sales. Hedstrom's total net sales decreased to $24.0 million in the
five months ended December 31, 1996 from $31.8 million in the comparable period
in 1995, a decrease of 24.5%. Net sales of the Bedford Division decreased by
$1.5 million, or 11.1%, in the 1996 period from the 1995 period, primarily as a
result of
31
<PAGE> 34
eliminating sales of low-margin juvenile products such as tricycles and ride-on
products. Net sales of the Ashland Division decreased by $6.3 million, or 37.7%,
in the 1996 period from the 1995 period. In the 1995 period, the Ashland
Division introduced its new ball pit line of products and obtained the benefit
of the initial "sell-in" of that product during the 1995 Christmas season. In
the 1996 period, ball pit products lacked the benefit of the initial "sell-in"
and were more vulnerable to competitive pressures that management believes have
since dissipated, resulting in a decline in sales of $5.0 million in the 1996
period from the 1995 period. The decline in the Ashland Division's sales is also
attributable to a decline in OEM sales. Net sales in the International Division
for the 1996 period approximated net sales for the 1995 period.
Gross Profit. Hedstrom's total gross profit decreased to $2.0 million in
the five months ended December 1996 from $5.8 million in the same period of
1995. As a percentage of net sales, gross profit decreased to 8.3% in the 1996
period from 18.2% in the 1995 period. Due to the lower production volume of
outdoor gym sets resulting from the implementation of just-in-time manufacturing
for the 1997 selling season, an additional $1.4 million of fixed manufacturing
costs were unabsorbed in the 1996 period as compared to the 1995 period. In
addition, in December 1996, Hedstrom changed the method of allocating
depreciation for interim reporting periods, resulting in a one-time adjustment
to depreciation of $0.6 million in the 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.5 million in the five months ended
December 31, 1996 from $7.1 million in the same period in 1995. Expressed as a
percentage of net sales, selling, general and administrative expenses increased
to 31.4% in the last five months of 1996 from 22.2% in the same period of 1995,
due principally to the decrease in sales and the inability to reduce such
expenses (which are largely fixed) proportionately. Selling, general and
administrative expenses in the 1996 period included a $0.2 million lawsuit
settlement.
Recapitalization Expense. In October of 1995 Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed, new
shares were issued to the purchaser, new debt facilities were obtained and
existing debt facilities were repaid. In addition, Holdings effected a common
stock split of 39,095 shares for one and increased the authorized shares from
1,000 to 50,000,000. After the Recapitalization, the majority of the common
stock was held by Hicks, Muse, Tate, and First Equity Fund II, L.P. However, two
of the existing shareholders retained a minority investment in Holdings.
Holdings expensed all of its costs associated with the Recapitalization. These
expenses include the following (in millions of dollars):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Commitment fees for the new revolver and term loan
facilities................................................ $2.9
Buyer's financing and transaction fees...................... 2.0
Seller's transaction fees................................... 1.7
Equity appreciation payments to employees................... 2.2
Other....................................................... .8
----
Total Recapitalization Expense.................... $9.6
====
</TABLE>
Interest Expense. Interest expense increased by 19.3%, due primarily to
increased borrowings associated with capital additions and higher working
capital requirements.
Income Tax Expense. Holdings' effective income tax rate for the five months
ended December 31, 1996 was 37.6% as compared with an effective income tax rate
of 35.5% in the same period of 1995. The increase was attributable to a decrease
in foreign losses, which provide no U.S. tax benefit, in 1996 relative to 1995.
In addition, the 1995 tax benefit was reduced by non-deductible transaction
costs incurred in fiscal 1995 in connection with the 1995 Recapitalization and
alternative minimum tax incurred by Holdings.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Hedstrom's total net sales decreased to $133.2 million in fiscal
1996 from $133.9 million in fiscal 1995, a decrease of 0.5%. Net sales in the
Bedford Division decreased by $1.6 million, or 2.0%, in fiscal 1996 as
32
<PAGE> 35
compared to fiscal 1995. Despite unit volume increases in outdoor gym sets, net
sales declined in fiscal 1996 from fiscal 1995 principally as a result of an
unfavorable product mix shift to lower-priced, lower-margin outdoor gym sets
due, in part, to pricing and promotional policies implemented by certain of
Hedstrom's retail customers. Net sales of the Ashland Division increased $1.2
million, or 2.7%, in fiscal 1996 as compared to fiscal 1995. This increase
reflected the initial Christmas season "sell-in" effect on ball pit sales.
Gross Profit. Total gross profit increased to $28.1 million in fiscal 1996
from $26.6 million in fiscal 1995, an increase of 5.6%. As a percentage of net
sales, gross profit increased to 21.1% in fiscal 1996 from 19.9% in fiscal 1995.
In the Bedford Division, gross profit margin increased to 17.3% in fiscal 1996
from 14.5% in fiscal 1995 primarily as a result of (i) a reduction in raw
materials prices and (ii) higher unit volume, which increased gross profits by
$3.0 million and $2.4 million, respectively, which effects were partially offset
by a shift in product mix to lower priced outdoor gym sets, which shift reduced
gross profits by $3.6 million. The gross profit margin of the Ashland Division
decreased to 28.5% in fiscal 1996 from 29.9% in fiscal 1995. The decrease was
attributable to increased promotional activity, an unfavorable shift in the mix
of playballs and a reduction in sales prices, which reduced gross profits by
$1.0 million, $0.9 million, and $1.8 million, respectively, but were partially
offset by a $2.7 million increase attributable to reductions in material prices.
The gross profit margin of the International Division decreased to 16.5% in
fiscal 1996 from 18.3% in fiscal 1995, principally as a result of an unfavorable
shift in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $24.6 million in fiscal 1996 from $19.3
million in fiscal 1995 (or stated as a percentage of net sales, to 18.5% in
fiscal 1996 from 14.3% in fiscal 1995). This increase was due primarily to (i)
an increase in material handling and warehousing costs of $2.0 million, (ii) an
increase in advertising expenses of $2.0 million and (iii) a non-cash charge of
$1.0 million related to the write-off of certain advertising barter credits. The
increase in material handling and warehousing costs was due primarily to higher
levels of outdoor gym set inventories arising from the unexpected shift in
product mix and the resultant expense of outside warehouse space and related
material handling. The increased advertising expenditures related primarily to
an unsuccessful trial advertising campaign that has since been discontinued. As
a result of Hedstrom's decision to reduce its advertising expenditures during
fiscal 1997, management determined that $1.0 million of barter credits available
to pay for a portion of future advertising programs could not be utilized before
their expiration and, accordingly, were written off.
Recapitalization Expense. In October of 1995 Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed, new
shares were issued to the purchaser, new debt facilities were obtained and
existing debt facilities were repaid. In addition, Holdings effected a common
stock split of 39,095 shares for one and increased the authorized shares from
1,000 to 50,000,000. After the Recapitalization, the majority of the common
stock was held by Hicks, Muse, Tate, and First Equity Fund II, L.P. However, two
of the existing shareholders retained a minority investment in Holdings.
Holdings expensed all of its costs associated with the Recapitalization. These
expenses include the following (in millions of dollars):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Commitment fees for the new revolver and term loan
facilities................................................ $2.9
Buyer's financing and transaction fees...................... 2.0
Seller's transaction fees................................... 1.7
Equity appreciation payments to employees................... 2.2
Other....................................................... .8
----
Total Recapitalization Expense.................... $9.6
====
</TABLE>
Interest Expense. Interest expense increased by 28.9%, due primarily to
higher working capital requirements and increased borrowings associated with
acquisitions of equipment.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1996 was
32.2% as compared with an effective income tax rate of 52.0% in fiscal 1995. The
decrease was attributable to non-deductible transaction
33
<PAGE> 36
costs incurred in connection with the 1995 Recapitalization. In addition,
Holdings incurred alternative minimum tax in 1995 that was not incurred in 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Hedstrom's total net sales were $133.9 million in fiscal 1995,
as compared to $108.7 million in fiscal 1994, an increase of 23.2%. This
increase was attributable primarily to increases in volume and selling prices at
both the Bedford Division and the Ashland Division. The Bedford Division's net
sales increased $9.5 million, or 13.3%, in fiscal 1995 over fiscal 1994,
primarily as a result of market share gains across the outdoor gym set and wood
gym kit product lines. The Ashland Division's net sales increased $14.4 million,
or 47.4% in fiscal 1995 over fiscal 1994, primarily as a result of (i) the
introduction of ball pit products, (ii) increases in the sales volume of premium
licensed playballs, (iii) a product mix shift toward higher-priced undecorated
playballs and (iv) increased sales of other products, which accounted for
increases of $7.2 million, $1.2 million, $4.0 million and $2.0 million,
respectively.
Gross Profit. Hedstrom's total gross profit was $26.6 million in fiscal
1995, as compared to $21.5 million in fiscal 1994, an increase of 23.7%.
Hedstrom's fiscal 1995 gross profit margin approximated fiscal 1994's gross
profit margin of 19.8%. The Bedford Division's gross profit margin decreased to
14.5% in fiscal 1995 from 17.1% in fiscal 1994 due to higher costs of raw
materials, particularly plastic resins. The Ashland Division's gross profit
margin increased to 29.9% in fiscal 1995 from 27.3% in fiscal 1994 primarily as
a result of (i) increases in selling prices and (ii) a product mix shift toward
higher-margin playballs, which increased gross profits by $0.9 million and $1.3
million, respectively, but the effects of which were partially offset by a $1.0
million increase in materials costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $19.3 million in fiscal 1995, as compared to $18.2
million in fiscal 1994, an increase of 6.0%. Expressed as a percentage of sales,
selling, general and administrative expenses decreased to 14.4% in fiscal 1995
from 16.7% in fiscal 1994 primarily as a result of higher sales volume.
Interest Expense. Interest expense increased by 53.3%, due primarily to
higher working capital requirements and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1995 was
52.0% as compared with an effective income tax rate of 32.0% in fiscal 1994. The
increase was attributable to larger losses from foreign operations, which
provide no U.S. tax benefit, in 1995 compared to 1994. In addition, Holdings
incurred alternative minimum tax in 1995 that was not incurred in 1994.
LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING COMPANY
Working Capital and Cash Flows.
Net cash used for operating activities was $7.0 million for the six months
ended June 30, 1997 (net of a $13.9 million increase in accrued expenses
primarily related to the Transactions), as compared to $12.7 million for the six
month period ended June 30, 1996. The net use of cash in both periods reflects
the seasonal nature of Hedstrom's business. Hedstrom accumulates accounts
receivable during the first half of the year and subsequently liquidates them in
the second half of the year.
Net cash used for investing activities was $126.0 million for the first six
months of 1997, including the $122.6 million used for the acquisition of ERO,
Inc. and $3.4 million used for other capital expenditures. Net cash used for
investing activities was $4.8 million for the first six months of 1996, which
amount was used for capital expenditures.
Net cash provided by financing activities was $135.6 million for the six
months ended June 30, 1997, including (i) $110.0 million of proceeds from the
issuance of the Senior Subordinated Notes, (ii) $110.0 million of proceeds from
the Term Loans, (iii) $21.6 million from the issuance of the Discount Notes,
(iv) $2.7 million of net borrowings under the Revolving Credit Facility, (v) the
repayment of old term loans in the aggregate amount of $91.4 million, (vi) the
repayment of old revolving loans in the aggregate amount of $38.9 million, (vii)
debt
34
<PAGE> 37
financing costs of $17.8 million, (viii) $4.0 million of proceeds from the
issuance of Holdings Common Stock and (ix) $37.5 million of proceeds from the
issuance of Holdings Non-Voting Common Stock. The net cash provided by financing
activities was used primarily to consummate the acquisition of ERO, Inc. and to
fund operating cash requirements.
For the five months ended December 31, 1996, Hedstrom's operations provided
net cash of $3.0 million, largely the result of a $9.7 million decrease in
accounts receivable attributable to the seasonality of Hedstrom's business.
During this period, Hedstrom spent $1.3 million on capital expenditures and made
net payments of $9.1 million under its revolving credit facility.
For the fiscal year ended July 31, 1996, Hedstrom used $17.7 million of
cash in its operating activities. This net use of cash was attributable
primarily to (i) Hedstrom's $8.1 million net loss (which included $9.6 million
in costs that were expensed in connection with the 1995 Recapitalization) and
(ii) a $7.9 million reduction in accounts payable due to an acceleration of
certain obligations that previously had been extended. During fiscal 1996,
Hedstrom spent $6.7 million on equipment, including $3.3 million related to the
vertical integration of the Bedford Divisions plastics operations. Holdings and
Hedstrom's financing activities during this period generated $31.1 million in
cash. The 1995 Recapitalization involved, among other things, (i) the redemption
of $29.8 million of common stock and $3.1 million of preferred stock, (ii) the
issuance of notes to related parties in the amount of $2.5 million, (iii)
proceeds of $27.2 million from the sale of common stock and (iv) term loan
borrowings of $35.0 million.
For the fiscal year ended July 31, 1995, Hedstrom's operations provided
cash of $0.4 million. Net income of $0.8 million included (i) non-cash charges
of $1.2 million related to the discontinuation of its traffic controls business
and (ii) non-cash credits of $2.0 million related to certain barter sales. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $2.1 million, spent $6.9 million to build up its inventories and
had an increase in of $2.4 million in prepaid expenses related to certain barter
credits. The effects of these actions were partially offset by the extension of
credit terms with certain vendors, which generated $5.8 million of cash. During
fiscal 1995, Hedstrom spent $2.6 million on capital expenditures and incurred
net borrowings of $2.9 million under its revolving credit facility.
For the fiscal year ended July 1994, Hedstrom's operations generated $1.3
million of cash. A net loss of $3.0 million included non-cash charges of $4.7
million related to the discontinuation of its traffic controls business. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $4.0 million and spent $1.7 million to build up its inventories.
The effects of these actions were partially offset by the extension of credit
terms with certain vendors, which generated $5.0 million of cash. During fiscal
1994, Hedstrom spent $3.0 million on capital expenditures and generated $1.1
million of cash in its financing activities.
Liquidity.
Interest payments on the Senior Subordinated Notes and interest and
principal payments under the Senior Credit Facilities represent significant cash
requirements for the Operating Company. The Senior Subordinated Notes require
semiannual interest payments of $5.5 million commencing in December 1997.
Borrowings under the Senior Credit Facilities will bear interest at floating
rates and will require interest payments on varying dates depending on the
interest rate option selected by the Operating Company. Borrowings under the
Senior Credit Facilities will consist of $110 million under the Term Loan
Facilities, comprised of a $75 million Tranche A Term Loan maturing in 2003 and
a $35 million Tranche B Term Loan maturing in 2005. In addition, the Senior
Credit Facilities include a $70 million Revolving Credit Facility.
35
<PAGE> 38
The Term Loan Facilities will require principal repayments according to the
following schedule:
<TABLE>
<CAPTION>
DATE TRANCHE A TERM LOAN TRANCHE B TERM LOAN
---- ------------------- -------------------
<S> <C> <C>
December 31, 1997............................... $1,000,000 $ 125,000
March 31, 1998.................................. 3,000,000 125,000
June 30, 1998................................... 750,000 125,000
September 30, 1998.............................. 3,000,000 125,000
December 31, 1998............................... 750,000 125,000
March 31, 1999.................................. 4,000,000 125,000
June 30, 1999................................... 1,000,000 125,000
September 30, 1999.............................. 4,000,000 125,000
December 31, 1999............................... 1,000,000 125,000
March 31, 2000.................................. 5,000,000 125,000
June 30, 2000................................... 1,250,000 125,000
September 30, 2000.............................. 5,000,000 125,000
December 31, 2000............................... 1,250,000 125,000
March 31, 2001.................................. 6,000,000 125,000
June 30, 2001................................... 1,500,000 125,000
September 30, 2001.............................. 6,000,000 125,000
December 31, 2001............................... 1,500,000 125,000
March 31, 2002.................................. 8,000,000 125,000
June 30, 2002................................... 2,000,000 125,000
September 30, 2002.............................. 8,000,000 125,000
December 31, 2002............................... 2,000,000 125,000
March 31, 2003.................................. 7,200,000 5,000,000
June 30, 2003................................... 1,800,000 1,250,000
September 30, 2003.............................. 5,000,000
December 31, 2003............................... 1,250,000
March 31, 2004.................................. 5,400,000
June 30, 2004................................... 1,350,000
September 30, 2004.............................. 5,400,000
December 31, 2004............................... 1,350,000
March 31, 2005.................................. 5,100,000
June 30, 2005................................... 1,275,000
</TABLE>
The Revolving Credit Facility terminates and all amounts outstanding
thereunder mature on the maturity date of the Tranche A Term Loan Facility. See
"Description of Senior Credit Facilities."
At present, the Discount Notes do not require cash interest payments.
Rather, principal will accrete to an aggregate principal amount of $44,612,000
on June 1, 2002. Commencing on such date, Holdings will be required to make
semiannual interest payments of $2,676,720. See "Description of the New Discount
Notes."
The Operating Company's remaining liquidity demands will be for capital
expenditures and for working capital needs. In each of 1997 and 1998 the
Operating Company is expected to make capital expenditures of approximately $9
million. For the foreseeable future, the Operating Company expects that its
capital expenditures will be limited primarily to maintaining existing
facilities and equipment and completing its insourcing of manufacturing certain
components. The Credit Agreement imposes an annual limit of $10,000,000 on the
Operating Company's capital expenditures and investments (subject in any given
year to a roll-over of up to $4,000,000 of unused capital expenditure capacity
from the previous year). In addition, to achieve the estimated net cost savings
of over $9.0 million described herein (see "Prospectus Summary -- Business
Strategy -- Achieve Cost Savings" and "Unaudited Pro Forma Consolidated
Financial Information"), the Operating Company may incur expenditures related to
the restructuring of its operations.
The Operating Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of June 30,
1997, approximately $67.3 million was available to the Operating
36
<PAGE> 39
Company (subject to borrowing base limitations) for borrowings under the
Revolving Credit Facility. See "Description of Senior Credit Facilities."
Management believes that cash generated from operations, together with
borrowings under the Revolving Credit Facility, will be sufficient to meet the
Operating Company's working capital and capital expenditures needs for the
foreseeable future.
The Operating Company's remaining liquidity demands will be for capital
expenditures and for working capital needs. In each of 1997 and 1998 the
Operating Company is expected to make capital expenditures of approximately $9
million. For the foreseeable future, the Operating Company expects that its
capital expenditures will be limited primarily to maintaining existing
facilities and equipment and completing its insourcing of manufacturing certain
components. The Senior Credit Facilities impose annual limits on the Operating
Company's capital expenditures and investments. In addition, to achieve the
estimated net cost savings of over $9.0 million described herein (see
"Prospectus Summary -- Business Strategy -- Achieve Cost Savings" and "Unaudited
Pro Forma Consolidated Financial Information"), the Operating Company may incur
expenditures related to the restructuring of its operations.
The Operating Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of June 30,
1997, approximately $67.3 million was available to the Operating Company
(subject to borrowing base limitations) for borrowings under the Revolving
Credit Facility. See "Description of Senior Credit Facilities." Management
believes that cash generated from operations, together with borrowings under the
Revolving Credit Facility, will be sufficient to meet the Operating Company's
working capital and capital expenditures needs for the foreseeable future.
The Operating Company believes it is more likely than not to realize the
net deferred tax asset and accordingly no valuation allowance has been provided.
This conclusion is based on, (i) changes in operations that have recently
occurred, including the 1996 Cost Reduction Plan and the acquisition of ERO,
Inc., which has a lengthy and consistent history of profitable operations, (ii)
projections (which include ERO, Inc.) of sufficient taxable U.S. income to fully
realize the net deferred tax asset by the end of calendar year 1999, (iii) the
tax loss carryforwards included in the net deferred tax asset were generated in
very recent periods and do not begin to expire until the years 2008-2011, and
(iv) the significant excess of book basis over tax basis relative to the net
assets of ERO, Inc. Management continually evaluates the realizability of the
net deferred tax assets and the need for a valuation allowance on such assets.
SEASONALITY OF THE OPERATING COMPANY
Hedstrom's peak selling season is the first half of the calendar year
whereas ERO's peak selling season is the second half of the calendar year.
Management believes that the Acquisition will smooth the historical seasonality
of Hedstrom's and ERO's businesses, thereby balancing working capital
requirements and enabling the Operating Company to generate more consistent cash
flows throughout the year. Pro forma net sales for the Operating Company for
each calendar quarter during the twelve months ended December 31, 1996 were
24.6%, 26.5%, 22.8% and 26.1%, respectively, of total pro forma net sales for
such twelve-month period.
ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Holdings will adopt SFAS No. 128, "Earnings Per Share", effective December
15, 1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock and common stock equivalents.
As required, Holdings will restate the reported earnings per share upon adoption
of SFAS No. 128. Assuming adoption of SFAS No. 128, basic and diluted earnings
per share for the six months ended June 30, 1997 and 1996, respectively would
have been the same as reported earnings per share.
Holdings will adopt SFAS No. 129, "Disclosure of Information about Capital
Structure", effective December 15, 1997. SFAS No. 129 requires companies to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. Those disclosures include such things as dividend and
liquidation preferences, participation rights, call prices and dates, conversion
prices, unusual voting rights and others. As
37
<PAGE> 40
required, Holdings will make such disclosures, if applicable, upon adoption.
Management does not believe that SFAS No. 129 will have a significant impact on
Holdings' financial statements.
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. This pronouncement is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. Management does
not believe that SFAS No. 130 will have a significant impact on Holdings'
financial statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", effective January 1, 1998. This
pronouncement changes the requirements under which public businesses must report
segment information. The objective of the pronouncement is to provide
information about a company's different types of business activities and
different economic environments. SFAS No. 131 will require companies to select
segments based on their internal reporting system. Restatement of prior year
segment disclosure will be required upon adoption of SFAS No. 131. Adoption of
this pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if any,
adoption will have on Holdings' financial statement disclosures.
38
<PAGE> 41
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF ERO
The selected consolidated historical financial data presented below as of
and for the years in the five-year period ended December 31, 1996 were derived
from the consolidated financial statements of ERO, which have been audited by
Price Waterhouse LLP. The selected consolidated financial data presented below
as of and for the three-month periods ended March 31, 1996 and 1997 have not
been audited, but, in the opinion of management, include all the adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly,
in all material respects, such information in accordance with GAAP applied on a
consistent basis. Interim results are not necessarily indicative of ERO's
results for the full year, principally because of the seasonal nature of ERO's
business. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of ERO" and the consolidated financial statements of ERO and the
notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 19,939 $ 18,883 $157,913 $128,722 $126,734 $95,459 $101,777
Cost of sales................................... 13,814 13,264 97,802 80,693 79,776 63,028 64,984
-------- -------- -------- -------- -------- ------- --------
Gross profit.................................... 6,125 5,619 60,111 48,029 46,958 32,431 36,793
Selling, general and administrative expenses.... 7,763 7,553 38,896 33,183 34,078 26,245 26,919
Restructuring charge............................ -- -- -- -- -- 1,700 --
-------- -------- -------- -------- -------- ------- --------
Operating income (loss)......................... (1,638) (1,934) 21,215 14,846 12,880 4,486 9,874
Interest expense................................ 2,010 1,846 9,062 1,997 1,939 1,261 2,292
-------- -------- -------- -------- -------- ------- --------
Income before income taxes...................... (3,648) (3,780) 12,153 12,849 10,941 3,225 7,582
Income tax benefit (expense).................... 1,495 1,552 (4,395) (5,167) (4,482) (1,040) (2,630)
-------- -------- -------- -------- -------- ------- --------
Income from continuing operations............... (2,153) (2,228) 7,758 7,682 6,459 2,185 4,952
Extraordinary expense -- early extinguishment of
debt, net of applicable income taxes.......... -- -- -- -- -- -- (1,558)
-------- -------- -------- -------- -------- ------- --------
Income before cumulative effect of the change in
accounting for income taxes................... (2,153) (2,228) 7,758 7,682 6,459 2,185 3,394
-------- -------- -------- -------- -------- ------- --------
Cumulative effect of the change in accounting
for income taxes.............................. -- -- -- -- -- -- (1,911)
-------- -------- -------- -------- -------- ------- --------
Net income...................................... $ (2,153) $ (2,228) $ 7,758 $ 7,682 $ 6,459 $ 2,185 $ 1,483
======== ======== ======== ======== ======== ======= ========
OTHER FINANCIAL DATA:
Net Cash provided by (used in):
Operating activities.......................... $ 12,708 $ 4,793 $ (1,277) $ 5,582 $ 8,832 $ 9,468 $ 9,369
Investing activities.......................... (289) (448) (3,619) (56,867) (6,442) (6,289) (13,443)
Financing activities.......................... (16,149) (3,628) 9,836 51,239 (2,515) (3,118) (920)
EBITDA(a)....................................... (315) (590) 26,504 18,411 15,949 7,320 12,994
Depreciation and amortization(b)................ 1,323 1,344 5,289 3,565 3,069 2,834 3,120
Capital expenditures............................ 289 448 3,625 1,772 1,287 989 1,881
Ratio (deficiency) of earnings to fixed
charges(c).................................... (3,648) (3,780) 2.2x 5.9x 5.5x 2.9x 3.8x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................... $136,381 $131,353 $159,994 $144,138 $ 56,792 $48,935 $ 51,112
Total debt (including current maturities)....... 79,431 82,041 95,640 84,998 11,875 14,650 17,800
Stockholders' equity............................ 40,649 32,789 43,014 36,064 27,997 21,177 18,781
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
EBITDA as determined by ERO may not be comparable to the EBITDA measure as
reported by other companies. While EBITDA is not intended to represent cash
flow from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow or
operating income (as measured by GAAP) or as a measure of liquidity. In
addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect to
the ability of ERO to meet its future debt service, capital expenditures and
working capital requirements.
(b) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(c) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and fixed charges. Fixed charges
consist of the total of (i) interest, whether expensed or capitalized; (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be
one-third). Due to the seasonal nature of ERO's business, the ratio of
earnings to fixed charges for the three months ended March 31, 1996 and
March 31, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
39
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ERO
GENERAL
ERO is a leading designer, manufacturer, importer and marketer of licensed
and branded children's leisure products through four principal business units:
- Amav, which ERO acquired in October 1995, is a fully integrated
manufacturer of children's products, including arts and crafts kits, game
tables such as table tennis, table-top hockey and soccer, pool and
shuffleboard, and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles.
- ERO Industries produces the Slumber Shoppe line of products, which
includes slumber products such as indoor sleeping bags and play tents
featuring popular licensed characters such as Mickey's Stuff for Kids,
Barbie(TM), Pooh, and Batman and Robin(TM), and a water sports line of
products including flotation jackets, masks, fins, goggles and snorkels
directed at the children's market through ERO's license portfolio and at
the children's and adults' markets under the Coral brand name.
- Priss Prints produces licensed room decorations for young children,
consisting principally of stick-on and peel-off wall decorations.
- Impact sells a broad line of school supplies featuring popular licensed
characters, including back packs, book bags, lunch kits and stationery
products such as portfolios, binders, study kits, pencils and theme
books.
RESULTS OF OPERATIONS
The following discussion generally relates to the historical consolidated
results of operations and financial condition of ERO and should be read in
conjunction with the Consolidated Financial Statements of ERO included elsewhere
herein.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
SUMMARY OF CONSOLIDATED FINANCIAL RESULTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
INCREASE
1997 1996 (DECREASE)
------ ------ -----------
<S> <C> <C> <C>
Net sales............................... $19.9 $18.9 5.3%
Gross profit margin..................... 30.7% 29.8% 0.9%
Selling, general and administrative
expense (as a percentage
of sales)............................. 38.9% 40.0% (1.1)%
Interest expense........................ $ 2.0 $ 1.8 11.1%
</TABLE>
ERO's first quarter results reflect the seasonal nature of its business.
The majority of the ERO's sales occur in the third and fourth quarters, while a
substantial portion of its expenses remain relatively consistent throughout the
year.
Net sales for the first quarter of 1997 increased 5.3% to $19.9 million as
compared to the first quarter of last year. The first quarter sales growth can
be attributed to ERO's Slumber Shoppe and Priss Prints businesses whose emphasis
on classic licenses resulted in gaining year-round placement at certain
retailers.
The gross profit margin for the quarter ended March 31, 1997 increased 0.9%
compared to the prior year due to improved pricing on its licensed products when
compared to a relatively weak performance in licensed products in the first
quarter of 1996.
40
<PAGE> 43
Selling, general and administrative expense as a percentage of sales
decreased by 1.1% as ERO was able to control fixed cost spending in a period of
increased revenues.
Interest expense increased by 11.1% compared to the same period in the
prior year due to higher interest rates and an increase in working capital
requirements.
1996 COMPARED TO 1995
Sales increased to $157.9 million, or 22.7%, in 1996 due primarily to
Amav's first full year of operations. Amav, which was acquired October 1, 1995,
contributed $66.1 million in 1996 compared to $24.6 million in 1995, a $41.5
million increase. Partially offsetting Amav's contribution, sales in ERO's
Impact business fell far short of 1995 levels due to the timing of 1996's major
licensing events. The success of Impact's back-to-school products relies heavily
on major summer licensing events. In 1996, the major licensing events occurred
in the fourth quarter, which is after the back-to-school selling season.
Amav's sales of $66.1 million represent a $16.1 million, or 32.2%, increase
over 1995 full year sales of $50.0 million. Amav's sales growth is attributable
to several factors including increased production capacity, working capital
availability, growth of the arts and crafts market, the introduction of new
products and increased account penetration.
Gross profit margins for 1996 increased by 0.8% compared to 1995 due
primarily to a shift in the sales mix to ERO's businesses with higher margins,
Amav and Priss Prints.
Selling, general and administrative expenses as a percentage of sales
decreased by 1.2% primarily due to a decrease in royalty expense as a percentage
of sales resulting from a shift in the sales mix to non-licensed products. This
decrease was partially offset by the increase in amortization expense resulting
from the Amav acquisition.
Interest expense increased significantly from the prior year due to the
acquisition debt and higher working capital requirements.
ERO's income before taxes in 1996 was generated primarily from its foreign
operations on account of the success of Amav, which has its operations based in
Canada. Because Amav manufactures its products in Canada, approximately 27% of
ERO's cost of sales in 1996 were denominated in Canadian dollars. However,
approximately 80% of Amav's sales were made to its U.S.-based corporate parent
for resale in the United States. These sales were denominated in U.S. dollars.
As a result, only 13% of ERO's 1996 sales were made to foreign customers.
ERO's effective tax rate for 1996 was 36% compared to 40% in 1995 due to an
increase in the percentage of income derived from ERO's foreign subsidiaries,
which carry lower statutory tax rates than its U.S. subsidiaries.
1995 COMPARED TO 1994
Sales increased to $128.7 million, or 1.6%, in 1995 due primarily to the
acquisition of Amav. Amav, which was acquired October 1, 1995, contributed $24.6
million to sales in 1995. Offsetting Amav's positive impact on sales, ERO's
sales of licensed products were significantly below the record levels achieved
during 1994 due to the lack of a strong license. During 1994, ERO's strongest
license, Mighty Morphin Power Rangers(TM), generated approximately 29% of total
sales. There was no such license in 1995.
Amav's full year sales in 1995 were $50.0 million as compared to $24.8
million in 1994, a 102% increase. Amav's sales improvement from the prior year
resulted from a number of factors including increased capacity due to its new
facility in Montreal, Quebec, increased account penetration and the introduction
of several new products.
During 1995, ERO discontinued the majority of products within the sports
bags and coolers product group. The products within this group, which did not
carry an exclusive license, offered ERO no competitive advantages and did not
fit into ERO's strategy of providing children's leisure products.
41
<PAGE> 44
Gross profit margins were relatively consistent with the prior year. The
shift in sales mix to ERO's businesses with higher margins, Amav and Priss
Prints, was slightly offset by the discontinuation of products in the sports
bags and coolers product group, as discussed above, and the liquidation of
certain slow-moving inventory.
Selling, general and administrative expenses as a percentage of sales
decreased by 1.1% primarily due to a decrease in royalty expense as a percentage
of sales resulting from a shift in the sales mix to Amav's non-licensed
products. This decrease was partially offset by the effect on ERO's fixed cost
structures of the decrease in licensed product sales.
Interest expense was relatively consistent with the prior year as ERO's new
$110.0 million credit facility, used to finance the Amav acquisition, was not in
effect until December 1995.
A majority of ERO's income before taxes in 1995 was generated by Amav's
Canadian operations. As mentioned above, approximately 27% of Amav's cost of
sales are denominated in Canadian dollars, whereas approximately 80% of its
sales are made to its U.S.-based corporate parent for resale in the United
States. Such resales are denominated in U.S. dollars. As a result, only 9% of
ERO's 1995 sales were made to foreign customers.
LIQUIDITY AND CAPITAL RESOURCES
Net cash generated from operating activities during the three months ended
March 31, 1997 totaled approximately $12.7 million. These cash flows, together
with cash on hand, were used principally to repay $16.2 million under ERO's then
existing loan facilities and fund capital expenditures of $0.3 million.
ERO's liquidity and capital resources are derived primarily through its
operations. Management anticipates that cash generated by operating activities
will be sufficient to conduct its operations as planned. Any additional capital
resources, if needed, will be available through capital contributions and loans
by Hedstrom (subject to restrictions imposed by certain of Hedstrom's debt
covenants).
As mentioned above, a significant portion of ERO's cost of sales is
denominated in Canadian dollars. Consequently, ERO's cash flows and earnings
(and to a lesser extent, its revenues) are affected by fluctuation in foreign
currency exchange rates, primarily, the Canadian dollar-U.S. dollar exchange
rate. ERO does not have any hedging program in place to mitigate the risks of
exchange rate fluctuation. Although ERO has not experienced material adverse
consequences from exchange rate fluctuations in the past, there can be no
assurance that future exchange rate fluctuations would not have material adverse
effects on its liquidity or capital resources.
42
<PAGE> 45
BUSINESS
GENERAL
Holdings is a holding company whose only material asset is the stock of
Hedstrom. Except for the performance of its obligations with respect to the
Discount Notes, the Senior Credit Facilities and the Holdings Guaranty, Holdings
currently conducts all of its business through the Operating Company.
The Operating Company (consisting of the combined businesses of Hedstrom
and ERO) is a leading North American manufacturer and marketer of
well-established children's leisure and activity products. The Operating
Company's diversified product lines are in such "evergreen" product categories
as outdoor gym sets, wood gym kits and slides, spring horses, playballs, arts
and crafts kits, game tables, and licensed indoor sleeping bags, play tents and
wall decorations. The Operating Company considers such product categories to be
"evergreen" in nature because each is characterized by proven longevity,
demonstrated market demand and consistent sales over time. For example, the
Operating Company believes products such as outdoor gym sets and playballs have
been marketed and sold in the United States for over 30 years.
The Operating Company believes that in the U.S. markets for nine of its ten
principal product categories, it enjoys the competitive advantage of being the
market share leader, the low-cost producer or both. For the twelve-month period
ended December 31, 1996, approximately half of the Operating Company's pro forma
net sales were derived from product categories for which the Operating Company
believes it has a market share of approximately 75% or greater. The Operating
Company's products are sold primarily through national retailers, mass
merchants, home improvement centers, sporting goods stores, drug store chains
and supermarkets. The Operating Company's outdoor gym set product line accounted
for approximately 20% of the Operating Company's pro forma net sales for the
twelve-month period ended December 31, 1996. No other product line accounted for
more than 10% of the Operating Company's pro forma net sales for the
twelve-month period ended December 31, 1996.
Hedstrom's operations historically have been conducted through two
principal divisions. The Bedford Division principally manufactures and markets
in the United States outdoor gym sets, wood gym kits and slides, spring horses
and gym accessories. The Ashland Division principally manufactures and markets
in the United States a wide variety of children's playballs and ball pit
products. In addition, Hedstrom sells products manufactured by both the Bedford
Division and the Ashland Division outside of the United States through its
International Division. Hedstrom utilizes excess capacity at both the Bedford
Division and the Ashland Division to supply components to a variety of OEMs of
industrial and consumer products.
ERO's operations historically have been conducted through four principal
business units:
- Amav, which ERO acquired in October 1995, is a fully integrated
manufacturer of children's products, including arts and crafts kits, game
tables such as table tennis, table-top hockey and soccer, pool and
shuffleboard, and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles.
- ERO Industries produces the Slumber Shoppe line of products, which
includes slumber products such as indoor sleeping bags and play tents
featuring popular licensed characters such as Mickey's Stuff for Kids,
Barbie(TM), Pooh, and Batman and Robin(TM), and a water sports line of
products including flotation jackets, masks, fins, goggles and snorkels
directed at the children's market through ERO's license portfolio and at
the children's and adults' markets under the Coral brand name.
- Priss Prints produces licensed room decorations for young children,
consisting principally of stick-on and peel-off wall decorations.
- Impact sells a broad line of school supplies featuring popular licensed
characters, including back packs, book bags, lunch kits and stationery
products such as portfolios, binders, study kits, pencils and theme
books.
43
<PAGE> 46
PRODUCTS
BEDFORD DIVISION
Outdoor Gym Sets. The Bedford Division produces a broad selection of
painted metal gym sets and composite metal and plastic gym sets. Each of the
Operating Company's outdoor gym sets consists of a heavy-duty metal frame which
supports several hanging, swinging rides such as contoured swing seats, glide
rides and trapezes. In addition, the Operating Company's outdoor gym sets often
incorporate a plastic slide and climbing tower. The Operating Company sells its
outdoor gym sets as complete, ready-to-assemble kits. The Operating Company's
outdoor gym set line consists of 19 styles available in a variety of colors that
sell at retail prices between $80 and $600. The Operating Company estimates that
its share of the total U.S. market for painted metal gym set units and composite
metal and plastic gym set units is approximately 75%.
Wood Gym Kits and Slides. The Bedford Division produces wood gym kits sold
through home improvement centers and building supply stores. Wood gym kits
consist of certain components necessary to construct a wood gym set, such as
nuts, bolts and framing brackets, and are typically sold together with accessory
products including swings, climbing towers and plastic slides. The Operating
Company does not sell the lumber, nails or the tools required to construct the
wood gym kits. The retailers that carry the Operating Company's wood gym kits,
primarily home improvement centers, benefit from the sale of such items,
particularly the lumber. The Operating Company currently offers wood gym kits
with differing designs and layouts, ranging from simple swing set designs to
more elaborate designs in the shape of pirate ships and trains. The Operating
Company's wood gym kits generally sell for retail prices between $69.99 and
$339.99, and the Operating Company's slides generally sell for retail prices
between $79.99 and $269.99. The Operating Company estimates that its share of
the total U.S. market for wood gym kits is approximately 25%, second only to
Swing-N-Slide Corporation.
Spring Horses. The Bedford Division designs and manufactures 11 different
styles of spring horses for use by children ages two to six. The Operating
Company manufactures the body of the horse, paints it to a specific style and
packages it with a metal frame manufactured by the Operating Company. The
Bedford Division has manufactured spring horses for over ten years, and
management estimates that the Operating Company has approximately a 75% share of
the U.S. market for this product category.
Gym Accessories, OEM and Other. The Bedford Division designs, manufactures,
sources and sells a broad line of accessories that complement its outdoor gym
sets and wood gym kits. Accessories include swing seats, climbing ropes, ladders
and nets. Many of the Operating Company's outdoor gym sets offer the customer
the ability to customize the gym set with various accessories sold both in
connection with the initial purchase of an outdoor gym set and as upgrades or
replacement parts for the Operating Company's large base of installed units. The
Operating Company currently offers over 65 individual accessory items. In
addition, the Operating Company has undertaken efforts to identify new products
that the Bedford Division can manufacture during the May through November period
when its manufacturing capacity historically has been underutilized. One such
product is "Turbo Hoops," a home version of the popular basketball game found in
taverns and other commercial establishments. The Operating Company intends to
begin producing Turbo Hoops during the second half of 1997. In addition, the
Operating Company is seeking opportunities to utilize seasonal excess capacity
at the Bedford Division to manufacture products for OEMs. The Operating
Company's sales to OEM customers will better enable it to cost-effectively
maintain a core of full-time, highly skilled workers and a high level of plant
utilization year-round, resulting in a consistent source of revenue and
profitability for the Bedford Division.
ASHLAND DIVISION
The Ashland Division produces a wide variety of children's playballs
ranging in size from 4" to 36" in diameter, including both premium playballs and
non-premium playballs. Management estimates the Operating Company's share of the
total U.S. playball market is approximately 85%.
Premium Playballs. The Operating Company's premium playballs generally
include stylized printing on 360 degrees or 180 degrees of the ball or contain
fun novelty items inside the ball. The premium playballs that are decorated with
stylized printing feature either popular characters from the Operating Company's
extensive license portfolio or the Operating Company's proprietary playball
patterns. The Operating Company's proprietary playball
44
<PAGE> 47
patterns include holograms, sparkles and other geometric patterns. In addition
to playballs with stylized printing, the Operating Company recently introduced a
line of "goofballs" that contain items inside the ball such as plastic spiders,
worms and beads. The Operating Company's premium playballs generally sell at
retail prices between $1.99 and $8.99.
Non-Premium Playballs. The Operating Company's non-premium playballs
include (i) decorated playballs with stripes or other simple patterns, (ii)
undecorated playballs and (iii) athletic-style playballs such as footballs,
basketballs, baseballs, volleyballs and soccer balls. Non-premium playballs are
available in a wide range of colors and sizes. This product line experienced
significant growth over the last two years from the introduction of an 18"
diameter playball, a new size in the playball category. The Operating Company's
non-premium playballs generally sell at retail prices between $1.99 and $24.99.
Ball Pits. In fiscal 1995, the Operating Company developed and introduced
home and backyard versions of the popular ball pits used by children in
commercial locations such as McDonald's. The Operating Company sells its ball
pit product as a complete, ready-to-assemble set including an inflatable
tent-like enclosure and 250 to 400 ball pit balls. Management estimates that the
Operating Company's share of the U.S. ball pit market exceeds 75%. The Operating
Company sources the enclosures from several overseas manufacturers and packages
the enclosures with ball pit balls manufactured at the Ashland Division.
Management believes that one of the Operating Company's competitive advantages
in this product category is its ability to manufacture high-quality ball pit
balls using a patented process for which the Operating Company has an exclusive
licensing agreement. Hedstrom currently offers four ball pit models.
OEM and Other. The Ashland Division complements its core playball and ball
pit businesses and smooths seasonal production requirements by manufacturing a
variety of custom-fabricated plastic products for toy, sporting goods, hospital
supply, decorating and lighting companies. Sales to OEM customers enable the
Ashland Division to cost-effectively maintain a core of full-time, highly
skilled workers and result in a high level of plant utilization year-round while
providing a consistent source of revenue and profitability.
AMAV
Amav manufactures and markets children's leisure and activity products
including arts and crafts kits, game tables, and certain other children's bulk
play products. Amav's entire product line consists of approximately 400 items,
approximately 70% of which are in the arts and crafts kits category.
Arts and crafts products include a broad variety of children's activity
kits, chests and boxes that include stickers, doll outfits, mazes, paints,
balloons, stamps, stationery, sun catchers, woodworking kits, magic sets,
puzzles, sand art, egg art and art materials. These products generally are
targeted at children between three and eight years of age.
Game tables include a wide variety of popular table games such as table
tennis, table-top hockey and soccer, pool and shuffleboard that are often
integrated into a single game table. For example, Amav's 3-in-1 game table
includes table tennis, hockey and pool whereas Amav's 6-in-1 game table includes
those games plus foosball and both arcade and floor basketball. The largest game
table Amav manufactures is an 18-in-1 game table. In addition, Amav also
manufactures certain other children's bulk play products such as play kitchens
and battery-operated ride-on vehicles, which Amav recently introduced.
ERO INDUSTRIES
ERO Industries' product offerings consist of its Slumber Shoppe line of
products and its water sports line of products.
The Slumber Shoppe line of products includes indoor sleeping bags, carrying
cases, play tents and selected children's furniture, all of which feature
popular licensed characters and are targeted at children between the ages of two
and ten. The core product within this line is the slumber bag, a lightweight
indoor sleeping bag used for slumber parties, sleepovers and children's nap
times. Carrying cases (called slumber mates) are large enough to fit a slumber
bag and pajamas, toothbrushes and other items a child may need to spend the
night at a friend's house. Play tents (called slumber tents) are designed to be
used indoors, and give children a private area that can
45
<PAGE> 48
be used as a clubhouse, fort or special play area. ERO Industries also sells
foam and bean bag chairs featuring licensed characters.
The water sports line of products includes a full range of personal
flotation devices (such as flotation vests) and swim and pool products
(including masks, fins, snorkels and goggles). These products are directed at
the children's market using the Operating Company's license portfolio, and at
the children's and adults' markets under the Coral brand name.
PRISS PRINTS
Through the 1993 acquisition of Priss Prints, ERO entered the children's
room decor industry with its licensed character wall decorations. Priss Prints
sells self-adhesive wall decorations for children's rooms that can be removed
without any damage to the wall or paint. Such wall decorations consist of
licensed characters and other decorations. For 1997, the Operating Company's
room decoration licenses include Batman and Robin(TM), Looney Tunes(TM), and 101
Dalmatians, Pooh and other of Disney's classic characters. Potential new product
offerings include licensed character borders, introduced by Priss Prints for
1997, door decorations, night-lights and switchplates.
IMPACT
ERO established its Back-to-School product line in 1994 through the
combination of ERO's then-existing Back-to-School product line and the acquired
product lines of Impact International, Inc. and Impact Designs, Ltd.
(collectively, "Impact"). Impact now offers a broad line of licensed school
supplies, including carry bags (such as backpacks, school bags, lunch kits,
luggage, fanny packs and locker bags) and stationery products (such as theme
books, portfolios, binders, pencils and study kits). This product line
capitalizes on the Operating Company's licensing and graphics strengths and
offers opportunities for innovative products featuring unique designs and other
special effects.
CUSTOMERS
The Operating Company maintains an extensive customer base that includes
the nation's leading mass merchants, toy retailers, home improvement centers,
department stores, catalog showrooms, sporting goods stores and warehouse clubs.
The Operating Company's products are sold in every state in the United States as
well as Canada, the United Kingdom and several other foreign countries.
The Operating Company's pro forma net sales to Toys "R" Us, Wal-Mart, Kmart
and Target (its four largest customers) during the twelve-month period ended
December 31, 1996 would have accounted for 16%, 17%, 10% and 7%, respectively,
of the Operating Company's pro forma net sales during such period. Although the
Operating Company has well-established relationships with its key customers, the
Operating Company does not have long-term contracts with any of them.
SALES AND MARKETING
HEDSTROM
Hedstrom's sales force is comprised of one Sales Manager of Major Accounts
who deals directly with its top four customers -- Toys "R" Us, Wal-Mart, Kmart
and Service Merchandise -- and two National Sales Managers who work with outside
vendor representatives to cover Hedstrom's other customers. These outside vendor
representatives include approximately 22 manufacturers representative
organizations with over 100 sales representatives to service Hedstrom's mass
merchant and home center customers.
Hedstrom's marketing activities include customer service, product
development and advertising and promotions. Hedstrom has six customer service
representatives in the Bedford Division and four in the Ashland Division who
serve retail customers by tracking and confirming orders and answering general
inquiries. Hedstrom's consumer relations department is staffed with trained
professionals who, through an "800" number, assist end-users in assembling
products and purchasing spare parts. Hedstrom's product development staff
46
<PAGE> 49
consists of twenty engineering and design professionals. The product development
process involves extensive product engineering, model making and sample testing.
Hedstrom historically has advertised its products in cooperation with its
retail customers, principally through print media such as newspaper circulars
and free-standing inserts sponsored by its customers. In fiscal 1996, Hedstrom
initiated, on a trial basis, its own multi-media advertising program designed to
increase consumer awareness of the Hedstrom brand over time. The total cost for
this advertising program was approximately $1.5 million. After careful review,
management determined that this trial advertising campaign would not provide an
acceptable return on investment and elected to discontinue it. Therefore, such
costs will not be incurred in 1997.
ERO
ERO's sales and marketing organization includes a small group of direct
salespeople and independent sales representatives. ERO markets its products
primarily through numerous trade shows and limited co-operative advertising. ERO
does not currently conduct direct advertising.
ERO has in-house creative services providing marketing support for each of
its business units. While ERO uses several outside, free-lance creative
resources, its in-house facilities have display design and packaging
capabilities. The creative services departments work closely with the marketing
groups of the licensors as well as retailers to enhance consumer appeal through
the display and packaging of products.
COMPETITION
The Operating Company generally operates in a highly-competitive
environment. Competition in the markets for the Operating Company's products is
based primarily on cost, characters licensed (for licensed character products),
product design and quality, reputation, customer service, new product innovation
and creative marketing and distribution approaches. Competitive factors in the
market for character licenses include royalty levels, breadth of product lines,
timely royalty reporting and payment, artistic applications and compliance with
licensors' guidelines.
Bedford Division. The Operating Company believes that its sales of outdoor
gym sets for the twelve months ended July 31, 1996, represented approximately
75% of the total U.S. market for outdoor painted metal gym sets and composite
metal and plastic gym sets. The Operating Company's principal competitor in this
product line is RDM, Inc., formerly known as Roadmaster Corporation (which
recently filed for bankruptcy protection). Certain custom gym set manufacturers
also compete in this market. The Operating Company believes that it holds the
second largest share of the total U.S. wood gym kit market behind Swing-N-Slide
Corporation.
Ashland Division. Based on the Operating Company's sales of playballs for
the twelve months ended July 31, 1996, management estimates that the Operating
Company accounts for approximately 85% of sales in the total U.S. market for
children's playballs. The Operating Company's largest competitor in this product
line is National Latex Corporation.
Amav. In the arts and activities product market, the Operating Company
competes with Hallmark Corporation's Binney & Smith unit (under the Crayola(TM)
brand name), and a number of smaller arts and crafts suppliers such as Rose Art,
Craft House, Ohio Art and Quincrafts Corporation. In the game table and
children's bulk activity products market, the Operating Company competes with
Fisher Price (a subsidiary of Mattel), Little Tikes (a subsidiary of
Rubbermaid), Monneret and Step 2. In this category, start-up costs are a barrier
to entry with substantial tooling costs and equipment requirements. The
Operating Company believes that it is a market leader in Amav's lines of
business.
ERO Industries. The Operating Company's main competitors with respect to
its Slumber Shoppe product line are Bibb and Coleman, which produces
non-licensed slumber bags, and Fisher Price which produces non-licensed slumber
tents. The Operating Company believes that it has a market share of greater than
75% with respect to licensed sleeping bags and slumber tents. With respect to
its water sports product line, its competitors include Sterns, Kent and Aqua
Leisure.
47
<PAGE> 50
Priss Prints. The Operating Company competes primarily against Borden,
Infantino, Dolly and 3M in the overall room decor industry. Management believes
that it is a market leader in this business.
Impact. The Operating Company competes against companies such as Mead,
Imaginings 3 and Plymouth in the stationery products market. With respect to its
carry bag product line, the Operating Company competes against companies such as
Pyramid Hand Bags and Imaginings 3.
MANUFACTURING AND SUPPLY; RAW MATERIALS
BEDFORD DIVISION
Production Process. The Bedford Division's production, warehousing and
distribution facilities are located in a 472,000 square foot facility in
Bedford, Pennsylvania. The manufacturing process for the Operating Company's
outdoor gym sets and accessories consists of eight integrated operations: steel
tube-forming, metal stamping, secondary fabrication, painting, plastic forming,
plastic coating, assembly and packaging. The steel tube-forming operations
consist of three high-speed tube mills which form metal strips into tubing of
various wall thickness (0.07 inches to 1.03 inches), diameters (0.50 to 2.50
inches) and lengths (19 inches to 20 feet). These steel tubes are used primarily
for the main structural supports of the Operating Company's gym sets. The metal
stamping operations consist of mechanical presses that utilize multi-station
dies to stamp, form or draw materials from coil metal stock. The materials from
the steel tube-forming and metal stamping operations are sent to the secondary
fabrication operations, which consist of mechanical presses, bending machines,
welding stations and custom fabrication equipment. After the secondary
fabrication operation, the products are painted in one of four electrostatic
spray paint systems. The three plastic forming machines (22 pound dual-head blow
molders) produce plastic slides and other large plastic parts from HDPE resin
(high density polyethylene). The plastic coating (extruding) process covers the
swing chain and cable for the gym sets with a soft coating of PVC (polyvinyl
chloride) in various colors. Next, the products are sent to one of three final
pack lines which consist of conveyor belts manned by employees at pre-arranged
stations placing parts in packing cartons. The three pack lines can produce up
to 8,000 gym sets per day depending on the type of outdoor gym sets in
production. A hardware bag containing components assembled on the automatic
bagging line, is also placed in the packing carton. The packing cartons are then
placed on large pallets, six to twelve per pallet, depending on size, and
wrapped in thin stretchable plastic and loaded onto trucks or stored in the
warehouse to await the arrival of the trucks.
Capacity. Management believes that the Bedford Division has adequate
capacity to supply anticipated future production requirements at times of peak
demand. The division has the capability to outsource or increase capacity in all
of its processes should backlog develop in the future.
Quality Assurance. The Bedford Division maintains an extensive quality
assurance program beginning with the development of plans for effective control
of manufacturing processes, supplier surveys to assure manufacturing capability
and a formal product release system to assure that product goals are achieved.
Quality assurance personnel verify that manufacturing employees are correctly
performing quality inspections including auditing incoming raw materials,
manufacturing processes and finished products. All manufacturing employees are
trained and provided with the tools necessary to determine whether manufactured
parts meet specifications. Employees systematically assemble one unit from each
production lot to verify that form and fit conform to safety standards.
Raw Materials. The primary raw materials used by the Bedford Division
include sheet and band steel and plastic resin. Most of the division's steel raw
materials (representing approximately 31% of the Bedford Division's total raw
materials purchased) are currently sourced from a single supplier. The Operating
Company typically enters into a one-year supply contract with this supplier each
August. These contracts protect the Operating Company from price increases while
allowing for downward adjustments if prices should fall. The Operating Company
is presently negotiating a new supply contract with this supplier and
anticipates that it will be similar to previous contracts. Management believes
that alternative sources of supply are readily available for substantially all
of the raw materials used by the Bedford Division, including steel.
Components Purchases. The Operating Company periodically evaluates the
economics of producing internally certain plastic components used in the
production and assembly of its outdoor gym sets versus purchasing such
components externally. In 1996, the Operating Company invested approximately
$3.0 million in
48
<PAGE> 51
new plastic blow-molding equipment to manufacture many of the plastic slides
that it had previously purchased from third-party vendors. Management believes
that producing these slides internally is currently providing annual cost
savings of approximately $1.5 million as compared to fiscal 1996 levels.
ASHLAND DIVISION
Facilities. The Ashland Division's production facilities are located in two
facilities in Ashland, Ohio. The main plant is 273,000 square feet and houses
most of the division's production capacity including a 115,200 square foot
warehouse and distribution center. A second 95,400 square foot leased facility
is used primarily to serve the division's OEM customer base and, to a lesser
degree, as a source of increased playball capacity. The second plant also houses
the division's administrative offices and showrooms. The Ashland Division also
has two satellite facilities strategically located in Carrollton, Texas and
Dothan, Alabama. These facilities are used primarily to manufacture undecorated
playballs for the local regions surrounding the plants and to inflate premium
and non-premium playballs that are shipped from Ashland.
Production Process. The Ashland Division manufactures its products
utilizing two basic manufacturing processes: (i) rotational molding for
polyvinyl playballs and polyethylene plastic OEM products and (ii) blow molding
for plastic ball pit balls. After the initial manufacturing process, the Ashland
Division employs a variety of value-added operations such as innovative
printing, decorating and packaging, utilizing, among other things, the Operating
Company's state-of-the-art 360 degrees playball printing systems. The Operating
Company believes it is the only manufacturer in the United States utilizing such
systems. All playballs are inflated at Ashland during production to ensure that
they meet the Operating Company's quality standards, then deflated for storage
or shipping. The Operating Company ships deflated playballs to customers with
inflation capabilities. Playballs being delivered to customers without inflation
capabilities are re-inflated and boxed at one of the Ashland Division's
satellite playball plants at the time orders are shipped to such customers. The
Operating Company believes its satellite playball plants provide it with a
competitive advantage by minimizing the distance that inflated balls must be
shipped, thereby reducing shipping costs.
Capacity. Management believes that the Ashland Division has adequate
in-house capacity to supply future increased production requirements at times of
peak demand and has ample space within its existing facilities to further expand
capacity.
Ball Pit License. The Operating Company has entered into a year-to-year
licensing agreement with Euro-Matic, Ltd. ("Euro-Matic"), a United Kingdom-based
company that holds the patent for the ball pit balls that the Operating Company
produces. Using machinery and molds supplied by Euro-Matic, the Operating
Company manufactures ball pit balls for sale by Euro-Matic to the "institutional
market," including McDonald's, Discovery Zone, hospitals, schools, and similar
institutions and businesses for which the Operating Company receives a fee per
ball. In addition, Euro-Matic provides the Operating Company with molds that the
Operating Company uses with its own machinery to produce ball pit balls that the
Operating Company packages with its ball bit products for sale to the retail
market.
Quality Assurance. The Ashland Division maintains a rigorous quality
control process. The division has three quality assurance personnel who are
trained in the methods of statistical process control and continuous
improvement. The quality assurance team selectively audits work-in-process and
finished goods and works closely with customers to define achievable product
standards.
Raw Materials. The Ashland Division manufactures its products from
commodity raw materials such as plastic resins, pigments and other chemicals
that generally are available from numerous sources. The Operating Company has
not entered into any supply contracts with any of the Ashland Division's
vendors. Management believes that alternate sources of supply are readily
available for all of the raw materials used by the Ashland Division.
ERO
The Operating Company manufactures all of its arts and crafts kits and
children's bulk activity products in its Montreal, Quebec manufacturing
facility. The Operating Company owns or leases numerous injection molding
49
<PAGE> 52
machines. The Operating Company also owns two large printing presses and four
smaller label/sticker printers. The Operating Company manufactures all of its
plastic components, mixes its own paint, prints all labels, cartons, coloring
books, stickers and instruction sheets and manufactures crayons. All of the
Operating Company's products are manufactured with non-toxic materials to comply
with industry standards for children's products and applicable environmental
laws.
The Operating Company produces or assembles slumber bags, personal
flotation devices, juvenile furniture and children's wall decoration products at
the Operating Company's Hazlehurst, Georgia facility. To reduce lead times and
inventory levels with respect to these product lines, the Operating Company
utilizes just-in-time manufacturing and sourcing systems. The Operating Company
purchases its play tents, slumber mates, swim, aqua fitness, back-to-school and
wall decoration products from manufacturers located in the United States,
Taiwan, Hong Kong and the People's Republic of China.
The Operating Company's largest suppliers for its domestic operations
provide printed fabric for the slumber bags, liners for the slumber bags, vinyl
prints for room decorations, polyester fiber to fill the slumber bags and
zippers and buckles. The Operating Company works closely with its suppliers in
order to consolidate the purchasing function and to foster teamwork between the
Operating Company and its suppliers. For the aforementioned products, the
Operating Company maintains alternative sources of supply.
TECHNOLOGY AND LICENSING
The Operating Company holds a variety of patents, patent applications,
trademarks and licenses. While the Operating Company considers such patents,
trademarks and licenses to be valuable assets, it does not believe that its
competitive position is dependent on patent or trademark protection or that its
operations are dependent on any individual patent trademark or license or group
of related patents, trademarks and licenses.
An important element in the Operating Company's marketing strategy is the
ability to differentiate its products from those of its competitors and
stimulate sales by using popular licensed characters and well-known brand names
on its products. Accordingly, the Operating Company emphasizes the acquisition
and maintenance of a broad portfolio of character licenses. Rather than pursuing
a few licenses with speculative appeal, the Operating Company maintains multiple
licenses in several categories, including both classic (e.g., Mickey's Stuff for
Kids, Barbie(TM), Pooh and 101 Dalmatians) and contemporary characters (e.g.,
Disney's Hercules, Jurassic Park: The Lost World(TM) and Batman and Robin(TM)).
The Operating Company's license agreements typically run for two years and
require payments of approximately 10-12% of licensed product revenues. The
renewal terms of certain license agreements are based upon the attainment of
specified sales levels, whereas others are based on informal understandings or
arrangements. License agreements typically are subject to termination by the
licensor upon failure of the licensee to meet various performance standards.
Under the terms of certain of its license agreements, the Operating Company is
required to pay minimum guaranteed fees to the licensor over the life of the
agreement. The guaranteed license fees payable by the Operating Company have
been insignificant due to the Operating Company's having exceeded its minimum
royalty requirements. After giving pro forma effect to the Transactions,
approximately 28% of the Operating Company's pro forma net sales for the twelve
months ended December 31, 1996 would have been derived from sales of licensed
products. Approximately 67% of such net sales would have been attributable to
licenses covering ten licensed characters and approximately 44% of such net
sales would have been derived from licenses with Disney Enterprises, Inc. and
its affiliates.
BACKLOG
The Operating Company monitors the inventory level of each of its key
customers, which allows the Operating Company to anticipate customer orders and
fill such orders within a matter of days. As a result of such monitoring and the
Operating Company's just-in-time manufacturing of several of its principal
products, the Operating Company does not generate significant backlog.
50
<PAGE> 53
PLANTS AND PRINCIPAL PROPERTIES
Management believes that the Operating Company's facilities are in good
condition and that it has sufficient capacity to meet its current and projected
manufacturing and distribution needs. The Operating Company's principal
executive offices are located at 585 Slawin Court, Mount Prospect, Illinois
60056.
The following table summarizes certain information regarding the Operating
Company's principal operating facilities.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
LOCATION FOOTAGE DESCRIPTION OF USE EXPIRATION(A)
-------- ----------- ------------------ -------------
<S> <C> <C> <C>
OWNED FACILITIES
Saint Laurent, Quebec................. 800,000 Amav Sales, Administration, N/A
Manufacturing and
Distribution
Bedford, Pennsylvania................. 472,000 Bedford Division N/A
Manufacturing, Warehouse
and Administrative
Ashland, Ohio......................... 273,000 Ashland Division N/A
Manufacturing, Warehouse
and Administrative
Hazlehurst, Georgia................... 230,000 ERO Industries and Impact N/A
Manufacturing and
Distribution
Plattsburgh, New York................. 80,000 Amav Manufacturing and N/A
Distribution
LEASED FACILITIES
Ashland, Ohio......................... 95,400 Ashland Division 2011
Manufacturing
Reno, Nevada.......................... 40,000 Bedford Division 2008
Manufacturing and
Warehouse
Mount Prospect, Illinois.............. 38,000 Executive Corporate Offices 1999
Carrollton, Texas..................... 34,000 Ashland Division Warehouse 2006
and Manufacturing
Hazlehurst, Georgia................... 27,000 Priss Prints Distribution 1998
Dothan, Alabama....................... 25,100 Ashland Division Warehouse 2003
and Manufacturing
Alma, Georgia 25,000 Bedford Division 2002
Manufacturing and
Warehouse
Kitchener, Ontario, Canada............ 19,300 Ashland Division Warehouse 2011
and Manufacturing
Coraopolis, Pennsylvania.............. 6,400 Corporate Offices 2000
Dallas, Texas......................... 4,000 Priss Prints Sales and 2000
Marketing
New York, New York.................... 3,900 New York Showroom 2004
Boca Raton, Florida................... 3,500 Impact Sales and Marketing 1998
Northampton, United Kingdom........... 400 Administrative Monthly
</TABLE>
- ---------------
(a) Assumes exercise of all options to renew.
51
<PAGE> 54
LEGAL PROCEEDINGS
The Operating Company is from time to time involved in lawsuits arising in
the ordinary course of business. The Operating Company maintains product
liability insurance and management does not believe that the outcome of any such
lawsuits will have a material adverse effect on the Operating Company's
financial condition. Although historically the Operating Company has not been
required to pay any material liability claims, there can be no assurance that
the Operating Company will not incur claims which are in excess of its
insurance.
SEASONALITY
Historically, the Operating Company's sales have been highly seasonal, with
Hedstrom's peak selling season occurring during the first two calendar quarters
of the year and ERO's peak selling season occurring during the third and fourth
calendar quarters of the year. However, management believes the Acquisition will
result in the Operating Company's sales being relatively balanced throughout the
year. Pro forma net sales for the Operating Company for each calendar quarter
during the twelve months ended December 31, 1996 were 24.6%, 26.5%, 22.8% and
26.1%, respectively, of total pro forma net sales for such twelve-month period.
ENVIRONMENTAL
Certain of the Operating Company's operations, including the use of
solvents, paints and other materials that contain chemicals that are considered
hazardous under various environmental laws, are subject to federal, state, local
and foreign environmental laws and regulations, which govern, among other
things, the discharge of pollutants into the air and water, as well as the
handling and disposal of solid and hazardous wastes. Permits are required for
certain of the Operating Company's operations, and these permits are subject to
modification, renewal and revocation by issuing authorities. Governmental
authorities have the power to enforce compliance with applicable laws and
regulations, and violations may result in fines, injunctions, including the
cessation of operations, or both. Management believes that the Operating
Company's operations currently comply in all material respects with applicable
environmental laws and regulations.
Under the Clean Air Act Amendments of 1990 (the "CAA"), the Environmental
Protection Agency has been directed, among other things, to develop standards
and permit procedures with respect to certain air pollutants. Because many of
the implementing regulations have not yet been promulgated, the Operating
Company cannot make a final assessment of the impact of the CAA. Based upon its
preliminary review of the CAA, management currently believes that compliance
with the CAA and other environmental laws and regulations will not have a
material adverse effect on the Operating Company.
GOVERNMENT REGULATIONS
The Operating Company is subject to the provisions of, among other laws,
the Federal Hazardous Substances Act and the Federal Consumer Product Safety
Act. These laws empower the Consumer Product Safety Commission (the "CPSC") to
protect consumers from hazardous products and other articles. The CPSC has the
authority to exclude from the market products which are found to be unsafe or
hazardous and can require a manufacturer to recall such products under certain
circumstances. Similar laws exist in some states and cities in the United States
and in Canada and Europe. While the Operating Company believes that it is, and
will continue to be, in compliance in all material respects with applicable
laws, rules and regulations, there can be no assurance that the Operating
Company's products will not be found to violate such laws, rules and
regulations, or that more restrictive laws, rules or regulations will not be
adopted in the future which could make compliance more difficult or expensive or
otherwise have a material adverse effect on the Operating Company's business,
financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Operating Company employed approximately 2,125
people. Approximately 9.5% of the Operating Company's employees are unionized,
all of whom are employed in the Ashland Division. These employees are
represented by the Rubber Workers Union, which is affiliated with the United
States Steel Workers Union. In the past five years, the Operating Company has
experienced only one work stoppage, which occurred in October 1995 and lasted
only two days. The Operating Company's collective bargaining agreement with the
Rubber Workers Union expires on October 10, 1998. The Operating Company believes
that it has a good relationship with its employees.
52
<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS
The following table sets forth the age and the position of the directors
and executive officers of each of Holdings and Hedstrom.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert H. Elman............ 58 Chairman of the Board of Directors of Holdings and Hedstrom
Alan B. Menkes............. 38 Director of Holdings and Hedstrom
Jack D. Furst.............. 38 Director of Holdings and Hedstrom
Arnold E. Ditri............ 60 Director of Holdings and Hedstrom; Chief Executive Officer and
President of Holdings and Hedstrom
David F. Crowley........... 47 Chief Financial Officer of Holdings and Hedstrom
Alastair H. McKelvie....... 65 Executive Vice President -- Operations of Hedstrom
John D. Dellos............. 58 Executive Vice President -- Manufacturing of Hedstrom
Alfred C. Carosi, Jr....... 49 Executive Vice President -- Sales and Marketing of Hedstrom
</TABLE>
Robert H. Elman has been the Chairman of the Board of Holdings and Hedstrom
since July 1997 and has been a director of Holdings and Hedstrom since October
1995. Mr. Elman is Chairman and Chief Executive of DESA International, Inc.
("DESA International"), a manufacturer of indoor and outdoor heating products
and specialty tools. Mr. Elman has served in that capacity since March 1985 when
DESA International was formed as part of the leveraged buy out of AMCA
International, Inc.'s Consumer Products Division. Prior to 1985, he served as
Senior Group Vice President of AMCA International with responsibilities for the
Consumer, Automotive Products, Aerospace, and Food Packaging Divisions. Mr.
Elman joined AMCA International in 1975 when it acquired DESA Industries, a
company he assisted in forming in 1969. Prior to forming DESA Industries, Mr.
Elman was employed with ITT and Singer in various management positions in the
United States and Europe.
Alan B. Menkes has been a director of Holdings and Hedstrom since October
1995. Mr. Menkes is a Managing Director and Principal of Hicks Muse, having
served as such since April 1996. Prior thereto, Mr. Menkes served as a Vice
President of Hicks Muse. Before joining Hicks Muse in 1992, Mr. Menkes was
employed by The Carlyle Group, a Washington D.C.-based private investment firm,
most recently as a Senior Vice President. Mr. Menkes also serves as a director
of International Home Foods, Inc.
Jack D. Furst has been a director of Holdings and Hedstrom since July 1997.
Mr. Furst is a Managing Director and Principal of Hicks Muse and has held such
position since 1989. Prior to joining Hicks Muse, Mr. Furst was a Vice President
and subsequently a Partner of Hicks & Haas, Incorporated, a Dallas-based private
investment firm from 1987 to May 1989. From 1984 to 1986, Mr. Furst was a merger
and acquisition/corporate finance specialist for The First Boston Corporation in
New York. Mr. Furst serves on the board of directors of Neodata Corporation,
Desa Holdings Corporation, International Wire Holding Company, Viasystems Group,
Inc., Viasystems, Inc. and Cooperative Computing, Inc.
Arnold E. Ditri was Chairman of the Board of Hedstrom from December 1991
until October 1995 and has been a director of Holdings and Hedstrom since
October 1995. He has been President and Chief Executive Officer of Hedstrom
since March 1993 and of Holdings since October 1995. Mr. Ditri served as
President of Ditri Associates, Inc. from 1981 until 1994. Ditri Associates, with
a number of financial partners, specialized in acquiring and building
under-achieving companies. From 1984 through 1988, Ditri Associates built Eagle
Industries, Inc. in partnership with Great American Management, Inc. of Chicago.
From 1961 to 1981, Mr. Ditri was a management consultant with Booz Allen &
Hamilton and Touche Ross & Co. He was a partner in Touche Ross from 1967 to
1981.
David F. Crowley has been Chief Financial Officer of Hedstrom since 1994
and of Holdings since October 1995. Prior to joining Hedstrom, Mr. Crowley
served as Chief Financial Officer and/or Vice President of Finance for various
companies owned and operated by Ditri Associates. Prior to joining Ditri
Associates, from 1986 to 1990, Mr. Crowley was Treasurer of the Ring Screw Works
Company in Detroit, Michigan. From 1974 to
53
<PAGE> 56
1985, he was employed by Price Waterhouse where he was a Retail and Banking
Industry Specialist and served in London, England for two years managing
strategic planning and technical projects for the firm.
Alastair H. McKelvie has been Executive Vice President of Operations with
Hedstrom since 1991. Mr. McKelvie has over 40 years of experience chiefly in
manufacturing and general management positions covering a wide range of
products, processes, and geographic locations. From 1989 to 1991, Mr. McKelvie
served as Executive Vice President for various companies owned and operated by
Ditri Associates. Prior to 1989, he served as Executive Vice President of Eagle
Industries. From 1965 to 1982, Mr. McKelvie held a number of line and staff
positions in the Singer Operating Company including Vice President of
Manufacturing in its International Group and General Manager of its two most
profitable operating divisions.
John D. Dellos has been Executive Vice President of Operations with
Hedstrom since 1994 and has over 36 years of operations experience. Previous to
joining Hedstrom, Mr. Dellos was Senior Vice President of Manufacturing of
P.P.M. Cranes, Inc. in Conway, South Carolina from 1990 to 1993. Prior to that,
Mr. Dellos was employed as General Manager of Manufacturing from 1986 to 1989 by
Komatsu America Manufacturing Company located in Chattanooga, Tennessee. Before
joining Komatsu, Mr. Dellos served in several capacities for a division of
Dresser Industries in Galion, Ohio from 1974 to 1985. From 1959 to 1973, Mr.
Dellos worked for Deere and Operating Company in various positions.
Alfred A. Carosi, Jr. has been Executive Vice President of Sales and
Marketing with Hedstrom since December 1996. In this position he is also
responsible for corporate product development. Prior to joining Hedstrom, Mr.
Carosi was Senior Vice President of Marketing and Marketing Services for the
Parker Brothers Division of Hasbro, Inc. from 1991 to 1995. From 1990 to 1991,
he was Vice President of Children's and Family Programs at NBC. Before joining
NBC, Mr. Carosi served as Senior Vice President of Marketing and Marketing
Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's Playskool Division
from 1987 to 1988. Prior to 1987, Mr. Carosi worked in various marketing-related
capacities for Hasbro, Sara Lee Corp. and Anheuser Busch, Inc.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the fiscal year ended July 31, 1996 (the
last full fiscal year of Hedstrom), the compensation awarded to or earned by the
President and Chief Executive Officer of Hedstrom and each other executive
officer of Hedstrom whose total annual salary and bonus for the fiscal year
ended July 31, 1996 was in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) ($)(1)
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Arnold E. Ditri................................... 333,938 -- 543,544 15,422
President and Chief Executive Officer
David F. Crowley.................................. 120,941 4,463 271,777 1,515
Chief Financial Officer
John D. Dellos.................................... 124,435 7,456 271,777 6,014
Executive Vice President -- Manufacturing
</TABLE>
- ---------------
(1) All Other Compensation for the fiscal year ended July 31, 1996 includes the
following: (i) contributions made by Hedstrom on behalf of the following
individuals to Hedstrom's 401(K) Savings Plan: Mr. Ditri -- $11,435; Mr.
Crowley -- $1,254; and Mr. Dellos -- $5,276; and (ii) premiums paid by
Hedstrom for term life insurance policies in the following amounts: Mr.
Ditri -- $3,987; Mr. Crowley -- $261; and Mr. Dellos -- $738.
54
<PAGE> 57
The following table summarizes option grants made during the fiscal year
ended July 31, 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- -------------- ------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arnold E. Ditri............. 543,544 25.0% $1.00 10/27/05 341,832 866,269
David F. Crowley............ 271,777 12.5% $1.00 10/27/05 170,919 433,143
John D. Dellos.............. 271,777 12.5% $1.00 10/27/05 170,919 433,143
</TABLE>
- ---------------
(1) The options to purchase Holdings Common Stock were granted under the
Hedstrom Holdings, Inc. 1995 Stock Option Plan (the "1995 Option Plan") and
become exercisable in three equal annual installments commencing on the
first anniversary of the date of grant.
(2) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compound rates
of appreciation of Holdings Common Stock over the term of the options. These
amounts represent certain assumed rates of appreciation only, assuming a
fair market value on the date of grant of $1.00 per share. Because Holdings
Common Stock is privately-held, Hedstrom assumed a per share fair market
value on the date of grant of the foregoing options equal to $1.00 per share
based on the per share amount paid by Hicks Muse in connection with the
acquisition of Holdings and Hedstrom in October 1995. Actual gains on the
exercise of options are dependent on the future performance of Holdings
Common Stock. There can be no assurance that the potential values reflected
in this table will be achieved. All amounts have been rounded to the nearest
whole dollar amount.
The following table summarizes the value of options to acquire Holdings
Common Stock held by the Named Executive Officers as of July 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JULY 31, 1996 (#) FISCAL YEAR END ($)(2)
------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
Arnold E. Ditri..................................... 0/543,544 0/0
David F. Crowley.................................... 0/271,777 0/0
John D. Dellos...................................... 0/271,777 0/0
</TABLE>
- ---------------
(1) No options were exercised by a Named Executive Officer in fiscal 1996.
(2) Assumes a fair market value of $1.00 per share. Because Holdings Common
Stock is privately-held, for purposes of the calculation of the value of
unexercised options as of July 31, 1996, Hedstrom has assumed a per share
fair market value for Holdings Common Stock equal to the per share value
paid by Hicks Muse in connection with the acquisition of Holdings and
Hedstrom in October 1995.
55
<PAGE> 58
EMPLOYMENT AGREEMENTS
Arnold E. Ditri Employment Agreement. Mr. Ditri entered into an employment
agreement with Holdings and Hedstrom on October 27, 1995. Pursuant to such
employment agreement, Mr. Ditri will serve as the President and Chief Executive
Officer of Holdings and Hedstrom through October 31, 1998, which term shall be
extended for successive terms of one year each unless terminated by either party
at least 90 days prior to the end of the initial term or any annual extension.
Mr. Ditri is required to devote substantially all of his business efforts to
Holdings, Hedstrom and their subsidiaries.
The compensation provided to Mr. Ditri under his employment agreement
includes an annual base salary of $340,000 and such benefits as are customarily
accorded to senior executive employees of Holdings and Hedstrom who are
similarly situated. In addition, Mr. Ditri is entitled to an annual cash bonus
equal to not less than 50% of his base salary if Holdings and Hedstrom achieve
the sales, operating income and departmental performance targets set forth in
the Hedstrom Corporation Incentive Plan.
Mr. Ditri's employment agreement also provides that if Holdings and
Hedstrom terminate Mr. Ditri's employment without Cause (as defined) or if Mr.
Ditri terminates his employment for Good Reason (as defined), Mr. Ditri shall be
entitled to receive his base salary for one year after such termination or for
the remaining term of the employment agreement, whichever is greater; provided,
however, that if Mr. Ditri is employed by (A) an entity other than a Competitive
Business (as defined), then all compensation earned by Mr. Ditri will reduce the
amounts required to be paid by the Holdings and Hedstrom as described in this
sentence, or (B) any Competitive Business, then Holdings and Hedstrom shall have
no obligation to pay the amounts described in this sentence. In the event Mr.
Ditri's employment is terminated due to Mr. Ditri's death, his base salary shall
continue for six months and any bonus payment shall be prorated to reflect the
portion of the then current year for which Mr. Ditri performed services. In the
event of Mr. Ditri's disability, Mr. Ditri shall be entitled to receive his base
salary (less disability insurance proceeds pursuant to any benefit plan of the
Holdings or Hedstrom) for the Disability Period (as defined).
"Cause" exists if and when (i) Holdings' board of directors has notified
Mr. Ditri in writing of its reasonable determination that he is not
substantially performing the primary duties of his office; (ii) Mr. Ditri has
been convicted of a felony under state or federal criminal law involving theft,
fraud or moral turpitude; (iii) Mr. Ditri has engaged in gross negligence or
willful misconduct injurious to Holdings or Hedstrom; or (iv) Mr. Ditri has
materially breached any of his covenants under his employment agreement or any
other agreement with Holdings or Hedstrom.
"Good Reason" means any of the following (without Mr. Ditri's consent): (i)
the taking of any action by Holdings' board of directors or its designees
(unless it has determined that Mr. Ditri is not substantially performing the
primary duties of his then current office, after 30 days' notice and failure to
correct by Mr. Ditri) in a manner that has the effect of significantly divesting
Mr. Ditri's authority with respect to his subordinates or materially interferes
with the exercise of Mr. Ditri's authority to manage and supervise the business
and operations of Holdings and Hedstrom; (ii) any relocation of Holdings' and
Hedstrom's executive offices to a location outside of the Cleveland, Ohio,
Pittsburgh, Pennsylvania or New York, New York metropolitan areas, except for
required travel in connection with Holdings' and Hedstrom's business; and (iii)
any failure to pay Mr. Ditri his compensation when due pursuant to the terms of
his employment agreement.
"Competitive Business" means any business entity which is engaged in the
businesses in which Holdings or Hedstrom engages during the Restricted Period
(as defined), sells or markets its products in the United States, and derives or
plans to derive a material portion of its revenues from such products. For
purposes of the preceding sentence, sales of 50% of its total revenues or in
excess of $5,000,000 in dollar volume shall be deemed to be material.
"Restricted Period" means the period during which Mr. Ditri is employed by
Holdings and Hedstrom and for a period of one year thereafter; provided, that if
Mr. Ditri's employment is terminated without Cause or if Mr. Ditri terminates
his employment for Good Reason, the "Restricted Period" shall extend only so
long as Holdings and Hedstrom are required to pay Mr. Ditri pursuant to his
employment agreement.
56
<PAGE> 59
A "Disability" occurs if and when Mr. Ditri becomes unable to substantially
perform his services as a result of his permanent or temporary, total or partial
physical or mental disability.
"Disability Period" means the period commencing on the first day of the
calendar month following the month during which a Disability occurs and ending
on the first to occur of the following: (i) the expiration of Mr. Ditri's
employment agreement; (ii) if the Disability is continuous throughout the six
consecutive months following the month during which the Disability occurs, then
the last day of such sixth consecutive calendar month; and (iii) if the
Disability is intermittent and shall exist throughout any 12 calendar months
following the month during which the Disability occurs, then the last day of
such 12th calendar month.
David F. Crowley Severance Arrangement. While Mr. Crowley does not have a
formal employment agreement, Holdings and Hedstrom have agreed that Mr. Crowley
will be entitled to receive his base salary for a period of 12 months following
any termination of his employment, other than for cause, on or prior to November
15, 1997.
COMPENSATION OF DIRECTORS
With the exception of Robert H. Elman, the directors of Holdings and
Hedstrom did not receive compensation from either Holdings or Hedstrom for
services rendered in that capacity during the fiscal year ended July 31, 1996.
Mr. Elman receives $500 for each telephonic meeting and $1,000 for each meeting
attended in person. During the fiscal year ended July 31, 1996, Mr. Elman
received a total of $3,000 pursuant to such arrangements. Directors of Holdings
and Hedstrom are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
board of directors or committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended July 31, 1996, all matters concerning
executive officer compensation were addressed by the Board of Directors of
Holdings and Hedstrom. During this period Mr. Ditri served as both a director
and an officer of Holdings and Hedstrom. No executive officer of Holdings or
Hedstrom served as a member of the board of directors or compensation committee
of any entity which has one or more executive officers who serve on Holdings' or
Hedstrom's Board of Directors.
57
<PAGE> 60
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
STOCK OWNERSHIP
All of the issued and outstanding capital stock of Hedstrom is owned by
Holdings. The following table sets forth certain information regarding the
beneficial ownership of the outstanding Holdings Common Stock by each person who
is known by Holdings to beneficially own more than 5% of the Holdings Common
Stock and by the directors of Holdings and the Named Executive Officers,
individually, and by the directors and executive officers of Holdings as a
group.
<TABLE>
<CAPTION>
SHARES OF HOLDINGS
COMMON STOCK
BENEFICIALLY OWNED
---------------------
PERCENT
NUMBER OF OF
SHARES CLASS
---------- -------
<S> <C> <C>
5% STOCKHOLDERS
HM Parties(1)............................................. 56,030,600 82.8%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
OFFICERS AND DIRECTORS
Robert H. Elman........................................... 1,625,000 4.5%
Alan B. Menkes (1)(2)..................................... 55,385,370 81.9%
Jack D. Furst (1)(3)...................................... 55,451,640 82.0%
Arnold E. Ditri (4)....................................... 4,087,481 11.3%
David E. Crowley (5)...................................... 122,171 *
John N. Dellos (6)........................................ 169,539 *
Alastair H. McKelvie (7).................................. 1,884,292 5.2%
All executive officers and directors as a group (8
persons)............................................... 61,766,552 92.3%
</TABLE>
- ---------------
* Represents less than 1%
(1) Includes (i) 23,829,000 shares owned of record by HM Fund II, a limited
partnership of which the sole general partner is HM2/GP Partners, L.P., a
limited partnership of which the sole general partner is Hicks, Muse GP
Partners, L.P., a limited partnership of which the sole general partner is
Hicks, Muse, Tate & Furst Fund II Incorporated, a corporation affiliated
with Hicks Muse; (ii) 31,520,000 shares of Non-Voting Common Stock owned of
record by HM Fund II which are convertible into shares of Holdings Common
Stock, on a one-for-one basis, at the option of HM Fund II, (iii) 479,400
shares owned of record by Thomas O. Hicks; and (iv) 202,200 shares owned of
record by four children's trusts of which Mr. Hicks serves as trustee. Mr.
Hicks is a controlling stockholder of Hicks Muse and serves as Chairman of
the Board, President, Chief Executive Officer, Chief Operating Officer and
Secretary of Hicks Muse. Accordingly, Mr. Hicks may be deemed to be the
beneficial owner of Holdings Common Stock held by HM Fund II. John R. Muse,
Charles W. Tate, Jack D. Furst, Lawrence D. Stuart, Jr., Alan B. Menkes, and
Michael J. Levitt are officers, directors and minority stockholders of Hicks
Muse and as such may be deemed to share with Mr. Hicks the power to vote or
dispose of Holdings Common Stock held by HM Fund II. Each of Messrs. Hicks,
Muse, Tate, Furst, Stuart, Menkes and Levitt disclaims the existence of a
group and disclaims beneficial ownership of Holdings Common Stock not
respectively owned of record by him.
(2) Includes 36,370 shares owned of record by Mr. Menkes.
(3) Includes (i) 36,078 shares owned of record by Mr. Furst and (ii) 66,562
shares owned of record by a family trust of which Mr. Furst serves as
trustee. Mr. Furst disclaims beneficial ownership of shares not owned of
record by him.
(4) Includes (i) 3,106,300 shares owned of record by Mr. Ditri, (ii) 800,000
shares owned of record by certain members of Mr. Ditri's family, and (iii)
181,181 shares subject to options that are exercisable within 60 days. Mr.
Ditri disclaims beneficial ownership of shares not owned of record by him.
58
<PAGE> 61
(5) Includes (i) 31,579 shares owned of record by Mr. Crowley and (ii) 90,592
shares subject to options that are exercisable within 60 days.
(6) Includes (i) 78,947 shares owned of record by Mr. Dellos and (ii) 90,592
shares subject to options that are exercisable within 60 days.
(7) Includes (i) 1,793,700 shares owned of record by Mr. McKelvie and (ii)
90,592 shares subject to options that are exercisable within 60 days.
CERTAIN TRANSACTIONS
Monitoring and Oversight Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year
agreement (the "Monitoring and Oversight Agreement") with Hicks, Muse & Co.
Partners, L.P. ("Hicks Muse Partners"), pursuant to which they pay Hicks Muse
Partners an annual fee of $175,000 for oversight and monitoring services to
Holdings and Hedstrom. The annual fee is adjustable at the end of each fiscal
year to an amount equal to 0.1% of the consolidated net sales of Hedstrom during
such fiscal year, but in no event less than $175,000. Messrs. Furst and Menkes,
directors of Holdings and Hedstrom, are each principals of Hicks Muse Partners.
In addition, Holdings and Hedstrom have agreed to indemnify Hicks Muse Partners,
its affiliates and their respective directors, officers and controlling persons,
if any, and, agents and employees of Hicks Muse Partners or any of its
affiliates from and against all claims, liabilities, losses, damages, and
expenses, including legal fees, arising out of or in connection with the
services rendered by Hicks Muse Partners in connection with the Monitoring and
Oversight Agreement.
The Monitoring and Oversight Agreement makes available the resources of
Hicks Muse Partners concerning a variety of financial and operational matters.
The services that have been and will continue to be provided by Hicks Muse
Partners could not otherwise be obtained by Holdings and Hedstrom without the
addition of personnel or the engagement of outside professional advisors. In
management's opinion, the fees provided for under this agreement reasonably
reflect the benefits received and to be received by Holdings and Hedstrom.
Financial Advisory Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year
agreement (the "Financial Advisory Agreement") with HM2/Management Partners,
L.P. ("HM2"), pursuant to which they paid HM2 a cash financial advisory fee of
approximately $1.175 million as compensation for its services as financial
advisor in connection with the acquisition of Holdings and Hedstrom by Hicks
Muse. HM2 also will be entitled to receive a fee equal to 1.5% of the
transaction value (as defined) for each add-on transaction (as defined) in which
Hedstrom is involved. The term "transaction value" means the total value of any
add-on transaction (excluding any fees payable pursuant to the Financial
Advisory Agreement in connection with such add-on transaction) including the
amount of any indebtedness, preferred stock or similar items assumed (or
remaining outstanding). The term "add-on transaction" means any future proposal
for a tender offer, acquisition, sale, merger, exchange offer, recapitalization,
restructuring, or other similar transaction directly or indirectly involving
Holdings, Hedstrom, or any of their respective subsidiaries, and any other
person or entity. In connection with the Acquisition, Holdings and Hedstrom paid
HM2 a cash financial advisory fee under the Financial Advisory Agreement of
approximately $3 million as compensation for its services as financial advisor
in connection with the Acquisition.
Messrs. Furst and Menkes, directors of Holdings and Hedstrom, are each
principals of HM2. In addition, Holdings and Hedstrom have agreed to indemnify
HM2, its affiliates and their respective directors, officers and controlling
persons, if any, and agents and employees of HM2 from and against all claims,
liabilities, losses, damages, and expenses, including legal fees, arising out of
or in connection with the services rendered by HM2 in connection with the
Financial Advisory Agreement. The Financial Advisory Agreement makes available
the resources of HM2 concerning a variety of financial matters. The services
that have been and will continue to be provided by HM2 could not otherwise be
obtained by Holdings and Hedstrom without the addition of personnel or the
engagement of outside professional advisors. In management's opinion, the fees
provided for under this agreement reasonably reflect the benefits received and
to be received by Holdings and Hedstrom.
59
<PAGE> 62
Stockholders Agreement
The investors who purchased or received Holdings Common Stock in connection
with or subsequent to the acquisition of Holdings and Hedstrom by Hicks Muse and
its affiliates have entered into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement grants preemptive rights and certain
piggy-back registration rights to the parties thereto and contains provisions
requiring the parties thereto to sell their shares of Holdings Common Stock in
connection with certain sales of Holdings Common Stock by HM Fund II
("drag-along rights") and grants the parties thereto other than HM Fund II the
right to include a portion of their shares of Holdings Common Stock in certain
sales in which HM Fund II does not exercise its drag-along rights ("tag-along
rights"). The Stockholders Agreement terminates on its tenth anniversary date,
although the preemptive rights, drag-along rights and tag-along rights contained
therein will terminate earlier upon the consummation of a registered
underwritten public offering of Holdings Common Stock by Holdings.
DESCRIPTION OF CAPITAL STOCK
The following summarizes certain provisions of Holdings' Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation").
Such summary does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions of the Certificate of
Incorporation, copies of which are available as set forth under "Available
Information."
GENERAL
The Certificate of Incorporation provides for, among other things, the
authorization of 100,000,000 shares of Holdings Common Stock, 40,000,000 shares
of Holdings Non-Voting Common Stock and 10,000,000 shares of undesignated
preferred stock (the "Preferred Stock"). As of June 30, 1997, there were
36,127,395 shares of Holdings Common Stock, 31,520,000 shares of Holdings
Non-Voting Common Stock and no shares of Preferred Stock outstanding. In
addition, Holdings had 2,174,216 shares of Holdings Common Stock reserved for
issuance upon exercise of outstanding options granted under the 1995 Option Plan
and 31,520,000 shares of Holdings Common Stock reserved for issuance upon
conversion of Holdings Non-Voting Common Stock.
COMMON STOCK
All of the issued and outstanding shares of Holdings Common Stock and
Holdings Non-Voting Common Stock are fully paid and non-assessable. The Holdings
Common Stock and Holdings Non-Voting Common Stock are substantially identical
except with respect to voting and conversion rights. Holders of Holdings Common
Stock are entitled to one vote per share on all matters to be voted on by
stockholders whereas holders of Holdings Non-Voting Common Stock generally have
no right to vote except as may be specified in the Certificate of Incorporation
or as required by applicable law. Subject to the rights of holders of any class
or series of Preferred Stock and the restrictions, if any, imposed by
indebtedness outstanding from time to time, the holders of Holdings Common Stock
and Holdings Non-Voting Common Stock are entitled to receive dividends and other
distributions on a pro rata basis as and when declared by the Board of Directors
of Holdings out of any funds of Holdings legally available therefor. Holders of
Holdings Common Stock and Holdings Non-Voting Common Stock have no preemptive,
subscription, redemption or sinking fund rights under the terms of the
Certificate of Incorporation, but each holder of Holdings Common Stock and
Holdings Non-Voting Common Stock who is a party to the Stockholders Agreement is
entitled to the preemptive rights granted therein. See "Stock Ownership and
Certain Transactions -- Certain Transactions -- Stockholders Agreement." Shares
of Holdings Non-Voting Common Stock are convertible into shares of Holdings
Common Stock at any time and from time to time at the option of the holders
thereof.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors of
Holdings to create and issue one or more classes or series of Preferred Stock
and to determine the rights and preferences of each class or series, to the
extent permitted by the Certificate of Incorporation and applicable law. The
Board of Directors of Holdings may determine, without the further vote or action
by Holding's stockholders: (i) whether or not the class or series is to
60
<PAGE> 63
have voting rights, full, special, or limited, or is to be without voting
rights, and whether or not such class or series is to be entitled to vote as a
separate class either alone or together with the holders of one or more other
classes or series of stock; (ii) the number of shares to constitute the class or
series and the designations thereof; (iii) the preferences, and relative,
participating, optional, or other special rights, if any, and the
qualifications, limitations, or restrictions thereof, if any, with respect to
any class or series; (iv) whether or not the shares of any class or series shall
be redeemable at the option of Holdings or the holders thereof or upon the
happening of any specified event and, if redeemable, the redemption price or
prices (which may be payable in the form of cash, notes, securities, or other
property), and the time or times at which, and the terms and conditions upon
which, such shares shall be redeemable and the manner of redemption; (v) whether
or not the shares of a class or series shall be subject to the operation of
retirement or sinking funds to be applied to the purchase or redemption of such
shares for retirement, and, if such retirement or sinking fund or funds are to
be established, the annual amount thereof, and the terms and provisions relative
to the operation thereof; (vi) the dividend rate, whether dividends are payable
in cash, stock of Holdings, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation to the
payment of dividends payable on any other class or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate; (vii)
the preferences, if any, and the amounts thereof which the holders of any class
or series thereof shall be entitled to receive upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, Holdings; (viii)
whether or not the shares of any class or series, at the option of Holdings or
the holder thereof or upon the happening of any specified event, shall be
convertible into or exchangeable for, the shares of any other class or classes
or of any other series of the same or any other class or classes of stock,
securities, or other property of Holdings and the conversion price or prices or
ratio or ratios or the rate or rates at which such exchange may be made, with
such adjustments, if any, as shall be stated and expressed or provided for in
such resolution or resolutions; and (ix) such other special rights and
protective provisions with respect to any class or series as may to the Board of
Directors of Holdings seem advisable.
DESCRIPTION OF THE SENIOR CREDIT FACILITIES
In connection with the Financings, Holdings and Hedstrom entered into a
Credit Agreement (the "Credit Agreement") with Credit Suisse First Boston
Corporation ("CSFB") and the other lenders party thereto to provide the Senior
Credit Facilities. The description of the Senior Credit Facilities set forth
below does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Credit Agreement, including the definitions
therein of certain terms, and the other underlying agreements of the Senior
Credit Facilities.
The Senior Credit Facilities consist of (a) the six-year Tranche A Term
Loan in the principal amount of $75 million; (b) the eight-year Tranche B Term
Loan in the principal amount of $35 million; and (c) the Revolving Credit
Facility providing for revolving loans to Hedstrom and the issuance of letters
of credit for the account of Hedstrom in an aggregate principal and stated
amount at any time not to exceed $70 million. Borrowings under the Revolving
Credit Facility are available based upon a borrowing base not to exceed 85% of
eligible accounts receivable and 50% of eligible inventory.
The full amount of each Term Loan was drawn on the date on which the
Tenders Offer was consummated (the "Closing Date"). Amounts repaid or prepaid in
respect of the Term Loans may not be reborrowed. Loans under the Revolving
Credit Facility were available on the Closing Date and will continue to be
available until the date that is six years after such Closing Date (the
"Revolving Credit Termination Date"). Letters of credit under the Revolving
Credit Facility are available at any time subject to the limitations contained
in the following sentence. No letter of credit will be permitted to have an
expiration date after the earlier of (a) one year from the date of its issuance
and (b) five business days before the Revolving Credit Termination Date. Letters
of credit will be renewable for one-year periods, provided that no letter of
credit shall extend beyond the time specified in clause (b) of the previous
sentence.
61
<PAGE> 64
The Term Loans will amortize according to the following schedule:
<TABLE>
<CAPTION>
DATE TRANCHE A TERM LOAN TRANCHE B TERM LOAN
---- ------------------- -------------------
<S> <C> <C>
December 31, 1997............................... $1,000,000 $ 125,000
March 31, 1998.................................. 3,000,000 125,000
June 30, 1998................................... 750,000 125,000
September 30, 1998.............................. 3,000,000 125,000
December 31, 1998............................... 750,000 125,000
March 31, 1999.................................. 4,000,000 125,000
June 30, 1999................................... 1,000,000 125,000
September 30, 1999.............................. 4,000,000 125,000
December 31, 1999............................... 1,000,000 125,000
March 31, 2000.................................. 5,000,000 125,000
June 30, 2000................................... 1,250,000 125,000
September 30, 2000.............................. 5,000,000 125,000
December 31, 2000............................... 1,250,000 125,000
March 31, 2001.................................. 6,000,000 125,000
June 30, 2001................................... 1,500,000 125,000
September 30, 2001.............................. 6,000,000 125,000
December 31, 2001............................... 1,500,000 125,000
March 31, 2002.................................. 8,000,000 125,000
June 30, 2002................................... 2,000,000 125,000
September 30, 2002.............................. 8,000,000 125,000
December 31, 2002............................... 2,000,000 125,000
March 31, 2003.................................. 7,200,000 5,000,000
June 30, 2003................................... 1,800,000 1,250,000
September 30, 2003.............................. 5,000,000
December 31, 2003............................... 1,250,000
March 31, 2004.................................. 5,400,000
June 30, 2004................................... 1,350,000
September 30, 2004.............................. 5,400,000
December 31, 2004............................... 1,350,000
March 31, 2005.................................. 5,100,000
June 30, 2005................................... 1,275,000
</TABLE>
Hedstrom is required to make mandatory prepayments of loans, and revolving
credit commitments will be mandatorily reduced, in amounts, at times and subject
to certain exceptions, (a) in respect of 75% of consolidated excess cash flow of
Hedstrom starting with fiscal year 1998 and (b) in respect of 100% of the net
proceeds of certain dispositions of material assets or the stock of subsidiaries
or the issuance of capital stock or the incurrence of certain indebtedness by
Hedstrom or any of its subsidiaries. Hedstrom is entitled, at its option, to
prepay loans, and permanently reduce revolving credit commitments, in whole or
in part, at any time in certain minimum amounts. All such prepayments shall be
applied first to the Tranche A Term Loans and the Tranche B Term Loans ratably
(and to the installments thereof ratably in accordance with the then remaining
number of installments) and second, to reduce the commitments under the
Revolving Credit Facility.
The obligations of Hedstrom under the Senior Credit Facilities are
unconditionally and irrevocably guaranteed by Holdings and each of Hedstrom's
direct or indirect domestic subsidiaries (collectively, the "Senior Credit
Facilities Guarantors"). In addition, the Senior Credit Facilities are secured
by first priority or equivalent security interests in (i) all the capital stock
of, or other equity interests in, Hedstrom and each direct or indirect domestic
subsidiary of Hedstrom and 65% of the capital stock of, or other equity
interests in, each direct foreign subsidiary of Hedstrom, or any of its domestic
subsidiaries and (ii) all tangible and intangible assets (including, without
limitation, intellectual property and owned real property) of Hedstrom and the
Senior Credit Facilities Guarantors and the proceeds thereof (subject to certain
excepts and qualifications).
At Hedstrom's option, the interest rates per annum applicable to the Senior
Credit Facilities may be either (i) the Eurocurrency Rate (as defined in the
Credit Agreement) plus (x) 2.5% in the case of the Tranche A Term Loan and the
Revolving Credit Facility or (y) 3.0% in the case of the Tranche B Term Loan or
(ii) the Alternate Base Rate (as defined in the Credit Agreement) plus (x) 1.5%
in the case of the Tranche A Term Loan and the Revolving Credit Facility or (y)
2.0% in the case of the Tranche B Term Loan. The Alternate Base Rate is the
highest of (a) CSFB's Prime Rate (as defined in the Credit Agreement) and (b)
the federal funds effective rate from time to time plus 0.5%. The applicable
margin in respect of the Tranche A Term Loan and the Revolving
62
<PAGE> 65
Credit Facility will be adjusted from time to time by amounts to be agreed upon
based on the achievement of certain performance targets to be determined.
Hedstrom must pay a commission on the face amount of all outstanding
letters of credit at a per annum rate equal to the Applicable Margin then in
effect with respect to Eurocurrency Loans (as defined in the Credit Agreement)
under the Revolving Credit Facility. Hedstrom will also pay a per annum
commitment fee equal to 0.50% on the undrawn portion of the commitments in
respect of the Revolving Credit Facility.
The Credit Agreement contains covenants that require Hedstrom to maintain
its properties and those of its subsidiaries, together with insurance thereon;
to provide certain information to the administrative agent, including financial
statements, notices and reports and permit inspections of the books and records
of Hedstrom and its subsidiaries; to comply with applicable laws, including
environmental laws and ERISA; and to pay taxes and contractual obligations. The
Credit Agreement also contains a number of significant covenants that, among
other things, restrict the ability of Hedstrom to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in certain transactions with affiliates, amend the Indentures, refinance
the New Notes and otherwise restrict corporate activities. In addition, under
the Credit Agreement, Hedstrom is required to comply with specified minimum
interest coverage and maximum leverage ratios. Hedstrom presently is in
compliance with all covenants under the Credit Agreement.
The Credit Agreement contains customary events of default, including
failure to pay principal on either of the Term Loans when due or any interest or
other amount that becomes due within 5 days after the due date thereof, any
representation or warranty made or deemed made is incorrect in any material
respect on or as of the date made or deemed made, the default in the performance
of negative covenants or a default in the performance of certain other covenants
or agreements for a period of thirty days, default in other indebtedness or
guarantee obligations, certain insolvency events, certain ERISA events, actual
or asserted invalidity of any loan documents and a change in control of
Hedstrom.
63
<PAGE> 66
DESCRIPTION OF THE SENIOR SUBORDINATED NOTES
GENERAL
On June 12, 1997, Hedstrom issued $110.0 million in aggregate principal
amount of the Old Senior Subordinated Notes under an Indenture, dated as of June
1, 1997 (the "Senior Subordinated Notes Indenture"), among Hedstrom, Holdings,
the Subsidiary Guarantors (as defined) and IBJ Schroder Bank & Trust Company, as
Trustee (the "Senior Subordinated Notes Trustee"). In connection with the sale
of the Old Senior Subordinated Notes, Hedstrom, Holdings and the initial
purchasers of the Senior Subordinated Notes entered into a Registration Rights
Agreement dated as of June 9, 1997 (the "Registration Rights Agreement"). In
accordance with the terms of the Registration Rights Agreement, Hedstrom,
Holdings and the Subsidiary Guarantors have filed with the Commission a
registration statement on Form S-1 (File No. 333-32385) (the "Exchange Offer
Registration Statement") with respect to, among other things, an offer (the
"Senior Subordinated Notes Exchange Offer") by Hedstrom, Holdings and the
Subsidiary Guarantors to exchange $1,000 principal amount of registered 10%
Senior Subordinated Notes (the "New Senior Subordinated Notes") issued by
Hedstrom for each $1,000 principal amount of Old Senior Subordinated Notes
issued by Hedstrom. The form and terms of the New Senior Subordinated Notes are
identical to the form and terms of the Old Senior Subordinated Notes except that
(i) interest on the New Senior Subordinated Notes will accrue from the date of
issuance of the Old Senior Subordinated Notes and (ii) the New Senior
Subordinated Notes are being registered under the Securities Act and will not
bear any legends restricting their transfer. The New Senior Subordinated Notes
will evidence the same debt as the Old Senior Subordinated Notes and will be
issued pursuant to, and entitled to the benefits of, the Senior Subordinated
Notes Indenture. Upon the issuance of the New Senior Subordinated Notes, the
Senior Subordinated Notes Indenture will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). References herein
to the "Senior Subordinated Notes" shall include both the Old Senior
Subordinated Notes and the New Senior Subordinated Notes.
The following summary of certain provisions of the Senior Subordinated
Notes Indenture and the Senior Subordinated Notes does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Senior Subordinated Notes Indenture (including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act) and the Senior Subordinated Notes, copies of which are
available as set forth under "Available Information."
TERMS OF SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes are unsecured, senior subordinated
obligations of Hedstrom, limited to $110 million aggregate principal amount, and
will mature on June 1, 2007. Each Senior Subordinated Note will bear interest at
the rate of 10% per annum from June 12, 1997, or from the most recent date to
which interest has been paid or provided for, payable semiannually on June 1 and
December 1 of each year, commencing December 1, 1997 to holders of record at the
close of business on the May 15 or November 15 immediately preceding the
interest payment date.
The interest rate on the Old Senior Subordinated Notes is subject to
increase in certain circumstances if the Senior Subordinated Notes Exchange
Offer is not consummated on a timely basis or if certain other conditions are
not satisfied.
OPTIONAL REDEMPTION
Except as set forth below, the Senior Subordinated Notes are not redeemable
at the option of Hedstrom prior to June 1, 2002. On and after such date, the New
Senior Subordinated Notes will be redeemable, at Hedstrom's option, in whole or
in part, at any time upon not less than 30 nor more than 60 days prior notice
mailed by first-class mail to each holder's registered address, at the following
redemption prices (expressed in percentages of
64
<PAGE> 67
principal amount), plus accrued and unpaid interest to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 105.000
2003........................................................ 103.333
2004........................................................ 101.667
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Hedstrom may redeem in the aggregate up to $44,000,000 principal amount of
Senior Subordinated Notes with the proceeds of one or more Equity Offerings (as
defined in the Senior Subordinated Notes Indenture) so long as there is a Public
Market (as defined in the Senior Subordinated Notes Indenture) at the time of
such redemption (provided that if the Equity Offering is an offering by
Holdings, a portion of the net cash proceeds thereof equal to the amount
required to redeem any such Senior Subordinated Notes is contributed to the
equity capital of Hedstrom), at a redemption price (expressed as a percentage of
principal amount) of 110%, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive accrued and unpaid interest due on the relevant interest
payment date in respect of the Senior Subordinated Notes); provided, however,
that at least $66,000,000 aggregate principal amount of the Senior Subordinated
Notes remains outstanding after each such redemption.
At any time on or prior to June 1, 2002, the Senior Subordinated Notes may
also be redeemed as a whole at the option of Hedstrom upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days prior notice (but
in no event more than 90 days after the occurrence of such Change of Control)
mailed by first-class mail to each holder's registered address, at a redemption
price equal to 100% of the principal amount thereof plus the Applicable Premium
as of, and accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to a Senior Subordinated Note at
any Redemption Date, the greater of (i) 1.0% of the principal amount of such
Senior Subordinated Note and (ii) the excess of (A) the present value at such
time of (1) the redemption price of such Senior Subordinated Note at June 1,
2002 (such redemption price being described under "-- Optional Redemption") plus
(2) all required interest payments due on such Senior Subordinated Note through
June 1, 2002, computed using a discount rate equal to the Treasury Rate plus 100
basis points, over (B) the principal amount of such Senior Subordinated Note.
"Change of Control" means:
(i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of Hedstrom and its Subsidiaries to any Person (as defined in the Senior
Subordinated Notes Indenture) or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Senior Subordinated Notes Indenture),
other than to Hicks Muse, Arnold E. Ditri or any of their respective
Affiliates (as defined in the Senior Subordinated Notes Indenture),
officers and directors (the "Permitted Holders"); or
(ii) a majority of the Board of Directors of Holdings or Hedstrom
shall consist of Persons who are not Continuing Directors; or
(iii) the acquisition by any Person or Group (other than the Permitted
Holders) of the power, directly or indirectly, to vote or direct the voting
of securities having more than 50% of the ordinary voting power for the
election of directors of Hedstrom.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such
65
<PAGE> 68
Statistical Release is no longer published, any publicly available source or
similar market data)) most nearly equal to the period from the Redemption Date
to June 1, 2002; provided, however, that if the period from the Redemption Date
to June 1, 2002 is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that if the period from the Redemption
Date to June 1, 2002 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one
year shall be used.
GUARANTIES
The obligations of Hedstrom pursuant to the Senior Subordinated Notes,
including the repurchase obligation resulting from a Change of Control, are
unconditionally guaranteed, jointly and severally, on (i) a senior unsecured
basis (the "Holdings Guaranty") by Holdings and (ii) a senior subordinated basis
(the "Subsidiary Guaranties," and together with the Holdings Guaranty, the
"Guaranties") by each of Hedstrom's domestic subsidiaries (the "Subsidiary
Guarantors," and together with Holdings, the "Guarantors"). The obligations of
each Subsidiary Guarantor are limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor (including, without limitation, any guarantees under the Credit
Agreement) and after giving effect to any collections from or payments made by
or on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guaranty or pursuant to its
contribution obligations under the Senior Subordinated Notes Indenture, result
in the obligations of such Subsidiary Guarantor under the Subsidiary Guaranty
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law.
The provisions under the Senior Subordinated Notes Indenture relating to
the Guaranties may be waived or modified with the written consent of the holders
of a majority in principal amount of the Senior Subordinated Notes then
outstanding.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require Hedstrom to repurchase all or any part of such holder's Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive accrued and unpaid interest due on the relevant interest payment
date in respect of outstanding Senior Subordinated Notes).
The provisions under the Senior Subordinated Notes Indenture relating to
Hedstrom's obligation to make an offer to repurchase the Senior Subordinated
Notes as a result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount of the Senior
Subordinated Notes then outstanding.
CERTAIN COVENANTS
The Senior Subordinated Notes Indenture contains certain covenants
including, among others: limitations on indebtedness, layering, restricted
payments, restrictions on distributions from restricted subsidiaries, sales of
assets and subsidiary stock, affiliate transactions and capital stock of
subsidiaries; SEC reporting requirements; and restrictions on mergers and
consolidations.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Senior
Subordinated Notes Indenture: (i) a default in any payment of interest on any
Senior Subordinated Note when due, continued for 30 days, (ii) a default in the
payment of principal of any Senior Subordinated Note when due at its Stated
Maturity (as defined in the Senior Subordinated Notes Indenture), upon optional
redemption, upon required repurchase, upon declaration or otherwise, (iii) the
failure by Hedstrom to comply with its obligations under the covenant
restricting mergers and consolidations, (iv) the failure by Hedstrom to comply
for 30 days after notice with any of
66
<PAGE> 69
its obligations under the Change of Control covenant or under the other
covenants described above (in each case, other than a failure to purchase Senior
Subordinated Notes which shall constitute an Event of Default under clause (ii)
above), other than the covenant restricting mergers and consolidations, (v) the
failure by Hedstrom to comply for 60 days after notice with its other agreements
contained in the Senior Subordinated Notes Indenture, (vi) Indebtedness (as
defined in the Senior Subordinated Notes Indenture) of Hedstrom or any
Restricted Subsidiary (as defined in the Senior Subordinated Notes Indenture) is
not paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total amount of
such Indebtedness unpaid or accelerated exceeds $10 million and such default
shall not have been cured or such acceleration rescinded after a 10 day period
(the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of Hedstrom, Holdings or a Significant Subsidiary
(as defined in the Senior Subordinated Notes Indenture) (the "bankruptcy
provisions"), (viii) any judgment or decree for the payment of money in excess
of $10 million (to the extent not covered by insurance) is rendered against
Hedstrom or a Significant Subsidiary and such judgment or decree shall remain
undischarged or unstayed for a period of 60 days after such judgment becomes
final and non-appealable (the "judgment default provision") or (ix) the Holdings
Guaranty or any Subsidiary Guaranty by a Significant Subsidiary ceases to be in
full force and effect (except as contemplated by the terms of the Senior
Subordinated Notes Indenture) or Holdings or any Subsidiary Guarantor that is a
Significant Subsidiary denies or disaffirms its obligations under the Senior
Subordinated Notes Indenture or the Holdings Guaranty or its Subsidiary
Guaranty, respectively, and such Default continues for 10 days. However, a
default under clauses (iv) and (v) will not constitute an Event of Default until
the Senior Subordinated Notes Trustee or the holders of 25% in principal amount
of the outstanding Senior Subordinated Notes notify Hedstrom of the default and
Hedstrom does not cure such default within the time specified in clauses (iv)
and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Senior Subordinated
Notes Trustee or the holders of at least 25% in principal amount of the
outstanding Senior Subordinated Notes by notice to Hedstrom may declare the
principal of and accrued and unpaid interest, if any, on all the Senior
Subordinated Notes to be due and payable. Upon such a declaration, such
principal and accrued and unpaid interest shall be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of Hedstrom, Holdings or any Significant Subsidiary occurs and is
continuing, the principal of and accrued and unpaid interest on all the Senior
Subordinated Notes will become and be immediately due and payable without any
declaration or other act on the part of the Senior Subordinated Notes Trustee or
any holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Senior Subordinated Notes may rescind any such
acceleration with respect to the Senior Subordinated Notes and its consequences.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Senior Subordinated Notes Indenture may
be amended with the consent of the holders of a majority in principal amount of
the Senior Subordinated Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Senior Subordinated Notes)
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Senior
Subordinated Notes then outstanding. However, without the consent of each holder
of an outstanding Senior Subordinated Note affected, no amendment may, among
other things, (i) reduce the amount of Senior Subordinated Notes whose holders
must consent to an amendment, (ii) reduce the stated rate of or extend the
stated time for payment of interest on any Senior Subordinated Note, (iii)
reduce the principal of or extend the Stated Maturity of any Senior Subordinated
Note, (iv) reduce the premium payable upon the redemption or repurchase of any
Senior Subordinated Note or change the time at which any Senior Subordinated
Note may be redeemed as described under "Optional Redemption" above, (v) make
any Senior Subordinated Note payable in money other than that stated in the
Senior Subordinated Note, (vi) impair the right of any holder to receive payment
of principal of and interest on such holder's Senior Subordinated Notes on or
after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Senior Subordinated Notes or (vii)
make any change in the amendment provisions which require each holder's consent
or in the waiver provisions.
67
<PAGE> 70
DESCRIPTION OF THE DISCOUNT NOTES
GENERAL
On June 12, 1997, Holdings issued $44,612,000 in aggregate principal amount
at maturity of the Old Discount Notes under an Indenture, dated as of June 1,
1997 (the "Discount Notes Indenture"), between Holdings and United States Trust
Company of New York, as Trustee (the "Discount Notes Trustee"). In connection
with the sale of the Old Discount Notes, Hedstrom, Holdings and the initial
purchasers of the Discount Notes entered into the Registration Rights Agreement.
In accordance with the terms of the Registration Rights Agreement, Hedstrom,
Holdings and the Subsidiary Guarantors have filed with the Commission the
Exchange Offer Registration Statement with respect to, among other things, an
offer by Holdings to exchange $1,000 principal amount at maturity of registered
12% Senior Discount Notes (the "New Discount Notes") issued by Holdings for each
$1,000 principal amount at maturity of Old Discount Notes issued by Holdings.
The form and terms of the New Discount Notes are identical to the form and terms
of the Old Discount Notes except that (i) the Accreted Value (as defined) of the
New Discount Notes will be calculated from the date of issuance of the Old
Discount Notes and (ii) the New Discount Notes are being registered under the
Securities Act and will not bear any legends restricting their transfer. The New
Discount Notes will evidence the same debt as the Old Discount Notes and will be
issued pursuant to, and entitled to the benefits of, the Discount Notes
Indenture. References herein to the "Discount Notes" shall include both the Old
Discount Notes and the New Discount Notes.
The following summary of certain provisions of the Discount Notes Indenture
and the Discount Notes does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Discount
Notes Indenture (including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act) and the Discount Notes,
copies of which are available as set forth under "Available Information."
TERMS OF DISCOUNT NOTES
The Discount Notes are unsecured senior obligations of Holdings, limited to
$44,612,000 aggregate principal amount at maturity, and will mature on June 1,
2009. No cash interest will accrue on the Discount Notes prior to June 1, 2002,
although for U.S. Federal income tax purposes a significant amount of original
issue discount will be recognized by a Holder as such discount accrues. Cash
interest will accrue on the Discount Notes at the rate of 12% per annum from
June 12, 2002, or from the most recent date to which interest has been paid or
provided for, payable semiannually on June 1 and December 1 of each year,
commencing December 1, 2002 to holders of record at the close of business on the
May 15 or November 15 immediately preceding the interest payment date.
The interest rate on the Old Discount Notes is subject to increase in
certain circumstances if the Discount Notes Exchange Offer is not consummated on
a timely basis or if certain other conditions are not satisfied.
OPTIONAL REDEMPTION
Except as set forth below, the Discount Notes are not redeemable at the
option of Holdings prior to June 1, 2002. On and after such date, the Discount
Notes will be redeemable, at Holdings' option, in whole or in part, at any time
upon not less than 30 nor more than 60 days prior notice mailed by first-class
mail to each holder's registered address, at the following redemption prices
(expressed in percentages of principal amount at maturity),
68
<PAGE> 71
plus accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date):
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 106.000
2003........................................................ 104.000
2004........................................................ 102.000
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Holdings may redeem in the aggregate up to 40% of the Accreted Value of the
Discount Notes with the proceeds of one or more Equity Offerings (as defined in
the Discount Notes Indenture) by Holdings so long as there is a Public Market
(as defined in the Discount Notes Indenture) at the time of such redemption, at
a redemption price (expressed as a percentage of Accreted Value on the
redemption date) of 112%, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive accrued and unpaid interest due on the relevant interest
payment date in respect of the Discount Notes); provided, however, that at least
$26,767,200 aggregate principal amount at maturity of the Discount Notes remains
outstanding after each such redemption.
At any time on or prior to June 1, 2002, the Discount Notes may also be
redeemed as a whole at the option of Holdings upon the occurrence of a Change of
Control, upon not less than 30 nor more than 60 days prior notice (but in no
event more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each holder's registered address, at a redemption price
equal to 100% of the Accreted Value thereof plus the Applicable Premium as of,
and accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Discount Notes:
"Applicable Premium" means, with respect to a Discount Note at any
Redemption Date, the greater of (i) 1.0% of the Accreted Value of such Discount
Note on such Redemption Date and (ii) the excess of (A) the present value at
such time of (1) the redemption price of such Discount Note at June 1, 2002
(such redemption price being described under "Optional Redemption") plus (2) all
required interest payments, if any, due on such Discount Note through June 1,
2002, computed using a discount rate equal to the Treasury Rate plus 100 basis
points, over (B) the Accreted Value of such Discount Note on the Redemption
Date.
"Change of Control" means:
(i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets
of Holdings and its Subsidiaries to any Person (as defined in the Discount
Notes Indenture) or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") (whether or not otherwise in compliance
with the provisions of the Discount Notes Indenture), other than to Hicks
Muse, Arnold E. Ditri or any of their Affiliates (as defined in the
Discount Notes Indenture), officers and directors (the "Permitted
Holders"); or
(ii) a majority of the Board of Directors of Holdings shall consist of
Persons who are not Continuing Directors; or
(iii) the acquisition by any Person or Group (other than the Permitted
Holders) of the power, directly or indirectly, to vote or direct the voting
of securities having more than 50% of the ordinary voting power for the
election of directors of Holdings.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such
69
<PAGE> 72
Statistical Release is no longer published, any publicly available source or
similar market data)) most nearly equal to the period from the Redemption Date
to June 1, 2002; provided, however, that if the period from the Redemption Date
to June 1, 2002 is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that if the period from the Redemption
Date to June 1, 2002 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one
year shall be used.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require Holdings to repurchase all or any part of such holder's Discount
Notes at a purchase price in cash equal to 101% of the Accreted Value thereof
plus accrued and unpaid interest, if any, to the date of repurchase (subject to
the right of holders of record on the relevant record date to receive accrued
and unpaid interest due on the relevant interest payment date in respect of
outstanding Discount Notes).
The provisions under the Discount Notes Indenture relating to Holdings'
obligation to make an offer to repurchase the Discount Notes as a result of a
Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount at maturity of the Discount Notes then
outstanding.
CERTAIN COVENANTS
The Discount Notes Indenture contains certain covenants including, among
others: limitations on indebtedness, restricted payments, restrictions on
distributions from restricted subsidiaries, sales of assets and subsidiary
stock, affiliate transactions, liens, sale-leaseback transactions, and capital
stock of restricted subsidiaries; SEC reporting requirements; and restrictions
on mergers and consolidations.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Discount
Notes Indenture: (i) a default in any payment of interest on any Discount Note
when due, continued for 30 days, (ii) a default in the payment of principal of
any Discount Note when due at its Stated Maturity (as defined in the Discount
Notes Indenture), upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by Holdings to comply with its
obligations under the covenant restricting mergers and consolidations, (iv) the
failure by Holdings to comply for 30 days after notice with any of its
obligations under the "Change of Control" covenant or under the other covenants
described above (in each case, other than a failure to purchase Discount Notes
which shall constitute an Event of Default under clause (ii) above), other than
the covenant restricting mergers and consolidations, (v) the failure by Holdings
to comply for 60 days after notice with its other agreements contained in the
Discount Notes Indenture, (vi) Indebtedness (as defined in the Discount Notes
Indenture) of Holdings or any Restricted Subsidiary (as defined in the Discount
Notes Indenture) is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $10 million and
such default shall not have been cured or such acceleration rescinded after a
10-day period (the "cross acceleration provision"), (vii) certain events of
bankruptcy, insolvency or reorganization of Holdings or a Significant Subsidiary
(as defined in the Discount Notes Indenture) (the "bankruptcy provisions") or
(viii) any judgment or decree for the payment of money in excess of $10 million
(to the extent not covered by insurance) is rendered against Holdings or a
Significant Subsidiary and such judgment or decree shall remain undischarged or
unstayed for a period of 60 days after such judgment becomes final and
non-appealable (the "judgment default provision"). However, a default under
clauses (iv) and (v) will not constitute an Event of Default until the Discount
Notes Trustee or the holders of 25% in principal amount at maturity of the
outstanding Discount Notes notify Holdings of the default and Holdings does not
cure such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default occurs and is continuing, the Discount Notes Trustee
or the holders of at least 25% in principal amount of the outstanding Discount
Notes by notice to Holdings may declare the Accreted Value of and
70
<PAGE> 73
accrued and unpaid interest, if any, on all the Discount Notes to be due and
payable. Upon such a declaration, such Accreted Value and accrued and unpaid
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of Holdings occurs
and is continuing, the Accreted Value of and accrued and unpaid interest on all
the Discount Notes will become and be immediately due and payable without any
declaration or other act on the part of the Discount Notes Trustee or any
holders. Under certain circumstances, the holders of a majority in principal
amount at maturity of the outstanding Discount Notes may rescind any such
acceleration with respect to the Discount Notes and its consequences.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Discount Notes Indenture may be amended
with the consent of the holders of a majority in principal amount at maturity of
the Discount Notes then outstanding (including consents obtained in connection
with a tender offer or exchange for the Discount Notes) and any past default or
compliance with any provisions may be waived with the consent of the holders of
a majority in principal amount at maturity of the Discount Notes then
outstanding. However, without the consent of each holder of an outstanding
Discount Note affected, no amendment may, among other things, (i) reduce the
amount of Discount Notes whose holders must consent to an amendment, (ii) reduce
the stated rate of or extend the stated time for payment of interest on any
Discount Note, (iii) reduce the principal of or extend the Stated Maturity of
any Discount Note, (iv) reduce the premium payable upon the redemption or
repurchase of any Discount Note or change the time at which any Note may be
redeemed as described under "Optional Redemption" above, (v) make any Discount
Note payable in money other than that stated in the Discount Note, (vi) impair
the right of any holder to receive payment of principal of and interest on such
holder's Discount Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Discount
Notes or (vii) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions. The Discount Notes Trustee will be
under no obligation to exercise any of its rights or powers under the Discount
Notes Indenture at the request of any holder of Discount Notes, unless such
holder shall have offered to the Discount Notes Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Discount Notes Indenture.
GOVERNING LAW
The Discount Notes Indenture provides that it and the Discount Notes will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
71
<PAGE> 74
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The following table sets forth the names of the Selling Securityholders and
the Shares that each Selling Securityholder may offer and sell pursuant to this
Prospectus, which represents all the Shares beneficially owned by each Selling
Securityholder. Because the Selling Securityholders may sell all or a portion of
their Shares at any time and from time to time after the date hereof, no
estimate can be made of the number of Shares offered hereby that each Selling
Securityholder may retain upon completion of the offering to which this
Prospectus relates. None of the Selling Securityholders have had any material
relationship with Holdings except as set forth in the notes to the table below
and as more fully described elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NAME OF NUMBER
BENEFICIAL OWNER OF SHARES
---------------- -------------
<S> <C>
Breezebell & Co............................................. 454,905.000
Eaton Vance Income Fund of Boston........................... 21,228.900
Eaton Vance High Income Trust............................... 84,915.600
General Motors Retirement Program for Salaried Employees
High Yield Account........................................ 12,130.800
Mason Street Funds, Inc.(1)................................. 39,425.100
The Northwestern Mutual Life Insurance Company(2)........... 457,149.200
Northwestern Mutual Series Fund, Inc.(3).................... 131,922.450
Prudential High Yield Fund, Inc............................. 206,223.600
Prudential High Yield Fund, Inc., High Yield Bond
Portfolio................................................. 24,261.600
Putnam Investment Management, Inc.(4)....................... 280,221.480
Putnam Fiduciary Trust Company(5)........................... 6,368.670
The Putnam Advisory Company, Inc.(6)........................ 16,073.310
T. Rowe Price High Yield Fund............................... 236,550.600
-------------
Subtotal.......................................... 1,971,376.000
-------------
Unnamed holders of Shares or any future transferees,
pledgees, donees or successors of or from such unnamed
holders(7)................................................ 734,520.000
-------------
Total............................................. 2,705,896.000
=============
</TABLE>
- ---------------
(1) All Shares are held in Mason Street Funds, Inc.'s High Yield Bond Fund.
(2) Includes, 131,922.450 Shares held in The Northwestern Mutual Life Insurance
Company Group Annuity Separate Account.
(3) All Shares are held in Northwestern Mutual Series Fund, Inc.'s High Yield
Bond Portfolio.
(4) Putnam Investment Management, Inc. is the investment manager of the
following funds and accounts, which funds and accounts own beneficially the
indicated number of Shares: Putnam Asset Allocation Funds -- Balanced
Portfolio (2,729.430); Putnam Asset Allocation Funds -- Conservative
Portfolio (909.810); Putnam Asset Allocation Funds -- Growth Portfolio
(909.810); Putnam Balanced Retirement Fund (303.270); Putnam Convertible
Opportunities and Income Trust (1,213.080); Putnam Diversified Income Trust
(40,031.640); Putnam Diversified Income Trust II (1,213.080); The George
Putnam Fund of Boston (1,213.080); Putnam High Income Convertible and Bond
Fund (1,213.080); Putnam High Yield Advantage Fund (74,907.690); Putnam
High Yield Total Return (606.540); Putnam High Yield Trust (105,841.230);
Putnam Income Fund (1,213.080); Putnam Managed High Yield Trust
(2,426.160); Putnam Master Income Trust (4,245.780); Putnam Master
Intermediate Income Trust (3,032.700); Putnam Premier Income Trust
(10,917.720); Putnam Variable Trust -- Putnam VT Diversified Income Fund
(4,852.320); Putnam Variable Trust -- Putnam VT Global Asset Allocation
Fund (909.810); Putnam Variable Trust -- Putnam VT High Yield Fund
(20,015.820); AST Putnam Balanced Portfolio (303.270); Putnam Diversified
Income Portfolio/ Smith Barney/Travelers Series Fund (909.810); and Lincoln
National Global Asset Allocation Fund, Inc. (303.270).
(5) Putnam Investment Management, Inc. is the investment manager of the
following accounts, which accounts own beneficially the indicated number of
Shares: Putnam High Yield Managed Trust (5,458.860) and Putnam High Yield
Fixed Income Trust (DBT) (909.810).
72
<PAGE> 75
(6) The Putnam Advisory Company, Inc. is the investment manager of the
following accounts, which accounts own beneficially the indicated number of
Shares: Dana Farber Cancer Institute (303.270); Employees Retirement Plan
of Agway, Inc. (909.810); Abbott Laboratories Annuity Retirement Plan
(1,516.350); Ameritech Corporation Pension Plan (3,032.700); Central
States, Southeast and Southwest Areas Pension Fund (8,794.830); and
Southern Farm Bureau Life Insurance Company (1,516.350).
(7) No such holder may offer Shares pursuant to this Prospectus until such
holder is included as a Selling Securityholder in a supplement to this
Prospectus.
Holdings will not receive any proceeds from the offering to which this
Prospectus relates. The Selling Securityholders may sell the securities offered
hereby through underwriters or dealers, through brokers or other agents, or
directly to one or more purchasers in one or more transactions in the
over-the-counter market, if such a market develops, or in privately negotiated
transactions, or in a combination of such transactions. Such transactions may be
effected by the Selling Securityholders at market prices prevailing at the time
of sale, at prices related to such prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. Such underwriters, dealers,
brokers or other agents may receive compensation in the form of discounts or
commissions from the Selling Securityholders and may receive commissions from
the purchasers of such securities for whom they act as agent.
Any Selling Securityholder and any dealer, broker or other agent selling
securities offered hereby for the Selling Securityholders or purchasing any such
securities from a Selling Securityholder for purposes of resale may be deemed to
be an underwriter under the Securities Act and any compensation received by such
Selling Securityholder, dealer, broker or other agent may be deemed underwriting
compensation. Neither Holdings nor the Selling Securityholders can presently
estimate the amount of such compensation. Holdings knows of no existing
arrangements between any Selling Securityholder and any other Selling
Securityholder, dealer, or broker or other agent.
Holdings has not taken any action to register or qualify the Shares for
offer and sale under the securities or "blue sky" laws of any state of the
United States. However, pursuant to the Common Stock Registration Rights
Agreement, Holdings has agreed to register or qualify or cooperate with the
Selling Securityholders and their respective counsel in connection with the
registration or qualification of the Shares for offer and sale under the
securities or "blue sky" laws of such states of the United States as any Selling
Securityholder reasonably requests in writing and to do any and all other acts
or things necessary or advisable to enable the offer and sale of the Shares in
such jurisdictions; provided, however, that Holdings shall not be required to
(i) qualify generally to do business in any jurisdiction where it is not then so
qualified or (ii) take any action which would subject it to general service of
process or to taxation in any jurisdiction where it is not then so subject.
Unless and until such times as offers and sales of the Shares by Selling
Securityholders are registered or qualified under applicable state securities or
"blue sky" laws, or are otherwise entitled to an exemption therefrom, initial
resales by Selling Securityholders will be materially restricted. Selling
Securityholders are advised to consult with their respective legal counsel prior
to offering or selling any of their Shares.
In accordance with the provisions contained in the Common Stock
Registration Rights Agreement, Holdings is obligated under certain circumstances
to indemnify the Selling Securityholders who sell securities pursuant to this
Prospectus, their respective officers, directors and agents, and controlling
persons, and each underwriter in an offering or sale of such securities, against
certain liabilities related to such sale or disposition, including liabilities
arising under the Securities Act or to contribute to payments which such persons
or entities may be required to make in respect thereof. In accordance with the
Common Stock Registration Rights Agreement, Holdings may, in certain
circumstances, also be entitled to indemnification or contribution by the
Selling Securityholders or underwriters participating in an offering of the
securities to which this Prospectus relates.
Holdings has agreed to pay, with certain limited exceptions, all the
expenses incurred in connection with the preparation and filing of this
Prospectus and the related Registration Statement, including the Securities Act
registration and filing fees, fees and expenses associated with filings required
to be made with the National Association of Securities Dealers, Inc., fees and
expenses of compliance with securities or "blue sky" laws, printing expenses,
messenger and delivery expenses, fees and expenses of counsel for Holdings and
its
73
<PAGE> 76
independent certified public accountants, securities acts liability insurance
(if Holdings elects to purchase such insurance), the fees and expenses of any
special experts retained by Holdings in connection with such registration, and
fees and expenses of other persons retained by Holdings. Holdings estimates that
the foregoing expenses in connection with the registration of the securities
will be approximately $216,024.96. In no event shall Holdings pay for any
underwriting discounts, commissions, or fees attributable to the sale of Shares
or any other out-of-pocket expenses of the Selling Securityholders incurred in
connection with a sale of Shares.
There is currently no established public market for the Shares. Holdings
presently has no intention of applying for listing of the Shares on any
securities exchange or for inclusion of any of the Shares in any automated
quotation system. No assurance can be given that an active market for the Shares
will develop.
LEGAL MATTERS
Certain legal matters with respect to the Securities offered hereby will be
passed upon for Holdings by Weil, Gotshal & Manges LLP, Dallas, Texas.
INDEPENDENT AUDITORS
The audited consolidated financial statements of Holdings included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, to the extent and for the periods indicated in
their report thereon, and are included herein in reliance upon the authority of
said firm as experts in giving said reports. The audited financial statements of
ERO, Inc. included in this Registration Statement have been audited by Price
Waterhouse LLP, independent certified public accountants, to the extent and for
the periods indicated in their report thereon, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
74
<PAGE> 77
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
July 31, 1996.......................................... F-3
Consolidated Income Statements for the five months ended
December 31, 1996, and for each of the fiscal years
ended July 31, 1996, 1995, and 1994.................... F-4
Consolidated Statements of Stockholders' Equity for the
five months ended December 31, 1996, and for each of
the fiscal years ended July 31, 1996, 1995 and 1994.... F-5
Consolidated Statements of Cash Flows for the five months
ended December 31, 1996 and for each of the fiscal
years ended July 31, 1996, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996...................... F-24
Consolidated Income Statements for the six months ended
June 30, 1997 and 1996
(unaudited)............................................ F-25
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997 (unaudited)................. F-26
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited)............... F-27
Notes to Consolidated Financial Statements (unaudited).... F-28
ERO, INC.:
Report of Independent Public Accountants.................. F-38
Consolidated Balance Sheets as of December 31, 1996, and
1995................................................... F-39
Consolidated Income Statements for the years ended
December 31, 1996, 1995, and 1994...................... F-40
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-41
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-42
Notes to Consolidated Financial Statements................ F-43
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996...................... F-56
Consolidated Income Statements for the three months ended
March 31, 1997 and 1996
(unaudited)............................................ F-57
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited).............. F-58
Notes to Consolidated Financial Statements (unaudited).... F-59
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hedstrom Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Hedstrom
Holdings, Inc. (a Delaware corporation) and subsidiary as of December 31, 1996,
and July 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the five months ended December 31,
1996, and for each of the fiscal years ended July 31, 1996, 1995, and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hedstrom Holdings, Inc. and
subsidiary as of December 31, 1996, and July 31, 1996, and the results of their
operations and their cash flows for the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 11, 1997 (except with respect
to the matter discussed in Note 16,
as to which the date is June 12, 1997)
F-2
<PAGE> 79
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996, AND JULY 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 533 $ 7,998
Trade accounts receivable, net of allowance for doubtful
accounts of $505 and $441, respectively................ 13,586 23,384
Inventories............................................... 23,816 21,774
Deferred income taxes..................................... 5,027 3,121
Prepaid expenses and other current assets................. 690 826
-------- -------
Total current assets.............................. 43,652 57,103
-------- -------
PROPERTY, PLANT, AND EQUIPMENT, at cost, net of accumulated
depreciation.............................................. 21,743 22,000
OTHER ASSETS:
Deferred charges and other, net of accumulated
amortization........................................... 2,318 2,515
Deferred income taxes..................................... 4,362 3,406
-------- -------
Total other assets................................ 6,680 5,921
-------- -------
Total assets...................................... $ 72,075 $85,024
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. $ 17,400 $26,450
Current portion of term loans............................. 1,750 --
Current portion of capital leases......................... 215 208
Accounts payable.......................................... 11,698 9,847
Accrued expenses --
Compensation........................................... 1,061 1,882
Commissions and royalties.............................. 206 196
Customer allowances and other.......................... 1,736 1,719
-------- -------
Total current liabilities......................... 34,066 40,302
-------- -------
LONG-TERM DEBT:
Term loans................................................ 36,750 38,500
Notes payable to related parties.......................... 2,500 2,500
Capital leases............................................ 1,556 1,648
Other..................................................... 300 400
-------- -------
Total long-term debt.............................. 41,106 43,048
-------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 32,941,499 shares issued, and
outstanding............................................ 329 329
Additional paid-in capital................................ 10,437 10,437
Accumulated deficit....................................... (13,863) (9,092)
-------- -------
Total stockholders' (deficit) equity.............. (3,097) 1,674
-------- -------
Total liabilities and stockholders' equity........ $ 72,075 $85,024
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 80
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND
FOR EACH OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, ------------------------------------
1996 1996 1995 1994
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES........................................ $23,994 $133,194 $133,862 $108,655
COST OF SALES.................................... 21,973 105,068 107,312 87,170
------- -------- -------- --------
Gross profit........................... 2,021 28,126 26,550 21,485
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.... 7,546 24,603 19,207 18,181
------- -------- -------- --------
Operating income (loss)................ (5,525) 3,523 7,343 3,304
RECAPITALIZATION EXPENSES........................ -- 9,600 -- --
INTEREST EXPENSE................................. 2,115 5,896 4,573 2,982
------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................... (7,640) (11,973) 2,770 322
INCOME TAX BENEFIT (EXPENSE)..................... 2,869 3,857 (1,440) (103)
------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... (4,771) (8,116) 1,330 219
LOSS FROM DISCONTINUED OPERATIONS (net of tax
benefit of $619 and $1,503, respectively)...... -- -- (585) (3,180)
------- -------- -------- --------
NET INCOME (LOSS)................................ $(4,771) $ (8,116) $ 745 $ (2,961)
======= ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 81
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND FOR EACH
OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- --------- ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1993............ 2,500,000 $ 2,500 33,231,090 $ 332 $ 12,964 $ 1,812 $ 17,608
Paid-in-kind dividends on
preferred stock................. 249,403 250 -- -- -- (250) --
Net loss.......................... -- -- -- -- -- (2,961) (2,961)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1994............ 2,749,403 2,750 33,231,090 332 12,964 (1,399) 14,647
Paid-in-kind dividends on
preferred stock................. 256,152 256 -- -- -- (256) --
Net income........................ -- -- -- -- -- 745 745
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1995............ 3,005,555 3,006 33,231,090 332 12,964 (910) 15,392
Paid-in-kind dividends on
preferred stock................. 66,277 66 -- -- -- (66) --
Redemption of common stock from
existing stockholders........... -- -- (27,531,941) (275) (29,497) -- (29,772)
Redemption of preferred stock from
existing stockholders........... (3,071,832) (3,072) -- -- -- -- (3,072)
Sale of common stock to new
stockholders.................... -- -- 27,242,350 272 26,970 -- 27,242
Net loss.......................... -- -- -- -- -- (8,116) (8,116)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1996............ -- -- 32,941,499 329 10,437 (9,092) 1,674
Net loss.......................... -- -- -- -- -- (4,771) (4,771)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 1996........ -- $ -- 32,941,499 $ 329 $ 10,437 $(13,863) $ (3,097)
========== ======= =========== ===== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 82
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND
FOR EACH OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS FOR THE FISCAL YEARS ENDED
ENDED JULY 31,
DECEMBER 31, ------------------------------
1996 1996 1995 1994
------------- -------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................... $ (4,771) $ (8,116) $ 745 $(2,961)
Adjustments to reconcile net (loss)
income to net cash provided by (used
for) operating activities-
Depreciation of property, plant and
equipment......................... 1,626 2,903 2,365 1,883
Amortization of deferred assets..... 350 511 582 521
Discontinued operations............. -- -- 1,204 4,683
Deferred income tax (benefit)
provision......................... (2,862) (3,808) 755 (1,428)
Gain on the disposition of property,
plant, and equipment.............. (60) (182) -- --
Provision for losses on accounts
receivable........................ 64 37 100 119
Changes in assets and liabilities
Accounts receivable............... 9,734 (892) (2,139) (4,041)
Inventories....................... (2,042) (139) (6,941) (1,703)
Prepaid expenses.................. (119) 6 (2,428) 1
Accounts payable.................. 1,851 (7,906) 5,757 5,054
Accrued expenses.................. (793) (158) 396 (784)
-------- -------- ------- -------
Net cash provided by (used for)
operating activities......... 2,978 (17,744) 396 1,344
-------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant, and
equipment........................... (1,376) (6,738) (2,574) (2,988)
Proceeds from the sale of property,
plant, and equipment................ 67 248 -- --
-------- -------- ------- -------
Net cash used for investing
activities................... (1,309) (6,490) (2,574) (2,988)
-------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock from
existing stockholders............... -- (29,772) -- --
Redemption of preferred stock from
existing stockholders............... -- (3,072) -- --
Notes payable to related parties...... -- 2,500 -- --
Proceeds from sale of common stock to
new stockholders.................... -- 27,242 -- --
Term loan borrowings.................. -- 35,000 -- --
Borrowings on old line of credit...... -- -- 4,667 --
Payments on old line of credit........ -- (23,837) (1,768) (840)
Borrowings on new revolving line of
credit.............................. 12,050 26,450 -- --
Payments on new revolving line of
credit.............................. (21,100) (4,973) -- --
Capital lease (payments) borrowings
and other........................... (84) 1,597 -- 1,900
-------- -------- ------- -------
Net cash (used for) provided by
financing activities......... (9,134) 31,135 2,899 1,060
-------- -------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (7,465) 6,901 721 (584)
CASH AND CASH EQUIVALENTS:
Beginning of year/period.............. 7,998 1,097 376 960
-------- -------- ------- -------
End of year/period.................... $ 533 $ 7,998 $ 1,097 $ 376
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid..................... $ 45 $ 503 $ 46 41
Interest paid......................... $ 1,534 $ 5,036 $ 4,405 $ 2,972
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 83
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Hedstrom Holdings, Inc. ("Holdings") is a holding Company with no
operations or assets, other than its 100% ownership of Hedstrom Corporation
("Hedstrom", and together with Holdings, the "Company"). The Company is a
manufacturer and marketer of children's activity-oriented play products. The
Company's principal products fall within two main categories: outdoor gym sets
and playballs. Through its facility in Bedford, Pennsylvania, the Company
manufactures and distributes gym set products consisting of painted metal gym
sets, composite metal and plastic gym sets, wood gym kits, plastic outdoor
slides and gym set accessories. Through its facility in Ashland, Ohio, the
Company manufactures playball products, which consist of premium playballs made
of plastic or vinyl and decorated with popular licensed characters or designs,
nonpremium playballs that generally have minimal decoration, athletic balls
targeted at young children, and ball pit products. The Company sells its
products through major national toy retailers, mass merchants, supermarkets,
drug store chains, and home centers in the United States, Canada, and the United
Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and its wholly owned subsidiary, Hedstrom. All intercompany balances
and transactions have been eliminated in consolidation.
During fiscal 1995, Holdings discontinued the operations of its Hedstrom
Holdings II subsidiary. Hedstrom Holdings II was involved in the manufacturing
of traffic control devices. The sole customer of Hedstrom Holdings II was a
related party which the Company no longer has an ongoing relationship with.
During the fiscal years ended July 31, 1995 and 1994, Hedstrom Holdings II
incurred net losses of $0.6 million and $3.2 million, respectively.
Fiscal Year
Prior to August 1, 1996, the Company's fiscal year ended on July 31.
Effective January 1, 1997, the Company changed its fiscal year to a calendar
year ending on December 31. The accompanying consolidated financial statements
include the 5-month period from August 1, 1996 to December 31, 1996. The
following unaudited consolidated financial statements for the five-month period
ended December 31, 1995 are provided for comparative purposes.
CONSOLIDATED INCOME STATEMENT
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES................................................... $ 31,792
COST OF SALES............................................... 26,000
--------
Gross profit...................................... 5,792
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 7,067
--------
Operating loss.................................... (1,275)
RECAPITALIZATION EXPENSES................................... 9,600
INTEREST EXPENSE............................................ 1,773
--------
LOSS BEFORE INCOME TAXES.................................... (12,648)
INCOME TAX BENEFIT.......................................... 4,074
--------
NET LOSS.................................................... $ (8,574)
========
</TABLE>
F-7
<PAGE> 84
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (8,574)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................. 882
Changes in assets and liabilities:
Accounts receivable.................................... 5,045
Inventories............................................ (6,272)
Accounts payable....................................... (11,559)
Accrued expenses....................................... 106
Other.................................................. 270
--------
Net cash used for operating activities.................... (20,102)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment............. (1,342)
--------
Net cash used for investing activities.................... (1,342)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock................................ (29,772)
Redemption of preferred stock............................. (3,072)
Proceeds from sale of common stock........................ 27,242
Payments on line of credit, net........................... (8,855)
Notes payable to related party............................ 2,500
Borrowings on term loans.................................. 35,000
Capital lease payments and other.......................... (2,308)
--------
Net cash provided by financing activities................. 20,735
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (709)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 1,097
--------
End of period............................................. $ 388
========
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at cost which
approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. The cost of manufactured products
includes materials, direct labor, and an allocation of plant overheads. The cost
of purchased products includes inbound freight and duty.
Property, Plant, and Equipment
Property, plant, and equipment acquired subsequent to January 10, 1991, are
stated at cost. Property, plant, and equipment acquired in connection with a
prior acquisition of the Company on January 10, 1991, were stated
F-8
<PAGE> 85
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at fair market value as of that date as determined by independent appraisals.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Additions and improvements are capitalized, while
expenditures for maintenance and repairs are charged to operations as incurred.
The cost and accumulated depreciation of property sold or retired are removed
from the respective accounts and the resultant gains or losses, if any, are
included in current operations.
The estimated useful lives of property, plant, and equipment are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10-40 years
Machinery and equipment..................................... 3-12 years
Furniture and fixtures...................................... 5 years
</TABLE>
Depreciation is allocated to cost of sales and selling, general, and
administrative expense based upon the related asset's use. Depreciation of
approximately $1,576,000, $2,797,000, $2,248,000, and $1,749,000 is included in
cost of sales for the five months ended December 31, 1996, and for each of the
fiscal years ended July 31, 1996, 1995, and 1994, respectively. Depreciation of
approximately $50,000, $106,000, $117,000, and $134,000 is included in selling,
general, and administrative expense for the five months ended December 31, 1996,
and for each of the fiscal years ended July 31, 1996, 1995, and 1994,
respectively.
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 had no effect on the Company's financial
position or results of operations as of and for the five months ended December
31, 1996.
Deferred Charges and Other, Net
Deferred charges and other on the accompanying balance sheets is comprised
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ ----------
<S> <C> <C>
Deferred expenses.......................................... $2,546,000 $2,388,000
Barter credits............................................. 519,000 524,000
---------- ----------
3,065,000 2,912,000
Less-Accumulated amortization.............................. (747,000) (397,000)
---------- ----------
$2,318,000 $2,515,000
========== ==========
</TABLE>
Deferred expenses primarily relate to costs the Company incurs to obtain
shelf space, and replace competitors products, at certain of its retail
customers. In connection with these transactions, the Company obtains a
commitment from the retailer that it will exclusively stock the Company's
products for a period not less than three years. As a result, these costs are
deferred and amortized over a 36-month period on a straight-line basis.
Amortization expense is included in selling, general, and administrative expense
on the accompanying income statements and was $350,000, $358,000, $37,000, and
$0 for the five months ended December 31, 1996 and for each of the fiscal years
ended July 31, 1996, 1995, and 1994, respectively.
Prior to the recapitalization discussed in Note 3, the Company had
capitalized certain financing costs and organizational costs. These costs were
immediately expensed in connection with the recapitalization and are included in
recapitalization expenses on the accompanying July 31, 1996, income statement.
The deferred financing costs were being amortized over the period of the
underlying debt on a straight-line basis and organizational costs were being
amortized over a 60-month period. Prior to the recapitalization, amortization of
F-9
<PAGE> 86
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred financing costs were $67,000, $202,000, and $179,000 in the fiscal
years ended July 31, 1996, 1995, and 1994, respectively, and are included in
interest expense on the accompanying income statements. Amortization of
organizational costs prior to the recapitalization were $85,000, $341,000, and
$341,000 in the fiscal years ended July 31, 1996, 1995, and 1994, respectively,
and are included in selling, general, and administrative expense on the
accompanying income statements.
During the fiscal year ended July 31, 1995, the Company exchanged certain
finished goods inventory with a cost basis of approximately $2,000,000 for
barter credits. Although the barter credits had a stated value of approximately
$3,200,000, they were recorded at an amount equal to the cost basis of the
inventory exchanged, such that no profit was recognized on the transaction. The
barter credits can be used principally for the purchase of print and media
advertising; however, cash must be used in addition to the barter credits to
secure the advertising. During the fiscal year ended July 31, 1996, and for the
five months ended December 31, 1996, the Company utilized approximately $262,000
of these barter credits. As a result of the Company's decision to reduce its
advertising expenditures during calendar 1997, management determined that all of
its barter credits may not be fully utilized prior to their expiration in August
1998. Therefore, the Company wrote-off an additional $1,000,000 of the barter
credits during the fiscal year ended July 31, 1996. Management believes that the
remaining recorded credits will be utilized prior to their expiration.
Revenue Recognition
The Company recognizes revenue when title to the goods transfers. For the
majority of the Company's sales, this occurs at the time of shipment.
Income Taxes
Deferred income taxes are determined under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109). Deferred income taxes arise from
temporary differences between the income tax basis of assets and liabilities and
their reported amounts in the financial statements.
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximates fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments are at rates
similar to current rates offered to the Company for debt with the same remaining
maturities.
Significant Concentration of Customers
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately four retail companies that
serve national markets. Net sales, as a percentage of total net sales, to the
Company's top four customers for the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, were:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED FISCAL YEARS ENDED JULY 31,
DECEMBER 31, ---------------------------
CUSTOMER 1996 1996 1995 1994
-------- ------------ ----- ----- -----
<S> <C> <C> <C> <C>
Toys "R" Us.............................. 15 % 12% 17% 19%
Wal-Mart................................. 12 % 19% 12% 10%
K-Mart................................... 11 % 12% 9% 9%
Service Merchandise...................... 8 % 5% 5% 7%
</TABLE>
F-10
<PAGE> 87
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.
3. RECAPITALIZATION:
Prior to October 27, 1995, the majority of Holdings common stock was held
by Arnold E. Ditri, President and Chief Executive Officer, and Alastair H.
McKelvie, Executive Vice President. The remaining common stock was held by John
H. Hurshman and the Fidelity Investment Charitable Gift Trust.
On October 27, 1995, Holdings was purchased by another investment group.
Concurrently, all of the outstanding preferred stock was redeemed, the
outstanding common stock held by John H. Hurshman and the Fidelity Investment
Charitable Trust was redeemed, a majority of the outstanding common stock of
Arnold E. Ditri and Alastair H. McKelvie was redeemed, new common shares were
issued to the purchaser, new debt facilities were obtained and existing debt
facilities were repaid as part of the transaction. As Arnold Ditri and Alastair
H. McKelvie retained a minority investment in Holdings, the transaction was
accounted for as a recapitalization, and existing account balances were carried
forward. The Company expensed all of its costs associated with the
recapitalization, which totaled approximately $9,600,000.
In connection with the recapitalization, Holdings effected a common stock
split of 39,095.40 shares for one and increased the authorized shares from 1,000
(par value $.01) to 50,000,000 (par value $.01). After the recapitalization, the
majority of the common stock is held by Hicks, Muse, Tate & Furst Equity Fund
II, L.P. (Hicks Muse). The remaining common stock is held by Arnold E. Ditri,
Alastair H. McKelvie, various other members of management, and various other
investment groups.
4. INVENTORIES:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Raw materials............................................. $ 7,534,000 $ 8,456,000
Work-in-process........................................... 2,298,000 1,262,000
Finished goods............................................ 13,984,000 12,056,000
----------- -----------
$23,816,000 $21,774,000
=========== ===========
</TABLE>
F-11
<PAGE> 88
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Buildings and improvements................................. $ 7,695,000 $ 7,598,000
Machinery and equipment.................................... 25,218,000 24,235,000
Furniture and fixtures..................................... 758,000 540,000
----------- -----------
33,671,000 32,373,000
Less - Accumulated depreciation............................ (12,074,000) (10,519,000)
----------- -----------
21,597,000 21,854,000
Land....................................................... 146,000 146,000
----------- -----------
$21,743,000 $22,000,000
=========== ===========
</TABLE>
6. REVOLVING LINE OF CREDIT:
In connection with the recapitalization discussed in Note 3, the Company
entered into a new revolving line of credit agreement, which allows the Company
to borrow up to $65,000,000. The Company pays interest on the borrowings equal
to either the highest of 1/2 of 1% in excess of the Base Rate, as defined in the
agreement, or the Eurodollar Rate, as defined in the agreement, plus the
Applicable Margin on Base Rate Loans of 1.50% and Eurodollar Loans of 2.75%. The
Company has the ability to convert their borrowings from Base Rate Loans to
Eurodollar Loans and vice versa pursuant to certain restrictions in the
agreement. At December 31, 1996, and July 31, 1996, the Company has borrowings
outstanding under this revolving line of credit of $17,400,000 and $26,450,000,
respectively, of which $14,000,000 and $16,000,000, respectively, are at the
Eurodollar Rate (8.25% and 8.19%, respectively) and $3,400,000 and $10,450,000,
respectively, are at the Base Rate (9.75%).
The revolving line of credit agreement contains restrictive covenants,
which were revised effective July 31, 1996, the most significant of which
requires the Company to comply with certain consolidated financial ratios,
including a leverage ratio and an interest coverage ratio, earnings before
interest, income taxes, depreciation and amortization, and annual capital
expenditure requirements. Additionally the revolving line of credit is
collateralized by the Company's inventories and accounts receivable. The Company
was in compliance with the revised restrictive covenants as of December 31,
1996, and July 31, 1996.
7. TERM LOANS:
In connection with the recapitalization discussed in Note 3, a term loan
agreement was entered into for $35,000,000. The Company pays interest on these
borrowings consistent with the revolving line of credit (see Note 6). At
December 31, 1996, and July 31, 1996, the term loan has an interest rate equal
to the Eurodollar rate (8.25% and 8.19%, respectively). Principal payments,
which range from $525,000 to $7,875,000 over the life of the term loan
agreement, begin on October 15, 1997, and continue until the term loan matures
on April 27, 2001. The term loan is also subject to the revised restrictive
covenants described in Note 6 for the revolving line of credit.
The Company also has a $3,500,000 Industrial Revenue Bond from Bedford
County which bears interest at 7.13%. Annual principal payments begin in 2004 in
amounts ranging from $500,000 to $600,000 and will retire the bond in 2009.
Aggregate maturities of the Company's term loans over the next five years
are as follows: 1997 -- $1,750,000; 1998 -- $3,500,000; 1999 -- $6,000,000;
2000 -- $8,000,000; 2001 -- $15,750,000; thereafter, $3,500,000.
F-12
<PAGE> 89
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE TO RELATED PARTIES:
In connection with the recapitalization discussed in Note 3, $2,500,000 of
the common stock redemption payment was held back from the previous owners. This
$2,500,000 is payable to the previous owners at the earlier of April 30, 2002,
or when the Company has met certain cash flow levels. Holdings makes quarterly
interest payments to the previous owners based on a rate of 10.00% per annum.
9. INCOME TAXES:
Provisions (benefits) for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, --------------------------------------
1996 1996 1995 1994
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Continuing operations....................... $(2,869,000) $(3,857,000) $1,440,000 $ 103,000
Discontinued operations..................... -- -- (619,000) (1,503,000)
----------- ----------- ---------- -----------
$(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========== ===========
</TABLE>
The components of the provisions (benefits) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, -------------------------------------
1996 1996 1995 1994
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Current:
State....................................... $ 33,000 $ 43,000 $ 179,000 $ 28,000
U.S. federal................................ (40,000) (92,000) (113,000) --
----------- ----------- --------- -----------
(7,000) (49,000) 66,000 28,000
Deferred:
U.S. federal................................ (2,862,000) (3,808,000) 755,000 (1,428,000)
----------- ----------- --------- -----------
$(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========= ===========
</TABLE>
The provisions (benefits) for income taxes differ from those computed using
the statutory U.S. federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, -------------------------------------
1996 1996 1995 1994
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Expected provision (benefit).................. $(2,598,000) $(4,071,000) $ 532,000 $(1,483,000)
State income taxes, net of federal benefit.... (219,000) (183,000) 82,000 (200,000)
Foreign corporate earnings.................... 47,000 151,000 169,000 116,000
Recapitalization costs........................ -- 479,000 -- --
Other......................................... (99,000) (233,000) 38,000 167,000
----------- ----------- --------- -----------
Actual provision (benefit).................... $(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========= ===========
</TABLE>
F-13
<PAGE> 90
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Current deferred tax asset:
Net operating loss carryforward......................... $ 2,246,000 $ --
Inventory reserves...................................... 248,000 454,000
Costs capitalized to inventory for tax purposes......... 304,000 247,000
Allowances for accounts receivable...................... 938,000 1,187,000
Nondeductible accruals.................................. 1,243,000 1,184,000
Other................................................... 48,000 49,000
----------- -----------
Current deferred tax asset...................... $ 5,027,000 $ 3,121,000
=========== ===========
Noncurrent deferred tax asset (liability):
Net operating loss carryforward......................... $ 4,408,000 $ 3,238,000
Tax over book depreciation.............................. (1,898,000) (1,844,000)
Recapitalization costs.................................. 1,592,000 1,753,000
Other................................................... 260,000 259,000
----------- -----------
Noncurrent deferred tax asset................... $ 4,362,000 $ 3,406,000
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of $17,511,000 to apply
against future taxable income. Such carryforwards expire as follows: $911,000 in
2008, $3,500,000 in 2009, $4,200,000 in 2010, and $8,900,000 in 2011.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred,
including the 1996 Cost Reduction Plan (see Note 14) and the acquisition of ERO,
Inc. (see Note 16), which has a lengthy and consistent history of profitable
operations, (ii) projections (which include ERO, Inc.) of sufficient taxable
U.S. income to fully realize the net deferred tax asset by the end of calendar
year 1999, (iii) the tax loss carryforwards included in the net deferred tax
asset were generated in very recent periods and do not begin to expire until the
years 2008-2011, and (iv) the significant excess of book basis over tax basis
relative to the net assets of ERO, Inc. Management continually evaluates the
realizability of the net deferred tax assets and the need for a valuation
allowance on such assets.
10. EMPLOYEE BENEFIT PLANS:
All Company employees are eligible to participate in either the Union
Employees' Tax Sheltered Savings Plan or the tax-sheltered Savings Plan
(collectively the "Plans"), depending upon the employment status of the
employees as union or nonunion after meeting certain requirements. The Union
Employees' Tax Sheltered Savings Plan covers all union employees 18 years of age
or older who have worked for 1,000 consecutive hours within a 12-month period.
The tax-sheltered Savings Plan covers all nonunion employees 18 years of age or
older who have been employed for 120 consecutive days within a 12-month period.
For both Plans the employees may contribute from 1% to 15% of their
compensation (either before tax, after tax, or a combination thereof) to the
Plans. The Company provides matching contributions at the rate of 50% of the
employee's contribution up to 6% of gross wages as defined by the Plans
agreements.
The Company may make annual discretionary contributions to the Plans.
Discretionary contributions during the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, aggregated
approximately $218,000, $634,000, $642,000, and $591,000, respectively.
F-14
<PAGE> 91
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK-BASED COMPENSATION PLAN:
In October 1995, Holdings adopted the Hedstrom Holdings, Inc. 1995 Stock
Option Plan (the "Plan") which authorizes grants of stock options to all regular
salaried full-time officers and key employees of the Company. There are
2,446,236 shares of common stock authorized for issuance under the Plan. In
October 1995 and December 1996, stock options were granted for 2,174,216 and
200,000 shares, respectively, at 100% of the fair market value at the date of
grant. Fair market value of Holdings common stock on the October 1995 and
December 1996 grant dates was assumed to be $1 per share, which is equal to the
per share value paid by Hicks Muse in connection with their acquisition of
Holdings in October 1995.
Options issued under the Plan expire ten years from date of grant and vest
equally over a three year period from the date of grant. There were
approximately 725,000 options exercisable as of December 31, 1996. No options
were exercised or forfeited during the fiscal year ended July 31, 1996 or for
the five months ended December 31, 1996.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the stock options
issued in October 1995 and December 1996 been determined under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net losses for the fiscal year ended July
31, 1996 and the five months ended December 31,1996 would not have been
materially different from the reported net losses for those respective periods.
Pro forma compensation cost may not be representative of that to be expected in
future years.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following assumptions used for the two grants in
October 1995 and December 1996; risk free interest rates of 6.16% - 6.21%;
expected dividend yield of 0% and expected life of ten years.
12. COMMITMENTS AND CONTINGENCIES:
Leases
In July 1996, the Company entered into a capital lease agreement for
certain production equipment. The net capital lease asset of $1,767,000 and
$1,880,000 as of December 31, 1996, and July 31, 1996, respectively, is included
in property, plant, and equipment on the accompanying consolidated balance
sheets. Aggregate future minimum lease payments related to this capital lease
are as follows: 1997 -- $362,000; 1998 -- $362,000; 1999 -- $362,000;
2000 -- $362,000; 2001 -- $362,000; thereafter -- $511,000. The portion related
to interest over the remaining life of the lease was $550,000 at December 31,
1996.
The Company leases production equipment under operating lease agreements
with terms expiring at various times through 2004. Rent expense under operating
leases for the five months ended December 31, 1996, and for the fiscal years
ended July 31, 1996, 1995, and 1994, aggregated $936,000, $2,500,000,
$1,167,800, and $742,000, respectively. Aggregate future minimum lease
commitments for noncancelable operating leases that have initial or remaining
lease terms in excess of one year as of December 31, 1996, are as follows:
1997 -- $943,000; 1998 -- $746,000; 1999 -- $661,000; 2000 -- $548,000;
2001 -- $481,000; thereafter $807,000.
Legal Matters
There are various claims and pending legal actions against the Company,
primarily involving product liability, seeking damages in varying amounts. In
the opinion of management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position or results of
operations of the Company.
F-15
<PAGE> 92
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED-PARTY TRANSACTIONS:
On October 27, 1995, in connection with the recapitalization discussed in
Note 3, the Company entered into a ten-year agreement with Hicks Muse, pursuant
to which they pay Hicks Muse an annual fee of $175,000 for management and
advisory services in connection with the organization, management, and
operations of the Company. The annual fee is adjustable at the end of each
fiscal year to an amount equal to 0.1% of the consolidated net sales of the
Company during such fiscal year, but in no event less than $175,000. Management
fees and related expenses under this agreement amounted to $82,000 and $207,000
for the five months ended December 31, 1996, and for the fiscal year ended July
31, 1996, respectively, and are included in selling, general, and administrative
expenses on the accompanying income statements.
On October 27, 1995, in connection with the recapitalization discussed in
Note 3, the Company entered into a ten-year agreement with an affiliate of Hicks
Muse pursuant to which they paid this affiliate a financial advisory fee of
approximately $1,175,000 as compensation for its services as financial advisor
in connection with the recapitalization. In addition, this Hicks Muse affiliate
will be entitled to receive a fee equal to 1.5% of the transaction value, as
defined, for each add-on transaction, as defined, in which the Company is
involved.
14. 1996 COST REDUCTION PLAN:
During fiscal 1996, the Company incurred a loss before income taxes and
recapitalization expenses of $2.4 million. In order to improve Hedstrom's
profitability in 1997 and thereafter, management implemented a plan in the fall
of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in
1997 and thereafter as compared with fiscal 1996 levels. Important elements of
the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. The
implementation of just-in-time manufacturing of outdoor gym sets will
enable Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, to eliminate the need for utilizing third party warehouses
for outdoor gym sets. Management believes the Company will save
approximately $2.1 million of warehouse and material handling expense in
1997 and thereafter as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product offerings, (ii)
redesigned certain outdoor gym set components to reduce the cost of such
components and (iii) further standardized many of the components among
its various outdoor gym set product offerings. Management believes these
actions will improve profitability by approximately $2.0 million in 1997
and thereafter over fiscal 1996 levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally will provide
annual cost savings of approximately $1.5 million as compared to fiscal
1996 levels.
F-16
<PAGE> 93
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand
over time. The total cost for this advertising program was approximately
$1.5 million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable return on investment
and elected to discontinue it. Therefore, such costs will not be incurred
in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
15. QUARTERLY FINANCIAL DATA (UNAUDITED; IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales...................................... $19,115 $24,217 $60,430 $29,432
Gross profit................................... 3,160 5,713 16,125 3,128
Net (loss) income.............................. (7,782) (387) 4,415 (4,362)
Pro forma income (loss) per share.............. (0.12) (0.01) 0.07 (0.06)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1995 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales...................................... $17,120 $27,009 $61,827 $27,906
Gross profit................................... 2,743 6,193 13,721 3,893
Net (loss) income.............................. (584) 525 2,254 (1,450)
</TABLE>
16. SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom, entered into an Agreement and Plan of Merger (the
"Merger Agreement") with ERO, Inc. to acquire ERO for a total enterprise value
of approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of the
outstanding shares of the common stock of ERO at a purchase price of $11.25 per
share (the "Tender Offer"). Upon consummation of the Tender Offer, (i) HC
Acquisition Corp. was merged with and into ERO (the "Merger") with ERO surviving
the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's
outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and
(iii) Hedstrom refinanced (the "Hedstrom Refinancing") its existing revolving
credit facility and term loan facility (the Merger, the Tender Offer, the ERO
Refinancing and the Hedstrom Refinancing, are collectively referred to herein as
the "Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing, and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to
F-17
<PAGE> 94
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consummate the Acquisition were provided by (i) $75.0 million of term loans
under a new six-year senior secured term loan facility (the "Tranche A Term Loan
Facility"), (ii) $35.0 million of term loans under a new eight-year senior
secured term loan facility (the "Tranche B Term Loan Facility" and, together
with the Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1
million of borrowings under a new $70.0 million senior secured revolving credit
facility (the "Revolving Credit Facility" and, together with the Term Loan
Facilities, the "Senior Credit Facilities", (iv) $110.0 million of gross
proceeds from the offering by Hedstrom of 10% Senior Subordinated Notes Due 2007
(the "Senior Subordinated Notes"), (v) $25.0 million of gross proceeds from the
offering by Holdings of 44,612 units consisting of 12% Senior Discount Notes Due
2009 (the "Discount Notes") and 2,705,896 shares of Common Stock, $.01 par value
per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of gross
proceeds from the private placement of 31,520,000 shares of Non-Voting Common
Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting Common
Stock") and 480,000 shares of Holdings Common Stock.
The acquisition of ERO will be accounted for under the purchase method of
accounting, and accordingly, the purchase price will be allocated to the assets
acquired and the liabilities assumed based upon fair value at the date of the
acquisition of ERO. The excess of the purchase price over the fair values of the
tangible net assets acquired is $146.8 million, will be recorded as goodwill and
will be amortized on a straight-line basis over 40 years.
The net purchase price will be allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 59,400
Net property, plant and equipment........................... 20,000
Goodwill.................................................... 146,800
Liabilities assumed......................................... (103,600)
---------
Cash paid for ERO................................. $ 122,600
=========
</TABLE>
In connection with the acquisition of ERO, management implemented a plan
(the "Rationalization Plan") that will result in annual cost savings of $6
million as a result of rationalizing sales, marketing and general and
administrative functions, closings of duplicate facilities and reductions in
external administrative expenditures including legal, insurance, tax, audit and
public relations expenditures. The cost savings outlined below reflect personnel
terminations that have already occurred or that have been formally communicated
to the employees, closings of duplicate facilities that have occurred and
reductions in external administrative expenses that have been negotiated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Salaries and benefits from personnel terminations........... $3,700
Duplicative facilities that have been closed................ 900
External administrative expenses that have been reduced..... 1,400
------
Total annual cost savings......................... $6,000
======
</TABLE>
The unaudited pro forma results below assume the Acquisition occurred at
the beginning of the periods presented and that the Rationalization Plan
discussed in the preceding paragraph were implemented at the beginning of the
periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIVE MONTHS TWELVE MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 JULY 31, 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
Net sales............................. $119,745 $283,307 $260,008
Net income (loss)..................... $ 1,049 $ (3,552) $(12,792)
Net income (loss) per share........... $ 0.02 $ (0.05) $ (0.19)
</TABLE>
F-18
<PAGE> 95
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense related to the Senior Subordinated
Notes, the Discount Notes and the Senior Credit Facilities and implementation of
the Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would have
occurred had the Acquisition been consummated and had the Rationalization Plan
been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
The obligations of Hedstrom relating to the Senior Subordinated Notes and
the Senior Credit Facilities are unconditionally, fully and irrevocably
guaranteed (jointly and severally) by Holdings and each of Hedstrom's direct and
indirect domestic subsidiaries. The Senior Subordinated Notes are unsecured
senior subordinated obligations of Hedstrom. The Senior Credit Facilities are
secured by 100% of the stock of Hedstrom Corporation and its domestic
subsidiaries and 65% of the capital stock of each foreign subsidiary of
Hedstrom. The Discount Notes are unsecured senior obligations of Holdings.
F-19
<PAGE> 96
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is financial information pertaining to Hedstrom and its
subsidiary guarantors and its subsidiary nonguarantor (with respect to the
Senior Subordinated Notes and the Senior Credit Facilities) for the periods in
which they are included in Holding's consolidated financial statements.
HEDSTROM CORPORATION
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1996 AND JULY 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JULY 31, 1996
------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 467 $ 66 $ 533 $ 7,893 $ 105 $ 7,998
Trade accounts receivable, net....... 13,126 460 13,586 21,984 1,400 23,384
Inventories.......................... 23,368 448 23,816 21,279 495 21,774
Deferred income taxes................ 5,027 0 5,027 3,121 -- 3,121
Prepaid expenses and other........... 674 16 690 797 29 826
-------- ------- -------- ------- ------- -------
Total current assets........... 42,662 990 43,652 55,074 2,029 57,103
PROPERTY, PLANT, AND EQUIPMENT, net.... 21,735 8 21,743 21,990 10 22,000
DEFERRED CHARGES AND OTHER,
net.................................. 2,318 -- 2,318 2,515 -- 2,515
DEFERRED INCOME TAXES (d).............. 4,251 -- 4,251 3,335 -- 3,335
-------- ------- -------- ------- ------- -------
Total assets................... $ 70,966 $ 998 $71,964 $82,914 $ 2,039 $84,953
======== ======= ======== ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit............. $ 15,430 $ 1,970 $17,400 $24,158 $ 2,292 $26,450
Current portion of term loans........ 1,750 -- 1,750 -- -- --
Current portion of capital leases.... 215 -- 215 208 -- 208
Accounts payable (c)................. 11,275 131 11,406 9,522 137 9,659
Accrued expenses..................... 3,006 (3) 3,003 3,170 627 3,797
-------- ------- -------- ------- ------- -------
Total current liabilities...... 31,676 2,098 33,774 37,058 3,056 40,114
LONG-TERM DEBT (a):
Term loans........................... 36,750 -- 36,750 38,500 -- 38,500
Capital leases....................... 1,556 -- 1,556 1,648 -- 1,648
Other................................ 300 -- 300 400 -- 400
-------- ------- -------- ------- ------- -------
Total long-term debt........... 38,606 -- 38,606 40,548 -- 40,548
STOCKHOLDER'S EQUITY (b):
Common stock......................... -- -- -- -- -- --
Additional paid-in capital........... 8,929 -- 8,929 8,929 -- 8,929
Accumulated deficit.................. (8,245) (1,100) (9,345) (3,621) (1,017) (4,638)
-------- ------- -------- ------- ------- -------
Total stockholder's equity
(deficit).................... 684 (1,100) (416) 5,308 (1,017) 4,291
-------- ------- -------- ------- ------- -------
Total liabilities and
stockholder's equity......... $ 70,966 $ 998 $71,964 $82,914 $ 2,039 $84,953
======== ======= ======== ======= ======= =======
</TABLE>
footnotes to follow
F-20
<PAGE> 97
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING INCOME STATEMENTS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996 AND
THE FISCAL YEAR ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1996 FOR THE FISCAL YEAR ENDED JULY 31, 1996
------------------------------------- -----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- -------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES............................... $ 23,074 $ 920 $23,994 $ 129,074 $ 4,120 $ 133,194
COST OF SALES........................... 21,238 735 21,973 101,482 3,586 105,068
-------- ------- -------- --------- ------- ---------
Gross Profit.................... 1,836 185 2,021 27,592 534 28,126
SG&A EXPENSES........................... 7,225 321 7,546 23,659 944 24,603
-------- ------- -------- --------- ------- ---------
Operating income (loss)......... (5,389) (136) (5,525) 3,933 (410) 3,523
RECAPITALIZATION EXPENSES............... -- -- -- 9,600 -- 9,600
INTEREST EXPENSE (c).................... 2,010 1 2,011 5,674 34 5,708
-------- ------- -------- --------- ------- ---------
LOSS BEFORE TAXES....................... (7,399) (137) (7,536) (11,341) (444) (11,785)
INCOME TAX BENEFIT (d).................. 2,775 54 2,829 3,786 -- 3,786
-------- ------- -------- --------- ------- ---------
NET LOSS $ (4,624) $ (83) $(4,707) $ (7,555) $ (444) $ (7,999)
======== ======= ======== ========= ======= =========
</TABLE>
HEDSTROM CORPORATION
CONSOLIDATING INCOME STATEMENTS
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE FISCAL YEAR ENDED
JULY 31, 1995 JULY 31, 1994
-------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES................................ $ 131,551 $ 2,311 $133,862 $107,211 $ 1,444 $108,655
COST OF SALES............................ 105,223 2,089 107,312 85,747 1,423 87,170
--------- ------- --------- -------- ------- --------
Gross profit..................... 26,328 222 26,550 21,464 21 21,485
SG&A EXPENSES............................ 18,508 699 19,207 17,820 361 18,181
--------- ------- --------- -------- ------- --------
Operating income (loss).......... 7,820 (477) 7,343 3,644 (340) 3,304
INTEREST EXPENSE......................... 4,555 18 4,573 2,973 9 2,982
--------- ------- --------- -------- ------- --------
INCOME (LOSS) BEFORE TAXES............... 3,265 (495) 2,770 671 (349) 322
INCOME TAX (EXPENSE) BENEFIT............. (1,577) 137 (1,440) (237) 134 (103)
--------- ------- --------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................. 1,688 (358) 1,330 434 (215) 219
LOSS FROM DISCONTINUED OPERATIONS (NET OF
TAX BENEFIT)........................... (585) -- (585) (3,180) -- (3,180)
--------- ------- --------- -------- ------- --------
NET INCOME (LOSS)........................ $ 1,103 $ (358) $ 745 $ (2,746) $ (215) $ (2,961)
========= ======= ========= ======== ======= ========
</TABLE>
footnotes to follow
F-21
<PAGE> 98
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996 AND
THE FISCAL YEAR ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1996 FOR THE FISCAL YEAR ENDED JULY 31, 1996
-------------------------------------- -----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- -------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (c)(d).................... $ (4,624) $ (83) $(4,707) $ (7,555) $ (444) $ (7,999)
Depreciation and amortization...... 1,973 3 1,976 3,407 7 3,414
Deferred income tax benefit (d).... (2,862) -- (2,862) (3,808) -- (3,808)
Other.............................. 4 -- 4 (145) -- (145)
Changes in assets and liabilities:
Accounts receivable.............. 8,794 940 9,734 (817) (75) (892)
Inventories...................... (2,089) 47 (2,042) (64) (75) (139)
Prepaid expenses and other....... (132) 13 (119) (20) 26 6
Accounts payable (c)............. 1,793 (6) 1,787 (8,012) (11) (8,023)
Accrued expenses................. (163) (630) (793) 26 (184) (158)
-------- ----- -------- -------- ------- --------
Net cash provided by (used
for) operating
activities................. 2,694 284 2,978 (16,988) (756) (17,744)
-------- ----- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of PP&E............... (1,375) (1) (1,376) (6,735) (3) (6,738)
Proceeds from the sale of PP&E..... 67 -- 67 248 -- 248
-------- ----- -------- -------- ------- --------
Net cash used for investing
activities................. (1,308) (1) (1,309) (6,487) (3) (6,490)
-------- ----- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock......... -- -- -- (29,772) -- (29,772)
Redemption of preferred stock...... -- -- -- (3,072) -- (3,072)
Proceeds from sale of common
stock............................ -- -- -- 29,742 -- 29,742
Term loan borrowings............... -- -- -- 35,000 -- 35,000
Borrowings on revolving line of
credit........................... 12,050 -- 12,050 24,528 1,922 26,450
Payments on revolving line of
credit........................... (20,778) (322) (21,100) (27,690) (1,120) (28,810)
Capital lease (payments) borrowings
and other........................ (84) -- (84) 1,597 -- 1,597
-------- ----- -------- -------- ------- --------
Net cash (used for) provided
by financing activities.... (8,812) (322) (9,134) 30,333 802 31,135
-------- ----- -------- -------- ------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (7,426) (39) (7,465) 6,858 43 6,901
CASH AND CASH EQUIVALENTS:
Beginning of year/period........... 7,893 105 7,998 1,035 62 1,097
-------- ----- -------- -------- ------- --------
End of year/period................. $ 467 $ 66 $ 533 $ 7,893 $ 105 $ 7,998
======== ===== ======== ======== ======= ========
</TABLE>
footnotes to follow
F-22
<PAGE> 99
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JULY 31, 1995 FOR THE FISCAL YEAR ENDED JULY 31, 1994
---------------------------------------- ----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
----------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 1,103 $ (358) $ 745 $(2,746) $ (215) $(2,961)
Depreciation and amortization........ 2,942 5 2,947 2,402 2 2,404
Discontinued operations.............. 1,204 -- 1,204 4,683 -- 4,683
Deferred income tax provision........ 755 -- 755 (1,428) -- (1,428)
Other................................ 100 -- 100 119 -- 119
Changes in assets and liabilities:
Accounts receivable................ (1,741) (398) (2,139) (3,114) (927) (4,041)
Inventories........................ (6,876) (65) (6,941) (1,348) (355) (1,703)
Prepaid expenses and other......... (2,434) 6 (2,428) (22) 23 1
Accounts payable................... 5,662 95 5,757 5,086 (32) 5,054
Accrued expenses................... (455) 851 396 (744) (40) (784)
------- ------- ------- ------- ------- -------
Net cash provided by (used for)
operating activities......... 260 136 396 2,888 (1,544) 1,344
------- ------- ------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of PP&E................. (2,565) (9) (2,574) (2,977) (11) (2,988)
------- ------- ------- ------- ------- -------
Net cash used for investing
activities................... (2,565) (9) (2,574) (2,977) (11) (2,988)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of
credit............................. 3,366 1,301 4,667 -- -- --
Payments on revolving line of
credit............................. (383) (1,385) (1,768) (406) (434) (840)
Capital lease (payments) borrowings
and other.......................... -- -- -- (108) 2,008 1,900
------- ------- ------- ------- ------- -------
Net cash provided by (used for)
financing activities......... 2,983 (84) 2,899 (514) 1,574 1,060
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 678 43 721 (603) 19 (584)
CASH AND CASH EQUIVALENTS:
Beginning of year.................... 357 19 376 960 -- 960
------- ------- ------- ------- ------- -------
End of year.......................... $ 1,035 $ 62 $ 1,097 $ 357 $ 19 $ 376
======= ======= ======= ======= ======= =======
</TABLE>
The column "Total Hedstrom" represents the consolidated financial
statements of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is
Holdings' only direct subsidiary. The primary differences between the
consolidated amounts of Hedstrom Corporation and the consolidated amounts
included in the accompanying consolidated financial statements of Holdings are
as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million note
payable issued by Holdings in connection with the 1995 Recapitalization.
(b) Hedstrom Corporation's stockholder's equity is $2.5 million higher than
Holdings' stockholders' equity as a result of the note payable discussed in
(a) above.
(c) Accounts Payable and Interest Expense do not reflect the accrued interest
and interest expense, respectively, on the note payable discussed in (a)
above.
(d) Deferred income taxes does not reflect the deferred tax benefit of accrued
interest on the note payable discussed in (a) above.
F-23
<PAGE> 100
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,165 $ 533
Trade accounts receivable................................. 70,231 13,586
Inventories............................................... 47,120 23,816
Deferred income taxes..................................... 3,611 5,027
Prepaid expenses and other current assets................. 4,116 690
-------- --------
Total current assets.............................. 128,243 43,652
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost, net of accumulated
depreciation.............................................. 42,442 21,743
GOODWILL, net of accumulated amortization................... 146,800 --
OTHER ASSETS:
Deferred financing charges, net of accumulated
amortization........................................... 17,800 --
Deferred charges and other, net of accumulated
amortization........................................... 7,691 2,318
Deferred income taxes..................................... 6,986 4,362
-------- --------
Total other assets................................ 32,477 6,680
-------- --------
Total assets...................................... $349,962 $ 72,075
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. 2,700 17,400
Current portion of long-term debt......................... 6,371 1,965
Accounts payable.......................................... 22,621 11,698
Accrued expenses.......................................... 27,320 3,003
-------- --------
Total current liabilities......................... 59,012 34,066
-------- --------
LONG-TERM DEBT
Senior Subordinated Notes................................. 110,000 --
Senior Discount Notes..................................... 21,618 --
Term loans................................................ 108,375 36,750
Notes payable to related parties.......................... 2,500 2,500
Capital leases............................................ 1,745 1,556
Other..................................................... 2,380 300
-------- --------
Total long-term debt.............................. 246,618 41,106
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 36,127,395 and 32,941,499 shares issued and
outstanding, respectively.............................. 361 329
Non-voting common stock, $.01 par value, 40,000,000 shares
authorized, 31,520,000 shares issued and outstanding... 315 --
Additional paid-in capital................................ 51,534 10,437
Accumulated deficit....................................... (7,878) (13,863)
-------- --------
Total stockholders' equity (deficit).............. 44,332 (3,097)
-------- --------
Total liabilities and stockholders' equity........ $349,962 $ 72,075
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-24
<PAGE> 101
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
NET SALES................................................... $104,051 $ 96,059
COST OF SALES............................................... 73,579 72,897
-------- --------
Gross profit...................................... 30,472 23,162
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 16,242 15,107
-------- --------
Operating income.................................. 14,230 8,055
INTEREST EXPENSE............................................ 4,709 3,545
-------- --------
INCOME BEFORE INCOME TAXES.................................. 9,521 4,510
INCOME TAX EXPENSE.......................................... 3,536 1,812
-------- --------
NET INCOME.................................................. $ 5,985 $ 2,698
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-25
<PAGE> 102
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
----------- ----- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......... 32,941,499 $329 $10,437 $(13,863) $(3,097)
Issuance of voting common stock.... 3,185,896 32 3,950 -- 3,982
Issuance of non-voting common
stock........................... 31,520,000 315 37,147 -- 37,462
Net income......................... -- -- -- 5,985 5,985
----------- ---- ------- -------- -------
BALANCE AT JUNE 30, 1997............. 67,647,395 $676 $51,534 $ (7,878) $44,332
=========== ==== ======= ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-26
<PAGE> 103
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 5,985 $ 2,698
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization............................. 2,767 2,322
Deferred income tax provision (benefit)................... (2,676) --
Changes in assets and liabilities:
Accounts receivable.................................... (32,260) (27,569)
Inventories............................................ 6,239 3,607
Prepaid expenses and other current assets.............. 983 (343)
Accounts payable....................................... 949 2,821
Accrued expenses....................................... 13,890 3,739
Other.................................................. (2,845) --
--------- --------
Net cash used for operating activities.................... (6,968) (12,725)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ERO, Inc................................... (122,600) --
Acquisitions of property, plant and equipment............. (3,446) (4,792)
--------- --------
Net cash used for investing activities.................... (126,046) (4,792)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Subordinated Notes... 110,000 --
Net proceeds from issuance of new term loans.............. 110,000 --
Net proceeds from issuance of Senior Discount Notes....... 21,618 --
Borrowings on new revolving line of credit, net........... 2,700 --
Repayments of old term loans.............................. (91,393) --
Repayments of old revolving lines of credit, net.......... (38,925) 16,058
Debt financing costs...................................... (17,800) --
Net proceeds from issuance of voting common stock......... 3,982 --
Net proceeds from issuance of non-voting common stock..... 37,462 --
Capital lease payments and other.......................... (1,998) 1,648
--------- --------
Net cash provided by financing activities................. 135,646 17,706
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,632 189
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 533 388
--------- --------
End of period............................................. $ 3,165 $ 577
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-Cash investing and financing activities:
Fair value of ERO Assets Acquired...................... $ 226,200 --
ERO Liabilities Assumed................................ $(103,600) --
--------- --------
Cash Paid......................................... $ 122,600 $ --
========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-27
<PAGE> 104
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying interim consolidated financial statements include the
accounts of Hedstrom Holdings, Inc. ("Holdings") and its wholly owned
subsidiary, Hedstrom Corporation ("Hedstrom," and together with Holdings, the
"Company"). Effective June 12, 1997, Hedstrom acquired ERO, Inc. ("ERO"), which
became a wholly owned subsidiary of Hedstrom (see Note 2). The accompanying
consolidated financial statements reflect the operations of ERO for the month of
June 1997. These financial statements are unaudited but, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial condition, results of
operations and cash flows of the Company. All intercompany balances and
transactions have been eliminated in consolidation.
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results to be expected for the entire fiscal year.
2. ACQUISITION OF ERO, INC.
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom, entered into an Agreement and Plan of Merger (the
"Merger Agreement") with ERO to acquire ERO for a total enterprise value of
approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of the
outstanding shares of the common stock of ERO at a purchase price of $11.25 per
share (the "Tender Offer"). Upon consummation of the Tender Offer, (i) HC
Acquisition Corp. was merged with and into ERO (the "Merger") with ERO surviving
the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's
outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and
(ii) Hedstrom refinanced (the "Hedstrom Refinancing") its existing revolving
credit facility and term loan facility (the Merger, the Tender Offer, the ERO
Refinancing and the Hedstrom Refinancing, are collectively referred to herein as
the "Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to consummate the Acquisition were provided by (i)
$75.0 million of term loans under a new six-year senior secured term loan
facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans
under a new eight-year senior secured term loan facility (the "Tranche B Term
Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term
Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million
senior secured revolving credit facility (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Senior Credit Facilities", (iv)
$110.0 million of gross proceeds from the offering by Hedstrom of 10% Senior
Subordinated Notes Due 2007 (the "Senior Subordinated Notes"), (v) $25.0 million
of gross proceeds from the offering by Holdings of 44,612 units consisting of
12% Senior Discount Notes Due 2009 (the "Discount Notes") and 2,705,896 shares
of Common Stock, $.01 par value per share, of Holdings ("Holdings Common Stock")
and (vi) $40.0 million of gross proceeds from the private placement of
31,520,000 shares of Non-Voting Common Stock, $.01 par value per share, of
Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares of Holdings
Common Stock. In addition, Hedstrom entered into a new $70.0 million senior
secured revolving credit facility (the "Revolving Credit Facility") to finance
certain seasonal working capital requirements.
The acquisition of ERO has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon fair value at the date of the
acquisition of ERO. The excess of the purchase price over the fair values of the
tangible net assets acquired was approximately $146.8 million, has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years. In
the event that facts and circumstances indicate that the goodwill may be
impaired, an
F-28
<PAGE> 105
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the assets carrying amount to determine if an adjustment is
required.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 59,400
Net property, plant and equipment........................... 20,000
Goodwill.................................................... 146,800
Liabilities assumed......................................... (103,600)
---------
Cash paid for ERO................................. $ 122,600
=========
</TABLE>
In connection with the acquisition of ERO, management implemented a plan
(the "Rationalization Plan") that will result in annual cost savings of $6
million as a result of rationalizing sales, marketing and general and
administrative functions, closings of duplicate facilities and reductions in
external administrative expenditures including legal, insurance, tax, audit and
public relations expenditures. The cost savings outlined below reflect personnel
terminations that have already occurred or that have been formally communicated
to the employees, closings of duplicate facilities that have occurred and
reductions in external administrative expenses that have been negotiated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Salaries and benefits from personnel terminations..... $$3,700
Duplicative functions and facilities that have been
closed.............................................. 900
External administrative expenses that have been
reduced............................................. 1,400
------
Total Annual Cost Savings................... $6,000
======
</TABLE>
The unaudited pro forma results below assume the Acquisition occurred at
the beginning of the periods presented and that the Rationalization Plan
discussed in the preceding paragraph were implemented at the beginning of the
periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales.............................................. $142,355 $144,551
Net income (loss)...................................... $ (26) $ (4,447)
Net income (loss) per share............................ $ 0.00 $ (0.07)
</TABLE>
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense related to the Senior Subordinated
Notes, the Discount Notes and the Senior Credit Facilities and implementation of
the Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would have
occurred had the Acquisition been consummated and had the Rationalization Plan
been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
F-29
<PAGE> 106
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Senior Subordinated Notes................................... $110,000 $ --
Term Loans.................................................. 113,500 38,500
Senior Discount Notes....................................... 21,618 --
Revolving Credit Facility................................... 2,700 17,400
Other....................................................... 7,571 4,571
-------- -------
$255,389 $60,471
======== =======
</TABLE>
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 105.000
2003........................................................ 103.333
2004........................................................ 101.667
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Hedstrom may redeem in the aggregate up to $44.0 million principal amount of
Senior Subordinated Notes with the proceeds of one or more equity offerings so
long as there is a public market at the time of such redemption (provided that
if the equity offering is an offering by Holdings, a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of Hedstrom), at a
redemption price (expressed as a percentage of principal amount) of 110%, plus
accrued and unpaid interest, if any, to the redemption date; provided, however,
that at least $66.0 million aggregate principal amount of the Senior
Subordinated Notes remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated obligations
of Hedstrom and are unconditionally and fully guaranteed (jointly and severally)
on a senior basis by Holdings and on a senior subordinated basis by each
domestic subsidiary of Hedstrom. The Senior Subordinated Notes are subordinated
to all senior indebtedness (as defined) of Hedstrom rank pari passu in right of
payment with all senior subordinated indebtedness (as defined) of Hedstrom.
The Senior Subordinated Notes Indenture contains certain covenants that,
among other things, limit (i) the incurrence of additional indebtedness by
Hedstrom and its restricted subsidiaries (as defined), (ii) the payment of
dividends and other restricted payments by Hedstrom and its restricted
subsidiaries, (iii) restrictions on distributions from restricted subsidiaries,
(iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of
restricted subsidiary capital stock and (vii) mergers and consolidations.
Term Loans and Revolving Credit Facility
In connection with the Acquisition, Hedstrom's existing term loans of $35.0
million and its existing revolving credit facility borrowings were repaid and
the facilities were terminated. Hedstrom's $3.5 million Industrial Revenue Bond
from Bedford County, which bears interest at 7.13%, was not retired in
connection with the Acquisition.
As discussed in Note 2, in connection with the Acquisition, Hedstrom
obtained the Term Loan Facilities and the Revolving Credit Facility
(collectively, the "Senior Credit Facilities"). The Senior Credit Facilities
consist of (a) a six-year Tranche A Senior Secured Term Loan Facility providing
for term loans to Hedstrom in a principal
F-30
<PAGE> 107
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of $75 million; (b) an eight-year Tranche B Senior Secured Term Loan
Facility providing for term loans to Hedstrom in a principal amount of $35
million; and (c) a Senior Secured Revolving Credit Facility providing for
revolving loans to Hedstrom and the issuance of letters of credit for the
account of Hedstrom in an aggregate principal and stated amount at any time not
to exceed $70 million. Borrowings under the Revolving Credit Facility will be
available based upon a borrowing base not to exceed 85% of eligible accounts
receivable and 50% of eligible inventory.
At Hedstrom's option, the interest rates per annum applicable to the Senior
Credit Facilities will be either (i) the Eurocurrency Rate (as defined) plus
2.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit
Facility or 3.0% in the case of the Tranche B Term Loan Facility or (ii) the
Alternate Base Rate (as defined) plus 1.5% in the case of the Tranche A Term
Loan Facility and the Revolving Credit Facility or 2.0% in the case of the
Tranche B Term Loan Facility. The Alternate Base Rate is the highest of (a)
Credit Suisse First Boston's Prime Rate (as defined) or (b) the federal funds
effective rate from time to time plus 0.5%. The applicable margin in respect of
the Tranche A Term Loan Facility and the Revolving Credit Facility will be
adjusted from time to time by amounts to be agreed upon based on the achievement
of certain performance targets to be determined.
The obligations of Hedstrom under the Senior Credit Facilities are
unconditionally, fully and irrevocably guaranteed (jointly and severally) by
Holdings and each of Hedstrom's direct or indirect domestic subsidiaries
(collectively, the "Senior Credit Facilities Guarantors"). In addition, the
Senior Credit Facilities will be secured by first priority or equivalent
security interests in (i) all the capital stock of, or other equity interests
in, each direct or indirect domestic subsidiary of Hedstrom and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of Hedstrom, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of Hedstrom and the Senior Credit Facilities Guarantors.
The Senior Credit Facilities contain a number of significant covenants
that, among other things, restrict the ability of Hedstrom to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in certain transactions with affiliates. In addition, under the Senior
Credit Facilities, Hedstrom is required to comply with specified minimum
interest coverage and maximum leverage ratios.
Senior Discount Notes
In connection with the Acquisition, Holdings received $25.0 million of
gross proceeds from the issuance by Holdings of 44,612 units, consisting of the
Discount Notes and 2,705,896 shares of Holdings common stock. Of the $25.0
million in gross proceeds, $3.4 million ($1.25 per share) was allocated to the
common stock, based upon management's estimate of fair market value, and $21.6
million was allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an
aggregate principal amount at maturity (June 1, 2009) of $44.6 million,
representing a yield to maturity of 12%. No cash interest will accrue on the
Discount Notes prior to June 1, 2002. Thereafter, cash interest will be payable
on June 1 and December 1 of each year, commencing December 1, 2002.
Except as set forth below, the Discount Notes will not be redeemable at the
option of Holdings prior to June 1, 2002. On and after such date, the Discount
Notes will be redeemable, at Holdings' option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued and unpaid interest to the redemption date:
F-31
<PAGE> 108
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 106.000
2003........................................................ 104.000
2004........................................................ 102.000
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Holdings may redeem in the aggregate up to 40% of the accreted value of the
Discount Notes with the proceeds of one or more equity offerings by Holdings so
long as there is a public market at the time of such redemption, at a redemption
price (expressed as a percentage of accreted value on the redemption date) of
112%, plus accrued and unpaid interest, if any, to the redemption date; provided
however, that at least $26.8 million aggregate principal amount at maturity of
the Discount Notes remains outstanding after each such redemption.
Senior Subordinated Notes
The $110.0 million Senior Subordinated Notes bear interest at 10% per
annum, payable on June 1 and December 1 of each year, commencing December 1,
1997. The Senior Subordinated Notes mature on June 1, 2007. Except as set forth
below, the Senior Subordinated Notes are not redeemable at the option of
Hedstrom prior to June 1, 2002. On and after such date, the Senior Subordinated
Notes are redeemable, at Hedstrom's option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued and unpaid interest to the redemption date:
At any time on or prior to June 1, 2002, the Discount Notes may also be
redeemed as a whole at the option of Holdings upon the occurrence of a change of
control (as defined) at a redemption price equal to 100% of the accreted value
thereof plus the applicable premium as of, and accrued and unpaid interest, if
any, to the date of redemption.
The Discount Notes Indenture contains certain covenants that, among other
things, limit (i) the incurrence of additional indebtedness by Holdings and its
restricted subsidiaries (as defined), (ii) the payment of dividends and other
restricted payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Other Debt
Other debt consists of a $2.5 million Holdings note payable to the previous
owners of Holdings as well as various other mortgages, capital leases and
equipment loans. The $2.5 million note payable bears interest at 10% per annum
and is payable at the earlier of April 30, 2002, or when the Company has met
certain cash flow levels and the mortgages and equipment loans have varying
interest rates and maturities.
F-32
<PAGE> 109
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION
The following is financial information pertaining to Hedstrom and its
subsidiary guarantors and subsidiary nonguarantors (with respect to the Senior
Subordinated Notes and the Senior Credit Facilities) for the periods in which
they are included in Holding's accompanying consolidated financial statements.
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
----------------------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- ------------ -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,666 $ 516 $ (17) $ 3,165 $ 467 $ 66 $ 533
Trade accounts receivable,
net........................... 64,441 5,829 (39) 70,231 13,126 460 13,586
Inventories..................... 32,353 14,627 140 47,120 23,368 448 23,816
Deferred income taxes........... 3,611 -- -- 3,611 5,027 -- 5,027
Prepaid expenses and other...... 3,696 691 -- 4,387 674 16 690
-------- -------- --------- -------- -------- ------- --------
Total current assets...... 106,767 21,663 84 128,514 42,662 990 43,652
PROPERTY, PLANT, AND EQUIPMENT,
net............................. 27,153 15,289 -- 42,442 21,735 8 21,743
Investment in and Advances to
Nonguarantor Subsidiaries..... 241,637 (30,468) (211,169) -- -- -- --
GOODWILL, net..................... 132,672 18,503 (4,375) 146,800 -- -- --
DEFERRED CHARGES AND OTHER, net... 24,241 -- -- 24,241 2,318 -- 2,318
DEFERRED INCOME TAXES(d).......... 7,496 (510) -- 6,986 4,251 -- 4,251
-------- -------- --------- -------- -------- ------- --------
Total assets.............. $539,966 $ 24,477 $(215,460) $348,983 $ 70,966 $ 998 $ 71,964
======== ======== ========= ======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit........ 2,700 -- -- 2,700 15,430 1,970 17,400
Current portion of term loans... 1,736 4,282 -- 6,018 1,750 -- 1,750
Current portion of capital
leases........................ 353 -- -- 353 215 -- 215
Advances from Nonguarantor
Subsidiaries.................. 143,812 5,718 (149,530) -- -- -- --
Accounts payable(c)............. 21,632 2,988 (1,999) 22,621 11,275 131 11,406
Accrued expenses................ 24,498 3,327 (505) 27,320 3,006 (3) 3,003
-------- -------- --------- -------- -------- ------- --------
Total current
liabilities............. 194,731 16,315 (152,034) 59,012 31,676 2,098 33,774
LONG-TERM DEBT(a):
Senior subordinated notes....... 110,000 -- -- 110,000 -- -- --
Term loans...................... 108,375 -- -- 108,375 36,750 -- 36,750
Capital leases.................. 1,745 -- -- 1,745 1,556 -- 1,556
Other........................... 1,792 588 -- 2,380 300 -- 300
-------- -------- --------- -------- -------- ------- --------
Total long-term debt...... 221,912 588 -- 222,500 38,606 -- 38,606
STOCKHOLDER'S EQUITY
Total Stockholder's equity
(deficit)(b)............ 123,323 7,574 (63,426) 67,471 684 (1,100) (416)
-------- -------- --------- -------- -------- ------- --------
Total liabilities and
Stockholder's equity.... $539,966 $ 24,477 $(215,460) $348,983 $ 70,966 $ 998 $ 71,964
======== ======== ========= ======== ======== ======= ========
</TABLE>
footnotes to follow
F-33
<PAGE> 110
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- ------------ -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES............. $100,923 $ 7,024 $(3,896) $104,051 $ 93,403 $ 2,656 $ 96,059
COST OF SALES......... 71,344 4,762 (2,527) 73,579 70,465 2,432 72,897
-------- ------- ------- -------- -------- ------- --------
Gross
profit..... 29,579 2,262 (1,369) 30,472 22,938 224 23,162
SG&A EXPENSES......... 15,270 986 (14) 16,242 14,582 525 15,107
-------- ------- ------- -------- -------- ------- --------
Operating
income
(loss)..... 14,309 1,276 (1,355) 14,230 8,356 (301) 8,055
INTEREST
EXPENSE(c).......... 4,364 219 -- 4,583 3,404 15 3,419
-------- ------- ------- -------- -------- ------- --------
INCOME (LOSS) BEFORE
TAXES............... 9,945 1,057 (1,355) 9,647 4,952 (316) 4,636
INCOME TAX BENEFIT
(EXPENSE)(d)........ (3,849) (21) 285 (3,585) (1,979) 119 (1,860)
-------- ------- ------- -------- -------- ------- --------
NET INCOME
(LOSS).............. $ 6,096 $ 1,036 $(1,070) $ 6,062 $ 2,973 $ (197) $ 2,776
======== ======= ======= ======== ======== ======= ========
</TABLE>
footnotes to follow
F-34
<PAGE> 111
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------ --------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTORS HEDSTROM
---------- -------------- ------------ --------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)(c)(d)....... 6,096 1,036 (1,070) $ 6,062 $ 2,973 $ (197) $ 2,776
Depreciation and
amortization................ 2,614 153 -- 2,767 2,317 5 2,322
Deferred income tax provision
(benefit)(a)................ (2,676) -- -- (2,676) 48 -- 48
Changes in assets and
liabilities:
Accounts receivable......... (30,173) (2,126) 39 (32,260) (26,466) (1,103) (27,569)
Inventories................. 7,830 (1,451) (140) 6,239 3,933 (326) 3,607
Prepaid expenses and
other..................... 979 4 -- 983 (338) (5) (343)
Deferred charges and
other..................... (4,089) 12 -- (4,077) -- -- --
Accounts payable(c)......... (805) 1,100 654 949 2,589 106 2,695
Accrued expenses............ 12,124 1,266 500 13,890 3,931 (192) 3,739
--------- ------- ------- --------- -------- ------- --------
Net cash provided by
(used for) operating
activities............ (8,100) (6) (17) (8,123) (11,013) (1,712) (12,725)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc....... (122,600) -- -- (122,600) -- -- --
Acquisitions of PP&E.......... (3,444) (2) -- (3,446) (4,791) (1) (4,792)
--------- ------- ------- --------- -------- ------- --------
Net cash used for
investing
activities............ (126,044) (2) -- (126,046) (4,791) (1) (4,792)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
Senior Subordinated notes... 110,000 -- -- 110,000 -- -- --
Net proceeds from issuance of
new term loans.............. 110,000 -- -- 110,000 -- -- --
Equity contribution from
Holdings(b)................. 63,062 -- -- 63,062 -- -- --
Borrowings on new revolving
line of credit.............. 2,700 -- -- 2,700 -- -- --
Repayments of old term
loans....................... (91,851) -- -- (91,851) -- -- --
Debt financing cost(b)........ (16,550) -- (16,550) -- -- --
Repayments on old revolving
lines of credit, net........ (38,925) 458 -- (38,467) 14,330 1,728 16,058
Other......................... (2,093) -- -- (2,093) 1,648 -- 1,648
--------- ------- ------- --------- -------- ------- --------
Net cash provided by
(used for) financing
activities............ 136,343 458 -- 136,801 15,978 1,728 17,706
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.......... 2,199 450 (17) 2,632 174 15 189
CASH AND CASH EQUIVALENTS:
Beginning of period........... 467 66 -- 533 383 5 388
--------- ------- ------- --------- -------- ------- --------
End of period................. $ 2,666 $ 516 $ (17) $ 3,165 $ 557 20 $ 577
========= ======= ======= ========= ======== ======= ========
</TABLE>
The column "Total Hedstrom" represents the consolidated financial statements
of Hedstrom Corporation and its subsidiaries, Hedstrom Corporation is Holdings'
only subsidiary. The primary differences between the consolidated amounts of
Hedstrom Corporation and the consolidated amounts included in the accompanying
consolidated financial statements of Holdings are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million note
payable issued by Holdings in connection with the 1995 Recapitalization,
and as of June 30, 1997, the $21.6 million in proceeds from the Units
Offering ascribed to the Holdings' Discount Notes.
(b) Hedstrom Corporation's stockholder's equity includes Holdings' stockholders'
equity plus, as of June 30, 1997 only, $21.6 million in proceeds from the
Units Offering ascribed to the Holdings' Discount Notes (net of certain
transaction costs), which proceeds were contributed as equity by Holdings to
Hedstrom Corporation, and, as of both June 30, 1997 and December 31, 1996,
the $2.5 million related to the 1995 Recapitalization note payable.
(c) Accounts Payable and Interest Expense do not reflect the accrued interest
and interest expense, respectively, on the obligation discussed in (a)
above.
(d) Deferred income taxes does not reflect the deferred tax benefit of accrued
interest on the obligations discussed in (a) above.
F-35
<PAGE> 112
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Raw materials............................................... $15,806
Work-in-progress............................................ 7,907
Finished goods.............................................. 23,407
-------
$47,120
=======
</TABLE>
6. 1996 COST REDUCTION PLAN
During fiscal 1996, the Company incurred a loss before income taxes and
recapitalization expenses of $2.4 million. In order to improve Hedstrom's
profitability in 1997 and thereafter, management implemented a plan in the fall
of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in
1997 and thereafter as compared with fiscal 1996 levels. Important elements of
the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. The
implementation of just-in-time manufacturing of outdoor gym sets will
enable Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, to eliminate the need for utilizing third party warehouses
for outdoor gym sets. Management believes the Company will save
approximately $2.1 million of warehouse and material handling expense in
1997 and thereafter as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product offerings, (ii)
redesigned certain outdoor gym set components to reduce the cost of such
components and (iii) further standardized many of the components among
its various outdoor gym set product offerings. Management believes these
actions will improve profitability by approximately $2.0 million in 1997
and thereafter over fiscal 1996 levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally will provide
annual cost savings of approximately $1.5 million as compared to fiscal
1996 levels.
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand
over time. The total cost for this advertising program was approximately
$1.5 million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable
F-36
<PAGE> 113
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
return on investment and elected to discontinue it. Therefore, such costs
will not be incurred in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
7. RECENT ACCOUNTING PRONOUNCEMENTS
Holdings will adopt SFAS No. 128 "Earnings Per Share", effective December
15, 1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock and common stock equivalents.
As required, Holdings will restate the reported earnings per share upon adoption
of SFAS No. 128. Assuming adoption of SFAS No. 128, basic and diluted earnings
per share for the six months ended June 30, 1997 and 1996, respectively, would
have been the same as reported earnings per share.
Holdings will adopt SFAS No. 129 "Disclosure of Information about Capital
Structure", effective December 15, 1997. SFAS No. 129 requires companies to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. Those disclosures include such things as dividend and
liquidation preferences, participation rights, call prices and dates, conversion
prices, unusual voting rights and others. As required, Holdings will make such
disclosures, if applicable, upon adoption. Management does not believe that SFAS
No. 129 will have a significant impact on Holdings' financial statements.
Holdings will adopt SFAS No. 130 "Reporting Comprehensive Income" effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net income
and all other non-owner changes in equity. Management does not believe that SFAS
No. 130 will have a significant impact on Holdings' financial statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", effective January 1, 1998. This
pronouncement changes the requirements under which public businesses must report
segment information. The objective of the pronouncement is to provide
information about a company's different types of business activities and
different economic environments. SFAS No. 131 will require companies to select
segments based on their internal reporting system. Restatement of prior year
segment disclosure will be required upon adoption of SFAS No. 131. Adoption of
this pronouncement will not have a significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if any,
adoption will have on Holdings' financial statement disclosures.
F-37
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of ERO, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, of stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of ERO, Inc.
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Price Waterhouse LLP
Chicago, Illinois
February 7, 1997, except as to Note 13,
which is as of June 12, 1997
F-38
<PAGE> 115
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,094 $ 154
Trade accounts receivable, net of allowance for doubtful
accounts of $287 and $1,038, respectively.............. 48,296 38,679
Inventories............................................... 22,058 17,001
Prepaid expenses and other current assets................. 4,085 2,662
-------- --------
TOTAL CURRENT ASSETS.............................. 79,533 58,496
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation.............................................. 20,871 20,348
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated amortization......... 2,648 3,283
Intangible assets, net of accumulated amortization........ 56,942 61,212
Deferred income tax benefit............................... -- 799
-------- --------
TOTAL OTHER ASSETS................................ 59,590 65,294
-------- --------
TOTAL ASSETS...................................... $159,994 $144,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 8,893 $ 6,728
Accounts payable.......................................... 9,389 6,398
Accrued expenses:
Compensation........................................... 1,131 1,207
Commissions and royalties.............................. 4,793 2,861
Advertising, freight and other allowances.............. 3,821 4,777
Purchase price......................................... -- 2,960
Other.................................................. 1,600 1,991
Income taxes payable...................................... 70 2,882
-------- --------
TOTAL CURRENT LIABILITIES......................... 29,697 29,804
-------- --------
LONG-TERM DEBT:
Revolving loan............................................ 31,525 15,225
Term loan................................................. 46,000 54,000
Other loans............................................... 9,222 9,045
-------- --------
TOTAL LONG-TERM DEBT.............................. 86,747 78,270
-------- --------
DEFERRED INCOME TAX LIABILITY............................... 536 --
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 9,947,700 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 10,373,300 and 10,346,300 shares issued,
respectively........................................... 104 103
Capital in excess of par value............................ 39,173 38,990
Foreign currency translation adjustment................... 3 324
Retained earnings/(accumulated deficit), per accompanying
statement.............................................. 4,507 (3,251)
Common stock held in treasury, 120,000 and 15,000 shares,
respectively, at cost.................................. (773) (102)
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 43,014 36,064
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $159,994 $144,138
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-39
<PAGE> 116
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $157,913 $128,722 $126,734
Cost of sales............................................... 97,802 80,693 79,776
-------- -------- --------
Gross profit................................................ 60,111 48,029 46,958
Selling, general and administrative expense................. 38,896 33,183 34,078
-------- -------- --------
Operating income............................................ 21,215 14,846 12,880
Interest expense............................................ 9,062 1,997 1,939
-------- -------- --------
Income before income taxes.................................. 12,153 12,849 10,941
Income tax provision........................................ 4,395 5,167 4,482
-------- -------- --------
Net income.................................................. $ 7,758 $ 7,682 $ 6,459
======== ======== ========
Net income per share........................................ $ 0.75 $ 0.73 $ 0.61
Weighted average number of shares outstanding (in
thousands)................................................ 10,316 10,487 10,580
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-40
<PAGE> 117
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,758 $ 7,682 $ 6,459
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation of property, plant and equipment.......... 2,739 1,422 1,018
Amortization of other assets........................... 3,395 2,237 2,184
Deferred income taxes.................................. 1,335 (588) (294)
Loss (gain) on the disposition of property, plant and
equipment............................................ 21 (3) 21
Provision for losses on accounts receivable............ 770 343 460
Tax benefit of stock options exercised................. 9 -- 162
Changes in current assets and current liabilities, net
of acquisitions:
Accounts receivable.................................. (10,405) (59) (8,600)
Inventories.......................................... (4,958) 3,626 3,425
Prepaid expenses..................................... (1,414) (936) 471
Accounts payable..................................... 2,942 (7,907) 1,682
Accrued expenses..................................... (657) (1,735) 1,268
Income taxes payable................................. (2,812) 1,500 576
-------- -------- -------
Net cash provided by (used for) operating activities........ (1,277) 5,582 8,832
-------- -------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (3,625) (1,772) (1,287)
Proceeds from the sale of property, plant and equipment... 6 3 --
Acquisition of Amav Industries Ltd. ...................... -- (55,098) --
Acquisition of Impact, Inc. .............................. -- -- (4,400)
Acquisition of ERO Canada, Inc. .......................... -- -- (755)
-------- -------- -------
Net cash used for investing activities...................... (3,619) (56,867) (6,442)
-------- -------- -------
Cash flows from financing activities:
Net borrowings (repayments) under revolving loan.......... 16,300 (5,236) (2,775)
Net borrowings (repayments) under term loan............... (6,000) 60,000 --
Net borrowings (repayments) under other loans............. 342 (315) --
Financing fees paid....................................... (310) (3,210) --
Net proceeds from the exercise of stock options........... 175 -- 260
Purchase of common stock for treasury..................... (671) -- --
-------- -------- -------
Net cash provided by (used for) financing activities........ 9,836 51,239 (2,515)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 4,940 (46) (125)
Cash and cash equivalents:
Beginning of year......................................... 154 200 325
-------- -------- -------
End of year............................................... $ 5,094 $ 154 $ 200
======== ======== =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 8,515 $ 1,574 $ 1,822
Income taxes paid......................................... 5,872 4,295 4,038
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-41
<PAGE> 118
ERO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL FOREIGN RETAINED
COMMON STOCK IN EXCESS CURRENCY EARNINGS/
---------------------- OF PAR TRANSLATION (ACCUMULATED TREASURY
SHARES PAR VALUE VALUE ADJUSTMENT DEFICIT) STOCK TOTAL
---------- --------- --------- ----------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 10,257,300 $103 $38,568 -- $(17,392) $(102) $21,177
Stock options exercised................. 89,000 -- 260 -- -- -- 260
Tax benefit from stock options
exercised............................. -- -- 162 -- -- -- 162
Foreign currency translation
adjustment............................ -- -- -- $(61) -- -- (61)
Net income.............................. -- -- -- -- 6,459 -- 6,459
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1994............ 10,346,300 103 38,990 (61) (10,933) (102) 27,997
Foreign currency translation
adjustment............................ -- -- -- 385 -- -- 385
Net income.............................. -- -- -- -- 7,682 -- 7,682
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1995............ 10,346,300 103 38,990 324 (3,251) (102) 36,064
Stock options exercised................. 27,000 1 174 -- -- -- 175
Tax benefit from stock options
exercised............................. -- -- 9 -- -- -- 9
Purchase of common stock for treasury... -- -- -- -- -- (671) (671)
Foreign currency translation
adjustment............................ -- -- -- (321) -- -- (321)
Net income.............................. -- -- -- -- 7,758 -- 7,758
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1996............ 10,373,300 $104 $39,173 $ 3 $ 4,507 $(773) $43,014
========== ==== ======= ==== ======== ===== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-42
<PAGE> 119
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS:
ERO, Inc. ("ERO" or the "Company") is a leading designer, manufacturer,
importer and marketer of children's leisure products. ERO's major product areas
are grouped into four business units: ERO Industries, Inc., which consists of
Slumber Shoppe and water sports products; Impact, Inc., which consists of
back-to-school products; Priss Prints, Inc., which consists of children's room
decor products; and Amav Industries, Inc., which consists of children's
activities, arts and crafts. The Company's products are sold to all major mass
retailers, sporting goods stores, toy retailers and specialty craft chains.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, ERO Industries, Inc., Impact,
Inc., Priss Prints, Inc., Amav Industries, Inc., ERO Canada, Inc. and ERO
Marketing, Inc. All intercompany balances and transactions have been eliminated
in consolidation. These consolidated financial statements include estimates that
are determined by the Company's management.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at cost which
approximates market.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. The cost of manufactured products
includes materials, direct labor and an allocation of plant overheads. The cost
of the purchased products includes inbound freight and duty.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Additions
and improvements are capitalized, while expenditures for maintenance and repairs
are charged to operations as incurred. The cost and accumulated depreciation of
property sold or retired are removed from the respective accounts and the
resultant gains or losses, if any, are included in current operations.
The estimated useful lives of these assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-20 years
Machinery and equipment..................................... 3-10 years
Computer hardware and software.............................. 3-5 years
Furniture and fixtures...................................... 5-10 years
</TABLE>
Depreciation is allocated to cost of sales and selling, general and
administrative expense based upon the related asset's use. Depreciation of
approximately $2,046,000, $786,000 and $482,000 is included in cost of sales for
the years ended December 31, 1996, 1995 and 1994, respectively. Depreciation of
approximately $693,000, $636,000 and $536,000 is included in selling, general
and administrative expense for the years ended December 31, 1996, 1995 and 1994,
respectively.
DEFERRED CHARGES
Deferred charges consist of costs associated with certain prepaid
noncompetition agreements and professional fees and other costs incurred in
connection with obtaining borrowings under long-term debt agreements.
F-43
<PAGE> 120
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs of noncompetition agreements are amortized over their terms using the
straight-line method. Deferred financing costs are amortized over the life of
the related debt. Fully amortized items are removed from the accounts.
Amortization of noncompetition agreements of approximately $100,000,
$435,000 and $483,000 is included in selling, general and administrative expense
for the years ended December 31, 1996, 1995 and 1994, respectively. Amortization
of deferred financing costs of approximately $845,000, $94,000 and $133,000 is
included as additional interest expense for the years ended December 31, 1996,
1995 and 1994, respectively.
INTANGIBLE ASSETS
Capitalized intangible assets include license agreements, trademarks and
trade names, patents and the excess of cost over the fair value of identifiable
assets acquired (goodwill). License agreements are amortized using an
accelerated method over their average estimated useful lives of 10 years.
Trademarks and trade names and goodwill are amortized using the straight-line
method over their estimated useful lives of 10 years and 15-40 years,
respectively. Patents are amortized using the straight-line method over their
remaining lives.
Amortization of intangible assets of $2,450,000, $1,708,000 and $1,568,000
is included in selling, general and administrative expense for the years ended
December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In the event that facts and circumstances indicate that the cost of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required. The Company did not write-down any long-lived assets during the year
ended December 31, 1996.
INCOME TAXES
Deferred income taxes are determined under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Deferred income taxes arise from temporary
differences between the income tax basis of assets and liabilities and their
reported amounts in the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments are at rates
similar to current rates offered to the Company for debt with the same remaining
maturities.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using each subsidiary's local currency as the
functional currency. Assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars using exchange rates in effect at balance sheet
dates. Income and expense items are translated at monthly average rates of
exchange. The resultant translation gains or losses are included in the
component of stockholders' equity designated as foreign currency translation
adjustment. Transaction gains or losses were not significant in any year.
F-44
<PAGE> 121
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per share are determined by dividing net income by the weighted
average number of common shares outstanding, including common stock equivalents
(stock options granted), using the treasury stock method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the employee must pay to acquire
the stock. See Note 7.
SIGNIFICANT CONCENTRATION OF CUSTOMERS
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately five retail companies that
serve national markets. Sales to the Company's top five customers aggregated
approximately 56%, 60% and 61% of net sales for the years ended December 31,
1996, 1995 and 1994, respectively. Net Sales, as a percentage of total net
sales, to the Company's top four customers for the years ended December 31,
1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
CUSTOMER 1996 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C>
Toys "R" Us................................................. 16% 21% 22%
Wal-Mart.................................................... 17% 16% 20%
Kmart....................................................... 10% 7% 5%
Target...................................................... 7% 12% 11%
</TABLE>
SIGNIFICANT CONCENTRATION OF LICENSORS
The Company has entered into numerous license agreements with multiple
licensors. Typically, these licenses have a life of two years. A significant
level of the Company's net sales is generated from a variety of products
licensed from four licensors. Sales of these products aggregated approximately
42%, 62% and 73% of net sales for the years ended December 31, 1996, 1995 and
1994, respectively. One of the Company's licensors, The Walt Disney Company,
accounted for over 10% of the Company's net sales during 1996, aggregating
approximately 33% of net sales. Two of the Company's licensors, The Walt Disney
Company and Warner Bros., each accounted for over 10% of the Company's net sales
during 1995, aggregating approximately 48% of net sales. Three of the Company's
licensors, The Walt Disney Company, Warner Bros. and Saban Merchandising, Inc.,
each accounted for over 10% of the Company's net sales during 1994, aggregating
approximately 70% of net sales.
NOTE 3 -- ACQUISITIONS:
AMAV INDUSTRIES LTD.
Pursuant to the terms of an asset purchase agreement, on October 1, 1995
(the date effective control was transferred to the Company), the Company,
through its newly formed subsidiary, Amav Industries, Inc. ("Amav"), acquired
certain assets and assumed certain liabilities of Amav Industries Ltd.
("Seller") of Montreal, Quebec and its wholly-owned U.S. subsidiary, and
acquired the stock of its wholly-owned U.K. subsidiary for $54.4 million in
cash. The purchase price for the assets acquired, including related transaction
costs, was
F-45
<PAGE> 122
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $61.3 million. The Company financed the acquisition through
borrowings under a new $110 million credit facility (Note 5).
The Company recorded a $2,960,000 current liability to account for an
estimate of an unpaid purchase price contingency as well as unpaid transaction
costs relating to the acquisition. The actual amount of this liability was paid
in 1996 and approximated the estimate. The purchase agreement also incudes an
additional C$5 million (Canadian dollars) of purchase price contingent upon the
achievement of certain conditions. If these conditions are met, the contingent
purchase price is due to be paid March 1, 1998.
This transaction has been accounted for using the purchase method.
Accordingly, the total purchase price of $61.3 million, which includes
transaction costs, was allocated to the assets acquired and liabilities assumed
based upon their fair market values at the effective date of acquisition.
The fair value of assets acquired and liabilities assumed, reflecting the
final allocation, was as follows:
<TABLE>
<S> <C>
Net working capital......................................... $ 17,748,000
Property, plant and equipment............................... 15,229,000
Goodwill.................................................... 43,755,000
Deferred financing fees..................................... 3,210,000
Debt assumed................................................ (18,674,000)
------------
$ 61,268,000
============
</TABLE>
The income statement for the year ended December 31, 1995 reflects the
operations of Amav since October 1, 1995. Unaudited pro forma combined results
of operations for the Company and Amav for the years ended December 31, 1995 and
1994, as if the acquisition had occurred on January 1, 1994, would be as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Net sales............................................... $154,144,000 $151,530,000
Net income.............................................. $ 6,792,000 $ 3,806,000
Net income per share.................................... $ 0.65 $ 0.36
Weighted average shares outstanding..................... 10,487,000 10,580,000
</TABLE>
The unaudited pro forma amounts are not necessarily indicative of the
actual results of operations had the acquisition occurred on January 1, 1994.
IMPACT, INC.
Effective January 1, 1994, pursuant to the terms of an asset purchase
agreement, the Company, through its newly formed subsidiary, Impact, Inc.,
acquired for $4,400,000 in cash, certain assets of Impact International, Inc.
and Impact Designs, Ltd., marketers of licensed school supplies.
The acquisition has been accounted for using the purchase method.
Accordingly, the net purchase price was allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of acquisition. The
income statement for the year ended December 31, 1994 reflects the operations of
Impact, Inc. since January 1, 1994.
ERO CANADA, INC.
During the third quarter of 1994, the Company incorporated a wholly-owned
subsidiary, ERO Canada, Inc., which subsequently purchased certain assets of a
Canadian manufacturer and distributor of licensed products for a purchase price
of $755,000. These assets primarily consisted of inventories and prepaid
expenses.
F-46
<PAGE> 123
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- COMPOSITION OF BALANCE SHEET ACCOUNTS:
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
INVENTORIES
Raw materials............................................. $ 6,823,000 $ 6,333,000
Work-in-process........................................... 1,720,000 3,090,000
Finished goods............................................ 13,515,000 7,578,000
------------ ------------
$ 22,058,000 $ 17,001,000
============ ============
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements................................ $ 9,049,000 $ 9,066,000
Machinery and equipment................................... 12,817,000 10,490,000
Computer hardware and software............................ 2,856,000 2,186,000
Furniture and fixtures.................................... 1,084,000 1,045,000
------------ ------------
25,806,000 22,787,000
Less: Accumulated depreciation............................ (8,745,000) (6,324,000)
------------ ------------
17,061,000 16,463,000
Land...................................................... 3,810,000 3,885,000
------------ ------------
$ 20,871,000 $ 20,348,000
============ ============
DEFERRED CHARGES
Noncompetition agreements................................. $ -- $ 1,200,000
Deferred financing costs.................................. 3,210,000 3,210,000
------------ ------------
3,210,000 4,410,000
Less: Accumulated amortization............................ (562,000) (1,127,000)
------------ ------------
$ 2,648,000 $ 3,283,000
============ ============
INTANGIBLE ASSETS
License agreements........................................ $ 6,463,000 $ 6,463,000
Trademarks and trade names................................ 3,984,000 3,984,000
Patents................................................... 335,000 335,000
Goodwill.................................................. 60,134,000 61,999,000
------------ ------------
70,916,000 72,781,000
Less: Accumulated amortization............................ (13,974,000) (11,569,000)
------------ ------------
$ 56,942,000 $ 61,212,000
============ ============
</TABLE>
NOTE 5 -- LONG-TERM DEBT:
On December 14, 1995, in connection with the Amav acquisition (Note 3), the
Company amended its existing credit agreement with a group of banks to provide a
$110,000,000 Credit Facility (the "Credit Facility") consisting of a $60,000,000
Term Loan (the "Term Loan"), a $40,000,000 Revolving Credit Facility (the
"Revolving Loan"), and a $10,000,000 Letter of Credit Facility. During 1996, the
Company amended the Credit Facility to provide a seasonal increase of
$10,000,000 to the Revolving Loan limit. This increase was in effect from
September 1, 1996 through January 15, 1997. Borrowings under the Credit Facility
bear interest, at the option of the Company, at either the prime rate plus 1.75%
or a Eurodollar rate plus 3.0%. The Company is also required to pay a commitment
fee of 0.50% per annum on the daily unborrowed portion of the Revolving Loan.
F-47
<PAGE> 124
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Credit Facility, which expires on December 14, 2001, is secured by
substantially all of the Company's assets and contains customary restrictive
covenants requiring the maintenance of certain minimum financial ratios and
limiting the amount of any dividends paid by the Company.
As of December 31, 1996, the Company had two three-year interest rate swap
agreements (the "Swap Agreements") in place with two of its lenders, with
notional amounts totaling $27 million. These Swap Agreements expire on December
31, 1998, however the lenders have the right to extend the expiration dates to
December 29, 2000. Under the Swap Agreements, the Company exchanged a variable
interest rate for a fixed interest rate of 8.41%. The Company anticipates that
the counter parties to the Swap Agreements will fully perform their obligations.
During the year ended December 31, 1996 ERO recognized an immaterial gain on the
Swap Agreements.
The Company also maintains various other mortgages, equipment loans and
other loans ("Other Loans") with varying interest rates and maturities,
including the mortgage on Amav's Montreal, Quebec facility ("Amav Mortgage")
with a balance and interest rate of $5,750,000 and 9.88% at December 31, 1996,
respectively. The Amav Mortgage is payable in full on December 14, 2002, is held
by the Seller and is secured by the Montreal Facility.
Aggregate maturities of long-term debt over the next five years are as
follows: 1997 -- $8,893,000; 1998 -- $10,847,000; 1999 -- $10,658,000;
2000 -- $12,383,000; 2001 -- $14,213,000
NOTE 6 -- INCOME TAXES:
The sources of pretax income (loss) are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Domestic................................ $ (397,000) $ 5,419,000 $10,941,000
Foreign................................. 12,550,000 7,430,000 --
----------- ----------- -----------
$12,153,000 $12,849,000 $10,941,000
=========== =========== ===========
</TABLE>
The Company has not provided for U.S. federal income and foreign income
withholding taxes on its foreign subsidiaries' undistributed earnings as of
December 31, 1996, because such earnings are considered to be indefinitely
reinvested. Repatriation of these earnings would not materially increase the
Company's tax liability. If these earnings were distributed in the form of
dividends or otherwise, foreign tax credits could be used to offset the U.S.
income taxes due on income earned from foreign sources.
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
State................................. $ (21,000) $ 498,000 $ 860,000
U.S. Federal.......................... (102,000) 2,403,000 3,916,000
Foreign............................... 3,183,000 2,854,000 --
---------- ---------- ----------
3,060,000 5,755,000 4,776,000
---------- ---------- ----------
Deferred:
State................................. (7,000) (114,000) (53,000)
U.S. Federal.......................... (33,000) (518,000) (241,000)
Foreign............................... 1,375,000 44,000 --
---------- ---------- ----------
1,335,000 (588,000) (294,000)
---------- ---------- ----------
$4,395,000 $5,167,000 $4,482,000
========== ========== ==========
</TABLE>
F-48
<PAGE> 125
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes differ from those computed using the
statutory U.S. federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Expected provision.................... $4,132,000 34% $4,369,000 34% $3,720,000 34%
Rate difference on foreign income..... 279,000 2 372,000 3 -- --
State income taxes, net of federal
benefit............................. 1,000 -- 254,000 2 521,000 5
Amortization of goodwill.............. 106,000 1 106,000 1 106,000 1
Other................................. (123,000) (1) 66,000 -- 135,000 1
---------- -- ---------- -- ---------- --
Actual provision...................... $4,395,000 36% $5,167,000 40% $4,482,000 41%
========== == ========== == ========== ==
</TABLE>
The net deferred tax asset (liability) is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Depreciation of property, plant and equipment............... $(946,000) $(411,000)
Amortization of package design costs........................ 871,000 714,000
Amortization of intangible assets........................... (547,000) 146,000
Allowance for doubtful accounts............................. 70,000 191,000
Additional inventory capitalization......................... 18,000 65,000
Accrued restructuring costs................................. -- 64,000
Other....................................................... (2,000) 30,000
--------- ---------
$(536,000) $ 799,000
========= =========
</TABLE>
NOTE 7 -- STOCK OPTION PLANS:
The Company maintains three stock option plans, the 1988 Key Employee Stock
Option Plan, the 1992 Key Employee Stock Option Plan and the 1992 Directors'
Stock Option Plan, which entitle certain employees and directors of the Company
to acquire up to 490,000, 900,000 and 15,000 shares, respectively, of the
Company's authorized common stock. Options granted under these plans have a
maximum term of 10 years. Awards can no longer be granted under the 1988 plan.
Options granted under the 1992 plans are made at the discretion of the
Compensation Committee of the Board of Directors, are to be issued at no less
than the fair market value of the Company's common stock at the date of the
grant, and vest over periods of time, as determined by the Compensation
Committee.
Additionally, during 1993, options to purchase 540,000 shares of the
Company's common stock were granted to the Company's Chairman, President and
Chief Executive Officer at the fair market value of the Company's common stock
on the date of grant. These options vest in equal annual installments over three
years and have a maximum term of 10 years.
F-49
<PAGE> 126
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions during the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES OPTION PRICES EXERCISE PRICE
--------- ----------------- ----------------
<S> <C> <C> <C>
Shares under option at December 31, 1993........ 1,270,000 $0.974 to $12.750 $ 7.275
Options granted............................... 481,000 6.750 to 8.750 8.005
Options exercised............................. (89,000) 0.974 to 7.250 2.928
Options terminated............................ (451,000) 1.160 to 12.750 10.154
--------- ----------------- -------
Shares under option at December 31, 1994........ 1,211,000 0.974 to 10.125 6.646
Options granted............................... 91,500 6.250 to 8.625 6.773
Options exercised............................. --
Options terminated............................ (62,934) 8.000 to 8.500 8.076
--------- ----------------- -------
Shares under option at December 31, 1995........ 1,239,566 0.974 to 10.125 6.583
Options granted............................... 317,000 5.750 to 6.500 6.020
Options exercised............................. (27,000) 6.456 to 6.456 6.456
Options terminated............................ (111,066) 6.250 to 9.750 7.605
--------- ----------------- -------
Shares under option at December 31, 1996........ 1,418,500 0.974 to 10.125 6.370
--------- ----------------- -------
Shares exercisable at December 31, 1996......... 853,367 0.974 to 10.125 6.168
Shares exercisable at December 31, 1995......... 636,600 0.974 to 10.125 6.122
Shares exercisable at December 31, 1994......... 312,400 $0.974 to $10.125 $ 5.515
--------- ----------------- -------
</TABLE>
At December 31, 1996, 202,500 remaining options are available for grant
under the 1992 Key Employee Stock Option Plan and 9,000 remaining options are
available for grant under the 1992 Director's Stock Option Plan.
The following table summarizes information about shares under option at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE --------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ---------------- --------- ---------------- ---------------- ------- ----------------
<C> <C> <C> <C> <C> <C>
$0.974 - $ 1.320 55,000 2.42 $1.100 55,000 $1.100
5.250 - 5.750 187,000 9.10 5.737 1,000 5.250
6.110 - 6.750 851,500 7.13 6.212 646,900 6.164
7.000 - 7.875 115,000 7.19 7.353 50,000 7.330
8.000 - 8.750 206,600 7.62 8.394 97,067 8.348
9.750 - 10.125 3,400 6.04 9.816 3,400 9.816
--------- ----- ------- ------- -------
$0.974 - $10.125 1,418,500 7.28 $6.370 853,367 $6.168
--------- ----- ------- ------- -------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's plans been determined based on
the fair value at the grant date for awards in the years ended December 31, 1996
and 1995, the Company's net income and net income per share would not have been
materially different from the amounts reported by the Company.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for options granted during the years ended December 31, 1996
and 1995: dividend yield of 0.0%; risk-free interest rate of 7.5%; and expected
term of 7.5 years. For options granted during the years ended December 31, 1996
and 1995, an expected volatility of 40.0% and 41.7%, respectively, was assumed.
The weighted-average fair value of options granted during the year ended
December 31, 1996 totaled $3.47.
F-50
<PAGE> 127
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLAN:
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code which
provides retirement benefits for eligible employees of the Company. The Company
may make annual discretionary contributions to the plan. Discretionary
contributions during the years ended December 31, 1996, 1995 and 1994 aggregated
$187,000, $72,000 and $296,000, respectively.
NOTE 9 -- COMMITMENTS UNDER OPERATING LEASE AGREEMENTS:
The Company leases certain office and distribution facilities and
manufacturing and office equipment under operating lease agreements with terms
expiring at various times through 2001.
Aggregate future minimum lease commitments, exclusive of escalation
payments, for noncancellable leases that have initial or remaining lease terms
in excess of one year as of December 31, 1996 are as follows: 1997 --
$1,159,000; 1998 -- $982,000; 1999 -- $421,000; 2000 -- $55,000;
2001 -- $53,000.
Rent expense under operating leases for the years ended December 31, 1996,
1995 and 1994 aggregated approximately $1,035,000, $1,544,000 and $1,006,000,
respectively.
NOTE 10 -- STOCK REPURCHASE:
On October 19, 1995, the Company's Board of Directors approved the
repurchase of up to 500,000 shares of the Company's common stock. Such
repurchases can be made from time to time in the open market, in privately
negotiated transactions or otherwise. As of December 31, 1996, the Company had
repurchased 105,000 shares of common stock under this program at a total cost of
$671,000. The Company's Credit Facility allows for annual stock repurchases of
up to 10% of the prior year's net income, or $776,000, in 1997.
NOTE 11 -- GEOGRAPHIC INFORMATION:
Summarized geographic information for the years ended December 31, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER FOREIGN
1996 STATES CANADA OPERATIONS ELIMINATIONS TOTAL
---- -------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $139,579 $11,205 $7,129 $ -- $157,913
Transfers between geographic areas...... 9,649 52,637 -- (62,286) --
-------- ------- ------ --------- --------
Total net sales......................... $149,228 $63,842 $7,129 $ (62,286) $157,913
-------- ------- ------ --------- --------
Operating income........................ $ 6,206 $15,760 $ 675 $ (1,426) $ 21,215
-------- ------- ------ --------- --------
Identifiable assets..................... $210,106 $64,761 $5,145 $(120,018) $159,994
-------- ------- ------ --------- --------
</TABLE>
<TABLE>
<CAPTION>
UNITED OTHER FOREIGN
1995 STATES CANADA OPERATIONS ELIMINATIONS TOTAL
---- -------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers....... $121,314 $ 6,261 $1,147 $ -- $128,722
Transfers between geographic areas.... 2,389 18,332 -- (20,721) --
-------- ------- ------ --------- --------
Total net sales....................... $123,703 $24,593 $1,147 $ (20,721) $128,722
-------- ------- ------ --------- --------
Operating income...................... $ 8,029 $ 7,544 $ 334 $ (1,061) $ 14,846
-------- ------- ------ --------- --------
Identifiable assets................... $194,500 $66,026 $5,645 $(122,033) $144,138
-------- ------- ------ --------- --------
</TABLE>
The Company generated no material foreign income for the year ended
December 31, 1994 and owned no material foreign assets at December 31, 1994.
F-51
<PAGE> 128
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly data for the years ended December 31, 1996
and 1995 are as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
1996 FIRST SECOND THIRD FOURTH TOTAL
---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................... $18,883 $29,609 $49,633 $59,788 $157,913
Gross profit................................ 5,619 11,115 18,310 25,067 60,111
Operating income (loss)..................... (1,934) 2,812 7,771 12,566 21,215
Net income (loss)........................... (2,228) 483 3,067 6,436 7,758
Net income (loss) per share................. $ (0.21) $ 0.05 $ 0.30 $ 0.62 $ 0.75
Weighted average number of shares
outstanding
(in thousands)............................ 10,364 10,324 10,305 10,406 10,316
Market price of common stock:
High...................................... $ 7.250 $ 7.250 $ 6.250 $ 8.750 $ 8.750
Low....................................... 5.750 $ 5.750 4.250 5.125 4.250
</TABLE>
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
1995 FIRST SECOND THIRD FOURTH TOTAL
---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................... $14,807 $37,478 $28,238 $48,199 $128,722
Gross profit................................ 5,622 13,081 9,983 19,343 48,029
Operating income............................ 375 3,576 2,026 8,869 14,846
Net income.................................. 65 1,906 1,014 4,697 7,682
Net income per share........................ $ 0.01 $ 0.18 $ 0.10 $ 0.45 $ 0.73
Weighted average number of shares
outstanding
(in thousands)............................ 10,495 10,540 10,529 10,380 10,487
Market price of common stock:
High...................................... $ 8.250 $ 9.250 $ 9.000 $ 7.250 $ 9.250
Low....................................... 6.750 7.000 6.500 5.250 5.250
</TABLE>
NOTE 13 -- SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom Holdings, Inc. and HC Acquisition Corp., a
wholly owned subsidiary of Hedstrom Holdings, Inc., entered into an Agreement
and Plan of Merger (the "Merger Agreement") with ERO to acquire the Company for
a total enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, HC Acquisition Corp. commenced and, on June 12, 1997, consummated a
tender offer for all of the outstanding shares of common stock of the Company.
Following is consolidating financial information pertaining to the Company
and its subsidiary guarantors and its subsidiary nonguarantors (with respect to
Hedstrom Holdings, Inc.'s 10% Senior Subordinated Notes Due 2007, which are
unsecured senior subordinated obligations of Hedstrom, and Senior Credit
Facilities, which are secured by 100% of the stock of Hedstrom Corporation and
its domestic subsidiaries and 65% of the capital stock of each foreign
subsidiary of Hedstrom) for the years ended December 31, 1996 and 1995.
F-52
<PAGE> 129
ERO, INC.
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
---------------------------------------------------- -----------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON-
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS
---------- ---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ 3,992 $ 1,102 $ -- $ 5,094 $ 154 $ --
Accounts receivable....................... 40,496 8,118 (318) 48,296 32,944 5,737
Inventories............................... 16,073 7,595 (1,610) 22,058 12,596 5,437
Prepaid expenses and
other................................... 3,784 301 -- 4,085 2,709 575
-------- ------- --------- -------- -------- -------
Total current assets.................... 64,345 17,116 (1,928) 79,533 48,403 11,749
-------- ------- --------- -------- -------- -------
Property, plant, and equipment, net....... 6,118 14,753 -- 20,871 6,522 13,826
-------- ------- --------- -------- -------- -------
Goodwill.................................. 26,835 30,107 -- 56,942 28,188 33,024
Deferred financing costs.................. 1,460 1,188 -- 2,648 1,855 1,428
Deferred income taxes..................... -- -- -- -- 843 --
Investment in/advances to Subsidiaries.... 107,344 -- (107,344) -- 104,716 --
-------- ------- --------- -------- -------- -------
Total other assets...................... 135,639 31,295 (107,344) 59,590 135,602 34,452
-------- ------- --------- -------- -------- -------
Total assets................................ $206,102 $63,164 $(109,272) $159,994 $190,527 $60,027
======== ======= ========= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 8,120 $ 773 $ -- $ 8,893 $ 6,123 $ 605
Accounts payable.......................... 6,289 4,235 (1,135) 9,389 3,400 3,319
Accrued expenses.......................... 9,527 2,156 (338) 11,345 11,618 2,872
Income taxes payable (receivable)......... (408) (866) 1,344 70 1,047 1,284
-------- ------- --------- -------- -------- -------
Total current liabilities............... 23,528 6,298 (129) 29,697 22,188 8,080
-------- ------- --------- -------- -------- -------
Revolving loan............................ 29,727 1,798 -- 31,525 15,225 --
Term loan................................. 40,250 5,750 -- 46,000 54,000 --
Intercompany advance and other............ 70,490 -- (61,268) 9,222 63,050 7,263
-------- ------- --------- -------- -------- -------
Total long-term debt.................... 140,467 7,548 (61,268) 86,747 132,275 7,263
Intercompany -- other long-term liability
and equity.............................. -- 33,831 (33,831) -- -- 40,188
Deferred income taxes..................... (907) 1,443 -- 536 -- --
-------- ------- --------- -------- -------- -------
Total stockholders' equity.................. 43,014 14,044 (14,044) 43,014 36,064 4,496
-------- ------- --------- -------- -------- -------
Total liabilities and stockholders'
equity.................................... $206,102 $63,164 $(109,272) $159,994 $190,527 $60,027
======== ======= ========= ======== ======== =======
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
ERO, INC.
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ -- $ 154
Accounts receivable....................... (2) 38,679
Inventories............................... (1,032) 17,001
Prepaid expenses and
other................................... (622) 2,662
--------- --------
Total current assets.................... (1,656) 58,496
--------- --------
Property, plant, and equipment, net....... -- 20,348
--------- --------
Goodwill.................................. -- 61,212
Deferred financing costs.................. -- 3,283
Deferred income taxes..................... (44) 799
Investment in/advances to Subsidiaries.... (104,716) --
--------- --------
Total other assets...................... (104,760) 65,294
--------- --------
Total assets................................ $(106,416) $144,138
========= ========
Current liabilities:
Current portion of long-term debt......... $ -- $ 6,728
Accounts payable.......................... (321) 6,398
Accrued expenses.......................... (694) 13,796
Income taxes payable (receivable)......... 551 2,882
--------- --------
Total current liabilities............... (464) 29,804
--------- --------
Revolving loan............................ -- 15,225
Term loan................................. -- 54,000
Intercompany advance and other............ (61,268) 9,045
--------- --------
Total long-term debt.................... (61,268) 78,270
Intercompany -- other long-term liability
and equity.............................. (40,188) --
Deferred income taxes..................... -- --
--------- --------
Total stockholders' equity.................. (4,496) 36,064
--------- --------
Total liabilities and stockholders'
equity.................................... $(106,416) $144,138
========= ========
</TABLE>
F-53
<PAGE> 130
ERO, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $90,074 $67,839 $ -- $157,913
Cost of sales............................... 50,593 47,209 -- 97,802
------- ------- ------- --------
Gross profit................................ 39,481 20,630 -- 60,111
Selling, general and administrative......... 34,329 4,567 -- 38,896
------- ------- ------- --------
Operating income............................ 5,152 16,063 -- 21,215
Interest.................................... 6,126 2,936 -- 9,062
------- ------- ------- --------
Income before income taxes.................. (974) 13,127 -- 12,153
Income tax provision........................ 816 3,579 -- 4,395
------- ------- ------- --------
Net income (loss) before equity income
adjustment................................ (1,790) 9,548 -- 7,758
Equity income in subsidiaries............... 9,548 -- (9,548) --
------- ------- ------- --------
Net income (loss)........................... $ 7,758 $ 9,548 $(9,548) $ 7,758
======= ======= ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $107,911 $20,811 $ -- $128,722
Cost of sales............................... 67,643 13,050 -- 80,693
-------- ------- ------- --------
Gross profit................................ 40,268 7,761 -- 48,029
Selling, general and administrative......... 31,551 1,632 -- 33,183
-------- ------- ------- --------
Operating income............................ 8,717 6,129 -- 14,846
Interest.................................... 1,633 364 -- 1,997
-------- ------- ------- --------
Income before income taxes.................. 7,084 5,765 -- 12,849
Income tax provision........................ 3,898 1,269 -- 5,167
-------- ------- ------- --------
Net income (loss) before equity income
adjustment................................ 3,186 4,496 -- 7,682
Equity income in subsidiaries............... 4,496 -- (4,496) --
-------- ------- ------- --------
Net income (loss)........................... $ 7,682 $ 4,496 $(4,496) $ 7,682
======== ======= ======= ========
</TABLE>
F-54
<PAGE> 131
ERO, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 7,758 $ 9,548 $(9,548) $ 7,758
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... (9,548) -- 9,548 --
Depreciation of property, plant and
equipment............................. 1,255 1,484 -- 2,739
Amortization of other assets............ 2,370 1,025 -- 3,395
Deferred income taxes................... (110) 1,445 -- 1,335
(Gain) loss on the disposition of
property,
plant and equipment................... -- 21 -- 21
Provision for losses on accounts
receivable............................ 716 54 -- 770
Tax benefit of stock options
exercised............................. 9 -- -- 9
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... (8,024) (2,381) -- (10,405)
Inventories........................... (2,800) (2,158) -- (4,958)
Prepaid expenses and other current
assets.............................. (1,688) 274 -- (1,414)
Accounts payable...................... 1,556 1,386 -- 2,942
Accrued expenses...................... 529 (1,186) -- (657)
Intercompany other long-term
liability........................... 6,179 (6,179) -- --
Income taxes.......................... (1,341) (1,471) -- (2,812)
------- ------- ------- --------
Net cash (used for) provided by operating
activities................................ (3,139) 1,862 -- (1,277)
------- ------- ------- --------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (2,406) (1,219) -- (3,625)
Acquisition of Amav Industries,
Ltd. ................................... -- -- -- --
Proceeds from the sale of property, plant
and equipment........................... -- 6 -- 6
------- ------- ------- --------
Net cash used for investing activities...... (2,406) (1,213) -- (3,619)
------- ------- ------- --------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ 16,189 111 -- 16,300
Net repayments under term loan facility... (6,000) -- -- (6,000)
Net repayments under other loans.......... -- 342 -- 342
Financing fees paid....................... (310) -- -- (310)
Purchase of common stock for treasury..... 175 -- -- 175
Net proceeds from the exercise of stock
options................................. (671) -- -- (671)
------- ------- ------- --------
Net cash provided (used) by financing
activities................................ 9,383 453 -- 9,836
------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................... 3,838 1,102 -- 4,940
Cash and cash equivalents:
Beginning of period....................... 154 -- -- 154
------- ------- ------- --------
End of period............................. $ 3,992 $ 1,102 $ -- $ 5,094
======= ======= ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 7,682 $ 4,496 $(4,496) $ 7,682
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... (4,496) -- 4,496 --
Depreciation of property, plant and
equipment............................. 1,189 233 -- 1,422
Amortization of other assets............ 2,024 213 -- 2,237
Deferred income taxes................... (632) 44 -- (588)
(Gain) loss on the disposition of
property,
plant and equipment................... (3) -- -- (3)
Provision for losses on accounts
receivable............................ 214 129 -- 343
Tax benefit of stock options
exercised............................. -- -- -- --
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... 2,894 (2,953) -- (59)
Inventories........................... 671 2,955 -- 3,626
Prepaid expenses and other current
assets.............................. (1,069) 133 -- (936)
Accounts payable...................... (3,289) (4,618) -- (7,907)
Accrued expenses...................... (2,021) 286 -- (1,735)
Intercompany other long-term
liability........................... (7,399) 7,399 -- --
Income taxes.......................... 196 1,304 -- 1,500
-------- ------- ------- --------
Net cash (used for) provided by operating
activities................................ (4,039) 9,621 -- 5,582
-------- ------- ------- --------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (1,052) (720) -- (1,772)
Acquisition of Amav Industries,
Ltd. ................................... (55,098) -- -- (55,098)
Proceeds from the sale of property, plant
and equipment........................... 3 -- -- 3
-------- ------- ------- --------
Net cash used for investing activities...... (56,147) (720) -- (56,867)
-------- ------- ------- --------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ 3,350 (8,586) -- (5,236)
Net repayments under term loan facility... 60,000 -- -- 60,000
Net repayments under other loans.......... -- (315) -- (315)
Financing fees paid....................... (3,210) -- -- (3,210)
Purchase of common stock for treasury..... -- -- -- --
Net proceeds from the exercise of stock
options................................. -- -- -- --
-------- ------- ------- --------
Net cash provided (used) by financing
activities................................ 60,140 (8,901) -- 51,239
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................... (46) -- -- (46)
Cash and cash equivalents:
Beginning of period....................... 200 -- -- 200
-------- ------- ------- --------
End of period............................. $ 154 $ -- $ -- $ 154
======== ======= ======= ========
</TABLE>
F-55
<PAGE> 132
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,364 $ 5,094
Trade accounts receivable, net of allowance for doubtful
accounts.................................................. 22,419 48,296
Inventories................................................. 25,237 22,058
Prepaid expenses and other current assets................... 5,067 4,085
Prepaid income taxes........................................ 3,084 --
-------- --------
TOTAL CURRENT ASSETS........................................ 57,171 79,533
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation.............................................. 20,244 20,871
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated amortization......... 2,592 2,648
Intangible assets, net of accumulated amortization........ 56,374 56,942
-------- --------
TOTAL OTHER ASSETS.......................................... 58,966 59,590
-------- --------
TOTAL ASSETS................................................ $136,381 $159,994
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........................... $ 9,393 $ 8,893
Accounts payable............................................ 7,765 9,389
Accrued expenses:
Compensation.............................................. 1,139 1,131
Commissions and royalties................................. 2,578 4,793
Advertising, freight and other allowances................. 1,963 3,821
Other..................................................... 2,160 1,600
Income taxes payable........................................ -- 70
-------- --------
TOTAL CURRENT LIABILITIES................................... 24,998 29,697
-------- --------
LONG-TERM DEBT:
Revolving loan............................................ 17,600 31,525
Term loan................................................. 43,500 46,000
Other loans............................................... 8,938 9,222
-------- --------
TOTAL LONG-TERM DEBT........................................ 70,038 86,747
-------- --------
DEFERRED TAX LIABILITY...................................... 696 536
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 9,947,700 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized,10,394,300 shares issued.................... 104 104
Capital in excess of par value............................ 39,329 39,173
Foreign currency translation adjustment................... (365) 3
Retained earnings......................................... 2,354 4,507
Common stock held in treasury, 120,000 shares and 15,000
shares, respectively, at cost.......................... (773) (773)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 40,649 43,014
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $136,381 $159,994
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-56
<PAGE> 133
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Net sales................................................... $19,939 $18,883
Cost of sales............................................... 13,814 13,264
------- -------
Gross profit................................................ 6,125 5,619
Selling, general and administrative expense................. 7,763 7,553
------- -------
Operating loss.............................................. (1,638) (1,934)
Interest expense............................................ 2,010 1,846
------- -------
Loss before income taxes.................................... (3,648) (3,780)
Income tax benefit.......................................... (1,495) (1,552)
------- -------
Net loss.................................................... $(2,153) $(2,228)
======= =======
Net loss per share.......................................... $ (0.20) $ (0.21)
Weighted average number of shares outstanding (in
thousands)................................................ 10,652 10,364
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-57
<PAGE> 134
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Net loss.................................................... $ (2,153) $(2,228)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of property, plant and equipment............. 742 631
Amortization of other assets.............................. 715 847
Deferred income taxes..................................... 160 592
Provision for losses on accounts receivable............... 68 164
Tax benefit of stock options exercised.................... 18 --
Changes in current assets and current liabilities, net of
acquisitions:
Accounts receivable.................................... 25,659 16,523
Inventories............................................ (3,304) (3,181)
Prepaid expenses and other current assets.............. (982) (611)
Accounts payable....................................... (1,592) 102
Accrued expenses....................................... (3,469) (3,648)
Income taxes payable................................... (3,154) (4,398)
-------- -------
Net cash provided by operating activities................... 12,708 4,793
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (289) (448)
-------- -------
Net cash used for investing activities...................... (289) (448)
-------- -------
Cash flows from financing activities:
Net repayments under revolving loan facility.............. (13,925) (1,275)
Net repayments under term loan facility................... (2,000) (1,500)
Net repayments under other loans.......................... (284) (182)
Financing fees paid....................................... (78) --
Net proceeds from the exercise of stock options........... 138 --
Purchase of common stock for treasury..................... -- (671)
-------- -------
Net cash used for financing activities...................... (16,149) (3,628)
-------- -------
Net increase (decrease) in cash and cash equivalents........ (3,730) 717
Cash and cash equivalents:
Beginning of period....................................... 5,094 154
-------- -------
End of period............................................. $ 1,364 $ 871
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-58
<PAGE> 135
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include the
accounts of ERO, Inc. (the "Company") and its wholly-owned subsidiaries, ERO
Industries, Inc., Impact, Inc., Priss Prints, Inc., Amav Industries, Inc., ERO
Canada, Inc. and ERO Marketing, Inc. These financial statements are unaudited
but, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
condition, results of operations and cash flows of the Company.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal year.
NOTE 2 -- INVENTORIES:
Inventories at March 31, 1997 and December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Raw materials..................................... $ 7,277,000 $ 6,823,000
Work-in-process................................... 4,161,000 1,720,000
Finished goods.................................... 13,799,000 13,515,000
----------- -----------
$25,237,000 $22,058,000
=========== ===========
</TABLE>
NOTE 3 -- SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom Holdings, Inc. and HC Acquisition Corp., a
wholly owned subsidiary of Hedstrom Holdings, Inc., entered into an Agreement
and Plan of Merger (the "Merger Agreement") with ERO to acquire the Company for
a total enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, HC Acquisition Corp. commenced and, on June 12, 1997, consummated a
tender offer for all of the outstanding shares of common stock of the Company.
Following is consolidating financial information pertaining to the Company
and its subsidiary guarantors and its subsidiary nonguarantors (with respect to
Hedstrom Holdings, Inc.'s 10% Senior Subordinated Notes Due 2007, which are
unsecured senior subordinated obligations of Hedstrom, and Senior Credit
Facilities, which are secured by 100% of the stock of Hedstrom Corporation and
its domestic subsidiaries and 65% of the capital stock of each foreign
subsidiary of Hedstrom) for the three months ended March 31, 1997 and 1996.
F-59
<PAGE> 136
ERO, INC.
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT MARCH 31, 1996
---------------------------------------------------- -----------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON-
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS
---------- ---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ 904 $ 460 $ -- $ 1,364 $ 454 $ 417
Accounts receivable....................... 18,698 3,721 -- 22,419 18,595 3,138
Inventories............................... 16,137 9,216 (116) 25,237 14,731 6,753
Prepaid expenses and
other................................... 4,364 703 -- 5,067 3,280 1,484
Deferred income taxes..................... 4,694 (1,610) -- 3,084 -- --
-------- ------- --------- -------- -------- -------
Total current assets.................... 44,797 12,490 (116) 57,171 37,060 11,792
-------- ------- --------- -------- -------- -------
Property, plant, and equipment, net....... 5,933 14,311 -- 20,244 6,319 13,674
-------- ------- --------- -------- -------- -------
Goodwill.................................. 26,469 29,905 -- 56,374 27,786 32,813
Deferred financing costs.................. 1,464 1,128 -- 2,592 1,682 1,367
Deferred income taxes..................... -- -- -- -- 160 1
Investment in/advances to Subsidiaries.... 107,139 -- (107,139) -- 94,731 --
-------- ------- --------- -------- -------- -------
Total other assets...................... 135,072 31,033 (107,139) 58,966 124,359 34,181
-------- ------- --------- -------- -------- -------
Total assets................................ $185,802 $57,834 $(107,255) $136,381 $167,738 $59,647
======== ======= ========= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 8,620 $ 773 $ -- $ 9,393 $ 6,623 $ 605
Accounts payable.......................... 5,548 2,214 3 7,765 2,950 3,201
Accrued expenses.......................... 4,718 3,122 -- 7,840 6,505 3,461
Income taxes payable (receivable)......... 1,604 (2,329) 725 -- 156 (511)
-------- ------- --------- -------- -------- -------
Total current liabilities............... 20,490 3,780 728 24,998 16,234 6,756
-------- ------- --------- -------- -------- -------
Revolving loan............................ 17,600 -- -- 17,600 13,950 --
Term loan................................. 43,500 -- -- 43,500 52,000 --
Intercompany advance and other............ 62,916 7,290 (61,268) 8,938 52,811 17,320
-------- ------- --------- -------- -------- -------
Total long-term debt.................... 124,016 7,290 (61,268) 70,038 118,761 17,320
Intercompany -- other long-term liability
and equity.............................. -- 33,372 (33,372) -- -- 31,569
Deferred revenue.......................... 647 49 -- 696 (46) 46
-------- ------- --------- -------- -------- -------
Total stockholders' equity.................. 40,649 13,343 (13,343) 40,649 32,789 3,956
-------- ------- --------- -------- -------- -------
Total liabilities and stockholders'
equity.................................... $185,802 $57,834 $(107,255) $136,381 $167,738 $59,647
======== ======= ========= ======== ======== =======
<CAPTION>
AT MARCH 31, 1996
--------------------------
ERO, INC.
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ -- $ 871
Accounts receivable....................... 155 21,888
Inventories............................... (1,502) 19,982
Prepaid expenses and
other................................... -- 4,764
Deferred income taxes..................... -- --
-------- --------
Total current assets.................... (1,347) 47,505
-------- --------
Property, plant, and equipment, net....... -- 19,993
-------- --------
Goodwill.................................. -- 60,599
Deferred financing costs.................. -- 3,049
Deferred income taxes..................... 46 207
Investment in/advances to Subsidiaries.... (94,731) --
-------- --------
Total other assets...................... (94,685) 63,855
-------- --------
Total assets................................ $(96,032) $131,353
======== ========
Current liabilities:
Current portion of long-term debt......... $ -- $ 7,228
Accounts payable.......................... 299 6,450
Accrued expenses.......................... 107 10,073
Income taxes payable (receivable)......... 355 --
-------- --------
Total current liabilities............... 761 23,751
-------- --------
Revolving loan............................ -- 13,950
Term loan................................. -- 52,000
Intercompany advance and other............ (61,268) 8,863
-------- --------
Total long-term debt.................... (61,268) 74,813
Intercompany -- other long-term liability
and equity.............................. (31,569) --
Deferred revenue.......................... -- --
-------- --------
Total stockholders' equity.................. (3,956) 32,789
-------- --------
Total liabilities and stockholders'
equity.................................... $(96,032) $131,353
======== ========
</TABLE>
F-60
<PAGE> 137
ERO, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $12,804 $7,135 $ -- $19,939
Cost of sales............................... 7,895 5,919 -- 13,814
------- ------ ---- -------
Gross profit................................ 4,909 1,216 -- 6,125
Selling, general and administrative......... 6,472 1,291 -- 7,763
------- ------ ---- -------
Operating income
(loss).................................... (1,563) (75) -- (1,638)
Interest.................................... 1,338 672 -- 2,010
------- ------ ---- -------
Income (loss) before income taxes........... (2,901) (747) -- (3,648)
Income tax provision (benefit).............. (1,495) -- -- (1,495)
------- ------ ---- -------
Net income (loss) before equity income
adjustment................................ (1,406) (747) -- (2,153)
Equity income in subsidiaries............... (747) -- 747 --
------- ------ ---- -------
Net income (loss)........................... $(2,153) $ (747) $747 $(2,153)
======= ====== ==== =======
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $ 9,296 $9,587 $ -- $18,883
Cost of sales............................... 5,972 7,292 -- 13,264
------- ------ ---- -------
Gross profit................................ 3,324 2,295 -- 5,619
Selling, general and administrative......... 5,912 1,641 -- 7,553
------- ------ ---- -------
Operating income
(loss).................................... (2,588) 654 -- (1,934)
Interest.................................... 651 1,195 -- 1,846
------- ------ ---- -------
Income (loss) before income taxes........... (3,239) (541) -- (3,780)
Income tax provision (benefit).............. (1,552) -- -- (1,552)
------- ------ ---- -------
Net income (loss) before equity income
adjustment................................ (1,687) (541) -- (2,228)
Equity income in subsidiaries............... (541) -- 541 --
------- ------ ---- -------
Net income (loss)........................... $(2,228) $ (541) $541 $(2,228)
======= ====== ==== =======
</TABLE>
F-61
<PAGE> 138
ERO, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ (2,153) $ 747 $747 $ (2,153)
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... 747 -- (747) --
Depreciation of property, plant
and equipment......................... 309 433 -- 742
Amortization of other assets............ 453 262 -- 715
Deferred income taxes................... 1,770 (1,610) -- 160
(Gain) loss on the disposition of
property,
plant and equipment................... -- -- -- --
Provision for losses on accounts
receivable............................ 60 8 -- 68
Tax benefit of stock options
exercised............................. 18 -- -- 18
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... 21,262 4,397 -- 25,659
Inventories........................... (1,683) (1,621) -- (3,304)
Prepaid expenses and other current
assets.............................. (580) (402) -- (982)
Accounts payable...................... 429 (2,021) -- (1,592)
Accrued expenses...................... (4,435) 966 -- (3,469)
Intercompany other long-term
liability........................... 1,226 (1,226) -- --
Income taxes.......................... (4,609) 1,455 -- (3,154)
-------- ------- ---- --------
Net cash (used for) provided by
operating activities...................... 12,814 (106) -- 12,708
-------- ------- ---- --------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (71) (218) -- (289)
-------- ------- ---- --------
Net cash used for investing activities...... (71) (218) -- (289)
-------- ------- ---- --------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ (13,925) -- -- (13,925)
Net repayments under term loan facility... (2,000) -- -- (2,000)
Net repayments under other loans.......... (26) (258) -- (284)
Financing fees paid....................... (18) (60) -- (78)
Purchase of common stock for treasury..... -- -- -- --
Net proceeds from the exercise of
stock options........................... 138 -- -- 138
-------- ------- ---- --------
Net cash provided (used) by financing
activities................................ (15,831) (318) -- (16,149)
-------- ------- ---- --------
Net increase (decrease) in cash and
cash equivalents.......................... (3,088) (642) -- (3,730)
Cash and cash equivalents:
Beginning of period....................... 3,992 1,102 -- 5,094
-------- ------- ---- --------
End of period............................. $ 904 $ 460 $ -- $ 1,364
======== ======= ==== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ (2,228) $ (541) $ 541 $(2,228)
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... 541 -- (541) --
Depreciation of property, plant
and equipment......................... 322 309 -- 631
Amortization of other assets............ 559 288 -- 847
Deferred income taxes................... 2,036 (1,444) -- 592
(Gain) loss on the disposition of
property,
plant and equipment................... -- -- -- --
Provision for losses on accounts
receivable............................ 201 (37) -- 164
Tax benefit of stock options
exercised............................. -- -- -- --
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... 11,506 5,017 -- 16,523
Inventories........................... (4,023) 842 -- (3,181)
Prepaid expenses and other current
assets.............................. 572 (1,183) -- (611)
Accounts payable...................... 3,682 (3,580) -- 102
Accrued expenses...................... (5,283) 1,635 -- (3,648)
Intercompany other long-term
liability........................... 10,990 (10,990) -- --
Income taxes.......................... (4,753) 355 -- (4,398)
-------- ------- ----- -------
Net cash (used for) provided by
operating activities...................... 14,122 (9,329) -- 4,793
-------- ------- ----- -------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (422) (26) -- (448)
-------- ------- ----- -------
Net cash used for investing activities...... (422) (26) -- (448)
-------- ------- ----- -------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ (1,275) -- -- (1,275)
Net repayments under term loan facility... (1,500) -- -- (1,500)
Net repayments under other loans.......... (9,954) 9,772 -- (182)
Financing fees paid....................... -- -- -- --
Purchase of common stock for treasury..... (671) -- -- (671)
Net proceeds from the exercise of
stock options........................... -- -- -- --
-------- ------- ----- -------
Net cash provided (used) by financing
activities................................ (13,400) 9,772 -- (3,628)
-------- ------- ----- -------
Net increase (decrease) in cash and
cash equivalents.......................... 300 417 -- 717
Cash and cash equivalents:
Beginning of period....................... 154 -- -- 154
-------- ------- ----- -------
End of period............................. $ 454 $ 417 $ -- $ 871
======== ======= ===== =======
</TABLE>
F-62
<PAGE> 139
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY HEDSTROM CORPORATION OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS
SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 16
Use of Proceeds....................... 21
Dividend Policy....................... 21
Capitalization........................ 22
Unaudited Pro Forma Consolidated
Financial Information............... 23
Selected Consolidated Historical
Financial Data of Holdings.......... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Hedstrom and
Holdings............................ 29
Selected Consolidated Historical
Financial Data of ERO............... 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of ERO................ 40
Business.............................. 43
Management............................ 53
Stock Ownership and Certain
Transactions........................ 58
Description of Capital Stock.......... 60
Description of the Senior Credit
Facilities.......................... 61
Description of Senior Subordinated
Notes............................... 64
Description of the Discount Notes..... 68
Selling Securityholders and Plan of
Distribution........................ 72
Legal Matters......................... 74
Independent Auditors.................. 74
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
Hedstrom Holdings, Inc.
2,705,896 Shares
of
Common Stock
PROSPECTUS
, 1997
------------------------------------------------------
<PAGE> 140
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable in connection with the
offering of the securities to be registered and offered hereby. All of such
expenses are estimates, other than the registration fee payable to the
Securities and Exchange Commission.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 1,024.96
-----------
Printing and Engraving Expenses............................. 100,000.00
-----------
Legal Fees and Expenses..................................... 62,500.00
-----------
Accounting Fees and Expenses................................ 42,500.00
-----------
Miscellaneous............................................... $ 10,000.00
-----------
Total............................................. $216,024.96
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law authorizes corporations to limit or to eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The certificate of
incorporation of Holdings, as amended, limits the liability of Holdings'
directors to Holdings or its stockholders to the fullest extent permitted by the
Delaware statute as in effect from time to time. Specifically, directors of
Holdings will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to Holdings or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in the Delaware law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The certificate of incorporation, as amended, of Holdings provides that
Holdings shall indemnify its officers and directors and former officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, each Issuer has the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding (other than an
action by or in the right of each Issuer) by reason of the fact that he is or
was a director, officer, employee, or agent of Holdings, against any and all
expenses, judgments, fines, and amounts paid in actually and reasonably incurred
in connection with such action, suit, or proceeding. The power to indemnify
applies only if such person acted in good faith and in a manner he reasonably
believed to be in the best interest or not opposed to the best interest, of
Holdings and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
Holdings as well, but only to the extent of defense and settlement expenses and
not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnifications for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of Holdings pursuant to the foregoing
provisions, or otherwise, Holdings has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by
II-1
<PAGE> 141
Holdings of expenses incurred or paid by a director, officer or controlling
person thereof in the successful defense of any action, suit or proceeding) is
asserted by a director, officer or controlling person in connection with the
securities being registered, Holdings will, unless in the opinion of its counsel
the matter has been settled by controlled precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 12, 1997, Holdings sold 44,612 Units consisting of $44,612,000
aggregate principal amount at maturity of Old Discount Notes and 2,705,896
shares of Holdings Common Stock in a private placement in reliance of Section
4(2) under the Securities Act, for a total price of $25,000,000. The Old
Discount Notes were immediately resold by the initial purchasers thereof in
reliance on Rule 144A under the Securities Act.
On June 12, 1997, Hedstrom sold $110,000,000 aggregate principal amount of
Old Senior Subordinated Notes in a private placement in reliance on Section 4(2)
under the Securities Act, at a price equal to 100% of the stated principal
amount of such Old Senior Subordinated Notes. The Old Senior Subordinated Notes
were immediately resold by the initial purchasers thereof in reliance on Rule
144A under the Securities Act. The Old Senior Subordinated Notes are fully and
unconditionally guaranteed by Holdings on a senior basis.
On October 27, 1995, in connection with the 1995 Recapitalization, Holdings
issued (i) to HM Fund II and certain other parties, an aggregate of 32,941,499
shares of Holdings Common Stock, and (ii) to certain officers of Hedstrom and
other individuals, Subordinated Notes, Promissory Notes (Series A) and
Promissory Notes (Series B) in private placements in reliance on Section 4(2)
under the Securities Act. The aggregate amount of the Subordinated Notes issued
was $2.5 million. The Promissory Notes (Series A) and the Promissory Notes
(Series B) are earn-out notes, the principal amounts of which are determined
according to sales and EBIDTA levels during 1996 and 1997, subject to aggregate
limits of $6,000,000 and $9,000,000, respectively. No cash was received by
Holdings upon issuance of any of these notes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 10, 1997,
among Hedstrom Corporation, HC Acquisition Corp. and ERO,
Inc. (Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1 (File No. 333-32385)
of Hedstrom Holdings, Inc., Hedstrom Corporation, ERO,
Inc., ERO Industries, Inc., ERO Marketing, Inc., Priss
Prints, Inc., Impact, Inc., ERO Canada, Inc., and Amav
Industries, Inc. as filed with the Securities and
Exchange Commission on July 30, 1997 (the "Exchange Offer
Registration Statement"))*
3.1 -- Restated Certificate of Incorporation of Hedstrom
Holdings, Inc., as filed with the Secretary of State of
the State of Delaware on October 27, 1995. (Incorporated
by reference to Exhibit 3.1 to the Exchange Offer
Registration Statement)*
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation of Hedstrom Holdings, Inc., as filed with
the Secretary of State of the State of Delaware on June
6, 1997. (Incorporated by reference to Exhibit 3.2 to the
Exchange Offer Registration Statement)*
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc. (Incorporated
by reference to Exhibit 3.3 to the Exchange Offer
Registration Statement)*
4.1 -- Restated Certificate of Incorporation of Hedstrom
Holdings, Inc., as filed with the Secretary of State of
the State of Delaware on October 27, 1995. (Incorporated
by reference to Exhibit 2.1 to the Exchange Offer
Registration Statement)*
</TABLE>
II-2
<PAGE> 142
<TABLE>
<CAPTION>
<C> <S>
4.2 -- Certificate of Amendment of Restated Certificate of
Incorporation of Hedstrom Holdings, Inc., as filed with
the Secretary of State of the State of Delaware on June
6, 1997. (Incorporated by reference to Exhibit 3.2 to the
Exchange Offer Registration Statement)*
4.3 -- Restated Bylaws of Hedstrom Holdings, Inc. (Incorporated
by reference to Exhibit 3.3 to the Exchange Offer
Registration Statement)*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the
securities issued hereby.**
10.1 -- Credit Agreement, dated as of June 12, 1997, among
Hedstrom Corporation, Hedstrom Holdings, Inc., the
Lenders from time to time parties thereto, Societe
Generale, as Documentation Agent, UBS Securities LLC, as
Syndication Agent, and Credit Suisse First Boston
Corporation, as Administrative Agent. (Incorporated by
reference to Exhibit 10.1 to the Exchange Offer
Registration Statement)*
10.2 -- Form of Tranche A Note (included as Exhibit A to Exhibit
10.1 hereto).*
10.3 -- Form of Tranche B Note (included as Exhibit B to Exhibit
10.1 hereto).*
10.4 -- Form of Revolving Credit Note (included as Exhibit C to
Exhibit 10.1 hereto).*
10.5 -- Form of Swing Line Note (included as Exhibit D to Exhibit
10.1 hereto).*
10.6 -- Master Guarantee and Collateral Agreement, dated as of
June 12, 1997, made by Hedstrom Corporation, Hedstrom
Holdings, Inc. and the other Grantors party thereto in
favor of Credit Suisse First Boston Corporation, as
Administrative Agent. (Incorporated by reference to
Exhibit 10.6 to the Exchange Offer Registration
Statement)*
10.7 -- Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse
First Boston Corporation, as Mortgagee. (Incorporated by
reference to Exhibit 10.7 to the Exchange Offer
Registration Statement)*
10.8 -- Open End Mortgage and Security Agreement, dated as of
June 12, 1997, from Hedstrom Corporation, as Mortgagor,
to Credit Suisse Corporation, as Mortgagee. (Incorporated
by reference to Exhibit 10.8 to the Exchange Offer
Registration Statement)*
10.9 -- Deed and Security Agreement, dated as of June 12, 1997,
from ERO Industries, Inc., as Grantor, to Credit Suisse
First Boston Corporation, as Grantee. (Incorporated by
reference to Exhibit 10.9 to the Exchange Offer
Registration Statement)*
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent. (Incorporated by
reference to Exhibit 10.10 to the Exchange Offer
Registration Statement)*
10.11 -- Mortgage of Shares, dated as of June 12, 1997, between
Amav Industries, Inc., as Chargor, and Credit Suisse
First Boston, as Administrative Agent. (Incorporated by
reference to Exhibit 10.11 to the Exchange Offer
Registration Statement)*
10.12 -- Indenture, dated as of June 1, 1997, among Hedstrom
Corporation, Hedstrom Holdings, Inc., the Subsidiary
Guarantors identified on the signature pages thereto and
IBJ Schroder Bank & Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the Exchange
Offer Registration Statement)*
10.13 -- Form of Old Senior Subordinated Note (included as Exhibit
1 to the Appendix of Exhibit 10.12 hereto).*
10.14 -- Form of New Senior Subordinated Note (included as Exhibit
A to Exhibit 10.12 hereto).*
10.15 -- Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee. (Incorporated by reference to Exhibit
4.4 to the Exchange Offer Registration Statement)*
</TABLE>
II-3
<PAGE> 143
<TABLE>
<CAPTION>
<C> <S>
10.16 -- Form of Old Discount Note (included as Exhibit 1 to the
Appendix of Exhibit 10.15 hereto).*
10.17 -- Form of New Discount Note (included as Exhibit A to
Exhibit 10.15).*
10.18 -- Purchase Agreement, dated as of June 9, 1997, among
Hedstrom Corporation and Hedstrom Holdings, Inc., as
Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers. (Incorporated by
reference to Exhibit 4.7 to the Exchange Offer
Registration Statement)*
10.19 -- Registration Rights Agreement, dated as of June 9, 1997,
among Hedstrom Corporation and Hedstrom Holdings, Inc.,
as Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers. (Incorporated by
reference to Exhibit 4.8 to the Exchange Offer
Registration Statement)*
10.20 -- Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Holdings, Inc. and Credit
Suisse First Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC, as Initial
Purchasers. (Incorporated by reference to Exhibit 4.9 to
the Exchange Offer Registration Statement)*
10.21 -- Stockholders Agreement, dated as of October 27, 1995,
among Hedstrom Holdings and the Holders listed on the
signature pages thereof. (Incorporated by reference to
Exhibit 10.12 to the Exchange Offer Registration
Statement)*
10.22 -- First Amendment to Stockholders Agreement, dated as of
June 1, 1997, between Hedstrom Holdings, Inc. and Hicks,
Muse, Tate & Furst Equity Fund II, L.P. (Incorporated by
reference to Exhibit 10.13 to the Exchange Offer
Registration Statement)*
10.23 -- Form of Subordinated Note issued by Hedstrom Holdings,
Inc. (Incorporated by reference to Exhibit 10.14 to the
Exchange Offer Registration Statement)*
10.24 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Subordinated Notes of
Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.15 to the Exchange Offer Registration
Statement)*
10.25 -- Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc. (Incorporated by reference to Exhibit
10.16 to the Exchange Offer Registration Statement)*
10.26 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory Notes (Series A)
of Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.17 to the Exchange Offer Registration
Statement)*
10.27 -- Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc. (Incorporated by reference to Exhibit
10.18 to the Exchange Offer Registration Statement)*
10.28 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory Notes (Series B)
of Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.19 to the Exchange Offer Registration
Statement)*
10.29 -- Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri. (Incorporated by reference to
Exhibit 10.20 to the Exchange Offer Registration
Statement)*
10.30 -- Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair McKelvie.
(Incorporated by reference to Exhibit 10.21 to the
Exchange Offer Registration Statement)*
</TABLE>
II-4
<PAGE> 144
<TABLE>
<CAPTION>
<C> <S>
10.31 -- Monitoring and Oversight Agreement, dated as of October
27, 1995, among Hedstrom Holdings, Inc., Hedstrom
Corporation and Hicks, Muse & Co. Partners, L.P.
(Incorporated by reference to Exhibit 10.22 to the
Exchange Offer Registration Statement)*
10.32 -- Financial Advisory Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and HM2/Management Partners, L.P. (Incorporated by
reference to Exhibit 10.23 to the Exchange Offer
Registration Statement)*
10.33 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.
(Incorporated by reference to Exhibit 10.24 to the
Exchange Offer Registration Statement)*
10.34 -- Manufacturing Agreement, dated as of July 21, 1987,
between Euro-Matic Ltd. and Hedstrom Corporation.
(Incorporated by reference to Exhibit 10.25 to the
Exchange Offer Registration Statement)*
10.35 -- Manufacturing and Royalty Agreement, dated as of April
13, 1994, between Euro-Matic Ltd. and Hedstrom
Corporation. (Incorporated by reference to Exhibit 10.26
to the Exchange Offer Registration Statement)*
10.36 -- Manufacturing Agreement, dated as of December 21, 1994,
between Euro-Matic Limited and Hedstrom Corporation.
(Incorporated by reference to Exhibit 10.27 to the
Exchange Offer Registration Statement)*
10.37 -- Lease, dated as of January 24, 1992, between J.J.D.
Properties and Hedstrom Corporation. (Incorporated by
reference to Exhibit 10.28 to the Exchange Offer
Registration Statement)*
10.38 -- Net Lease Agreement, dated as of May 26, 1992, between
Opus North Corporation and ERO Industries, Inc.
(Incorporated by reference to Exhibit 10.29 to the
Exchange Offer Registration Statement)*
10.39 -- Specimen of Disney License Agreement (with Schedule of
other Disney License Agreements).**
10.40 -- Consent to Assignment, effective as of June 12, 1997,
among ERO Marketing, Inc., Impact International, Inc.,
Priss Prints, Inc., Amav Industries, Ltd., ERO Canada,
Inc., Hedstrom Corporation and Disney Enterprises, Inc.**
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed
Charges.**
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).**
23.2 -- Consent of Arthur Andersen LLP, independent auditors.**
23.3 -- Consent of Price Waterhouse LLP, independent auditors.**
24.1 -- Power of Attorney for Hedstrom Holdings, Inc.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is either
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
II-5
<PAGE> 145
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) See Item 14.
II-6
<PAGE> 146
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mount
Prospect, State of Illinois, on the 23rd day of October, 1997.
HEDSTROM HOLDINGS, INC.
By: /s/ DAVID F. CROWLEY
----------------------------------
David F. Crowley
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive October 23, 1997
- ----------------------------------------------------- Officer and Director of the
Arnold E. Ditri Registrant (Principal
Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the October 23, 1997
- ----------------------------------------------------- Registrant (Principal
David F. Crowley Financial and Accounting
Officer)
* Director of the Registrant October 23, 1997
- -----------------------------------------------------
Alan B. Menkes
* Director of the Registrant October 23, 1997
- -----------------------------------------------------
Jack D. Furst
*/s/ DAVID F. CROWLEY
- -----------------------------------------------------
David F. Crowley
Attorney-In-Fact
</TABLE>
II-7
<PAGE> 147
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 10, 1997,
among Hedstrom Corporation, HC Acquisition Corp. and ERO,
Inc. (Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1 (File No. 333-32385)
of Hedstrom Holdings, Inc., Hedstrom Corporation, ERO,
Inc., ERO Industries, Inc., ERO Marketing, Inc., Priss
Prints, Inc., Impact, Inc., ERO Canada, Inc., and Amav
Industries, Inc. as filed with the Securities and
Exchange Commission on July 30, 1997 (the "Exchange Offer
Registration Statement"))*
3.1 -- Restated Certificate of Incorporation of Hedstrom
Holdings, Inc., as filed with the Secretary of State of
the State of Delaware on October 27, 1995. (Incorporated
by reference to Exhibit 3.1 to the Exchange Offer
Registration Statement)*
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation of Hedstrom Holdings, Inc., as filed with
the Secretary of State of the State of Delaware on June
6, 1997. (Incorporated by reference to Exhibit 3.2 to the
Exchange Offer Registration Statement)*
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc. (Incorporated
by reference to Exhibit 3.3 to the Exchange Offer
Registration Statement)*
4.1 -- Restated Certificate of Incorporation of Hedstrom
Holdings, Inc., as filed with the Secretary of State of
the State of Delaware on October 27, 1995. (Incorporated
by reference to Exhibit 2.1 to the Exchange Offer
Registration Statement)*
4.2 -- Certificate of Amendment of Restated Certificate of
Incorporation of Hedstrom Holdings, Inc., as filed with
the Secretary of State of the State of Delaware on June
6, 1997. (Incorporated by reference to Exhibit 3.2 to the
Exchange Offer Registration Statement)*
4.3 -- Restated Bylaws of Hedstrom Holdings, Inc. (Incorporated
by reference to Exhibit 3.3 to the Exchange Offer
Registration Statement)*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the
securities issued hereby.**
10.1 -- Credit Agreement, dated as of June 12, 1997, among
Hedstrom Corporation, Hedstrom Holdings, Inc., the
Lenders from time to time parties thereto, Societe
Generale, as Documentation Agent, UBS Securities LLC, as
Syndication Agent, and Credit Suisse First Boston
Corporation, as Administrative Agent. (Incorporated by
reference to Exhibit 10.1 to the Exchange Offer
Registration Statement)*
10.2 -- Form of Tranche A Note (included as Exhibit A to Exhibit
10.1 hereto).*
10.3 -- Form of Tranche B Note (included as Exhibit B to Exhibit
10.1 hereto).*
10.4 -- Form of Revolving Credit Note (included as Exhibit C to
Exhibit 10.1 hereto).*
10.5 -- Form of Swing Line Note (included as Exhibit D to Exhibit
10.1 hereto).*
10.6 -- Master Guarantee and Collateral Agreement, dated as of
June 12, 1997, made by Hedstrom Corporation, Hedstrom
Holdings, Inc. and the other Grantors party thereto in
favor of Credit Suisse First Boston Corporation, as
Administrative Agent. (Incorporated by reference to
Exhibit 10.6 to the Exchange Offer Registration
Statement)*
10.7 -- Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse
First Boston Corporation, as Mortgagee. (Incorporated by
reference to Exhibit 10.7 to the Exchange Offer
Registration Statement)*
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.8 -- Open End Mortgage and Security Agreement, dated as of
June 12, 1997, from Hedstrom Corporation, as Mortgagor,
to Credit Suisse Corporation, as Mortgagee. (Incorporated
by reference to Exhibit 10.8 to the Exchange Offer
Registration Statement)*
10.9 -- Deed and Security Agreement, dated as of June 12, 1997,
from ERO Industries, Inc., as Grantor, to Credit Suisse
First Boston Corporation, as Grantee. (Incorporated by
reference to Exhibit 10.9 to the Exchange Offer
Registration Statement)*
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent. (Incorporated by
reference to Exhibit 10.10 to the Exchange Offer
Registration Statement)*
10.11 -- Mortgage of Shares, dated as of June 12, 1997, between
Amav Industries, Inc., as Chargor, and Credit Suisse
First Boston, as Administrative Agent. (Incorporated by
reference to Exhibit 10.11 to the Exchange Offer
Registration Statement)*
10.12 -- Indenture, dated as of June 1, 1997, among Hedstrom
Corporation, Hedstrom Holdings, Inc., the Subsidiary
Guarantors identified on the signature pages thereto and
IBJ Schroder Bank & Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the Exchange
Offer Registration Statement)*
10.13 -- Form of Old Senior Subordinated Note (included as Exhibit
1 to the Appendix of Exhibit 10.12 hereto).*
10.14 -- Form of New Senior Subordinated Note (included as Exhibit
A to Exhibit 10.12 hereto).*
10.15 -- Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee. (Incorporated by reference to Exhibit
4.4 to the Exchange Offer Registration Statement)*
10.16 -- Form of Old Discount Note (included as Exhibit 1 to the
Appendix of Exhibit 10.15 hereto).*
10.17 -- Form of New Discount Note (included as Exhibit A to
Exhibit 10.15).*
10.18 -- Purchase Agreement, dated as of June 9, 1997, among
Hedstrom Corporation and Hedstrom Holdings, Inc., as
Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers. (Incorporated by
reference to Exhibit 4.7 to the Exchange Offer
Registration Statement)*
10.19 -- Registration Rights Agreement, dated as of June 9, 1997,
among Hedstrom Corporation and Hedstrom Holdings, Inc.,
as Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers. (Incorporated by
reference to Exhibit 4.8 to the Exchange Offer
Registration Statement)*
10.20 -- Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Holdings, Inc. and Credit
Suisse First Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC, as Initial
Purchasers. (Incorporated by reference to Exhibit 4.9 to
the Exchange Offer Registration Statement)*
10.21 -- Stockholders Agreement, dated as of October 27, 1995,
among Hedstrom Holdings and the Holders listed on the
signature pages thereof. (Incorporated by reference to
Exhibit 10.12 to the Exchange Offer Registration
Statement)*
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.22 -- First Amendment to Stockholders Agreement, dated as of
June 1, 1997, between Hedstrom Holdings, Inc. and Hicks,
Muse, Tate & Furst Equity Fund II, L.P. (Incorporated by
reference to Exhibit 10.13 to the Exchange Offer
Registration Statement)*
10.23 -- Form of Subordinated Note issued by Hedstrom Holdings,
Inc. (Incorporated by reference to Exhibit 10.14 to the
Exchange Offer Registration Statement)*
10.24 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Subordinated Notes of
Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.15 to the Exchange Offer Registration
Statement)*
10.25 -- Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc. (Incorporated by reference to Exhibit
10.16 to the Exchange Offer Registration Statement)*
10.26 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory Notes (Series A)
of Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.17 to the Exchange Offer Registration
Statement)*
10.27 -- Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc. (Incorporated by reference to Exhibit
10.18 to the Exchange Offer Registration Statement)*
10.28 -- Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory Notes (Series B)
of Hedstrom Holdings, Inc. (Incorporated by reference to
Exhibit 10.19 to the Exchange Offer Registration
Statement)*
10.29 -- Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri. (Incorporated by reference to
Exhibit 10.20 to the Exchange Offer Registration
Statement)*
10.30 -- Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair McKelvie.
(Incorporated by reference to Exhibit 10.21 to the
Exchange Offer Registration Statement)*
10.31 -- Monitoring and Oversight Agreement, dated as of October
27, 1995, among Hedstrom Holdings, Inc., Hedstrom
Corporation and Hicks, Muse & Co. Partners, L.P.
(Incorporated by reference to Exhibit 10.22 to the
Exchange Offer Registration Statement)*
10.32 -- Financial Advisory Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and HM2/Management Partners, L.P. (Incorporated by
reference to Exhibit 10.23 to the Exchange Offer
Registration Statement)*
10.33 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.
(Incorporated by reference to Exhibit 10.24 to the
Exchange Offer Registration Statement)*
10.34 -- Manufacturing Agreement, dated as of July 21, 1987,
between Euro-Matic Ltd. and Hedstrom Corporation.
(Incorporated by reference to Exhibit 10.25 to the
Exchange Offer Registration Statement)*
10.35 -- Manufacturing and Royalty Agreement, dated as of April
13, 1994, between Euro-Matic Ltd. and Hedstrom
Corporation. (Incorporated by reference to Exhibit 10.26
to the Exchange Offer Registration Statement)*
10.36 -- Manufacturing Agreement, dated as of December 21, 1994,
between Euro-Matic Limited and Hedstrom Corporation.
(Incorporated by reference to Exhibit 10.27 to the
Exchange Offer Registration Statement)*
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.37 -- Lease, dated as of January 24, 1992, between J.J.D.
Properties and Hedstrom Corporation. (Incorporated by
reference to Exhibit 10.28 to the Exchange Offer
Registration Statement)*
10.38 -- Net Lease Agreement, dated as of May 26, 1992, between
Opus North Corporation and ERO Industries, Inc.
(Incorporated by reference to Exhibit 10.29 to the
Exchange Offer Registration Statement)*
10.39 -- Specimen of Disney License Agreement (with Schedule of
other Disney License Agreements).**
10.40 -- Consent to Assignment, effective as of June 12, 1997,
among ERO Marketing, Inc., Impact International, Inc.,
Priss Prints, Inc., Amav Industries, Ltd., ERO Canada,
Inc., Hedstrom Corporation and Disney Enterprises, Inc.**
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed
Charges.**
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).**
23.2 -- Consent of Arthur Andersen LLP, independent auditors.**
23.3 -- Consent of Price Waterhouse LLP, independent auditors.**
24.1 -- Power of Attorney for Hedstrom Holdings, Inc.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF WEIL,
GOTSHAL & MANGES LLP]
October 23, 1997
Hedstrom Holdings, Inc.
585 Slawin Court
Mount Prospect, Illinois 60056
Ladies and Gentlemen:
We have acted as counsel to Hedstrom Holdings, Inc., a Delaware
corporation ("Holdings") in connection with the preparation and filing by
Hedstrom and the Guarantors of a Registration Statement on Form S-1
(Registration No. 333- 33377) (as amended to date, the "Registration
Statement"), initially filed with the Securities and Exchange Commission on
August 12, 1997 under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the resale of 2,705,896 shares of common stock, par value
$.01 per share, of Holdings (the "Shares") by certain holders thereof. The
Shares were originally issued and sold pursuant to the terms of that certain
Purchase Agreement, dated June 9, 1997, by and among Holdings, Hedstrom
Corporation, a Delaware corporation and wholly owned subsidiary of Holdings,
and Credit Suisse First Boston Corporation, Societe Generale Securities
Corporation and UBS Securities LLC, as initial purchasers (the "Purchase
Agreement"). Capitalized terms defined in the Registration Statement and not
otherwise defined herein are used herein as so defined.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Purchase Agreement and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of Holdings, and have made such inquiries of such officers and
representatives as we have deemed relevant and necessary as a basis for the
opinions hereinafter set forth.
<PAGE> 2
Hedstrom Holdings, Inc.
October 23, 1997
Page 2
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. As to all questions of
fact material to this opinion that have not been independently established, we
have relied upon certificates or comparable documents of officers and
representatives of Holdings.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the Shares are validly issued, fully paid
and non-assessable, and are free of preemptive rights pursuant to law or in
Holdings' certificate of incorporation.
The opinions expressed herein are limited to the laws of the State of
New York, the corporate laws of the State of Delaware and the federal laws of
the United States, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ WEIL, GOTSHAL & MANGES LLP
<PAGE> 1
EXHIBIT 10.39
LICENSE AGREEMENT
Date: December 13, 1996
Re: DISNEY'S GEORGE OF THE JUNGLE
This License agreement ("Agreement") is entered into by and between Disney
Enterprises, Inc. ("Disney"), with a principal place of business at 500 South
Buena Vista Street, Burbank, California 91521, and IMPACT, INC. ("Licensee"),
with its principal place of business at 1515 N. Federal Highway, Suite 208,
Boca Raton, Florida 33432. Disney and Licensee agree as follows:
1. MEANING OF TERMS
A. "LICENSED MATERIAL" means the graphic representations of the
following:
DISNEY'S GEORGE OF THE JUNGLE characters, but only
such characters and depictions of such characters as
may be designated by Disney;
and designated still scenes from the motion picture identified
in Subparagraph 1.B. hereafter.
B. "TRADEMARKS" means "Wait Disney", "Disney", the
representations of Licensed Material included in Subparagraph
1.A. above, and the logo of the following motion picture:
DISNEY'S GEORGE OF THE JUNGLE
C. "ARTICLES" means the following items on or in connection with
which the Licensed Material and/or the Trademarks are
reproduced or used, and includes each and every stock keeping
unit ("SKU") of each Article:
(1) Portfolios
(2) Binders
(3) Theme books
(4) Study kits, including pencil pouch, ruler, sharpener,
eraser (poly bagged)
(5) 12" die-cut rulers
(6) Five (5) pack pencils
(7) 3"x5" memo pads
<PAGE> 2
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 2
(8) Die-cut erasers
D. "MINIMUM PER ARTICLE ROYALTY" means for each Article
identified herein which is sold the sum indicated herein:
[*]
E. "PRINCIPAL TERM" means the period commencing December 13,
1996, and ending December 31, 1999.
F. "TERRITORY" means the United States, United States PX's
wherever located, and United States territories and
possessions, excluding Puerto Rico, Guam, Commonwealth of
Northern Mariana Islands and Palau. However, if sales are
made to chain stores in the United States which have stores in
Puerto Rico, such chain stores may supply Articles to such
stores in Puerto Rico.
G. "ROYALTIES" means a royalty in the amounts set forth below in
Subparagraphs 1.G.(1)(a), (b), and (c) and Royalties shall be
further governed by the provisions contained in Subparagraphs
1.G.(2)-(6):
(1)(a) [*] of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers for Articles shipped by
Licensee from a location in the Territory for
delivery to a customer located in the Territory
("F.O.B. In Sales"); or
(b) [*] of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers when Licensee's customer
located in the Territory takes title to the Articles
outside the Territory and/or bears the risk of loss
of Articles manufactured and shipped to the customer
from outside the Territory ("F.O.B. Out Sales"); or
(c) if a Minimum Per Article Royalty has been specified
in Subparagraph 1.D. above, and it would result in a
higher royalty to be paid for the Articles, Licensee
agrees to pay the higher royalty amount.
__________________________________
* FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
<PAGE> 3
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 3
(2) The sums paid to Disney as Royalties on any sales to
Licensee's Affiliates shall be no less than the sums
paid on sales to customers not affiliated with
Licensee.
(3) All sales of Articles shipped to a customer outside
the Territory pursuant to a distribution permission
shall bear a Royalty at the rate for F.O.B. Out
Sales. However, sales of Articles to Disney's
Affiliates outside the Territory shall bear a Royalty
at the rate for F.O.B. In Sales.
(4) No Royalties are payable on the mere manufacture of
Articles.
(5) The full Royalty percentage shall be payable on
close-out or other deep discount sales of Articles,
including sales to employees.
(6) Royalties reported on sales of Articles which have
been returned to Licensee for credit or refund and
on which a refund has been made or credit memo issued
may be credited against Royalties due. The credit
shall be taken in the Royalty Payment Period in which
the refund is given or credit memo issued. Unused
credits may be carried forward, but in no event shall
Licensee be entitled to a refund of Royalties.
H. "NET INVOICED BILLINGS" means the following:
(1) actual invoiced billings (i.e., sales quantity
multiplied by Licensee's selling price) for Articles
sold, and all other receivables of any kind
whatsoever, received in payment for the Articles,
whether received by Licensee or any of Licensee's
Affiliates, except as provided in Subparagraph
1.H.(2), less "Allowable Deductions" as hereinafter
defined.
(2) The following are not part of Net Invoiced Billings:
invoiced charges for transportation of Articles
within the Territory which are separately identified
on the sales invoice, and sales taxes.
I. "ALLOWABLE DEDUCTIONS" means the following:
(1) volume discounts, and other discounts from the
invoice price (or post-invoice credits) unilaterally
imposed in the regular course of business by
Licensee's customers, so long as Licensee documents
such discounts (or credits) to Disney's
satisfaction. In the event a documented
<PAGE> 4
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 4
unilateral discount (or credit) is taken with respect
to combined sales of Articles and other products not
licensed by Disney, and Licensee cannot document the
portion of the discount (or credit) applicable to the
Articles, Licensee may apply only a pro rata portion
of the discount (or credit) to the Articles.
Unilateral discounts or credits are never deductible
if they represent items listed below in Subparagraph
1.I.(2).
(2) The following are not Allowable Deductions, whether
granted on sales invoices or unilaterally imposed as
discounts or as post-invoice credits: cash discounts
granted as terms of payment; early payment discounts;
allowances or discounts relating to advertising; mark
down allowances; new store allowances; defective
goods allowances or allowances taken by customers in
lieu of returning goods; costs incurred in
manufacturing, importing, selling or advertising
Articles; freight costs incorporated in the selling
price; and uncollectible accounts.
J. "ROYALTY PAYMENT PERIOD" means each calendar quarterly period
during the Principal Term and during the sell-off period, if
granted.
K. "ADVANCE" means the following sum(s) payable by the following
date(s) as an advance on Royalties to accrue in the following
period(s):
[*] payable upon Licensee's signing of this Agreement
for the Principal Term,
L. "GUARANTEE" means the following sum(s) which Licensee
guarantees to pay as minimum Royalties on Licensee's
cumulative sales in the following period(s):
[*] for the Principal Term.
M. "SAMPLES" means twelve (12) samples of each SKU of each
Article, from the first production run of each supplier of
each SKU of each Article.
N. "PROMOTION COMMITMENT" means the following sum(s) which
Licensee agrees to spend in the following way(s):
__________________________________
* FILED SEPARATELY WITH COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
<PAGE> 5
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 5
Licensee hereby acknowledges Licensee's understanding that
Disney is implementing a common marketing and promotional fund
(the "Common Marketing Fund"), during the Principal Term, for
purposes of marketing and promoting the Licensed Material and
the Trademarks, as Disney may deem appropriate in Disney's
absolute discretion. In order to implement the Common
Marketing Fund, Licensee shall be required, from time to time
at Disney's request, to provide a contribution(s) to the
Common Marketing Fund, the cumulative total of which shall not
exceed one percent (1%) of Licensee's Net Invoiced Billings
for Articles (such Net Invoiced Billings to be estimated by
Disney in a reasonable manner) during the Principal Term, but
in no event less than a cumulative total of one percent (1%)
of the quotient of (the Guarantee divided by the Royalty rate
for F.O.B. In Sales). Within fifteen (15) days after each
request by Disney, Licensee shall pay to Disney the amount of
the contribution designated by Disney. Such contribution may
be expended by Disney and/or Disney's designees in the amount
and in the manner Disney deems most appropriate in order to
market, promote, and advertise the Licensed Material and the
Trademarks. Licensee's contribution shall only be spent for
the promotion of the Licensed Material and the Trademarks
licensed hereunder. However, Disney does not ensure that
Licensee will benefit directly or pro-rata from the operation
of the Common Marketing Fund. Licensee shall not be entitled
to any audit rights with regard to the Common Marketing Fund.
O. "MARKETING DATE" means the following date(s) by which the
following Article(s) shall be available for purchase by the
public at the retail outlets authorized pursuant to
Subparagraph 2.A.:
By the release date of the motion picture referenced
in Subparagraph 1.B. (to be determined), for all
Articles. When the actual release date of the motion
picture is determined, Licensee shall be advised of
such date in writing.
P. "AFFILIATE" means, with regard to Licensee, any corporation or
other entity which directly or indirectly controls, is
controlled by, or is under common control with Licensee, with
regard to Disney, "Affiliate" means any corporation or other
entity which directly or indirectly controls, is controlled
by, or is under common control with Disney. "Control" of an
entity shall mean possession, directly or indirectly, of power
to direct or cause the direction of management : or policies
of such entity, whether through ownership of voting
securities, by contract or otherwise.
<PAGE> 6
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 6
Q. "LAWS" means any and all applicable laws, rules, regulations,
voluntary industry standards, association laws, codes or other
obligations pertaining to any of Licensee's activities under
this Agreement, including but not limited to those applicable
to the manufacture, pricing, sale and/or distribution of the
Articles.
R. "RETAILER" means independent and chain retail outlets which
have storefronts and business licenses, and which customers
walk into, not up to; "WHOLESALER" means a seller of items to
retailers, not consumers, and includes the term "distributor".
The following do not qualify as authorized sales outlets for
Articles under this Agreement under any circumstances: swap
meets, flea markets, street peddlers, unauthorized kiosks, and
the like.
2. RIGHTS GRANTED
A. In consideration for Licensee's promise to pay and Licensee's
payment of all Royalties, Advances and Guarantees required
hereunder, Disney grants Licensee the non-exclusive right,
during the Principal Term, and only within the Territory, to
reproduce the Licensed Material only on or in connection with
the Articles, to use such Trademarks and uses thereof as may
be approved when each SKU of the Articles is approved and only
on or in connection with the Articles, and to manufacture,
distribute for sale and sell the Articles (other than by
direct marketing methods, which includes but is not limited
to, computer on-line selling, direct mail and door-to-door
solicitation). Licensee will sell the Articles only to the
following Retailers in the Territory for resale to the public
in the Territory, or to Wholesalers in the Territory for
resale only to the following Retailers: (1) mass market
Retailers (including such Retailers as Target, Toys R Us,
WalMart and KMart), (2) value-oriented department stores
(including such Retailers as Sears, Mervyn's and Montgomery
Ward), (3) value-oriented specialty stores, (4) mid-tier
department stores (including such Retailers as J.C. Penney and
Kohl's), and (5) drug chains. Licensee will not sell the
Articles to other Retailers, or to supermarkets or food
chains, or to other Wholesalers. In addition, Licensee may not
sell the Articles to Retailers selling merchandise on a
duty-free basis, or to Wholesalers for resale to such
Retailers, unless such Retailer or Wholesaler has a
then-current license agreement with Disney or any of Disney's
Affiliates permitting it to make such duty-free sales.
Licensee may sell the Articles to authorized customers for
resale through the pre-approved mail order catalogs listed on
the Catalog Schedule to this Agreement. If there is a question
as to whether a particular customer falls within any of the
categories specified above, Disney's determination shall be
binding.
<PAGE> 7
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 7
B. Unless Disney consents in writing, Licensee shall not sell or
otherwise provide Articles for use as premiums (including
those in purchase-with purchase promotions), promotions,
give-aways, fund-raisers, or entries in sweepstakes, or
through unapproved direct marketing methods, including but not
limited to, home shopping television programs, or to customers
for inclusion in another product. If Licensee wishes to sell
the Articles to customers for resale through mail order
catalogs other than those listed on the Catalog Schedule
hereto, Licensee must obtain Disney's prior written consent in
each instance. However, Licensee may solicit orders by mail
from those Wholesalers or Retailers authorized pursuant to
Subparagraph 2.A. above, and Licensee may sell to such
authorized Retailers which sell predominantly at retail, but
which include the Articles in their mail order catalogs, or
otherwise sell Articles by direct marketing methods as well as
at retail.
C. The prohibition of computer on-line selling referenced in
Subparagraph 2.A. includes, but is not limited to, the
display, promotion or offering of Articles in or on any
on-line venues, including but not limited to, any catalog
company's or Retailer's "Websites," "home pages," or any
similar venues, except as specifically permitted in the next
two sentences. With Disney's prior written permission,
Articles approved by Disney may be displayed and promoted on
Disney-controlled Internet services, only within the
Territory. In addition, with Disney's prior written
permission, Articles approved by Disney may be displayed and
promoted on Licensee's own Website; however, Licensee must
obtain Disney's prior written approval of all creative and
editorial elements of such promotional uses, in accordance
with the provisions of Paragraph 7 of this Agreement.
D. Unless Disney consents in writing, Licensee shall not give
away or donate Articles to Licensee's accounts or other
persons for the purpose of promoting sales of Articles, except
for minor quantities or samples which are not for onward
distribution.
E. Nothing contained herein shall preclude Licensee from selling
Articles to Disney or to any of Disney's Affiliates, or to
Licensee's or Disney's employees, subject to the payment to
Disney of Royalties on such sales.
F. Disney further grants Licensee the right to reproduce the
Licensed Material and to use the approved Trademarks, only
within the Territory, during the Principal Term, on
containers, packaging and display material for the Articles,
and in advertising for the Articles.
<PAGE> 8
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 8
G. Nothing contained in this Agreement shall be deemed to imply
any restriction on Licensee's freedom and that of Licensee's
customers to sell the Articles at such prices as Licensee or
they shall determine.
H. Licensee recognizes and acknowledges the vital importance to
Disney of the characters and other proprietary material Disney
owns and creates, and the association of the Disney name with
them. In order to prevent the denigration of Disney's products
and the value of their association with the Disney name, and
in order to ensure the dedication of Licensee's best efforts
to preserve and maintain that value, Licensee agrees that,
during the Principal Term and any extension hereof, Licensee
will not manufacture or distribute any merchandise embodying
or bearing any artwork or other representation which Disney
determines, in Disney's reasonable discretion, is confusingly
similar to Disney's characters or other proprietary material.
I. Licensee's obligations under this Agreement shall be secured
by the letter of credit which is the subject of the Revised
Global Amendment dated December 6, 1996, between Disney and
ERO, Inc. In the event such Revised Global Amendment is not
executed, then Licensee shall maintain the irrevocable letter
of credit it currently has in place to secure payment of
Licensee's obligations hereunder and under any other prior,
concurrent or subsequent agreement between the parties (in
addition to any and all separate letters of credit that may be
in place regarding such agreement(s)). Licensee agrees to
modify such letter of credit as necessary to ensure that it
does not expire earlier than May 31, 2000. In the event of
one or more partial draws on such letter of credit, Licensee
agrees to restore it to the original amount within fifteen (
15) days after the partial draw(s).
3. ADVANCE
A. Licensee agrees to pay the Advance, which shall be on account
of Royalties to accrue during the Principal Term only, and
only with respect to sales in the Territory; provided,
however, that if any part of the Advance is specified
hereinabove as applying to any period less than the Principal
Term, such part shall be on account of Royalties to accrue
during such lesser period only. If said Royalties should be
less than the Advance, no part of the Advance shall be
repayable.
B. Royalties accruing during any sell-off period or extension of
the Principal Term shall not be offset against the Advance
unless otherwise agreed in writing.
<PAGE> 9
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 9
Royalties accruing during any extension of the Principal Term
or any other term shall be offset only against an advance paid
with respect to such extended term.
C. In no event shall Royalties accruing by reason of any sales to
Disney or any of Disney's Affiliates or by reason of sales
outside the Territory pursuant to a distribution permission be
offset against the Advance or any subsequent advance.
4. GUARANTEE
A. Licensee shall, with Licensee's statement for each Royalty
Payment Period ending on a date indicated in Subparagraph I.L.
hereof defining "Guarantee," or upon termination if the
Agreement is terminated prior to the end of the Principal
Term, pay Disney the amount, if any, by which cumulative
Royalties paid with respect to sales in the Territory during
any period or periods covered by the Guarantee provision, or
any Guarantee provision contained in any agreement extending
the term hereof, fall short of the amount of the Guarantee for
such period.
B. Advances applicable to Royalties due on sales in the period to
which the Guarantee relates apply towards meeting the
Guarantee.
C. In no event shall Royalties paid with respect to sales to
Disney or to any of Disney's Affiliates, or with respect to
sales outside the Territory pursuant to a distribution
permission, apply towards the meeting of the Guarantee or any
subsequent guarantee.
5. PRE-PRODUCTION APPROVALS
A. As early as possible, and in any case before commercial
production of any Article, Licensee shall submit to Disney for
Disney's review and written approval (to utilize such
materials in preparing a pre-production sample) all concepts,
all preliminary and proposed final artwork, and all three
dimensional models which are to appear on or in any and all
SKUs of the Article. Thereafter, Licensee shall submit to
Disney for Disney's written approval a pre-production sample
of each SKU of each Article. Disney shaH endeavor to respond
to such requests within a reasonable time, but such approvals
should be sought as early as possible in case of delays. In
addition to the foregoing, as early as possible, and in any
case no later than sixty (60) days following written
conceptual approval, Licensee shall supply to Disney for
Disney's use for
<PAGE> 10
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 10
internal purposes, a mock-up, prototype or pre production
sample of each SKU of each Article on or in connection with
which the Licensed Material is used. Licensee acknowledges
that Disney may not approve concepts or artwork submitted near
the end of the Principal Term. Any pre-production approval
Disney may give will not constitute or imply a representation
or belief by Disney that such materials comply with any
applicable Laws.
B. Approval or disapproval shall lie solely in Disney's
discretion, and any SKU of any Article not so approved in
writing shall be deemed unlicensed and shall not be
manufactured or sold. If any unapproved SKU of any Article is
being sold, Disney may, together with other remedies available
to Disney, including but not limited to, immediate termination
of this Agreement, by written notice require such SKU of such
Article to be immediately withdrawn from the market. Any
modification of any SKU of an Article, including, but not
limited to, change of materials, color, design or size of the
representation of Licensed Material must be submitted in
advance for Disney's written approval as if it were a new SKU
of an Article. Approval of any SKU of an Article which uses
particular artwork does not imply approval of such artwork for
use with a different Article. The fact that artwork has been
taken from a Disney publication or a previously approved
Article does not mean that its use will necessarily be
approved in connection with an Article licensed hereunder.
C. If Licensee submits for approval artwork from an article or
book manufactured or published by another licensee of Disney's
or of any of Disney's Affiliates, Licensee must advise Disney
in writing of the source of such artwork. If Licensee fails to
do so, any approval which Disney may give for use by Licensee
of such artwork may be withdrawn by giving Licensee written
notice thereof, and Licensee may be required by Disney not to
sell Articles using such artwork.
D. Licensee is responsible for the consistent quality and safety
of the Articles and their compliance with applicable Laws.
Disney will not unreasonably object to any change in the
design of an Article or in the materials used in the
manufacture of the Article or in the process of manufacturing
the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
E. If Disney has supplied Licensee with forms for use in applying
for approval of artwork, models, pre-production and production
samples of Articles, Licensee shall use such forms when
submitting anything for Disney's approval.
<PAGE> 11
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 11
F. The Articles are subject to any third party approvals Disney
deems necessary to obtain. Disney will act as the liaison with
such third parties during the approval process.
6. APPROVAL OF PRODUCTION SAMPLES
A. Before shipping an Article to any customer, Licensee agrees to
furnish to Disney, from the first production run of each
supplier of each of the Articles, for Disney's approval of all
aspects of the Article in question, the number of Samples with
packaging which is hereinabove set forth, which shall conform
to the approved artwork, three-dimensional models and
pre-production sample. Approval or disapproval of the artwork
as it appears on any SKU of the Article, as well as of the
quality of the Article, shall lie in Disney's sole discretion
and may, among other things, be based on unacceptable quality
of the artwork or of the Article as manufactured. Any SKU of
any Article not so approved shall be deemed unlicensed, shall
not be sold and, unless otherwise agreed by Disney in writing,
shall be destroyed. Such destruction shall be attested to in a
certificate signed by one of Licensee's officers. Production
samples of Articles for which Disney has approved a
preproduction sample shall be deemed approved, unless within
twenty (20) days of Disney's receipt of such production sample
Disney notifies Licensee to the contrary. Any approval of a
production sample attributable to Disney win not constitute or
imply a representation or belief by Disney that such
production sample complies with any applicable Laws.
B. Licensee agrees to make available at no charge such additional
samples of any or all SKUs of each Article as Disney may from
time to time reasonably request for the purpose of comparison
with earlier samples, or for Disney's anti-piracy efforts, or
to test for compliance with applicable Laws, and to permit
Disney to inspect Licensee's manufacturing operations and
testing records (and those of Licensee's third-party
manufacturers) for the Articles.
C. Licensee acknowledges that Disney may disapprove any SKU of an
Article or a production run of any SKU of an Article because
the quality is unacceptable to Disney, and accordingly, Disney
recommends that Licensee submit production samples to Disney
for approval before committing to a large original production
run or to purchase a large shipment from a new supplier.
D. No modification of an approved production sample shall be made
without Disney's further prior written approval. Ail SKUs of
Articles being sold must conform in all respects to the
approved production sample. It is understood that
<PAGE> 12
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 12
if in Disney's reasonable judgment the quality of any SKU of
an Article originally approved has deteriorated in later
production runs, or if the SKU has otherwise been altered,
Disney may, in addition to other remedies available to Disney,
by written notice require such SKU of the Article to be
immediately withdrawn from the market.
E. The rights granted hereunder do not permit the sale of
"seconds" or "irregulars". All Articles not meeting the
standard of approved samples shall be destroyed or all
Licensed Material and Trademarks shall be removed or
obliterated therefrom.
F. Licensee is responsible for the consistent quality and safety
of the Articles and their compliance with applicable Laws.
Disney will not unreasonably object to any change in the
design of an Article or in the materials used in the
manufacture of the Article or in the process of manufacturing
the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
G. Disney shall have the right, by written notice to Licensee, to
require modification of any SKU of any Article approved by
Disney under this or any previous agreement between the
parties pertaining to Licensed Material. Likewise, if the
Principal Term of this Agreement is extended by mutual
agreement, Disney shall have the fight, by written notice to
Licensee, to require modification of any SKU of any Article
approved by Disney under this Agreement. It is understood that
there is no obligation upon either party to extend the
Agreement.
H. If Disney notifies Licensee of a required modification under
Subparagraph 6.G. with respect to any SKU of a particular
Article, such notification shall advise Licensee of the nature
of the changes required, and Licensee shall not accept any
order for any such Article until the subject SKU has been
resubmitted to Disney with such changes and Licensee has
received Disney's written approval of the Article as modified.
However, Licensee may continue to distribute Licensee's
inventory of the previously approved Articles until such
inventory is exhausted (unless such Articles are dangerously
defective, as determined by Disney). Upon Disney's request,
Licensee agrees to give Disney written notice of the first
ship date for each Article.
I. If Disney has inadvertently approved a concept, pre-production
sample, or production sample of a product which is not
included in the Articles under this
<PAGE> 13
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 13
Agreement, or if Disney has inadvertently approved an Article
using artwork and/or trademarks not included in the Agreement,
such approval may be revoked at any time without any
obligation whatsoever on Disney's part to Licensee. Any such
product as to which Disney's approval is revoked shall be
deemed unauthorized and shall not be distributed or sold by or
for Licensee.
7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND ADVERTISING
A. All containers, packaging, display material, promotional
material, catalogs, and all advertising, including but not
limited to, television advertising and press releases, for
Articles must be submitted to Disney and receive Disney's
written approval before use. To avoid unnecessary expense if
changes are required, Disney's approval thereof should be
procured when such is still in rough or storyboard format.
Disney shall endeavor to respond to requests for approval
within a reasonable time. Approval or disapproval shall lie in
Disney's sole discretion, and the use of unapproved
containers, packaging, display material, promotional material,
catalogs or advertising is prohibited. Disney's approval of
any containers, packaging, display material, promotional
material, catalogs or advertising under this Agreement will
not constitute or imply a representation or belief by Disney
that such materials comply with any applicable Laws. Whenever
Licensee prepares catalog sheets or other printed matter
containing illustrations of Articles, Licensee will furnish to
Disney five (5) copies thereof when they are published.
B. If Disney has supplied Licensee with forms for use in applying
for approval of materials referenced in this Paragraph 7,
Licensee shall use such forms when submitting anything for
Disney's approval.
C. Disney has designed character artwork and/or a brand name
logo(s) to be used by all licensees in connection with the
packaging of all merchandise using the Licensed Material, and,
if applicable, on hang tags and garment labels for such
merchandise. Disney will supply Licensee with reproduction
artwork thereof, and Licensee agrees to use such artwork
and/or logo(s) on the packaging of the Articles, and, if
applicable, on hang tags and garment labels, which Licensee
will have printed and attached to each Article at Licensee's
cost. Disney recommends that Licensee source the hang tags and
garment labels from Disney's authorized manufacturer (if any)
of pre approved hang tags and garment labels, the name of
which will be provided to Licensee upon request. However,
Licensee may use another manufacturer for the required hang
tags
<PAGE> 14
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 14
and garment labels if the hang tags and garment labels
manufactured are of equivalent quality and are approved by
Disney in accordance with Disney's usual approval process.
8. ARTWORK
Licensee shall pay Disney, within thirty (30) days of receiving an
invoice therefor, for Style Guides and for artwork done at Licensee's
request by Disney or third parties under contract to Disney in the
development and creation of Articles, display, packaging or
promotional material (including any artwork which in Disney's opinion
is necessary to modify artwork initially prepared by Licensee and
submitted to Disney for approval, subject to Licensee's prior written
approval) at Disney's then prevailing commercial art rates. Estimates
of artwork charges are available upon request. While Licensee is not
obligated to utilize the services of Disney's Art Department, Licensee
is encouraged to do so in order to minimize delays which may occur if
outside artists do renditions of Licensed Material which Disney cannot
approve and to maximize the attractiveness of the Articles. Artwork
will be returned to Licensee by overnight courier, at Licensee's cost
(unless other arrangements are made).
9. PRINT, RADIO OR TV ADVERTISING
Licensee will obtain all approvals necessary in connection with print,
radio or television advertising, if any, which Disney may authorize.
Licensee represents and warrants that all advertising and promotional
materials shall comply with all applicable Laws. Disney's approval of
copy or storyboards for such advertising will not constitute or imply
a representation or belief by Disney that such copy or storyboards
comply with any applicable Laws. This Agreement does not grant
Licensee any rights to use the Licensed Material in animation.
Licensee may not use any animation or live action footage from the
motion picture from which the Licensed Material comes without Disney's
prior written approval in each instance. In the event Disney approves
the use of film clips of the motion picture from which the Licensed
Material comes, for use in a television commercial, Licensee shall be
responsible for any re-use fees which may be applicable, including SAG
payments for talent. No reproduction of the film clip footage shall
be made except for inclusion, as approved by Disney, in such
commercial and there shall be no modifications of the film clip
footage. All film clip footage shall be returned to Disney immediately
after its inclusion in such commercial. Disney shall have the right to
prohibit Licensee from advertising the Articles by means of television
and/or billboards. Such fight shall be exercised within Disney's
absolute discretion, including without limitation for reasons of
overexposure of the Licensed Material.
<PAGE> 15
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 15
10. LICENSEE NAME AND ADDRESS ON ARTICLES
A. Licensee's name, trade name (or Licensee's trademark which
Licensee has advised Disney in writing that Licensee is using)
and Licensee's address (at least city and state) will appear
on permanently affixed labeling on each Article or, if the
Article is sold to the public in packaging or a container,
printed on such packaging or a container so that the public
can identify the supplier of the Article. On soft goods
"permanently affixed" shall mean sewn on. RN numbers do not
constitute a sufficient label under this paragraph.
B. Licensee shall advise Disney in writing of all trade names or
trademarks Licensee wishes to use on Articles being sold under
this license. Licensee may sell the Articles only under
mutually agreed upon trade names or trademarks.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE LAWS AND STANDARDS
A. Licensee covenants that each Article and component thereof
distributed hereunder shall be of good quality and free of
defects in design, materials and workmanship, and shall comply
with all applicable Laws, and such specifications, if any, as
may have been specified in connection with this Agreement
(e.g., Disney's Apparel Performance Specification Manual, if
the Articles are items of apparel), and shall conform to the
Sample thereof approved by Disney.
B. Without limiting the foregoing, Licensee covenants on behalf
of Licensee's own company, and on behalf of all of Licensee's
third-party manufacturers and suppliers (collectively,
"Manufacturers"), as follows:
(1) Licensee and the Manufacturers agree not to use child
labor in the manufacturing, packaging or distribution
of Disney merchandise, The term "child" refers to a
person younger than the age for completing compulsory
education, but in no case shall any child younger
than fourteen (14) years of age be employed in the
manufacturing, packaging or distribution of Disney
merchandise.
(2) Licensee and the Manufacturers agree to provide
employees with a safe and healthy workplace in
compliance with all applicable Laws. Licensee and the
Manufacturers agree to provide Disney with all
information
<PAGE> 16
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 16
Disney may request about manufacturing, packaging and
distribution facilities for the Articles.
(3) Licensee and the Manufacturers agree only to employ
persons whose presence is voluntary. Licensee and
the Manufacturers agree not to use prison labor, or
to use corporal punishment or other forms of mental
or physical coercion as a form of discipline of
employees.
(4) Licensee and the Manufacturers agree to comply with
all applicable wage and hour Laws, including minimum
wage, overtime, and maximum hours. Licensee and the
Manufacturers agree to utilize fair employment
practices as defined by applicable Laws.
(5) Licensee and the Manufacturers agree not to
discriminate in hiring and employment practices on
grounds of race, religion, national origin, political
affiliation, sexual preference, or gender.
(6) Licensee and the Manufacturers agree to comply with
all applicable environmental Laws.
(7) Licensee and the Manufacturers agree to comply with
all applicable Laws pertaining to the manufacture,
pricing, sale and distribution of the Articles.
(8) Licensee and the Manufacturers agree that Disney may
engage in activities such as unannounced on-site
inspections of manufacturing, packaging and
distribution facilities in order to monitor
compliance with applicable Laws.
C. Both before and after Licensee puts Articles on the market,
Licensee shall follow reasonable and proper procedures for
testing that Articles comply with a applicable Laws, and shall
permit Disney's designees to inspect testing, manufacturing
and quality control records and procedures and to test the
Articles for compliance. Licensee agrees to promptly reimburse
Disney for the reasonable costs of such testing. Licensee
shall also give due consideration to any recommendations by
Disney that Articles exceed the requirements of applicable
Laws. Articles not manufactured, packaged or distributed in
accordance with applicable Laws shall be deemed unapproved,
even if previously approved by Disney, and shall not be
shipped unless and until they have been brought into full
compliance therewith.
<PAGE> 17
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 17
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
Licensee acknowledges that the copyrights and all other proprietary
rights in and to Licensed Material are exclusively owned by and
reserved to Disney or its licensor. Licensee shall neither acquire nor
assert copyright ownership or any other proprietary rights in Licensed
Material or in any derivation, adaptation, variation or name thereof
Without limiting the foregoing, Licensee hereby assigns to Disney an
Licensee's worldwide right, title and interest in the Licensed
Material and in any material objects consisting of or incorporating
drawings, paintings, animation cels, or sculptures of Licensed
Material, or other derivations, adaptations, computations, collective
works, variations or names of Licensed Material, heretofore or
hereafter created by or for Licensee or any of Licensee's Affiliates.
All such new materials shall be included in the definition of
"Licensed Material" under this Agreement. If any third party makes or
has made any contribution to the creation of any new materials which
are included in the definition of Licensed Material under this
Paragraph 12, Licensee agrees to obtain from such party a full
assignment of rights so that the foregoing assignment by Licensee
shall vest full rights to such new materials in Disney. Licensee
further covenants that any such new materials created by Licensee or
by any third party Licensee has engaged are original to Licensee or
-such third party and do not violate the rights of any other person or
entity; this covenant regarding originality shall not extend to any
materials Disney supplies to Licensee, but does apply to all materials
Licensee or Licensee's third party contractors may add thereto. The
foregoing assignment to Disney of material objects shall not include
that portion of Licensee's displays, catalogs or promotional material
not containing Licensed Material, or the physical items constituting
the Articles, unless such items are in the shape of the Licensed
Material.
13. COPYRIGHT NOTICE
As a condition to the grant of rights hereunder, each Article and any
other matter containing Licensed Material shall bear a properly
located permanently affixed copyright notice in Disney's name (e.g.,
"(C) Disney"), and in the name of Jay Ward Productions, Inc. (e.g.,
"Animated characters (C)Jay Ward Productions, Inc."), or such other
notice as Disney specifies to Licensee in writing. Licensee will
comply with such instructions as to form, location and content of the
notice as Disney may give from time to time. Licensee will not,
without Disney's prior written consent, affix to any Article or any
other matter containing Licensed Material a copyright notice in any
other name. If through inadvertence or otherwise a copyright notice on
any Article or other such matter should appear in Licensee's name or
the name of a third party, Licensee hereby agrees to assign to Disney
the copyright represented by any such copyright notice in Licensee's
name and, upon request, cause the execution and delivery to
<PAGE> 18
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 18
Disney of whatever documents are necessary to convey to Disney that
copyright represented by any such copyright notice. If by inadvertence
a proper copyright notice is omitted from any Article or other matter
containing Licensed Material, Licensee agrees at Licensee's expense to
use all reasonable efforts to correct the omission on a such Articles
or other matter in process of manufacture or in distribution. Licensee
agrees to advise Disney promptly and in writing of the steps being
taken to correct any such omission and to make the corrections on
existing Articles which can be located.
14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH LICENSED MATERIAL
To preserve Disney's identification with Disney's characters and to
avoid confusion of the public, Licensee agrees not to associate other
characters or licensed properties with the Licensed Material or the
Trademarks either on the Articles or in their packaging, or, without
Disney's written permission, on advertising, promotional or display
materials. If Licensee wishes to use a character which constitutes
Licensee's trademark on the Articles or their packaging, or otherwise
in connection with the Articles, Licensee agrees to obtain Disney's
prior written permission.
15. ACTIVE MARKETING OF ARTICLES
Licensee agrees to manufacture (or have manufactured for Licensee) and
offer for sale all the Articles and to exercise the rights granted
herein. Licensee agrees that by the Marketing Date applicable to a
particular Article or, if such a date is not specified in Subparagraph
1.0., by six (6) months from the commencement of the Principal Term or
the date of any applicable amendment, shipments to customers of such
Article will have taken place in sufficient time that such Article
shall be available for purchase in commercial quantities by the public
at the retail outlets authorized pursuant to Subparagraph 2.A. In any
case in which such sales have not taken place or when the Article is
not then and thereafter available for purchase in commercial
quantities by the public, Disney may either invoke Disney's remedies
under Paragraph 28, or withdraw such Article from the list of Articles
licensed in this Agreement without obligation to Licensee other than
to give Licensee written notice thereof.
16. PROMOTION COMMITMENT
Licensee agrees to carry out the Promotion Commitment, if any, as
defined in Subparagraph 1.N.
<PAGE> 19
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 19
17. TRADEMARK RIGHTS AND OBLIGATIONS
A. All uses of the Trademarks by Licensee hereunder shall inure
to Disney's benefit. Licensee acknowledges that Disney or its
licensor is the exclusive owner of all the Trademarks, and of
any trademark incorporating all or any part of a Trademark or
any Licensed Material, and the trademark rights created by
such uses. Without limiting the foregoing, Licensee hereby
assigns to Disney all the Trademarks, and any trademark
incorporating all or any part of a Trademark or any Licensed
Material, and the trademark rights created by such uses,
together with the goodwill attaching to that part of the
business in connection with which such Trademarks or
trademarks are used. Licensee agrees to execute and deliver to
Disney such documents as Disney requires to register Licensee
as a Registered User or Permitted User of the Trademarks or
such trademarks and to follow Disney's instructions for proper
use thereof in order that protection and/or registrations for
the Trademarks and such trademarks may be obtained or
maintained.
B. Licensee agrees not to use any Licensed Material or
Trademarks, or any trademark incorporating all or any part of
a Trademark or of any Licensed Material, on any business sign,
business cards, stationery or forms (except as licensed
herein), or to use any Licensed Material or Trademark as the
name of Licensee's business or any division thereof, unless
otherwise agreed by Disney in writing.
C. Nothing contained herein shall prohibit Licensee from using
Licensee's own trademarks on the Articles or Licensee's
copyright notice on the Articles when the Articles contain
independent material which is Licensee's property. Nothing
contained herein is intended to give Disney any rights to, and
Disney shall not use, any trademark, copyright or patent used
by Licensee in connection with the Articles which is not
derived or adapted from Licensed Material, Trademarks, or
other materials owned by Disney or its licensor.
18. REGISTRATIONS
Except with Disney's written consent, neither Licensee nor any of
Licensee's Affiliates will register or attempt in any country to
register copyrights in, or to register as a trademark, service mark,
design patent or industrial design, or business designation, any of
the Licensed Material, Trademarks or derivations or adaptations
thereof, or any word, symbol or design which is so similar thereto as
to suggest association with or sponsorship by Disney or any of
Disney's Affiliates. In the event of breach of the
<PAGE> 20
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 20
foregoing, Licensee agrees, at Licensee's expense and at Disney's
request, immediately to terminate the unauthorized registration
activity and promptly to execute and deliver, or cause to be
delivered, to Disney such assignments and other documents as Disney
may require to transfer to Disney all rights to the registrations,
patents or applications involved.
19. UNLICENSED USE OF LICENSED MATERIALS
A. Licensee agrees that Licensee will not use the Licensed
Material, or the Trademarks, or any other material the
copyright to which is owned or licensed by Disney in any way
other than as herein authorized (or as is authorized in any
other written contract in effect between the parties). In
addition to any other remedy Disney may have, Licensee agrees
that all revenues from any use thereof on products other than
the Articles (unless authorized by Disney in writing), and all
revenues from the use of any other copyrighted material of
Disney's or its licensor's without written authorization,
shall be immediately payable to Disney.
B. Licensee agrees to give Disney prompt written notice of any
unlicensed use by third parties of Licensed Material or
Trademarks, and that Licensee will not, without Disney's
written consent, bring or cause to be brought any criminal
prosecution, lawsuit or administrative action for
infringement, interference with or violation of any fights to
Licensed Material or Trademarks. Because of the need for and
the high costs of an effective anti piracy enforcement
program, Licensee agrees to cooperate with Disney, and, if
necessary, to be named by Disney as a sole complainant or
co-complainant in any action against an infringer of the
Licensed Material or Trademarks and, notwithstanding any right
of Licensee to recover same, legal or otherwise, Licensee
agrees to pay to Disney, and hereby waives all claims to, all
damages or other monetary relief recovered in such action by
reason of a judgment or settlement whether or not such damages
or other monetary relief, or any part thereof, represent or
are intended to represent injury sustained by Licensee as a
licensee hereunder; in any such action against an infringer,
Disney agrees to reimburse Licensee for reasonable expenses
incurred at Disney's request, including reasonable attorney's
fees if Disney has requested Licensee to retain separate
counsel.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
A. Licensee agrees to furnish to Disney by the 30th day after
each Royalty Payment Period full and accurate statements on
statement forms Disney
<PAGE> 21
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 21
designates for Licensee's use, showing all information
requested by such forms, including but not limited to, the
quantities, Net Invoiced Billings and applicable Royalty
rate(s) of Articles invoiced during the preceding Royalty
Payment Period, and the quantities and invoice value of
Articles returned for credit or refund in such period. At the
same time Licensee %kill pay Disney all Royalties due on
billings shown by such statements. To the extent that any
Royalties are not paid, Licensee authorizes Disney to offset
Royalties due against any sums which Disney or any of Disney's
Affiliates may owe to Licensee or any of Licensee's
Affiliates. No deduction or withholding from Royalties payable
to Disney shall be made by reason of any tax. Any applicable
tax on the manufacture, distribution and sale of the Articles
shall be borne by Licensee.
B. The statement forms Disney designates for Licensee's use may
be changed from time to time, and Licensee agrees to use the
most current form Disney provides to Licensee. Licensee agrees
to fully comply with all instructions supplied by Disney for
completing such forms.
C. In addition to the other information requested by the
statement forms, Licensee's statement shall with respect to
all Articles report separately:
(1) F.O.B. In Sales;
(2) F.O.B. Out Sales,
(3) if licensed hereunder, sales of Articles using
Licensed Material consisting of animated characters
(separately reported by SKU and character);
(4) if licensed hereunder, sales of Articles using
Licensed Material consisting of live action
characters from the motion picture referenced in
Subparagraph 1.B. (separately reported by SKU and
character);
(5) sales of Articles outside the Territory pursuant to a
distribution permission (indicating the country
involved);
(6) Licensee's sales of Articles to any of Disney's
licensees or Disney's Affiliates' licensees who are
licensed to sell the Articles, and who are reselling
such Articles and paying Disney royalties on such
resales;
<PAGE> 22
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 22
(7) sales of Articles to Disney or any of Disney's
Affiliates;
(8) sales of Articles to Licensee's or Disney's
employees;
(9) sales of Articles under any brand or program
identified in Subparagraph 1.B. hereinabove,
(10) sales of Articles to or for distribution through any
mail order catalogs approved under this Agreement.
D. Sales of items licensed under contracts with Disney other than
this Agreement shall not be reported on the same statement as
sales of Articles under this Agreement.
E. Licensee's statements and payments, including all Royalties,
shall be delivered to Wachovia South Metro Center, DEI
Account, P.O. Box 101947, Atlanta, Georgia 30392. A copy of
each statement must be sent to Disney at 500 South Buena Vista
Street, Burbank, California 91521-6771, to the attention of
the Contract Administrator, Consumer Products Division. If
Licensee wishes to send statements and payments by overnight
courier, please use the following address: Wachovia South
Metro Center, DEI Account, 3585 Atlanta Avenue, Hapeville, GA
30354, Attention Peggy Morris, Reference Lock box 101947.
However, Advances should be mailed directly to Disney at 500
South Buena Vista Street, Burbank, California 91521-6771, to
the attention of the Contract Administrator or Legal
Department, Consumer Products Division.
21. CONFIDENTIALITY
Licensee represents and warrants that Licensee did not disclose to any
third party the prospect of a license from Disney, and that Licensee
did not trade on the prospect of a license from Disney, prior to full
execution of this Agreement. Licensee agrees to keep the terms and
conditions of this Agreement confidential, and Licensee shall not
disclose such terms and conditions to any third party without
obtaining Disney's prior written consent; provided, however, that this
Agreement may be disclosed on a need-to-know basis to Licensee's
attorneys and accountants who agree to be bound by this
confidentiality provision.
22. INTEREST
<PAGE> 23
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 23
Royalties or any other payments due to Disney hereunder which are
received after the due date shall bear interest at the rate of 18% per
annum from the due date (or the maximum permissible by law if less
than 18%).
23. AUDITS AND MAINTAINING RECORDS
A. Licensee agrees to keep accurate records of all transactions
relating to this Agreement and any prior agreement with Disney
regarding the Licensed Material, including, without
limitation, shipments to Licensee of Articles and components
thereof, inventory records, records of sales and shipments by
Licensee, and records of returns, and to preserve such records
for the lesser of seven (7) years or two (2) years after the
expiration or termination of this Agreement.
B. Disney, or Disney's representatives, shall have the right from
time to time, during Licensee's normal business hours, but
only for the purpose of confirming Licensee's performance
hereunder, to examine and make extracts from all such records,
including the general ledger, invoices and any other records
which Disney reasonably deems appropriate to verify the
accuracy of Licensee's statements or Licensee's performance
hereunder, including records of Licensee's Affiliates if they
are involved in activities which are the subject of this
Agreement. In particular, Licensee's invoices shall identify
the Articles separately from goods which are not licensed
hereunder. Licensee acknowledges that Disney may furnish
Licensee with an audit questionnaire, and Licensee agrees to
fully and accurately complete such questionnaire, and return
it to Disney within the designated time. Disney's use of an
audit questionnaire shall not limit Disney's ability to
conduct any on-site audit(s) as provided above.
C. If in an audit of Licensee's records it is determined that
there is a short fall of five percent (5%) or more in
Royalties reported for any Royalty Payment Period, Licensee
shall upon request from Disney reimburse Disney for the full
out-of-pocket costs of the audit, including the costs of
employee auditors calculated at $60 per hour per person for
travel time during normal working hours and actual working
time.
D. If Licensee has failed to keep adequate records for one or
more Royalty Payment Periods, Disney will assume that the
Royalties owed to Disney for such Royalty Payment Period(s)
are equal to a reasonable amount, determined in Disney's
absolute discretion, which may be up to but will not exceed
the highest Royalties owed to Disney in a Royalty Payment
Period for which Licensee has
<PAGE> 24
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 24
kept adequate records; if Licensee has failed to keep adequate
records for any Royalty Payment Period, Disney will assume a
reasonable amount of Royalties which Licensee will owe to
Disney, based on the records Licensee has kept and other
reasonable assumptions Disney deems appropriate.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
A. If Licensee at any time desires to have Articles or components
thereof containing Licensed Material manufactured by a third
party, whether the third party is located within or outside
the United States, Licensee must, as a condition to the
continuation of this Agreement, notify Disney of the name and
address of such manufacturer and the Articles or components
involved and obtain Disney's prior written permission to do
so. If Disney is prepared to grant permission, Disney will do
so if Licensee and each of Licensee's manufacturers and any
submanufacturers sign a Consent/Manufacturer's Agreement in a
form which Disney will furnish to Licensee and Disney receives
all such agreements properly signed.
(A SAMPLE OF SAID AGREEMENT FORM IS AVAILABLE ON REQUEST)
B. It is not Disney's policy to reveal the names of Licensee's
suppliers to third parties or to any Disney division involved
with buying products, except as may be necessary to enforce
Disney's contract fights or protect Disney's trademarks and
copyrights.
C. If any such manufacturer utilizes Licensed Material or
Trademarks for any unauthorized purpose, Licensee shall
cooperate fully in bringing such utilization to an immediate
halt. If, by reason of Licensee's not having supplied the
above mentioned agreements to Disney or not having given
Disney the name of any supplier, Disney makes any
representation or takes any action and is thereby subjected to
any penalty or expense, Licensee will fully compensate Disney
for any cost or loss Disney sustains (in addition to any other
legal or equitable remedies available to Disney.
25. INDEMNITY
A. Licensee shall indemnify Disney during and after the term
hereof against all claims, demands, suits, judgments, losses,
liabilities (including settlements entered into in good faith
with Licensee's consent, not to be unreasonably withheld) and
expenses of any nature (including reasonable attorneys' fees)
<PAGE> 25
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 25
arising out of Licensee's activities under this Agreement,
including but not limited to, any actual or alleged: (1)
negligent acts or omissions on Licensee's part, (2) defect
(whether obvious or hidden and whether or not present in any
Sample approved by Disney) in an Article, (3) personal injury,
(4) infringement of any rights of any other person by the
manufacture, sale, possession or use of Articles, (5) breach
on Licensee's part of any covenant contained in this
Agreement, or (6) failure of the Articles or by Licensee to
comply with applicable Laws. The parties indemnified hereunder
shall include Disney Enterprises, Inc., its licensor, and its
and their parent, Affiliates and successors, and its and their
officers, directors, employees and agents. The indemnity shall
not apply to any claim or liability relating to any
infringement of the copyright of a third party caused by
Licensee's utilization of the Licensed Material and the
Trademarks in accordance with the provisions hereof, unless
such claim or liability arises out of Licensee's failure to
obtain the full assignment of rights referenced in Paragraph
12.
B. Disney shall indemnify Licensee during and after the term
hereof against all claims, demands, suits, judgments, losses,
liabilities (including settlements entered into in good faith
with Disney's consent, not to be unreasonably withheld) and
expenses of any nature (including reasonable attorneys' fees)
arising out of any claim that Licensee's use of any
representation of the Licensed Material or the Trademarks
approved in accordance with the provisions of this Agreement
infringes the copyright of any third party or infringes any
right granted by Disney to such third party, except for claims
arising out of Licensee's failure to obtain the full
assignment of rights referenced in Paragraph 12. ~Licensee
shall not, in any case, be entitled to recover for lost
profits.
C. Additionally, if by reason of any claims referred to in
Subparagraph 25.B., Licensee is precluded from selling any
stock of Articles or utilizing any materials in Licensee's
possession or which come into Licensee's possession by reason
of any required recall, Disney shall be obligated to purchase
such Articles and materials from Licensee at their
out-of-pocket cost to Licensee, excluding overheads, but
Disney shall have no other responsibility or liability with
respect to such Articles or materials.
D. Disney gives no warranty or indemnity with respect to any
liability or expense arising from any claim that use of the
Licensed Material or the Trademarks on or in connection with
the Articles hereunder or any packaging, advertising or
promotional material infringes on any trademark right of any
third party or
<PAGE> 26
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 26
otherwise constitutes unfair competition by reason of any
prior rights acquired by such third party, other than rights
acquired from Disney. It is expressly agreed that it is
Licensee's responsibility to carry out such investigations as
Licensee may deem appropriate to establish that Articles,
packaging, and promotional and advertising material which are
manufactured or created hereunder, including any use made of
the Licensed Material and the Trademarks therewith, do not
infringe such right of any third party, and Disney shall not
be liable to Licensee if such infringement occurs.
E. Licensee and Disney agree to give each other prompt written
notice of any claim or suit which may arise under the
indemnity provisions set forth above. Without limiting the
foregoing, Licensee agrees to give Disney written notice of
any product liability claim made or suit filed with respect to
any Article, any investigations or directives regarding the
Articles issued by the Consumer Product Safety Commission
("CPSC") or other federal, state or local consumer safety
agency, and any notices sent by Licensee to, or received by
Licensee from, the CPSC or other consumer safety agency
regarding the Articles within seven (7) days of Licensee's
receipt or promulgation of the claim, suit, investigation,
directive, or notice.
26. INSURANCE
Licensee shall maintain in full force and effect at all times while
this Agreement is in effect and for three years thereafter commercial
general liability insurance on a per occurrence form, including broad
form coverage for contractual liability, property damage, products
liability and personal injury liability (including bodily injury and
death), waiving subrogation, with minimum limits of no less than two
million dollars (US $2,000,000.00) per occurrence, and naming as
additional insureds those indemnified in Paragraph 25 hereof.
Licensee also agrees to maintain in full force and effect at all times
while this Agreement is in effect such Worker's Compensation Insurance
as is required by applicable law and Employer's Liability Insurance
with minimum limits of one million dollars (US $1,000,000.00) per
occurrence. All insurance shall be primary and not contributory.
Licensee shall deliver to Disney a certificate or certificates of
insurance evidencing satisfactory coverage and indicating that Disney
shall receive thirty (30) days unrestricted prior written notice of
cancellation, non-renewal or of any material change in coverage.
Licensee's insurance shall be carried by an insurer with a BEST Guide
rating of B + VII or better. Compliance herewith in no way limits
Licensee's indemnity obligations, except to the extent that Licensee's
insurance company actually pays Disney amounts which Licensee would
otherwise pay Disney.
<PAGE> 27
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 27
27. WITHDRAWAL OF LICENSED MATERIAL
Licensee agrees that Disney may, without obligation to Licensee other
than to give Licensee written notice thereof, withdraw from the scope
of this Agreement any Licensed Material which by the Marketing Date
or, if such a date is not specified in Subparagraph 1.O., by six (6)
months from the commencement of the Principal Term or the date of any
applicable amendment, is not being used on or in connection with the
Articles. Disney may also withdraw any Licensed Material or Articles
the use or sale of which under this Agreement would infringe or
reasonably be claimed to infringe the rights of a third party, other
than rights granted by Disney, in which case Disney's obligations to
Licensee shall be limited to the purchase at cost of Articles and
other materials utilizing such withdrawn Licensed Material which
cannot be sold or used. In the case of any withdrawal under the
preceding sentence, the Advances and Guarantees shall be adjusted to
correspond to the time remaining in the Principal Term, or the number
of Articles remaining under the Agreement, at the date of withdrawal.
28. TERMINATION
Without prejudice to any other right or remedy available to Disney:
A. Disney shall have the right at any time to terminate this
Agreement by giving Licensee written notice thereof, if
Licensee fails to manufacture, sell and distribute the
Articles, or to furnish statements and pay Royalties as herein
provided, or if Licensee otherwise breaches the terms of this
Agreement, and if any such failure is not corrected within
fifteen (15) days after Disney sends Licensee written notice
thereof.
B. Disney shall have the right at any time to terminate this
Agreement immediately by giving Licensee written notice
thereof:
(1) if Licensee delivers to any customer without Disney's
written authorization merchandise containing
representations of Licensed Material or other
material the copyright or other proprietary rights to
which are owned or licensed by Disney other than
Articles listed herein and approved in accordance
with the provisions hereof,
(2) if Licensee delivers Articles outside the Territory
or knowingly sells Articles to a third party for
delivery outside the Territory, unless pursuant to a
written distribution permission or separate written
license agreement with Disney or any of Disney's
Affiliates;
<PAGE> 28
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 28
(3) if a breach occurs which is of the same nature, and
which violates the same provision of this Agreement,
as a breach of which Disney has previously given
Licensee written notice;
(4) if Licensee breaches any material term of any other
license agreement between the parties, and Disney
terminates such agreement for cause;
(5) if Licensee shall make any assignment for the benefit
of creditors, or file a petition in bankruptcy, or is
adjudged bankrupt, or becomes insolvent, or is placed
in the hands of a receiver, or if the equivalent of
any such proceedings or acts occurs, though known by
some other name or term;
(6) if Licensee is not permitted or is unable to operate
Licensee's business in the usual manner, or is not
permitted or is unable to provide Disney with
assurance satisfactory to Disney that Licensee will
so operate Licensee's business, as debtor in
possession or its equivalent, or is not permitted, or
is unable to otherwise meet Licensee's obligations
under this Agreement or to provide Disney with
assurance satisfactory to Disney that Licensee will
meet such obligations; and/or
(7) if Licensee breaches any covenant set forth in
Paragraph 11 of this Agreement.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
A. Upon the expiration or termination of this Agreement, all
rights herein granted to Licensee shall revert to Disney, any
unpaid portion of the Guarantee shall be immediately due and
payable, and Disney shall be entitled to retain all Royalties
and other things of value paid or delivered to Disney.
Licensee agrees that the Articles shall be manufactured during
the Principal Term in quantities consistent with anticipated
demand therefor so as not to result in an excessive inventory
build-up immediately prior to the end of the Principal Term.
Licensee agrees that from the expiration or termination of
this Agreement Licensee shall neither manufacture nor have
manufactured for Licensee any Articles, that Licensee will
deliver to Disney any and all artwork (including Style Guides,
animation cels and drawings) which may have been used or
created by Licensee in connection with this Agreement, that
Licensee ,will at Disney's option either sell to Disney at
cost or destroy or efface any molds, plates and other items
used to reproduce Licensed Material or Trademarks, and that,
except as hereinafter provided, Licensee will cease selling
Articles. Any unauthorized distribution of Articles
<PAGE> 29
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 29
after the expiration or termination of this Agreement shall
constitute copyright infringement.
B. If Licensee has any unsold Articles in inventory on the
expiration or termination date, Licensee shall provide Disney
with a full statement of the kinds and numbers of such unsold
Articles. If such statement has been provided to Disney and if
Licensee has fully complied with the terms of this Agreement,
including the payment of all Royalties due and the Guarantee,
upon notice from Disney Licensee shall have the right for a
limited period of three (3) calendar months from such
expiration or earlier termination date to sell off and deliver
such Articles as authorized under Subparagraph 2.A. Licensee
shall furnish Disney statements covering such sales and pay
Disney Royalties in respect of such sales. Such Royalties
shall not be applied against the Advance or towards meeting
the Guarantee. If the sell-off period is extended by Disney
to a date which is not a quarter end month, Licensee's
statement and Royalties for such sell-off period shall be due
thirty (30) days after the last day of the sell-off period.
C. In recognition of Disney's interest in maintaining a stable
and viable market for the Articles during and after the
Principal Term and any sell-off period, Licensee agrees to
refrain from "dumping" the Articles in the market during any
sell-off period granted to Licensee. "Dumping" shall mean the
distribution of product at volume levels significantly above
Licensee's prior sales practices with respect to the Articles,
and at price levels so far below Licensee's prior sales
practices with respect to the Articles as to disparage the
Articles; provided, however, that nothing contained herein
shall be deemed to restrict Licensee's ability to set product
prices at Licensee's discretion.
D. Except as otherwise agreed by Disney in writing, any inventory
of Articles in Licensee's possession or control after the
expiration or termination hereof and of any sell-off period
granted hereunder shall be destroyed, or all Licensed Material
and Trademarks removed or obliterated therefrom.
E. If Disney supplies Licensee with forms regarding compliance
with this Paragraph 29, Licensee agrees to complete, execute
and return such forms to Disney expeditiously.
F. Notwithstanding any provision to the contrary, in the case of
termination under Paragraph 28.B. (5) or (6), in order to
protect the value of the Articles and to avoid any
disparagement of the Articles which could occur as a result of
the
<PAGE> 30
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 30
circumstances of termination, Disney shall have the option, in
Disney's absolute discretion, to purchase any or all unsold
Articles in Licensee's inventory on the termination date at
20% over Licensee's cost of goods for such Articles (not
including overhead).
30. WAIVERS
A waiver by either party at any time of a breach of any provision of
this Agreement shall not apply to any breach of any other provision of
this Agreement, or imply that a breach of the same provision at any
other time has been or will be waived, or that this Agreement has been
in any way amended, nor shall any failure by either party to object to
conduct of the other be deemed to waive such party's right to claim
that a repetition of such conduct is a breach hereof.
31. PURCHASE OF ARTICLES BY DISNEY
If Disney wishes to purchase Articles, Licensee agrees to sell such
Articles to Disney or any of Disney's Affiliates at as low a price as
Licensee charges for similar quantities sold to Licensee's regular
customers and to pay Disney Royalties on any such sales.
32. NON-ASSIGNABILITY
A. Licensee shall not voluntarily or by operation of law assign,
sub-license, transfer, encumber or otherwise dispose of all or
any part of Licensee's interest in this Agreement without
Disney's prior written consent, to be granted or withheld in
Disney's absolute discretion. Any attempted assignment,
sub-license, transfer, encumbrance or other disposal without
such consent shall be void and shall constitute a material
default and breach of this Agreement. "Transfer" within the
meaning of this Paragraph 32 shall include any merger or
consolidation involving Licensee or any directly or indirectly
controlling Affiliate(s) of Licensee ("Controlling
Affiliate"), any sale or transfer of all or substantially all
of Licensee's or its Controlling Affiliate(s)' assets; any
transfer of Licensee's rights hereunder to a division,
business segment or other entity different from the one
specifically referenced on page I hereof (or any sale or
attempted sale of Articles under a trademark or trade name of
such division, business segment or other entity); any public
offering, or series of public offerings, whereby a cumulative
total of thirty-three and one-third percent (33-1/3%) or more
of the voting stock of Licensee or its Controlling
Affiliate(s) is offered for purchase, and any acquisition or
series of acquisitions, by any person or entity, or group of
related persons or entities, of a cumulative total of
<PAGE> 31
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 31
thirty-three and one-third percent (33-1/3%) or more of the
voting stock of Licensee or its Controlling Affiliate(s), or
the right to vote such percentage (or, if Licensee is a
partnership, resulting in the transfer of thirty-three and
one-third percent (33-1/3%) or more of the profit and loss
participation in Licensee, or the occurrence of any of the
foregoing with respect to any general partner of Licensee).
B. Licensee agrees to provide Disney with at least two (2) weeks
prior written notice of any desired assignment of this
Agreement or other transfer as defined in Subparagraph 32.A.
At the time Licensee gives such notice, Licensee shall provide
Disney with the information and documentation necessary to
evaluate the contemplated transaction. Disney's consent (if
given) to any assignment of this Agreement or other transfer
as defined in Subparagraph 32.A. shall be subject to such
terms and conditions as Disney deems appropriate, including
but not limited to, payment of a transfer fee. The amount of
the transfer fee shall be determined by Disney based upon the
circumstances of the particular assignment or transfer, taking
into account such factors as the estimated value of the
license being assigned or otherwise transferred, the risk of
business interruption or loss of quality, production or
control Disney may suffer as a result of the assignment or
other transfer; the identity, reputation, creditworthiness,
financial condition and business capabilities of the proposed
assignee or transferee; and Disney's internal costs related to
the assignment or other transfer, provided, however, in no
event shall the transfer fee be less than $100,000,00. The
foregoing transfer fee shall not apply if this Agreement is
assigned to one of Licensee's Affiliates as part of a
corporate reorganization exclusively among some or all of the
entities existing in Licensee's corporate structure when this
Agreement is signed; provided, however, that Licensee must
give Disney written notice of such assignment and a
description of the reorganization. The provisions of this
Subparagraph 32.B. shall supersede any conflicting provisions
on this subject in any merchandise license agreement
previously entered into between the parties for this
Territory.
C. Notwithstanding Subparagraph's 32.A. and B., Licensee may,
upon written notice to Disney, unless Disney has objected
'within thirty (30) days of receipt of such notice, sublicense
Licensee's rights hereunder to Licensee's Affiliates. Licensee
hereby irrevocably and unconditionally guarantees that they
will observe and perform all of Licensee's obligations
hereunder, including, without limitation, the provisions
governing approvals, and compliance with approved samples,
applicable Laws, and all other provisions hereof, and that
they will otherwise adhere strictly to all of the terms hereof
and act in accordance with
<PAGE> 32
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 32
Licensee's obligations hereunder. Any involvement of an
Affiliate in the activities which are the subject of this
Agreement shall be deemed carried on pursuant to such a
sublicense and thus covered by such guarantee; however such
involvement may be treated by Disney as a breach of this
Agreement, unless Licensee has notified Disney of Licensee's
intent to sublicense an Affiliate in each instance, and Disney
has failed to object within thirty (30) days of receipt of
such notice.
33. RELATIONSHIP
This Agreement does not provide for a joint venture, partnership,
agency or employment relationship between the parties, or any other
relationship than that of licensor and licensee.
34. CONSTRUCTION
The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning and not strictly
for or against any of the parties. Headings of paragraphs herein are
for convenience of reference only and are without substantive
significance.
35. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
Except as otherwise provided herein, this Agreement can only be
extended or modified by a writing signed by both parties; provided,
however, that certain modifications shall be effective if signed by
the party to be charged and communicated to the other party.
36. NOTICES
All notices which either party is required or may desire to serve upon
the other party shall be in writing, addressed to the party to be
served at the address set forth on page 1 of this Agreement, and may
be served personally or by depositing the same addressed as herein
provided (unless and until otherwise notified), postage prepaid, in
the United States mail. Such notice shall be deemed served upon
personal delivery or upon the date of mailing; provided, however, that
Disney shall be deemed to have been served with a notice of a request
for approval of materials under this Agreement only upon Disney's
actual receipt of the request and of any required accompanying
materials. Any notice sent to Disney hereunder shall be sent to the
attention of "Vice President, Licensing", unless Disney advises
Licensee in writing otherwise.
<PAGE> 33
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 33
37. MUSIC
Music is not licensed hereunder. Any charges, fees or royalties
payable for music rights or any other tights not covered by this
Agreement shall be additional to the Royalties and covered by separate
agreement.
38. PREVIOUS AGREEMENTS
This Agreement, and any confidentiality agreement Licensee may have
signed pertaining to any of the Licensed Material, contains the entire
agreement between the parties concerning the subject matter hereof and
supersedes any pre-existing or contemporaneous agreement and any oral
or written communications between the parties.
39. CHOICE OF LAW AND FORUM
This Agreement shall be deemed to be entered into in California and
shall be governed and interpreted according to the laws of the State
of California. Any legal actions pertaining to this Agreement shall be
commenced within the State of California and within either Los Angeles
or Orange Counties.
40. EQUITABLE RELIEF
Licensee acknowledges that Disney will have no adequate remedy at law
if Licensee continues to manufacture, sell, advertise, promote or
distribute the Articles upon the expiration or termination of this
Agreement. Licensee acknowledges and agrees that, in addition to any
and all other remedies available to Disney, Disney shall have the
right to have any such activity by Licensee restrained by equitable
relief, including, but not limited to, a temporary restraining order,
a preliminary injunction, a permanent injunction, or such other
alternative relief as may be appropriate, without the necessity of
Disney posting any bond.
41. GOODWILL
Licensee acknowledges that the rights and powers retained by Disney
hereunder are necessary to protect Disney's or its licensor's
copyrights and property rights, and, specifically, to conserve
Disney's and its licensor's goodwill and good name, and the name
"Disney", and therefore Licensee agrees that Licensee will not allow
the same to become involved in matters which will, or could, detract
from or impugn the public acceptance and popularity thereof, or impair
their legal status.
<PAGE> 34
Impact, Inc.
Disney's George of the Jungle
Agreement dated December 13, 1996
Page 34
42. POWER TO SIGN
The parties warrant and represent that their respective
representatives signing this Agreement have full power and proper
authority to sign this Agreement and to bind the parties.
43. SURVIVAL OF OBLIGATIONS
The respective obligations of the parties under this Agreement, which
by their nature would continue beyond the termination, cancellation or
expiration of this Agreement, including but not limited to
indemnification, insurance, payment of Royalties, and Paragraph 29,
shall survive termination, cancellation or expiration of this
Agreement.
Please sign below under the word "Agreed". When signed by both parties this
shall constitute an agreement between Disney and Licensee.
AGREED:
DISNEY ENTERPRISES, INC.
By: /s/ [ILLEGIBLE]
------------------------------------------------
Title:
---------------------------------------------
Date:
----------------------------------------------
IMPACT, INC.
By: /s/ [ILLEGIBLE]
------------------------------------------------
Title:
---------------------------------------------
<PAGE> 35
CATALOG SCHEDULE
(LIST OF PRE-APPROVED CATALOGS)
STATIONERY
MASS
Currents
Fingerhut
Lillian Vernon
The Right Start
Troll Learn and Play
Viewers Edge
This Catalog Schedule is subject to change, Disney reserves the right to add
catalogs to or delete catalogs from the Catalog Schedule without prior notice
to Licensee. Licensee agrees to cease selling Articles to a deleted catalog
within sixty (60) days after written notice of the deletion. Disney will
consider new catalogs requested by Licensee on a case-by-case basis,
6/15/96
<PAGE> 36
SCHEDULE OF DISNEY LICENSES
The license agreement to which this schedule is attached has
been filed as a specimen of all Disney license agreements to which Hedstrom
Corporation and its subsidiaries are parties. It has been filed as a specimen
because it is substantially similar in all material respects to each of the
Disney license agreements listed below, except, perhaps, with respect to the
information that has been redacted from the specimen and filed with the
Securities and Exchange Commission pursuant to a request for confidential
treatment under Rule 406 under the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
LICENSOR PROPERTY LICENSEE TERM TERRITORY
-------- -------- -------- ---- ---------
<S> <C> <C> <C> <C>
Disney Mickey's Stuff for Kids Amav 12/31/99 US
Disney Mickey's Stuff for Kids Amav 12/31/99 Canada
Disney 101 Dalmatians/Live ERO 6/30/98 US
Action #57
Disney 101 Dalmatians/Live ERO 12/31/97 US
Action #56
Disney Cinderella ERO 12/31/97 US
Disney Hercules ERO 12/31/98 US
Disney Hunchback of Notre Dame ERO 12/31/97 US
Disney Little Mermaid #65 ERO 7/31/99 US
Disney Mickey's Stuff for ERO 12/31/98 US
Kids/Babies
Disney Mulan ERO 12/31/99 USTP
Disney Toy Story ERO 12/31/97 US
Disney Winnie The Pooh ERO 12/31/97 US
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
LICENSOR PROPERTY LICENSEE TERM TERRITORY
-------- -------- -------- ---- ---------
<S> <C> <C> <C> <C>
Disney 101 Dalmatians/Live ERO Canada 6/30/98 Canada
Action
Disney Hercules ERO-Canada 12/31/98 Canada
Disney Hunchback of Notre Dame ERO-Canada 12/31/97 Canada
Disney Hunchback of Notre Dame ERO-Canada 12/31/97 Canada
Disney Little Mermaid ERO-Canada 8/30/99 Canada
Disney Mickey's Stuff for Kids ERO-Canada 12/31/97 Canada
Disney Toy Story ERO-Canada 12/31/97 Canada
Disney Toy Story ERO-Canada 12/31/97 Canada
Disney Winnie the Pooh ERO-Canada 12/31/97 Canada
Disney Mickey for Kids Hedstrom 12/31/97 US
Disney Hunchback of Notre Dame Hedstrom 12/31/97 US
Disney 101 Dalmatians Hedstrom 12/31/97 US
Disney Hercules Hedstrom 12/31/98 US
Disney The Little Mermaid Hedstrom 11/30/98 US
Disney Mulan Hedstrom 10/30/99 US
Disney Simba's Pride Hedstrom 12/30/99 US
Disney A Bug's Life Hedstrom 12/30/99 US
Disney 101 Dalmatians Hedstrom 12/31/97 Canada
Disney 101 Dalmatians/Live Impact 6/30/98 US
Action
</TABLE>
2
<PAGE> 38
<TABLE>
<CAPTION>
LICENSOR PROPERTY LICENSEE TERM TERRITORY
-------- -------- -------- ---- ---------
<S> <C> <C> <C> <C>
Disney 101 Dalmatians/Live Impact 12/31/97 Canada
Action
Disney Brand Spanking New Doug Impact 12/31/99 US
Disney Hercules Impact 12/31/98 US
Disney Hercules Impact 12/31/98 Canada
Disney Hunchback of Notre Dame Impact 12/31/96 US
Disney Little Mermaid Impact 6/30/99 US
Disney Little Mermaid Impact 6/30/99 (or Canada
12/31/99?)
Disney Mickey's Stuff for Kids Impact 12/31/98 US
Disney Mickey's Stuff for Kids Impact 12/31/98 US
Disney Mighty Ducks Impact 6/30/98 US
Disney Mighty Ducks Impact 6/30/98 Canada
Disney Mulan Impact 12/31/99 USTP
Disney Toy Story Impact 12/31/97 US
Disney Winnie The Pooh Impact 12/31/98 US
Disney Winnie The Pooh Impact 12/31/98 Canada
Disney 101 Dalmatians/Live Priss 12/31/97 Canada
Action
Disney Cinderella Priss 12/31/97 Canada
Disney Disney Babies Priss 12/31/98 US
Disney Hercules Priss 12/31/98 US
</TABLE>
3
<PAGE> 39
<TABLE>
<CAPTION>
LICENSOR PROPERTY LICENSEE TERM TERRITORY
-------- -------- -------- ---- ---------
<S> <C> <C> <C> <C>
Disney Hercules Priss 12/31/98 Canada
Disney Hunchback of Notre Dame Priss 12/31/97 US
Disney Lion King Priss 12/31/97 Canada
Disney Little Mermaid Priss 12/31/98 Canada
Disney Little Mermaid Priss 12/31/99 US
Disney Mickey's Stuff for Kids Priss 12/31/98 US
Disney Mickey's Stuff for Priss 12/31/98 Canada
Kids/Disney Babies
Disney Toy Story Priss 12/31/98 US
Disney Winnie the Pooh Priss 12/31/98 US
Disney Winnie the Pooh Priss 12/31/98 Canada
Disney 101 Dalmations/Live Priss 12/31/98 US
Action
DCPLA DALLA, STAND, POOH, ERO 4/30/98 PR & Carib
LMERM. HERCD
DCPLA DALLA, HUNCH, LIONK, ERO 3/31/98 CR, Guat, El Sal,
POCAH, STAND, TOYS, POOH Pan, Nic, Hond,
Bel
DCPLA HUNCH, LIONK, POCAH, Priss 4/30/97 Cent. Am & Carib
STAND, POOH, TOYS,
HERCD, BABY, BABYN,
CINDR, DALLA
</TABLE>
4
<PAGE> 40
<TABLE>
<CAPTION>
LICENSOR PROPERTY LICENSEE TERM TERRITORY
<S> <C> <C> <C> <C> <C>
DCPLA STAND, LIONK, POCAH, ERO Priss 4/30/1997 (new Colombia &
HUNCH, GARGO & for Priss contract Equador
BABYN, POOH, DALLA coming)
DCPLA HUNCH, TOYS Impact 1/31/98 PR
DCPLA DALLA, BABYN, LIONK, Priss 2/28/98 Brazil
HERCD, HUNCH, LMERM,
TOYS, POOH, STAND
Disney-Europe, DALLA, DALMA, TOYS, ERO Priss 6/30/96 Middle East
Mid. East & Africa POOH, STAND, HERCD,
LMERM Impact
Disney-Mexico DALLA, HERCD, STAND, ERO 4/30/98 Mexico
POOH
</TABLE>
5
<PAGE> 1
EXHIBIT 10.40
CONSENT TO ASSIGNMENT
ERO Marketing, Inc. ("ERO Marketing"), Impact International, Inc. ("Impact"),
Priss Prints, Inc. ("Priss"), AMAV Industries, Ltd. ("AMAV") and ERO Canada,
Inc. ("ERO Canada") (sometimes collectively referred to herein as the
"Licensees") have represented to Disney Enterprises, Inc. ("Disney") that
Hedstrom Corporation ("Hedstrom") will acquire one hundred percent (100%) of
the stock of ERO, Inc., the parent corporation of each of the Licensees, by
virtue of a merger between ERO, Inc., and a wholly owned subsidiary of Hedstrom
(the "Merger"). It has been further represented that the Merger transaction is
anticipated to close on or about June 12, 1997, and that immediately after the
Merger each of ERO Marketing, Impact, Priss, AMAV and ERO Canada shall operate
as wholly owned subsidiaries of the acquired company. Effective as of June 12,
1997 based on the representations to Disney concerning the Merger, and provided
that the Merger closes as planned and is not later rescinded, Disney hereby
consents to the above described Merger and the resulting assignment and
transfer by ERO Marketing, Impact, Priss, AMAV and ERO Canada of all of the
rights and obligations of each of them under those certain license agreements
as referenced on Exhibit A attached hereto (collectively the "Transferred
Agreements"), subject to the terms stated herein.
Nothing contained herein shall be construed to modify, waive or impair any of
the provisions, terms and conditions of any of the Transferred Agreements
except as specified herein. Moreover, such assignment and transfer of the
Transferred Agreements shall not be effective unless and until Hedstrom agrees
by signing below to assume the payment and performance of all liabilities and
obligations of ERO Marketing, Impact, Priss, AMAV and ERO Canada respectively,
under the Transferred Agreements, as if Hedstrom had been an original party
thereto, and assumes all rights, obligations and liabilities of each of the
Licensees respectively, under the Transferred Agreements, whether incurred
prior to or after the effective date of the Merger described herein. Hedstrom
hereby further assumes full liability for any and all audit findings determined
by Disney to be payable in relation to all prior and current license
agreements, including but not limited to the Transferred Agreements, of any of
the Licensees.
Disney's consent herein is further based upon the representation that the
above-described Merger shall not cause the interruption of the businesses of
the Licensees as regards the Transferred Agreements, and is conditional upon
the following agreed terms and conditions:
1. Disney shall receive a transfer fee in the amount and according to the
terms and conditions set forth in that certain Transfer Fee Agreement
concurrently entered into by and between the parties, dated effective as of
June 12, 1997.
<PAGE> 2
2. The Royalty rates and Principal Terms for the Transferred Agreements
for the United States and Canada only shall be as follows:
a. The Royalty rates shall [*] all Transferred Agreements through
December 31, 1997. On all Standard Character and Pooh Transferred Agreements,
the Principal Terms shall be extended through December 31, 1999 and the Royalty
rate shall [*] on F.O.B.-In Sales ([*] on F.O.B-Out Sales).
b. The Principal Terms of Filmed Entertainment Transferred
Agreements for "Hercules", "Toy Story", "101 Dalmatians (live action)", and
"The Little Mermaid" shall be extended through December 31, 1999 and the
Royalty rates on each of them shall [*] through June 30, 1998. Effective for
sales periods from July 1, 1998 through December 31, 1999, Royalty rates for
any and all Filmed Entertainment Transferred Agreements shall be [*] on
F.O.B.-In Sales ([*] on F.O.B.-Out Sales).
c. The Royalty Payment Period for all Transferred Agreements
shall be monthly.
d. Nothing contained herein shall be deemed to modify the Royalty
rates, Principal Terms or Royalty Payment Periods of any of the European
Transferred Agreements.
3. Guarantee amounts for the extended terms of the Transferred Agreements
for the United States and Canada only shall be stated on the attached Exhibit
B.
4. Disney shall offer to appropriate Licensee(s) future licenses for
"Mulan", "Simba's Pride" and "A Bug's Life" in the United States and Canada at
the following Royalty rates:
a. The licenses for "Mulan" shall be at [*] on F.O.B.-In Sales
([*] on F.O.B.-Out Sales).
b. For all other Filmed Entertainment licenses, for sales periods
effective on or after July 1, 1998, through December 31, 1999, the Royalty rate
shall be [*] on F.O.B.-In Sales ([*] on F.O.B.-Out Sales).
c. Except as to the Royalty rates set forth above, any and all
future licenses shall be subject to the parties' good faith negotiation of all
other terms and conditions, and their execution of a formal written contract
for each subject property. If after a reasonable period
__________________________________
* FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.
2
<PAGE> 3
of negotiations, the parties were unable to agree upon the terms and conditions
for any such license, Disney may withdraw its offer to the subject license
without any further obligation to the subject Licensee(s).
5. Royalty rates for any license(s) in effect after December 31, 1999,
shall be governed by the applicable license as agreed between the parties.
6. Disney's consent herein shall not be construed to create or evidence
any obligation on the part of Disney to grant any renewals, extensions or
re-licenses of the Transferred Agreements, or to grant any future license(s),
except as specified herein.
7. All capitalized terms used herein shall have the same meanings as
ascribed to them in the most recent Transferred Agreement.
8. Except as expressly modified by this Consent to Assignment or the
corresponding Transfer Fee Agreement, the Transferred Agreements shall remain
unchanged and in full force and effect according to their terms. To the extent
required by Disney, ERO Marketing, Impact, Priss, AMAV and ERO Canada hereby
agree to execute formal written amendments to their respective Transferred
Agreements to memorialize the modifications set forth herein.
9. All terms and conditions stated in this Consent to Assignment shall be
treated by the parties as confidential and maintained with the same degree of
protection as each uses in protection of its own confidential information.
10. ERO, Inc. represents and warrants that it is the parent corporation of
each of the Licensees and that it has the full power and authority to bind each
Licensee and to execute this Consent to Assignment on behalf of each of them.
The parties hereto are not presently aware of any additional ERO, Inc.
subsidiaries that are parties to current Disney licenses in Europe and would be
affected by this Merger transaction. However, if any such additional
subsidiaries are found to exist, they shall be deemed to be included within the
definition of "Licensees" and their licenses that are transferred hereunder
shall be deemed to be included within the definition of "Transferred
Agreements" under this Consent to Assignment.
11. Each of the signatories below hereby expressly represents and warrants
that he or she has the full power and authority to execute this Consent to
Assignment on behalf of the party for which he or she is signing, and to so
bind said party to the terms hereof, without any further consents, approvals or
authorizations being required for such binding execution. Specifically, and
without limitation of the foregoing, Hedstrom hereby represents and warrants
that it has the full power and authority to execute this Consent to Assignment
on behalf of
3
<PAGE> 4
ERO, Inc., and to bind ERO, Inc., and thereby each of the Licenses, to the
terms and conditions stated herein.
12. Disney's execution of this Consent to Assignment shall not be binding
or effective unless and until this Consent to Assignment and the separate
corresponding Transfer Fee Agreement have been executed by all parties and a
fully executed copy of each has been returned to Disney. No modification of
any provision of this Consent to Assignment shall be binding upon Disney unless
specifically agreed to in writing by Disney.
DISNEY ENTERPRISES, INC.
By: /s/ [ILLEGIBLE]
-----------------------------
Title: [ILLEGIBLE]
--------------------------
ACCEPTED AND AGREED:
ERO, INC. (On behalf of itself and each of its wholly-owned subsidiaries, ERO
Marketing, Inc., Impact International, Inc., Priss Prints, Inc., AMAV
Industries, Ltd. and ERO Canada, Inc.)
By: /s/ Alan Plotkin
-----------------------------
Title: Vice President
--------------------------
HEDSTROM CORPORATION
By: /s/ Alan Plotkin
-----------------------------
Title: Vice President
--------------------------
4
<PAGE> 5
EXHIBIT A
TRANSFERRED AGREEMENTS: USA
<TABLE>
<CAPTION>
Contract Name Start Date End Date
- -------------------------------------------------------- --------------- --------------
<S> <C> <C>
Impact International, Inc.
- --------------------------
The Hunchback of Notre Dame 06/01/95 12/31/98
Toy Story 02/01/96 12/31/97
Disney's 101 Dalmatians - Live Action 02/01/96 06/30/98
Mighty Ducks - Animated TV Show 05/31/96 06/30/98
Disney's Hercules 07/18/96 12/31/98
The Little Mermaid 11/04/96 06/30/99
Brand Spanking New Doug 12/13/96 12/31/99
Disney's George of the Jungle 12/13/96 12/31/99
Winnie the Pooh 10/01/96 12/31/98
Mickey's Stuff for Kids 04/01/96 12/31/98
Mickey's Stuff for Kids 09/01/96 12/31/98
Priss Prints, Inc.
- ------------------
The Hunchback of Notre Dame 08/15/95 12/31/97
Disney's 101 Dalmatians - Live Action 02/12/96 12/31/98
Disney's Hercules 10/10/96 12/31/98
The Little Mermaid 01/14/97 12/31/99
Toy Story 01/01/97 12/31/97
Winnie the Pooh 01/01/97 12/31/98
Disney Babies 01/01/97 12/31/98
Mickey's Stuff for Kids 01/01/97 12/31/98
ERO Marketing, Inc.
- -------------------
The Hunchback of Notre Dame 05/03/95 12/31/97
Cinderella 04/01/95 12/31/97
The Hunchback of Notre Dame (Home Furnishings) 09/25/95 12/31/97
Disney's 101 Dalmatians - Live Action 02/01/96 12/31/97
Disney's 101 Dalmatians - Live Action (Home Furnishings) 03/01/96 06/30/98
Toy Story 04/26/96 12/31/97
Disney's Hercules 09/17/96 12/31/98
The Little Mermaid 01/01/97 07/31/99
Winnie the Pooh 07/01/96 12/31/97
Mickey's Stuff for Kids/Disney Babies 01/01/97 12/31/98
AMAV Industries, Ltd.
- ---------------------
Mickey's Stuff for Kids 01/15/97 12/31/99
</TABLE>
<PAGE> 6
TRANSFERRED AGREEMENTS: CANADA
<TABLE>
<CAPTION>
Contract Name Start Date End Date
- -------------------------------------------------------- --------------- --------------
<S> <C> <C>
ERO Canada, Inc.
- ----------------
Mickey's Stuff for Kids 01/01/97 12/31/97
The Hunchback of Notre Dame (Home Furnishings) 10/01/95 03/31/97**
The Hunchback of Notre Dame (Stationery) 10/01/95 12/31/97
The Hunchback of Notre Dame (Home Furnishings) 10/01/95 12/31/97
Disney's 101 Dalmatians - Live Action (Home Furnishings) 03/01/96 06/30/98
Disney's 101 Dalmatians - Live Action (Stationery) 08/01/96 12/31/97
Toy Story 05/01/96 12/31/97
Winnie the Pooh 01/01/96 12/31/97
Disney's Hercules 01/01/97 12/31/98
Priss Prints, Inc.
- ------------------
Mickey's Stuff for Kids/Disney Babies 01/01/97 12/31/98
The Lion King 01/01/97 12/31/97
The Little Mermaid 01/01/97 12/31/98
Cinderella 01/01/97 12/31/97
Disney's 101 Dalmatians - Live Action 01/01/96 12/31/97
Toy Story 01/01/97 12/31/97
Winnie the Pooh 01/01/97 12/31/98
Disney's Hercules 10/01/96 12/31/98
Impact International, Inc.
- --------------------------
Mighty Ducks - Animated TV Show 01/01/97 06/30/98
Disney's Hercules 01/01/97 12/31/98
Winnie the Pooh 01/01/97 12/31/98
</TABLE>
**Sell off: 270 days
<PAGE> 7
TRANSFERRED AGREEMENTS: INTERNATIONAL
License No. 7960310, for various film properties and Winnie the Pooh, expiring
June 30, 1997.
License No. 7960321, for standard characters, expiring June 30, 1997.
License No. 7960326, for 101 Dalmatians (animated and live action), expiring
June 30, 1997.
<PAGE> 8
EXHIBIT B
IMPACT INTERNATIONAL/PRISS PRINTS/ERO MARKETING - PROPOSED CONTRACT EXTENSIONS
UNITED STATES AND CANADA ONLY*
<TABLE>
<CAPTION>
========================================================================================================================
CONTRACT RENEWAL PERIOD '98 EXTENSION GUARANTEE '99 EXTENSION GUARANTEE
- ---------------------------- ---------------- ------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Impact International, Inc. Toy Story 1/1/98-12/31/99 * *
101 Dalmatians 7/1/98-12/31/99 * *
Hercules 1/1/99-12/31/99 * *
Little Mermaid 7/1/99-12/31/99 * *
MFK 1/1/99-12/31/99 * *
Winnie-The-Pooh 1/1/99-12/31/99 * *
Doug No Change * *
George of the No Change * *
Jungle
Mighty Ducks TV None * *
MFK (Sandwich None * *
Bags)
Hunchback None * *
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
CONTRACT RENEWAL PERIOD '98 EXTENSION GUARANTEE '99 EXTENSION GUARANTEE
- ---------------------------- ---------------- ------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Priss Prints Hercules 1/1/99-12/31/99 * *
Little Mermaid No Change * *
101 Dalmatians 1/1/99-12/31/99 * *
Toy Story 1/1/98-12/31/99 * *
Disney Babies 1/1/99-12/31/99 * *
MFK 1/1/99-12/31/99 * *
Winnie-The-Pooh 1/1/99-12/31/99 * *
Hunchback None * *
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
CONTRACT RENEWAL PERIOD '98 EXTENSION GUARANTEE '99 EXTENSION GUARANTEE
- ---------------------------- ---------------- ------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Ero Marketing, Inc. 101 Dalmatians 7/1/98-12/31/99 * *
(HF)
101 Dalmatians 1/1/98-12/31/99 * *
Toy Story 1/1/98-12/31/99 * *
Hercules 1/1/99-12/31/99 * *
Little Mermaid 1/1/97-12/31/97 * *
MFK/Disney 1/1/99-12/31/99 * *
Babies
Winnie-The-Pooh 1/1/98-12/31/99 * *
Hunchback None * *
Hunchback (HF) None * *
Cinderella None * *
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
CONTRACT RENEWAL PERIOD '98 EXTENSION GUARANTEE '99 EXTENSION GUARANTEE
- ---------------------------- ---------------- ------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
AMAV MFK No Change * *
========================================================================================================================
</TABLE>
* FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.
<PAGE> 1
EXHIBIT 12.1
Hedstrom Holdings, Inc.
Computation of Ratio of Earnings to Fixed Charges
(In Thousands, Except Ratio)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Consolidated net income (loss) $ (8,116) $ 745 $(2,961) $(1,916) $ 96
Loss from discontinued operations $ 0 $ 585 $ 3,180 $ 0 $ 0
Consolidated provision (benefit) for income taxes $ (3,857) $ 1,440 $ (663) $ 103 $ 257
Fixed charges $ 5,896 $ 4,573 $ 2,512 $ 2,982 $ 2,728
TOTAL $ (6,077) $ 7,343 $ 3,304 $ (67) $ 3,081
FIXED CHARGES
interest on debt and capitalized leases $ 5,896 $ 4,573 $ 2,982 $ 2,512 $ 2,728
TOTAL $ 5,896 $ 4,573 $ 2,982 $ 2,512 $ 2,728
RATIO (DEFICIENCY) OF EARNINGS TO FIXED CHARGES(A) $(11,973) 1.6x 1.1x $(2,579) 1.1x
<CAPTION>
Proforma Proforma
Six Months Ended Year Ended Six Months Ended
JUNE 30, DECEMBER 31, June 30,
----------------- ---------------- ---------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Consolidated net income (loss) $ (26) $(3,552) $ 5,985 $ 2,698
Loss from discontinued operations $ 0 0 0
Consolidated provision (benefit) for income taxes $ 573 $ (764) $ 3,536 $ 1,812
Fixed charges $14,260 $28,493 $ 4,709 $ 3,545
TOTAL $14,807 $24,177 $14,230 $ 8,055
FIXED CHARGES
Interest on debt and capitalized leases $14,260 $28,493 $ 4,709 $ 3,545
TOTAL $14,260 $28,493 $ 4,709 $ 3,545
RATIO (DEFICIENCY) OF EARNINGS TO FIXED CHARGES 1.0x $(4,316) 3.0x 2.2x
Five Months Ended
DECEMBER 31,
---------------------------
1996 1995
<S> <C> <C>
Consolidated net income (loss) $(4,771) $ (8,574)
Loss from discontinued operations $ 0 $ 0
Consolidated provision (benefit) for income taxes $(2,869) $ (4,074)
Fixed charges $ 2,115 $ 1,773
TOTAL $(5,525) $(10,875)
Interest on debt and capitalized leases $ 2,115 $ 1,773
TOTAL $ 2,115 $ 1,773
RATIO (DEFICIENCY) OF EARNINGS TO FIXED CHARGES(A) $(7,640) $(12,648)
</TABLE>
(A) If the ratio is less than 1.0x, the deficiency is shown
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
Dallas, Texas,
October 22, 1997
/s/ ARTHUR ANDERSEN LLP
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 7, 1997, except
as to Note 13 which is as of June 12, 1997, relating to the financial
statements of ERO, Inc., which appears in such Prospectus. We also consent to
the references to us under the headings "Independent Auditors" and "Selected
Consolidated Financial Data of ERO" in such Prospectus. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Historical Financial Data of ERO."
PRICE WATERHOUSE LLP
Chicago, Illinois
October 22, 1997