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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1997.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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)
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Copies to:
GLENN D. WEST
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT
SUITE 1300
DALLAS, TEXAS 75201
(214) 746-7700
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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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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Common Stock, par value $.01 per share....... 2,705,896 shares $1.25 $3,382,370 $1,024.96
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(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.
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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
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FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
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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
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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 AUGUST , 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.
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.
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.
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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.
Holdings is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, is 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.
The Issuers 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
This Prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. 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.
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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 "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 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
Company. Such estimates are based on management's internal research and
experience in the Company's markets. Such estimates, while believed by
management to be accurate, have not been verified by any independent source.
THE COMPANY
The 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 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 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 Company believes products such as outdoor gym sets and playballs
have been marketed and sold in the United States for over 30 years.
The 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 Company's pro forma net sales were
derived from product categories for which the Company believes it has a market
share of approximately 75% or greater. As a result of the Company's leading
market shares, the Company enjoys favorable relationships with its customers and
suppliers and with licensors of popular characters that decorate certain of the
Company's products. The Company believes its focus on evergreen product
categories in which it has competitive advantages provides consistent sales and
cash flows. The Company's products are sold primarily through national
retailers, mass merchants, home improvement centers, sporting goods stores, drug
store chains and supermarkets. For the twelve-month period ended December 31,
1996, the Company's pro forma net sales and EBITDA (as defined) were $283.3
million and $44.5 million, respectively.
COMPETITIVE STRENGTHS
The Company believes that the following characteristics contribute to the
Company's position as a leading manufacturer and marketer of children's leisure
and activity products:
- Leading Share in Selected Niche Markets. The 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 the Company's pro forma net sales for the twelve-month period
ended December 31, 1996. In addition, the 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
Company believes its position as a market share leader in selected niche
markets (i) provides the 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.
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- Stable and Established Product Categories. Substantially all of the
Company's products are in evergreen categories within the children's
leisure and activity products industry. For example, the Company believes
products such as outdoor gym sets and playballs have been marketed and
sold in the United States for over 30 years. The Company believes its
diverse portfolio of evergreen products will contribute to stable
revenues and cash flows, providing resources for the Company to implement
its business strategies. See "-- Business Strategy."
- Low-Cost Manufacturing Capabilities. The Company believes that it is the
low-cost manufacturer in the markets for each major product category
which the Company manufactures internally. The 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
Company's greater sales volume and resultant operating leverage and
efficiencies. With respect to the Company's children's arts and crafts
kits and game tables, the Company is able to realize cost advantages from
the low labor rates, low overhead and extensive vertical integration of
its Canadian manufacturing facility. The 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 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 Company plans to improve its profitability by
rationalizing its cost structure and utilizing the Company's excess capacity at
certain of its facilities through, among other things, pursuing counter-seasonal
sales opportunities. Furthermore, the 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 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 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 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 Company
has already identified several products that it will begin producing in
the second half 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 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 Company will evaluate
opportunities to expand its product lines, increase its market shares and
acquire complementary products through strategic acquisitions.
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- Focus Licensed Products on Traditional Characters. The 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 Company's products lines that feature licensed
characters, such as sleeping bags, play tents and wall decorations, the
Company intends to emphasize traditionally popular characters such as the
classic Disney and Looney Tunes(TM) characters, although the Company will
also complement such characters by obtaining licenses for event-driven
characters. The 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 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 Company's pro forma net sales for such period.
- Pursue International Sales Opportunities. To date, the 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 Company's pro forma net sales outside the United States and
Canada totaled less than 4% of the Company's total pro forma net sales.
The Company believes there are significant sales opportunities for the
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 Company's dependence on any
particular product line while expanding the Company's overall presence in
children's evergreen leisure and activity product categories. With the
combination of Hedstrom and ERO, the Company has ten principal product
categories, with its largest product line (outdoor gym sets) accounting
for approximately 20% of the 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 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 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 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 Company's
sales throughout the year will be relatively balanced. Pro forma net
sales for the 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
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such twelve-month period. Balanced sales throughout the year will reduce
seasonal fluctuations in working capital and will enable the 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 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 Company will have
significantly more clout with retailers, suppliers and licensors than
either Hedstrom or ERO individually. In addition, management anticipates
that the 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 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 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 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
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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
EBITDA of $104.1 million and $17.0 million, respectively, as compared with net
sales and EBITDA for the comparable period in 1996 of $96.1 million and $10.4
million, respectively. EBITDA as a percentage of net sales increased to 16% for
the six-month period 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.
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
7
<PAGE> 10
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 shares of non-voting common stock, $.01 par
value per share, of Holdings ("Holdings Non-Voting Common Stock") and 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 Company and its material subsidiaries after consummation of the
Transactions and (ii) the sources of financing for the Transactions.
LOGO
- ---------------
(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.
USE OF PROCEEDS
The Selling Securityholders will receive all proceeds from the sale of the
Shares. The Company has agreed to pay all expenses related to the registration
of the Shares, except as described herein. Such expenses are estimated at
$ .
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.
10
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma consolidated
financial data for Holdings and the 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 and a
portion of the cost savings expected to result from the 1996 Cost Reduction
Plan. The pro forma income statement and other financial data give effect to the
Transactions and such cost savings 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 Company and Holdings and its subsidiaries would actually
have been had the Transactions and the cost savings 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>
COMPANY HOLDINGS
------------------------------- -------------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1996 1997 1996 1997
------------ ---------------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $283,307 $142,355 $283,307 $142,355
Cost of sales..................... 196,646 102,315 196,646 102,315
-------- -------- -------- --------
Gross profit...................... 86,661 40,040 86,661 40,040
Selling, general and
administrative expenses........ 56,684 25,233 56,684 25,233
-------- -------- -------- --------
Operating income.................. 29,977 14,807 29,977 14,807
OTHER FINANCIAL DATA:
EBITDA(a)......................... $ 44,494 $ 20,721 $ 44,494 $ 20,721
Depreciation and
amortization(b)................ 11,967 5,914 11,967 5,914
Capital expenditures.............. 10,397 5,258 10,397 5,258
Cash interest expense(c).......... 22,969 11,498 23,219 11,623
Ratio of EBITDA to cash interest
expense(d)..................... 1.9x -- 1.9x --
Ratio of EBITDA to interest
expense(d)..................... 1.8x -- 1.6x --
Ratio of debt to EBITDA(d)(e)..... 5.2x -- 5.7x --
</TABLE>
footnotes on following page
11
<PAGE> 14
- ---------------
(a) 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. 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, it is included herein
to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
(c) Excludes non-cash interest expense on the Discount Notes and non-cash
amortization of debt issuance costs.
(d) A significant portion of the Company's EBITDA is generated by its Amav
division in the second half of the 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.
(e) 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.
12
<PAGE> 15
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
ENDED SIX MONTHS ENDED
FISCAL YEAR ENDED JULY 31, DECEMBER 31, JUNE 30,
------------------------------ ------------------ -------------------
1994 1995 1996 1995 1996 1996 1997
-------- -------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $108,655 $133,862 $133,194 $ 31,792 $23,994 $ 96,059 $104,051
Cost of sales......................... 87,170 107,312 105,068 26,000 21,973 72,897 73,579
-------- -------- -------- -------- ------- -------- --------
Gross profit.......................... 21,485 26,550 28,126 5,792 2,021 23,162 30,472
Selling, general and administrative
expenses............................ 18,181 19,207 24,603 7,067 7,546 15,107 16,242
-------- -------- -------- -------- ------- -------- --------
Operating income (loss)............... 3,304 7,343 3,523 (1,275) (5,525) 8,055 14,230
OTHER FINANCIAL DATA:
EBITDA(a)............................. $ 5,529 $ 10,088 $ 9,420 $ (393) $(3,549) $ 10,377 $ 16,997
Depreciation and amortization(b)...... 2,225 2,745 3,347 882 1,976 2,322 2,767
Capital expenditures.................. 2,988 2,574 6,738 1,342 1,376 4,792 3,446
Ratio (deficiency) of earnings to
fixed charges(c).................... 1.1x 1.6x (11,973) (12,648) (7,640) -- --
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $ 60,005 $ 69,809 $ 85,024 $ 70,459 $72,075 $100,206 $349,962
Total debt (including current
maturities)......................... 29,811 32,710 69,306 57,750 60,171 77,956 255,389
Stockholders' equity (deficit)........ 14,647 15,392 1,674 2,055 (3,097) 4,556 44,332
</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. 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, 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.
13
<PAGE> 16
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
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $126,734 $128,722 $157,913 $ 18,883 $ 19,939
Cost of sales......................... 79,776 80,693 97,802 13,264 13,814
-------- -------- -------- -------- --------
Gross profit.......................... 46,958 48,029 60,111 5,619 6,125
Selling, general and administrative
expenses........................... 34,078 33,183 38,896 7,553 7,763
-------- -------- -------- -------- --------
Operating income (loss)............... 12,880 14,846 21,215 (1,934) (1,638)
OTHER FINANCIAL DATA:
EBITDA(a)............................. $ 15,949 $ 18,411 $ 26,504 $ (590) $ (315)
Depreciation and amortization(b)...... 3,069 3,565 5,289 1,344 1,323
Capital expenditures.................. 1,287 1,772 3,625 448 289
Ratio of earnings to fixed
charges(c)......................... 5.5x 5.9x 2.2x -- --
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $ 56,792 $144,138 $159,994 $131,353 $136,381
Total debt (including current
maturities)........................ 11,875 84,998 95,640 82,041 79,431
Stockholders' equity.................. 27,997 36,064 43,014 32,789 40,649
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
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, 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.
14
<PAGE> 17
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 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.
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. After
giving pro forma effect to the Transactions and a portion of the cost savings
expected to result from the 1996 Cost Reduction Plan, Holdings' ratio of
earnings to fixed charges would have been 1.1 to 1.0 for the twelve months ended
December 31, 1996, and Hedstrom's ratio of earnings to fixed charges would have
been 1.2 to 1.0 for the twelve months ended December 31, 1996. See
"Capitalization" 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. Based upon Hedstrom's current operations and anticipated
growth, management believes that 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 -- 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 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.
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
15
<PAGE> 18
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" and
"Description of the Discount Notes."
RELIANCE ON KEY CUSTOMERS
After giving pro forma effect to the Transactions, the Company's pro forma
net sales to its four largest customers (Toys "R" Us, Wal-Mart, Kmart and
Target) during the twelve-month period ended December 31, 1996 would have
aggregated approximately 50% of the Company's pro forma net sales. Each of the
four largest customers individually would have accounted for over 9% of the
Company's pro forma net sales during such period. Although the Company has
well-established relationships with its key customers, the 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 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
Company's pro forma net sales for the twelve months ended December 31, 1996
would have been derived from sales of licensed products and approximately
two-thirds of such net sales would have been attributable to licenses covering
ten licensed characters. Approximately 19% of such net sales would have been
derived from licenses with Disney Enterprises, Inc. and its affiliates. Although
the Company intends to renew key existing licenses and to obtain new licenses,
there can be no assurance that the Company will be able to do so. The failure to
renew key existing licenses or obtain new licenses could inhibit the Company's
ability to effectively compete in the licensed product market, which could in
turn have a material adverse effect on the Company. A significant segment of the
Company's business is dependent on obtaining new licenses for its products. The
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 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 Company's licensed products business is dependent upon obtaining
new licenses for popular characters. No assurance can be given that the 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 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
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 Company's results of operations to
fluctuate significantly. A large, rapid increase in the price of raw materials
could have a material adverse effect on the 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 Company's results of operations.
16
<PAGE> 19
In addition, the Company intends to continue the implementation of its
business strategy, an element of which is to achieve significant annual cost
savings. The 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 Company. There can be no assurance
that the Company will be able to continue to successfully implement its business
strategy or that the 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 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 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 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 Company will continue to be successful in introducing new
products or further enhancing existing products. See "Business -- Competition."
INVENTORY MANAGEMENT; DISTRIBUTION
The 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 Company to fill orders promptly and shift a
portion of the retailer's inventory risk onto the supplier. Production of excess
products by the Company to meet anticipated demand could result in increased
inventory carrying costs for the Company. In addition, if the 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
Company's vendors or from the Company's warehouse facilities could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
GOVERNMENT REGULATIONS
The 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 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 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
Company's business, financial condition and results of operations.
PRODUCT LIABILITY RISKS
The Company's products are used for and by small children. The 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 Company's success will depend largely on the efforts and abilities of
its executive officers and certain other key employees, and there can be no
assurance that the Company will be able to retain all of such officers
17
<PAGE> 20
and employees. The failure of such key personnel to remain active in the
Company's management could have a material adverse effect on the 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 Company's business strategies is to
pursue opportunities for counter-seasonal sales (including new product and OEM
sales) and the Company expects decreased exposure to seasonality as a result of
the Acquisition, the 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 Company's product
categories are concentrated in relatively short periods of time during the year.
As a result, a failure by the 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 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 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 Company.
A portion of the Company's expenses and sales are denominated in foreign
currencies, and accordingly, the 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 Company's sales,
costs of goods sold and other expenses are denominated in Canadian dollars, the
Company has a translation exposure to fluctuations in the Canadian dollar
against the U.S. dollar. Theses currency fluctuations could have a material
impact on the Company 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 Company's Canadian production facilities.
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 direction of the affairs of Holdings, and indirectly control
the election of the Board of Directors and the direction of the affairs of
Hedstrom. See "Stock Ownership and Certain Transactions."
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.
18
<PAGE> 21
USE OF PROCEEDS
This Prospectus has been prepared for use by Selling Securityholders in
sales of Shares. Holding 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
$ .
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."
19
<PAGE> 22
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.
20
<PAGE> 23
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 paragraphs
as if they occurred on January 1, 1996.
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." The Pro Forma Consolidated Income Statement 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 the twelve-month period ending December 31,
1997. The pro forma adjustments related to the 1996 Cost Reduction Plan do 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."
Independent of the 1996 Cost Reduction Plan, management has implemented or
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 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.
21
<PAGE> 24
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 (2,200)(b) 196,646 -- 196,646
-------- -------- ------- -------- ------- --------
Gross profit.................... 24,350 60,111 2,200 86,661 -- 86,661
Selling, general and
administrative expenses....... 25,083 38,896 (3,600)(b) 56,684 -- 56,684
2,305(c)
(6,000)(d)
-------- -------- ------- -------- ------- --------
Operating income (loss)......... (733) 21,215 9,495 29,977 -- 29,977
Interest expense................ 5,986 9,062 9,809(e) 24,857 3,386(e) 28,493
250(f)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes......................... (6,719) 12,153 (314) 5,120 (3,636) 1,484
Income tax benefit (expense).... 2,158 (4,395) (584)(g) (2,821) 1,381(g) (1,440)
-------- -------- ------- -------- ------- --------
Net income (loss)............... $ (4,561) $ 7,758 $ (898) $ 2,299 $(2,255) $ 44
Net income (loss) per share..... $ .00
Weighted average shares
outstanding................... -- -- -- -- -- 67,647
======== ======== ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA:
Operating income (loss)..... $ (733) $ 21,215 $ 9,495 $ 29,977 $ -- $ 29,977
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 $11,800 $ 44,494 $ -- $ 44,494
======== ======== ======= ======== ======= ========
Pro forma ratio of earnings to
fixed charges(i).............. -- -- -- 1.2x -- 1.1x
======== ======== ======= ======== ======= ========
</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(j) HISTORICAL(j) 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(c) 25,233 -- 25,233
(3,000)(d)
-------- -------- ------- -------- ------- --------
Operating income (loss)........ 14,230 (1,463) 2,040 14,807 -- 14,807
Interest expense............... 4,584 3,267 4,591(e) 12,442 1,693(e) 14,260
125(f)
-------- -------- ------- -------- ------- --------
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(g) (1,263) 690(g) (573)
-------- -------- ------- -------- ------- --------
Net income (loss).............. $ 6,062 $ (2,790) $(2,170) $ 1,102 $(1,128) $ (26)
Net income (loss) per share.... $ .00
Weighted average shares
outstanding.................. -- -- -- -- -- 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(i)............. -- -- -- 1.2x -- 1.0x
======== ======== ======= ======== ======= ========
</TABLE>
22
<PAGE> 25
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 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.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Cost of sales:
Savings from manufacturing certain components
internally(1)......................................... $1,500
Elimination of certain full-time employees(2).......... 700
------
$2,200
======
Selling, general and administrative expenses:
Reductions in warehouse and shipping(3)................ $2,100
Elimination of trial advertising program(4)............ 1,500
------
$3,600
======
</TABLE>
- ---------------
(1) 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.
(2) 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.
(3) 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.
(4) 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,
23
<PAGE> 26
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.
(c) 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
Company.
(d) 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>
(e) 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>
24
<PAGE> 27
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>
(f) Represents a consolidation adjustment to reflect interest expense on a $2.5
million note payable at Holdings.
(g) 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.
(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. 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, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements.
(i) 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).
(j) 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.
25
<PAGE> 28
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>
FIVE MONTHS SIX MONTHS
ENDED ENDED
FISCAL YEAR ENDED JULY 31, DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------ -------------------
1992 1993 1994 1995 1996 1995 1996 1996 1997
------- ------- -------- -------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................... $87,529 $93,891 $108,655 $133,862 $133,194 $ 31,792 $23,994 $ 96,059 $104,051
Cost of sales................... 68,632 75,592 87,170 107,312 105,068 26,000 21,973 72,897 73,579
------- ------- -------- -------- -------- -------- ------- -------- --------
Gross profit.................... 18,897 18,299 21,485 26,550 28,126 5,792 2,021 23,162 30,472
Selling, general and
administrative expenses....... 15,816 16,890 18,181 19,207 24,603 7,067 7,546 15,107 16,242
------- ------- -------- -------- -------- -------- ------- -------- --------
Operating income (loss)......... 3,081 1,409 3,304 7,343 3,523 (1,275) (5,525) 8,055 14,230
Recapitalization expenses(a).... -- -- -- -- 9,600 9,600 -- -- --
Restructuring expense........... -- 1,476 -- -- -- -- -- -- --
Interest expense................ 2,728 2,512 2,982 4,573 5,896 1,773 2,115 3,545 4,709
------- ------- -------- -------- -------- -------- ------- -------- --------
Income (loss) before income
taxes......................... 353 (2,579) 322 2,770 (11,973) (12,648) (7,640) 4,510 9,521
Income tax benefit (expense).... (257) 663 (103) (1,440) 3,857 4,488 2,869 (1,812) (3,536)
------- ------- -------- -------- -------- -------- ------- -------- --------
Income (loss) from continuing
operations.................... 96 (1,916) 219 1,330 (8,116) (8,160) (4,771) 2,698 5,985
Loss from discontinued
operations(b)................. -- -- (3,180) (585) -- -- -- -- --
------- ------- -------- -------- -------- -------- ------- -------- --------
Net income (loss)............... $ 96 $(1,916) $ (2,961) $ 745 $ (8,116) $ (8,160) $(4,771) $ 2,698 $ 5,985
======= ======= ======== ======== ======== ======== ======= ======== ========
Pro forma net income (loss) per
share(c)...................... $ -- $ -- $ -- $ -- $ (0.12) $ -- $ (0.07) $ -- $ 0.09
OTHER FINANCIAL DATA:
EBITDA(d)....................... $ 5,111 $ 3,651 $ 5,529 $ 10,088 $ 6,870 $ (393) $(3,549) $ 10,377 $ 16,997
Depreciation and
amortization(e)............... 2,030 2,242 2,225 2,745 3,347 882 1,976 2,322 2,767
Capital expenditures............ 1,858 3,010 2,988 2,574 6,738 1,342 1,376 4,792 3,446
Ratio (deficiency) of earnings
to fixed charges(f)........... 1.1x (2,579) 1.1x 1.6x (11,973) (12,648) (7,640) -- --
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.................... $48,116 $55,607 $ 60,005 $ 69,809 $ 85,024 $ 70,459 $72,075 $100,206 $349,962
Total debt (including current
maturities)................... 19,812 28,351 29,811 32,710 69,306 57,750 60,171 77,956 255,389
Stockholders' equity
(deficit)..................... 17,144 15,228 14,647 15,392 1,674 2,055 (3,097) 4,556 44,332
</TABLE>
- ---------------------
(a) In connection with the 1995 Recapitalization, Holdings incurred
approximately $9.6 million in costs, all of which were expensed.
(b) 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.
(c) As a result of the Units Offering and Equity Private Placement, pro forma
net income (loss) per share is calculated using the common shares
outstanding immediately following the Transactions. Net income (loss) per
share is not shown for the periods prior to the fiscal year ended July 31,
1996.
(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"). 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, 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 June 30, 1997 are not accurate representations of
full-year results. If the ratio is less than 1.0x, the deficiency is shown.
26
<PAGE> 29
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
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
27
<PAGE> 30
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
ENDED SIX MONTHS
YEAR ENDED JULY 31, DECEMBER 31, ENDED JUNE 30,
------------------------ ------------- ---------------
1994 1995 1996 1995 1996 1996 1997
------ ------ ------ ----- ----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Bedford Division.......................... $ 71.4 $ 80.9 $ 79.3 $13.5 $12.0 $63.0 $58.7
Ashland Division.......................... 30.4 44.8 46.0 16.7 10.4 27.2 24.8
International Division.................... 6.9 8.2 7.9 1.6 1.6 5.9 6.6
ERO....................................... -- -- -- -- -- -- 14.0
------ ------ ------ ----- ----- ----- -----
Total net sales................... 108.7 133.9 133.2 31.8 24.0 96.1 104.1
------ ------ ------ ----- ----- ----- -----
Gross profit:
Bedford Division.......................... 12.2 11.7 13.7 0.8 (.2) 14.3 16.1
Ashland Division.......................... 8.3 13.4 13.1 4.6 1.9 8.0 7.7
International Division.................... 1.0 1.5 1.3 .4 .3 .9 1.6
ERO....................................... -- -- -- -- -- -- 5.1
------ ------ ------ ----- ----- ----- -----
Total gross profit................ 21.5 26.6 28.1 5.8 2.0 23.2 30.5
------ ------ ------ ----- ----- ----- -----
Total selling, general and administrative
expenses.................................. 18.2 19.3 24.6 7.1 7.5 15.1 16.3
------ ------ ------ ----- ----- ----- -----
Total operating income (loss)............... $ 3.3 $ 7.3 $ 3.5 $(1.3) $(5.5) $ 8.1 $14.2
====== ====== ====== ===== ===== ===== =====
</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.
28
<PAGE> 31
This decline in sales was partially offset by selling price increases and the
restructuring of certain promotional allowances. Selling prices of products sold
by the Bedford Division increased approximately 3.3% 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, reflecting a decline in sales of certain undecorated
playballs and O.E.M. products, which decline was partially offset by the
successful introduction of "goofballs" and the increase in market share of ball
pits. Selling prices of the Ashland Division increased approximately 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 and selling price increases, partially offset by 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 improvement in
ball pit margins due to new product introductions, (ii) an increase in selling
prices, and (iii) the favorable effects of the 1996 Cost Reduction Plan. 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 resultant lower inventory levels and material handling
costs, the effects of which were partially offset by the inclusion of ERO's
relatively high selling, general and administrative expenses in June 1997.
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 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.
29
<PAGE> 32
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. Selling, general
and administrative expenses in the 1996 period include a $0.2 million lawsuit
settlement.
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 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 plastic
resin prices and (ii) the implementation of the 1996 Cost Reduction Plan. 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 and an unfavorable shift in the mix of playballs. 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, an increase of 27.5%. This increase was due primarily to
(i) a $2.0 million increase in material handling and warehousing costs, (ii) a
$2.0 million increase in advertising expenses and (iii) a $1.0 million non-cash
charge 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.
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) overall sales price increases.
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 that were partially offset by higher material 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
30
<PAGE> 33
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.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Interest payments on the Senior Subordinated Notes and interest and
principal payments under the Senior Credit Facilities represent significant cash
requirements for the 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 Company. Borrowings under the Senior Credit Facilities 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. The Term Loan Facilities require periodic
principal repayments in increasing amounts prior to the maturity of each Term
Loan Facility. 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."
The Company's remaining liquidity demands will be for capital expenditures
and for working capital needs. In each of 1997 and 1998 the Company is expected
to make capital expenditures of approximately $9 million. For the foreseeable
future, the 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 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
Company may incur expenditures related to the restructuring of its operations.
The 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 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 Company's working capital and capital
expenditures needs for the foreseeable future.
SEASONALITY OF THE 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 Company to generate more consistent cash flows
throughout the year. Pro forma net sales for the 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.
31
<PAGE> 34
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
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $101,777 $95,459 $126,734 $128,722 $157,913 $ 18,883 $ 19,939
Cost of sales................................... 64,984 63,028 79,776 80,693 97,802 13,264 13,814
-------- ------- -------- -------- -------- -------- --------
Gross profit.................................... 36,793 32,431 46,958 48,029 60,111 5,619 6,125
Selling, general and administrative expenses.... 26,919 26,245 34,078 33,183 38,896 7,553 7,763
Restructuring charge............................ -- 1,700 -- -- -- -- --
-------- ------- -------- -------- -------- -------- --------
Operating income (loss)......................... 9,874 4,486 12,880 14,846 21,215 (1,934) (1,638)
Interest expense................................ 2,292 1,261 1,939 1,997 9,062 1,846 2,010
-------- ------- -------- -------- -------- -------- --------
Income before income taxes...................... 7,582 3,225 10,941 12,849 12,153 (3,780) (3,648)
Income tax benefit (expense).................... (2,630) (1,040) (4,482) (5,167) (4,395) 1,552 1,495
-------- ------- -------- -------- -------- -------- --------
Income from continuing operations............... 4,952 2,185 6,459 7,682 7,758 (2,228) (2,153)
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................... 3,394 2,185 6,459 7,682 7,758 (2,228) (2,153)
-------- ------- -------- -------- -------- -------- --------
Cumulative effect of the change in accounting
for income taxes.............................. (1,911) -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- --------
Net income...................................... $ 1,483 $ 2,185 $ 6,459 $ 7,682 $ 7,758 $ (2,228) $ (2,153)
======== ======= ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(a)....................................... $ 12,994 $ 7,320 $ 15,949 $ 18,411 $ 26,504 $ (590) $ (315)
Depreciation and amortization(b)................ 3,120 2,834 3,069 3,565 5,289 1,344 1,323
Capital expenditures............................ 1,881 989 1,287 1,772 3,625 448 289
Ratio of earnings to fixed charges(c)........... 3.8x 2.9x 5.5x 5.9x 2.2x -- --
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................... $ 51,112 $48,935 $ 56,792 $144,138 $159,994 $131,353 $136,381
Total debt (including current maturities)....... 17,800 14,650 11,875 84,998 95,640 82,041 79,431
Stockholders' equity............................ 18,781 21,177 27,997 36,064 43,014 32,789 40,649
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
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, 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.
32
<PAGE> 35
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
1996 1997 (DECREASE)
------ ------ -----------
<S> <C> <C> <C>
Net sales............................... $18.9 $19.9 5.3%
Gross profit margin..................... 29.8% 30.7% 3.0%
Selling, general and administrative
expense (as a percentage of sales).... 40.0% 38.9% (2.8)%
Interest expense........................ $ 1.8 $ 2.0 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 3.0%
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.
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Selling, general and administrative expense as a percentage of sales
decreased 2.8% as ERO was able to control fixed cost spending in a period of
increased revenues.
Interest expense increased by 11.1% compared to 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 2.1% 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 4.7% 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 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.
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.
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Selling, general and administrative expenses as a percentage of sales
decreased by 4.1% 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.
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BUSINESS
GENERAL
The 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 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 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 Company believes products such as outdoor gym
sets and playballs have been marketed and sold in the United States for over 30
years.
The 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 Company's pro forma net sales were
derived from product categories for which the Company believes it has a market
share of approximately 75% or greater. The Company's products are sold primarily
through national retailers, mass merchants, home improvement centers, sporting
goods stores, drug store chains and supermarkets. For the twelve-month period
ended December 31, 1996, the Company's pro forma net sales and EBITDA (as
defined) were $283.3 million and $44.5 million, respectively. The Company's
outdoor gym set product line accounted for approximately 20% of the 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 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.
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
Company's outdoor gym sets consists of a heavy-duty metal
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frame which supports several hanging, swinging rides such as contoured swing
seats, glide rides and trapezes. In addition, the Company's outdoor gym sets
often incorporate a plastic slide and climbing tower. The Company sells its
outdoor gym sets as complete, ready-to-assemble kits. The 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 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 Company does
not sell the lumber, nails or the tools required to construct the wood gym kits.
The retailers that carry the Company's wood gym kits, primarily home improvement
centers, benefit from the sale of such items, particularly the lumber. The
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 Company's wood gym kits generally sell for retail
prices between $69.99 and $339.99, and the Company's slides generally sell for
retail prices between $79.99 and $269.99. The 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 Company
manufactures the body of the horse, paints it to a specific style and packages
it with a metal frame manufactured by the Company. The Bedford Division has
manufactured spring horses for over ten years, and management estimates that the
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 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 Company's large base of installed units. The Company currently offers
over 65 individual accessory items. In addition, the 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 Company intends to begin producing Turbo Hoops during the
second half of 1997. In addition, the Company is seeking opportunities to
utilize seasonal excess capacity at the Bedford Division to manufacture products
for OEMs. The 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 Company's share of the total
U.S. playball market is approximately 85%.
Premium Playballs. The 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 Company's extensive
license portfolio or the Company's proprietary playball patterns. The Company's
proprietary playball patterns include holograms, sparkles and other geometric
patterns. In addition to playballs with stylized printing, the Company recently
introduced a line of "goofballs" that contain items inside the ball such as
plastic spiders, worms and beads. The Company's premium playballs generally sell
at retail prices between $1.99 and $8.99.
Non-Premium Playballs. The 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,
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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 Company's non-premium
playballs generally sell at retail prices between $1.99 and $24.99.
Ball Pits. In fiscal 1995, the Company developed and introduced home and
backyard versions of the popular ball pits used by children in commercial
locations such as McDonald's. The 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 Company's share of the
U.S. ball pit market exceeds 75%. The 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
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
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 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 Company's license portfolio, and at the
children's and adults' markets under the Coral brand name.
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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 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 Company's licensing and graphics strengths and offers
opportunities for innovative products featuring unique designs and other special
effects.
CUSTOMERS
The 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
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 Company's pro forma net sales to its four largest customers (Toys "R"
Us, Wal-Mart, Kmart and Target) during the twelve-month period ended December
31, 1996 would have aggregated approximately 50% of the Company's pro forma net
sales for such period. Each of the four largest customers individually would
have accounted for over 9% of the Company's pro forma net sales during such
period. Although the Company has well-established relationships with its key
customers, the 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
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.
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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 Company generally operates in a highly-competitive environment.
Competition in the markets for the 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 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 Company's principal competitor in this product line is
RDM, Inc., formerly known as Roadmaster Corporation. Certain custom gym set
manufacturers also compete in this market. The 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 Company's sales of playballs for the twelve
months ended July 31, 1996, management estimates that the Company accounts for
approximately 85% of sales in the total U.S. market for children's playballs.
The Company's largest competitor in this product line is National Latex
Corporation.
Amav. In the arts and activities product market, the 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 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.
ERO Industries. The 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. With respect
to its water sports product line, its competitors include Sterns, Kent and Aqua
Leisure.
Priss Prints. The Company competes primarily against Borden, Infantino,
Dolly and 3M in the overall room decor industry.
Impact. The 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 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 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
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primarily for the main structural supports of the 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. Management
believes that alternative sources of supply are readily available for
substantially all of the raw materials used by the Bedford Division.
Components Purchases. The 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 Company 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 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 Company's
state-of-the-art 360 degrees playball printing systems. The Company believes it
is the only manufacturer
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in the United States utilizing such systems. All playballs are inflated at
Ashland during production to ensure that they meet the Company's quality
standards, then deflated for storage or shipping. The 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 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 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 Company produces. Using
machinery and molds supplied by Euro-Matic, the 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 Company receives a fee per ball. In addition,
Euro-Matic provides the Company with molds that the Company uses with its own
machinery to produce ball pit balls that the 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 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 Company manufactures all of its arts and crafts kits and children's
bulk activity products in its Montreal, Quebec manufacturing facility. The
Company owns or leases numerous injection molding machines. The Company also
owns two large printing presses and four smaller label/sticker printers. The
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 Company's products are manufactured with
non-toxic materials to comply with industry standards for children's products
and applicable environmental laws.
The Company produces or assembles slumber bags, personal flotation devices,
juvenile furniture and children's wall decoration products at the Company's
Hazlehurst, Georgia facility. To reduce lead times and inventory levels with
respect to these product lines, the Company utilizes just-in-time manufacturing
and sourcing systems. The 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 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 Company works closely with its suppliers in order to consolidate the
purchasing function and to foster teamwork between the Company and its
suppliers. For the aforementioned products, the Company maintains alternative
sources of supply.
TECHNOLOGY AND LICENSING
The Company holds a variety of patents, patent applications, trademarks and
licenses. While the 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.
42
<PAGE> 45
An important element in the 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 Company emphasizes the acquisition and maintenance of a broad
portfolio of character licenses. Rather than pursuing a few licenses with
speculative appeal, the 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 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 Company is required to pay minimum guaranteed
fees to the licensor over the life of the agreement. The guaranteed license fees
payable by the Company have been insignificant due to the Company's having
exceeded its minimum royalty requirements. After giving pro forma effect to the
Transactions, approximately 28% of the 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 Company monitors the inventory level of each of its key customers,
which allows the Company to anticipate customer orders and fill such orders
within a matter of days. As a result of such monitoring and the Company's
just-in-time manufacturing of several of its principal products, the Company
does not generate significant backlog.
PLANTS AND PRINCIPAL PROPERTIES
Management believes that the Company's facilities are in good condition and
that it has sufficient capacity to meet its current and projected manufacturing
and distribution needs. The Company's principal executive offices are located at
585 Slawin Court, Mount Prospect, Illinois 60056.
43
<PAGE> 46
The following table summarizes certain information regarding the 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
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
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.
LEGAL PROCEEDINGS
The Company is from time to time involved in lawsuits arising in the
ordinary course of business. The 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 Company's financial condition. Although
historically the Company has not been required to pay any material liability
claims, there can be no assurance that the Company will not incur claims which
are in excess of its insurance.
SEASONALITY
Historically, the 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 Company's sales being relatively balanced throughout the year. Pro
forma net sales for the Company for each calendar
44
<PAGE> 47
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 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
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 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 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 Company.
GOVERNMENT REGULATIONS
The 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 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 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
Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Company employed approximately 2,125 people.
Approximately 9.5% of the 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 Company has experienced only one work stoppage,
which occurred in October 1995 and lasted only two days. The Company believes
that it has a good relationship with its employees.
45
<PAGE> 48
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
46
<PAGE> 49
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 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 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. Half of Mr. Carosi's 20 plus
years in sales and marketing have been in major consumer packaged goods
companies such as Procter & Gamble, Anheuser-Busch and Sara Lee Corporation. The
balance of his background is in the toy, game and entertainment industries. He
has been Vice President of Children's & Family Programming at NBC and has held
positions of increasing responsibility at Hasbro, Inc. During his 11 years at
Hasbro, Mr. Carosi was Senior Vice President of Marketing and Marketing Services
for the Playskool, Hasbro and Parker Brothers divisions.
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 -- $738.
47
<PAGE> 50
The following table summarizes option grants made during the fiscal year
ended July 31, 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- -------------- ------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arnold E. Ditri............. 543,544 25.0% $1.00 10/27/05 314,832 865,659
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.
48
<PAGE> 51
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 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 therein) or
if Mr. Ditri terminates his employment for Good Reason (as defined therein), 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 therein), 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 therein).
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.
49
<PAGE> 52
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.
50
<PAGE> 53
(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.
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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
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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.
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The Tranche A Term Loan amortizes over six years commencing December 31,
1997 in quarterly installments. The Tranche B Term Loan amortizes over eight
years commencing December 31, 1997 in quarterly installments.
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 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.
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.
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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
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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 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 (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 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, 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 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
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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.
In the case of any partial redemption, selection of the Senior Subordinated
Notes for redemption will be made by the Senior Subordinated Notes Trustee on a
pro rata basis, by lot or by such other method as the Senior Subordinated Notes
Trustee in its sole discretion shall deem to be fair and appropriate, although
no Senior Subordinated Note of $1,000 in original principal amount or less will
be redeemed in part. If any Senior Subordinated Note is to be redeemed in part
only, the notice of redemption relating to such Senior Subordinated Note shall
state the portion of the principal amount thereof to be redeemed. A new Senior
Subordinated Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the holder thereof upon cancellation of the
original Senior Subordinated Note.
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"). Holdings is a
holding company that will derive all its operating income and cash flow from its
subsidiaries, including primarily Hedstrom, the common stock of which will be
pledged to secure Holdings' guarantee of all indebtedness of Hedstrom
outstanding under the Credit Agreement. 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.
Each Guarantor may consolidate with or merge into or sell its assets to
Hedstrom or another Subsidiary Guarantor without limitation. Each Guarantor may
consolidate with or merge into or sell all or substantially all its assets to a
Person other than Hedstrom or another Subsidiary Guarantor (whether or not
affiliated with such Guarantor). Upon the sale or disposition (by merger or
otherwise) of a Subsidiary Guarantor (or all or substantially all of its assets)
to a Person (whether or not an Affiliate of such Subsidiary Guarantor) which is
not a Subsidiary of Hedstrom, which sale or disposition is otherwise in
compliance with the Senior Subordinated Notes Indenture (including the covenant
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock"), such Subsidiary Guarantor shall be deemed released from all
its obligations under the Senior Subordinated Notes Indenture and its Subsidiary
Guaranty and such Subsidiary Guaranty shall terminate; provided, however, that
any such termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under the Credit Agreement and all of its Guarantees of,
and under all of its pledges of assets or other security interests which secure,
any other Indebtedness of Hedstrom shall also terminate upon such release, sale
or transfer.
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.
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RANKING AND SUBORDINATION
Senior Subordinated Notes and Subsidiary Guaranties
The payment of the principal of, premium (if any), and interest on the
Senior Subordinated Notes and the payment of any Subsidiary Guaranty is
subordinated in right of payment, as set forth in the Senior Subordinated Notes
Indenture, to the payment when due of all Senior Indebtedness of Hedstrom or all
Subsidiary Guarantor Senior Indebtedness of the relevant Subsidiary Guarantor,
as the case may be. However, payment from the money or the proceeds of U.S.
Government Obligations held in any defeasance trust described under "Defeasance"
below is not subordinate to any Senior Indebtedness or subject to the
restrictions described herein. As of June 30, 1997, (i) the outstanding Senior
Indebtedness of Hedstrom was $117.7 million (exclusive of unused commitments)
and (ii) the outstanding Subsidiary Guarantor Senior Indebtedness of the
Subsidiary Guarantors was approximately $112.7 million, virtually all of it
represented by guarantees of Senior Indebtedness of Hedstrom under the Credit
Agreement. Although the Senior Subordinated Notes Indenture contains limitations
on the amount of additional Indebtedness that Hedstrom may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "Certain
Covenants -- Limitation on Indebtedness" below.
As used herein, "Senior Indebtedness" of Hedstrom is defined, whether
outstanding on the Issue Date or thereafter Incurred, as the Bank Indebtedness
and all other Indebtedness of Hedstrom, including interest and fees thereon,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of such
Indebtedness are not superior in right of payment to the Senior Subordinated
Notes; provided, however, that Senior Indebtedness will not include (1) any
obligation of Hedstrom to any Subsidiary, (2) any liability for Federal, state,
foreign, local or other taxes owed or owing by Hedstrom, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including Guarantees thereof or instruments evidencing such
liabilities) or (4) any Indebtedness, Guarantee or obligation of Hedstrom that
is expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Hedstrom, including any Senior
Subordinated Indebtedness and any Subordinated Obligations.
A portion of the operations of Hedstrom are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of Hedstrom,
including holders of the Senior Subordinated Notes, even if such obligations do
not constitute Senior Indebtedness. The Senior Subordinated Notes and each
Subsidiary Guaranty, therefore, will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders (if any) of the
subsidiaries of Hedstrom (other than the Subsidiary Guarantors). At June 30,
1997, the total liabilities of Hedstrom's subsidiaries (other than the
Subsidiary Guarantors) were approximately $16.9 million, including trade
payables. Although the Senior Subordinated Notes Indenture limits the Incurrence
of Indebtedness of certain of Hedstrom's subsidiaries, such limitation is
subject to a number of significant qualifications. Moreover, the Senior
Subordinated Notes Indenture does not impose any limitation on the Incurrence by
such subsidiaries of liabilities that are not considered Indebtedness under the
Senior Subordinated Notes Indenture. See "-- Certain Covenants -- Limitation on
Indebtedness."
Only Indebtedness of Hedstrom or a Subsidiary Guarantor that is Senior
Indebtedness or Subsidiary Guarantor Senior Indebtedness, as the case may be,
will rank senior to the Senior Subordinated Notes and the relevant Subsidiary
Guaranty in accordance with the provisions of the Senior Subordinated Notes
Indenture. The Senior Subordinated Notes and each Subsidiary Guaranty will in
all respects rank pari passu with all other Senior Subordinated Indebtedness of
Hedstrom and Subsidiary Guarantor Senior Subordinated Indebtedness of the
relevant Subsidiary Guarantor, as the case may be. Hedstrom has agreed in the
Senior Subordinated Notes Indenture that it will not Incur, directly or
indirectly, any Indebtedness that is subordinate or junior in ranking in any
respect to Senior Indebtedness unless such Indebtedness is Senior Subordinated
Indebtedness or is contractually subordinated in right of payment to Senior
Subordinated Indebtedness. In addition, no Subsidiary Guarantor may Incur any
Indebtedness if such Indebtedness is subordinate or junior in ranking in any
respect to any Subsidiary Guarantor Senior Indebtedness of such Subsidiary
Guarantor unless such Indebtedness is
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Subsidiary Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor or is contractually subordinated in right of payment to Subsidiary
Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured.
Hedstrom may not pay principal of, premium (if any), or interest on, the
Senior Subordinated Notes or make any deposit pursuant to the provisions
described under "Defeasance" below and may not otherwise purchase or retire any
Senior Subordinated Notes (collectively, "pay the Senior Subordinated Notes") if
(i) any Senior Indebtedness is not paid when due or (ii) any other default on
Senior Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full. However, Hedstrom may pay the Senior
Subordinated Notes without regard to the foregoing if Hedstrom and the Trustee
receive written notice approving such payment from the Representative of the
Senior Indebtedness with respect to which either of the events set forth in
clause (i) or (ii) of the immediately preceding sentence has occurred and is
continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, Hedstrom may not pay the Senior Subordinated Notes (except in (i)
Capital Stock (other than Disqualified Stock) issued by Hedstrom to pay interest
on the Senior Subordinated Notes or issued in exchange for the Senior
Subordinated Notes, (ii) in securities substantially identical to the Senior
Subordinated Notes issued by Hedstrom in payment of interest thereon or (iii) in
securities issued by Hedstrom which are subordinated to Senior Indebtedness at
least to the same extent as the Senior Subordinated Notes and having an Average
Life at least equal to the remaining Average Life of the Senior Subordinated
Notes) for a period (a "Payment Blockage Period") commencing upon the receipt by
the Senior Subordinated Notes Trustee (with a copy to Hedstrom) of written
notice (a "Blockage Notice") of such default from the Representative of the
holders of such Designated Senior Indebtedness specifying an election to effect
a Payment Blockage Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Senior
Subordinated Notes Trustee and Hedstrom from the Person or Persons who gave such
Blockage Notice, (ii) because the default giving rise to such Blockage Notice is
no longer continuing or (iii) because such Designated Senior Indebtedness has
been repaid in full). Notwithstanding the provisions described in the
immediately preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness, Hedstrom may resume payments on the
Senior Subordinated Notes after the end of such Payment Blockage Period. Not
more than one Blockage Notice may be given in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of Hedstrom upon a total or
partial liquidation or dissolution or reorganization or bankruptcy of or similar
proceeding relating to Hedstrom or its property, the holders of Senior
Indebtedness will be entitled to receive payment in full of the Senior
Indebtedness before the holders of the Senior Subordinated Notes are entitled to
receive any payment, and until the Senior Indebtedness is paid in full, any
payment or distribution to which holders of the Senior Subordinated Notes would
be entitled but for the subordination provisions of the Senior Subordinated
Notes Indenture will be made to holders of the Senior Indebtedness as their
interests may appear. If a distribution is made to holders of the Senior
Subordinated Notes that, due to the subordination provisions, should not have
been made to them, such holders are required to hold it in trust for the holders
of Senior Indebtedness and pay it over to them as their interests may appear.
If payment of the Senior Subordinated Notes is accelerated because of an
Event of Default, Hedstrom or the Senior Subordinated Notes Trustee shall
promptly notify the holders of the Designated Senior Indebtedness or the
Representative of such holders of the acceleration. Hedstrom may not pay the
Senior Subordinated Notes until five Business Days after such holders or the
Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Senior Subordinated Notes only if the
subordination provisions of the Senior Subordinated Notes Indenture otherwise
permit payment at that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of holders of the Senior
Subordinated Notes to receive payment by a Subsidiary Guarantor
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pursuant to its Subsidiary Guaranty will be subordinated in right of payment to
the rights of holders of Subsidiary Guarantor Senior Indebtedness of such
Subsidiary Guarantor. The terms of the subordination provisions described above
with respect to Hedstrom's obligations under the Senior Subordinated Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of such subordination provisions contained in the Senior
Subordinated Notes Indenture, in the event of insolvency, creditors of Hedstrom
or a Subsidiary Guarantor who are holders of Senior Indebtedness of Hedstrom or
of Subsidiary Guarantor Senior Indebtedness of a Subsidiary Guarantor, as the
case may be, may recover more, ratably, than the holders of the Senior
Subordinated Notes, and creditors of Hedstrom who are not holders of Senior
Indebtedness or of Senior Subordinated Indebtedness (including the Senior
Subordinated Notes) may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the holders of Senior
Subordinated Indebtedness.
The provisions under the Senior Subordinated Notes Indenture relating to
the subordination of the Senior Subordinated Notes 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.
Holdings Guaranty
The Indebtedness evidenced by the Holdings Guaranty are senior obligations
of Holdings, will rank pari passu in right of payment with all Holdings Senior
Indebtedness, including the Discount Notes and Holdings' guarantee under the
Credit Agreement, and will be senior in right of payment to all Holdings
Subordinated Obligations. As of June 30, 1997, there was approximately $244.3
million of Holdings Senior Indebtedness (all of which was represented by the Old
Discount Notes, the Holdings Guaranty and Holdings' Guarantee of the Credit
Agreement), and $2.5 million of Holdings Subordinated Obligations.
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).
Within 30 days following any Change of Control, unless Hedstrom has mailed
a redemption notice with respect to all the outstanding Senior Subordinated
Notes in connection with such Change of Control, Hedstrom shall mail a notice to
each holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such holder has the right to require Hedstrom to purchase 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 purchase (subject to the right of holders of record on a record date to
receive accrued and unpaid interest on the relevant interest payment date in
respect of outstanding Senior Subordinated Notes); (2) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (3) the procedures determined by Hedstrom,
consistent with the Senior Subordinated Notes Indenture, that a holder must
follow in order to have its Senior Subordinated Notes purchased.
Hedstrom will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Subordinated Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Senior Subordinated Notes Indenture,
Hedstrom will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Senior
Subordinated Notes Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of Hedstrom
and its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Senior Subordinated Notes
Indenture varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under
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York law (which is the choice of law under the Senior Subordinated Notes
Indenture) and is subject to judicial interpretation. Accordingly, in certain
circumstances there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the property or assets of a Person and, therefore, it may be unclear as to
whether a Change of Control has occurred and whether Hedstrom is required to
make an offer to repurchase the Senior Subordinated Notes as described above.
The Change of Control purchase feature is a result of negotiations between
Hedstrom and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Hedstrom would decide to do so in the future. Subject to the limitations
discussed below, Hedstrom could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Senior Subordinated Notes Indenture,
but that could increase the amount of indebtedness outstanding at such time or
otherwise affect Hedstrom's capital structure or credit ratings. Restrictions on
the ability of Hedstrom to Incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount of the Senior Subordinated Notes then outstanding.
Except for the limitations contained in such covenants, however, the Senior
Subordinated Notes Indenture does not contain any covenants or provisions that
may afford holders of the Senior Subordinated Notes protection in the event of a
highly leveraged transaction.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of Hedstrom and its Subsidiaries may also contain prohibitions of
certain events that would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Hedstrom to repurchase the Senior
Subordinated Notes could cause a default under such Senior Indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchase on Hedstrom. Finally, Hedstrom's ability to pay cash to the holders
upon a repurchase may be limited by Hedstrom's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. Even if sufficient funds were
otherwise available, the terms of the Bank Indebtedness will prohibit Hedstrom's
prepayment of Senior Subordinated Notes prior to their scheduled maturity.
Consequently, if Hedstrom is not able to prepay the Bank Indebtedness and any
other Senior Indebtedness containing similar restrictions or obtain requisite
consents, as described above, Hedstrom will be unable to fulfill its repurchase
obligations if holders of Senior Subordinated Notes exercise their repurchase
rights following a Change of Control, thereby resulting in a default under the
Senior Subordinated Notes Indenture.
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, the following:
Limitation on Indebtedness.
(a) Hedstrom shall not and shall not permit any of its Restricted
Subsidiaries to, Incur, directly or indirectly, any Indebtedness; provided,
however, that Hedstrom and any of its Restricted Subsidiaries may Incur
Indebtedness if on the date thereof the Consolidated Coverage Ratio would be
greater than 2.00 to 1.00, if such Indebtedness is Incurred on or prior to
December 31, 1999 or 2.25 to 1.00, if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), Hedstrom and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to (A) the Credit Agreement (including, without limitation,
any renewal, extension, refunding, restructuring, replacement or refinancing
thereof referred to in clause (ii) of the definition thereof) or (B) any other
agreements or indentures governing Senior Indebtedness; provided, however, that
the aggregate principal amount of all Indebtedness Incurred pursuant to this
clause
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(i) does not exceed $180 million at any time outstanding, less the aggregate
principal amount thereof repaid with the net proceeds of Asset Dispositions (to
the extent, in the case of a repayment of revolving credit Indebtedness, the
commitment to advance the loans repaid has been terminated); (ii) Indebtedness
represented by Capitalized Lease Obligations, mortgage financings or purchase
money obligations, in each case Incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of property
used in a Related Business or Incurred to Refinance any such purchase price or
cost of construction or improvement, in each case Incurred no later than 365
days after the date of such acquisition or the date of completion of such
construction or improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (ii) shall not exceed $15 million
at any time outstanding; (iii) Permitted Indebtedness; and (iv) Indebtedness
(other than Indebtedness described in clauses (i) - (iii)) in a principal amount
which, when taken together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (iv) and then outstanding, will not exceed $15
million (it being understood that any Indebtedness Incurred under this clause
(iv) shall cease to be deemed Incurred or outstanding for purposes of this
clause (iv) (but shall be deemed to be Incurred for purposes of paragraph (a))
from and after the first date on which Hedstrom or its Restricted Subsidiaries
could have Incurred such Indebtedness under the foregoing paragraph (a) without
reliance upon this clause (iv)).
(c) Notwithstanding the foregoing, neither Hedstrom nor any Restricted
Subsidiary shall Incur any Indebtedness under paragraph (b) above if the
proceeds thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations of Hedstrom unless such Indebtedness shall be subordinated to the
Senior Subordinated Notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor shall Incur any Indebtedness under
paragraph (b) above if the proceeds thereof are used, directly or indirectly, to
Refinance any Subsidiary Guarantor Subordinated Obligation of such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the obligations of
such Subsidiary Guarantor under the Subsidiary Guaranty to at least the same
extent as such Subsidiary Guarantor Subordinated Obligation.
(d) In addition, Hedstrom shall not Incur any Secured Indebtedness which is
not Senior Indebtedness unless contemporaneously therewith effective provision
is made to secure the Senior Subordinated Notes equally and ratably with such
Secured Indebtedness for so long as such Secured Indebtedness is secured by a
Lien. No Subsidiary Guarantor shall Incur any Secured Indebtedness which is not
Subsidiary Guarantor Senior Indebtedness unless contemporaneously therewith
effective provision is made to secure such Subsidiary Guarantor's obligations
under the Subsidiary Guaranty equally and ratably with such Secured Indebtedness
for so long as such Secured Indebtedness is secured by a Lien.
(e) Hedstrom will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to
constitute an Incurrence of Indebtedness by Hedstrom or a Restricted Subsidiary.
(f) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, Hedstrom, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Layering. Hedstrom shall not Incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to Senior Subordinated
Indebtedness. No Subsidiary Guarantor shall Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect to
any Guarantor Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness is Subsidiary Guarantor Senior Subordinated Indebtedness of such
Subsidiary Guarantor or is contractually subordinated in right of payment to
Subsidiary Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor.
Limitation on Restricted Payments. (a) Hedstrom shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving Hedstrom or
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any of its Restricted Subsidiaries) except (A) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) or in
options, warrants or other rights to purchase such Capital Stock, and (B)
dividends or distributions payable solely to Hedstrom or a Restricted Subsidiary
(and if such Restricted Subsidiary is not a Wholly-Owned Subsidiary, to its
other holders of Capital Stock on a pro rata basis), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of Hedstrom held by any
Person other than a Restricted Subsidiary of Hedstrom or any Capital Stock of a
Restricted Subsidiary held by any Affiliate of Hedstrom, other than another
Restricted Subsidiary (in either case, other than in exchange for its Capital
Stock (other than Disqualified Stock)), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment, any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being herein referred to in clauses (i) through (iv) as
a "Restricted Payment"), if at the time Hedstrom or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); or (2) Hedstrom is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) under "-- Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted Payment
as to which financial results are available (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit); (B) the aggregate net
proceeds received by Hedstrom from the issue or sale of its Capital Stock (other
than Disqualified Stock) or other capital contributions subsequent to the Issue
Date (other than net proceeds received from an issuance or sale of such Capital
Stock to a Subsidiary of Hedstrom or an employee stock ownership plan or similar
trust); provided, however, that the value of any non-cash net proceeds shall be
as determined by the Board of Directors in good faith, except that in the event
the value of any non-cash net proceeds shall be $10 million or more, the value
shall be as determined in writing by an independent investment banking firm of
nationally recognized standing; (C) the aggregate Net Cash Proceeds received by
Hedstrom from the issue or sale of its Capital Stock (other than Disqualified
Stock) to an employee stock ownership plan or similar trust subsequent to the
Issue Date; provided, however, that if such plan or trust Incurs any
Indebtedness to or Guaranteed by Hedstrom or any of its Restricted Subsidiaries
to finance the acquisition of such Capital Stock, such aggregate amount shall be
limited to such Net Cash Proceeds less such Indebtedness Incurred to or
Guaranteed by Hedstrom or any of its Restricted Subsidiaries and any increase in
the Consolidated Net Worth of Hedstrom resulting from principal repayments made
by such plan or trust with respect to Indebtedness Incurred by it to finance the
purchase of such Capital Stock; (D) the amount by which Indebtedness of Hedstrom
is reduced on Hedstrom's balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of Hedstrom) subsequent to the Issue Date of any
Indebtedness of Hedstrom for Capital Stock of Hedstrom (less the amount of any
cash, or other property, distributed by Hedstrom upon such conversion or
exchange); (E) the amount equal to the net reduction in Investments (other than
Permitted Investments) made by Hedstrom or any of its Restricted Subsidiaries in
any Person resulting from (i) repurchases or redemptions of such Investments by
such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser, and repayments of loans or advances or other transfers
of assets by such Person to Hedstrom or any Restricted Subsidiary of Hedstrom or
(ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made by Hedstrom or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments; provided, however, that no amount shall be included under
this clause (E) to the extent it is already included in Consolidated Net Income;
(F) the aggregate Net Cash Proceeds received by a Person in consideration for
the issuance of such Person's Capital Stock (other than Disqualified Stock)
which are held by such Person at the time such Person is merged with and into
Hedstrom in accordance with the "Merger and Consolidation" covenant subsequent
to the Issue Date; provided, however, that concurrently with or immediately
following such merger Hedstrom uses an amount equal to such Net Cash Proceeds to
redeem or repurchase Hedstrom's Capital Stock; and (G) $5 million.
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(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of Hedstrom made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of Hedstrom (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary or an employee stock ownership plan or
similar trust); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3)(B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of Hedstrom
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of Hedstrom; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "Limitation on
Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration if at such date of declaration such dividend would have complied
with this provision; provided, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments; (v) payments of dividends
on Hedstrom's common stock after an initial public offering of common stock of
Hedstrom in an annual amount not to exceed 6% of the gross proceeds (before
deducting underwriting discounts and commissions and other fees and expenses of
the offering) received by Hedstrom from shares of common stock sold for the
account of Hedstrom (and not for the account of any stockholder) in such initial
public offering or 6% of the amount contributed to Hedstrom by Holdings from the
proceeds of an initial public offering of common stock of Holdings; (vi)
payments by Hedstrom to repurchase Capital Stock or other securities of Holdings
or Hedstrom from members of management of Holdings or Hedstrom in an aggregate
amount not to exceed $5 million; (vii) payments to enable Holdings or Hedstrom
to redeem or repurchase stock purchase or similar rights granted by Holdings or
Hedstrom with respect to its Capital Stock in an aggregate amount not to exceed
$1 million; (viii) payments, not to exceed $200,000 in the aggregate, to enable
Holdings or Hedstrom to make cash payments to holders of its Capital Stock in
lieu of the issuance of fractional shares of its Capital Stock; (ix) payments
made pursuant to any merger, consolidation or sale of assets effected in
accordance with the "Merger and Consolidation" covenant; provided, however, that
no such payment may be made pursuant to this clause (ix) unless, after giving
effect to such transaction (and the incurrence of any Indebtedness in connection
therewith and the use of the proceeds thereof), Hedstrom would be able to Incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Indebtedness" covenant such that, after
Incurring that $1.00 of additional Indebtedness, the Consolidated Coverage Ratio
would be greater than 3.50: 1.00; (x) purchase or redemption by Hedstrom or a
Restricted Subsidiary of Capital Stock of ERO, Inc. contemplated by the Merger
Agreement; (xi) payments by Hedstrom to fund (A) out of pocket expenses of
Holdings for administrative, legal and accounting services provided by third
parties, or to pay franchise fees and similar costs in an amount not to exceed
$1 million per annum and (B) taxes of Holdings attributable to Hedstrom and its
Subsidiaries; provided however, that such payments shall be excluded in the
calculation of the amount of Restricted Payments; and (xii) the declaration or
payment of any dividend on shares of Hedstrom's common stock so long as (A)
Hedstrom would be permitted immediately after giving pro forma effect to such
declaration or payment to incur an additional $1.00 of Indebtedness pursuant to
clause (a) under "Limitations on Indebtedness," (B) such declaration or payment
is made immediately prior to a date on which cash interest is required to be
paid on the Discount Notes and (C) the full amount of such payment is applied by
Holdings on such date as payment of such cash interest on the Discount Notes;
provided, however, that such dividend shall be included in the calculation of
the amount of Restricted Payments; provided, however, that in the case of
clauses (v), (vi), (vii), (viii) and (ix) no Default or Event of Default shall
have occurred or be continuing at the time of such payment or as a result
thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Hedstrom shall not, and shall not permit any of its Restricted Subsidiaries to,
create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to Hedstrom, (ii) make any loans or
advances to Hedstrom or (iii) transfer any of its property or assets to
Hedstrom; except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Credit Agreement; (b)
any encumbrance or restriction with respect to such a Restricted Subsidiary
pursuant to an
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agreement relating to any Indebtedness Incurred or Preferred Stock issued and
outstanding by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by Hedstrom and outstanding on such date
(other than Indebtedness Incurred or Preferred Stock issued as consideration in,
or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary of Hedstrom or was
acquired by Hedstrom); (c) any encumbrance or restriction with respect to such a
Restricted Subsidiary pursuant to an agreement evidencing Indebtedness Incurred
without violation of the Senior Subordinated Notes Indenture or effecting a
refinancing of Indebtedness issued pursuant to an agreement referred to in
clauses (a) or (b) or this clause (c) or contained in any amendment to an
agreement referred to in clauses (a) or (b) or this clause (c); provided,
however, that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or amendment, taken as a
whole, are no less favorable to the holders of the Senior Subordinated Notes in
any material respect, as determined in good faith by the senior management of
Hedstrom or Board of Directors of Hedstrom, than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in agreements in effect at,
or entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of Hedstrom or any Restricted Subsidiary not
otherwise prohibited by the Senior Subordinated Notes Indenture, (C) that is
included in a licensing agreement to the extent such restrictions limit the
transfer of the property subject to such licensing agreement or (D) arising or
agreed to in the ordinary course of business and that does not, individually or
in the aggregate, detract from the value of property or assets of Hedstrom or
any of its Subsidiaries in any manner material to Hedstrom or any such
Restricted Subsidiary as determined in good faith by the senior management of
Hedstrom; (e) in the case of clause (iii) above, restrictions contained in
security agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements; (f) any restriction with
respect to such a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of such sale or
disposition; (g) any encumbrance or restriction imposed solely upon a Foreign
Subsidiary; provided, however, that, immediately after giving effect to such
encumbrance or restriction, Hedstrom would be able to Incur at least $1.00 of
Indebtedness pursuant to clause (a) of the covenant described under
"-- Limitation on Indebtedness;" and (h) encumbrances or restrictions arising or
existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) Hedstrom shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Asset Disposition unless (i) Hedstrom or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value, as determined in good faith by Hedstrom's senior
management or the Board of Directors (including as to the value of all noncash
consideration), of the shares and assets subject to such Asset Disposition, (ii)
at least 75% of the consideration thereof received by Hedstrom or such
Restricted Subsidiary is in the form of cash or cash equivalents and (iii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by Hedstrom (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent Hedstrom or any Restricted Subsidiary elects (or is
required by the terms of any Senior Indebtedness), to prepay, repay or purchase
(x) Senior Indebtedness or (y) Indebtedness (other than any Disqualified Stock)
of a Wholly-Owned Subsidiary (in each case other than Indebtedness owed to
Hedstrom) within 180 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; (B) second, within one year from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), at Hedstrom's
election either (x) to the investment in or acquisition of Additional Assets or
(y) to prepay, repay or purchase (1) Senior Indebtedness or (2) Indebtedness
(other than any Disqualified Stock) of a Wholly-Owned Subsidiary (in each case
other than Indebtedness owed to Hedstrom); and (C) third, within 45 days after
the later of the application of Net Available Cash in accordance with clauses
(A) and (B) and the date that is one year from the receipt of such Net Available
Cash, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B), to make an offer to purchase Senior
Subordinated Notes (and other Senior Subordinated Indebtedness designated by
Hedstrom), pro rata tendered at 100% of the principal amount thereof (or 100% of
the accreted value of such other Senior Subordinated
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Indebtedness, if such Senior Subordinated Indebtedness was issued at a discount)
plus accrued and unpaid interest, if any, thereon to the date of purchase. The
balance of such Net Available Cash after application in accordance with clauses
(A), (B) and (C) may be used by Hedstrom in any manner not otherwise prohibited
under the Senior Subordinated Notes Indenture. Notwithstanding anything
contained herein to the contrary, in connection with any prepayment, repayment
or purchase of Indebtedness pursuant to clause (A), (B) or (C) above, Hedstrom
or such Restricted Subsidiary shall retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions, Hedstrom and its Restricted Subsidiaries shall not be
required to apply any Net Available Cash in accordance herewith except to the
extent that the aggregate Net Available Cash from all Asset Dispositions which
are not applied in accordance with this covenant at any time exceeds $5 million.
Hedstrom shall not be required to make an offer for Senior Subordinated Notes
pursuant to this covenant if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (A) and (B)) is less than $10
million for any particular Asset Disposition (which lesser amounts shall be
carried forward for purposes of determining whether an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash
or cash equivalents: (x) the assumption by the transferee of Senior Indebtedness
of Hedstrom or Indebtedness of any Restricted Subsidiary of Hedstrom and the
release of Hedstrom or such Restricted Subsidiary from all liability on such
Senior Indebtedness or Indebtedness in connection with such Asset Disposition
(in which case Hedstrom shall, without further action, be deemed to have applied
such assumed Indebtedness in accordance with clause (A) of the preceding
paragraph) and (y) securities received by Hedstrom or any Restricted Subsidiary
of Hedstrom from the transferee that are promptly converted by Hedstrom or such
Restricted Subsidiary into cash.
Notwithstanding the foregoing, Hedstrom and its Restricted Subsidiaries
will be permitted to consummate an Asset Swap if (i) immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred or
be continuing, (ii) in the event such Asset Swap involves an aggregate amount in
excess of $5 million, the terms of such Asset Swap have been approved by a
majority of the members of the Board of Directors of Hedstrom, and (iii) in the
event such Asset Swap involves an aggregate amount in excess of $20 million,
Hedstrom has received a written opinion from an independent investment banking
firm of nationally recognized standing that such Asset Swap is fair to Hedstrom
or such Restricted Subsidiary, as the case may be, from a financial point of
view.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Subordinated Notes pursuant to clause (a)(iii)(C), Hedstrom will be
required to purchase Senior Subordinated Notes (and any other Senior
Subordinated Indebtedness tendered for by Hedstrom) tendered pursuant to an
offer by Hedstrom for the Senior Subordinated Notes (and any other Senior
Subordinated Indebtedness) at a purchase price of 100% of their principal amount
plus accrued and unpaid interest, if any, to the purchase date in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Senior Subordinated Notes Indenture. If the aggregate purchase
price of the Senior Subordinated Notes (and any other Senior Subordinated
Indebtedness) tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase thereof, Hedstrom may use the remaining Net Available
Cash for any purpose not prohibited by the Senior Subordinated Notes Indenture
and any remaining Net Available Cash will not be subject to any future offer.
(c) Hedstrom will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Senior Subordinated Notes
pursuant to the Senior Subordinated Notes Indenture. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, Hedstrom will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Senior Subordinated Notes Indenture by virtue thereof.
Limitation on Affiliate Transactions. (a) Hedstrom shall not, and shall not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Hedstrom other than a Wholly-Owned Subsidiary (an
"Affiliate Transaction") unless: (i) the terms of such
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Affiliate Transaction are no less favorable to Hedstrom or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction or series of related transactions, in arm's-length dealings
with a Person who is not such an Affiliate; (ii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $5 million, the terms of
such transaction or series of related transactions, have been approved by a
majority of the members of the Board of Directors of Hedstrom and by a majority
of the disinterested members of such Board, if any (and such majority or
majorities as the case may be, determines that such Affiliate Transaction
satisfies the criteria in (i) above); and (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $15 million, Hedstrom has
received a written opinion from an independent investment banking firm of
nationally recognized standing that such Affiliate Transaction is fair to
Hedstrom or such Restricted Subsidiary, as the case may be, from a financial
point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors of Hedstrom, (iii) loans or advances to
employees in the ordinary course of business of Hedstrom or any of its
Restricted Subsidiaries, (iv) any transaction between Wholly-Owned Subsidiaries,
(v) indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of Hedstrom and its Restricted Subsidiaries,
in each case in the ordinary course of business, (vi) transactions pursuant to
agreements as in existence on the Issue Date, (vii) any employment,
noncompetition or confidentiality agreements entered into by Hedstrom or any of
its Restricted Subsidiaries with its employees in the ordinary course of
business, (viii) payments made in connection with the Transactions, including
fees to Hicks Muse, (ix) the issuance of Capital Stock of Hedstrom (other than
Disqualified Stock) and (x) any obligations of Hedstrom pursuant to the
Monitoring and Oversight Agreement and the Financial Advisory Agreement.
Limitation on Capital Stock of Restricted Subsidiaries. Hedstrom shall not,
nor shall it permit any Restricted Subsidiary to, sell or otherwise dispose of
any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary to any
Person (other than to Hedstrom or a Wholly-Owned Subsidiary of Hedstrom) or
permit any Person (other than Hedstrom or a Wholly-Owned Subsidiary of Hedstrom)
to own any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary
of Hedstrom, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of Hedstrom; provided, however, that
this provision shall not prohibit (x) Hedstrom or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Senior
Subordinated Notes Indenture.
SEC Reports. Hedstrom shall file with the Senior Subordinated Notes Trustee
and provide to the holders of the Senior Subordinated Notes, within 15 days
after it files them with the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) which
Hedstrom or Holdings files with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. Pursuant to the Senior Subordinated Notes Indenture,
Hedstrom and Holdings have agreed that they shall file with the Commission all
annual reports and such other documents, information and reports required by
Section 13 or 15(d) of the Exchange Act notwithstanding that Hedstrom and
Holdings may not be subject to the reporting requirements of the Exchange Act.
Merger and Consolidation. Hedstrom shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not Hedstrom) shall
expressly assume, by supplemental indenture, executed and delivered to the
Senior Subordinated Notes Trustee, in form satisfactory to the Senior
Subordinated Notes Trustee, all the obligations of Hedstrom under the Senior
Subordinated Notes and the Senior Subordinated Notes Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Company or any Subsidiary of the
Successor Company as a result of such transaction as having been Incurred by the
Successor Company or such Subsidiary at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing;
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(iii) immediately after giving effect to such transaction, the Successor Company
would be able to Incur at least an additional $1.00 of Indebtedness pursuant to
paragraph (a) of "-- Limitation on Indebtedness"; and (iv) Hedstrom shall have
delivered to the Senior Subordinated Notes Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Senior Subordinated
Notes Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Hedstrom under the Senior Subordinated Notes
Indenture, but, in the case of a lease of all or substantially all its assets,
Hedstrom will not be released from the obligation to pay the principal of and
interest on the Senior Subordinated Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of Hedstrom may consolidate with, merge into or transfer all or part
of its properties and assets to Hedstrom and (2) Hedstrom may merge with an
Affiliate incorporated solely for the purpose of reincorporating Hedstrom in
another jurisdiction to realize tax or other benefits.
Future Guarantors. Hedstrom shall cause each domestic Restricted Subsidiary
(including each domestic Restricted Subsidiary created or acquired following the
Issue Date) to Guarantee the Senior Subordinated Notes pursuant to a Subsidiary
Guaranty on the terms and conditions set forth in the Senior Subordinated Notes
Indenture.
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, whether or not such
payment is prohibited by the provisions described under "Ranking and
Subordination" above, (ii) a default in the payment of principal of any Senior
Subordinated Note when due at its Stated Maturity, upon optional redemption,
upon required repurchase, upon declaration or otherwise, whether or not such
payment is prohibited by the provisions described under "Ranking and
Subordination" above, (iii) the failure by Hedstrom to comply with its
obligations under "Certain Covenants -- Merger and Consolidation" above, (iv)
the failure by Hedstrom to comply for 30 days after notice with any of its
obligations under the covenant described under "Change of Control" above or
under the covenants described under "Certain Covenants" 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 "Merger and
Consolidation", (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 of Hedstrom or any Restricted Subsidiary 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 (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
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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.
Subject to the provisions of the Senior Subordinated Notes Indenture
relating to the duties of the Senior Subordinated Notes Trustee, if an Event of
Default occurs and is continuing, the Senior Subordinated Notes Trustee will be
under no obligation to exercise any of the rights or powers under the Senior
Subordinated Notes Indenture at the request or direction of any of the holders
unless such holders have offered to the Senior Subordinated Notes Trustee
reasonable indemnity or security against any loss, liability or expense. Except
to enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder may pursue any remedy with respect to the Senior
Subordinated Notes Indenture or the Senior Subordinated Notes unless (i) such
holder has previously given the Senior Subordinated Notes Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal amount
of the outstanding Senior Subordinated Notes have requested the Senior
Subordinated Notes Trustee to pursue the remedy, (iii) such holders have offered
the Senior Subordinated Notes Trustee reasonable security or indemnity against
any loss, liability or expense, (iv) the Senior Subordinated Notes Trustee has
not complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the holders of a majority in
principal amount of the outstanding Senior Subordinated Notes have not given the
Senior Subordinated Notes Trustee a direction that, in the opinion of the Senior
Subordinated Notes Trustee, is inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Senior Subordinated Notes are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Senior Subordinated Notes Trustee or of exercising any trust or
power conferred on the Senior Subordinated Notes Trustee. The Senior
Subordinated Notes Trustee, however, may refuse to follow any direction that
conflicts with law or the Senior Subordinated Notes Indenture or that the Senior
Subordinated Notes Trustee determines is unduly prejudicial to the rights of any
other holder or that would involve the Senior Subordinated Notes Trustee in
personal liability. Prior to taking any action under the Senior Subordinated
Notes Indenture, the Senior Subordinated Notes Trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Senior Subordinated Notes Indenture provides that if a Default occurs
and is continuing and is known to the Senior Subordinated Notes Trustee, the
Senior Subordinated Notes Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Senior Subordinated Note,
the Senior Subordinated Notes Trustee may withhold notice if and so long as its
board of directors, a committee of its board of directors or a committee of its
Trust officers in good faith determines that withholding notice is in the
interests of the holders of Senior Subordinated Notes. In addition, Hedstrom is
required to deliver to the Senior Subordinated Notes Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. Hedstrom
also is required to deliver to the Senior Subordinated Notes Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults.
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
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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.
Without the consent of any holder, Hedstrom and the Trustee may amend the
Senior Subordinated Notes Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of Hedstrom
under the Senior Subordinated Notes Indenture, to provide for uncertificated
Senior Subordinated Notes in addition to or in place of certificated Senior
Subordinated Notes (provided that the uncertificated Senior Subordinated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or in
a manner such that the uncertificated Senior Subordinated Notes are described in
Section 163(f) (2) (B) of the Code), to add further Guarantees with respect to
the Senior Subordinated Notes, to secure the Senior Subordinated Notes, to add
to the covenants of Hedstrom for the benefit of the holders or to surrender any
right or power conferred upon Hedstrom, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Senior Subordinated
Notes Indenture under the Trust Indenture Act. However, no amendment may be made
to the subordination provisions of the Senior Subordinated Notes Indenture that
adversely affects the rights of any holder of Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the holders is not necessary under the Senior Subordinated
Notes Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Senior Subordinated Notes Indenture becomes
effective, Hedstrom is required to mail to the holders a notice briefly
describing such amendment. However, the failure to give such notice to all the
holders, or any defect therein, will not impair or affect the validity of the
amendment.
DEFEASANCE
Hedstrom at any time may terminate all its obligations under the Senior
Subordinated Notes and the Senior Subordinated Notes Indenture ("legal
defeasance"), except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
Senior Subordinated Notes, to replace mutilated, destroyed, lost or stolen
Senior Subordinated Notes and to maintain a registrar and paying agent in
respect of the Senior Subordinated Notes. Hedstrom at any time may terminate its
obligations under "-- Change of Control," and under substantially all of its
covenants in the Senior Subordinated Notes Indenture, including the covenants
described under "-- Certain Covenants" (other than "-- Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries and the judgment
default provision described under "-- Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
Hedstrom may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Hedstrom exercises its legal
defeasance option, payment of the Senior Subordinated Notes may not be
accelerated because of an Event of Default with respect thereto. If Hedstrom
exercises its covenant defeasance option, payment of the Senior Subordinated
Notes may not be accelerated because of an Event of Default specified in clause
(iv), (vi), (vii) (with respect only to Significant Subsidiaries), (viii) or
(ix) under "Events of Default" above or because of the failure of Hedstrom to
comply with clause (iii) or (iv) under "-- Certain Covenants -- Merger and
Consolidation" above. If Hedstrom exercises its legal defeasance option or
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its covenant defeasance option, each Guarantor will be released from all its
obligations with respect to its Guaranty.
In order to exercise either defeasance option, Hedstrom must irrevocably
deposit in trust (the "defeasance trust") with the Senior Subordinated Notes
Trustee money or U.S. Government Obligations for the payment of principal,
premium (if any) and interest on the Senior Subordinated Notes to maturity or
any redemption date specified by Hedstrom, as the case may be, and must comply
with certain other conditions, including delivery to the Senior Subordinated
Notes Trustee of an Opinion of Counsel to the effect that holders of the Senior
Subordinated Notes will not recognize income, gain or loss for U.S. Federal
income tax purposes as a result of such deposit and defeasance and will be
subject to U.S. Federal income tax on the same amounts and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service (the
"Service") or other change in applicable U.S. Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Senior Subordinated Notes Trustee
under the Senior Subordinated Notes Indenture and has been appointed by Hedstrom
as Registrar and Paying Agent with regard to the Senior Subordinated Notes.
The Holders of a majority in principal amount of the outstanding Senior
Subordinated Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Senior
Subordinated Notes Trustee, subject to certain exceptions. The Senior
Subordinated Notes Indenture provides that if an Event of Default occurs (and is
not cured), the Senior Subordinated Notes Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Senior Subordinated Notes
Trustee will be under no obligation to exercise any of its rights or powers
under the Senior Subordinated Notes Indenture at the request of any holder of
Senior Subordinated Notes, unless such holder shall have offered to the Senior
Subordinated 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 Senior Subordinated Notes Indenture.
GOVERNING LAW
The Senior Subordinated Notes Indenture provides that it and the Senior
Subordinated 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.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Hedstrom or a Restricted Subsidiary of Hedstrom; (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of Hedstrom; or (iv) Permitted Investments of the
type and in the amounts described in clause (viii) of the definition thereof;
provided, however, that, in the case of clauses (ii) and (iii), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
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Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Hedstrom or any of its Restricted Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Restricted Subsidiary to Hedstrom or by Hedstrom or
a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business, (iii) a disposition of obsolete or
worn out equipment or equipment that is no longer useful in the conduct of the
business of Hedstrom and its Restricted Subsidiaries and that is disposed of in
each case in the ordinary course of business, (iv) dispositions of property for
net proceeds which, when taken collectively with the net proceeds of any other
such dispositions under this clause (iv) that were consummated since the
beginning of the calendar year in which such disposition is consummated, do not
exceed 1.5% of the consolidated book value of Hedstrom's assets as of the most
recent date prior to such disposition for which a consolidated balance sheet of
Hedstrom has been regularly prepared, and (v) transactions permitted under
"Certain Covenants -- Merger and Consolidation" above.
"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions that Hedstrom in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between Hedstrom or any of its Restricted Subsidiaries and
another Person or group of affiliated Persons; provided, however, that any
amendment to or waiver of any closing condition that individually or in the
aggregate is material to the Asset Swap shall be deemed to be a new Asset Swap.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Senior Subordinated Notes, compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter Incurred, payable by Hedstrom under or in respect of
the Credit Agreement and any related notes, collateral documents, letters of
credit and guarantees, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Hedstrom whether or not a claim for
post filing interest is allowed in such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof.
"Board of Directors" means, as the context requires, the Board of Directors
of Holdings or Hedstrom or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted as a capitalized lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus, without duplication, the following to the extent deducted
in calculating such Consolidated Net Income: (i) income tax expense, (ii)
Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization
expense,
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(v) exchange or translation losses on foreign currencies, and (vi) all other
non-cash items reducing Consolidated Net Income (excluding any non-cash item to
the extent it represents an accrual of or reserve for cash disbursements for any
subsequent period prior to the Stated Maturity of the Senior Subordinated Notes)
and less, to the extent added in calculating Consolidated Net Income, (x)
exchange or translation gains on foreign currencies and (y) non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Senior Subordinated Notes), in each case for such period. Notwithstanding the
foregoing, the income tax expense, the depreciation expense and amortization
expense of a Subsidiary of Hedstrom shall be included in Consolidated Cash Flow
only to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if Hedstrom or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by senior
management of Hedstrom and assuming a constant level of sales) shall be deemed
outstanding for purposes of this calculation) and (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period any Indebtedness
of Hedstrom or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced), Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period and as if Hedstrom or such Restricted Subsidiary
had not earned the interest income actually earned during such period in respect
of cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Hedstrom or any of its Restricted Subsidiaries shall have made any Asset
Disposition or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Asset Disposition, Consolidated Cash Flow for
such period shall be reduced by an amount equal to the Consolidated Cash Flow
(if positive) attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) attributable thereto for such period, and Consolidated
Interest Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of Hedstrom or
any of its Restricted Subsidiaries repaid, repurchased, defeased or otherwise
discharged with respect to Hedstrom and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary of Hedstrom is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent Hedstrom and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale) and
(ii) increased by interest income attributable to the assets which are the
subject of such Asset Disposition for such period, (4) if since the beginning of
such period Hedstrom or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of
Hedstrom (or any Person which becomes a Restricted Subsidiary of Hedstrom) or an
acquisition of assets, including any Investment in a Restricted Subsidiary of
Hedstrom or any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of a product line or operating unit of a business.
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and the use of the proceeds therefrom) as if such Investment or
acquisition occurred on the first day of such period and (5) if since the
beginning of such period
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any Person (that subsequently became a Restricted Subsidiary of Hedstrom or was
merged with or into Hedstrom or any Restricted Subsidiary of Hedstrom since the
beginning of such period) shall have made any Asset Disposition, Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by Hedstrom or a Restricted Subsidiary of Hedstrom
during such period, Consolidated Cash Flow and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Asset Disposition, Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
Hedstrom. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months). Notwithstanding anything herein to the
contrary, if at the time the calculation of the Consolidated Coverage Ratio is
to be made, Hedstrom does not have available consolidated financial statements
reflecting the ownership by Hedstrom of ERO for a period of at least four full
fiscal quarters, all calculations required by the Consolidated Coverage Ratio
shall be prepared on a pro forma basis, as though such acquisition and the
related transactions (to the extent not otherwise reflected in the consolidated
financial statements of Hedstrom) had occurred on the first day of the
four-fiscal-quarter period for which such calculation is being made.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Hedstrom and its Restricted Subsidiaries, plus, to the extent not
included in such interest expense, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by Hedstrom or any such Restricted Subsidiary under any
Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than Hedstrom) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Restricted Subsidiaries and
Disqualified Stock of Hedstrom held by Persons other than Hedstrom or a
Wholly-Owned Subsidiary and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs and debt discount
solely to the extent relating to the issuance and sale of Indebtedness together
with any other security as part of an investment unit and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of Hedstrom, that was not a Wholly-Owned Subsidiary,
shall be included only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
Hedstrom and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person acquired by Hedstrom or any of its Restricted Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) any net income of any Restricted Subsidiary of Hedstrom if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Hedstrom (other than restrictions in
effect on the Issue Date with respect to a Restricted Subsidiary of Hedstrom and
other than restrictions that are created or exist in compliance with the
"-- Limitation on Restrictions on Distributions from Restricted Subsidiaries"
covenant), (iii) any gain or loss realized upon the sale or other disposition of
any assets of Hedstrom or its consolidated Restricted Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) which are not sold or otherwise
disposed of in the ordinary course of business and any gain or loss realized
upon the sale or other disposition of any Capital Stock of any Person, (iv) any
extraordinary gain or loss, (v) the cumulative effect of a change in accounting
principles, (vi) restructuring charges or writeoffs recorded within the one year
period following the Issue Date in an aggregate amount not to exceed $5 million
including any reversals of any such charges, (vii) the net income of any Person,
other than a Restricted Subsidiary, except to the extent of the lesser of (A)
dividends or distributions paid to Hedstrom or any of its Restricted
Subsidiaries by such Person
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and (B) the net income of such Person (but in no event less than zero), and the
net loss of such Person (other than an Unrestricted Subsidiary) shall be
included only to the extent of the aggregate Investment of Hedstrom or any of
its Restricted Subsidiaries in such Person and (viii) any non-cash expenses
attributable to grants or exercises of employee stock options. Notwithstanding
the foregoing, for the purpose of the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any dividends, repayments of loans or advances or
other transfers of assets from Unrestricted Subsidiaries to Hedstrom or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Hedstrom and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of Hedstrom ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of Hedstrom plus (ii) paid-in capital or capital surplus relating
to such Capital Stock plus (iii) any retained earnings or earned surplus less
(A) any accumulated deficit and (B) any amounts attributable to Disqualified
Stock.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the Board of Directors on the date of the Senior
Subordinated Notes Indenture, (ii) was nominated for election or elected to the
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of such Board of Directors at the time of such
nomination or election, or (iii) is a representative of a Permitted Holder.
"Credit Agreement" means (i) the Credit Agreement as well as all exhibits,
schedules and appendices thereto to be entered into among Hedstrom, Credit
Suisse First Boston, as Administrative Agent, and the lenders parties thereto
from time to time, as the same may be amended, supplemented or otherwise
modified from time to time and (ii) any renewal, extension, refunding,
restructuring, replacement or refinancing thereof (whether with the original
Administrative Agent and lenders or another administrative agent or agents or
other lenders and whether provided under the original Credit Agreement or any
other agreement).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness in the
case of Hedstrom, (ii) any Guarantee by a Subsidiary Guarantor of the Bank
Indebtedness in the case of such Subsidiary Guarantor and (iii) any other Senior
Indebtedness in the case of Hedstrom or Subsidiary Guarantor Senior Indebtedness
in the case of such Subsidiary Guarantor which, at the date of determination,
has an aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $10
million and is specifically designated by Hedstrom or such Subsidiary Guarantor
in the instrument evidencing or governing such Senior Indebtedness or Subsidiary
Guarantor Senior Indebtedness as "Designated Senior Indebtedness" for purposes
of the Senior Subordinated Notes Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock (excluding capital stock which is convertible or exchangeable
solely at the option of Hedstrom or a Restricted Subsidiary) or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the Stated Maturity of the Senior Subordinated Notes;
provided, however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such Stated Maturity shall be deemed
to be Disqualified Stock; provided further, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof
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the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Senior Subordinated Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "Change of
Control".
"Equity Offering" means an offering for cash by Holdings or Hedstrom of its
common stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Advisory Agreement" means the Financial Advisory Agreement
between Hicks Muse Partners and Holdings and Hedstrom as in effect on the Issue
Date.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 80% of its assets (determined on
a consolidated basis in accordance with GAAP) are located in territories outside
of the United States of America and jurisdictions outside the United States of
America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Senior Subordinated Notes
Indenture, including those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or the SEC or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Senior Subordinated Notes Indenture
shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Holdings Guaranty" means the Guarantee of the Senior Subordinated Notes by
Holdings.
"Holdings Senior Indebtedness" means, with respect to Holdings, whether
outstanding on the Issue Date or thereafter issued, any Guarantee of the Bank
Indebtedness by Holdings, all other Guarantees by Holdings of Senior
Indebtedness of Hedstrom and all Indebtedness of Holdings, including interest
and fees thereon, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that the obligations
of Holdings in respect of such Indebtedness are not superior in right of payment
to the obligations of Holdings under the Holdings Guaranty; provided, however,
that Holdings Senior Indebtedness shall not include (1) any obligations of
Holdings to Hedstrom or any Subsidiary of Hedstrom, (2) any liability for
Federal, state, local or other taxes owed or owing by Holdings, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including Guarantees thereof or instruments evidencing such
liabilities) or (4) any Indebtedness, Guarantee or obligation of Holdings that
is expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Holdings, including any Holdings Senior
Subordinated Indebtedness and Holdings Subordinated Obligations.
"Holdings Subordinated Obligation" means, with respect to Holdings, any
indebtedness of Holdings (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the obligations
of Holdings under the Holdings Guaranty pursuant to a written agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary
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(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. The term "Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of Hedstrom, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Senior Subordinated Notes (but excluding, in each case, any accrued
dividends) and (ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding principal
amount of all unconditional obligations as described above, as such amount would
be reflected on a balance sheet prepared in accordance with GAAP, and the
maximum liability of such Person, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations described above at such
date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement designed to protect such Person against fluctuations in interest
rates as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the portion (proportionate to Hedstrom's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of Hedstrom at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, Hedstrom shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) Hedstrom's "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to Hedstrom's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at the
time that such Subsidiary is so redesignated a Restricted Subsidiary; and (ii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors and evidenced by a resolution
of such Board of Directors certified in an Officers' Certificate to the Trustee.
"Issue Date" means June 12, 1997.
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"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Merger Agreement" means the Agreement and Plan of Merger, dated April 10,
1997, between Hedstrom, HC Acquisition Corp. and ERO, Inc.
"Monitoring and Oversight Agreement" means the Monitoring and Oversight
Agreement between Hicks Muse Partners and Holdings and Hedstrom as in effect on
the Issue Date.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition), in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to any Person owning a beneficial interest in
assets subject to sale or minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by Hedstrom or any Restricted Subsidiary of
Hedstrom after such Asset Disposition and (v) any portion of the purchase price
from an Asset Disposition placed in escrow (whether as a reserve for adjustment
of the purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition); provided,
however, that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to Hedstrom or any Restricted
Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Hedstrom nor
any Restricted Subsidiary (a) provides any guarantee or credit support of any
kind (including any undertaking, guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of Hedstrom or any Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
"Permitted Indebtedness" means (i) Indebtedness of Hedstrom owing to and
held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by Hedstrom or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to
Hedstrom or a Wholly-Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (ii)
Indebtedness represented by (x) the Senior Subordinated Notes, (y) any
Indebtedness (other than the Indebtedness described in clauses (i), (ii) and
(iv) of paragraph (b) of the covenant described under "Limitation on
Indebtedness" and other than Indebtedness Incurred pursuant to clause (i) above
or clauses (iv), (v) or (vi) below) outstanding on the Issue Date and (z) any
Refinancing Indebtedness Incurred in respect of any Indebtedness described in
this clause (ii) or Incurred pursuant to paragraph (a) of the covenant described
under "Limitation on Indebtedness;" (iii) (A) Indebtedness of a Restricted
Subsidiary Incurred and outstanding on the date on which such Restricted
Subsidiary was acquired by Hedstrom or a Restricted Subsidiary (other than
Indebtedness Incurred as consideration in, or to provide all or any portion of
the funds or credit support utilized to consummate, the
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transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Subsidiary or was otherwise acquired by Hedstrom or a
Restricted Subsidiary); provided, however, that at the time such Restricted
Subsidiary is acquired by Hedstrom or a Restricted Subsidiary, Hedstrom would
have been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) of the covenant described under "Limitation on Indebtedness" above after
giving effect to the Incurrence of such Indebtedness pursuant to this clause
(iii) and (B) Refinancing Indebtedness Incurred by Hedstrom or a Restricted
Subsidiary in respect of Indebtedness Incurred by such Restricted Subsidiary
pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance
bonds, bankers' acceptances and surety or appeal bonds provided by Hedstrom or
any of its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations of
Hedstrom or any of its Restricted Subsidiaries for or in connection with
pledges, deposits or payments made or given in the ordinary course of business
in connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations, (C)
arising from Guarantees to suppliers, lessors, licensees, contractors,
franchisees or customers of obligations (other than Indebtedness) incurred in
the ordinary course of business and (D) under Currency Agreements and Interest
Rate Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate Agreements
are entered into for bona fide hedging purposes of Hedstrom or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or senior
management of Hedstrom) and correspond in terms of notional amount, duration,
currencies and interest rates, as applicable, to Indebtedness of Hedstrom or its
Restricted Subsidiaries Incurred without violation of the Senior Subordinated
Notes Indenture or to business transactions of Hedstrom or its Restricted
Subsidiaries on customary terms entered into in the ordinary course of business;
(v) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations of
Hedstrom or any of its Restricted Subsidiaries pursuant to such agreements, in
each case Incurred in connection with the disposition of any business assets or
Restricted Subsidiary of Hedstrom (other than Guarantees of Indebtedness or
other obligations Incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of Hedstrom for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by Hedstrom or any of its Restricted Subsidiaries in
connection with such disposition; provided, however, that the principal amount
of any Indebtedness Incurred pursuant to this clause (v), when taken together
with all Indebtedness Incurred pursuant to this clause (v) and then outstanding,
shall not exceed $10 million; (vi) Indebtedness consisting of (A) Guarantees by
Hedstrom or a Restricted Subsidiary of Indebtedness Incurred by a Wholly-Owned
Subsidiary without violation of the Senior Subordinated Notes Indenture and (B)
Guarantees by a Restricted Subsidiary of Senior Indebtedness Incurred by
Hedstrom without violation of the Senior Subordinated Notes Indenture (so long
as such Restricted Subsidiary could have Incurred such Indebtedness directly
without violation of the Senior Subordinated Notes Indenture); and (vii)
Indebtedness arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument drawn against insufficient funds in the
ordinary course of business, provided that such Indebtedness is extinguished
within ten Business Days of its incurrence.
"Permitted Investment" means an Investment by Hedstrom or any of its
Restricted Subsidiaries in (i) Hedstrom or a Wholly-Owned Subsidiary of
Hedstrom; provided, however, that the primary business of such Wholly-Owned
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person becomes a Wholly-Owned Subsidiary of Hedstrom or is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Hedstrom or a Wholly-Owned Subsidiary of
Hedstrom; provided, however, that in each case such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
Hedstrom or any of its Restricted Subsidiaries, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees for purposes of purchasing
Hedstrom's common stock in an aggregate amount outstanding at any one time not
to exceed $5 million and other loans and advances to employees made in the
ordinary course of business consistent with past practices of Hedstrom or such
Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
Hedstrom or any
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of its Restricted Subsidiaries or in satisfaction of judgments or claims; (viii)
a Person engaged in a Related Business or a loan or advance to Hedstrom the
proceeds of which are used solely to make an Investment in a Person engaged in a
Related Business or a Guarantee by Hedstrom of Indebtedness of any Person in
which such Investment has been made; provided, however, that no Permitted
Investments may be made pursuant to this clause (viii) to the extent the amount
thereof would, when taken together with all other Permitted Investments made
pursuant to this clause (viii), exceed $10 million in the aggregate (plus, to
the extent not previously reinvested, any return of capital realized on
Permitted Investments made pursuant to this clause (viii), or any release or
other cancellation of any Guarantee constituting such Permitted Investment);
(ix) Persons to the extent such Investment is received by Hedstrom or any
Restricted Subsidiary as non-cash consideration for asset dispositions effected
in compliance with the covenant described under "-- Limitations on Sales of
Assets and Subsidiary Stock;" (x) prepayments and other credits to suppliers
made in the ordinary course of business consistent with the past practices of
Hedstrom and its Restricted Subsidiaries; and (xi) Investments in connection
with pledges, deposits, payments or performance bonds made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health, safety or
environmental obligations.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Productive Assets" means assets of a kind used or usable by Hedstrom and
its Restricted Subsidiaries in Hedstrom's business or any Related Business.
A "Public Market" exists at any time with respect to the common stock of
Hedstrom or Holdings if (a) the common stock of Hedstrom or Holdings is then
registered with the Securities and Exchange Commission pursuant to Section 12(b)
or 12(g) of the Exchange Act and traded either on a national securities exchange
or in the National Association of Securities Dealers Automated Quotation System
and (b) at least 15% of the total issued and outstanding common stock of
Hedstrom or Holdings has been distributed prior to such time by means of an
effective registration statement under the Securities Act, or pursuant to sales
pursuant to Rule 144 under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of Hedstrom or any Restricted Subsidiary
existing on the date of the Senior Subordinated Notes Indenture or Incurred in
compliance with the Senior Subordinated Notes Indenture (including Indebtedness
of Hedstrom that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the earlier of (A) the first
anniversary of the Stated Maturity of the Senior Subordinated Notes and (B) the
Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the lesser of (A) the Average Life of
the Senior Subordinated Notes and (B) the Average Life of the Indebtedness being
refinanced, and (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to (or 101% of, in the case of a refinancing of the Senior
Subordinated Notes in connection with a Change of Control) or less than the sum
of the aggregate principal amount (or if issued with original issue discount,
the aggregate accreted value) then outstanding of the Indebtedness being
refinanced, plus applicable premium and defeasance costs and reasonable fees and
expenses paid in connection with such refinancing.
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"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Hedstrom and its
Restricted Subsidiaries on the date of the Senior Subordinated Notes Indenture,
as reasonably determined by Hedstrom's Board of Directors.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of Hedstrom other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Hedstrom or a Restricted Subsidiary
transfers such property to a Person and Hedstrom or a Subsidiary leases it from
such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Hedstrom or a Subsidiary
Guarantor secured by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Subordinated Indebtedness" means the Senior Subordinated Notes and
any other Indebtedness of Hedstrom that specifically provides that such
Indebtedness is to rank pari passu with the Senior Subordinated Notes in right
of payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of Hedstrom which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Hedstrom within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of Hedstrom (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Subordinated Notes pursuant to a
written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of Hedstrom.
"Subsidiary Guarantor" means each Subsidiary (other than foreign
subsidiaries) of Hedstrom in existence on the Issue Date and each Subsidiary
(other than foreign subsidiaries and Unrestricted Subsidiaries) created or
acquired by Hedstrom after the Issue Date.
"Subsidiary Guarantor Senior Indebtedness" means, with respect to any
Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter
issued, any Guarantee of the Bank Indebtedness by such Subsidiary Guarantor, all
other Guarantees by such Subsidiary Guarantor of Senior Indebtedness of Hedstrom
and all Indebtedness of such Subsidiary Guarantor, including interest and fees
thereon, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that the obligations of such
Subsidiary Guarantor in respect of such Indebtedness are not superior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guaranty; provided, however, that Subsidiary Guarantor Senior Indebtedness shall
not include (1) any obligations of such Subsidiary Guarantor to Hedstrom or any
other Subsidiary of Hedstrom, (2) any liability for Federal, state, local or
other taxes owed or owing by such Subsidiary Guarantor, (3) any accounts payable
or other liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities) or (4)
any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor that is
expressly subordinate or junior in right of payment to any other Indebtedness,
Guarantee or obligation of such Subsidiary Guarantor, including any Subsidiary
Guarantor Senior Subordinated Indebtedness and Subsidiary Guarantor Subordinated
Obligations of such Subsidiary Guarantor.
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"Subsidiary Guarantor Senior Subordinated Indebtedness" means, with respect
to a Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under
the Subsidiary Guaranty and any other Indebtedness of such Subsidiary Guarantor
that specifically provides that such Indebtedness is to rank pari passu in right
of payment with the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty and is not subordinated by its terms in right of payment to
any Indebtedness or other obligation of such Subsidiary Guarantor which is not
Subsidiary Guarantor Senior Indebtedness of such Subsidiary Guarantor.
"Subsidiary Guarantor Subordinated Obligation" means, with respect to a
Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the obligations of such Subsidiary Guarantor under
the Subsidiary Guaranty pursuant to a written agreement.
"Subsidiary Guaranty" means the Guarantee of the Senior Subordinated Notes
by a Subsidiary Guarantor.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of Hedstrom) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of Hedstrom that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
Hedstrom (including any newly acquired or newly formed Subsidiary of Hedstrom)
to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, Hedstrom or any Subsidiary of Hedstrom that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total consolidated assets of $10,000
or less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Hedstrom could Incur $1.00 of additional
Indebtedness under clause (a) of "-- Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
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"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors thereof.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Hedstrom, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by Hedstrom or another Wholly-Owned Subsidiary; provided,
however, that until the date that is 180 days following the Issue Date, ERO,
Inc. shall be deemed to be a Wholly-Owned Subsidiary of Hedstrom so long as
Hedstrom or a Wholly-Owned Subsidiary owns at least a percentage of the Capital
Stock of ERO, Inc. equal to the percentage of such Capital Stock acquired by HC
Acquisition Corp. in connection with its tender offer for the Capital Stock of
ERO, Inc.
DESCRIPTION OF THE DISCOUNT NOTES
GENERAL
On June 12, 1997, Hedstrom 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
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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),
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 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 (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).
"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 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, 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 Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly
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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.
In the case of any partial redemption, selection of the Discount Notes for
redemption will be made by the Discount Notes Trustee on a pro rata basis, by
lot or by such other method as the Discount Notes Trustee in its sole discretion
shall deem to be fair and appropriate, although no Discount Note of $1,000 in
principal amount at maturity or less will be redeemed in part. If any Discount
Note is to be redeemed in part only, the notice of redemption relating to such
Discount Note shall state the portion of the principal amount at maturity
thereof to be redeemed. A new Discount Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Discount Note.
RANKING
The indebtedness evidenced by the Discount Notes constitute senior,
unsecured obligations of Holdings, will rank pari passu in right of payment with
all existing and future unsecured Senior Indebtedness of Holdings and will rank
senior in right of payment to any future subordinated indebtedness of Holdings.
At June 30, 1997, Holdings had no Indebtedness other than the Old Senior
Subordinated Discount Notes, its Guarantees with respect to the Old Senior
Subordinated Notes and the Senior Credit Facilities and the 1995
Recapitalization Notes. See "Capitalization."
All of the operations of Holdings are conducted through its subsidiaries.
Claims of creditors of such subsidiaries, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries
generally will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of Holdings, including holders of the
Discount Notes. The Discount Notes, therefore, will be effectively subordinated
to creditors (including trade creditors) and preferred stockholders (if any) of
subsidiaries of Holdings. At June 30, 1997, the aggregate liabilities
(consisting of Indebtedness and trade payables) of Holdings' subsidiaries would
have been approximately $282.4 million, including the Old Senior Subordinated
Notes and the Senior Credit Facilities. Although the Discount Notes Indenture
limits the incurrence of Indebtedness and preferred stock of Holdings'
Restricted Subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Discount Notes Indenture does not impose any
limitation on the incurrence by such Restricted Subsidiaries of liabilities that
are not considered Indebtedness under the Discount Notes Indenture. See
"-- Certain Covenants -- Limitation on Indebtedness" and "-- Limitation and
Restrictions on Distributions from Restricted Subsidiaries."
As used herein, "Senior Indebtedness" of Holdings is defined, whether
outstanding on the Issue Date or thereafter Incurred, as Indebtedness of
Holdings, including interest and fees thereon, unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that the obligations in respect of such Indebtedness are subordinate
in right of payment to the Discount Notes; provided, however, that Senior
Indebtedness will not include (1) any obligation of Holdings to any Subsidiary,
(2) any liability for Federal, state, foreign, local or other taxes owed or
owing by Holdings, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities) or (4) any Indebtedness (and
any accrued and unpaid interest in respect thereof), Guarantee or obligation of
Holdings that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of Holdings including any
Subordinated Obligations.
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
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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).
Within 30 days following any Change of Control, unless Holdings has mailed
a redemption notice with respect to all the outstanding Discount Notes in
connection with such Change of Control, Holdings shall mail a notice to each
holder with a copy to the Discount Notes Trustee stating: (1) that a Change of
Control has occurred and that such holder has the right to require Holdings to
purchase 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 purchase (subject to the right of holders of record on a record date to
receive accrued and unpaid interest on the relevant interest payment date in
respect of outstanding Discount Notes); (2) the repurchase date (which shall be
no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (3) the procedures determined by Holdings, consistent with the
Discount Notes Indenture, that a holder must follow in order to have its
Discount Notes purchased.
Holdings will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Discount Notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations conflict
with provisions of the Discount Notes Indenture, Holdings will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the Discount Notes Indenture by virtue
thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of Holdings
and its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Discount Notes Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
the Discount Notes Indenture) and is subject to judicial interpretation.
Accordingly, in certain circumstances there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the property or assets of a Person, and therefore
it may be unclear as to whether a Change of Control has occurred and whether
Holdings is required to make an offer to repurchase the Discount Notes as
described above.
The Change of Control purchase feature is a result of negotiations between
Holdings and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Holdings would decide to do so in the future. Subject to the limitations
discussed below, Holdings could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Discount Notes Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect Holdings' capital structure or credit ratings. Restrictions on the
ability of Holdings to Incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount at maturity of the Discount Notes then outstanding.
Except for the limitations contained in such covenants, however, the Discount
Notes Indenture will not contain any covenants or provisions that may afford
holders of the Discount Notes protection in the event of a highly leveraged
transaction.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future
indebtedness of Holdings and its Subsidiaries may also contain prohibitions of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Holdings to repurchase the Discount
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on
Holdings. Finally, Holdings' ability to pay cash to the holders upon a
repurchase may be limited by Holdings' then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases. Even if sufficient funds were otherwise
available, the terms of the certain Indebtedness could prohibit Holdings'
prepayment of Discount Notes prior to their scheduled maturity. Consequently, if
Holdings is not able to prepay such Indebtedness, Holdings
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will be unable to fulfill its repurchase obligations if holders of Discount
Notes exercise their repurchase rights following a Change of Control, thereby
resulting in a default under the Discount Notes Indenture.
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, the following:
Limitation on Indebtedness.
(a) Holdings shall not and shall not permit any of its Restricted
Subsidiaries to, Incur, directly or indirectly, any Indebtedness; provided,
however, that Holdings and any of its Restricted Subsidiaries may Incur
Indebtedness if on the date thereof the Consolidated Coverage Ratio would
be greater than 1.75 to 1.00, if such Indebtedness is Incurred on or prior
to December 31, 1999 or 2.00 to 1.00, if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its
Restricted Subsidiaries may Incur the following Indebtedness: (i)
Indebtedness Incurred pursuant to (A) the Credit Agreement (including,
without limitation, any renewal, extension, refunding, restructuring,
replacement or refinancing thereof referred to in clause (ii) of the
definition thereof) or (B) any other agreements or indentures governing
Senior Indebtedness; provided, however, that the aggregate principal amount
of all Indebtedness Incurred pursuant to this clause (i) does not exceed
$180 million at any time outstanding, less the aggregate principal amount
thereof repaid with the net proceeds of Asset Dispositions (to the extent,
in the case of a repayment of revolving credit Indebtedness, the commitment
to advance the loans repaid has been terminated); (ii) Indebtedness
represented by Capitalized Lease Obligations, mortgage financings or
purchase money obligations, in each case Incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in a Related Business or Incurred to Refinance
any such purchase price or cost of construction or improvement, in each
case Incurred no later than 365 days after the date of such acquisition or
the date of completion of such construction or improvement; provided,
however, that the principal amount of any Indebtedness Incurred pursuant to
this clause (ii) shall not exceed $15 million at any time outstanding;
(iii) Permitted Indebtedness; and (iv) Indebtedness (other than
Indebtedness described in clauses (i) - (iii)) in a principal amount which,
when taken together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (iv) and then outstanding, will not exceed
$15 million (it being understood that any Indebtedness Incurred under this
clause (iv) shall cease to be deemed Incurred or outstanding for purposes
of this clause (iv) (but shall be deemed to be Incurred for purposes of
paragraph (a)) from and after the first date on which Holdings or its
Restricted Subsidiaries could have Incurred such Indebtedness under the
foregoing paragraph (a) without reliance upon this clause (iv)).
(c) Notwithstanding the foregoing, neither Holdings nor any Restricted
Subsidiary shall Incur any Indebtedness under paragraph (b) above if the
proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of Holdings unless such Indebtedness shall be
subordinated to the Discount Notes to at least the same extent as such
Subordinated Obligations.
(d) Holdings will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, that if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be
deemed to constitute an Incurrence of Indebtedness by Holdings or a
Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, Holdings, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
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Limitation on Restricted Payments. (a) Holdings shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving Holdings or any of its Restricted Subsidiaries) except
(A) dividends or distributions payable solely in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock, and (B) dividends or distributions payable solely to Holdings or
a Restricted Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of Capital Stock on a pro rata basis), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of
Holdings held by any Person other than a Restricted Subsidiary of Holdings or
any Capital Stock of a Restricted Subsidiary held by any Affiliate of Holdings,
other than another Restricted Subsidiary (in either case, other than in exchange
for its Capital Stock (other than Disqualified Stock)), (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to in clauses (i)
through (iv) as a "Restricted Payment"), if at the time Holdings or such
Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have
occurred and be continuing (or would result therefrom); or (2) Holdings is not
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
under "-- Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments declared or made subsequent
to the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net
Income accrued during the period (treated as one accounting period) from the
Issue Date to the end of the most recent fiscal quarter ending prior to the date
of such Restricted Payment as to which financial results are available (or, in
case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit); (B) the aggregate net proceeds received by Holdings from the issue or
sale of its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds received
from an issuance or sale of such Capital Stock to a Subsidiary of Holdings or an
employee stock ownership plan or similar trust); provided, however, that the
value of any non-cash net proceeds shall be as determined by the Board of
Directors in good faith, except that in the event the value of any non-cash net
proceeds shall be $10 million or more, the value shall be as determined in
writing by an independent investment banking firm of nationally recognized
standing; (C) the aggregate Net Cash Proceeds received by Holdings from the
issue or sale of its Capital Stock (other than Disqualified Stock) to an
employee stock ownership plan or similar trust subsequent to the Issue Date;
provided, however, that if such plan or trust Incurs any Indebtedness to or
Guaranteed by Holdings or any of its Restricted Subsidiaries to finance the
acquisition of such Capital Stock, such aggregate amount shall be limited to
such Net Cash Proceeds less such Indebtedness Incurred to or Guaranteed by
Holdings or any of its Restricted Subsidiaries and any increase in the
Consolidated Net Worth of Holdings resulting from principal repayments made by
such plan or trust with respect to Indebtedness Incurred by it to finance the
purchase of such Capital Stock; (D) the amount by which Indebtedness of Holdings
is reduced on Holdings' balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of Holdings) subsequent to the Issue Date of any
Indebtedness of Holdings for Capital Stock of Holdings (less the amount of any
cash, or other property, distributed by Holdings upon such conversion or
exchange); (E) the amount equal to the net reduction in Investments (other than
Permitted Investments) made by Holdings or any of its Restricted Subsidiaries in
any Person resulting from (i) repurchases or redemptions of such Investments by
such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser, and repayments of loans or advances or other transfers
of assets by such Person to Holdings or any Restricted Subsidiary of Holdings or
(ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made by Holdings or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments; provided, however, that no amount shall be included under
this clause (E) to the extent it is already included in Consolidated Net Income;
(F) the aggregate Net Cash Proceeds received by a Person in consideration for
the issuance of such Person's Capital Stock (other than Disqualified Stock)
which are held by such Person at the time such Person is merged with and into
Holdings in accordance with the "Merger and Consolidation" covenant
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subsequent to the Issue Date; provided, however, that concurrently with or
immediately following such merger Holdings uses an amount equal to such Net Cash
Proceeds to redeem or repurchase Holdings' Capital Stock; and (G) $5 million.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of Holdings made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of Holdings (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of Holdings or an employee stock ownership
plan or similar trust); provided, however, that (A) such purchase or redemption
shall be excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded from clause (3)(B) of
paragraph (a); (ii) any purchase or redemption of Subordinated Obligations of
Holdings made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of Holdings; provided, however,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "-- Limitation
on Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this provision; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (v) payments
of dividends on Holdings' common stock after an initial public offering of
common stock of Holdings in an annual amount not to exceed 6% of the gross
proceeds (before deducting underwriting discounts and commissions and other fees
and expenses of the offering) received by Holdings from shares of common stock
sold for the account of Holdings (and not for the account of any stockholder) in
such initial public offering; (vi) payments by Holdings to repurchase Capital
Stock or other securities of Holdings from members of management of Holdings in
an aggregate amount not to exceed $5 million; (vii) payments to enable Holdings
to redeem or repurchase stock purchase or similar rights granted by Holdings
with respect to its Capital Stock in an aggregate amount not to exceed $1
million; (viii) payments, not to exceed $200,000 in the aggregate, to enable
Holdings to make cash payments to holders of its Capital Stock in lieu of the
issuance of fractional shares of its Capital Stock; (ix) payments made pursuant
to any merger, consolidation or sale of assets effected in accordance with the
"Merger and Consolidation" covenant; provided, however, that no such payment may
be made pursuant to this clause (ix) unless, after giving effect to such
transaction (and the incurrence of any Indebtedness in connection therewith and
the use of the proceeds thereof), Holdings would be able to Incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Indebtedness" covenant such that, after Incurring that $1.00
of additional Indebtedness, the Consolidated Coverage Ratio would be greater
than 3.50:1.00; and (x) purchase or redemption by Holdings or a Restricted
Subsidiary of Capital Stock of ERO, Inc. contemplated by the Merger Agreement;
provided, however, that in the case of clauses (v), (vi), (vii), (viii) and (ix)
no Default or Event of Default shall have occurred or be continuing at the time
of such payment or as a result thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Holdings shall not, and shall not permit any of its Restricted Subsidiaries to,
create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to Holdings, (ii) make any loans or
advances to Holdings or (iii) transfer any of its property or assets to
Holdings; except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Senior Subordinated
Notes Indenture and the Credit Agreement; (b) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement relating
to any Indebtedness Incurred or Preferred Stock issued and outstanding by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by Holdings and outstanding on such date (other than
Indebtedness Incurred or Preferred Stock issued as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary of Holdings or was
acquired by Holdings); (c) any encumbrance or restriction with respect to such a
Restricted Subsidiary pursuant to an agreement evidencing Indebtedness Incurred
without violation of the Discount Notes Indenture or effecting a refinancing of
Indebtedness issued pursuant to an agreement referred to in clause (a) or (b) or
this clause (c) or contained in any amendment to an agreement referred to in
clauses (a) or
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(b) or this clause (c); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Discount Notes in any material respect, as determined in good
faith by the senior management or the Board of Directors, than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in agreements
in effect at, or entered into on, the Issue Date; (d) in the case of clause
(iii), any encumbrance or restriction (A) that restricts in a customary manner
the subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of Holdings or any Restricted Subsidiary not
otherwise prohibited by the Discount Notes Indenture, (C) that is included in a
licensing agreement to the extent such restrictions limit the transfer of the
property subject to such licensing agreement or (D) arising or agreed to in the
ordinary course of business and that does not, individually or in the aggregate,
detract from the value of property or assets of Holdings or any of its
Subsidiaries in any manner material to Holdings or any such Restricted
Subsidiary; (e) in the case of clause (iii) above, restrictions contained in
security agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements; (f) any restriction with
respect to such a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of such sale or
disposition; (g) any encumbrance or restriction imposed solely upon a Foreign
Subsidiary; provided, however, that, immediately after giving effect to such
encumbrance or restriction, Holdings would be able to Incur at least $1.00 of
Indebtedness pursuant to clause (a) of the covenant described under
"-- Limitation on Indebtedness;" and (h) encumbrances or restrictions arising or
existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) Holdings shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Asset Disposition unless (i) Holdings or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value, as determined in good faith by Holdings' senior
management or the Board of Directors (including as to the value of all non-cash
consideration), of the shares and assets subject to such Asset Disposition, (ii)
at least 75% of the consideration thereof received by Holdings or such
Restricted Subsidiary is in the form of cash or cash equivalents and (iii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by Holdings (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent Holdings or any Restricted Subsidiary elects (or is
required by the terms of any Senior Indebtedness), to prepay, repay or purchase
(x) Senior Indebtedness or (y) Indebtedness (other than any Disqualified Stock)
of a Wholly-Owned Subsidiary (in each case other than Indebtedness owed to
Holdings) within 180 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; (B) second, within one year from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), at Holdings'
election either (x) to the investment in or acquisition of Additional Assets or
(y) to prepay, repay or purchase (1) Senior Indebtedness or (2) Indebtedness
(other than any Disqualified Stock) of a Wholly-Owned Subsidiary (in each case
other than Indebtedness owed to Holdings); and (C) third, within 45 days after
the later of the application of Net Available Cash in accordance with clauses
(A) and (B) and the date that is one year from the receipt of such Net Available
Cash, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B), to make an offer to purchase Discount
Notes (and other Senior Indebtedness designated by Holdings), pro rata tendered
at 100% of the Accreted Value thereof (or 100% of the principal amount of such
other Senior Indebtedness, if such Senior Indebtedness was not issued at a
discount) plus accrued and unpaid interest, if any, thereon to the date of
purchase. The balance of such Net Available Cash after application in accordance
with clauses (A), (B) and (C) may be used by Holdings in any manner not
otherwise prohibited under the Discount Notes Indenture. Notwithstanding
anything contained herein to the contrary, in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (B) or (C) above,
Holdings or such Restricted Subsidiary shall retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, Holdings and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant at any
time exceeds $5 million. Holdings shall not be required to make an offer for
Discount Notes pursuant to
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this covenant if the Net Available Cash available therefor (after application of
the proceeds as provided in clauses (A) and (B)) is less than $10 million for
any particular Asset Disposition (which lesser amounts shall be carried forward
for purposes of determining whether an offer is required with respect to the Net
Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash
or cash equivalents: (x) the assumption by the transferee of Indebtedness of
Holdings or any Restricted Subsidiary of Holdings and the release of Holdings or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition (in which case Holdings shall, without further
action, be deemed to have applied such assumed Indebtedness in accordance with
clause (A) of the preceding paragraph) and (y) securities received by Holdings
or any Restricted Subsidiary of Holdings from the transferee that are promptly
converted by Holdings or such Restricted Subsidiary into cash.
Notwithstanding the foregoing, Holdings and its Restricted Subsidiaries
will be permitted to consummate an Asset Swap if (i) immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred or
be continuing, (ii) in the event such Asset Swap involves an aggregate amount in
excess of $5 million, the terms of such Asset Swap have been approved by a
majority of the members of the Board of Directors of Holdings, and (iii) in the
event such Asset Swap involves an aggregate amount in excess of $20 million,
Holdings has received a written opinion from an independent investment banking
firm of nationally recognized standing that such Asset Swap is fair to Holdings
or such Restricted Subsidiary, as the case may be, from a financial point of
view.
(b) In the event of an Asset Disposition that requires the purchase of
Discount Notes pursuant to clause (a) (iii) (C), Holdings will be required to
purchase Discount Notes (and any other Senior Indebtedness tendered for by
Holdings) tendered pursuant to an offer by Holdings for the Discount Notes (and
any other Senior Indebtedness) at a purchase price of 100% of their Accreted
Value on the date of purchase plus accrued and unpaid interest, if any, to the
purchase date in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Discount Notes Indenture. If the
aggregate purchase price of the Discount Notes and any other Senior Indebtedness
tendered pursuant to the offer is less than the Net Available Cash allotted to
the purchase thereof, Holdings may use the remaining Net Available Cash for any
purpose not prohibited by the Discount Notes Indenture and any remaining Net
Available Cash will not be subject to any future offer to purchase.
(c) Holdings will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Discount Notes pursuant to the
Discount Notes Indenture. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, Holdings will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Discount Notes Indenture by
virtue thereof.
Limitation on Affiliate Transactions. (a) Holdings shall not, and shall not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Holdings other than a Wholly-Owned Subsidiary (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to Holdings or such Restricted Subsidiary, as the case may be,
than those that could be obtained at the time of such transaction or series of
related transactions in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $5 million, the terms of such transaction or series of
related transactions have been approved by a majority of the members of the
Board of Directors of Holdings and by a majority of the disinterested members of
such Board, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i) above);
and (iii) in the event such Affiliate Transaction involves an aggregate amount
in excess of $15 million, Holdings has received a written opinion from an
independent investment banking firm of nationally recognized standing that such
Affiliate Transaction is fair to Holdings or such Restricted Subsidiary, as the
case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
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payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors of Holdings, (iii) loans or advances to
employees in the ordinary course of business of Holdings or any of its
Restricted Subsidiaries, (iv) any transaction between Wholly-Owned Subsidiaries,
(v) indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of Holdings and its Restricted Subsidiaries,
in each case in the ordinary course of business, (vi) transactions pursuant to
agreements as in existence on the Issue Date, (vii) any employment,
noncompetition or confidentiality agreements entered into by Holdings or any of
its Restricted Subsidiaries with its employees in the ordinary course of
business, (viii) payments made in connection with the Transactions, including
fees to Hicks Muse, (ix) the issuance of Capital Stock of Holdings (other than
Disqualified Stock) and (x) any obligations of Holdings pursuant to the
Monitoring and Oversight Agreement and the Financial Advisory Agreement.
Limitation on Liens. Holdings shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Discount Notes will be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. Holdings shall not, and shall
not permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) Holdings or such Restricted
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "-- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Discount Notes pursuant to the covenant described under
"-- Limitation on Liens," (ii) the net proceeds received by Holdings or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) Holdings applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Sales of Assets
and Subsidiary Stock."
Limitation on Capital Stock of Restricted Subsidiaries. Holdings shall not,
nor shall it permit any Restricted Subsidiary to, sell or otherwise dispose of
any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary to any
Person (other than to Holdings or a Wholly-Owned Subsidiary of Holdings) or
permit any Person (other than Holdings or a Wholly-Owned Subsidiary of Holdings)
to own any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary
of Holdings, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of Holdings; provided, however, that
this provision shall not prohibit (x) Holdings or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Discount Notes
Indenture.
SEC Reports. Holdings shall file with the Discount Notes Trustee and
provide to the holders of the Discount Notes, within 15 days after it files them
with the Commission, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) which Holdings files
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Pursuant to the Discount Notes Indenture, Holdings has agreed that it shall file
with the Commission all annual reports and such other documents, information and
reports required by Section 13 or 15(d) of the Exchange Act notwithstanding that
Holdings may not be subject to the reporting requirements of the Exchange Act.
Merger and Consolidation. Holdings shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not Holdings) shall
expressly assume, by supplemental indenture, executed and delivered to the
Discount Notes Trustee, in form satisfactory to the Discount Notes Trustee, all
the obligations of Holdings under the Discount Notes and the Discount Notes
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Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor Company or
any Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of "-- Limitation on Indebtedness"; and
(iv) Holdings shall have delivered to the Discount Notes Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Discount Notes Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Holdings under the Discount Notes Indenture,
but, in the case of a lease of all or substantially all its assets, Holdings
will not be released from the obligation to pay the principal of and interest on
the Discount Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of Holdings may consolidate with, merge into or transfer all or part
of its properties and assets to Holdings and (2) Holdings may merge with an
Affiliate incorporated solely for the purpose of reincorporating Holdings in
another jurisdiction to realize tax or other benefits.
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, upon optional redemption,
upon required repurchase, upon declaration or otherwise, (iii) the failure by
Holdings to comply with its obligations under "Certain Covenants -- Merger and
Consolidation" above, (iv) the failure by Holdings to comply for 30 days after
notice with any of its obligations under the covenant described under "Change of
Control" above or under the covenants described under "Certain Covenants" 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 "Merger and
Consolidation", (v) the failure by Holdings to comply for 60 days after notice
with its other agreements contained in the Discount Notes Indenture, (vi)
Indebtedness of Holdings or any Restricted Subsidiary 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 (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 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.
Subject to the provisions of the Discount Notes Indenture relating to the
duties of the Discount Notes Trustee, if an Event of Default occurs and is
continuing, the Discount Notes Trustee will be under no obligation
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to exercise any of the rights or powers under the Discount Notes Indenture at
the request or direction of any of the holders unless such holders have offered
to the Discount Notes Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Discount Notes Indenture or the Discount Notes unless
(i) such holder has previously given the Discount Notes Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal amount
at maturity of the outstanding Discount Notes have requested the Discount Notes
Trustee to pursue the remedy, (iii) such holders have offered the Discount Notes
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Discount Notes Trustee has not complied with such request within 60
days after the receipt of the request and the offer of security or indemnity and
(v) the holders of a majority in principal amount at maturity of the outstanding
Discount Notes have not given the Discount Notes Trustee a direction that, in
the opinion of the Discount Notes Trustee, is inconsistent with such request
within such 60-day period. Subject to certain restrictions, the holders of a
majority in principal amount at maturity of the outstanding Discount Notes are
given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Discount Notes Trustee or of
exercising any trust or power conferred on the Discount Notes Trustee. The
Discount Notes Trustee, however, may refuse to follow any direction that
conflicts with law or the Discount Notes Indenture or that the Discount Notes
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the Discount Notes Trustee in personal liability. Prior to
taking any action under the Discount Notes Indenture, the Discount Notes Trustee
shall be entitled to indemnification satisfactory to it in its sole discretion
against all losses and expenses caused by taking or not taking such action.
The Discount Notes Indenture provides that if a Default occurs and is
continuing and is known to the Discount Notes Trustee, the Discount Notes
Trustee must mail to each holder notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of, premium
(if any) or interest on any Discount Note, the Discount Notes Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its Trust officers in good faith determines
that withholding notice is in the interests of the holders of Discount Notes. In
addition, Holdings is required to deliver to the Discount Notes Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year.
Holdings also is required to deliver to the Discount Notes Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults.
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.
Without the consent of any holder, Holdings and the Discount Notes Trustee
may amend the Discount Notes Indenture to cure any ambiguity, omission, defect
or inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of Holdings
under the Discount Notes Indenture, to provide for uncertificated Discount Notes
in addition to or in place of certificated Discount Notes (provided that the
uncertificated Discount Notes are issued in registered form for purposes of Sec-
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tion 163(f) of the Code, or in a manner such that the uncertificated Discount
Notes are described in Section 163(f) (2) (B) of the Code), to add Guarantees
with respect to the Discount Notes, to secure the Discount Notes, to add to the
covenants of Holdings for the benefit of the holders or to surrender any right
or power conferred upon Holdings, to make any change that does not adversely
affect the rights of any holder or to comply with any requirement of the
Commission in connection with the qualification of the Discount Notes Indenture
under the Trust Indenture Act.
The consent of the holders is not necessary under the Discount Notes
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Discount Notes Indenture becomes effective,
Holdings is required to mail to the holders a notice briefly describing such
amendment. However, the failure to give such notice to all the holders, or any
defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
Holdings at any time may terminate all its obligations under the Discount
Notes and the Discount Notes Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Discount Notes, to replace mutilated,
destroyed, lost or stolen Discount Notes and to maintain a registrar and paying
agent in respect of the Discount Notes. Holdings at any time may terminate its
obligations under "-- Change of Control" and under substantially all of its
covenants in the Discount Notes Indenture, including the covenants described
under "-- Certain Covenants" (other than "-- Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries, the judgment default provision described
under "Events of Default" above and the limitations contained in clauses (iii)
and (iv) under "-- Certain Covenants -- Merger and Consolidation" above
("covenant defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default with respect thereto. If Holdings exercises its covenant
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default specified in clause (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under "Events of Default" above or
because of the failure of Holdings to comply with clause (iii) or (iv) under
"-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Discount Notes Trustee money
or U.S. Government Obligations for the payment of principal, premium (if any)
and interest on the Discount Notes to maturity or any redemption date specified
by Holdings, as the case may be, and must comply with certain other conditions,
including delivery to the Discount Notes Trustee of an Opinion of Counsel to the
effect that holders of the Discount Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and defeasance
and will be subject to Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Discount Notes Trustee under
the Discount Notes Indenture and has been appointed by Holdings as Registrar and
Paying Agent with regard to the Discount Notes.
The Holders of a majority in principal amount of the outstanding Discount
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Discount Notes Trustee,
subject to certain exceptions. The Discount Notes Indenture provides that if an
Event of Default occurs (and is not cured), the Discount Notes Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Discount
Notes
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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.
CERTAIN DEFINITIONS
"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:
(i) if the Specified Date occurs on one of the following dates (each,
a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
------------ --------------
<S> <C>
December 1, 1997....................................... $ 591.90
June 1, 1998........................................... 627.41
December 1, 1998....................................... 665.06
June 1, 1999........................................... 704.96
December 1, 1999....................................... 747.26
June 1, 2000........................................... 792.10
December 1, 2000....................................... 839.62
June 1, 2001........................................... 890.00
December 1, 2001....................................... 943.40
June 1, 2002........................................... 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
($560.387 per Unit) of a Unit and (b) an amount equal to the product of (1)
the Accreted Value for the first Semi-Annual Accrual Date less such
original issue price multiplied by (2) a fraction, the numerator of which
is the number of days elapsed from the Issue Date to the Specified Date,
using a 360-day year of 12 30-day months, and the denominator of which is
the number of days from the Issue Date to the first Semi-Annual Accrual
Date, using a 360-day year of 12 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days elapsed from the
immediately preceding Semi-Annual Accrual Date to the Specified Date, using
a 360-day year of 12 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Holdings or a Restricted Subsidiary of Holdings; (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of Holdings; or (iv) Permitted Investments of the
type and in the amounts described in clause (viii) of the definition thereof;
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provided, however, that, in the case of clauses (ii) and (iii), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Holdings or any of its Restricted Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Restricted Subsidiary to Holdings or by Holdings or
a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business, (iii) a disposition of obsolete or
worn out equipment or equipment that is no longer useful in the conduct of the
business of Holdings and its Restricted Subsidiaries and that is disposed of in
each case in the ordinary course of business, (iv) dispositions of property for
net proceeds which, when taken collectively with the net proceeds of any other
such dispositions under this clause (iv) that were consummated since the
beginning of the calendar year in which such disposition is consummated, do not
exceed 1.5% of the consolidated book value of Holdings' assets as of the most
recent date prior to such disposition for which a consolidated balance sheet of
Holdings has been regularly prepared, and (v) transactions permitted under
"Certain Covenants -- Merger and Consolidation" above.
"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions that Holdings in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between Holdings or any of its Restricted Subsidiaries and
another Person or group of affiliated Persons; provided, however, that any
amendment to or waiver of any closing condition that individually or in the
aggregate is material to the Asset Swap shall be deemed to be a new Asset Swap.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Discount Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of Holdings or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted as a capitalized lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus, without duplication, the following to the extent deducted
in calculating such Consolidated Net Income: (i) income tax expense, (ii)
Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization
expense, (v) exchange or translation losses on foreign currencies, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the Stated Maturity of the Discount Notes)
and less, to the extent added in calculating Consolidated Net Income, (x)
exchange or translation gains on foreign currencies and (y) non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Discount Notes), in each case for such period. Notwithstanding the foregoing,
the income tax expense, the depreciation expense and amortization expense of a
Subsidiary of Holdings shall be included in Consolidated Cash Flow only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if Holdings or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by senior
management of Holdings and assuming a constant level of sales) shall be deemed
outstanding for purposes of this calculation) and (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period any Indebtedness
of Holdings or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced), Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period and as if Holdings or such Restricted Subsidiary
had not earned the interest income actually earned during such period in respect
of cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Holdings or any of its Restricted Subsidiaries shall have made any Asset
Disposition or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Asset Disposition, Consolidated Cash Flow for
such period shall be reduced by an amount equal to the Consolidated Cash Flow
(if positive) attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) attributable thereto for such period, and Consolidated
Interest Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of Holdings or
any of its Restricted Subsidiaries repaid, repurchased, defeased or otherwise
discharged with respect to Holdings and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary of Holdings is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent Holdings and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale) and
(ii) increased by interest income attributable to the assets which are the
subject of such Asset Disposition for such period, (4) if since the beginning of
such period Holdings or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of
Holdings (or any Person which becomes a Restricted Subsidiary of Holdings) or an
acquisition of assets, including any Investment in a Restricted Subsidiary of
Holdings or any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of a product line or operating unit of a business.
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect
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thereto (including the Incurrence of any Indebtedness and the use of the
proceeds therefrom) as if such Investment or acquisition occurred on the first
day of such period and (5) if since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary of Holdings or was merged with
or into Holdings or any Restricted Subsidiary of Holdings since the beginning of
such period) shall have made any Asset Disposition, Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by Holdings or a Restricted Subsidiary of Holdings during such
period, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of Holdings. If
any Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months). Notwithstanding anything herein to the contrary, if at the time
the calculation of the Consolidated Coverage Ratio is to be made, Holdings does
not have available consolidated financial statements reflecting the ownership by
Holdings of ERO for a period of at least four full fiscal quarters, all
calculations required by the Consolidated Coverage Ratio shall be prepared on a
pro forma basis, as though such acquisition and the related transactions (to the
extent not otherwise reflected in the consolidated financial statements of
Holdings) had occurred on the first day of the four-fiscal-quarter period for
which such calculation is being made.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its Restricted Subsidiaries, plus, to the extent not
included in such interest expense, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by Holdings or any such Restricted Subsidiary under any
Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than Holdings) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Restricted Subsidiaries and
Disqualified Stock of Holdings held by Persons other than Holdings or a
Wholly-Owned Subsidiary and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs and debt discount
solely to the extent relating to the issuance and sale of Indebtedness together
with any other security as part of an investment unit and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of Holdings, that was not a Wholly-Owned Subsidiary,
shall be included only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
Holdings and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person acquired by Holdings or any of its Restricted Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) any net income of any Restricted Subsidiary of Holdings if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Holdings (other than restrictions in
effect on the Issue Date with respect to a Restricted Subsidiary of Holdings and
other than restrictions that are created or exist in compliance with the
"-- Limitation on Restrictions on Distributions from Restricted Subsidiaries"
covenant), (iii) any gain or loss realized upon the sale or other disposition of
any assets of Holdings or its consolidated Restricted Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) which are not sold or otherwise
disposed of in the ordinary course of business and any gain or loss realized
upon the sale or other disposition of any Capital Stock of any Person, (iv) any
extraordinary gain or loss, (v) the cumulative effect of a change in accounting
principles, (vi) restructuring charges or writeoffs recorded within the one year
period following the Issue Date in an aggregate amount not to exceed $5 million
including any reversals
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of any such charges, (vii) the net income of any Person, other than a Restricted
Subsidiary, except to the extent of the lesser of (A) dividends or distributions
paid to Holdings or any of its Restricted Subsidiaries by such Person and (B)
the net income of such Person (but in no event less than zero), and the net loss
of such Person (other than an Unrestricted Subsidiary) shall be included only to
the extent of the aggregate Investment of Holdings or any of its Restricted
Subsidiaries in such Person and (viii) any non-cash expenses attributable to
grants or exercises of employee stock options. Notwithstanding the foregoing,
for the purpose of the covenant described under "Certain Covenants -- Limitation
on Restricted Payments" only, there shall be excluded from Consolidated Net
Income any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to Holdings or a Restricted Subsidiary to
the extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a) (3)(E)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Holdings and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of Holdings ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of Holdings plus (ii) paid in capital or capital surplus relating
to such Capital Stock plus (iii) any retained earnings or earned surplus less
(A) any accumulated deficit and (B) any amounts attributable to Disqualified
Stock.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the Board of Directors on the date of the Discount Notes
Indenture, (ii) was nominated for election or elected to the Board of Directors
with the affirmative vote of a majority of the Continuing Directors who were
members of such Board of Directors at the time of such nomination or election,
or (iii) is a representative of a Permitted Holder.
"Credit Agreement" means (i) the Credit Agreement as well as all exhibits,
schedules and appendices thereto to be entered into among Hedstrom, Credit
Suisse First Boston, as Administrative Agent, and the lenders parties thereto
from time to time, as the same may be amended, supplemented or otherwise
modified from time to time and (ii) any renewal, extension, refunding,
restructuring, replacement or refinancing thereof (whether with the original
Administrative Agent and lenders or another administrative agent or agents or
other lenders and whether provided under the original Credit Agreement or any
other agreement).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock (excluding capital stock which is convertible or exchangeable
solely at the option of Holdings or a Restricted Subsidiary) or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the Stated Maturity of the Discount Notes; provided,
however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such Stated Maturity shall be deemed
to be Disqualified Stock; provided further, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Discount Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "Change of
Control".
"Equity Offering" means an offering for cash by Holdings of its common
stock, or options, warrants or rights with respect to its common stock.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Advisory Agreement" means the Financial Advisory Agreement
between Hicks Muse Partners and Holdings and Hedstrom as in effect on the Issue
Date.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 80% of its assets (determined on
a consolidated basis in accordance with GAAP) are located in territories outside
of the United States of America and jurisdictions outside the United States of
America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Discount Notes Indenture,
including those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or the
SEC or in such other statements by such other entity as approved by a
significant segment of the accounting profession. All ratios and computations
based on GAAP contained in the Discount Notes Indenture shall be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
The term "Incurrence" when used as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such person of a
demand for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of Holdings, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Discount Notes (but excluding, in each case, any accrued dividends) and
(ix) to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding principal amount of all
unconditional obligations as described above, as such amount would be reflected
on a balance sheet prepared in accordance with GAAP, and the maximum
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liability of such Person, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement designed to protect such Person against fluctuations in interest
rates as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "-- Limitation on Restricted Payments" covenant, (i) "Investment" shall
include the portion (proportionate to Holdings' equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of Holdings at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, Holdings shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) Holdings' "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to Holdings' equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at the
time that such Subsidiary is so redesignated a Restricted Subsidiary; and (ii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors and evidenced by a resolution
of such Board of Directors certified in an Officers' Certificate to the Trustee.
"Issue Date" means June 12, 1997.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Merger Agreement" means the Agreement and Plan of Merger, dated April 10,
1997, between Hedstrom, HC Acquisition Corp. and ERO, Inc.
"Monitoring and Oversight Agreement" means the Monitoring and Oversight
Agreement between Hicks Muse Partners and Holdings and Hedstrom as in effect on
the Issue Date.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition), in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to any Person owning a beneficial interest in
assets subject to sale or minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by Holdings or any Restricted Subsidiary of
Holdings after such Asset Disposition and (v) any portion of the purchase price
from an Asset Disposition placed in escrow (whether as a reserve for adjustment
of the purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition);
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provided, however, that upon the termination of such escrow, Net Available Cash
shall be increased by any portion of funds therein released to Holdings or any
Restricted Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Holdings nor
any Restricted Subsidiary (a) provides any guarantee or credit support of any
kind (including any undertaking, guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of Holdings or any Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
"Permitted Indebtedness" means (i) Indebtedness of Holdings owing to and
held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by Hedstrom or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to
Holdings or a Wholly-Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (ii)
Indebtedness represented by (x) the Discount Notes and the Senior Subordinated
Notes, (y) any Indebtedness (other than the Indebtedness described in clauses
(i), (ii) and (iv) of paragraph (b) of the covenant described under "Limitation
on Indebtedness" and other than Indebtedness Incurred pursuant to clause (i)
above or clauses (iv), (v) or (vi) below) outstanding on the Issue Date and (z)
any Refinancing Indebtedness Incurred in respect of any Indebtedness described
in this clause (ii) or Incurred pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness;" (iii) (A) Indebtedness of a
Restricted Subsidiary Incurred and outstanding on the date on which such
Restricted Subsidiary was acquired by Holdings or a Restricted Subsidiary (other
than Indebtedness Incurred as consideration in, or to provide all or any portion
of the funds or credit support utilized to consummate, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Subsidiary or was otherwise acquired by Holdings or a Restricted Subsidiary);
provided, however, that at the time such Restricted Subsidiary is acquired by
Holdings or a Restricted Subsidiary, Holdings would have been able to Incur
$1.00 of additional Indebtedness pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness" above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (iii) and (B)
Refinancing Indebtedness Incurred by Holdings or a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this
clause (iii); (iv) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by Holdings or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
business, (B) in respect of performance bonds or similar obligations of Holdings
or any of its Restricted Subsidiaries for or in connection with pledges,
deposits or payments made or given in the ordinary course of business in
connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations, (C)
arising from Guarantees to suppliers, lessors, licensees, contractors,
franchisees or customers of obligations (other than Indebtedness) incurred in
the ordinary course of business and (D) under Currency Agreements and Interest
Rate Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate Agreements
are entered into for bona fide hedging purposes of Holdings or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or senior
management of Holdings) and correspond in terms of notional amount, duration,
currencies and interest rates, as applicable, to Indebtedness of Holdings or its
Restricted Subsidiaries Incurred without violation of the Discount Notes
Indenture or to business transactions of Holdings or its Restricted Subsidiaries
on customary terms entered into in the ordinary course of business; (v)
Indebtedness arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of Holdings
or any of its Restricted Subsidiaries pursuant to such agreements, in each case
Incurred in connection with the disposition of any business assets or
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Restricted Subsidiary of Holdings (other than Guarantees of Indebtedness or
other obligations Incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of Holdings for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by Holdings or any of its Restricted Subsidiaries in
connection with such disposition; provided, however, that the principal amount
of any Indebtedness Incurred pursuant to this clause (v), when taken together
with all Indebtedness Incurred pursuant to this clause (v) and then outstanding,
shall not exceed $10 million; (vi) Indebtedness consisting of (A) Guarantees by
Holdings or a Restricted Subsidiary of Indebtedness Incurred by a Wholly-Owned
Subsidiary without violation of the Discount Notes Indenture and (B) Guarantees
by a Restricted Subsidiary of Senior Indebtedness Incurred by Holdings without
violation of the Discount Notes Indenture (so long as such Restricted Subsidiary
could have Incurred such Indebtedness directly without violation of the Discount
Notes Indenture); and (vii) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument drawn
against insufficient funds in the ordinary course of business, provided that
such Indebtedness is extinguished within ten Business Days of its incurrence.
"Permitted Investment" means an Investment by Holdings or any of its
Restricted Subsidiaries in (i) Holdings or a Wholly-Owned Subsidiary of
Holdings; provided, however, that the primary business of such Wholly-Owned
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person becomes a Wholly-Owned Subsidiary of Holdings or is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Holdings or a Wholly-Owned Subsidiary of
Holdings; provided, however, that in each case such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
Holdings or any of its Restricted Subsidiaries, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees for purposes of purchasing
Holdings' common stock in an aggregate amount outstanding at any one time not to
exceed $5 million and other loans and advances to employees made in the ordinary
course of business consistent with past practices of Holdings or such Restricted
Subsidiary; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to Holdings or any of
its Restricted Subsidiaries or in satisfaction of judgments or claims; (viii) a
Person engaged in a Related Business or a loan or advance to Holdings the
proceeds of which are used solely to make an Investment in a Person engaged in a
Related Business or a Guarantee by Holdings of Indebtedness of any Person in
which such Investment has been made; provided, however, that no Permitted
Investments may be made pursuant to this clause (viii) to the extent the amount
thereof would, when taken together with all other Permitted Investments made
pursuant to this clause (viii), exceed $10 million in the aggregate (plus, to
the extent not previously reinvested, any return of capital realized on
Permitted Investments made pursuant to this clause (viii), or any release or
other cancellation of any Guarantee constituting such Permitted Investment);
(ix) Persons to the extent such Investment is received by Holdings or any
Restricted Subsidiary as non-cash consideration for asset dispositions effected
in compliance with the covenant described under "-- Limitations on Sales of
Assets and Subsidiary Stock;" (x) prepayments and other credits to suppliers
made in the ordinary course of business consistent with the past practices of
Holdings and its Restricted Subsidiaries; and (xi) Investments in connection
with pledges, deposits, payments or performance bonds made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health, safety or
environmental obligations.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety
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bonds or letters of credit issued pursuant to the request of and for the account
of such Person in the ordinary course of its business; provided, however, that
such letters of credit do not constitute Indebtedness; (e) minor survey
exceptions, minor encumbrances, easements or reservations of, or rights of
others for, licenses, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as
to the use of real property or Liens incidental to the conduct of the business
of such Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (f) Liens securing Indebtedness
Incurred to finance the construction, purchase or lease of, or repairs,
improvements or additions to, property of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness (other than
any interest thereon) secured by the Lien may not be Incurred more than 180 days
after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens to secure Indebtedness permitted under the provisions
described in clause (b)(i) under "-- Certain Covenants -- Limitation on
Indebtedness"; (h) Liens existing on the Issue Date; (i) Liens on property or
shares of Capital Stock of another Person at the time such other Person becomes
a Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such other
Person becoming such a Subsidiary; provided further, however, that such Lien may
not extend to any other property owned by such Person or any of its
Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a
Wholly-Owned Subsidiary of such Person; (1) Liens securing Interest Rate
Agreements and Currency Agreements so long as such Interest Rate Agreements and
Currency Agreements relate to Indebtedness that is, and is permitted to be under
the Discount Notes Indenture, secured by a Lien on the same property securing
such Interest Rate Agreements and Currency Agreements; and (m) Liens to secure
any Refinancing (or successive Refinancings) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f), (h),
(i) and (j); provided, however, that (x) such new Lien shall be limited to all
or part of the same property that secured the original Lien (plus improvements
to or on such property) and (y) the Indebtedness secured by such Lien at such
time is not increased to any amount greater than the sum of (A) the outstanding
principal amount or, if greater, committed amount of the Indebtedness described
under clauses (f), (h), (i) or (j) at the time the original Lien became a
Permitted Lien and (B) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, renewal
or replacement. Notwithstanding the foregoing, "Permitted Liens" will not
include any Lien described in clauses (f), (i) or (j) above to the extent such
Lien applies to any Additional Assets acquired directly or indirectly from Net
Available Cash pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock." For purposes
of this definition, the term "Indebtedness" shall be deemed to include interest
on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Productive Assets" means assets of a kind used or usable by Holdings and
its Restricted Subsidiaries in Holdings' business or any Related Business.
A "Public Market" exists at any time with respect to the common stock of
Holdings if (a) the common stock of Holdings is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities
105
<PAGE> 108
Dealers Automated Quotation System and (b) at least 15% of the total issued and
outstanding common stock of Holdings has been distributed prior to such time by
means of an effective registration statement under the Securities Act, or
pursuant to sales pursuant to Rule 144 under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of Holdings or any Restricted Subsidiary
existing on the date of the Discount Notes Indenture or Incurred in compliance
with the Discount Notes Indenture (including Indebtedness of Holdings that
refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any
Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Discount Notes and (B) the Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
lesser of (A) the Average Life of the Discount Notes and (B) the Average Life of
the Indebtedness being refinanced, and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to (or 101% of, in the case of
a refinancing of the Discount Notes in connection with a Change of Control) or
less than the sum of the aggregate principal amount (or if issued with original
issue discount, the aggregate accreted value) then outstanding of the
indebtedness being refinanced, plus applicable premium and defeasance costs and
reasonable fees and expenses paid in connection with refinancing.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Holdings and its
Restricted Subsidiaries on the date of the Discount Notes Indenture, as
reasonably determined by Holdings's Board of Directors.
"Restricted Subsidiary" means any Subsidiary of Holdings other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Subsidiary leases it from
such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Holdings or a Subsidiary
Guarantor secured by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of Holdings (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Discount Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of Holdings.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized
106
<PAGE> 109
under the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America having capital, surplus and
undivided profits aggregating in excess of $250 million (or the foreign currency
equivalent thereof) and whose long-term debt, or whose parent holding company's
long-term debt, is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act), (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in clause
(i) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) Investments in commercial paper, maturing not more than
180 days after the date of acquisition, issued by a corporation (other than an
Affiliate of Holdings) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
Holdings (including any newly acquired or newly formed Subsidiary of Holdings)
to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, Holdings or any Subsidiary of Holdings that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total consolidated assets of $10,000
or less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Holdings could Incur $1.00 of additional
Indebtedness under clause (a) of "-- Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors thereof.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Holdings, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by Holdings or another Wholly-Owned Subsidiary; provided,
however, that until the date that is 180 days following the Issue Date, ERO,
Inc. shall be deemed to be a Wholly-Owned Subsidiary of Holdings so long as
Holdings or a Wholly-Owned Subsidiary owns at least a percentage of the Capital
Stock of ERO, Inc. equal to the percentage of such Capital Stock acquired by HC
Acquisition Corp. in connection with its tender offer for the Capital Stock of
ERO, Inc.
107
<PAGE> 110
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 the Company 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>
Eaton Vance Income Fund of Boston..................................... 21,228.900
Eaton Vance High Income Trust......................................... 84,915.600
-------------
Subtotal.................................................... 106,144.500
-------------
Unnamed holders of Shares or any future transferees, pledgees, donees
or successors of or from such unnamed holders(1).................... 2,599,751.500
-------------
Total....................................................... 2,705,896.000
=============
</TABLE>
- ---------------
(1) 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.
To comply with certain states' securities laws, if applicable, the
securities offered hereby may be sold in such states only through brokers or
dealers. In addition, in certain states the securities may not be sold unless
they have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and complied with.
In accordance with the provisions contained in the Common Stock
Registration Rights Agreement, dated as of June 9, 1997, among Holdings and the
initial purchasers of the Units (the "Common Stock Registration Rights
Agreement"), pursuant to which the Registration Statement of which this
Prospectus is a part has been filed, 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, the
Company may, in certain circumstances, also be entitled to indemnification or
contribution by the
108
<PAGE> 111
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 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 $ . 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.
109
<PAGE> 112
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-22
Consolidated Income Statements for the six months ended June 30, 1997 and 1996
(unaudited)..................................................................... F-23
Consolidated Statement of Stockholders' Equity for the six months ended June 30,
1997 (unaudited)................................................................ F-24
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and
1996 (unaudited)................................................................ F-25
Notes to Consolidated Financial Statements (unaudited)............................. F-26
ERO, INC.:
Report of Independent Public Accountants........................................... F-36
Consolidated Balance Sheets as of December 31, 1996, and 1995...................... F-37
Consolidated Income Statements for the years ended December 31, 1996, 1995, and
1994............................................................................ F-38
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994........................................................................ F-39
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994............................................................. F-40
Notes to Consolidated Financial Statements......................................... F-41
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and December 31,
1996............................................................................ F-54
Consolidated Income Statements for the three months ended March 31, 1997 and 1996
(unaudited)..................................................................... F-55
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and
1996 (unaudited)................................................................ F-56
Notes to Consolidated Financial Statements (unaudited)............................. F-60
</TABLE>
F-1
<PAGE> 113
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 15,
as to which the date is June 12, 1997)
F-2
<PAGE> 114
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> 115
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, EXCEPT PER SHARE AMOUNTS)
<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)
======= ======== ======== ========
PRO FORMA NET INCOME (LOSS) PER SHARE:
Net income (loss).............................. $ (0.07) $ (0.12) -- --
Weighted average shares outstanding............ 67,647 67,647 -- --
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 116
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> 117
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> 118
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.
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 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.
F-7
<PAGE> 119
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-8
<PAGE> 120
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Pro Forma Net Income (Loss) Per Common Share
Pro forma net income (loss) per common share are based on the number of
common shares outstanding immediately after the Acquisition (see Note 16).
Average common equivalent shares (stock options) outstanding have not been
included, since their inclusion would be anti-dilutive. Preferred dividends are
deducted from net earnings to arrive at net earnings available to common
shareholders, when applicable. The number of pro forma common shares used in
computing net income (loss) per share was 67,647,000 for the five months ended
December 31, 1996, and for the fiscal year ended July 31, 1996.
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 five retail companies that
serve national markets. Sales to the Company's top five customers aggregated
approximately 55%, 56%, 50%, and 52% of net sales for the five months ended
December 31, 1996, and for each of the fiscal years ended July 31, 1996, 1995,
and 1994, respectively. Three of the Company's customers, Toys "R" Us, Wal-Mart,
and Target each accounted for over 10% of the Company's net sales during the
five months ended 1996, and for each of the fiscal years ended July 31, 1996,
1995, and 1994, aggregating approximately 41%, 47%, 41%, and 41% of net sales,
respectively.
F-9
<PAGE> 121
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-10
<PAGE> 122
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-11
<PAGE> 123
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-12
<PAGE> 124
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. A
valuation allowance has not been recorded for the deferred income tax assets
since the Company believes it will generate sufficient taxable income in the
future to realize all of the recorded benefits.
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.
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
F-13
<PAGE> 125
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 126
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
- 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
F-15
<PAGE> 127
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 and (vi) $40.0 million of
gross proceeds from the private placement of shares of non-voting common stock,
$.01 par value per share, of Holdings.
F-16
<PAGE> 128
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and a portion of the 1996 Cost Reduction
Plan discussed in Note 14 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)..................... $ 2,723 $ 44 $(12,792)
Net income (loss) per share........... $ 0.04 $ 0.00 $ (0.19)
</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 and a portion of the 1996 Cost Reduction 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 the Rationalization Plan and the 1996 Cost Reduction Plan
were implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
F-17
<PAGE> 129
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The obligations of Hedstrom relating to the Senior Subordinated Notes and
the Senior Credit Facilities are unconditionally and irrevocably guaranteed by
Holdings and each of Hedstrom's direct and indirect domestic subsidiaries. The
Discount Notes are unsecured senior obligations of Holdings.
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.................. 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..................... 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:
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:
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>
F-18
<PAGE> 130
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........................ 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...................... 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>
F-19
<PAGE> 131
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........................... $ (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........ (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................. 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>
F-20
<PAGE> 132
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>
F-21
<PAGE> 133
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-22
<PAGE> 134
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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
======== ========
PRO FORMA NET INCOME PER SHARE:
Net income per share...................................... $ 0.09 $ 0.04
Weighted average shares outstanding....................... 67,647 67,647
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-23
<PAGE> 135
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-24
<PAGE> 136
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-25
<PAGE> 137
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 and (vi) $40.0 million of
gross proceeds from the private placement of shares of non-voting common stock,
$.01 par value per share, of Holdings. 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 evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted
F-26
<PAGE> 138
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
The unaudited pro forma results below assume the Acquisition occurred at
the beginning of the periods presented and that the Rationalization Plan and the
1996 Cost Reduction Plan, discussed below, 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) $ (2,954)
Net income (loss) per share............................ $ 0.00 $ (0.04)
</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 and the 1996 Cost Reduction Plan (both discussed
below), 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 the Rationalization Plan and the Cost Reduction
Plan been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
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>
Independent from the acquisition of ERO and the related refinancings,
certain other events have occurred which are material to the operations of the
Company. Management of Hedstrom implemented a plan (the "1996 Cost Reduction
Plan") in the fall of 1996 to reduce the costs of Hedstrom in 1997 and
thereafter as compared with 1996 levels. The plan includes the following
significant elements:
(1) 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
F-27
<PAGE> 139
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
believes that producing these slides internally is currently providing
annual cost savings of approximately $1.5 million as compared to 1996
levels.
(2) Hedstrom reduced its number of full-time employees by
approximately 30 persons in a variety of departments. Management believes
that such personnel reductions will result in savings of approximately $0.7
million in 1997 and thereafter.
(3) Hedstrom re-engineered certain manufacturing operations to
increase its daily production capacity of outdoor gym sets allowing for the
ability to implement just-in-time manufacturing of the outdoor gym sets.
The implementation of just-in-time manufacturing has enabled Hedstrom to
manufacture outdoor gym sets to specific customer orders rather than
producing in anticipation of customer orders, which Hedstrom had done in
the past because of capacity constraints. The implementation of
just-in-time manufacturing has enabled Hedstrom to carry a lower level of
outdoor gym set inventory and, as a result, eliminate the need for
third-party warehousing for outdoor gym sets. Management believes that it
is currently saving over $2.1 million of warehouse and material-handling
expense in 1997 as a result of this re-engineering effort.
(4) In fiscal year 1996, Hedstrom initiated, on a trial basis, its own
multi-media advertising program designed to increase consumer awareness of
the Hedstrom brand over time. Historically, Hedstrom has advertised its
products in cooperation with its retail customers through the print media.
Management determined that a reasonable return on investment was not
forthcoming from this program and elected to terminate it. Therefore, the
$1.5 million annual cost of this program will no longer be incurred.
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.
F-28
<PAGE> 140
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Subordinated Notes are unsecured senior subordinated obligations
of Hedstrom and are unconditionally guaranteed 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 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 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 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
F-29
<PAGE> 141
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
F-30
<PAGE> 142
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-31
<PAGE> 143
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............. 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................ 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:
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)............... 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>
F-32
<PAGE> 144
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...... 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)........... (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>
F-33
<PAGE> 145
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)............. 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)................... (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............ (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.................... 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........... (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>
F-34
<PAGE> 146
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. PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
Pro forma net income per common share is based on the number of common
shares outstanding immediately after the Acquisition (See Note 2). Average
common equivalent shares (stock options) have not been included in the
calculation of weighted average number of common shares outstanding for the six
months ended June 30, 1997, since their inclusion would not be significant
during this period. The number of common shares used in computing net income per
share was 67,647,000 for the six months ended June 30, 1997 and 1996,
respectively.
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.
F-35
<PAGE> 147
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-36
<PAGE> 148
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-37
<PAGE> 149
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-38
<PAGE> 150
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-39
<PAGE> 151
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-40
<PAGE> 152
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-41
<PAGE> 153
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-42
<PAGE> 154
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. Three of the Company's customers, Toys "R"
Us, Wal-Mart and Target, each accounted for over 10% of the Company's net sales
during 1996, 1995 and 1994, aggregating approximately 46%, 49% and 52% of net
sales, respectively.
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 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.
F-43
<PAGE> 155
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-44
<PAGE> 156
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-45
<PAGE> 157
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. 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.
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-46
<PAGE> 158
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-47
<PAGE> 159
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-48
<PAGE> 160
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-49
<PAGE> 161
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 and Senior
Credit Facilities) for the years ended December 31, 1996 and 1995.
F-50
<PAGE> 162
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- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents...... $ 3,992 $ 1,102 $ -- $ 5,094 $ 154 $ -- $ -- $ 154
Accounts
receivable....... 40,496 8,118 (318) 48,296 32,944 5,737 (2) 38,679
Inventories........ 16,073 7,595 (1,610) 22,058 12,596 5,437 (1,032) 17,001
Prepaid expenses
and
other............ 3,784 301 -- 4,085 2,709 575 (622) 2,662
-------- -------- --------- -------- -------- -------- --------- --------
Total current
assets......... 64,345 17,116 (1,928) 79,533 48,403 11,749 (1,656) 58,496
-------- -------- --------- -------- -------- -------- --------- --------
Property, plant,
and equipment,
net.............. 6,118 14,753 -- 20,871 6,522 13,826 -- 20,348
-------- -------- --------- -------- -------- -------- --------- --------
Goodwill........... 26,835 30,107 -- 56,942 28,188 33,024 -- 61,212
Deferred financing
costs............ 1,460 1,188 -- 2,648 1,855 1,428 -- 3,283
Deferred income
taxes............ -- -- -- -- 843 -- (44) 799
Investment
in/advances to
Subsidiaries..... 107,344 -- (107,344) -- 104,716 -- (104,716) --
-------- -------- --------- -------- -------- -------- --------- --------
Total other
assets......... 135,639 31,295 (107,344) 59,590 135,602 34,452 (104,760) 65,294
-------- -------- --------- -------- -------- -------- --------- --------
Total assets......... $206,102 $ 63,164 $(109,272) $159,994 $190,527 $ 60,027 $(106,416) $144,138
======== ======== ========= ======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt... $ 8,120 $ 773 $ -- $ 8,893 $ 6,123 $ 605 $ -- $ 6,728
Accounts payable... 6,289 4,235 (1,135) 9,389 3,400 3,319 (321) 6,398
Accrued expenses... 9,527 2,156 (338) 11,345 11,618 2,872 (694) 13,796
Income taxes
payable
(receivable)..... (408) (866) 1,344 70 1,047 1,284 551 2,882
-------- -------- --------- -------- -------- -------- --------- --------
Total current
liabilities.... 23,528 6,298 (129) 29,697 22,188 8,080 (464) 29,804
-------- -------- --------- -------- -------- -------- --------- --------
Revolving loan..... 29,727 1,798 -- 31,525 15,225 -- -- 15,225
Term loan.......... 40,250 5,750 -- 46,000 54,000 -- -- 54,000
Intercompany
advance and
other............ 70,490 -- (61,268) 9,222 63,050 7,263 (61,268) 9,045
-------- -------- --------- -------- -------- -------- --------- --------
Total long-term
debt........... 140,467 7,548 (61,268) 86,747 132,275 7,263 (61,268) 78,270
Intercompany -- other
long-term
liability and
equity........... -- 33,831 (33,831) -- -- 40,188 (40,188) --
Deferred income
taxes............ (907) 1,443 -- 536 -- -- -- --
-------- -------- --------- -------- -------- -------- --------- --------
Total stockholders'
equity............. 43,014 14,044 (14,044) 43,014 36,064 4,496 (4,496) 36,064
-------- -------- --------- -------- -------- -------- --------- --------
Total liabilities and
stockholders'
equity............. $206,102 $ 63,164 $(109,272) $159,994 $190,527 $ 60,027 $(106,416) $144,138
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
F-51
<PAGE> 163
ERO, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------- ----------------------------------------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
STATEMENT OF SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON- ERO, INC.
OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
- --------------------- ---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 90,074 $ 67,839 $ -- $157,913 $107,911 $ 20,811 $ -- $128,722
Cost of sales........ 50,593 47,209 -- 97,802 67,643 13,050 -- 80,693
-------- -------- ------- -------- -------- -------- ------- --------
Gross profit......... 39,481 20,630 -- 60,111 40,268 7,761 -- 48,029
Selling, general and
administrative..... 34,329 4,567 -- 38,896 31,551 1,632 -- 33,183
-------- -------- ------- -------- -------- -------- ------- --------
Operating income..... 5,152 16,063 -- 21,215 8,717 6,129 -- 14,846
Interest............. 6,126 2,936 -- 9,062 1,633 364 -- 1,997
-------- -------- ------- -------- -------- -------- ------- --------
Income before income
taxes.............. (974) 13,127 -- 12,153 7,084 5,765 -- 12,849
Income tax
provision.......... 816 3,579 -- 4,395 3,898 1,269 -- 5,167
-------- -------- ------- -------- -------- -------- ------- --------
Net income (loss)
before equity
income adjustment.. (1,790) 9,548 -- 7,758 3,186 4,496 -- 7,682
Equity income in
subsidiaries....... 9,548 -- (9,548) -- 4,496 -- (4,496) --
-------- -------- ------- -------- -------- -------- ------- --------
Net income (loss).... $ 7,758 $ 9,548 $(9,548) $ 7,758 $ 7,682 $ 4,496 $(4,496) $ 7,682
======== ======== ======= ======== ======== ======== ======= ========
</TABLE>
F-52
<PAGE> 164
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 YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------- ----------------------------------------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating
activities:
Net income......... $ 7,758 $ 9,548 $(9,548) $ 7,758 $ 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... (9,548) -- 9,548 -- (4,496) -- 4,496 --
Depreciation of
property, plant
and equipment.. 1,255 1,484 -- 2,739 1,189 233 -- 1,422
Amortization of
other assets... 2,370 1,025 -- 3,395 2,024 213 -- 2,237
Deferred income
taxes.......... (110) 1,445 -- 1,335 (632) 44 -- (588)
(Gain) loss on
the disposition
of property,
plant and
equipment...... -- 21 -- 21 (3) -- -- (3)
Provision for
losses on
accounts
receivable..... 716 54 -- 770 214 129 -- 343
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) 2,894 (2,953) -- (59)
Inventories.... (2,800) (2,158) -- (4,958) 671 2,955 -- 3,626
Prepaid
expenses and
other current
assets....... (1,688) 274 -- (1,414) (1,069) 133 -- (936)
Accounts
payable...... 1,556 1,386 -- 2,942 (3,289) (4,618) -- (7,907)
Accrued
expenses..... 529 (1,186) -- (657) (2,021) 286 -- (1,735)
Intercompany
other
long-term
liability.... 6,179 (6,179) -- -- (7,399) 7,399 -- --
Income taxes... (1,341) (1,471) -- (2,812) 196 1,304 -- 1,500
-------- -------- -------- -------- -------- -------- -------- --------
Net cash (used for)
provided by
operating
activities......... (3,139) 1,862 -- (1,277) (4,039) 9,621 -- 5,582
-------- -------- -------- -------- -------- -------- -------- --------
Cash flows from
investing
activities:
Acquisitions of
property, plant
and equipment.... (2,406) (1,219) -- (3,625) (1,052) (720) -- (1,772)
Acquisition of Amav
Industries,
Ltd. ............ -- -- -- -- (55,098) -- -- (55,098)
Proceeds from the
sale of property,
plant and
equipment........ -- 6 -- 6 3 -- -- 3
-------- -------- -------- -------- -------- -------- -------- --------
Net cash used for
investing
activities......... (2,406) (1,213) -- (3,619) (56,147) (720) -- (56,867)
-------- -------- -------- -------- -------- -------- -------- --------
Cash flows from
financing
activities:
Net borrowings
under revolving
loan facility.... 16,189 111 -- 16,300 3,350 (8,586) -- (5,236)
Net repayments
under term loan
facility......... (6,000) -- -- (6,000) 60,000 -- -- 60,000
Net repayments
under other
loans............ -- 342 -- 342 -- (315) -- (315)
Financing fees
paid............. (310) -- -- (310) (3,210) -- -- (3,210)
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 60,140 (8,901) -- 51,239
-------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in cash
and cash
equivalents........ 3,838 1,102 -- 4,940 (46) -- -- (46)
Cash and cash
equivalents:
Beginning of
period........... 154 -- -- 154 200 -- -- 200
-------- -------- -------- -------- -------- -------- -------- --------
End of period...... $ 3,992 $ 1,102 $ -- $ 5,094 $ 154 $ -- $ -- $ 154
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-53
<PAGE> 165
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
MARCH 31, ------------
1997
-----------
(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-54
<PAGE> 166
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-55
<PAGE> 167
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-56
<PAGE> 168
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 and Senior
Credit Facilities) for the three months ended March 31, 1997 and 1996.
F-57
<PAGE> 169
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- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents...... $ 904 $ 460 $ -- $ 1,364 $ 454 $ 417 $ -- $ 871
Accounts
receivable....... 18,698 3,721 -- 22,419 18,595 3,138 155 21,888
Inventories........ 16,137 9,216 (116) 25,237 14,731 6,753 (1,502) 19,982
Prepaid expenses
and
other............ 4,364 703 -- 5,067 3,280 1,484 -- 4,764
Deferred income
taxes............ 4,694 (1,610) -- 3,084 -- -- -- --
-------- -------- --------- -------- -------- -------- --------- --------
Total current
assets......... 44,797 12,490 (116) 57,171 37,060 11,792 (1,347) 47,505
-------- -------- --------- -------- -------- -------- --------- --------
Property, plant,
and equipment,
net.............. 5,933 14,311 -- 20,244 6,319 13,674 -- 19,993
-------- -------- --------- -------- -------- -------- --------- --------
Goodwill........... 26,469 29,905 -- 56,374 27,786 32,813 -- 60,599
Deferred financing
costs............ 1,464 1,128 -- 2,592 1,682 1,367 -- 3,049
Deferred income
taxes............ -- -- -- -- 160 1 46 207
Investment
in/advances to
Subsidiaries..... 107,139 -- (107,139) -- 94,731 -- (94,731) --
-------- -------- --------- -------- -------- -------- --------- --------
Total other
assets......... 135,072 31,033 (107,139) 58,966 124,359 34,181 (94,685) 63,855
-------- -------- --------- -------- -------- -------- --------- --------
Total assets......... $185,802 $ 57,834 $(107,255) $136,381 $167,738 $ 59,647 $ (96,032) $131,353
======== ======== ========= ======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt... $ 8,620 $ 773 $ -- $ 9,393 $ 6,623 $ 605 $ -- $ 7,228
Accounts payable... 5,548 2,214 3 7,765 2,950 3,201 299 6,450
Accrued expenses... 4,718 3,122 -- 7,840 6,505 3,461 107 10,073
Income taxes
payable
(receivable)..... 1,604 (2,329) 725 -- 156 (511) 355 --
-------- -------- --------- -------- -------- -------- --------- --------
Total current
liabilities.... 20,490 3,780 728 24,998 16,234 6,756 761 23,751
-------- -------- --------- -------- -------- -------- --------- --------
Revolving loan..... 17,600 -- -- 17,600 13,950 -- -- 13,950
Term loan.......... 43,500 -- -- 43,500 52,000 -- -- 52,000
Intercompany
advance and
other............ 62,916 7,290 (61,268) 8,938 52,811 17,320 (61,268) 8,863
-------- -------- --------- -------- -------- -------- --------- --------
Total long-term
debt........... 124,016 7,290 (61,268) 70,038 118,761 17,320 (61,268) 74,813
Intercompany -- other
long-term
liability and
equity........... -- 33,372 (33,372) -- -- 31,569 (31,569) --
Deferred revenue... 647 49 -- 696 (46) 46 -- --
-------- -------- --------- -------- -------- -------- --------- --------
Total stockholders'
equity............. 40,649 13,343 (13,343) 40,649 32,789 3,956 (3,956) 32,789
-------- -------- --------- -------- -------- -------- --------- --------
Total liabilities and
stockholders'
equity............. $185,802 $ 57,834 $(107,255) $136,381 $167,738 $ 59,647 $ (96,032) $131,353
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
F-58
<PAGE> 170
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 THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------------- ----------------------------------------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
STATEMENT OF SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON- ERO, INC.
OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
- --------------------- ---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 12,804 $7,135 $ -- $ 19,939 $ 9,296 $9,587 $ -- $ 18,883
Cost of sales........ 7,895 5,919 -- 13,814 5,972 7,292 -- 13,264
-------- ------ ----- -------- -------- ------ ----- --------
Gross profit......... 4,909 1,216 -- 6,125 3,324 2,295 -- 5,619
Selling, general and
administrative..... 6,472 1,291 -- 7,763 5,912 1,641 -- 7,553
-------- ------ ----- -------- -------- ------ ----- --------
Operating income
(loss)............. (1,563) (75) -- (1,638) (2,588) 654 -- (1,934)
Interest............. 1,338 672 -- 2,010 651 1,195 -- 1,846
-------- ------ ----- -------- -------- ------ ----- --------
Income (loss) before
income taxes....... (2,901) (747) -- (3,648) (3,239) (541) -- (3,780)
Income tax provision
(benefit).......... (1,495) -- -- (1,495) (1,552) -- -- (1,552)
-------- ------ ----- -------- -------- ------ ----- --------
Net income (loss)
before equity
income
adjustment......... (1,406) (747) -- (2,153) (1,687) (541) -- (2,228)
Equity income in
subsidiaries....... (747) -- 747 -- (541) -- 541 --
-------- ------ ----- -------- -------- ------ ----- --------
Net income (loss).... $ (2,153) $ (747) $ 747 $ (2,153) $ (2,228) $ (541) $ 541 $ (2,228)
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
F-59
<PAGE> 171
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 THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------------- ----------------------------------------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating
activities:
Net income......... $ (2,153) $ 747 $ 747 $ (2,153) $ (2,228) $ (541) $ 541 $ (2,228)
Adjustments to
reconcile net
income to net
cash (used for)
provided by
operating
activities:
Equity income in
subsidiaries... 747 -- (747) -- 541 -- (541) --
Depreciation of
property, plant
and
equipment...... 309 433 -- 742 322 309 -- 631
Amortization of
other assets... 453 262 -- 715 559 288 -- 847
Deferred income
taxes.......... 1,770 (1,610) -- 160 2,036 (1,444) -- 592
(Gain) loss on
the disposition
of property,
plant and
equipment...... -- -- -- -- -- -- -- --
Provision for
losses on
accounts
receivable..... 60 8 -- 68 201 (37) -- 164
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 11,506 5,017 -- 16,523
Inventories.... (1,683) (1,621) -- (3,304) (4,023) 842 -- (3,181)
Prepaid
expenses and
other current
assets....... (580) (402) -- (982) 572 (1,183) -- (611)
Accounts
payable...... 429 (2,021) -- (1,592) 3,682 (3,580) -- 102
Accrued
expenses..... (4,435) 966 -- (3,469) (5,283) 1,635 -- (3,648)
Intercompany
other
long-term
liability.... 1,226 (1,226) -- -- 10,990 (10,990) -- --
Income taxes... (4,609) 1,455 -- (3,154) (4,753) 355 -- (4,398)
-------- -------- ----- -------- -------- -------- ----- --------
Net cash (used for)
provided by
operating
activities......... 12,814 (106) -- 12,708 14,122 (9,329) -- 4,793
-------- -------- ----- -------- -------- -------- ----- --------
Cash flows from
investing
activities:
Acquisitions of
property, plant
and equipment.... (71) (218) -- (289) (422) (26) -- (448)
-------- -------- ----- -------- -------- -------- ----- --------
Net cash used for
investing
activities......... (71) (218) -- (289) (422) (26) -- (448)
-------- -------- ----- -------- -------- -------- ----- --------
Cash flows from
financing
activities:
Net borrowings
under revolving
loan facility.... (13,925) -- -- (13,925) (1,275) -- -- (1,275)
Net repayments
under term loan
facility......... (2,000) -- -- (2,000) (1,500) -- -- (1,500)
Net repayments
under other
loans............ (26) (258) -- (284) (9,954) 9,772 -- (182)
Financing fees
paid............. (18) (60) -- (78) -- -- -- --
Purchase of common
stock for
treasury......... -- -- -- -- (671) -- -- (671)
Net proceeds from
the exercise of
stock options.... 138 -- -- 138 -- -- -- --
-------- -------- ----- -------- -------- -------- ----- --------
Net cash provided
(used) by financing
activities......... (15,831) (318) -- (16,149) (13,400) 9,772 -- (3,628)
-------- -------- ----- -------- -------- -------- ----- --------
Net increase
(decrease) in cash
and
cash equivalents... (3,088) (642) -- (3,730) 300 417 -- 717
Cash and cash
equivalents:
Beginning of
period........... 3,992 1,102 -- 5,094 154 -- -- 154
-------- -------- ----- -------- -------- -------- ----- --------
End of period...... $ 904 $ 460 $ -- $ 1,364 $ 454 $ 417 $ -- $ 871
======== ======== ===== ======== ======== ======== ===== ========
</TABLE>
F-60
<PAGE> 172
- ------------------------------------------------------
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.......................... 15
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Unaudited Pro Forma Consolidated
Financial Information............... 21
Selected Consolidated Historical
Financial Data of Holdings.......... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Hedstrom and
Holdings............................ 27
Selected Consolidated Historical
Financial Data of ERO............... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of ERO................ 33
Business.............................. 36
Management............................ 46
Stock Ownership and Certain
Transactions........................ 50
Description of Capital Stock.......... 52
Description of the Senior Credit
Facilities.......................... 53
Description of Senior Subordinated
Notes............................... 55
Description of the Discount Notes..... 83
Selling Securityholders and Plan of
Distribution........................ 108
Legal Matters......................... 109
Independent Auditors.................. 109
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
Hedstrom Holdings, Inc.
2,705,896 Shares
of
Common Stock
PROSPECTUS
, 1997
------------------------------------------------------
<PAGE> 173
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........................................... *
---------
Legal Fees and Expenses................................................... *
---------
Accounting Fees and Expenses.............................................. *
---------
Miscellaneous............................................................. *
---------
Total........................................................... $ *
========
</TABLE>
- ---------------
* To be supplied by amendment.
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
II-1
<PAGE> 174
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 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 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(a) EXHIBITS
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 10, 1997, among
Hedstrom Corporation, HC Acquisition Corp. and ERO, Inc.(1)
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.(1)
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.(1)
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc.(1)
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.(1)
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.(1)
4.3 -- Restated Bylaws of Hedstrom Holdings, Inc.(1)
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.(1)
10.2 -- Form of Tranche A Note.(1)
10.3 -- Form of Tranche B Note.(1)
10.4 -- Form of Revolving Credit Note.(1)
10.5 -- Form of Swing Line Note.(1)
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.(1)
</TABLE>
II-2
<PAGE> 175
<TABLE>
<CAPTION>
<C> <S>
10.7 -- Open End Mortgage, dated as of June 12, 1997, from Hedstrom
Corporation, as Mortgagor, to Credit Suisse First Boston Corporation,
as Mortgagee.(1)
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.(1)
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.(1)
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between Hedstrom
Corporation, as Chargor, and Credit Suisse First Boston, as
Administrative Agent.(1)
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.(1)
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.(1)
10.13 -- Form of Old Senior Subordinated Note.(1)
10.14 -- Form of New Senior Subordinated Note.(1)
10.15 -- Indenture, dated as of June 1, 1997, among Hedstrom Holdings, Inc.
and United States Trust Company of New York, as Trustee.(1)
10.16 -- Form of Old Discount Note.(1)
10.17 -- Form of New Discount Note.(1)
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.(1)
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.(1)
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.(1)
10.21 -- Stockholders Agreement, dated as of October 27, 1995, among Hedstrom
Holdings and the Holders listed on the signature pages thereof.(1)
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.(1)
10.23 -- Form of Subordinated Note issued by Hedstrom Holdings, Inc.(1)
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.(1)
10.25 -- Form of Promissory Note (Series A) issued by Hedstrom Holdings,
Inc.(1)
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.(1)
10.27 -- Form of Promissory Note (Series B) issued by Hedstrom Holdings,
Inc.(1)
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.(1)
</TABLE>
II-3
<PAGE> 176
<TABLE>
<CAPTION>
<C> <S>
10.29 -- Executive Employment Agreement, dated as of October 27, 1995, among
Hedstrom Holdings, Inc., Hedstrom Corporation and Arnold E. Ditri.(1)
10.30 -- Executive Employment Agreement, dated as of October 27, 1995, between
Hedstrom Corporation and Alastair McKelvie.(1)
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.(1)
10.32 -- Financial Advisory Agreement, dated as of October 27, 1995, among
Hedstrom Holdings, Inc., Hedstrom Corporation and HM2/Management
Partners, L.P.(1)
10.33 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.(1)
10.34 -- Manufacturing Agreement, dated as of July 21, 1987, between
Euro-Matic Ltd. and Hedstrom Corporation.(1)
10.35 -- Manufacturing and Royalty Agreement, dated as of April 13, 1994,
between Euro-Matic Ltd. and Hedstrom Corporation.(1)
10.36 -- Manufacturing Agreement, dated as of December 21, 1994, between
Euro-Matic Limited and Hedstrom Corporation.(1)
10.37 -- Lease, dated as of January 24, 1992, between J.J.D. Properties and
Hedstrom Corporation.(1)
10.38 -- Net Lease Agreement, dated as of May 26, 1992, between Opus North
Corporation and ERO Industries, Inc.(1)
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed Charges.(1)
12.2 -- Statement Re: Computation of Pro Forma Ratio of Earnings to Fixed
Charges.(1)
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. (included on the
signature page of Hedstrom Corporation to this Registration
Statement).
</TABLE>
- ---------------
(1) Incorporated by reference 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.
* Filed herewith.
+ To be filed by amendment.
(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.
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-4
<PAGE> 177
(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-5
<PAGE> 178
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 11th day of August, 1997.
HEDSTROM HOLDINGS, INC.
By: /s/ ARNOLD E. DITRI
----------------------------------
Arnold E. Ditri
President and Chief Executive
Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
Arnold E. Ditri and David F. Crowley, and each of them, such person's true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for such person and in such person's name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and requests to accelerate the
effectiveness of this registration statement, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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>
/s/ ARNOLD E. DITRI President, Chief Executive August 11, 1997
- --------------------------------------------- Officer and Director of the
Arnold E. Ditri Registrant (Principal
Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the August 11, 1997
- --------------------------------------------- Registrant (Principal
David F. Crowley Financial and Accounting
Officer)
/s/ ALAN B. MENKES Director of the Registrant August 11, 1997
- ---------------------------------------------
Alan B. Menkes
/s/ JACK D. FURST Director of the Registrant August 11, 1997
- ---------------------------------------------
Jack D. Furst
</TABLE>
II-6
<PAGE> 179
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.(1)
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.(1)
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.(1)
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc.(1)
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.(1)
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.(1)
4.3 -- Restated Bylaws of Hedstrom Holdings, Inc.(1)
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.(1)
10.2 -- Form of Tranche A Note.(1)
10.3 -- Form of Tranche B Note.(1)
10.4 -- Form of Revolving Credit Note.(1)
10.5 -- Form of Swing Line Note.(1)
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.(1)
10.7 -- Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse
First Boston Corporation, as Mortgagee.(1)
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.(1)
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.(1)
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent.(1)
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.(1)
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.(1)
10.13 -- Form of Old Senior Subordinated Note.(1)
10.14 -- Form of New Senior Subordinated Note.(1)
10.15 -- Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.(1)
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.16 -- Form of Old Discount Note.(1)
10.17 -- Form of New Discount Note.(1)
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.(1)
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.(1)
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.(1)
10.21 -- Stockholders Agreement, dated as of October 27, 1995,
among Hedstrom Holdings and the Holders listed on the
signature pages thereof.(1)
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.(1)
10.23 -- Form of Subordinated Note issued by Hedstrom Holdings,
Inc.(1)
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.(1)
10.25 -- Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc.(1)
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.(1)
10.27 -- Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc.(1)
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.(1)
10.29 -- Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri.(1)
10.30 -- Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair
McKelvie.(1)
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.(1)
10.32 -- Financial Advisory Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and HM2/Management Partners, L.P.(1)
10.33 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.(1)
10.34 -- Manufacturing Agreement, dated as of July 21, 1987,
between Euro-Matic Ltd. and Hedstrom Corporation.(1)
10.35 -- Manufacturing and Royalty Agreement, dated as of April
13, 1994, between Euro-Matic Ltd. and Hedstrom
Corporation.(1)
10.36 -- Manufacturing Agreement, dated as of December 21, 1994,
between Euro-Matic Limited and Hedstrom Corporation.(1)
</TABLE>
<PAGE> 181
<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.(1)
10.38 -- Net Lease Agreement, dated as of May 26, 1992, between
Opus North Corporation and ERO Industries, Inc.(1)
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed
Charges.(1)
12.2 -- Statement Re: Computation of Pro Forma Ratio of Earnings
to Fixed Charges.(1)
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. (included
on the signature page of Hedstrom Corporation to this
Registration Statement).
</TABLE>
- ---------------
(1) Incorporated by reference 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.
* Filed herewith.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation Business Names
- ---------- ----------------------------- --------------
<S> <C> <C>
Hedstrom Corporation Delaware N/A
ERO, Inc. Delaware N/A
ERO Industries, Inc. Delaware N/A
ERO Marketing, Inc. Illinois N/A
Priss Prints, Inc. Delaware N/A
Impact, Inc. Delaware N/A
ERO Canada, Inc. Delaware N/A
Amav Industries, Inc. Delaware N/A
Hedstrom (UK) Limited United Kingdom N/A
Amav Industries Limited United Kingdom N/A
Amav Industries Ltd. New Brunswick, Canada N/A
</TABLE>
<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,
August 11, 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
August 11, 1997
