SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Numbers: 333-32385-05 and 333-32385
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
Delaware
(State or other jurisdiction of incorporation or organization)
51-0329830
51-0329829
(I.R.S. Employer Identification No.)
585 Slawin Court, Mount Prospect, Illinois 60056-2183
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 1998 was $5,072,184.
<PAGE>
On March 23, 1998, there were outstanding: (i) 36,142,883 shares of Common
Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
(ii) 31,520,000 shares of Non-Voting Common Stock, par value $.01 per share,
of Hedstrom Holdings, Inc. and (iii) 10 shares of Common Stock, par value
$.01 per share, of Hedstrom Corporation.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Item 1. Business
<PAGE>
General
Hedstrom Holdings, Inc. ("Holdings") is a holding company whose primary
operating subsidiary is Hedstrom Corporation ("Hedstrom" or the "Company").
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"), certain affiliates of Hicks Muse and certain
members of Holding'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.
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 Holdings
senior management's 18% retained common equity ownership, implied a total
equity value of Holdings at that time of approximately $33 million. In June
of 1997, Hedstrom acquired ERO, Inc. ("ERO") and its subsidiaries,
manufacturers and marketers of children's leisure products (the
"Acquisition"). In connection with the Acquisition, HM Fund II purchased
31,520,000 shares of Holding's non-voting common stock for an aggregate
purchase price of $39,400,000.
Hedstrom 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, trampolines,
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'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, 1997, the
Company's net sales and EBITDA were $256.1 and $45.8 million, respectively.
The Company's outdoor gym set product line accounted for approximately 20%
of the Company's net sales for the fiscal year ended December 31, 1997. No
other product line accounted for more than 10% of the Company's net sales
for the fiscal year ended December 31, 1997.
Hedstrom's operations are conducted through four principal divisions:
- - The Bedford Division in Bedford, Pennsylvania ("Bedford Division"), which
principally manufactures and markets in the United States outdoor gym sets,
wood gym kits and slides, spring horses, trampolines and gym accessories;
- - The Ashland Division in Ashland, Ohio ("Ashland Division"), which
principally manufactures and markets in the United States a wide variety
of children's playballs and ball pit products;
<PAGE>
- - The Amav Division in Montreal, Canada ("Amav Division"), which is a fully
integrated manufacturer of children's products, including arts and crafts
kits, game tables and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles. In addition, this
division includes 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 marketed under the Impact name; and
- - The ERO Division in Hazlehurst, Georgia ("ERO Division"), which produces
the Slumber Shoppe line of products, including products such as indoor
sleeping bags and play tents featuring popular licensed characters, 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 and Priss Prints, which produces licensed room
decorations for young children, consisting principally of stick-on and
peel-off wall decorations.
In addition, Hedstrom sells products manufactured by all its divisions
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.
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 anticipates that the Company 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 the rationalization of sales, marketing and general administrative
functions, consolidation of purchases of raw materials and elimination of
less profitable product lines. Independent of the Acquisition, the Company
realized in excess of $9 million of permanent cost savings in 1997 as a
result of cost reduction programs implemented at Hedstrom in the second
half of 1996. Management anticipates that the Company will realize similar
cost savings in future years as a result of such reduction programs.
<PAGE>
- - 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. Management
believes that the Company can enhance its 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 began producing several such products in the second
half of 1997 such as the trampoline business it acquired from Bollinger
Industries, Inc. 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
relatively low economic risk. In addition, Management will evaluate
opportunities to expand its product lines, increase its market shares
and acquire complementary products through strategic acquisitions.
- - Focus Licensed Products on Traditional Characters. Management believes
that the Company can differentiate and stimulate sales of certain of
its products more effectively and inexpensively through the licensing
of recognized traditional characters rather than the development and
promotion of its own brand names. For product lines that feature licensed
characters, such as sleeping bags, play tents and wall decorations, the
Company emphasizes traditionally popular characters such as the classic
Disney and Looney Tunes(TM) characters, although the Company also
complements such characters by obtaining licenses for selected
event-driven characters. Management estimates that products featuring
licensed traditional characters (including products featuring 101
Dalmatians and the Little Mermaid characters, which experienced increased
sales as a result of recent movie releases) accounted for approximately
22% of the Company's net sales for the fiscal year ended December 31, 1997
assuming the Acquisition took place on January 1, 1997 ("Pro Forma Net
Sales"). Products based on licensed event-driven characters accounted
for approximately 7% 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 fiscal year ended December 31, 1997,
the Company's Pro Forma Net Sales outside the United States and Canada
totaled approximately 5% 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.
Acquisitions
See Note 4 to the consolidated financial statements on page 29 for a
discussion of the Company's acquisitions.
<PAGE>
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 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.
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. In 1997, the Company began to emphasize wood
complete gym sets, which consists of all components necessary for a wood
gym set. The wood components are cut, pre-drilled and treated by the Company.
These products generally sell for retail prices between $199.99 and $399.99.
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.
Trampolines. The Bedford Division designs, manufactures and imports three
different styles of trampolines primarily for use by children. This
relatively new product line was enhanced during 1997 through the acquisition
of Bollinger Industries, Inc.'s trampoline business.
<PAGE>
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. During the
second half of 1997, the Company began producing one such product, "Turbo
Hoops," which is a home version of the popular basketball game found in
taverns and other commercial establishments. In addition, the Company is
seeking opportunities to utilize seasonal excess capacity at the Bedford
Division to manufacture products for OEMs. 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.
For fiscal years 1997, 1996 and 1995, the Bedford Division accounted for
35.4%, 63.0% and 64.4%, respectively, of the Company's net sales.
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.
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,
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.
<PAGE>
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. 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 smoothes 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.
For fiscal years 1997, 1996 and 1995, the Ashland Division accounted for
15.7%, 37.0% and 35.6%, respectively, of the Company's net sales.
Amav Division
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 and a line of back-to-school products marketed under the
Impact name. 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 recently introduced certain other children's bulk play
products such as play kitchens and battery-operated ride-on vehicles.
Impact 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.
The Amav Division was acquired in June of 1997 in connection with the
Acquisition. For fiscal year 1997, the Amav Division accounted for 23.6% of
the Company's net sales.
ERO Division
<PAGE>
ERO's product offerings consist of its Slumber Shoppe line of products, its
water sports line of products and its Priss Prints 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 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.
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 proprietary designs. For 1997, the Company's
room decoration licenses included 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.
The ERO Division was acquired in June of 1997 in connection with the
Acquisition. For fiscal year 1997, the ERO Division accounted for 25.3% of
the Company's net sales.
Sales and Marketing
The Company's sales force for the Bedford, Ashland and ERO Divisions is
comprised of a Vice President, four sales managers of national accounts,
one sales manager of home centers and one international sales manager who
deal directly with customers and outside vendor representatives. These
outside vendor representatives include approximately 22 manufacturers
representative organizations with over 100 sales representatives that service
Hedstrom's mass merchant and home center customers. The Company's sales force
for the Amav Division is comprised of six in-house sales managers and three
outside vendor representatives.
Hedstrom's marketing activities include customer service, product development
and advertising and promotions. The Company utilizes six customer service
representatives to 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 engineering and design professionals.
The product development process involves extensive product engineering,
model making and sample testing.
<PAGE>
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 licensed characters. 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. The
Company's license agreements typically run for two years and require payments
by the Company of approximately 12-14% 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 licensors 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. Approximately 29% of the Company's Pro Forma Net Sales for the
fiscal year ended December 31, 1997 were derived from sales of licensed
products. Approximately 91% of such net sales would have been attributable
to licenses covering ten licensed characters and approximately 65% of such
net sales would have been derived from licenses with Disney Enterprises, Inc.
and its affiliates.
International
See Note 14 to the consolidated financial statements on page 38 for
geographic information.
The Company's sales to customers located outside the United States totaled
$30.8 million, $12.6 million and $10.9 million, for the fiscal year ended
December 31, 1997 and for each of the fiscal years ended July 31, 1996 and
1995, respectively.
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. Management believes that the Company's sales of outdoor
gym sets for the fiscal year ended December 31, 1997, represented
approximately 80% of the total sales in the 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 (which was recently purchased out of bankruptcy).
Certain custom gym set manufacturers also compete in this market. Management
believes that the Company holds the second largest share of the total U.S.
wood gym kit market behind Swing-N-Slide Corporation.
<PAGE>
Ashland Division. Based on the Company's sales of playballs for the fiscal
year ended December 31, 1997, management estimates that the Company accounted
for approximately 85% of total sales in the U.S. market for children's
playballs. The Company's largest competitor in this product line is National
Latex Corporation.
Amav Division. 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. 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.
ERO Division. 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. Management
believes that the Company has a market share of greater than 75% with respect
to licensed sleeping bags and slumber tents. With respect to its water sports
product line, the Company's competitors include Sterns, Kent and Aqua Leisure.
The Company competes primarily against Borden, Infantino, Dolly and 3M in the
overall room decor industry. Management believes that the Company is a market
leader in this business.
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, diameters and lengths. These steel
tubes are used 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
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 where employees at pre-arranged stations place parts
in packing cartons. 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. The Bedford
Division can produce up to 8,000 gym sets per day depending on the type
of outdoor gym sets then in production.
<PAGE>
Capacity. Management believes that the Bedford Division presently has adequate
capacity to meet anticipated future production requirements at times of peak
demand. The division also has the capability to outsource or increase capacity
in all of its processes in the future should backlog develop.
Quality Assurance. The Bedford Division maintains an extensive quality
assurance program that includes 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 by, among other things, 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 assemble
one unit from each production lot to verify conformance 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 (which represented approximately one-third of the Bedford Division's
total raw materials purchased in 1997) are currently sourced from a single
supplier. The Company typically enters into a one-year supply contract with
this supplier each August. These contracts protect the Company from price
increases while allowing for downward adjustments if market prices should fall.
Management believes that alternative sources of supply are readily available
for substantially all of the raw materials used by the Bedford Division,
including steel.
Components Purchases. Management periodically evaluates the economics of
producing internally rather than purchasing certain plastic components used
in the production and assembly of its outdoor gym sets. 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 currently provide 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 has 273,000 square feet and houses
most of the division's production capacity. It includes 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 regional customers and to inflate
premium and non-premium playballs that are shipped from Ashland.
<PAGE>
Production Process. The Ashland Division manufactures its products utilizing
two manufacturing processes: (i) rotational molding for polyvinyl playballs
and polyethylene plastic OEM products and (ii) blow molding for plastic ball
pit balls. After completion of 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 playball printing systems. The Company believes it
is the only manufacturer in the United States utilizing such systems. All
playballs are inflated at Ashland during production to ensure that they meet
the 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, and thereby
reducing shipping costs.
Capacity. Management believes that the Ashland Division has adequate capacity
to meet anticipated future production requirements at times of peak demand and
has ample space within its existing facilities to 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. The Company receives a fixed fee for each ball manufactured. 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 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 establish 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.
Amav Division
The Amav Division manufactures all of its arts and crafts kits and children's
bulk activity products in its Montreal, Quebec manufacturing facility. It owns
or leases numerous injection molding machines. It also owns two large printing
presses and four smaller label/sticker printers. The Amav Division
manufactures all of its plastic components and crayons, mixes its own paint
and prints all labels, cartons, coloring books, stickers and instruction
sheets. All of the Amav Division's products are manufactured with non-toxic
materials to comply with industry standards for children's products and
applicable environmental laws.
<PAGE>
ERO Division
The ERO Division produces or assembles slumber bags, personal flotation
devices, juvenile furniture and children's wall decoration products at the
ERO Division's Hazlehurst, Georgia facility. To reduce lead times and inventory
levels with respect to these product lines, the ERO Divison utilizes just-in-
time manufacturing and sourcing systems. The ERO Division 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 ERO Division's pricing and supply of
imported products has not been affected by the recent problem in the Asian
financial markets.
The ERO Division'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 ERO Division works closely with its suppliers in order to
consolidate the purchasing function and to foster teamwork between the ERO
Division and its suppliers. For the aforementioned products, the ERO Division
maintains alternative sources of supply.
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
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.
Seasonality
Historically, the Company's sales have been highly seasonal, with its peak
selling season occurring during the first two calendar quarters of the year.
However, management believes the Acquisition will help the Company to better
balance its sales throughout the year because ERO's peak selling season occurs
during the third and fourth calendar quarters of the year. Pro Forma Net Sales
for the Company for each calendar quarter during the fiscal year ended
December 31, 1997 were 22.7%, 25.6%, 20.9% and 30.8%, 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, and 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.
<PAGE>
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 December 31, 1997, the Company employed 1,968 people. Approximately 12%
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. The Company's
collective bargaining agreement with the Rubber Workers Union expires on
October 10, 1998. 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.
Item 2. 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.
<PAGE>
The following table summarizes certain information regarding the Company's
principal operating facilities all of which are owned by the Company or one of
its subsidiaries.
Approximate
Location Square Footage Description of Use
- ----------------------- -------------- -------------------
Saint Laurent, Quebec 800,000 Amav Division Sales,
Administration, Manufacturing
and Distribution
Bedford, Pennsylvania 472,000 Bedford Division Manufacturing,
Warehouse and Administrative
Ashland, Ohio 273,000 Ashland Division Manufacturing,
Warehouse and Administrative
Hazlehurst, Georgia 230,000 ERO Division Manufacturing and
Distribution
Plattsburgh, New York 80,000 Amav Manufacturing and
Distribution
Leased Facilities
The Company also leases various facilities in the U.S., Canada and United
Kingdom. Such facilities range in size from 95,400 square feet in Ashland,
Ohio to 400 square feet in the United Kingdom.
Item 3. 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, individually
or in the aggregate, 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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the year ended
December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
There is no established public trading market for the Company's common stock.
As of March 23, 1998, there were 58 record holders and 1 record holder of
Holdings common stock and non-voting common stock, respectively.
<PAGE>
The Senior Credit Facilities impose significant restrictions on the Company's
ability to make dividend payments (see further discussion of such in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Note 7 to the Company's consolidated financial statements
in Item 8). The Company has not paid cash dividends historically, and does
not intend to do so in the foreseeable future.
Item 6. Selected Financial Data
The selected consolidated historical financial data of Holdings presented
below (i) as of and for the fiscal year ended December 31, 1997, as of and
for each of 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 year 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 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 fiscal year ended December
31, 1997 reflects the operations of ERO since June 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of Holdings and the notes thereto contained
elsewhere herein. Holdings historically had a fiscal year ending July 31 but
changed its fiscal year to December 31, effective in 1997.
<PAGE>
<TABLE>
Fiscal Year Five Months
<S> Ended Ended Fiscal Year Ended July 31,
(Dollars in thousands, December 31, December 31, ---------------------------------
except per share amounts) 1997 1996 1995 1996 1995 1994 1993
------------ ---- ---- ---- ---- ---- -----
(unaudited)
Income Statement Data:
<C> <C> <C> <C> <C> <C> <C>
Net sales $ 256,146 $ 23,994 $ 31,792 $133,194 $ 133,862 $ 108,655 $ 93,891
Cost of sales 172,390 21,973 26,000 105,068 107,312 87,170 75,592
------- ------ ------ ------- ------- ------- ------
Gross profit 83,756 2,021 5,792 28,126 26,550 21,485 18,299
Selling, general and
administrative expenses 47,052 7,546 7,067 24,603 19,207 18,181 16,890
------- ------ ------ ------- ------- ------- ------
Operating income (loss) 36,704 (5,525) (1,275) 3,523 7,343 3,304 1,409
Recapitalization expenses(a) - - 9,600 9,600 - - -
Restructuring expense(b) - - - - - - 1,476
Interest expense 19,131 2,115 1,773 5,896 4,573 982 2,512
------- ------ ------ ------- ------- ------- ------
Income (loss) before income
taxes 17,573 (7,640) (12,648) (11,973) 2,770 322 (2,579)
Income tax expense (benefit) 7,997 (2,869) (4,074) (3,857) 1,440 103 (663)
------- ------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations 9,576 (4,771) (8,574) (8,116) 1,330 219 (1,916)
Loss from discontinued
operations(c) - - - - - (585) (3,180)
------- ------ ------- ------- -------- ------- ------
Net income (loss) $ 9,576 $ (4,771) $(8,574) $ (8,116) $ 745 $ (2,961) $(1,916)
======= ====== ======= ======= ======== ======= ======
Diluted earnings per share(f) $0.18
Diluted weighted average
shares outstanding(f) 52,416
Other Financial Data:
Net cash provided by (used in):
Operating activities $ (9,779) $ 2,978 $ (19,209)$(17,744) $ 396 $ 1,344 $(3,540)
Investing activities (146,387) (1,309) (1,342) (6,490) (2,574) (2,988) (4,594)
Financing activities 165,622 (9,134) 19,842 31,135 2,899 1,060 8,539
EBITDA(d) 45,772 (3,549) (393) 9,420 10,088 5,529 3,651
Depreciation and
amortization(e) 9,068 1,976 882 3,347 2,745 2,225 2,242
Capital expenditures 6,395 1,376 1,342 6,738 2,574 2,988 3,010
Balance Sheet Data (end of
period):
Total assets $383,145 $ 72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005 $ 55,607
Total debt (including current
maturities) 289,404 60,471 57,750 69,706 32,710 29,811 28,351
Stockholders' equity (deficit) 44,536 (3,097) 2,055 1,674 15,392 14,647 15,228
________________
</TABLE>
<PAGE>
(a) In connection with the 1995 Recapitalization, Holdings incurred
approximately $9.6 million in costs, all of which were expensed.
(b) During fiscal 1993, Holdings restructured its manufacturing processes
at its Bedford division, incurring costs associated with consultants,
equipment reorganization, training and temporarily idle facilities.
<PAGE>
(c) During fiscal 1995, Holdings discontinued the operations of its
Hedstrom Holdings II subsidiary. Hedstrom Holdings II was involved in the
manufacturing of traffic control devices. The sole customer of Hedstrom
Holdings II was a related party with which Holdings no longer has an ongoing
relationship.
(d) EBITDA represents operating income plus depreciation and amortization and,
for the twelve months ended July 31, 1996, certain other one-time charges
aggregating $2.55 million, 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 trail advertising campaign.
Management believes EBITDA for the twelve months ended July 31, 1996, as
adjusted for these one-time charges, provides a more meaningful comparison of
historical results. EBITDA as determined by Holdings may not be comparable to
the EBITDA measure as reported by other companies. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to cash
flow or operating income (as measured by GAAP) or as a measure of liquidity.
In addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect to
the ability of Holdings to meet its future debt service, capital expenditures
and working capital requirements.
(e) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(f) Due to the Acquisition, net income (loss) per share for the five months
ended December 31, 1996 and 1995 and for the four fiscal years ended July 31,
1996 has no significant relevance to current amounts.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion generally relates to the historical consolidated
results of operations and financial condition of Holdings and Hedstrom but
does reflect the significant impact of the Acquisition of ERO, Inc. 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).
<PAGE>
General
Hedstrom is a leading United States manufacturer and marketer of well-
established children's leisure and activity products. Hedstrom has four
principal divisions. The Bedford Division 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, trampolines and
gym accessories. The Ashland Division manufactures and markets in the United
States a wide variety of children's playballs and ball pit products. The Amav
Division manufactures children's products including arts and craft kits, game
tables, battery operated cars and back-to-school products. The ERO Division
manufactures and distributes slumber products, water sports products and room
decor items.
Fiscal Year Change
Hedstrom historically had a fiscal year ending July 31 but changed its fiscal
year-end to December 31, effective in 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 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.
<PAGE>
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 filing, 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 increased Hedstrom's profitability in 1997.
Results of Operations
<TABLE>
The following table sets forth net sales and gross profit for each of
Hedstrom's four operating divisions for the periods indicated:
Twelve Months
Ended Five Months
December 31, Ended December 31, Year Ended July 31,
-------------- ------------------ -------------------
1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S>
(In millions) (unaudited) (unaudited)
Net sales: <C> <C> <C> <C> <C> <C>
Bedford Division $ 90.6 $ 82.4 $ 13.0 $ 14.5 $ 83.9 $ 86.2
Ashland Division 40.2 43.0 11.0 17.3 49.3 47.7
Amav Division 60.5 - - - - -
ERO Division 64.8 - - - - -
------ ------ ------ ------- ------- ------
Total net sales $256.1 $125.4 $ 24.0 $ 31.8 $ 133.2 $133.9
====== ====== ====== ======= ======= ======
Gross profit:
Bedford Division $22.1 $ 13.1 $ - $ 1.0 $ 14.1 $ 12.4
Ashland Division 10.6 11.2 2.0 4.8 14.0 14.2
Amav Division 27.1 - - - - -
ERO Division 24.0 - - - - -
----- ------- ------ ------- ------- -------
Total gross profit $83.8 $ 24.3 $ 2.0 $ 5.8 $ 28.1 $ 26.6
===== ======= ====== ======= ======= =======
</TABLE>
Fiscal Year Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
A comparison of Hedstrom's results of operations for the fiscal year ended
December 31, 1997 with the same period in 1996 is necessarily affected by
the impact of the consummation of the ERO Acquisition in June 1997. Due to
the inclusion of seven months of operations of the ERO and Amav Divisions in
the fiscal year ended December 31, 1997, management does not believe that
comparisons with the same period in 1996 is meaningful.
<PAGE>
Net Sales. Hedstrom's total net sales increased to $256.1 million in the
fiscal year ended December 31, 1997 from $125.4 million in 1996, an increase
of $130.7 million. Such increase was attributable to the inclusion of the ERO
and Amav Divisions and an increase in sales at the Bedford Division, offset
by a decline in sales at the Ashland Division. Net sales of the Bedford
Division increased primarily as a result of (i) the restructuring of several
promotional allowances, (ii) increased sales of trampolines due to the
business acquired from Bollinger Industries, Inc., (iii) an increase in OEM
sales, (iv) new product introductions and (v) the acquisition of M.A. Henry
Limited in August of 1997. These increases were partially offset by a
decrease resulting from a shift in product mix to lower-priced outdoor gym
sets. Net sales of the Ashland Division decreased primarily as a result of a
decrease in sales of certain undecorated playballs which decrease was
partially offset by the increase in market share of ball pits. On a pro-forma
basis, the net sales of the ERO Division increased approximately 12% in 1997
as compared to 1996 due to increased account penetration in the Slumber
Shoppe and Priss Prints product lines. On a pro-forma basis, the net sales of
the Amav Division decreased by approximately 4% in 1997 primarily due to a
decline in the overall arts and crafts market which decrease was offset by
the introduction of its battery-operated car.
Gross Profit. As a result of the increase in Hedstrom's total net sales,
total gross profit increased to $83.8 million in 1997 from $24.3 million in
1996. As a percentage of net sales, gross profit increased to 32.7% in 1997
from 19.4% in 1996 due in part to the inclusion of the results of the ERO and
Amav Divisions, whose combined gross profit margin of 40.8% is higher than
the other divisions of Hedstrom. The Bedford Division's gross profit margin
in 1997 increased to 24.4% from 15.9% in 1996, primarily as a result of the
benefits of (i) a 1996 Cost Reduction Plan (see Note 3 to the consolidated
financial statements on page 28), and (iii) improvements in promotional
programs, which benefits were partially offset by a decrease in net sales
attributable to sales of lower-priced and lower-margin outdoor gym sets.
Gross profit margin in the Ashland Division increased to 26.4% in 1997 from
26.0% in 1996 primarily as a result of an increase in selling prices and the
favorable effects of the 1996 Cost Reduction Plan, the effects of which were
partially offset by a reduction in production volume. On a pro-forma basis,
the gross profit percentage of the ERO Division increased in 1997 as compared
to 1996 due to increased production volume and lower material costs. On a pro-
forma basis, the gross profit percentage of the Amav Division decreased in
1997 due primarily to (i) decreased production volume, (ii) the start-up
costs of producing a new product, battery-operated cars and (iii) a shift in
sales mix from higher-margin arts and crafts products to lower-margin battery-
operated cars.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $47.1 million in 1997 from $25.1 million
in 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 18.4% in 1997 from 20.0% in 1996, due principally to a
reduction in warehouse and shipping costs resulting from Hedstrom's
implementation of just-in-time manufacturing of outdoor gym sets and the
discontinuation of certain print advertising programs. This reduction was
partially offset by the inclusion of the ERO and Amav Divisions relatively
high selling, general and administrative expenses, which include the
amortization of acquisition-related intangible assets and royalty expense.
Interest Expense. Interest expense increased as a result of the incurrence of
Acquisition-related indebtedness and higher interest rates.
<PAGE>
Income Tax Expense. Holdings' effective income tax rate in 1997 was 45.5% as
compared with an effective income tax rate of 38.1% in 1996. The increase was
attributable to the acquisition of ERO, which generated a large amount of non-
deductible goodwill and a higher amount of income derived from foreign sources
which have a higher effective tax rate than the U.S. sources.
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 10.3%, 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 36.4%, 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.
Gross Profit. Hedstrom's total gross profit decreased to $2.0 million in the
five months ended December 1996 from $5.8 million in the same period of 1995.
As a percentage of net sales, gross profit decreased to 8.3% in the 1996
period from 18.2% in the 1995 period. Due to the lower production volume of
outdoor gym sets resulting from the implementation of just-in-time
manufacturing for the 1997 selling season, an additional $1.4 million of
fixed manufacturing costs were unabsorbed in the 1996 period as compared to
the 1995 period. In addition, in December 1996, Hedstrom changed the method
of allocating depreciation for interim reporting periods, resulting in a one-
time adjustment to depreciation of $0.6 million in the 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.5 million in the five months ended
December 31, 1996 from $7.1 million in the same period in 1995. Expressed as
a percentage of net sales, selling, general and administrative expenses
increased to 31.4% in the last five months of 1996 from 22.2% in the same
period of 1995, due principally to the decrease in sales and the inability
to reduce such expenses (which are largely fixed) proportionally. Selling,
general and administrative expenses in the 1996 period included a $0.2
million lawsuit settlement.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed,
new shares were issued to the purchaser, new debt facilities were obtained
and existing debt facilities were repaid. In addition, Holdings effected a
common stock split of 39,095 shares for one and increased the number of
authorized shares from 1,000 to 50,000,000. After the Recapitalization, the
majority of the common stock was held by Hicks, Muse, Tate, and First Equity
Fund II, L.P. However, two of the existing shareholders retained a minority
investment in Holdings. Holdings expensed all of its costs associated with
the Recapitalization. These expenses include the following (in millions of
dollars).
<PAGE>
Description Amount
- ------------------------------------------------------------- ------
Commitment fees for the new revolver and term loan facilities $ 2.9
Buyer's financing and transaction fees 2.0
Seller's transaction fees 1.7
Equity appreciation payments to employees 2.2
Other 0.8
------
Total Recapitalization Expense $ 9.6
======
Interest Expense. Interest expense increased by 19.3%, due primarily to
increased borrowings associated with capital additions and higher working
capital requirements.
Income Tax Expense. Holdings' effective income tax
rate for the five months ended December 31, 1996 was 37.6% as compared with
an effective income tax rate of 32.2% in the same period of 1995. The
increase was attributable to a decrease in foreign losses, which provide no
U.S. tax benefit, in 1996 relative to 1995. In addition, the 1995 tax benefit
was reduced by non-deductible transaction costs, incurred in connection with
the Recapitalization, and alternative minimum tax incurred by Holdings.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Hedstrom's total net sales decreased to $133.2 million in fiscal
1996 from $133.9 million in fiscal 1995, a decrease of 0.5%. Net sales in the
Bedford Division decreased by $2.3 million, or 2.7%, 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
$1.6 million, or 3.4%, 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 16.8%
in fiscal 1996 from 14.4% in fiscal 1995 primarily as a result of (i) a
reduction in raw materials prices and (ii) higher unit volume, which
increased gross profits by $3.0 million and $2.4 million, respectively, the
effects of which were partially offset by a shift in product mix to lower
priced outdoor gym sets, which reduced gross profits by $3.6 million. The
gross profit margin of the Ashland Division decreased to 28.4% in fiscal
1996 from 29.8% in fiscal 1995. The decrease was attributable to increased
promotional activity, an unfavorable shift in the mix of playballs and a
reduction in sales prices, which reduced gross profits by $1.0 million, $0.9
million and $1.8 million, respectively, the effects of which were partially
offset by a $2.7 million decrease attributable to reductions in material
prices.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $24.6 million in fiscal 1996 from $19.2
million in fiscal 1995 (or stated as a percentage of net sales, to 18.5% in
fiscal 1996 from 14.3% in fiscal 1995). This increase was due primarily to
(i) an increase in material handling and warehousing costs of $2.0 million,
(ii) an increase in advertising expenses of $2.0 million and (iii) a non-
cash charge of $1.0 million related to the write-off of certain advertising
barter credits. The increase in material handling and warehousing costs was
due primarily to higher levels of outdoor gym set inventories arising from
the unexpected shift in product mix and the resultant expense of outside
warehouse space and related material handling. The increased advertising
expenditures related primarily to an unsuccessful trial advertising campaign
that has since been discontinued. As a result of Hedstrom's decision to
reduce its advertising expenditures during fiscal 1997, management determined
that $1.0 million of barter credits available to pay for a portion of future
advertising programs could not be utilized before their expiration and,
accordingly, were written off.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed,
new shares were issued to the purchaser, new debt facilities were obtained
and existing debt facilities were repaid. In addition, Holdings effected a
common stock split of 39,095 shares for one and increased the number of
authorized shares from 1,000 to 50,000,000. After the Recapitalization, the
majority of the common stock was held by Hicks, Muse, Tate, and Furst Equity
Fund II, L.P. However, two of the existing shareholders retained a minority
investment in Holdings. Holdings expensed all of its costs associated with
the Recapitalization. These expenses include the following (in millions of
dollars).
Description Amount
- ------------------------------------------------------------- ------
Commitment fees for the new revolver and term loan facilities $ 2.9
Buyer's financing and transaction fees 2.0
Seller's transaction fees 1.7
Equity appreciation payments to employees 2.2
Other 0.8
-----
Total Recapitalization Expense $ 9.6
=====
Interest Expense. Interest expense increased by 28.9%, due primarily to higher
working capital requirements, acquisitions of equipment and increased
borrowings associated with the 1995 Recapitalization.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1996 was
32.2% as compared with an effective income tax rate of 52.0% in fiscal 1995.
The decrease was attributable to non-deductible transaction costs incurred
in fiscal 1995 in connection with the 1995 Recapitalization. In addition,
Holdings incurred alternative minimum tax in 1995 that was not incurred in
1996.
Liquidity and Capital Resources of the Company
<PAGE>
Working Capital and Cash Flows
Net cash used for operating activities was $9.8 million for the fiscal year
ended December 31, 1997. The net use of cash reflects the seasonal nature of
sales in the Company's ERO and Amav Divisions. These divisions accumulate
during the second half of the year and liquidate them in the first half of
the following year.
Net cash used for investing activities was $146.4 million for fiscal year
ended December 31, 1997, including the $140.0 million used for the
acquisition of ERO and other companies and $6.4 million used for the
acquisition of property, plant & equipment.
Net cash provided by financing activities, which was used primarily to
consummate the Acquisition and to fund operating cash requirements, was
$165.6 million for the fiscal year ended December 31, 1997, including (i)
$110.0 million of proceeds from the issuance by Hedstrom of its 10% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes"), (ii) $110.0
million of proceeds from Hedstrom's term loan facilities consisting of (a) a
six year loan in a principal amount of $75.0 million and (b) an eight year
loan in a principal amount of $35.0 million ("Term Loans"), (iii) $25.0
million from the issuance 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, par value $.01 per share ("Common Stock"), (iv) $40.0 million
of proceeds from the issuance of Holdings non-voting common stock, par value
$.01 per share ("Non-Voting Common Stock"), (v) debt financing and other
transaction costs of $21.0 million, (vi) the repayment of old term loans in
the aggregate amount of $92.8 million, (vii) the repayment of old revolving
loans in the aggregate amount of $42.4 million, (viii) $35.5 million of net
borrowings under Hedstrom's $70.0 million revolving credit facility (the
"Revolving Credit Facility" and together with the Term Loans, the "Senior
Credit Facilities") and (ix) the repayment of $1.1 million of Term Loans.
For the five months ended December 31, 1996, Hedstrom's operations provided
net cash of $3.0 million, largely the result of a $9.7 million decrease in
accounts receivable attributable to the seasonality of Hedstrom's business.
During this period, Hedstrom spent $1.4 million on capital expenditures and
made net payments of $9.1 million under its revolving credit facility.
For the fiscal year ended July 31, 1996, Hedstrom used $17.7 million of cash
in its operating activities. This net use of cash was attributable primarily
to (i) Hedstrom's $8.1 million net loss (which included $9.6 million in costs
that were expensed in connection with the 1995 Recapitalization) and (ii) a
$7.9 million reduction in accounts payable due to an acceleration of certain
obligations that previously had been extended. During fiscal 1996, Hedstrom
spent $6.7 million on equipment, including $3.3 million related to the
vertical integration of the Bedford Divisions plastics operations. Holdings
and Hedstrom's financing activities during this period generated $31.1 million
in cash. The 1995 Recapitalization involved, among other things, (i) the
redemption of $29.8 million of common stock and $3.1 million of preferred
stock, (ii) the issuance of notes to related parties in the amount of $2.5
million, (iii) proceeds of $27.2 million from the sale of common stock to the
HM Group and (iv) term loan borrowings of $35.0 million.
<PAGE>
For the fiscal year ended July 31, 1995, Hedstrom's operations provided cash
of $0.4 million. Net income of $0.7 million included (i) non-cash charges of
$1.2 million related to the discontinuation of its traffic controls business
and (ii) non-cash credits of $2.0 million related to certain barter sales. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $2.1 million, spent $6.9 million to build up its inventories
and had an increase of $2.4 million in prepaid expenses related to certain
barter credits. The effects of these actions were partially offset by the
extension of credit terms with certain vendors, which generated $5.8 million
of cash. During fiscal 1995, Hedstrom spent $2.6 million on capital
expenditures and incurred net borrowings of $2.9 million under its revolving
credit facility.
Liquidity
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. Borrowings under the Senior Credit
Facilities bear interest at floating rates and require interest payments on
varying dates depending on the interest rate option selected by the Company.
The Term Loan Facilities will require principal repayments in 1998 according
to the following schedule:
Date Tranche A Term Loan Tranche B Term Loan
---------------- ------------------- -------------------
March 31, 1998 $3,000,000 $125,000
June 30, 1998 750,000 125,000
September 30, 1998 3,000,000 125,000
December 31, 1998 750,000 125,000
The Revolving Credit Facility terminates and all amounts outstanding
thereunder mature on the maturity date of the Tranche A Term Loan Facility.
At present, the Discount Notes do not require cash interest payments. Rather,
principal will accrete to an aggregate principal amount of $44,612,000 on
June 1, 2002. Commencing on such date, Holdings will be required to make
semiannual interest payments of $2,676,720.
The Company's remaining liquidity demands are for capital expenditures and
for working capital needs. 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 an
annual limit of $10.0 million on the Company's capital expenditures and
investments (subject in any given year to a roll-over of up to $4.0 million
of unused capital expenditure capacity from the previous year). In addition,
to achieve the estimated net cost savings of over $9.0 million described
herein, the Company may incur expenditures related to the restructuring of
its operations. The Senior Credit Facilities impose significant restrictions
on the Company's ability to make dividend payments.
<PAGE>
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Revolving Credit Facility. As of December 31, 1997,
approximately $34.5 million was available to the Company (subject to
borrowing base limitations) for borrowings under the Revolving Credit
Facility. 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.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred
(which resulted in income before taxes of $17.6 million in 1997), including
the 1996 Cost Reduction Plan and the acquisition of ERO, Inc., which has a
lengthy and consistent history of profitable operations, (ii) projections
(which include the ERO and Amav Divisions) of sufficient taxable U.S. income
to fully realize the net deferred tax asset by the end of calendar year 1998,
(iii) the tax loss carryforwards included in the net deferred tax asset were
generated in very recent periods and do not begin to expire until the years
2008-2011, (iv) the significant excess of book basis over tax basis relative
to the net assets of ERO, Inc. and (v) the 1997 utilization of approximately
$4.5 million in net operating loss carryforwards. Management continually
evaluates the realizability of the net deferred tax assets and the need for
a valuation allowance on such assets.
Amav Division
Subsequent to the acquisition of ERO, the Amav Division experienced a decline
in sales of its arts and crafts product line, a new product line experienced
initial quality problems and the former owners of Amav announced they were
leaving the Company. These events triggered an assessment of recoverability
of the book value of the non-current assets, including goodwill, of Amav.
The net book value of the non-current assets of the Amav Division were
approximately $130 million at December 31, 1997. Cash flows for 1998 and
future years were estimated using management's current forecast and business
plan. Results of the assessment indicated there was no impairment of value
under Statement of Financial Accounting Standards No. 121 ("SFAS 121") as of
December 31, 1997. Although management is actively addressing these factors,
since the acquisition of the Amav Division occurred on June 12, 1997, the
Company has not developed enough operating experience to determine if the
factors that led to the impairment assessment under SFAS 121 can be overcome
in future periods.
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 fiscal year ended December 31, 1997 were 22.7%, 25.6%,
20.9% and 30.8%, respectively, of total Pro Forma Net Sales for such twelve-
month period.
<PAGE>
Adoption of Recently Issued Accounting Pronouncements
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. Management does not believe
that SFAS No. 130 will have a significant impact on Holdings' financial
statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," effective January 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information
about a company's different types of business activities and different
economic environments. SFAS No. 131 will require companies to select segments
based on their internal reporting system. Restatement of prior year segment
disclosure will be required upon adoption of SFAS No. 131. Adoption of this
pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if
any, adoption will have on Holdings' financial statement disclosures;
however, management anticipates that each of Hedstrom's operating divisions
will be reported as a segment in fiscal year 1998.
Year 2000 Date Conversion
The Company recognizes the need to ensure that its operations will not be
adversely impacted by year 2000 software failures. The company has
established processes for evaluating and managing the risks and costs
associated with the problem and is currently in the process of implementing
necessary changes. It is anticipated that implementation will be completed
by 1999. The additional cost of achieving Year 2000 compliance is estimated
to be approximately $500,000 and will be incurred through 1999. The Company
is in the process of conducting an additional assessment of certain year 2000
issues on their manufacturing equipment, time based operating equipment and
significant suppliers which will be completed in 1999. It is anticipated that
corrective action, if any, will be made by year 2000.
Item 8. Financial Statements and Supplementary Data
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,
1997 and 1996, and the related consolidated income statements, stockholders'
equity, and cash flows for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996, and for each of the fiscal years ended
July 31, 1996 and 1995. 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.
<PAGE>
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, 1997 and 1996, and the results of their
operations and their cash flows for the fiscal year ended December 31, 1997,
for the five months ended December 31, 1996, and for each of the fiscal years
ended July 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule appearing
on page 56 of this form 10-K is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/Arthur Andersen
ARTHUR ANDERSEN LLP
Dallas, Texas
February 13, 1998
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 10,844 $ 533
Trade accounts receivable, net of
allowance for bad debts of $2,297 and
$505 82,702 13,586
Inventories 47,464 23,816
Deferred income taxes 7,045 5,027
Prepaid expenses and other current assets 4,801 690
-------- --------
Total current assets 152,856 43,652
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost,
net of accumulated depreciation 42,823 21,743
GOODWILL, net of accumulated amortization 161,176 -
OTHER ASSETS:
Deferred financing fees, net of
accumulated amortization 17,474 -
Deferred charges and other, net of
accumulated amortization 1,387 2,318
Deferred income taxes 10,057 4,362
-------- --------
Total other assets 28,918 6,680
-------- --------
Total assets $385,773 $ 72,075
======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1997 1996
------------ ------------
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<C> <C>
Revolving line of credit $ 35,500 $ 17,400
Current portion of long-term debt 9,222 1,965
Accounts payable 23,381 11,698
Accrued expenses -
Compensation 4,066 1,061
Commissions and royalties 5,365 206
Acquisition costs 6,354 -
Customer allowances 7,193 1,585
Other 2,846 151
--------- --------
Total current liabilities 93,927 34,066
--------- --------
LONG-TERM DEBT
Senior Subordinated Notes 110,000 -
Senior Discount Notes 23,288 -
Term loans 104,375 36,750
Notes payable to related parties 2,500 2,500
Capital leases 1,605 1,556
Other 2,914 300
--------- --------
Total long-term debt 244,682 41,106
--------- --------
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,
36,142,883 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 51,553 10,437
Foreign currency translation adjustment (778) -
Accumulated deficit (4,287) (13,863)
--------- --------
Total stockholders' equity (deficit) 47,164 (3,097)
--------- --------
Total liabilities and stockholders'
equity $ 385,773 $ 72,075
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
For the For the Five
Fiscal Year Months For the Fiscal Years
Ended Ended Ended July 31,
December 31, December 31, ----------------------
1997 1996 1996 1995
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
NET SALES $256,146 $ 23,994 $ 133,194 $ 133,862
COST OF SALES 172,390 21,973 105,068 107,312
-------- --------- --------- ---------
Gross profit 83,756 2,021 28,126 26,550
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 47,052 7,546 24,603 19,207
Operating income (loss) 36,704 (5,525) 3,523 7,343
RECAPITALIZATION EXPENSES - - 9,600 -
INTEREST EXPENSE 19,131 2,115 5,896 4,573
-------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 17,573 (7,640) (11,973) 2,770
INCOME TAX EXPENSE (BENEFIT) 7,997 (2,869) (3,857) 1,440
-------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 9,576 (4,771) (8,116) 1,330
LOSS FROM DISCONTINUED OPERATIONS
(net of tax benefit of $619) - - - (585)
-------- --------- --------- ---------
NET INCOME (LOSS) $ 9,576 $ (4,771) $ (8,116) $ 745
======== ========= ========= =========
BASIC NET INCOME PER COMMON SHARE:
Net income $ 0.18
Weighted average shares outstanding 52,153
DILUTED NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Net income $ 0.18
Weighted average shares and common
share equivalents outstanding 52,416
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal For the Five
Year Months For the Fiscal Years Ended
Ended Ended July 31,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------ --------- ----------
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> <C> <C>
Net income (loss) $ 9,576 $ (4,771) $ (8,116) $ 745
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities-
Depreciation of property, plant and
equipment 5,802 1,626 2,903 2,365
Amortization of goodwill and
deferred charges 3,266 350 511 582
Amortization of deferred financing
fees and original issue discount 3,246 - - -
Discontinued operations - - - 1,204
Deferred income tax provision
(benefit) 7,027 (2,862) (3,808) 755
Gain on the disposition of property,
plant, and equipment (1) (60) (182) -
Provision for losses on accounts
receivable, net of recoveries 1,246 64 37 100
Changes in assets and liabilities
Accounts receivable (46,754) 9,734 (892) (2,139)
Inventories 4,874 (2,042) (139) (6,941)
Prepaid expenses 298 (119) 6 (2,428)
Accounts payable 1,709 1,851 (7,906) 5,757
Accrued expenses (68) (793) (158) 396
-------- -------- -------- -------
Net cash provided by (used for)
operating activities (9,779) 2,978 (17,744) 396
-------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ERO, Inc. (122,600) - - -
Acquisition of certain assets of
Bollinger Industries, Inc. (14,928) - - -
Acquisitions of property, plant,
and equipment (6,395) (1,376) (6,738) (2,574)
Proceeds from the sale of property,
plant, and equipment 8 67 248 -
Other acquisitions (2,472) - - -
-------- -------- -------- -------
Net cash used for investing
activities (146,387) (1,309) (6,490) (2,574)
-------- -------- -------- -------
<PAGE>
</TABLE>
<TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of <C> <C> <C> <C>
Senior, Subordinated Notes 110,000 - - -
Net proceeds from the issuance of
new Term Loans 110,000 - - -
Net proceeds from the issuance of
Senior Discount Notes 21,618 - - -
Borrowings on new Revolving Credit
Facility, net 35,500 - - -
Repayments on new term loans (1,125) - - -
Borrowings (repayments) of old
term loans, net (92,767) - 35,000 -
Debt financing and other transaction
costs (21,000) - - -
Borrowings (repayments) on old
revolving lines of credit, net (42,400) (9,050) (2,360) 2,899
Net proceeds from issuance of voting
common stock 3,401 - 27,242 -
Net proceeds from issuance of non-
voting common stock 40,000 - - -
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 -
Capital lease (payments) borrowings
and other 2,395 (84) 1,597 -
-------- -------- -------- -------
Net cash provided by (used for)
financing activities 165,622 (9,134) 31,135 2,899
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 9,456 (7,465) 6,901 721
CASH AND CASH EQUIVALENTS:
Purchased cash 855 - - -
Beginning of year/period 533 7,998 1,097 376
-------- -------- -------- -------
End of year/period $ 10,844 $ 533 $ 7,998 $ 1,097
======== ======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Income taxes paid $ 4,431 $ 45 $ 503 $ 46
Interest paid $ 13,922 $ 1,534 $ 5,036 $ 4,405
SUPPLEMENTAL DISCLOSURE OF ASSETS
ACQUIRED:
See Note 4
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Preferred Stock Common Stock
---------------- --------------- Foreign
Additional Currency
Par Par Paid-In Translation Accumulated
Shares Value Shares Value Capital Adjustment Deficit Total
-------- ------ ------ ------ -------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
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)
Issuance of voting
common stock - - 3,201,384 32 3,369 - - 3,401
Issuance of non-voting
common stock - - 31,520,000 315 39,685 - - 40,000
Foreign currency
translation adjustment - - - - - (778) - (778)
Acquisition transaction
costs - - - - (1,938) - - (1,938)
Net income - - - - - - 9,576 9,576
--------- ------ ---------- ----- -------- ------- -------- --------
BALANCE AT
DECEMBER 31, 1997 - $ - 67,662,883 $ 676 $ 51,553 $ (778) $ (4,287) $ 47,164
========= ====== ========== ===== ======== ======= ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
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,
other than its 100% ownership of Hedstrom Corporation ("Hedstrom", and
together with Holdings, the "Company"). The Company is a manufacturer and
marketer of well-established children's leisure and activity products. The
Company's products fall within four principal divisions: Bedford, Ashland,
Amav and ERO. Through its facility in Bedford, Pennsylvania, the Bedford
Division 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 Ashland Division 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. Through its facility in Montreal, Canada, the Amav Division
manufactures children's products including arts and crafts kits, game tables,
battery operated ride-on vehicles and back-to-school items. Through its
facility in Hazlehurst, Georgia, the ERO Division manufactures and distributes
slumber products, water sports products and room decorations for children.
The Company sells its products through major national toy retailers, mass
merchants, supermarkets, drug store chains, and home centers primarily in
the United States, Canada, and the United Kingdom. The Company employed
1,968 people at December 31, 1997 12% of which are represented by the Rubber
Workers Union. The collective bargaining agreement expires on October 10, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Hedstrom Holdings, Inc. and its wholly owned subsidiary, Hedstrom Corporation.
Effective June 12, 1997, Hedstrom acquired ERO, Inc. ("ERO"), which became a
wholly owned subsidiary of Hedstrom (see Note 4). The accompanying
consolidated financial statements reflect the operations of ERO since June 1,
1997. Management does not believe that the year over year comparisons are
meaningful, given the 1997 acquisition of ERO. All intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year
Prior to August 1, 1996, the Company's fiscal year ended on July 31. Effective
January 1, 1997, the Company changed its fiscal year to a calendar year ending
on December 31. The following consolidated financial statements include the
twelve month period from January 1, 1996 to December 31, 1996 for comparative
purposes only.
<PAGE>
<TABLE>
Consolidated Income Statement
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
<S> <C>
NET SALES $ 125,396
COST OF SALES 101,041
---------
Gross profit 24,355
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 25,082
---------
Operating loss (727)
INTEREST EXPENSE 6,238
---------
LOSS BEFORE INCOME TAXES (6,965)
INCOME TAX BENEFIT (2,652)
---------
NET LOSS $ (4,313)
=========
</TABLE>
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (4,313)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 4,401
Changes in assets and liabilities:
Accounts receivable 3,804
Inventories 4,088
Accounts payable (5)
Accrued expenses 1,434
Other (4,966)
---------
Net cash used for operating activities 4,443
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and
equipment (6,457)
---------
Net cash used for investing activities (6,457)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on loans 2,159
---------
Net cash provided by financing
activities 2,159
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 145
CASH AND CASH EQUIVALENTS:
Beginning of period 388
---------
End of period $ 533
=========
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.
</TABLE>
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.
<PAGE>
Property, Plant, and Equipment
Property, plant, and equipment acquired in the normal course of business are
stated at cost. Property, plant, and equipment acquired in connection with
the acquisitions of ERO and other companies are stated at fair market value
as of that date as determined by independent appraisals, where appropriate.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Additions and improvements are capitalized, while
expenditures for maintenance and repairs are charged to operations as
incurred. The cost and accumulated depreciation of property sold or retired
are removed from the respective accounts and the resultant gains or losses,
if any, are included in current operations.
The estimated useful lives of property, plant, and equipment are as follows:
Buildings and improvements 5-40 years
Machinery and equipment 3-12 years
Computer hardware and software 3-5 years
Furniture and fixtures 5-10 years
Depreciation is allocated to cost of sales and selling, general, and
administrative expense based upon the related asset's use. Depreciation of
approximately $5,184,000, $1,576,000, $2,797,000 and $2,248,000 is included
in cost of sales for the fiscal year ended December 31, 1997, for the five
months ended December 31, 1996, and for each of the fiscal years ended July
31, 1996 and 1995, respectively. Depreciation of approximately $618,000,
$50,000, $106,000 and $117,000 is included in selling, general, and
administrative expense for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996, and for each of the fiscal years ended
July 31, 1996 and 1995, 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,
including goodwill, 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,
1997. 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.
Goodwill
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, is stated at cost and
is amortized on a straight-line basis over forty years. Amortization of
goodwill of $2,384,000 is included in selling, and administrative expense
for the fiscal year ended December 31, 1997. Goodwill is reviewed for
impairment in accordance with SFAS 121, as discussed above.
<PAGE>
Deferred Financing Fees
Deferred financing fees, representing costs incurred in connection with
obtaining borrowings under long-term debt agreements, are stated at cost and
are amortized over the life of the related debt. Amortization of deferred
financing fees of $1,576,000 is included in interest expense for the fiscal
year ended December 31, 1997.
Deferred Charges and Other, Net
Deferred charges and other on the accompanying balance sheets is comprised of
the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Deferred expenses $ 2,546 $ 2,546
Barter credits 470 519
-------- -------
3,016 3,065
Less-Accumulated amortization (1,629) (747)
-------- -------
$ 1,387 $ 2,318
======== =======
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 $882,000, $350,000,
$358,000 and $37,000 for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996 and for each of the fiscal years ended
July 31, 1996 and 1995, respectively.
Prior to the recapitalization discussed in Note 13, 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 and
$202,000 in the fiscal years ended July 31, 1996 and 1995, respectively, and
are included in interest expense on the accompanying income statements.
Amortization of organizational costs prior to the recapitalization were
$85,000 and $341,000 in the fiscal years ended July 31, 1996 an 1995,
respectively, and are included in selling, general, and administrative expense
on the accompanying income statements.
<PAGE>
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
December 31, 1997, the five months ended December 31, 1996 and the fiscal
year ended July 31, 1996, the Company utilized approximately $49,000, $262,000
and $262,000, respectively, 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.
Net Income (Loss) Per Common Share
Holdings adopted 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 other dilutive
securities. Due to the ERO acquisition, described in Note 4, net income
(loss) per share for the five months ended December 31, 1996 and for the
fiscal years ended July 31, 1996 and 1995 have no significant relevance to
current amounts. Refer to Note 4 for pro-forma amounts.
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
<PAGE>
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately four retail companies
that serve national markets. Sales to the Company's top four customers
aggregated approximately 54%, 46%, 48% and 43% of net sales for the fiscal
year ended December 31, 1997, for the five months ended December 31, 1996,
and for each of the fiscal years ended July 31, 1996 and 1995, respectively.
Two of the Company's customers, Toys "R" Us and Wal-Mart, each accounted for
over 10% of the Company's net sales during the fiscal year ended December 31,
1997 and the fiscal year ended July 31, 1995, aggregating approximately 38%
and 29% of net sales, respectively. Three of the Company's customers, Toys
"R" Us, Wal-Mart and K-Mart, each accounted for over 10% of the Company's
net sales during the five months ended December 31, 1996, and for the fiscal
year ended July 31, 1996, aggregating approximately 38% and 43% of net sales,
respectively.
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 as a
component of stockholders' equity designated as foreign currency translation
adjustment. Transaction gains or losses were not significant in any year.
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 10.
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.
Recent Accounting Pronouncements
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. Management does not believe
that SFAS No. 130 will have a significant impact on Holdings' financial
statements.
<PAGE>
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An Enterprise
and Related Information," effective January 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information
about a company's different types of business activities and different
economic environments. SFAS No. 131 will require companies to select segments
based on their internal reporting system. Restatement of prior year segment
disclosure will be required upon adoption of SFAS No. 131. Adoption of this
pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if
any, adoption will have on Holdings' financial statement disclosures;
however, management anticipates that each of Hedstrom's operating divisions
will be reported as a segment in fiscal 1998.
3. 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 included:
- - 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 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 saved in excess of $2.1
million of warehouse and material handling expense in 1997 and will continue
to save an equivalent amount annually 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
improved profitability by in excess of $2.0 million in 1997 and will continue
to save an equivalent amount annually 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 provided cost savings in
excess of $1.5 million in 1997 and will continue to save an equivalent amount
annually as compared to fiscal 1996 levels.
<PAGE>
- - 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 in excess of $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 were not incurred in 1997.
- - 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 improved profitability in 1997 by in excess of $1.4 million
and will continue to save an equivalent amount annually 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 resulted in savings
in excess of $0.7 million in 1997 and will continue to save an equivalent
amount annually over fiscal 1996 levels.
4. 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"). Holdings also assumed a purchase price
contingency related to ERO, Inc.'s acquisition of Amav in October of 1995.
The contingency includes an additional $3.7 million of purchase price
contingent upon achievement of certain conditions. As those conditions were
met as of December 31, 1997, Holdings accrued a liability for the contingency
against goodwill. This is reflected in accrued expenses-acquisition costs in
the consolidated balance sheet. The payment will be made in March 1998. 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").
<PAGE>
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection
with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of
fees and expenses. The funds required to consummate the Acquisition were
provided by (i) $75.0 million of term loans under a new six-year senior secured
term loan facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of
term loans under a new eight-year senior secured term loan facility
(the "Tranche B Term Loan Facility" and, together with the Tranche A Term Loan
Facility, the "Term Loan Facilities"), (iii) $16.1 million of borrowings under
a new $70.0 million senior secured revolving credit facility (the "Revolving
Credit Facility" and, together with the Term Loan Facilities, the "Senior
Credit Facilities"), (iv) $110.0 million of gross proceeds from the offering
by Hedstrom of 10% Senior Subordinated Notes Due 2007 (the "Senior Subordinated
Notes"), (v) $25.0 million of gross proceeds from the offering by Holdings
of 44,612 units consisting of 12% Senior Discount Notes Due 2009
(the "Discount Notes") and 2,705,896 shares of Common Stock, $.01 par value
per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of
gross proceeds from the private placement of 31,520,000 shares of Non-Voting
Common Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting
Common Stock") and 480,000 shares of Holdings Common Stock. The Revolving
Credit Facility will also be used 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 $145.5 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 cash flows
associated with the asset would be compared to the assets carrying amount to
determine if an adjustment is required.
The fair value of assets acquired and liabilities assumed, reflecting the
final allocation, was as follows (in thousands):
Current assets $ 56,200
Net property, plant and equipment 20,000
Other assets 14,700
Goodwill 148,100
Liabilities assumed (116,400)
---------
Cash paid for ERO $ 122,600
=========
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 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.
<PAGE>
The cost savings are comprised of the following (in thousands):
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
========
The unaudited pro forma results below assume the Acquisition occurred and that
the Rationalization Plan was implemented at the beginning of the periods
presented and the 1996 Cost Reduction Plan was implemented at the beginning
of the fiscal year ended July 31, 1996 (in thousands, except per share amounts):
Twelve Months Fiscal Year
Ended December 31, Ended
-------------------- July 31,
1997 1996 1996
-------- -------- -----------
Net sales $294,450 $283,307 $260,008
Net income (loss) 9,298 (3,552) (12,792)
Net income (loss)
per share basic $0.14 $(0.05) $(0.19)
Net income (loss)
per share diluted 0.14 (0.05) (0.19)
The above pro forma results include adjustments to give effect to amortization
of goodwill, interest expense related to the Senior Subordinated Notes, the
Discount Notes and the Senior Credit Facilities and implementation of the
Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would
have occurred had the Acquisition been consummated and had the Rationalization
Plan and the Cost Reduction Plan been implemented as of the beginning of the
periods presented, nor are they necessarily indicative of future operating
results.
Subsequent to the acquisition of ERO, the Amav Division experienced a decline
in sales of its arts and crafts product-line, a new product line experienced
initial quality problems and the former owners of Amav announced they were
leaving the Company. These events triggered an assessment of the recoverability
of the book value of the non-current assets, including goodwill, of Amav. The
net book value of the non-current assets of the Amav Division were approximately
$130 million at December 31, 1997. Cash flows for 1998 and future years were
estimated using management's current forecast and business plan. Results of
the assessment indicated there was no impairment of value under SFAS 121 as of
December 31, 1997. Although management is actively addressing these factors,
since the acquisition of the Amav Division occurred on June 12, 1997, the
Company has not developed enough operating experience to determine if the
factors that led to the impairment assessment under SFAS 121 can be overcome
in future periods.
<PAGE>
5. INVENTORIES:
Inventories are comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Raw materials $ 16,502 $ 7,534
Work-in-process 5,690 2,298
Finished goods 25,272 13,984
---------- ----------
$ 47,464 $ 23,816
========== ==========
6. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment is comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Buildings and improvements $ 16,567 $ 7,695
Machinery and equipment 40,131 25,218
Computer software and hardware 1,469 -
Furniture and fixtures 1,277 758
--------- ---------
59,444 33,671
Less - Accumulated depreciation (20,430) (12,074)
--------- ---------
39,014 21,597
Land 3,809 146
--------- ---------
$ 42,823 $ 21,743
========= =========
7. DEBT
Debt consists of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Senior Subordinated Notes $ 110,000 $ -
Term Loans 112,375 38,500
Senior Discount Notes 23,288 -
Revolving Credit Facility 35,500 17,400
Other 8,241 4,571
--------- ---------
$ 289,404 $ 60,471
========= =========
<PAGE>
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 4, in connection with the Acquisition, Hedstrom obtained
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, fully and irrevocably guaranteed (jointly and severally) by
Holdings and each of Hedstrom's direct or indirect domestic subsidiaries
(collectively, the "Senior Credit Facilities Guarantors"). In addition, the
Senior Credit Facilities will be secured by first priority or equivalent
security interests in (i) all the capital stock of, or other equity interests
in, each direct or indirect domestic subsidiary of Hedstrom and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of Hedstrom, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of Hedstrom and the Senior Credit Facilities Guarantors.
The Senior Credit Facilities contain a number of significant covenants that,
among other things, restrict the ability of Hedstrom to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
or engage in certain transactions with affiliates. In addition, under the
Senior Credit Facilities, Hedstrom is required to comply with specified
minimum interest coverage and maximum leverage ratios.
<PAGE>
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. Amortization of the
original issue discount, which is included in interest expense, totaled
$1,670,000 during the fiscal year ended December 31, 1997.
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:
Period Redemption Price(%)
------ -------------------
2002 106.000
2003 104.000
2004 102.000
2005 and thereafter 100.000
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.
At any time on or prior to June 1, 2002, the Discount Notes may also be redeemed
as a whole at the option of Holdings upon the occurrence of a change of control
(as defined) at a redemption price equal to 100% of the accreted value thereof
plus the applicable premium as of, and accrued and unpaid interest, if any, to
the date of redemption.
The Discount Notes Indenture contains certain covenants that, among other
things, limit (i) the incurrence of additional indebtedness by Holdings and
its restricted subsidiaries (as defined), (ii) the payment of dividends and
other restricted payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
<PAGE>
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:
if redeemed during the 12-month period commencing on June 1 of the years set
forth below:
Period Redemption Price(%)
------ -------------------
2002 105.000
2003 103.333
2004 101.667
2005 and thereafter 100.000
In addition, at any time and from time to time prior to June 1, 2000, Hedstrom
may redeem in the aggregate up to $44.0 million principal amount of Senior
Subordinated Notes with the proceeds of one or more equity offerings so long
as there is a public market at the time of such redemption (provided that if
the equity offering is an offering by Holdings, a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of Hedstrom), at a
redemption price (expressed as a percentage of principal amount) of 110%,
plus accrued and unpaid interest, if any, to the redemption date; provided,
however, that at least $66.0 million aggregate principal amount of the Senior
Subordinated Notes remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated obligations of
Hedstrom and are unconditionally and fully guaranteed (jointly and severally)
on a senior basis by Holdings and on a senior subordinated basis by each
domestic subsidiary of Hedstrom. The Senior Subordinated Notes are
subordinated to all senior indebtedness (as defined) of Hedstrom rank pari
passu in right of payment with all senior subordinated indebtedness
(as defined) of Hedstrom.
The Senior Subordinated Notes Indenture contains certain covenants that, among
other things, limit (i) the incurrence of additional indebtedness by Hedstrom
and its restricted subsidiaries (as defined), (ii) the payment of dividends
and other restricted payments by Hedstrom and its restricted subsidiaries,
(iii) restrictions on distributions from restricted subsidiaries, (iv) asset
sales, (v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
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.
<PAGE>
Interest Rate Swaps
As of December 31, 1997, the Company had interest rate swap agreements
(the "Swap Agreements") in place with two of its lenders under which the
Company exchanged a variable interest rate for a fixed interest rate.
The Company anticipates that the counter parties to the Swap Agreements will
fully perform their obligations. During the fiscal year ended December 31, 1997,
the effect of the Swap Agreements were immaterial. Terms of the Swap Agreements
are as follows at December 31, 1997:
Notional Amounts Fixed Interest Rate Expiration Date
- ---------------- ------------------- ---------------
$30 million 8.05% October 28, 1999
$12 million 8.555% December 31, 1998*
* Expiration date can be extended at the option of the counter party to
December 29, 2000.
Maturities
Aggregate maturities of long-term debt over the next five years are as follows
(in thousands): 1998 - $ 9,222; 1999 - $11,722; 2000 - $14,222; 2001 - $16,722;
and 2002 - $21,722.
8. INCOME TAXES:
The sources of pretax income for the fiscal year ended December 31, 1997 is
as follows (in thousands):
Domestic $ 9,877
Foreign 7,696
--------
$ 17,573
========
<PAGE>
The Company has not provided for U.S. federal and foreign income withholding
taxes on its foreign subsidiaries' undistributed earnings as of December 31,
1997, 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.
Pretax income from foreign sources in prior periods was not significant.
Provisions (benefits) for income taxes are as follows (in thousands):
For the Fiscal For the Five For the Fiscal Years Ended
Year Ended Months Ended July 31,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------ -------- ---------
Continuing operations $7,997 $(2,869) $(3,857) $ 1,440
Discontinued operations - - - (619)
------ ------- ------- --------
$7,997 $(2,869) $(3,857) $ 821
====== ======= ======= ========
The components of the provisions (benefits) for income taxes are as follows
(in thousands):
For the Fiscal For the Five For the Fiscal Years
Year Ended Months Ended Ended July 31,
December 31, December 31, -----------------------
1997 1996 1996 1995
-------------- ------------ --------- -------
Current:
State $ 339 $ 33 $ 43 $ 179
U.S. federal (2,745) (40) (92) (113)
Foreign 3,376 - - -
-------- --------- -------- ------
970 (7) (49) 66
-------- --------- -------- ------
Deferred:
State 412 - - -
U.S. federal 6,133 (2,862) (3,808) 755
Foreign 482 - - -
-------- --------- -------- ------
7,027 (2,862) (3,808) 755
-------- --------- -------- ------
$ 7,997 $ (2,869) $ (3,857) $ 821
======== ========= ======== ======
<PAGE>
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
(in thousands):
<TABLE>
For the Fiscal For the Five For the Fiscal Years Ended
Year Ended Months Ended July 31,
December 31, December 31, ----------------------------
1997 1996 1996 1995
-------------- ------------ ------------- -----------
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Expected provision (benefit) $5,975 34% $ (2,598) (34)% $(4,071) (34)% $ 532 34%
State income taxes, net of
federal benefit 495 3 (219) (3) (183) (1) 82 5
Foreign corporate earnings 826 5 47 - 151 1 169 11
Goodwill 727 4 - - - - - -
Recapitalization costs - - - - 479 4 - -
Other (26) - (99) (1) (233) (2) 38 2
------ --- -------- ----- ------- ----- ----- ---
Actual provision (benefit) $7,997 46% $ (2,869) (38)% $(3,857) (32)% $ 821 52%
====== === ======== ===== ======= ===== ===== ===
</TABLE>
Deferred tax assets are comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Current deferred tax asset:
Net operating loss carryforward $ 2,429 $ 2,246
Inventory reserves 192 248
Costs capitalized to inventory for tax
purposes 346 304
Allowances for accounts receivable 1,190 938
Nondeductible accruals 2,781 1,243
Other 107 48
------- -------
Current deferred tax asset $ 7,045 $ 5,027
======= =======
Noncurrent deferred tax asset (liability):
Goodwill $10,263 $ -
Net operating loss carryforward - 4,408
Tax over book depreciation (3,411) (1,898)
Recapitalization costs 1,169 1,592
Other 2,036 260
------- -------
Noncurrent deferred tax asset $10,057 $ 4,362
======= =======
The Company has net operating loss carryforwards of $7,145,000 to apply against
future taxable income. Such carryforwards expire as follows: $36,000 in 2008,
$1,225,000 in 2010, and $5,884,000 in 2011.
<PAGE>
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred,
including the 1996 Cost Reduction Plan (see Note 3) and the acquisition of ERO,
Inc. (see Note 4), which has a lengthy and consistent history of profitable
operations, (ii) projections (which include ERO, Inc.) of sufficient taxable
U.S. income to fully realize the net deferred tax asset by the end of 1998,
(iii) the tax loss carryforwards included in the net deferred tax asset were
generated in very recent periods and do not begin to expire until the years
2008-2011, (iv) the significant excess of book basis over tax basis relative
to the net assets of ERO, Inc. and (v) the 1997 utilization of approximately
$4.5 million in net operating loss carryforwards. Management continually
evaluates the realizability of the net deferred tax assets and the need for a
valuation allowance on such assets.
9. EMPLOYEE BENEFIT PLANS:
All employees of the Bedford and Ashland Divisions are eligible to participate
in either the Union Employees' Tax Sheltered Savings Plan or the tax-sheltered
Savings Plan (collectively the "Hedstrom 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 the Hedstrom 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 Hedstrom Plans.
Discretionary contributions during the fiscal year ended December 31, 1997,
the five months ended December 31, 1996, and for each of the fiscal years
ended July 31, 1996 and 1995, aggregated approximately $607,000, $218,000,
$634,000 and $642,000, respectively.
U.S. Employees of the ERO and Amav Divisions are covered by 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 "ERO Plan"). Eligible employees may contribute
from 1% to 15% of their compensation. The Company may provide matching
contributions at the rate of 50% of the employee's contribution up to 6% of
the employee's gross wages. Discretionary contributions during the fiscal
year ended December 31, 1997, aggregated $171,000.
10. STOCK-BASED COMPENSATION PLAN:
The company maintains two stock option plans, the 1995 Stock Option Plan and
the 1997 Stock Option Plan (the "Plans") which authorize grants of stock
options of up to 2,446,236 and 2,750,000 shares, respectively, to key
employees of the Company. Options are granted at the fair market value at the
date of grant, as determined by management.
<PAGE>
Options issued under the Plan expire ten years from date of grant and vest
equally over periods of time ranging from two to three years, as determined
by the Company's Option Committee of the Board of Directors.
The following is a summary of stock option transactions from July 31, 1995
through December 31, 1997:
<TABLE>
Weighted
Average
Exercise
Shares Option Prices Price
--------- ------------ --------
<S> <C> <C> <C>
Shares under option at July 31, 1995 - - -
Options granted 2,174,216 $1.00 $1.00
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at July 31, 1996 2,174,216 1.00 1.00
Options granted 200,000 1.00 1.00
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at December 31, 1996 2,374,216 1.00 1.00
Options granted 1,767,912 1.25 1.25
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at December 31, 1997 4,142,128 $1.00 to 1.25 $1.11
========= =============
Shares exercisable at December 31, 1997 1,516,144 $1.00 $1.00
Shares exercisable at December 31, 1996 724,739 $1.00 $1.00
Shares exercisable at July 31, 1996 - - -
Shares exercisable at July 31, 1995 - - -
</TABLE>
At December 31, 1997, 22,020 and 1,032,088 remaining options are available for
grant under the 1995 Stock Option Plan and the 1997 Stock Option Plan,
respectively.
The Company has adopted APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for the stock
option plans. Due to the Acquisition, net income per share for the fiscal
years ended July 31, 1996 and 1995 have no significant relevance to current
amounts. Had compensation cost for the Company's plans been determined based
on the fair value at the date of grant for awards in the fiscal year ended
December 31, 1997, the Company's total and per share net income would have
been as follows (dollars in thousands, except per share amounts):
<PAGE>
Net income:
As reported $ 9,576
Pro forma 9,212
Basic net income
per common share:
As reported $0.18
Pro forma 0.18
Diluted net income
per common share and
common share equivalents:
As reported $0.18
Pro forma 0.18
The weighted average fair value of options granted is $0.71 during the fiscal
year ended December 31, 1997. The fair value of each option is estimated on
the date of the grant using the minimum value method with the following
assumptions used for the grant in December 1997; risk free interest rates of
5.89%; expected dividend yield of 0% and expected life of ten years.
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases production equipment under capital leases with terms expiring
at various times through 2004. The net capital lease asset of $1,825,000 and
$1,767,000 of December 31, 1997 and December 31, 1996, respectively, is
included in property, plant, and equipment on the accompanying consolidated
balance sheets. Aggregate future minimum lease payments related to capital
leases are as follows: 1998 - $419,000; 1999 - $419,000; 2000 - $419,000;
2001 - $419,000; 2002 - $419,000; and thereafter - $214,000. The portion
related to interest over the remaining life of the capital leases was $486,000
at December 31, 1997.
The Company leases production equipment under operating lease agreements with
terms expiring at various times through 2003. Rent expense under operating
leases for the fiscal year ended December 31, 1997, for the five months ended
December 31, 1996, and for the fiscal years ended July 31, 1996 and 1995,
aggregated $2,309,000, $936,000, $2,500,000 and $1,167,800, 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, 1997, are as follows: 1998 - $2,888,000; 1999 - $2,127,000;
2000 - $1,230,000; 2001 - $838,000; 2002 - $677,000; and thereafter $1,339,000.
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.
<PAGE>
Year 2000 Date Conversion (unaudited)
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. The company has established processes
for evaluating and managing the risks and costs associated with the problem
and is currently in the process of implementing necessary changes. It is
anticipated that implementation will be completed by 1999. The cost of achieving
Year 2000 compliance is estimated to be approximately $500,000 over the cost
of normal software upgrades and replacements and will be incurred through
1999. The Company is in the process of conducting an additional assessment
of certain year 2000 issues on their manufacturing equipment, time based
operating equipment and significant suppliers which will be completed in 1999.
It is anticipated that corrective action, if any, will be made by year 2000.
12. RELATED-PARTY TRANSACTIONS:
On October 27, 1995, in connection with the recapitalization discussed in Note
13, the Company entered into a ten-year agreement with Hicks Muse, pursuant to
which it pays Hicks Muse an annual fee (initially $175,000) for management and
advisory services in connection with the organization, management, and
operations of the Company. The annual fee is adjustable each July 31st to an
amount equal to 0.1% of the consolidated net sales of the Company during the
previous twelve months, but in no event less than $175,000. Management fees
and related expenses under this agreement amounted to $257,000, $82,000 and
$207,000 for the fiscal year ended December 31, 1997, 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 13, the Company entered into a ten-year agreement with an affiliate of
Hicks Muse pursuant to which it paid this affiliate a financial advisory fee
of approximately $1,175,000 as compensation for its services as financial
advisor in connection with the recapitalization. In addition, this Hicks Muse
affiliate will be entitled to receive a fee equal to 1.5% of the transaction
value, as defined, for each add-on transaction, as defined, in which the
Company is involved.
13. 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 Hicks, Muse, Tate & Furst Equity
Fund II, L.P. ("Hicks Muse"). 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.
<PAGE>
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).
The remaining common stock is held by Arnold E. Ditri, Alastair H. McKelvie,
various other members of management, and various other investment groups.
14. GEOGRAPHIC INFORMATION:
Summarized geographic information as of and for the fiscal year ended December
31, 1997 is as follows (in thousands):
<TABLE> Other
United Foreign
States Canada Operations Eliminations Total
-------- ------- ---------- ------------ -----
<S> <S> <S> <S> <S>
Sales to unaffiliated customers $229,601 $14,322 $12,223 $ - $256,146
Transfers between geographic areas 5,344 38,306 - (43,650) -
-------- ------- ------- -------- --------
Total net sales $234,945 $52,628 $12,223 $(43,650) $256,146
======== ======= ======= ======== ========
Operating income $ 23,936 $13,259 $ (451) $ (40) $ 36,704
======== ======= ======= ======== ========
Indentifiable assets $356,574 $52,176 $ 8,440 $(34,045) $383,145
======== ======= ======= ======== ========
</TABLE>
The Company generated no material foreign income for the fiscal years ended
July 31, 1996 and 1995 and owned no material foreign assets at July 31, 1996
and 1995.
15. QUARTERLY FINANCIAL DATA (unaudited; in thousands):
<TABLE>
Fiscal Year Ended December 31, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
- ----------------------------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 47,937 $ 56,114 $ 61,462 $ 90,633 $256,146
Gross profit 13,396 17,076 19,740 33,544 83,756
Net income (loss) 3,216 2,769 (919) 4,510 9,576
Basic net income (loss)
per common share $0.10 $0.05 $(0.01) $0.07 $0.18
Diluted net income (loss)
per common share and
common share equivalents 0.10 0.05 (0.01) 0.07 0.18
Fiscal Year Ended July 31, 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
- ------------------------------- ----------- ----------- ----------- ----------- -------
Net Sales $ 19,115 $ 24,217 $ 60,430 $ 29,432 $133,194
Gross profit 3,160 5,713 16,125 3,128 28,126
Net income (loss) (7,782) (387) 4,415 (4,362) (8,116)
<PAGE>
</TABLE>
16. 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.
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
ASSETS
At December 31, 1997 At December 31, 1996
--------------------------------------------------- ------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantor Eliminations Hedstrom Guarantors Guarantor Hedstrom
---------- ---------- ------------ -------- ---------- ---------- --------
<S>
CURRENT ASSETS:
<C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 8,984 $ 1,860 $ - $ 10,844 $ 467 $ 66 $ 533
Trade accounts receivable, net 73,625 9,077 - 82,702 13,126 460 13,586
Inventories 38,429 9,075 (40) 47,464 23,368 488 23,816
Deferred income taxes 7,045 - - 7,045 5,027 - 5,027
Prepaid expenses and other 4,310 491 - 4,801 674 16 690
--------- --------- -------- --------- ------- -------- -------
Total current assets 132,393 20,503 (40) 152,856 42,662 990 43,652
--------- --------- -------- --------- ------- -------- -------
PROPERTY, PLANT, AND EQUIPMENT,
net 27,448 15,375 - 42,823 21,735 8 21,743
GOODWILL, net 142,692 18,484 - 161,176 - - -
OTHER ASSETS:
Investment in and Advances to
Nonguarantor Subsidiaries 44,799 - (44,799)
Deferred financing fees, net 16,328 - - 16,328 - - -
Deferred charges and other, net 1,387 - - 1,387 2,318 - 2,318
Deferred income taxes 10,579 (522) - 10,057 4,251 - 4,251
--------- --------- -------- --------- ------- -------- -------
Total other assets 73,093 (522) (44,799) 27,772 6,569 - 6,569
--------- --------- -------- --------- ------- -------- -------
Total assets $ 375,626 $ 53,840 $(44,839) $ 384,627 $70,966 $ 998 $71,964
========= ========= ======== ========= ======= ======== =======
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S>
CURRENT LIABILITIES: <C> <C> <C> <C> <C> <C> <C>
Revolving line of credit $ 33,282 $ 2,218 $ - $ 35,500 $15,430 $ 1,970 $ 17,400
Current portion of long term debt 8,492 730 - 9,222 1,965 1,965
Advances from Nonguarantor
Subsidiaries - 31,956 (31,956) - - - -
Accounts payable(c) 20,784 2,597 - 23,381 11,275 131 11,406
Accrued expenses(c) 23,939 2,432 (16) 26,355 3,006 (3) 3,003
--------- -------- -------- --------- ------- -------- --------
Total current liabilities 86,497 39,933 (31,972) 94,458 31,676 2,098 33,774
--------- -------- -------- --------- ------- -------- --------
LONG-TERM DEBT(a):
Senior subordinated notes 110,000 - - 110,000 - - -
Term loans 104,375 - - 104,375 36,750 - 36,750
Capital leases 1,605 - - 1,605 1,556 - 1,556
Other 1,857 1,057 - 2,914 300 - 300
--------- -------- -------- --------- ------- -------- --------
Total long-term debt 217,837 1,057 - 218,894 38,606 - 38,606
--------- -------- -------- --------- ------- -------- --------
STOCKHOLDER'S EQUITY
Total Stockholder's equity
(deficit)(b) 71,292 12,850 (12,867) 71,275 684 (1,100) (416)
--------- -------- -------- --------- ------- -------- --------
Total liabilities and
Stockholder's equity $ 375,626 $ 53,840 $(44,839) $ 384,627 $70,966 $ 998 $ 71,964
========= ======== ======== ========= ======= ======== ========
footnotes to follow
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
For the Five Months Ended
For the Fiscal Year Ended December 31, 1997 December 31, 1996
------------------------------------------- -------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- ------------ --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES $ 243,344 $ 56,452 $ (43,650) $ 256,146 $ 23,074 $ 920 $ 23,994
COST OF SALES 175,834 40,166 (43,610) 172,390 21,238 735 21,973
---------- -------- ---------- --------- --------- ------ --------
Gross profit 67,510 16,286 (40) 83,756 1,836 185 2,021
SG&A EXPENSES 42,655 4,397 - 47,052 7,225 321 7,546
---------- -------- ---------- --------- --------- ------ --------
Operating income(loss) 24,855 11,889 (40) 36,704 (5,389) (136) (5,525)
INTEREST EXPENSE(c) 15,614 1,492 - 17,106 2,010 1 2,011
---------- -------- ---------- --------- --------- ------ --------
INCOME (LOSS) BEFORE TAXES 9,241 10,397 (40) 19,598 (7,399) (137) (7,536)
INCOME TAX EXPENSE (BENEFIT) 4,532 4,263 (16) 8,779 (2,775) (54) (2,829)
---------- -------- ---------- --------- --------- ------ --------
NET INCOME (LOSS) $ 4,709 $ 6,134 $ (24) $ 10,819 $ (4,624) $ (83) $ (4,707)
========== ======== ========== ========= ========= ====== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
For the Fiscal Year Ended
For the Fiscal Year Ended July 31, 1996 July 31, 1995
--------------------------------------- ----------------------------- July 31, 1995
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantors Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 129,074 $ 4,120 $ 133,194 $ 131,551 $ 2,311 $133,862
COST OF SALES 101,482 3,586 105,068 105,223 2,089 107,312
---------- --------- --------- --------- ------- --------
Gross profit 27,592 534 28,126 26,328 222 26,550
SG&A EXPENSES 23,659 944 24,603 18,508 699 19,207
---------- --------- --------- --------- ------- --------
Operating income (loss) 3,933 (410) 3,523 7,820 (477) 7,343
RECAPITALIZATION EXPENSE 9,600 - 9,600 - -
INTEREST EXPENSE 5,674 34 5,708 4,555 18 4,573
---------- --------- --------- --------- ------- --------
INCOME (LOSS) BEFORE TAXES (11,341) (444) (11,785) 3,265 (495) 2,770
INCOME TAX EXPENSE (BENEFIT) (3,786) - (3,786) 1,577 (137) 1,440
---------- --------- --------- --------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (7,555) (444) (7,999) 1,688 (358) 1,330
LOSS FROM DISCONTINUED
OPERATIONS (NET OF TAX
BENEFIT) - - - - - (585)
---------- --------- --------- --------- ------- --------
NET INCOME (LOSS) $ (7,555) $ (444) $ (7,999) $ 1,103 $ (358) $ 745
========== ========= ========= ========= ======= ========
</TABLE>
<PAGE>
<TABLE> footnotes to follow
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
<S>
For the Five Months Ended
For the Fiscal Year Ended December 31, 1997 December 31, 1996
----------------------------------------------- --------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Hedstrom
---------- ---------- ------------ --------- ---------- ---------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<C> <C> <C> <C> <C> <C> <C>
Net income (loss)(c) $ 4,709 $ 6,134 $ (24) $ 10,819 $ (4,624) $ (83) $ (4,707)
Depreciation and amortization 9,212 1,328 - 10,540 1,973 3 1,976
Deferred income tax provision
(benefit)(c) 6,916 - - 6,916 (2,862) - (2,862)
Gain on the disposition of
property, plant and equipment (1) - - (1) (60) - (60)
Provision for losses on accounts
receivable 1,246 - - 1,246 64 - 64
Changes in assets and
liabilities:
Accounts receivable (40,150) (6,604) - (46,754) 8,794 940 9,734
Inventories 461 4,373 40 4,874 (2,089) 47 (2,042)
Prepaid expenses and other 789 (491) - 298 (132) 13 (119)
Accounts payable(c) 2,535 (534) - 2,001 1,793 (6) 1,787
Accrued expenses(c) (1,768) 1,935 (16) 151 (163) (630) (793)
-------- ------- ------ --------- -------- ------ --------
Net cash provided by (used
for) operating activities (16,051) 6,141 - (9,910) 2,694 284 2,978
-------- ------- ------ --------- -------- ------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc. (122,600) - - (122,600) - - -
Acquisition of certain assets
of Bollinger Industries, Inc. (14,928) - - (14,928) - - -
Acquisitions of PP&E (6,395) - - (6,395) (1,375) (1) (1,376)
Other acquisitions (2,322) - - (2,322) - - -
Proceeds from the sale of PP&E 8 - - 8 67 - 67
-------- ------- ------ --------- -------- ------ --------
Net cash used for investing
activities (146,237) - - (146,237) (1,308) (1) (1,309)
-------- ------- ------ --------- -------- ------ --------
<PAGE>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from issuance of <C> <C> <C> <C> <C> <C> <C>
Senior Subordinated notes 110,000 - - 110,000 - - -
Net proceeds from issuance of
new term loans 110,000 - - 110,000 - - -
Equity contribution from
Holdings(b) 63,750 - - 63,750 - - -
Borrowings on new revolving
line of credit 35,500 - - 35,500 - - -
Repayments of new Term Loans (1,125) - - (1,125) - - -
Repayments of old term loans (87,017) (5,750) - (92,767) - - -
Debt financing cost(b) (19,750) - - (19,750) - - -
Repayments on old revolving
lines of credit, net (42,400) - - (42,400) (8,728) (322) (9,050)
Advances to/(from) Nonguarantor
Subsidiaries (1,078) 1,078 - - - - -
Other 2,395 - - 2,395 (84) - (84)
-------- ------- ------ --------- -------- ------ --------
Net cash provided by (used
for) financing activities 170,275 (4,672) - 165,603 (8,812) (322) (9,134)
-------- ------- ------ --------- -------- ------ --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 7,987 1,469 - 9,456 (7,426) (39) (7,465)
CASH AND CASH EQUIVALENTS:
Purchased Cash 530 325 - 855 - - -
Beginning of period 467 66 - 533 7,893 105 7,998
-------- ------- ------ --------- -------- ------ --------
End of period $ 8,984 $ 1,860 - $ 10,844 $ 467 $ 66 $ 533
======== ======= ====== ========= ======== ====== ========
footnotes to follow
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Year
For the Fiscal Year Ended July 31, 1996 Ended July 31, 1995
--------------------------------------- -------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantors Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- -------- ---------- ---------- --------
<S>
CASH FLOWS FROM OPERATING
ACTIVITIES:
<C> <C> <C> <C> <C> <C>
Net income (loss) $ (7,555) $ (444) $ (7,999) $ 1,103 $ (358) $ 745
Depreciation and amortization 3,407 7 3,414 2,942 5 2,947
Discontinued operations - - - 1,204 1,204
Deferred income tax provision
(benefit) (3,808) - (3,808) 755 - 755
Other (145) - (145) 100 - 100
Changes in assets and liabilities:
Accounts receivable (817) (75) (892) (1,741) (398) (2,139)
Inventories (64) (75) (139) (6,876) (65) (6,941)
Prepaid expenses and other (20) 26 6 (2,434) 6 (2,428)
Accounts payable (8,012) (11) (8,023) 5,662 95 5,757
Accrued expenses 26 (184) (158) (455) 851 396
-------- -------- --------- -------- ------- -------
Net cash provided by (used
for) operating activities (16,988) (756) (17,744) 260 136 396
-------- -------- --------- -------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of PP&E (6,735) (3) (6,738) (2,565) (9) (2,574)
Proceeds from the sale of PP&E 248 - 248 - - -
-------- -------- --------- -------- ------- -------
Net cash used for investing
activities (6,487) (3) (6,490) (2,565) (9) (2,574)
-------- -------- --------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock (29,772) - (29,772) - - -
Redemption of preferred stock (3,072) - (3,072) - - -
Proceeds from the sale of common
stock 29,742 - 29,742 - - -
Term loan borrowings 35,000 - 35,000 - - -
Borrowings (repayments) on
revolving line of credit (3,162) 802 (2,360) 2,983 (84) 2,899
Capital lease (payments) borrowings
and other 1,597 - 1,597 - - -
-------- -------- --------- -------- ------- -------
Net cash provided by (used
for) financing activities 30,333 802 31,135 2,983 (84) 2,899
-------- -------- --------- -------- ------- -------
<PAGE> <C> <C> <C> <C> <C> <C>
NET INCREASE IN CASH AND
CASH EQUIVALENTS 6,858 43 6,901 678 43 721
CASH AND CASH EQUIVALENTS:
Beginning of year 1,035 62 1,097 357 19 376
-------- -------- --------- -------- ------- -------
End of year $ 7,893 $ 105 $ 7,998 $ 1,035 $ 62 $ 1,097
======== ======== ========= ======== ======= =======
footnotes to follow
</TABLE>
<PAGE>
HEDSTROM CORPORATION AND SUBSIDIARIES
FOOTNOTES
Each domestic subsidiary of Hedstrom (the "Subsidiary Guarantors") has fully
and unconditionally guaranteed the Senior Subordinated Notes on a joint and
several basis. The Company has not presented separate financial statements
and other disclosures concerning the Subsidiary Guarantors because management
has determined that such information is not material to investors.
The column "Total Hedstrom" represents the consolidated financial statements
of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is
Holdings' only direct subsidiary. The primary differences between the
consolidated amounts of Hedstrom Corporation and the consolidated amounts
included in the accompanying consolidated financial statements of Holdings
are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million
note payable issued by Holdings in connection with its 1995 recapitalization,
and the Senior Discount Notes valued at $23.3 million at December 31, 1997.
(b) Hedstrom Corporation's stockholder's equity included Holdings'
stockholders' equity plus, as of December 31, 1997 only, $21.6 million in
proceeds from the issuance of Senior Discount Notes, which proceeds were
contributed as equity by Holdings to Hedstrom Corporation and the loss
incurred by Holding's discontinued subsidiary Holdings II and as of
both December 31, 1997 and December 31, 1996, the $2.5 million note payable
described in (a) above.
(c) Accounts payable, interest expense, income tax expense and accrued
expenses do not reflect the accrued interest, interest expense and the tax
benefit of accrued interest on the obligations discussed in (a) above.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers of Holdings and Hedstrom
<PAGE>
The following table sets forth the age and the position of the directors and
executive officers of each of Holdings and Hedstrom.
Name Age Position
- --------------- ----- ----------------------------------------------------
Robert H. Elman 59 Chairman of the Board of Directors of Holdings and
Hedstrom
Alan B. Menkes 38 Director of Holdings and Hedstrom
Jack D. Furst 39 Director of Holdings and Hedstrom
Arnold E. Ditri 61 Director of Holdings and Hedstrom; Chief Executive
Officer and President of Holdings and Hedstrom
David F. Crowley 48 Chief Financial Officer of Holdings and Hedstrom
Alastair H. McKelvie 66 Executive Vice President - Operations of Hedstrom
Michael J. Johnston 50 Executive Vice President - Manufacturing of Hedstrom
Alfred C. Carosi, Jr. 50 Executive Vice President - Sales and Marketing of
Hedstrom
John D. Dellos 59 Vice President - Manufacturing of Hedstrom
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., Venezuela Cable Service Holdings
Ltd. and Ibero American Media Partners.
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
Omni America Holdings Corporation, International Wire Holding Company,
Viasystems Group, Inc., Viasystems, Inc. and Cooperative Computing Holding
Company, Inc.
<PAGE>
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 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.
Michael J. Johnston has been Executive Vice President of Manufacturing of
Hedstrom since November 1997. Prior to joining Hedstrom, Mr. Johnston served
as senior Vice President and General Manger Services Company for Philips
Consumer Electronics from 1994 to 1997. From 1991 to 1994, he was Vice
President of Manufacturing for Black & Decker Household Products Group. From
1989 to 1991, Mr. Johnston was Senior Vice President and General Manger of
Danly Die Set, a division of Connell Ltd. Partnership. From 1970 to 1989,
he served in various manufacturing-related positions with General Electric Co.
Alfred A. Carosi, Jr. has been Executive Vice President of Sales and Marketing
with Hedstrom since December 1996. In this position he is also responsible for
corporate product development. Prior to joining Hedstrom, Mr. Carosi was
Senior Vice President of Marketing and Marketing Services for the Parker
Brothers Division of Hasbro, Inc. from 1991 to 1995. From 1990 to 1991, he
was Vice President of Children's and Family Programs at NBC. Before joining
NBC, Mr. Carosi served as Senior Vice President of Marketing and Marketing
Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's Playskool
Division from 1987 to 1988. Prior to 1987, Mr. Carosi worked in various
marketing-related capacities for Procter and Gamble, Sara Lee Corp. and
Anheuser Busch, Inc.
<PAGE>
John D. Dellos was Executive Vice President of Operations with Hedstrom from
1994 to November 1997 and now serves as Vice President-Manufacturing. 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.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth 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 year ended
December 31, 1997 was in excess of $100,000 (the "Named Executive Officers").
Fiscal year 1997 represents the fiscal year ended December 31, 1997. Fiscal
year 1996 and 1995 represent the twelve months ended July 31, 1996 and 1995,
respectively.
<TABLE>
Long Term
Compensation
---------------------------
Annual Compensation Securities All Other
Name and Fiscal ------------------------- Underlying Compensation
Principal Position Year Salary ($)(1) Bonus ($)(2) Options(#)(3) ($)(4)
- ------------------- ------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Arnold E. Ditri 1997 $340,000 $197,500 456,446 $ 3,791
President and Chief 1996 333,938 - 543,544 3,205
Executive Officer 1995 210,502 - - -
David F. Crowley (5) 1997 121,900 48,760 28,233 251
Chief Financial 1996 107,705 - 271,777 270
Officer 1995 102,937 13,237 - -
John D. Dellos 1997 187,155 61,695 - 855
Vice President 1996 102,322 - 271,777 50,790
Manufacturing 1995 143,863 22,113 - 630
Alfred A. Carosi,Jr.(6) 1997 220,644 90,000 200,000 39,774
Executive Vice 1996 17,917 - - -
President Sales and 1995 - - - -
Marketing
Alastair H. McKelvie(7) 1997 90,000 36,000 28,333 1,008
Executive Vice 1996 82,500 - 271,777 -
President Operations 1995 - - - -
</TABLE>
<PAGE>
(1) Includes the following amounts deferred by Messrs., Ditri, Dellos
and Carosi, respectively, pursuant to the Company's Savings Plan for
the following fiscal years: 1997, $18,837, $7,528 and $10,014; 1996,
$15,766, $7,901 and $0; 1995, $10,262, $8,184 and $0.
(2) Amount includes bonuses accrued during each fiscal year but paid shortly
thereafter.
(3) All stock option grants were made pursuant to the Company's 1995 and 1997
Stock Option Plans.
(4) Represents premiums paid by the Company under a group term life insurance
plan, the reimbursement of Mr. Carosi's relocation expenses in 1997 and the
reimbursement of Mr. Dellos' relocation expenses in 1996.
(5) Mr. Crowley was named Chief Financial Officer of the Company effective
November, 1994.
(6) Mr. Carosi was named Executive Vice President of Sales and Marketing of
the Company effective December, 1996.
(7) Mr. McKelvie was named Executive Vice President of Operations effective
September, 1997.
The following table summarizes option grants made during the year ended
December 31, 1997 to the Named Executive Officers.
<TABLE>
Option Grant Table
Option Grants in Last Fiscal Year
Potential
Realizable Value
at Assumed
Number Percent Annual Rates
of of of Stock Price
Securities Total Excercise Appreciation for
Underlying Options or Option Term
Options Employees Base --------------------
Granted During Price Expiration
(1) Year ($/sh) Date 5% 10%
---------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Arnold E. Ditri 456,446 25.8% $ 1.25 12/07 $358,821 $909,322
David F. Crowley 28,233 1.6% $ 1.25 12/07 22,194 56,245
Alfred A. Carosi, Jr. 200,000 11.3% $ 1.25 12/07 157,224 398,436
Alastair H. McKelvie 28,233 1.6% $ 1.25 12/07 22,194 56,245
</TABLE>
_________
(1) The options to purchase Holdings Common Stock were granted under the
Hedstrom Holdings, Inc. 1997 Stock Option Plan (the "1997 Option Plan") and
become exercisable in three equal annual installments commencing on the first
anniversary of the date of grant.
<PAGE>
(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 $1.25 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 $1.25 per share based on
the per share price paid by Hicks Muse and its affiliates in connection with
the Acquisition. 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 December 31, 1997.
Option Exercises and Year-End Option Value Table
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values(1)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1997 December 31, 1997(2)
--------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Arnold E. Ditri 362,363 637,627 $90,591 $45,296
David F. Crowley 181,185 118,825 45,296 22,648
John D. Dellos 181,185 90,592 45,296 22,648
Alfred A. Carosi, Jr. 66,667 333,333 16,667 33,333
Alastair H. McKelvie 181,185 118,825 45,296 22,648
__________
(1) No options were exercised by a Named Executive Officer in 1997.
(2) Assumes a fair market value of $1.25 per share. Because Holdings
Common Stock is privately-held, for purposes of the calculation of the
value of unexercised options as of December 31, 1997, Hedstrom has
assumed a per share fair market value for Holdings Common Stock equal
to the per share price paid by Hicks Muse and its affiliates in
connection with the Acquisition.
Item 12. Security Ownership of Certain Beneficial Owners and Management
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
<PAGE>
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 as of March 23, 1998.
Shares of Holdings
Common Stock
Beneficially Owned
----------------------------------------
Name Number of Shares Percent of Class
----------------------------- ---------------- ----------------
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 2.4%
Alan B. Menkes (1)(2) 55,385,370 81.9%
Jack D. Furst (1)(3) 55,451,640 82.0%
Arnold E. Ditri (4) 4,268,663 6.3%
David E. Crowley (5) 212,764 *
John N. Dellos (6) 260,132 *
Alastair H. McKelvie (7) 1,974,885 3.0%
Alfred C. Carosi, Jr. (8) 66,667 *
All executive officers and
directors as a group (9
persons) 63,896,121 93.1%
__________
* Represents less than 1%
<PAGE>
(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,
Chief Executive 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) 362,363 shares subject to options that are exercisable within 60 days.
Mr. Ditri disclaims beneficial ownership of shares not owned of record by him.
(5) Includes (i) 31,579 shares owned of record by Mr. Crowley and (ii) 181,185
shares subject to options that are exercisable within 60 days.
(6) Includes (i) 78,947 shares owned of record by Mr. Dellos and (ii) 181,185
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)
181,185 shares subject to options that are exercisable within 60 days.
(8) Consists of shares subject to options that are exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
<PAGE>
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 (initially $175,000) for oversight and monitoring services to
Holdings and Hedstrom. The annual fee is adjustable each July 31st to an
amount equal to 0.1% of the consolidated net sales of Hedstrom during the
previous twelve months, 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.
<PAGE>
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.
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.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
Report of Independent Accountants
Consolidated Income Statements for the Fiscal Year Ended December 31,
1997, for the Five Months Ended December 31, 1996 and for the Fiscal
Years Ended July 31, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Fiscal Year Ended
December 31, 1997, for the Five Months Ended December 31, 1996 and
for the Fiscal Years Ended July 31, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the Fiscal Year
Ended December 31, 1997, for the Five Months Ended December 31, 1996
and for the Fiscal Years Ended July 31, 1996 and 1995.
Notes to Consolidated Financial Statements
<PAGE>
(2) Financial Statement Schedule
Schedule IX - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not applicable
or are not required, or because the required information has been
included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits
Description of Exhibits
(1) 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) 3.4 - Certificate of Incorporation of New Hedstrom Corp., as filed
with the Secretary of State of the State of Delaware on
November 20, 1990.
(1) 3.5 - Certificate of Amendment of the Certificate of Incorporation
of New Hedstrom Corp., as filed with the Secretary of State
of the State of Delaware on January 14, 1991.
(1) 3.6 - By-Laws of Hedstrom Corporation.
(1) 3.7 - Amended and Restated Certificate of Incorporation of ERO,
Inc., as filed as Annex A to that certain Certificate of
Ownership and & Merger filed with the Secretary of State of
the State of Delaware on June 12, 1997 merging HC Acquisition
Corp. with and into ERO, Inc.
(1) 3.8 - Amended and Restated Bylaws of ERO, Inc.
(1) 3.9 - Certificate of Incorporation of ERO Industries, Inc., as
filed as Annex A to that certain Certificate of Merger filed
with the Secretary of State of the State of Delaware on July
15, 1988 merging GTC Leisure, Inc. with and into ERO
Industries, Inc.
(1) 3.10 - By-Laws of ERO Industries, Inc.
(1) 3.11 - Articles of Incorporation of ERO Marketing, Inc., as filed
with the Secretary of State of the State of Illinois on
January 21, 1992.
(1) 3.12 - Bylaws of ERO Marketing, Inc.
<PAGE>
(1) 3.13 - Certificate of Incorporation of Priss Prints Acquisition
Corp., as filed with the Secretary of State of the State
of Delaware on September 19, 1986.
(1) 3.14 - Certificate of Amendment of Certificate of Incorporation
of Priss Prints Acquisition Corp., as filed with the
Secretary of State of the State of Delaware on November 5,
1986.
(1) 3.15 - By-Laws of Priss Prints, Inc.
(1) 3.16 - Certificate of Incorporation of Impact, Inc., as filed with
the Secretary of State of the State of Delaware on November
3, 1993.
(1) 3.17 - By-Laws of Impact, Inc.
(1) 3.18 - Certificate of Incorporation of ERO Canada, Inc., as filed
with the Secretary of State of the State of Delaware on
August 3, 1994.
(1) 3.19 - By-Laws of ERO Canada, Inc.
(1) 3.20 - Certificate of Incorporation of ERO NY Acquisition, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 12,1995.
(1) 3.21 - Certificate of Amendment of Certificate of Incorporation
of ERO NY Acquisition, Inc., as filed with the Secretary
of State of the State of Delaware on January 23, 1996.
(1) 3.22 - By-Laws of Amav Industries, Inc.
(1) 4.1 - 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) 4.2 - Form of Old Senior Subordinated Note.
(1) 4.3 - Form of New Senior Subordinated Note.
(1) 4.4 - Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.
(1) 4.5 - Form of Old Discount Note.
(1) 4.6 - Form of New Discount Note.
(1) 4.7 - [Intentionally Omitted]
(1) 4.8 - 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.
<PAGE>
(1) 4.9 - 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) 10.1 - 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
(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 - Stockholders Agreement, dated as of October 27, 1995, among
Hedstrom Holdings and the holders listed on the signature
pages thereof.
(1) 10.13 - 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) 10.14 - Form of Subordinated Note issued by Hedstrom Holdings, Inc.
(1) 10.15 - 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.
<PAGE>
(1) 10.16 - Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc.
(1) 10.17 - 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) 10.18 - Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc.
(1) 10.19 - 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) 10.20 - Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri.
(1) 10.21 - Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair McKelvie.
(1) 10.22 - Monitoring and Oversight Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Hicks, Muse & Co. Partners, L.P.
(1) 10.23 - Financial Advisory Agreement, dated as of October 27, 1995,
among Hedstrom Holdings, Inc., Hedstrom Corporation and
HM2/Management Partners, L.P.
(1) 10.24 - Hedstrom Holdings, Inc. 1995 Stock Option Plan.
(2) 10.25 - The Third Restatement of ERO Industries, Inc. Retirement
Income Plan (401(k)).
10.26 - The Hedstrom Corporation Tax Sheltered Savings Plan
(401(k)).
10.27 - 1997 Hedstrom Holdings, Inc. Stock Option Plan.
10.28 - Amendment Number One, dated November 11, 1997, and Amendment
Number Two, dated December 19, 1997, to the Credit Agreement,
dated as of June 12, 1997, among Hedstrom Corporation,
Hedstrom Holdings, Inc., the financial institutions party
thereto and Credit Suisse First Boston, as agent.
10.29 - Specimen and listing of all license agreements between
Disney Enterprises, Inc. and Hedstrom Corporation and its
Subsidiaries.
(3) 10.30 - Second Amendment to the Third Restatement of ERO Industries,
Inc. Retirement Income Plan (401(k)).
11.1 - Computation of Earnings Per Share.
(1) 21.1 - Subsidiaries of the Company.
<PAGE>
23.1 - Consent of Arthur Andersen LLP, independent auditors.
____________
(1) Incorporated by reference to the respective exhibit to Holdings' and
Hedstrom's Registration Statement on Form S-1 (File Nos. 333-32385-05
and 333-32385).
(2) Incorporated by reference to ERO, Inc.'s Report on Form 10-K (File
No. 0-19942) for the fiscal year ended December 31, 1993.
(3) Incorporated by reference to ERO, Inc.'s Report on Form 10-K (File
No. 0-19942) for the fiscal year December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, each of the Co-Registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Mount Prospect, State of Illinois, on the 23rd day of March, 1998.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
By: /s/ ARNOLD E. DITRI
Arnold E. Ditri
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ ROBERT H. ELMAN Chairman of the Board of Directors March 23, 1998
- --------------------- Directors of the Co-Registrants
Robert H. Elman listed above
/s/ ARNOLD E. DITRI President, Chief Executive Officer March 23, 1998
- --------------------- and Director of the Co-Registrants
Arnold E. Ditri listed above
(Principal Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the March 23, 1998
- --------------------- Co-Registrants listed above
David F. Crowley (Principal Financial and
Accounting Officer)
/s/ ALAN B. MENKES Director of the Co-Registrants March 23, 1998
- --------------------- listed above
Alan B. Menkes
/s/ JACK D. FURST Director of the Co-Registrants March 23, 1998
- --------------------- listed above
Jack D. Furst
<TABLE>
<PAGE>
Hedstrom Holdings, Inc.
Schedule IX
Valuation and Qualifying Accounts and Reserves
As of and for the Fiscal Year Ended December 31, 1997
and as of and for the Fiscal Years Ended July 31, 1996 and 1995
Additions Deletions
------------------------- -----------------------
Foreign
Balance at Charged to Charged Currency Balance
Beginning Costs and to Other Write- Translation at End
of Year Expenses Accounts offs Adjustment of Year
---------- ---------- ----------- ----------- ----------- ------------
1997
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 505,000 $1,258,000 $ 751,000(1) $ (196,000) $(21,000) $2,297,000
Accumulated amortization of
goodwill - 2,384,000 - - - 2,384,000
Amortization of deferred
financing fees - 3,246,000 - - - 3,246,000
Accumulated amortization of
deferred charges 747,000 882,000 - - - 1,629,000
1996
Allowance for doubtful accounts $ 405,000 $ 76,000 - $ (39,000) $ (1,000) $ 441,000
Accumulated amortization of
deferred charges 2,907,000 520,000 - (3,030,000)(2) - 397,000
1995
Allowance for doubtful accounts $ 305,000 $ 224,000 $(124,000) - - $ 405,000
Accumulated amortization of
deferred charges 2,325,000 582,000 - - - 2,907,000
</TABLE>
(1) Represents reserve established on the opening balance sheet pursuant to
the ERO, Inc. acquisition.
(2) Represents a write-off in connection with the Company's 1995
Recapitalization.
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN
AND TRUST/CUSTODIAL ACCOUNT
Sponsored By
PNC BANK, NATIONAL ASSOCIATION
BASIC PLAN DOCUMENT #04
February 1993
COPYRIGHT 1993 THE McKAY HOCHMAN COMPANY, INC.
THIS DOCUMENT IS COPYRIGHTED UNDER THE LAWS OF THE UNITED STATES. USE,
DUPLICATION OR REPRODUCTION, INCLUDING THE USE OF ELECTRONIC MEANS, IS
PROHIBITED BY LAW WITHOUT THE EXPRESS CONSENT OF THE AUTHOR.
ARTICLE XVI
GOVERNING LAW
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN AND TRUST/CUSTODIAL
ACCOUNT
Sponsored By
PNC BANK, NATIONAL ASSOCIATION
The Sponsor hereby establishes the following Prototype Retirement Plan and
Trust/Custodial Account for use by those of its customers who qualify and
wish to adopt a qualified retirement program. Any Plan and Tnist/Custodial
Account established hereunder shall be administered for the exclusive benefit
of Participants and their beneficiaries under the following terms and
conditions:
ARTICLE I
DEFINITIONS
1.1 Actual Deferral Percentage - The ratio (expressed as a percentage and
calculated separately for each Participant) of:
(a) the amount of Employer contributions [as defined at (c) and (d)]
actually paid over to the Fund on behalf of such Participant for the Plan
Year to
(b) the Participant's Compensation for such Plan Year.
Compensation will only include amounts for the period during which the
Employee was eligible to participate.
Employer contributions on behalf of any Participant shali include:
(c) any Elective Deferrals made pursuant to the Participant's deferral
election, including Excess Elective Deferrals, but excluding Elective
Deferrals that are either taken into account in the Contribution Percentage
test (provided the ADP test is satisfied both with and without exclusion of
these Elective Deferrals) or are returned as excess Annual Additions; and
(d) at the election of the Employer, Qualified Non-Elective Contributions
and Qualified Matching Contributions.
For purposes of computing Actual Deferral Percentages, an Employee who would
be a Participant but for the failure to make Elective Deferrals shall be
treated as a Participant on whose behalf no Elective Deferrals are made.
1.2 Adoption Agreement - The document attached to this Plan by which an
Employer elects to establish a qualified retirement plan and trust/custodiaI
account under the terms of this Prototype Plan and Trust/Custodial Account.
1.3 Aggregate Limit - The sum of:
(a) 125 percent of the greater of the ADP of the non-Highly Compensated
Employees for the Plan Year or the ACP of non-Highly Compensated Employees
under the Plan subject to Code Section 401(m) for the Plan Year beginning
with or within the Plan Year of the cash or deferred arrangement as described
in Code Section 401(k) or Code Section 402(h)(1)(B), and
(b) the lesser of 260% or two percent plus the lesser of such ADP or ACP.
Alternatively, the aggregate limit can be determined by substituting "the
lesser of 200% or 2 percent plus" for 125 % of" in (a) above, and
substituting "1 25 % of" for "the lesser of 200% or 2 percent plus" in
(b) above.
1.4 Annual Additions - The sum of the following amounts credited to a
Participant's account for the Limitation Year:
(a) Employer Contributions,
(b) Employee Contributions (under Article IV),
(c) forfeitures,
(d) amounts allocated after March 31, 1994 to an individual medical
account, as defined in Code Section 415(l)(2), which is part of a pension or
annuity plan maintained by the Employer (these amounts are treated as Annual
Additions to a Defined Contribution Plan though they arise under a Defined
Benefit Plan), and
(e) amounts derived from contributions paid or accrued after 1985, in
taxable years ending after 1985, which are either attributable to post-
retirement medical benefits allocated to the account of a Key Emplovee, or
to a Welfare Benefit Fund maintained by the Employer, are also treated as
Annual Additions to a Defined Contribution Plan. For purposes of this
paragraph, an Employee is a Key Employee if he or she meets the requirements
of paragraph 1.43 at any time during the Plan Year or any preceding Plan Year.
Welfare Benefit Fund is defined at paragraph 1.89.
Excess amounts applied in a Limitation Year to reduce Employer contributions
will be considered Annual Additions for such Limitation Year, pursuant to
the provisions of Article X.
1.5 Annuity Starting Date - The first day of the first period for which an
amount is paid as an annuity or in any other form.
1.6 Applicable Calendar Year - The First Distribution Calendar Year, and
in the event of the recalculation of life expectancy, such succeeding
calendar year. If payments commence in accordance with paragraph 7.4(c)
before the Required Beginning Date, the Applicable Calendar Year is the year
such payments commence. If distribution is in the form of an immediate
annuity purchased after the Participant's death with the Participant's
remaining interest, the Applicable Calendar Year is the year of purchase.
1.7 Applicable Life Expectancy - Used in determining the required minimum
distribution. The life expectancy (or joint and last survivor expectancy)
calculated using the attained age of the Participant (or Designated
Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday
in the Applicable Calendar Year reduced by one for each calendar year which
has elapsed since the date life expectancy was first calculated. If life
expectancy is being recalculated, the Applicable Life Expectancy shall be
the life expectancy as so recalculated. The life expectancy of a non-Spouse
Beneficiary may not be recalculated.
1.8 Average Contribution Percentage (ACP) - The average of the Contribution
Percentages for each Highly Compensated Employee and for each non-Highly
Compensated Employee.
1.9 Average Deferral Percentage (ADP) - The average of the Actual Deferral
Percentages for each Highly Compensated Employee and for each non-Highly
Compensated Employee.
1.10 Break In Service - A Inconsecutive month period during which an
Employee fails to complete more than 500 Hours of Service.
1.11 Code - The Internal Revenue Code of 1986, including any
amendments.
1.12 Compensation - The Employer may select one of the following
three safe-harbor definitions of Compensation in the Adoption Agreement.
Compensation shall only include amounts earned while a Participant if Plan
Year is chosen as the applicable computation period.
(a) Code Section 3401 (a) Wages. Compensation is defined as wages within
the meaning of Code Section 3401 (a) for the purposes of Federal income tax
withholding at the source but determined without regard to any rules that
limit the remuneration included in wages based on the nature or location of
the employment or the services performed [such as the exception for
agricultural labor in Code Section 3401(a)(2)].
(b) Code Section 6041 and 6051 Wages. Compensation is defined as wages as
defined in Code Section 3401(a) and all other payments of compensation to an
Employee by the Employer (in the course of the Employer's trade or business)
for which the Employer is required to furnish the employee a written statement
under Code Section 6041(d) and 6051(a)(3). Compensation must be determined
without regard to any rules under Code Section 3401(a) that limit the
remuneration included in wages based on the nature or location of the
employment or the services performed [such as the exception for agricultural
labor in Code Section 3401(a)(2)].
(c) Code Section 415 Compensation. For purposes of applying the
limitations of Article X and Top-Heavy, Minimums, the definition of
Compensation shall be Code Section 415 Compensation defined as follows: a
Participant's Earned Income, wages, salaries, and fees for professional
services and other amounts received (without regard to whether or not an
amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer maintaining the Plan to the extent
that the amounts are includible in gross income (including, but not limited
to, commissions paid salesmen, Compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses,
fringe benefits and reimbursements or other expense allowances under a
nonaccountable plan (as described in Regulation 1.62-2(c)], and excluding
the following:
1 . Employer contributions to a plan of deferred compensation which are
not includible in the Employee's gross income for the taxable year in which
contributed, or Employer contributions under a Simplified Emplovee Pension
Plan or any distributions from a plan of deferred compensation,
2. Amounts realized from the exercise of a non-qualified stock option,
or when restricted stock (or property) held by the Employee either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture,
3 . Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
4 . Other amounts which received special tax benefits, or contributions
made bv the Employer (whether or not under a salary reduction agreement)
towards the purchase of an annuity contract described in Code Section 403(b)
(whether or not the contributions are actually excludible from the gross
income of the Employee).
For purposes of applying the limitations of Article X and Top-Heavy Minimums,
the definition of Compensation shall be Code Section 415 Compensation
described in this paragraph 1. 12(c). Also, for purposes of applying the
limitations of Article X, Compensation for a Limitation Year is the
Compensation actually paid or made available during such Limitation Year.
Notwithstanding the preceding sentence, Compensation for a Participant in a
defined contribution plan who is permanently and totally disabled [as defined
in Code Section 22(e)(3)] is the Compensation such Participant would have
received for the Limitation Year if the Participant had been paid at the
rate of Compensation paid immediately before becoming permanently and
totally disabled. Such imputed Compensation for the disabled Participant
may be taken into account only if the participant is not a Highly
Compensated Employee [as defined in Code Section 414(q)] and contributions
made on behalf of such Participant are nonforfeitable when made.
If the Employer fails to pick the applicable period in the Adoption
Agreement, the Plan Year shall be used. Unless otherwise specified by the
Employer in the Adoption Agreement, Compensation shall be determined as
provided in Code Section 3401(a) [as defined in this paragraph 1.12(a)]. In
nonstandardized Adoption Agreement 002, the Employer may choose to eliminate
or exclude categories of Compensation which do not violate the provisions of
Code Sections 401(a)(4), 414(s) the regulations thereunder and Revenue
Procedure 8965.
Beginning with 1989 Plan Years, the annual Compensation of each Participant
which may be taken into account for determining all benefits provided under
the Plan (including benefits under Article XIV) for any year shall not exceed
$200,000, as adjusted under Code Section 415(d). In determining the
Compensation of a Participant for purposes of this limitation, the rules of
Code Section 414(q)(6) shall apply, except in applying such rules, the term
"family" shall include only the Spouse of the Participant and any lineal
descendants of the Participant who have not attained age 19 before the end of
the Plan year. If, as a result of the application of such rules the adjusted
$200,000 limitation is exceeded, then (except for purposes of determining
the portion of Compensation up to the integration level if this Plan provides
for permitted disparity), the limitation shall be prorated among the affected
individuals in proportion to each such individual's Compensation as determined
under this section prior to the application of this limitation.
If a Plan has a Plan Year that contains fewer than 12 calendar months, then
the annual Compensation limit for that period is an amount equal to the
$200,000 as adjusted for the calendar year in which the Compensation period
begins, multiplied by a fraction the numerator of which is the number of
full months in the Short Plan Year and the denominator of which is 12. If
Compensation for any prior Plan Year is taken into account in determining
an Employee's contributions or benefits for the current year, the
Compensation for such prior year is subject to the applicable annual
Compensation limit in effect for that prior year. For this purpose, for
years beginning before January 1, 1990, the applicable annual Compensation
limit is $200,000.
Compensation shall not include deferred Compensation other than contributions
through a salary reduction agreement to a cash or deferred plan under Code
Section 401(k), a Simplified Employee Pension Plan under Code Section 402(h)
(1)(B), a cafeteria plan under Code Section 125 or a tax-deferred annuity
under Code Section 403(b). Unless elected otherwise by the Employer in the
Adoption Agreement, these deferred amounts will be considered as Compensation
for Plan purposes. These deferred amounts are not counted as Compensation for
purposes of Articles X and XIV. When applicable to a Self-Employed Individual
Compensation shall mean Earned Income.
1.13 Contribution Percentage - The ratio (expressed as a percentage and
calculated separately for each Participant) of:
(a) the Participant's Contribution Percentage Amounts [as defined at
(c)-(f)] for the Plan Year, to
(b) the Participant's Compensation for the Plan Year. Compensation will
only include amounts for the period during which the Employee was eligible to
participate.
Contribution Percentage Amounts on behalf of any Participant shall include:
(c) the amount of Employee Voluntary Contributions, Matching Contributions,
and Qualified Matching Contributions (to the extent not taken into account
for purposes of the ADP test) made under the Plan on behalf of the
Participant for the Plan Year,
(d) forfeitures of Excess Aggregate Contributions or Matching Contributions
allocated to the Participant's account which shall be taken into account in
the year in which such forfeiture is allocated,
(e) at the election of the Employer, Qualified Non-Elective Contributions,
and
(f) the Employer also may elect to use Elective Deferrals in the
Contribution Percentage Amounts so long as the ADP test is met before the
Elective Deferrals are used in the ACP test and continues to be met following
the exclusion of those Elective Deferrals that are used to meet the ACP test.
Contribution Percentage Amounts shall not include Matching Contributions,
whether or not Qualified, that are forfeited either to correct Excess
Aggregate Contributions, or because the contributions to which they relate
are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions.
1.14 Custodian - The Sponsor of this Prototype, or, if applicable, an
affiliate or successor, shall serve as Custodian if a Custodian is appointed
in the Adoption Agreement.
1.15 Defined Benefit Plan - A Plan under which a Participant's benefit is
determined by a formula contained in the Plan and no individual accounts are
maintained for Participants.
1.16 Defined Benefit (Plan) Fraction - A fraction, the numerator of which
is the sum of the Participant's Projected Annual Benefits under all the Defined
Benefit Plans (whether or not terminated) maintained by the Employer, and the
denominator of which is the lesser of 125 percent of the dollar limitation
determined for the Limitation Year under Code Sections 415(b) and (d) or 140
percent of the Highest Average Compensation, including any adjustments under
Code Section 415(b).
Notwithstanding the above, if the Participant was a Participant as of the
first day of the first Limitation Year beginning after 1986, in one or more
Defined Benefit Plans maintained by the Employer which were in existence on
May 6, 1986, the denominator of this fraction will not be less than 125
percent of the sum of the annual benefits under such plans which the
Participant had accrued as of the close of the last Limitation Year
begirming before 1987, disregarding any changes in the terms and conditions
of the plan after May 5, 1986. The preceding sentence applies only if the
Defined Benefit Plans individually and in the aggregate satisfied the
requirements of Section 415 for all Limitation Years beginning before 1987.
1.17 Defined Contribution Dollar Limitation - Thirty thousand dollars
($30,000)or if greater, one-fourth of the defined benefit dollar limitation
set forth in Code Section 415(b)(1) as in effect for the Limitation Year.
1.18 Defined Contribution Plan - A Plan under which individual accounts
are maintained for each Participant to which all contributions, forfeitures,
investment income and gains or losses, and expenses are credited or deducted.
A Participant's benefit under such Plan is based solely on the fair market
value of his or her account balance.
1.19 Defined Contribution (Plan) Fraction - A Fraction, the numerator of
which is the sum of the Annual Additions to the Participant's account under
all the Defined Contribution Plans (whether or not terminated) maintained by
the Employer for the current and all prior Limitation Years (including the
Annual Additions attributable to the Participant's nondeductible Employee
contributions to all Defined Benefit Plans, whether or not terminated,
maintained by the Employer, and the Annual Additions attributable to all
Welfare Benefit Funds, as defined in paragraph 1.89 and individual medical
accounts, as defmed in Code Section 415(l)(2), maintained by the Employer),
and the denominator of which is the sum of the maximum aggregate amounts for
the current and all prior Limitation Years of service with the Employer
(regardless of whether a Defined Contribution Plan was maintained by the
Employer). The maximum aggregate amount in the Limitation Year is the
lesser of 125 percent of the dollar limitation determined under Code Sections
415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of
the Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first day of the first
Limitation Year beginning after 1986, in one or more Defined Contribution
Plans maintained by the Employer which were in existence on May 6,1986, the
numerator of this fraction will be adjusted if the sum of this fraction and
the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of
this Plan. Under the adjustment, an amount equal to the product of (1) the
excess of the sum of the fractions over 1.0 times (2) the denominator of
this fraction will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last Limitation Year beginning before 1987,
and disregarding any changes in the terms and conditions of the Plan made
after May 6, 1986, but using the Section 415 limitation applicable to the
first Limitation Year beginning on or after January 1, 1987. The Annual
Addition for any Limitation Year beginning before 1987, shall not be
re-computed to treat all Employee Contributions as Annual Additions.
1.20 Designated Beneficiary - The individual who is designated as
the beneficiary under the Plan in accordance with Code Section 401(a)(9)
and the regulations thereunder.
1.21 Disability - An illness or injury of a potentially permanent nature,
expected to last for a continuous period of not less than 12 months,
certified by a physician selected by or satisfactory to the Employer, which
prevents the Employee from engaging in anv occupation for wage or profit for
which the Employee is reasonably fitted by training, education or experience.
1.22 Distribution Calendar Year - A calendar year for which a minimum
distribution is required.
1.23 Early Retirement Age - The age set by the Employer in the Adoption
Agreement (but not less than 55), which is the earliest age at which a
Participant may retire and receive his or her benefits under the Plan.
1.24 Earned Income - Net earnings from self-employment in the trade or
business with respect to which the Plan is established, determined without
regard to items not included in gross income and the deductions allocable to
such items, provided that personal services of the individual are a material
income-producing factor. Earned income shall be reduced by contributions
made by an Employer to a qualified plan to the extent deductible under Code
Section 404. For tax years beginning after 1989, net earnings shall be
determined taking into account the deduction for one-half of self-employment
taxes allowed to the Employer under Code Section 164(f) to the extent
deductible.
1.25 Effective Date - The date on which the Employer's retirement plan or
amendment to such plan becomes effective. For amendments reflecting
statutory and regulatory changes post Tax Reform Act of 1986, the Effective
Date will be the earlier of the date upon which such amendment is first
administratively applied or the first day of the Plan Year following the
date of adoption of such amendment.
1.26 Election Period - The period which begins on the first day of the Plan
Year in which the Participant attains age 35 and ends on the date of the
Participant's death. If a Participant separates from service prior to the
first day of the Plan Year in which age 35 is attained, the Election Period
shall begin on the date of separation, with respect to the account balance as
of the date of separation.
1.27 Elective Deferral - Employer contributions made to the Plan at the
election of the Participant, in lieu of cash Compensation. Elective
Deferrals shall also include contributions made pursuant to a Salary Savings
Agreement or other deferral mechanism, such as a cash option contribution.
With respect to any taxable year, a Participant's Elective Deferral is the
sum of all Employer contributions made on behalf of such Participant pursuant
to an election to defer under any qualified cash or deferred arrangement as
described in Code Section 401(k), any simplified employee pension cash or
deferred arrangement as described in Code Section 402(h)(1)(B), any eligible
deferred compensation plan under Code Section 457, any plan as described
under Code Section 501(c)(18), and any Employer contributions made on the
behalf of a Participant for the purchase of an annuity contract under Code
Section 403(b) pursuant to a Salary Savings Agreement. Elective Deferrals
shall not include any deferrals properly distributed as Excess Annual
Additions.
1.28 Eligible Participant - Any Employee who is eligible to make a
Voluntary Contribution, or an Elective Deferral (if the Employer takes such
contributions into account in the calculation of the Contribution Percentage),
or to receive a Matching Contribution (including forfeitures) or a Qualified
Matching Contribution. If a Voluntary Contribution or Elective Deferral is
required as a condition of participation in the Plan, any Employee who would
be a Participant in the Plan if such Employee made such a contribution
shall be treated as an Eligible Participant even though no Voluntary
Contributions or Elective Deferrals are made.
1.29 Employee - Any person employed by the Employer (including Self-
Employed Individuals and partners), all Employees of a member of an affiliated
service group [as defined in Code Section 414(m)], Employees of a controlled
group of corporations [as defined in Code Section 414(b)], all Employees of any
incorporated or unincorporated trade or business which is under common
control [as defined in Code Section 414(c)], Leased Employees [as defined in
Code Section 414(n)) and any Employee required to be aggregated by Code
Section 414(o). All such Employees shall be treated as employed by a single
Employer.
1.30 Employer - The Self-Employed Individual, partnership, corporation or
other organization which adopts this Plan including any firm that succeeds
the Employer and adopts this Plan. For purposes of Article X, Limitations on
Allocations, Employer shall mean the Employer that adopts this Plan, and all
members of a controlled group of corporations [as defined in Code Section 414
(b) as modified by Code Section 415(h)], all commonly controlled trades or
businesses [as defined in Code Section 414(c) as modified by Code Section 415
(h)] or affiliated service groups [as defined in Code Section 414(m)] of
which the adopting Employer is a part, and any other entity required to be
aggregated with the Employer pursuant to regulations under Code Section
414(o).
1.31 Entry Date - The date on which an Employee commences participation in
the Plan as determined by the Employer in the Adoption Agreement.
1.32 Excess Aggregate Contributions - The excess, with respect to any Plan
Year, of:
(a) The aggregate Contribution Percentage Amounts taken into account in
computing the numerator of the Contribution Percentage actually made on
behalf of Highly Compensated Employees for such Plan Year, over
(b) The maximum Contribution Percentage Amounts permitted by the ACP
test (determined by reducing contributions made on behalf of Highly
Compensated Employees in order of their Contribution Percentages beginning
with the highest of such percentages),
Such determination shall be made after first determining Excess Elective
Deferrals pursuant to paragraph 1.35 and then determining Excess
Contributions pursuant to paragraph 1.34.
1.33 Excess Amount - The excess of the Participant's Annual Additions for
the Limitation Year over the Maximum Permissible Amount.
1.34 Excess Contribution - With respect to any Plan Year, the excess of:
(a) The aggregate amount of Employer contributions actually taken into
account in computing the ADP of Highly Compensated Employees for such Plan
Year, over
(b) The maximum amount of such contributions permitted by the ADP test
(determined by reducing contributions made on behalf of Highly Compensated
Employees in order of the ADPS, beginning with the highest of such
percentages).
1.35 Excess Elective Deferrals - Those Elective Deferrals that are
includible in a Participant's gross income under Code Section 402(g) to the
extent such Participant's Elective Deferrals for a taxable year exceed the
dollar limitation under such Code Section. Excess Elective Deferrals shall be
treated as Annual Additions under the Plan, unless such amounts are
distributed no later than the first April 15th following the close of the
Participant's taxable year.
1.36 Family Member - The Employee's Spouse, any lineal descendants and
ascendants and the Spouse of such lineal descendants and ascendants.
1.37 First Distribution Calendar Year - For distributions beginning before
the Participant's death, the First Distribution Calendar Year is the calendar
year immediately preceding the calendar year which contains the Participant's
Required Beginning Date. For distributions beginning after the Participant's
death, the First Distribution Calendar Year is the calendar year in which
distributions are required to begin pursuant to paragraph 7.10.
1.38 Fund - All contributions received by the Trustee/Custodian under this
Plan and Trust/Custodial Account, investments thereof and earnings and
appreciation thereon.
1.39 Hardship - An immediate and heavy financial need of the Employee where
such Employee lacks other available resources.
1.40 Highest Average Compensation - The average Compensation for the three
consecutive Years of Service with the Employer that produces the highest
average. A Year of Service with the Employer is the Inconsecutive month
period defmed in the Adoption Agreement.
1.41 Highly Compensated Employee - Any Employee who performs service for
the Employer during the determination year and who, during the immediate prior
year:
(a) received Compensation from the Employer in excess of $75,000 [as
adjusted pursuant to Code Section 415(d)]; or
(b) received Compensation from the Employer in excess of $50,000 [as
adjusted pursuant to Code Section 415(d)] and was a member of the Top-Paid
Group for such year; or
(c) was an officer of the Employer and received Compensation during such
year that is greater than 50 percent of the dollar limitation in effect under
Code Section 415(b)(1)(A).
Notwithstanding (a), (b) and (c), an Employee who was not Highly Compensated
during the preceding Plan Year shall not be treated as a Highly Compensated
Employee with respect to the current Plan Year unless such Employee is a
member of the 100 Employees paid the greatest Compensation during the year
for which such determination is being made.
(d) Employees who are five percent (5 %) Owners at any time during the
immediate prior year or determination year.
Highly Compensated Employee includes Highly Compensated active Employees and
Highly Compensated former Employees.
1.42 Hour Of Service
(a) Each hour for which an Employee is paid, or entitled to payment, for
the performance of duties for the Employer. These hours shall be credited
to the Employee for the computation period in which the duties are performed;
and
(b) Each hour for which an Employee is paid, or entitled to payment, by
the Employer on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has terminated)
due to vacation, holiday, illness, incapacity (including disability), layoff/
jury duty, military duty or leave of absence. No more than 501 Hours of
Service shall be credited under this paragraph for any single continuous
period (whether or not such period occurs in a single computation period).
Hours under this paragraph shall be calculated and credited pursuant to
Section 2530.200b-2 of the Department of Labor Regulations which are
incorporated herein by this reference; and
(c) Each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer. The same Hours of Service
shall not be credited both under paragraph (a) or paragraph (b), as the case
may be, and under this paragraph (c). These hours shall be credited to the
Employee for the computation period or periods to which the award or
agreement pertains rather than the computation period in which the award,
agreement or payment is made.
(d) Hours of Service shall be credited for employment with the Employer
and with other members of an affiliated service group [as defined in Code
Section 414(m)], a controlled group of corporations [as defined in Code
Section 414(b)], or a group of trades or businesses under common control
[as defined in Code Section 414(c)] of which the adopting Employer is a
member, and any other entity required to be aggregated with the Employer
pursuant to Code Section 414(o) and the regulations thereunder. Hours of
Service shall also be credited for any individual considered an Employee for
purposes of this Plan under Code Section 414(n) or Code Section 414(o) and
the regulations thereunder.
(e) Solely for purposes of determining whether a Break in Service, as
defined in paragraph 1. IO. for participation and vesting purposes has
occurred in a computation period, an individual who is absent from work for
maternity or paternity reasons shall receive credit for the Hours of Service
which would otherwise have been credited to such individual but for such
absence, or in any case in which such hours cannot be determined, 8 Hours of
Service per day of such absence. For purposes of this paragraph, an absence
from work for maternity or paternity reasons means an absence by reason of
the pregnancy of the individual, by reason of a birth of a child of the
individual, by reason of the placement of a child with the individual in
connection with the adoption of such child by such individual, or for
purposes of caring for such child for a period beginning immediately
following such birth or placement. The Hours of Service credited under
this paragraph shall be credited in the computation period in which the
absence begins if the crediting is necessary to prevent a Break in Service
in that period, or in all other cases, in the following computation period.
No more than 501 hours will be credited under this paragraph.
(f) Hours of Service shall be determined on the basis of the method
selected in the Adoption Agreement.
1.43 Key Employee - Any Employee or former Employee (and the beneficiaries
of such employee) who at any time during the determination period was an
officer of the Employer if such individual's annual compensation exceeds 50%
of the dollar limitation under Code. Section 415(b)(1)(A) (the defined
benefit maximum annual benefit), an owner (or considered an owner under
Code Section 318) of one of the ten largest interests in.the employer
if such individual's compensation exceeds 100% of the dollar limitation
under Code Section 415(c)(1)(A), a 5 % owner of the Employer, or a 1% owner
of the Employer who has an annual compensation of more than $150,000. For
purposes of determining who is a Key Employee, annual compensation shall mean
Compensation as defined for Article X, but including amounts deferred through
a salary reduction agreement to a cash or deferred plan under Code Section
401(k), a Simplified Employee Pension Plan under Code Section 408(k), a
cafeteria plan under Code Section 125 or a tax-deferred annuity under Code
Section 403(b). The determination period is the Plan Year containing the
Determination Date and the four preceding Plan Years. The determination of
who is a Key Employee will be made in accordance with Code Section 416(i)(1)
and the regulations thereunder.
1.44 Leased Employee - Any person (other than an Employee of the recipient)
who, pursuant to an agreement between the recipient and any other person
('leasing organization'), has performed services for the recipient [or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)] on a substantially full-time basis for a period of at least one
year, and such services are of a type historically performed by Employees
in the business field of the recipient Employer.
1.45 Limitation Year - The calendar year or such other 12 consecutive month
period designated by the Employer in the Adoption Agreement for purposes
of determining the maximum Annual Addition to a Participant's account. All
qualified plans maintained by the Employer must use the same Limitation Year.
If the Limitation Year is amended to a different 12 consecutive month period,
the new Limitation Year must begin on a date within the Limitation Year in
which the amendment is made.
1.46 Master Or Prototype Plan - A plan, the form of which is the subject of
a favorable opinion letter from the Internal Revenue Service.
1.47 Matching Contribution - An Employer contribution made to this or any
other defined contribution plan on behalf of a Participant on account of an
Employee Voluntary Contribution made by such Participant, or on account of
a Participant's Elective Deferral, under a Plan maintained by the Employer.
1.48 Maximum Permissible Amount - The maximum Annual Addition that may be
contributed or allocated to a Participant's account under the plan for any
Limitation Year shall not exceed the lesser of:
(a) the Defined Contribution Dollar Limitation, or
(b) 25% of the Participant's Compensation for the Limitation Year.
The compensation limitation referred to in (b) shall not apply to any
contribution for medical benefits [within the meaning of Code Section 401(h)
or Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition
under Code Section 415(l)(1) or 419(d)(2). If a short Limitation Year is
created because of an amendment changing the Limitation Year to a different
12 consecutive month period, the Maximum Permissible Amount will not exceed
the Defined Contribution Dollar Limitation multiplied by the following
fraction: Number of months in the short Limitation Year divided by 12.
1.49 Net Profit - The current and accumulated operating earnings of the
Employer before Federal and State income taxes, excluding nonrecurring or
unusual items of income, and before contributions to this and any other
qualified plan of the Employer. Alternatively, the Employer may fix
another definition in the Adoption Agreement.
1.50 Normal Retirement Age - The age, set by the Employer in the Adoption
Agreement, at which a Participant may retire and receive his or her benefits
under the Plan.
1.51 Owner-Employee - A sole proprietor, or a partner owning more than 10%
of either the capital or profits interest of the partnership.
1.52 Paired Plans - Two or more Plans maintained by the Sponsor designed
so that a single or any combination of Plans adopted by an Employer will meet
the antidiscrimination rules, the contribution and benefit limitations, and
the Top-Heavy provisions of the Code.
1.53 Participant - Any Employee who has met the eligibility requirements
and is participating in the Plan.
1.54 Participant's Benefit - The account balance as of the last Valuation
Date in the calendar year immediately preceding the Distribution Calendar
Year (valuation calendar year) increased by the amount of any contributions
or forfeitures allocated to the account balance as of the dates in the
valuation calendar year after the Valuation Date and decreased by
distributions made in the valuation calendar year after the Valuation Date.
A special exception exists for the second distribution Calendar Year.
For purposes of this paragraph, if any portion of the minimum distribution
for the First Distribution Calendar Year is made in the second Distribution
Calendar Year on or before the Required, Beginning Date, the amount of the
minimum distribution made in the second distribution calendar vear shall
be treated as if it had been made in the immediately preceding Distribution
Calendar Year.
1.55 Permissive Aggregation Group - Used for Top-Heavy testing purposes, it
is the Required Aggregation Group of plans plus any other plan or plans of
the Employer which, when considered as a group with the Required Aggregation
Group, A would continue to satisfy the requirements of Code Sections 401(a)
(4) and 410.
1.56 Plan - The Employer's retirement plan as embodied herein and in the
Adoption Agreement.
1.57 Plan Administrator - The Employer.
1.58 Plan Year - The 12 consecutive month period designated by the Employer
in the Adoption Agreement.
1.59 Present Value - Used for Top-Heavy test and determination purposes,
when determining the Present Value of accrued benefits, with respect to any
Defined Benefit Plan maintained by the Employer, interest and mortality rates
shall be determined in accordance with the provisions of the respective
plan. If applicable, interest and mortality assumptions will be specified
in Section II of the Adoption Agreement.
1.60 Projected Annual Benefit - Used to test the maximum benefit which may
be obtained from a combination of retirement plans, it is the annual
retirement benefit (adjusted to an actuarial equivalent straight life
annuity if such benefit is expressed in a form other than a straight life
annuity or Qualified Joint and Survivor Annuity) to which the Participant
would be entitled under the terms of a Defined Benefit Plan or plans,
assuming:
(a) the Participant will continue employment until Normal Retirement Age
under the plan (or current age, if later), and
(b) the Participant's Compensation for the current Limitation Year and
all other relevant factors used to determine benefits under the plan will
remain constant for all future Limitation Years.
1.61 Qualified Deferred Compensation Plan Any pension, profit-sharing,
stock bonus, or other plan which meets the requirements of Code Section 401
and includes a trust exempt from tax under Code Section 501(a) or any annuity
plan described in Code Section 403(a).
An Eligible Retirement Plan is an individual retirement account (IRA) as
described in Code Section 408(a), an individual retirement annuity (IRA) as
described in Code Section 408(b), an annuity plan as described in Code
Section 403(a), or a qualified trust as described in Code Section 401(a),
which accepts Eligible Rollover Distributions. However in the case of an
Eligible Rollover Distribution to a Surviving Spouse, an Eligible Retirement
Plan is an individual retirement account or individual retirement annuity.
1.62 Qualified Domestic Relations Order - A QDRO is a signed Domestic
Relations Order issued by a State Court which creates, recognizes or assigns
to an alternate payee(s) the right to receive all or part of a Participant's
Plan benefit and which meets the requirements of Code Section 414(p). An
alternate payee is a Spouse, former Spouse, child, or other dependent who is
treated as a beneficiary under the Plan as a result of the QDRO.
1.63 Qualified Early Retirement Age - For purposes of paragraph
8.9 Qualified Early Retirement Age is the latest of:
(a) the earliest date, under the Plan on which the Participant may
elect to receive retirement benefits, or
(b) the first day of the 120th month beginning before the Participant
reaches Normal Retirement Age, or
(c) the date the Participant begins participation.
1.64 Qualified Joint And Survivor Annuity - An immediate annuity for the
life of the Participant with a survivor annuity for the life of the
Participant's Spouse which is at least one-half of but not more than the
amount of the annuity payable during the joint lives of the Participant and
the Participant's Spouse. The exact amount of the Survivor Annuity is to
be specified by the Employer in the Adoption Agreement. If not designated by
the Employer, the Survivor Annuity will be 1/2 of the amount paid to the
Participant during his or her lifetime. The Qualified Joint and Survivor
Annuity will be the amount of benefit which can be provided by the
Participant's Vested Account Balance.
1.65 Qualified Matching Contribution - Matching Contributions which when
made are subject to the distribution and nonforfeitability requirements
under Code Section 401(k).
1.66 Qualified Non-Elective Contributions - Contributions (other than
Matching Contributions or Qualified Matching Contributions) made by the
Employer and allocated to Participants' accounts that the Participants may
not elect to receive in cash until distributed from the Plan; that are
nonforfeitable when made; and that are distributable only in accordance with
the distribution provisions that are applicable to Elective Deferrals and
Qualified Matching Contributions.
1.67 Qualified Voluntary Contribution - A tax-deductible voluntary
Employee contribution. These contributions may no longer be made to the Plan.
1.68 Required Aggregation Group - Used for Top-Heavy testing purposes, it
consists of:
(a) each qualified plan of the Employer in which at least one Key
Employee participates or participated at any time during the determination
period (regardless of whether the plan has terminated), and
(b) any other qualified plan of the Employer which enables a plan
described in (a) to meet the requirements of Code Sections 401(a)(4) or
410.
1.69 Required Beginning Date - The date on which a Participant is required
to take his or her first minimum distribution under the Plan. The rules are
set forth at paragraph 7.5.
1.70 Rollover Contribution - A contribution made by a Participant of an
amount distributed to such Participant from another Qualified Deferred
Compensation Plan in accordance with Code Sections 402(a)(5), (6), and (7).
An Eligible Rollover Distribution is any distribution of all or anv portion
of the balance to the credit of the Participant except that an Eligible
Rollover Distribution does not include:
(a) any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the Participant or the joint lives (or joint life
expectancies) of the Participant and the Participant's Designated Beneficiary,
or for a specified period of ten years or more;
(b) any distribution to the extent such distribution is required under
Code Section 401 (a)(9); and
(c) the portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to Employer securities).
A Direct Rollover is a payment by the plan to the Eligible Retirement
Plan specified by the Participant.
1.71 Salary Savings Agreement - An agreement between the Employer and a
participating Employee where the Employee authorizes the Emplover to
withhold a specified percentage of his or her Compensation for deposit to
the Plan on behalf of such Employee.
1.72 Self-Employed Individual - An individual who has Earned Income for
the taxable year from the trade or business for which the Plan is established
including an individual who would have had Earned Income but for the fact
that the trade or business had no Net Profit for the taxable year.
1.73 Service - The period of current or prior employment with the Employer.
If the Employer maintains a plan of a predecessor employer, Service for such
predecessor shall be treated as Service for the Employer.
1.74 Shareholder Employee - An Employee or Officer who owns [or is
considered as owning within the meaning of Code Section 318(a)(1)], on any
day during the taxable year of an electing small business corporation
(S Corporation), more than 5% of such corporation's outstanding stock.
1.75 Simplified Employee Pension Plan - An individual retirement account
which meets the requirements of Code Section 408(k), and to which the
Employer makes contributions pursuant to a written formula. These plans are
considered for contribution limitation and Top-Heavy testing purposes.
1.76 Sponsor - PNC BANK, NATIONAL ASSOCIATION, or any successor(s) or assign
(s).
1.77 Spouse (Surviving Spouse) - The Spouse or Surviving Spouse of the
Participant, provided that a former Spouse will be treated as the Spouse or
Surviving Spouse and a current Spouse will not be treated as the Spouse or
Surviving Spouse to the extent provided under a Qualified Domestic Relations
Order as described in Code Section 414(p).
1.78 Super Top-Heavy Plan - A Plan described at paragraph 1. 81 under which
the Top-Heavy Ratio [as defined at paragraph 1.82]exceeds 90%.
1.79 Taxable Wage Base - For plans with an allocation formula which takes
into account the Employer's contribution under the Federal Insurance
Contributions Act (FICA), the maximum amount of earnings which may be
considered wages for such Plan Year under the Social Security Act [Code
Section 3121(a)(1)], or the amount elected by the Employer in the Adoption
Agreement.
1.80 Top-Heavy Determination Date - For any Plan Year subsequent to the
first Plan Year, the last day of the preceding Plan Year. For the first
Plan Year of the Plan, the last day of that year.
1.81 Top-Heavy Plan - For any Plan Year beginning after 1983, the Employer's
Plan is top-heavy if any of the following conditions exist:
(a) If the Top-Heavy Ratio for the Employer's Plan exceeds 60% and this
Plan is not part of any required Aggregation Group or Permissive Aggregation
Group of Plans.
(b) If the Employer's plan is a part of a Required Aggregation Group of
plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio
for the group of plans exceeds 60 %.
(c) If the Employer's plan is a part of a Required Aggregation Group and
part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for
the Permissive Aggregation Group exceeds 60%.
1.82 Top-Heavy Ratio
(a) If the Employer maintains one or more Defined Contribution plans
(including any Simplified Employee Pension Plan) and the Employer has not
maintained any Defined Benefit Plan which during the 5-year period ending on
the Determination Date(s) has or has had accrued benefits, the Top-Heavy
Ratio for this Plan alone, or for the Required or Permissive Aggregation
Group as appropriate, is a fraction,
(1) the numerator of which is the sum of the account balances of all Key
Employees as of the Determination Date(s) [including any part of any account
balance distributed in the 5-year period ending on the Determination
Date(s)], and
(2) the denominator of which is the sum of all account balances
[including any part of any account balance distributed in the 5-year period
ending on the Determination Date(s)], both computed in accordance with Code
Section 416 and the regulations thereunder.
Both the numerator and denominator of the Top-Heavy Ratio are increased to
reflect any contribution not actually made as of the Determination Date, but
which is required to be taken into account on that date under Code Section
416 and the regulations thereunder.
(b) If the Employer maintains one or more Defined Contribution Plans
(including any Simplified Employee Pension Plan) and the Employer maintains
or has maintained one or more Defined Benefit Plans which during the 5-year
period ending on the Determination Date(s) has or has had any accrued
benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation
Group as appropriate is a fraction, the numerator of which is the sum of
account balances under the aggregated Defined Contribution Plan or Plans for
all Key Employees, determined in accordance with (a) above, and the Present
Value of accrued benefits under the aggregated Defined Benefit Plan or Plans
for all Key Employees as of the Determination Date(s), and the denominator
of which is the sum of the account balances under the aggregated Defined
Contribution Plan or Plans for all Participants, determined in accordance
with (a) above, and the Present Value of accrued benefits under the Defined
Benefit Plan or Plans for all Participants as of the Determination Date(s),
all determined in accordance with Code Section 416 and the regulations
thereunder. The accrued benefits under a Defined Benefit Plan in both the
numerator and denominator of the Top-Heavy Ratio are increased for any
distribution of an accrued benefit made in the 5-year period ending on the
Determination Date.
(c) For purposes of (a) and (b) above, the value of account balances and
the Present Value of accrued benefits will be determined as of the most
recent Valuation Date that falls within or ends with the 12-month period
ending on the Determination Date, except as provided in Code Section 416 and
the regulations thereunder for the first and second plan years of a Defined
Benefit Plan. The account balances and accrued benefits of a participant (1)
who is not a Key Employee but who was a Key Employee in a prior year, or (2)
who has not been credited with at least one hour of service with any Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date will be disregarded. The calculation of the Top-Heavy
Ratio, and the extent to which distributions, rollovers, and transfers are
taken into account will be made in accordance with Code Section 416 and the
regulations thereunder. Qualified Voluntary Employee Contributions will not
be taken into account for purposes of computing the Top-Heavy Ratio. When
aggregating plans the value of account balances and accrued benefits will be
calculated with reference to the Determination Dates that fall within the
same calendar year. The accrued benefit of a Participant other than a Key
Employee shall be determined under (1) the method, if any, that uniformly
applies for accrual purposes under all Defined Benefit Plans maintained by
the Employer, or (2) if there is no such method, as if such benefit accrued
not more rapidly than the slowest accrual rate permitted under the fractional
rule of Code Section 41 1 (b)(1)(C).
1.83 Top-Paid Group The group consisting of the top 20% of Employees when
ranked on the basis of Compensation paid during such year. For purposes of
determining the number of Employees in the group (but not who is in it),
the following Emplovees shall be excluded:
(a) Employees who have not completed 6 months of Service.
(b) Employees who normally work less than 17-1/2 hours per week.
(c) Employees who normally do not work more than 6 months during any year.
(d) Employees who have not attained age 21.
(e) Employees included in a collective bargaining unit, covered by an
agreement between employee representatives and the Employer, where retirement
benefits were the subject of good faith bargaining and provided that 90% or
more of the Employer's Employees are covered by the agreement.
(f) Employees who are nonresident aliens and who receive no earned income
which constitutes income from sources within the United States.
1.84 Transfer Contribution - A non-taxable transfer of a Participant's
benefit directly from a Qualified Deferred Compensation Plan to this Plan.
1.85 Trustee - The Sponsor of this Prototype Plan shall serve as Trustee.
1.86 Valuation Date - The last day of the Plan Year or such other date as
agreed to by the Employer and the Trustee/Custodian on which Participant
accounts are revalued in accordance with Article V hereof. For Top-Heavy
purposes, the date selected by the Employer as of which the Top-Heavy Ratio
is calculated.
1.87 Vested Account Balance - The aggregate value of the Participant's
Vested Account Balances derived from Employer and Employee contributions
(including Rollovers), whether vested before or upon death, including the
proceeds of insurance contracts, if any, on the Participant's life. The
provisions of Article VIII shall apply to a Participant who is vested in
amounts attributable to Employer contributions, Employee contributions (or
both) at the time of death or distribution.
1.88 Voluntary Contribution - An Employee contribution made to the Plan by
or on behalf of a Participant that is included in the Participant's gross
income in the year in which made and that is maintained under a separate
account to which earnings and losses are, allocated.
1.89 Welfare Benefit Fund - Any fund that is part of a plan of the Employer,
or has the effect of a plan, through which the Employer provides welfare
benefits to Employees or their beneficiaries. For these purposes, Welfare
Benefits means any benefit other than those with respect to which Code
Section 83(h) (relating to transfers of property in connection with the
performance of services), Code Section 404 (relating to deductions for
contributions to an Employee's trust or annuity and Compensation under a
deferred payment plan), Code Section 404A (relating to certain foreign
deferred compensation plans) apply. A "Fund" is any social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal service organization described in Code Section 501(c)
(7), (9), (17) or (20); any trust, corporation, or other organization not
exempt from income tax, or to the extent provided in regulations, any account
held for an Employer by any person.
1.90 Year Of Service - A 12 consecutive month period during which an
Employee is credited with not less than 1,000 (or such lesser number as
specified by the Employer in the Adoption Agreement) Hours of Service.
ARTICLE II
ELIGIBILITY REQUIREMENTS
2.1 Participation - Employees who meet the eligibility requirements in the
Adoption Agreement on the Effective Date of the Plan shall become Participants
as of the Effective Date of the Plan. If so elected in the Adoption
Agreement, all Employees employed on the Effective Date of the Plan may
participate, even if they have not satisfied the Plan's specified eligibility
requirements. Other Employees shall become Participants on the Entry Date
coinciding with or immediately following the date on which they meet the
eligibility requirements. The Employee must satisfy the eligibility
requirements specified in the Adoption Agreement and be employed on the
Entry Date to become a Participant in the Plan. In the event an Employee
who is not a member of the eligible class of Employees becomes a member of
the eligible class, such Employee shall participate immediately if such
Employee has satisfied the minimum age and service requirements and would
have previously become a Participant had he or she been in the eligible
class. A former Participant shall again become a Participant upon
returning to the employ of the Employer at the next Entry Date or if
earlier, the next Valuation Date. For this purpose, Participant's
Compensation and Service shall be considered from date of rehire.
2.2 Change In Classification Of Employment - In the event a Participant
becomes ineligible to participate because he or she is no longer a member of
an eligible class of Employees, such Employee shall participate upon his or
her return to an eligible class of Employees.
2.3 Computation Period - To determine Years of Service and Breaks in
Service for purposes of eligibility, the 12 consecutive month period shall
commence on the date on which an Employee first performs an Hour of Service
for the Employer and each anniversary thereof, such that the succeeding
12 consecutive month period commences with the employee's first anniversary
of employment and so on. If, however, the period so specified is one year
or less, the succeeding 12 consecutive month period shall commence on the
first day of the Plan Year prior to the anniversary of the date they first
performed an Hour of Service regardless of whether the Employee is entitled
to be credited with 1,000 (or such lesser number as specified by the Employer
in the Adoption Agreement) Hours of Service during their first employment
year.
2.4 Employment Rights - Participation in the Plan shall not confer upon a
Participant any employment rights, nor shall it interfere with the Employer's
right to terminate the employment of any Employee at any time.
2.5 Service With Controlled Groups - All Years of Service with other
members of a controlled group of corporations [as defined in Code Section
414(b)], trades or businesses under common control [as defined in Code
Section 414(c)], or members of an affiliated service group [as defined in
Code Section 414(m)] shall be credited for purposes of determining an
Employee's eligibility to participate.
2.6 Owner-Employees - If this Plan provides contributions or benefits for
one or more Owner-Employees who control both the business for which this Plan
is established and one or more other trades or businesses, this Plan and the
Plan established for other trades or businesses must, when looked at as a
single Plan, satisfy Code Sections 401(a) and (d) for the Employees of this
and all other trades or businesses.
If the Plan provides contributions or benefits for one or more Owner-
Employees who control one or more other trades or businesses, the Employees
of the other trades or businesses must be included in a Plan which satisfies
Code Sections 40 1 (a) and (d) and which provides contributions and benefits
not less favorable than provided for Owner-Employees under this Plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which are not controlled, and the individual
controls a trade or business, then the contributions or benefits of the
Employees under the plan of the trades or businesses which are controlled
must be as favorable as those provided for him or her under the most
favorable plan of the trade or business which is not controlled.
For purposes of the preceding sentences, an Owner-Employee, or two or more
Owner-Employees, will be considered to control a trade or business if the
Owner-Employee, or two or more Owner-Employees together:
(a) own the entire interest in an unincorporated trade or business, or
(b) in the case of a partnership, own more than 50% of either the capital
interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such Owner
Employee, or such two or more Owner-Employees, are considered to control
within the meaning of the preceding sentence.
2.7 Leased Employees - Any Leased Employee shall be treated as an Employee
of the recipient Employer; however, contributions or benefits provided by
the leasing organization which are attributable to services performed for the
recipient Employer shall be treated as provided by the recipient Employer.
A Leased Employee shall not be considered an Emplovee of the recipient if
such Employee is covered by a money purchase pension plan providing:
(a) a non-integrated Employer contribution rate of at least 10% of
Compensation, [as defined in Code Section 415(c)(3) but including amounts
contributed bv the Employer pursuant to a salary reduction agreement, which
are excludable from the Employee's gross income under a cafeteria plan
covered by Code Section 125, a cash or deferred profit-sharing plan under
Section 401(k) of the Code, a Simplified Employee Pension Plan under Code
Section 402(h)(1)(B) and a tax-sheltered annuity under Code Section 403(b)],
(b) immediate participation, and
(c) full and immediate vesting.
This exclusion is only available if Leased Employees do not constitute more
than twenty percent (20%) of the recipient's non-highly compensated work
force.
2.8 Thrift Plans - If the Employer makes an election in the Adoption
Agreement to require Voluntary Contributions to participate in this Plan,
the Employer shall notify each eligible Employee in writing of his or her
eligibility for participation at least 30 days prior to the appropriate
Entry Date. The Employee shall indicate his or her intention to join the
Plan by authorizing the Employer to withhold a percentage of his or her
Compensation as provided in the Plan. Such authorization shall be returned
to the Employer at least 10 days prior to the Employee's Entry Date.
The Employee may decline participation by so indicating on the enrollment
form or by failure to return the enrollment form to the Employer prior to
the Employee's Entry Date. If the Employee declines to participate, such
Employee shall be given the opportunity to join the Plan on the next Entry
Date. The taking of a Hardship Withdrawal under the provisions of paragraph
6.9 will impact the Participant's ability to make these contributions.
ARTICLE III
EMPLOYER CONTRIBUTIONSS
3.1 Amount - The Employer intends to make periodic contributions to the
Plan in accordance with the formula or formulas selected in the Adoption
Agreement. However, the Employer's contribution for any Plan Year shall be
subject to the limitations on allocations contained in Article X.
3.2 Expenses And Fees - The Employer shall also be authorized to reimburse
the Fund for all expenses and fees incurred in the administration of the Plan
or Trust/Custodial Account and paid out of the assets of the Fund. Such
expenses shall include, but shall not be limited to, fees for professional
services, printing and postage. Brokerage commissions may not be reimbursed.
3.3 Responsibility For Contributions Neither the Trustee/Custodian nor
the Sponsor shall be required to determine if the Employer has made a
contribution or if the amount contributed is in accordance with the Adoption
Agreement or the Code. The Employer shall have sole responsibility in this
regard. The Trustee/Custodian shall be accountable solely for contributions
actually received by it, within the limits of Article XI.
3.4 Return Of Contributions - Contributions made to the Fund by the
Employer shall be irrevocable except as provided below:
(a) Any contribution forwarded to the Trustee/Custodian because of
a mistake of fact, provided that the contribution is returned to
the Employer within one year of the contribution.
(b) In the event that the Commissioner of Internal Revenue determines that
the Plan is not initially qualified under the Internal Revenue Code, any
contribution made incident to that initial qualification by the Employer must
be returned to the Employer within one year after the date the initial
qualification is denied, but only if the application for the qualification is
made by the time prescribed by law for filing the Employer's return for the
taxable year in which thePlan is adopted, or such later date as the Secretary
of the Treasury may prescribe.
(c) Contributions forwarded to the Trustee/Custodian are presumed
to be deductible and are conditioned on their deductibility. Contributions
which are determined to not be deductible will be returned to the
Employer.
ARTICLE IV
EMPLOYEE CONTRIBLMONS
4.1 Voluntary Contributions - An Employee may make Voluntary Contributions
to the Plan established hereunder if so authorized by the Employer in a
uniform and nondiscriminatory manner. Such contributions are subject to the
limitations on Annual Additions and are subject to antidiscrimination testing.
4.2 Qualified Voluntary Contributions A Participant may no longer
make Qualified Voluntary Contributions to the Plan. Amounts already
contributed may remain in the Trust Fund/Custodial Account until distributed
to the Participant. Such amounts will be maintained in a separate
account which will be nonforfeitable at all times. The account will share
in the gains and losses of the Trust in the same manner as described at
paragraph 5.4 of the Plan. No part of the Qualified Voluntary Contribution
account will be used to purchase life insurance. Subject to Article VIII,
Joint and Survivor Annuity Requirements (if applicable), the Participant
may withdraw any part of the Qualified Voluntary Contribution account by
making a written application to the Plan Administrator.
4.3 Rollover Contribution - Unless provided otherwise in the Adoption
Agreement, a Participant may make a Rollover Contribution to any Defined
Contribution Plan established hereunder of all or any part of an amount
distributed or distributable to him or her from a Qualified Deferred
Compensation Plan provided:
(a) the amount distributed to the Participant is deposited to the Plan
no later than the sixtieth day after such distribution was received by the
Participant,
(b) the amount distributed is not one of a series of substantially equal
periodic payments made for the life (or life expectancy) of the Participant
or the joint lives (or joint life expectancies) of the Participant and the
Participant's Designated Beneficiary, or for a specified period of ten years
or more;
(c) the amount distributed is not required under Code Section 401(a)(9);
(d) if the amount distributed included property such property is rolled
over, or if sold the proceeds of such property may be rolled over,
(e) the amount distributed is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect
to employer securities).
In addition, if the Adoption Agreement allows Rollover Contributions, the
Plan will also accept any Eligible Rollover Distribution (as defined at
paragraph 1.70) directly to the Plan.
Rollover Contributions, which relate to distributions prior to January 1,
1993, must be made in accordance with paragraphs (a) through (e) and
additionally meet the requirements of paragraph (f):
(f) The distribution from the Qualified Deferred Compensation Plan
constituted the Participant's entire interest in such Plan and was
distributed within one taxable year to the Participant:
(1) on account of separation from Service, a Plan termination, or in the
case of a profit-sharing or stock bonus plan, a complete discontinuance of
contributions under such plan within the meaning of Code Section 402(a)(6)
(A), or
(2) in one or more distributions which constitute a qualified lump sum
distribution within the meaning of Code Section 402(e)(4)(A), determined
without reference to subparagraphs (B) and (H).
Such Rollover Contribution may also be made through an individual retirement
account qualified under Code Section 408 where the IRA was used as a conduit
from the Qualified Deferred Compensation Plan, the Rollover Contribution is
made in accordance with the rules provided under paragraphs (a) through (e)
and the Rollover Contribution does not include any regular IRA contributions,
or earnings thereon, which the Participant may have made to the IRA.
Rollover Contributions, which relate to distributions prior to January 1,
1993, may be made through an IRA in accordance with paragraphs (a) through
(f) and additional requirements as provided in the previous sentence. The
Trustee/Custodian shall not be held responsible for determining the tax free
status of any Rollover Contribution made under this Plan.
4.4 Transfer Contribution - Unless provided otherwise in the Adoption
Agreement a Participant may, subject to the provisions of paragraph 4.5, also
arrange for the direct transfer of his or her benefit from a Qualified
Deferred Compensation Plan to this Plan. For accounting and record keeping
purposes, Transfer Contributions shall be treated in the same manner as
Rollover Contributions.
In the event the Employer accepts a Transfer Contribution from a Plan in
which the Employee was directing the investments of his or her account, the
Employer may continue to permit the Employee to direct his or her investments
in accordance with paragraph 13.7 with respect only to such Transfer
Contribution. Notwithstanding the above, the Employer may refuse to accept
such Transfer Contributions.
4.5 Employer Approval Of Transfer Contributions - The Employer maintaining
a Safe-Harbor Profit-Sharing Plan in accordance with the provisions of
paragraph 8.7, acting in a nondiscriminatory manner, may in its sole
discretion refuse to allow Transfer Contributions to its profit-sharing plan,
if such contributions are directly or indirectly being transferred from a
defined benefit plan, a money purchase pension plan (including a target
benefit plan), a stock bonus plan, or another profit-sharing plan which would
otherwise provide for a life annuity form of payment to the Participant.
4.6 Elective Deferrals - A Participant may enter into a Salary Savings
Agreement with the Employer authorizing the Employer to withhold a portion
of such Participant's Compensation not to exceed $7,000 per calendar year as
adjusted under Code Section 415(d) or, if lesser, the percentage of
Compensation specified in the Adoption Agreement and to deposit such amount
to the Plan. No Participant shall be permitted to have Elective Deferrals
made under this Plan or any other qualified plan maintained by the Employer,
during any taxable year, in excess of the dollar limitation contained in Code
Section 402(g) in effect at the beginning of such taxable year. Thus, the
$7,0001imit may be reduced if a Participant contributes pre-tax contributions
to qualified plans of this or other Employers. Any such contribution shall
be credited to the Employee's Salary Savings Account. Unless otherwise
specified in the Adoption Agreement, a Participant may amend his or her
Salary Savings Agreement to increase, decrease or terminate the percentage
upon 30 days written notice to the Employer. If a Participant terminates his
or her agreement, such Participant shall not be permitted to put a new
Salary Savings Agreement into effect until the first pay period in the next
Plan Year, unless otherwise stated in the Adoption Agreement. The Employer
may also amend or terminate said agreement on written notice to the
Participant. If a Participant has not authorized the Employer to withhold
at the maximum rate and desires to increase the total withheld for a Plan
Year, such Participant may authorize the Employer upon 30 days notice to
withhold a supplemental amount up to 100% of his or her Compensation for
one or more pay periods. In no event may the sum of the amounts withheld
under the Salary Savings Agreement plus the supplemental withholding exceed
25 % of a Participant's Compensation for a Plan Year. The Employer may
also recharacterize, as after-tax Voluntary Contributions all or any
portion of amounts previously withheld under any Salary Savings Agreement
within the Plan Year as provided for at paragraph 10.9. This may be done to
insure that the Plan will meet one of the antidiscrimination tests under Code
Section 401(k). Elective Deferrals shall be deposited in the Trust within
30 days after being withheld from the Participant's pay.
4.7 Required Voluntary Contributions - If the Employer makes a thrift
election in the Adoption Agreement, each eligible Participant shall be
required to make Voluntary Contributions to the Plan for credit to his or
her account as provided in the Adoption Agreement. Such Voluntary
Contributions shall be withheld from the Employee's Compensation and shall
be transmitted by the Employer to the Trustee/Custodian as agreed between
the Employer and Trustee/Custodian. A Participant may discontinue
participation or change his or her Voluntary Contribution percentage by so
advising the Employer at least 10 days prior to the date on which such
discontinuance or change is to be effective. If a Participant discontinues
his or her Voluntary Contributions, such Participant may not again authorize
Voluntary Contributions for a period of one year from the date of
discontinuance. A Participant may voluntarily change his or her Voluntary
Contribution percentage once during any Plan Year and may also agree to
have a reduction in his or her contribution, if required to satisfy the
requirements of the ACP test.
4.8 Direct Rollover Of Benefits - Notwithstanding any provision of the Plan
to the contrary that would otherwise limit a Participant's election under
this paragraph, for distributions made on or after January 1, 1993, a
Participant may elect, at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the Participant in a
Direct Rollover. Any portion of a distribution which is not paid directly
to an Eligible Retirement Plan shall be distributed to the Participant. For
purposes of this paragraph, a Surviving Spouse or a Spouse or former Spouse
who is an alternate payee under a Qualified Domestic Relations Order as
defined in Code Section 414(p), will be permitted to elect to have any
Eligible Rollover Distribution paid directly to an individual retirement
account (IRA) or an individual retirement annuity(IRA).
The plan provisions otherwise applicable to distributions continue to apply
to Rollover and Transfer Contributiors
ARTICLE V
PARTICIPANT ACCOUNTS
5.1 Separate Accounts - The Employer shall establish a separate bookkeeping
account for each Participant showing the total value of his or her interest
in the Fund. Each Participant's account shall be separated for bookkeeping
purposes into the following sub-accounts:
(a) Employer contributions.
(1) Matching Contributions.
(2) Qualified Matching Contributions.
(3) Qualified Non-Elective Contributions.
(4) Discretionary Contributions.
(5) Elective Deferrals.
(b) Voluntary Contributions (and additional amounts including required
contributions and, if applicable either repayments of loans previously
defaulted on and treated as "deemed distributions" on which a tax report has
been issued, and amounts paid out upon a separation from service which have
been included in income and which are repaid after being re-hired by the
Employer).
(c) Qualified Voluntary Contributions (if the Plan previously accepted
these).
(d) Rollover Contributions and Transfer Contributions.
5.2 Adjustments To Participant Accounts - As of each Valuation Date of the
Plan, the Employer shall add to each account:
(a) the Participant's share of the Employer's contribution and forfeitures
as determined in the Adoption Agreement,
(b) any Elective Deferrals, Voluntary, Rollover or Transfer Contributions
made by the Participant,
(c) any repayment of amounts previously paid out to a Participant upon a
separation from Service and repaid by the Participant since the last
Valuation Date, and
(d) the Participant's proportionate share of any investment earnings and
increase in the fair market value of the Fund since the last Valuation Date,
as determined at paragraph 5.4.
The Employer shall deduct from each account:
(e) any withdrawals or payments made from the Participant's account since
the last Valuation Date, and
(f) the Participant's proportionate share of any decrease in the fair
market value of the Fund since the last Valuation Date, as determined at
paragraph 5.4.
5.3 Allocating Employer Contributions - The Emplyer's contribution shall
be allocated to Participants in accordance with the allocation formula
selected by the Employer in the Adoption Agreement, and the mini contribution
and allocation requirements for Top-Heavy Plans. Beginning with the 1990
Plan Year and thereafter, for plans on Standardized Adoption Agreement 001,
Participants who are credited with more than 500 Hours of Service or are
employed on the last day of the Plan Year must receive a full allocation of
Employer contributions. In Nonstandardized Adoption Agreement 002, Employer
contributions shall be allocated to the accounts of Participants employed by
the Employer on the last day of the Plan Year unless indicated otherwise in
the Adoption Agreement. In the case of a non-Top-Heavy, Nonstandardized Plan,
Participants must also have completed a Year of Service unless otherwise
specified in the Adoption Agreement. For Nonstandardized Adoption Agreement
002, the Employer may only apply the last day of the Plan Year and Year of
Service requirements if the Plan satisfies the requirements of Code Sections
401(a)(26) and 410(b) and the regulations thereunder including the exception
for 401(k) plans. If, when applying the last day and Year of Service
requirements, the Plan fails to satisfy the aforementioned requirements,
additional Participants will be eligible to receive an allocation of
Employer Contributions until the requirements are satisfied. Participants
who are credited with a Year of Service, but not employed at Plan Year end,
are the first category of additional Participants eligible to receive an
allocation. If the requirements are still not satisfied, Participants
credited with more than 500 Hours of Service and employed at Plan Year end
are the next category of Participants eligible to receive an allocation.
Finally, if necessary to satisfy the said requirements, any Participant
credited with more than 500 Hours of Service will be eligible for an
allocation of Employer Contributions. The Service requirement is not
applicable with respect to any Plan Year during which the Employer's Plan
is Top-Heavy.
5.4 Allocating Investment Earnings And Losses - A Participant's share of
investment earnings and any increase or decrease in the fair market value of
the Fund shall be based on the proportionate value of all active accounts
(other than accounts with segregated investments) as of the last Valuation
Date less withdrawals since the last Valuation Date. If Employer and/or
Employee contributions are made monthly, quarterly, or on some other
systematic basis, the adjusted value of such accounts for allocation of
investment income and gains or losses shall include one-half the
contributions for such period. If Employer and/or Employee contributions
are not made on a systematic basis, it is assumed that they are made at the
end of the valuation period and therefore will not receive an allocation of
investment earnings and gains or losses for such period. Account balances
not yet forfeited shall receive an allocation of earnings and/or losses.
Accounts with segregated investments shall receive only the income or loss
on such segregated investments.
5.5 Participant Statements - Upon completing the allocations described
above for the Valuation Date coinciding with the end of the Plan Year, the
Employer shall prepare a statement for each Participant showing the additions
to and subtractions from his or her account since the last such statement and
the fair market value of his or her account as of the current Valuation Date.
Employers so choosing may prepare Participant statements for each Valuation
Date.
ARTICLE VI
RETIREMENT BENEFITS AND DISTRIBUTIONS
6.1 Normal Retirement Benefits - A Participant shall be entitled to receive
the balance held in his or her account from Employer contributions upon
attaining Normal Retirement Age or at such earlier dates as the provisions
of this Article VI may allow. If the Participant elects to continue working
past his or her Normal Retirement Age, he or she will continue as an active
Plan Participant and no distribution shall be made to such Participant until
his or her actual retirement date unless the employer elects otherwise in
the Adoption Agreement, or a minimum distribution is required by law.
Settlement shall be made in the normal form, or if elected, in one of the
optional forms of payment provided below.
6.2 Early Retirement Benefits - If the Employer so provides in the Adoption
Agreement, an Early Retirement Benefit will be available to individuals who
meet the age and Service requirements. An individual who meets the Early
Retirement Age requirements and separates from Service, will become fully
vested, regardless of any vesting schedule which otherwise might apply. If
a Participant separates from Service before satisfying the age requirements.
but after having satisfied the Service requirement, the Participant will be
entitled to elect an Early Retirement benefit upon satisfaction of the age
requirement.
6.3 Benefits On Termination Of Employment
(a) If a Participant terminates employment prior to Normal Retirement Age,
such Participant shall be entitled to receive the vested balance held in his
or her account payable at Normal Retirement Age in the normal form, or if
elected, in one of the optional forms of payment provided hereunder. If
applicable, the Early Retirement Benefit provisions may be elected.
Notwithstanding the preceding sentence, a former Participant may, if allowed
in the Adoption Agreement, make application to the Employer requesting
early payment of any deferred vested and nonforfeitable benefit due.
(b) If a Participant terminates employment, and the value of that
Participant's Vested Account Balance derived from Employer and Employee
contributions is not greater than $3,500,the Participant may receive a lump
sum distribution of the value of the entire vested portion of such account
balance and the non-vested portion will be treated as a forfeiture. The
Employer shall continue to follow their consistent policy, as may be
established, regarding immediate cash-outs of Vested Account Balances of
$3,500 or less. For purposes of this Article, if the value of a Participant's
Vested Account Balance is zero, the Participant shall be deemed to have
received a distribution of such Vested Account Balance immediately following
termination. Likewise, if the Participant is reemployed prior to incurring
5 consecutive 1-year Breaks in Service they will be deemed to have immediately
repaid such distribution. For Plan Years beginning prior to 1989, a
Participant's Vested Account Balance shall not include Qualified Voluntary
Contributions. Notwithstanding the above, if the Employer maintains or has
maintained a policy of not distributing any amounts until the Participant's
Normal Retirement Age, the Employer can continue to uniformly apply such
policy.
(c) If a Participant terminates employment with a Vested Account Balance
derived from Employer and Employee contributions in excess of $3,500, and
elects (with his or her Spouse's consent, if required) to receive 100% of
the value of his or her Vested Account Balance in a lump sum, the non-vested
portion will be treated as a forfeiture. The Participant (and his or her
Spouse, if required) must consent to any distribution, when the Vested
Account Balance described above exceeds $3,500or if at the time of any prior
distribution it exceeded $3,500. For purposes of this paragraph, for Plan
Years beginning prior to 1989, a Participant's Vested Account Balance shall
not include Qualified Voluntary Contributions.
(d) Distribution of less than 100% of the Participant's Vested Account
Balance shall only be permitted if the Participant is fully vested upon
termination of employment.
(e) If a Participant who is not 100% vested receives or is deemed to
receive a distribution pursuant to this paragraph and resumes employment
covered under this Plan, the Participant shall have the right to repay to
the Plan the full amount of the distribution attributable to Employer
contributions on or before the earlier of the date that the Participant
incurs 5 consecutive 1-year Breaks in Service following the date of
distribution or five years after the first date on which the Participant is
subsequently reemployed. In such event, the Participant's account shall be
restored to the value thereof at the time the distribution was made and may
further be increased by the Plan's income and investment gains and/or losses
on the undistributed amount from the date of distribution to the date of
repayment.
(f) A Participant shall also have the option, to postpone payment of
his or her Plan benefits until the first day of April following the calendar
year in which he or she attains age 70-1/2. Any balance of a Participant's
account resulting from his or her Employee contributions not previously
withdrawn, if any, may be withdrawn by the Participant immediately following
separation from Service.
(g) If a Participant ceases to be an active Employee as a result of a
Disability as defined at paragraph 1.21, such Participant shall be able to
make an application for a disability retirement benefit payment. The
Participant's account balance will be deemed "immediately distributable" as
set forth in paragraph 6.4, and will be fully vested pursuant to paragraph
9.2.
6.4 Restrictions On Immediate Distributions
(a) An account balance is immediately distributable if any part of the
account balance could be distributed to the Participant (or Surviving Spouse)
before the Participant attains (or would have attained if not deceased) the
later of the Normal Retirement Age or age 62.
(b) If the value of a Participant's Vested Account Balance derived from
Employer and Employee Contributions exceeds (or at the time of any prior
distribution exceeded) $3,500,and the account balance is immediately
distributable, the Participant and his or her Spouse (or where either the
Participant or the Spouse has died, the survivor) must consent to any
distribution of such account balance. The consent of the Participant and
the Spouse shall be obtained in writing within the 90-day period ending on
the annuity starting date, which is the first day of the first period for
which an amount is paid as an annuity or any other form. The Plan
Administrator shall notify the Participant and the Participant's Spouse of
the right to defer any distribution until the Participant's account balance
is no longer immediately distributable. Such notification shall include a
general description of the material features, and an explanation of the
relative values of, the optional forms of benefit available under the plan
in a manner that would satisfy the notice requirements of Code Section 417(a)
(3), and shall be provided no less than 30 days and no more than 90 days
prior to the annuity starting date.
(c) Notwithstanding the foregoing, only the Participant need consent to
the commencement of a distribution.in the form of a qualified Joint and
Survivor Annuity while the account balance is immediately distributable.
Furthermore, if payment in the form of a Qualified Joint and Survivor
Annuity is not required with respect to the Participant pursuant to
paragraph 8.7 of the Plan, only the Participant need consent to the
distribution of an account balance that is immediately distributable.
Neither the consent of the Participant nor the Participant's Spouse shall
be required to the extent that a distribution is required to satisfy Code
Section 401(a)(9) or Code Section 415. In addition, upon termination of
this Plan if the Plan does not offer an annuity option (purchased from a
commercial provider), the Participant's account balance may, without the
Participant's consent, be distributed to the Participant or transferred
to another Defined Contribution Plan [other than an employee stock ownership
plan as defined in Code Section 4975(e)(7)] within the same controlled group.
(d) For purposes of determining the applicability of the foregoing
consent requirements to distributions made before the first day of the first
Plan Year beginning after 1988, the Participant's Vested Account Balance
shall not include amounts attributable to Qualified Voluntary Contributions.
6.5 Normal Form Of Payment - The normal form of payment for a profit-
sharing plan satisfying the requirements of paragraph 8.7 hereof shall be a
lump sum with no option for annuity payments. For all other plans, the
normal form of payment hereunder shall be a Qualified Joint and Survivor
Annuity as provided under Article VIII. A Participant whose Vested Account
Balance derived from Employer and Employee contributions exceeds $3,500, or if
at the time of any prior distribution it exceeded S3,500, shall (with the
consent of his or her Spouse) have the right to receive his or her benefit in
a lump sum or in monthly, quarterly, semi-annual or annual payments from the
Fund over any period not extending beyond the life expectancy of the
Participant and his or her Beneficiary. For purposes of this paragraph,
for Plan Years prior to 1989, a Participant's Vested Account Balance shall
not include Qualified Voluntary Contributions. The normal form of payment
shall be automatic, unless the Participant files a written request with the
Employer prior to the date on which the benefit is automatically payable,
electing a lump sum or installment payment option. No amendment to the Plan
may eliminate one of the optional distribution forms listed above.
6.6 Commencement Of Benefits
(a) Unless the Participant elects otherwise, distribution of benefits
will begin no later than the 60th day after the close of the Plan Year in
which the latest of the following events occurs:
(1) the Participant attains age 65 (or normal retirement age if earlier),
(2) the 10th anniversary of the year in which the Participant commenced
participation in the Plan, or
(3) the Participant terminates Service with the Employer.
(b) Notwithstanding the foregoing, the failure of a Participant and
Spouse (if necessary) to consent to a distribution while a benefit is
immediately distributable, within the meaning of paragraph 6.4 ereof, shall
be deemed an election to defer commencement of payment of any benefit
sufficient to satisfy this paragraph.
6.7 Claims Procedures - Upon retirement, death, or other severance of
employment, the Participant or his or her representative may make application
to the Employer requesting payment of benefits due and the manner of payment.
If no application for benefits is made, the Employer shall automatically pay
any vested benefit due hereunder in the normal form at the time prescribed
at paragraph 6.4. If an application for benefits is made, the Employer shall
accept, reject, or modify such request and shall notify the Participant in
writing setting forth the response of the Employer and in the case of a
denial or modification the Employer shall:
(a) state the specific reason or reasons for the denial,
(b) provide specific reference to pertinent Plan provisions on which the
denial is based,
(c) provide a description of any additional material or information
necessary for the Participant or his representative to perfect the claim and
an explanation of why such material or information is necessary, and
(d) explain the Plan's claim review procedure as contained in this Plan.
In the event the request is rejected or modified, the Participant or his or
her representative may within 60 days following receipt by the Participant or
representative of such rejection or modification, submit a written request
for review by the Employer of its initial decision. Within 60 days
following such request for review, the Employer shall tender its final
decision in writing to the Participant or representative stating specific
reasons for such decision. If the Participant or representative is not
satisfied with the Employer's final decision, the Participant or representative
can institute an action in a federal court of competent jurisdiction; for
this purpose, process would be served on the Emplover.
6.8 In-Service Withdrawals - An Employee may withdraw all or any part of
the fair market value of his or her Mandatory Contributions, Voluntary
Contributions, Qualified Voluntary Contributions or Rollover Contributions,
upon written request to the Employer. Transfer Contributions, which originate
from a Plan meeting the safeharbor provisions of paragraph 8.7, may also be
withdrawn by an Employee upon written request to the Employer. Transfer
Contributions not meeting the safe-harbor provisions may only be withdrawn
upon retirement, death, Disability, termination or termination of the Plan,
and will be subject to Spousal consent requirements contained in Code
Sections 411(a)(11) and 417. No such withdrawals are permitted from a
money purchase plan until the participant reaches Normal Retirement Age.
Such request shall include the Participant's address, social security number,
birthdate, and amount of the withdrawal. If at the time a distribution of
Qualified Voluntary Contributions is received the Participant has not a
ttained age 59-1/2 and is not disabled, as defined at Code Section 22(e)(3),
the Participant will be subject to a federal income tax penalty, unless the
distribution is rolled over to a qualified plan or individual retirement plan
within 60 days of the date of distribution. A Participant may withdraw all
or any part of the fair market value of his or her pre-1987 Voluntary
Contributions with or without withdrawing the earnings attributable thereto.
Post-1986 Voluntary Contributions may only be withdrawn along with a portion
of the earnings thereon. The amount of the earnings to be withdrawn is
determined by using the formula: DA[1-(V/V+E)], where DA is the
distribution amount, V is the amount of Voluntary Contributions and V + E is
the amount of Voluntary Contributions plus the earnings attributable thereto.
A Participant withdrawing his or her other contributions prior to attaining
age 591/2, will be subject to a federal tax penalty to the extent that the
withdrawn amounts are includible in income. Unless the Employer provides
otherwise in the Adoption Agreement, any Participant in a profit-sharing plan
who is 100 % fully vested in his or her Employer contributions may withdraw
all or any part of the fair market value of any of such contributions that
have been in the account at least two years, plus the investment earnings
thereon, after attaining age 59-1/2 without separation from Service. Such
distributions shall not be eligible for redeposit to the Fund. A withdrawal
under this paragraph shall not prohibit such Participant from sharing in any
future Employer Contribution he or she would otherwise be eligible to share
in. A request to withdraw amounts pursuant to this paragraph must if
applicable, be consented to by the Participant's Spouse. The consent shall
comply with the requirements of paragraph 6.4 relating to immediate
distributions.
Elective Deferrals, Qualified Non-elective Contributions, and Qualified
Matching Contributions, and income allocable to each are not distributable to
a Participant or his or her Beneficiary or Beneficiaries, in accordance with
such Participant's or Beneficiary's or Beneficiaries' election, earlier than
upon separation from Service, death, or Disability. Such amounts may also
be distributed upon:
(a) Termination of the Plan without the establishment of another Defined
Contribution Plan.
(b) The disposition by a corporation to an unrelated corporation of
substantially all of the assets [within the meaning of Code Section 409(d)
(2)] used in a trade or business of such corporation if such corporation
continues to maintain this Plan after the disposition, but only with respect
to Employees who continue employment with the corporation acquiring such
assets.
(c) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary [within the meaning of Code Section
409(d)(3)] if such corporation continues to maintain this plan, but only with
respect to Employees who continue employment with such subsidiary.
(d) The attainmnent of age 59-1/2.
(e) The Hardship of the Participant as described in paragraph 6.9.
All distributions that may be made pursuant to one or more of the foregoing
distributable events are subject to the Spousal and Participant consent
requirements, if applicable, contained in Code Sections 401 (a)(11) and
417.
6.9 Hardship Withdrawal - If permitted by the Trustee/Custodian and the
Employer in the Adoption Agreement, a Participant may request a Hardship
withdrawal prior to attaining age 59-1/2. If the Participant has not
attained age 59-1/2, the Participant may be subject to a federal income tax
penalty. Such request shall be in writing to the Employer who shall have
sole authority to authorize a Hardship withdrawal, pursuant to the rules
below. Hardship withdrawals may include Elective Deferrals regardless of
when contributed and any earnings accrued and credited thereon as of the
last day of the Plan Year ending before July 1, 1989 and Employer related
contributions, including but not limited to Employer Matching Contributions.
plus the investment earnings thereon to the extent vested. Qualified
Matching Contributions, Qualified Non-Elective Contributions and Elective
Deferrals reclassified as Voluntary Contributions plus the investment
earnings thereon are only available for Hardship withdrawal prior to age 59-1/2
to the extent that they were credited to the Participant's
Account as of the last day of the Plan Year ending prior to July 1, 1989.
The Plan Administrator may limit withdrawals to Elective Deferrals and the
earnings thereon as stipulated above. Hardship withdrawals are subject to
the Spousal consent requirements contained in Code Sections 401 (a)(11)
and 417. Only the following reasons are valid to obtain Hardship withdrawal:
(a) medical expenses [within the meaning of Code Section 213(d)],
incurred or necessary for the medical care of the Participant, his or her
Spouse, children and other dependents,
(b) the purchase (excluding mortgage payments) of the principal residence
for the Participant,
(c) payment of tuition and related educational expenses for the next
twelve (12) months of post-secondary education for the Participant, his or
her Spouse, children or other dependents, or
(d) the need to prevent eviction of the Employee from or a foreclosure
on the mortgage of, the Employee's principal residence.
Furthermore, the following conditions must be met in order for a withdrawal
to be authorized:
(e) the Participant has obtained all distributions, other than hardship
distributions, and all nontaxable loans under all plans maintained by the
Employer,
(f) all plans maintained by the Employer, other than flexible benefit
plans under Code Section 125 providing for current benefits, provide that
the Employee's Elective Deferrals and Voluntary Contributions will be
suspended for twelve months after the receipt of the Hardship distribution,
(g) the distribution is not in excess of the amount of the immediate
and heavy financial need [(a) through (d) above], including amounts
necessary to pay any federal, state or local income tax or penalties
reasonably anticipated to result from the distribution, and
(h) all plans maintained by the Employer provide that an Employee may
not make Elective Deferrals for the Employee's taxable year immediately
following the taxable year of the Hardship distribution in excess of the
applicable limit under Code Section 402(g) for such taxable year, less the
amount of such Employee's pre-tax contributions for the taxable year of the
Hardship distribution.
If a distribution is made at a time when a Participant has a nonforfeitable
right to less than 100% of the account balance derived from Emplover
contributions and the Participant may increase the nonforfeitable percentage
in the account:
(a) A separate account will be established for the Participant's interest
in the Plan as of the time of the distribution, and
(b) At any relevant time the Participant's nonforfeitable portion of the
separate account will be equal to an amount ("X') determined by the formula:
X = P [AB + (R X D)] - (R X D)
For purposes of applying the formula: 'P'is the nonforfeitable percentage at
the relevant time, "AB' is the account balance at the relevant time, "D" is
the amount of the distribution and 'R"is the ratio of the account balance
at the relevant time to the account balance after distribution.
ARTICLE VII
DISTRIBUTION REQUIREMENTS
7.1 Joint And Survivor Annuity Requirements - All distributions made under
the terms of this Plan must comply with the provisions of Article VIII
including, if applicable, the safe harbor provisions thereunder.
7.2 Minimum Distribution Requirements - All distributions required under
this Article shall be determined and made in accordance with the minimum
distribution requirements of Code Section 401(a)(9) and the regulations
thereunder, including the minimum distribution incidental benefit rules
found at Regulations Section 1.401(a)(9)-2. The entire interest of a
Participant must be distributed or begin to be distributed no later than
the Participant's Required Beginning Date. Life expectancy and joint and
last survivor life expectancy are computed by using the expected return
multiples found in Tables V and VI of Regulations Section 1.72-9.
7.3 Limits On Distribution Periods - As of the First Distribution Calendar
Year, distributions if not made in a single-sum, may only be made over one
of the following periods (or a combination thereof):
(a) the life of the Participant,
(b) the life of the Participant and a Designated Beneficiary,
(c) a period certain not extending beyond the life expectancy of the
participant, or
(d) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
7.4 Required Distributions On Or After The Required Beginning Date
(a) If a participant's benefit is to be distributed over (1) a period not
extending beyond the life expectancy of the Participant or the joint life and
last survivor expectancy of the Participant and the Participant's Designated
Beneficiary or (2) a period not extending beyond the life expectancy of the
Designated Beneficiary, the amount required to be distributed for each
calendar year, beginning with distributions for the First Distribution
Calendar Year, must at least equal the quotient obtained by dividing the
Participant's benefit by the Applicable Life Expectancy.
(b) For calendar vears beginning before 1989, if the Participant's
Spouse is not the Designated Beneficiary, the method of distribution selected
must have assured that at least 50% of the Present Value of the amount
available for distribution was to be paid within the life expectancy of the
Participant.
(c) For calendar years beginning after 1988, the amount to be distributed
each year, beginning with distributions for the First Distribution Calendar
Year shall not be less than the quotient obtained by dividing the Participant's
benefit by the lesser of (1) the Applicable Life Expectancy or (2) if the
Participant's Spouse is not the Designated Beneficiary, the applicable
divisor determined from the table set forth in Q&A-4 of Regulations Section
1.401(a)(9)-2. Distributions after the death of the Participant shall be
distributed using the Applicable Life Expectancy as the relevant divisor
without regard to Regulations Section 1.401(a)(9)-2.
(d) The minimum distribution required for the Participant's First
Distribution Calendar Year must be made on or before the Participant's
Required Beginning Date. The minimum distribution for other calendar years,
including the minimum distribution for the Distribution Calendar Year
in which the Participant's Required Beginning Date occurs, must be
made on or before December 31 of that Distribution Calendar Year.
(e) If the Participant's benefit is distributed in the form of an annuity
purchased from an insurance company, distributions thereunder shall be
made in accordance with the requirements of Code Section 401(a)(9) and
the Regulations thereunder.
(f) For purposes of determining the amount of the required
distribution for each Distribution Calendar Year, the account balance to
be used is the account balance determined as of the last valuation
preceedig the Distribution Calendar Year. This balance will be increased
by the amount of any contributions or forfeitures allocated to the
account balance after the valuation date in such preceding calendar year.
Such balance will also be decreased by distributions made after the
Valuation Date in such preceding Calendar Year.
(g) For purposes of subparagraph 7.4(f), if any portion of the
minimum distribution for the First Distribution Calendar Year is made in
the second Distribution Calendar Year on or before the Required
Beginning Date, the amount of the minimum distribution made in the
second Distribution Calendar Year shall be treated as if it had been
made in the immediately preceding Distribution Calendar Year.
7.5 Required Beginning Date
(a) General Rule, The Required Beginning Date of a Participant is the
first day of April of the calendar year following the calendar year in which
the Participant attains age 70-1/2.
(b) Transitional Rules. The Required Beginning Date of a Participant who
attains age 70-1/2 before 1988, shall be determined in accordance with (1) or
(2) below:
(1) Non-5-percent owners. The Required Beginning Date of a Participant
who is not a 5-percent owner is the first day of April of the calendar year
following the calendar year in which the later of retirement or attaimnent of
age 70-1/2 occurs. In the case of a Participant who is not a 5-percent owner
who attains age 70-1/2 during 1988 and who has not retired as of January 1,
1989, the Required Beginning Date is April 1, 1990.
(2) 5-percent owners. The Required Beginning Date of a Participant who
is a 5-percent owner during any year beginning after 1979, is the first day
of April following the later of:
(i) the calendar year in which the Participant attains age 70-1/2,
or
(ii) the earlier of the calendar year with or within which ends
the plan year in which the Participant becomes a 5-percent owner, or the
calendar year in which the Participant retires.
(c) A Participant is treated as a 5-percent owner for purposes of this
Paragraph if such Participant is a 5-percent owner as defined in Code Section
416(i) (determined in accordance with Code Section 416 but without regard to
whether the Plan is Top-Heavy) at any time during the Plan Year ending with or
within the calendar year in which such Owner attains age 66-1/2 or any
subsequent Plan Year.
(d) Once distributions have begun to a 3-percent owner under this
paragraph, they must continue to be distributed, even if the Participant
ceases to be a 5-percent owner in a subsequent year.
7.6 Tmnsitional Rule
(a) Notwithstanding the other requirements of this Article and subject
to the requirements of Article VIII, Joint and Survivor Annuity Requirements,
distribution on behalf of any Employee, including a 5-percent owner, may be
made in accordance with all of the following requirements (regardless of when
such distribution commences):
(1) The distribution by the Trust is one which would not have disqualified
such Trust under Code Section 401(a)(9) as in effect prior to amendment by
the Deficit Reduction Act of 1984.
(2) The distribution is in accordance with a method of distribution
designated by the Employee whose interest in the Trust is being distributed
or, if the Employee is deceased by a beneficiary of such Employee.
(3) Such designation was in writing, was signed by the Employee or the
beneficiary, and was made before 1984.
(4) The Employee had accrued a benefit under the Plan as of December 31,
1983.
(5) The method of distribution designated by the Employee or the
beneficiary specifies the time at which distribution will commence, the
period over which distributions will be made, and in the case of any
distribution upon the Employee's death, the beneficiaries of the Employee
listed in order of priority.
(b) A distribution upon death will not be covered by this transitional
rule unless the information in the designation contains the required
information described above with respect to the distributions to be made
upon the death of the Employee.
(c) For any distribution which commences before 1984, but continues
after 1983, the Employee or the beneficiary, to whom such distribution is
being made, will be presumed to have designated the method of distribution
under which the distribution is being made if the method of distribution was
specified in writing and the distribution satisfies the requirements in
subparagraphs (a)(1) and (5) above.
(d) If a designation is revoked, any subsequent distribution must
satisfy the requirements of Code Section 401(a)(9) and the regulations
thereunder. If a designation is revoked subsequent to the date distributions
are required to begin, the Trust must distribute by the end of the calendar
year following the calendar year in which the revocation occurs the total
amount not yet distributed which would have been required to have been
distributed to satisfy Code Section 401(a)(9) and the regulations thereunder,
but for the section 242(b)(2) election of the Tax Equity and Fiscal
Responsibility Act of 1982. For calendar years beginning after 1988, such
distributions must meet the minimum distribution incidental benefit
requirements in section 1.401(a)(9)-2 of the Income Tax Regulations. Any
changes in the designation will be considered to be a revocation of the
designation. However, the mere substitution or addition of another
beneficiary (one not named in the designation) under the designation will
not be considered to be a revocation of the designation, so long as such
substitution or addition does not alter the period over which distributions
are to be made under the designation, directly or indirectly (for example,
by altering the relevant measuring life). In the case in which an amount is
transferred or rolled over from one plan to another plan, the rules in Q&A
J-2 and Q&A J-3 of the regulations shall apply.
7.7 Designation Of Beneficiary For Death Benefit - Each Participant shall
file a written designation of beneficiary with the Employer upon qualifying
for participation in this Plan. Such designation shall remain in force until
revoked by the Participant by filing a new beneficiary form with the Employer.
The Participant may elect to have a portion of his or her account balance
invested in an insurance contract. If an insurance contract is purchased
under the Plan, the Trustee must be named as Beneficiary under the terms of
the contract. However, the Participant shall designate a Beneficiary to
receive the proceeds of the contract after settlement is received by the
Trustee. Under a profit-sharing plan satisfying the requirements of paragraph
8.7, the Designated Beneficiary shall be the Participant's Surviving Spouse,
if any, unless such Spouse properly consents otherwise.
7.8 Nonexistence Of Beneficiary - Any portion of the amount payable
hereunder which is not disposed of because of the Participant's or former
Participant's failure to designate a beneficiary, or because all of the
Designated Beneficiaries predeceased the Participant, shall be paid to his
or her Spouse. If the Participant had no Spouse at the time of death,
payment shall be made to the personal representative of his or her estate
in a lump sum.
7.9 Distribution Beginning Before Death - If the Participant dies after
distribution of his or her interest has begun, the remaining portion of such
interest will continue to be distributed at least as rapidly as under the
method of distribution being used prior to the Participant's death.
7.10 Distribution Beginning After Death - If the Participant dies before
distribution of his or her interest begins, distribution of the Participant's
entire interest shall be completed by December 31 of the calendar year
containing the fifth anniversary of the Participant's death except to the
extent that an election is made to receive distributions in accordance with
(a) or (b) below:
(a) If any portion of the Participant's interest is payable to a
Designated Beneficiary, distributions may be made over the life or over a
period certain not greater than the life expectancy of the Designated
Beneficiary commencing on or before December 31 of the calendar year
immediately following the calendar year in which the Participant died;
(b) If the Designated Beneficiary is the Participant's surviving Spouse,
the date distributions are required to begin in accordance with (a) above
shall not be earlier than the later of (1) December 31 of the calendar year
immediately following the calendar year in which the participant died or (2)
December 31 of the calendar year in which the Participant would have attained
age 70-1/2.
If the Participant has not made an election pursuant to this paragraph 7. 10
by the time of his or her death, the Participant's Designated Beneficiary
must elect the method of distribution no later than the earlier of (1)
December 31 of the calendar year in which distributions would be required to
begin under this section, or (2) December 31 of the calendar year which
contains the fifth anniversary of the date of death of the participant. If
the Participant has no Designated Beneficiary, or if the Designated
Beneficiary does not elect a method of distribution, then distribution of
the Participant's entire interest must be completed by December 31 of the
calendar year containing the fifth anniversary of the Participant's death.
For purposes of this paragraph if the Surviving Spouse dies after the
Participant, but before payments to such Spouse begin, the provisions of
this paragraph with the exception of paragraph (b) therein, shall be applied
as if the Surviving Spouse were the Participant. For the purposes of this
paragraph and paragraph 7.9,distribution of a Participant's interest is
considered to begin an the Participant's Required Beginning Date (or, if the
preceding sentence is applicable, the date distribution is required to begin
to the Surviving Spouse). If distribution in the form of an annuity
described in paragraph 7.4(e) irrevocably commences to the Participant
before the Required Beginning Date, the date distribution is considered
to begin is the date distribution actually commences.
7.11 Distribution Of Excess Elective Deferrals
(a) Notwithstanding any other provision of the Plan, Excess Elective
Deferrals plus any income and minus any loss allocable thereto, shall be
distributed no later than April 15, 1988, and each April 1 thereafter, to
Participants to whose accounts Excess Elective Deferrals were allocated for
the preceding taxable year, and who claim Excess Elective Deferrals for such
taxable year. Excess Elective Deferrals shall be treated as Annual Additions
under the Plan, unless such amounts are distributed no later than the first
April 15th following Elie close of the Participant's taxable year. A
Participant is deemed to notify the Plan Administrator of any Excess Elective
Deferrals that arise by taking into account only those Elective Deferrals
made to this Plan and any other plans of this Employer.
(b) Furthermore, a Participant who participates in another plan allowing
Elective Deferrals may assign to this Plan any Excess Elective Deferrals made
during a taxable year of the Participant by notifying the Plan Administrator
of the amount of the Excess Elective Deferrals to be assigned. The
Participant's claim shall be in writing; shall be submitted to the Plan
Administrator not later than March 1 of each year; shall specify the amount
of the Participant's Excess Elective Deferrals for the preceding taxable
year, and shall be accompanied by the Participant's written statement that
if such amounts are not distributed, such Excess Elective Deferrals, when
added to amounts deferred under other plans or arrangements described in Code
Sections 401 (k), 408(k) [Simplified Employee Pensions], or 403(b) [annuity
programs for public schools and charitable organizations] will exceed the
$7,000 limit as adjusted under Code Section 415(d) imposed on the Participant
by Code Section 402(g) for the year in which the deferral occurred.
(c) Excess Elective Deferrals shall be adjusted for any income or loss up
to the end of the taxable year, during which such excess was deferred.
Income or loss will be calculated under the method used to calculate
investment earnings and losses elsewhere in the Plan.
(d) If the Participant receives a return of his or her Elective Deferrals,
the amount of such contributions which are returned must be brought into the
Employee's taxable income.
7.12 Distributions of Excess Contributions
(a) Notwithstanding any other provision of this Plan, Excess Contributions,
plus any income and minus any loss allocable thereto, shall be distributed no
later than the last day of each Plan Year to Participants to whose accounts
such Excess Contributions were allocated for the preceding Plan Year. If
such excess amounts are distributed more than 2-1/2 months after the last
day of the Plan Year in which such excess amounts arose, a ten (10) percent
excise tax will be imposed on the Employer maintaining the Plan with respect
to such amounts. Such distributions shall be made to Highly Compensated
Employees on the basis of the respective portions of the Excess Contributions
attributable to each of such Employees. Excess Contributions of Participants
who are subject to the Family Member aggregation rules of Code Section 414(q)
(6) shall be allocated among the Family Members in proportion to the Elective
Deferrals (and amounts treated as Elective Deferrals) of each Family Member
that is combined to determine the Average Deferral Percentage.
(b) Excess Contributions (including the amounts recharacterized) shall be
treated as Annual Additions under the Plan.
(c) Excess Contributions shall be adjusted for any income or loss up to
the end of the Plan Year. Income or loss will be calculated under the method
used to calculate investment earnings and losses elsewhere in the Plan.
(d) Excess Contributions shall be distributed from the Participant's
Elective Deferral account and Qualified Matching Contribution account (if
applicable) in proportion to the Participant's Elective Deferrals and
Qualified Matching Contributions (to the extent used in the ADP test) for
the Plan Year. Excess Contributions shall be distributed from the Participant's
Qualified Non-Elective Contribution account onlyto the extent that such
Excess Contributions exceed the balance in the Participant's Elective
Deferral account and Qualified Matching Contribution account.
7.13 Distribution or Excess Aggregate Contributions
(a) Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions, plus any income and minus any loss allocable thereto, shall
be forfeited, if forfeitable, or if not forfeitable, distributed no later
than the last day of each Plan Year to Participants to whose accounts such
Excess Aggregate Contributions were allocated for the preceding Plan Year.
Excess Aggregate Contributions shall be allocated to Participants who are
subject to the Family Member aggregation rules of Code Section 414(q)(6) in
the manner prescribed by the regulations. If such Excess Aggregate
Contributions are distributed more than 2-1/2 months after the last day of
the Plan Year in which such excess amounts arose, a ten (1O) percent excise
tax will be imposed on the Employer maintaining the Plan with respect to
those amounts. Excess Aggregate Contributions shall be treated as Annual
Additions under the plan.
(b) Excess Aggregate Contributions shall be adjusted for any income or
loss up to the end of the Plan Year. The income or loss allocable to Excess
Aggregate Contributions is the sum of income or loss for the Plan Year
allocable to the Participant's Voluntary Contribution account, Matching
Contribution account (if any, and if all amounts therein are not used in the
ADP test) and, if applicable, Qualified Non-Elective Contribution account
and Elective Deferral account. Income or loss will be calculated under the
method used to calculate investment earnings and losses elsewhere in the Plan.
(c) Forfeitures of Excess Aggregate Contributions may either be
reallocated to the accounts of non-Highly Compensated Employees or applied
to reduce Employer contributions, as elected by the employer in the Adoption
Agreement.
(d) Excess Aggregate Contributions shall be forfeited if such amount is
not vested. If vested, such excess shall be distributed on a pro-rata basis
from the Participant's Voluntary Contribution account (and, if applicable,
the Participant's Qualified Non-Elective Contribution account, Matching
Contribution account, Qualified Matching Contribution account, or Elective
Deferral account, or both).
ARTICLE VIII
JOINT AND SURVIVOR-ANNUITY REQUIREMENTS
8.1 Applicability Of Provisions - The provisions of this Article shall
apply to any Participant who is credited with at least one Hour of Service with
the Employer on or after August 23, 1984 and such other Participants as
provided in paragraph 8.8.
8.2 Payment Of Qualified Joint And Survivor Annuity - Unless an optional
form of benefit is selected pursuant to a Qualified Election within the 90-day
period ending on the Annuity Starting Date, a married Participant's Vested
Account Balance will be paid in the form of a Qualified Joint and Survivor
Annuity and an unmarried Participant's Vested Account Balance will be paid
in the form of a life annuity. The Participant may elect to have such annuity
distributed upon attainment of the Early Retirement Age under the Plan.
8.3 Payment Of Qualified Pre-Retirement Survivor Annuity - Unless an
optional form of benefit has been selected within the Election Period
pursuant to a Qualified Election, if a Participant dies before benefits have
commenced then the Participant's Vested Account Balance shall be paid in the
form of an annuity for the life of the Surviving Spouse. The Surviving
Spouse may elect to have such annuity distributed within a reasonable period
after the Participant's death.
A Participant who does not meet the age 35 requirement set forth in the
Election Period as of the end of any current Plan Year may make a special
qualified election to waive the qualified Pre-retirement Survivor Annuity
for the period beginning on the date of such election and ending on the first
day of the Plan Year in which the Participant will attain age 35. Such
election shall not be valid unless the Participant receives a written
explanation of the Qualified Pre-retirement Survivor Annuity in such terms
as are comparable to the explanation required under paragraph 8.5. Qualified
Pre-retirement Survivor Annuity coverage will be automatically reinstated as
of the first day of the Plan Year in which the Participant attains age 35.
Any new waiver on or after such date shall be subject to the full requirements
of this Article.
8.4 Qualified Election - A Qualified Election is an election to either
waive a Qualified Joint and Survivor Annuity or a qualified pre-retirement
survivor annuity. Any such election shall not be effective unless:
(a) the Participant's Spouse consents in writing to the election;
(b) the election designates a specific beneficiary, including any class
of beneficiaries or any contingent beneficiaries, which may not be changed
without spousal consent (or the Spouse expressly permits designations by the
Participant without any further spousal consent);
(c) the Spouse's consent acknowledges the effect of the election, and
(d) the Spouse's consent is witnessed by a Plan representative or notary
public.
Additionally, a Parrticipant's waiver of the Qualified Joint and Survivor
Annuity shall not be effective unless the election designates a form of
benefit payment which may not be changed without spousal consent (or the
Spouse expressly permits designations by the Participant without any further
spousal consent). If it is established to the satisfaction of the Plan
Administrator that there is no Spouse or that the Spouse cannot be located,
a waiver will be deemed a Qualified Election. Any consent by a Spouse
obtained under this provision (or establishment that the consent of a Spouse
may not be obtained) shall be effective only with respect to such Spouse.
A consent that permits designations by the Participant without any requirement
of further consent by such Spouse must acknowledge that the Spouse has the
right to limit consent to a specific beneficiary, and a specific form of
benefit where applicable, and that the Spouse voluntarily elects to
relinquish either or both of such rights. A revocation of a prior waiver
may be made by a Participant without the consent of the Spouse at any time
before the commencement of benefits. The number of revocations shall not be
limited. No consent obtained under this provision shall be valid unless the
Participant has received notice as provided in paragraphs 8.5 and 8.6 below.
8.5 Notice Requirements For Qualified Joint And Survivor Annuity -In the
case of a Qualified Joint and Survivor Annuity, the Plan Administrator shall,
nonless than 30 days and no more than 90 days prior to the Annuity Starting
date, provide each Participant a written explanation of:
(a) the terms and conditions of a Qualified Joint and Survivor Annuity;
(b) the Participant's right to make and the effect of an election to
waive the Qualified Joint and Survivor Annuity form of benefit;
(c) the rights of a Participant's Spouse; and
(d) the right to make, and the effect of, a revocation of a previous
election to waive the Qualified Joint and Survivor Annuity.
8.6 Notice Requirements For Qualified Pre-Retirement Survivor Annuity- In
the case of a qualified preretirement survivor annuity as described in
paragraph 8.3, the Plan Administrator shall provide each Participant within
the applicable period for such Participant a written explanation of the
qualified pre-retirement survivor annuitv in such terms and in such manner
as would be comparable to the explanation provided for meeting the requirements
of paragraph 8.5 applicable to a Qualified Joint and Survivor Annuity. The
applicable period for a Participant is whichever of the following periods
ends last:
(a) the period beginning with the first day of the Plan Year in which
the Participant attains age 32 and ending with the close of the Plan Year
preceding the Plan Year in which the Participant attains age 35,
(b) a reasonable period ending after the individual becomes a Participant;
(c) a reasonable period ending after this Article first applies to the
Participant. Notwithstanding the foregoing, notice must be provided within
a reasonable period ending after separation from Service in the case of a
Participant who separates from Service before attaining age 35.
For purposes of applying the preceding paragraph, a reasonable period ending
after the events described in (b) and (c) is the end of the two-year period
beginning one-year prior to the date the applicable event occurs, and ending
one-year after that date. In the case of a Participant who separates from
Service before the Plan Year in which age 35 is attained, notice shall be
provided within the two-year period beginning one year prior to separation
and ending one year after separation. If such a Participant subsequently
returns to employment with the Employer, the applicable period for such
Participant shall be re-determined.
8.7 Special Safe-Harbor Exception For Certain Prorit-Sharing Plans
(a) This paragraph shall apply to a Participant in a profit-sharing plan,
and to any distribution, made on or after the first day of the first plan
year beginning after 1988, from or under a separate account attributable
solely to Qualified Voluntary contributions, as maintained on behalf of a
Participant in a money purchase pension plan, (including a target benefit
plan) if the following conditions are satisfied:
(1) the Participant does not or cannot elect payments in the form of a life
annuity; and
(2) on the death of a Participant, the Participant's Vested Account
Balance will be paid to the Participant's Surviving Spouse, but if there is
no Surviving Spouse, or if the Surviving Spouse has consented in a manner
conforming to a Qualified Election, then to the Participant's Designated
Beneficiary. The Surviving Spouse may elect to have distribution of the
Vested Account Balance commence within the 90-day period following the date
of the Participant's death. The account balance shall be adjusted for gains
or losses occurring after the Participant's death in accordance with the
provisions of the Plan governing the adjustment of account balances for other
types of distributions. These safe-harbor rules shall not be operative with
respect to a Participant in a profit-sharing plan if that plan is a direct or
indirect transferee of a Defined Benefit Plan, money purchase plan, a target
benefit plan, stock bonus plan, or profit-sharing plan which is subject to
the survivor annuity requirements of Code Section 401(a)(11) and Code
Section 417, and would therefore have a Qualified Joint and Survivor Annuity
as its normal form of benefit.
(b) The Participant may waive the spousal death benefit described in this
paragraph at any time provided that no such waiver shall be effective unless
it satisfies the conditions (described in paragraph 8.4) that would apply to
the Participant's waiver of the Qualified Pre-Retirement Survivor Annuity.
(c) If this paragraph 8.7 is operative, then all other provisions of this
Article other than paragraph 8.8 are inoperative.
8.8 Transitional Joint And Survivor Annuity Rules - Special transition
rules apply to Participants who were not receiving benefits on August 23, 1984.
(a) Any living Participant not receiving benefits on August 23, 1984, who
would otherwise not receive the benefits prescribed by the previous paragraphs
of this Article, must be given the opportunity to elect to have the prior
paragraphs of this Article apply if such Participant is credited with at
least one Hour of Service under this Plan or a predecessor Plan in a Plan
Year beginning on or after January 1, 1976 and such Participant had at least
10 Years of Service for vesting purposes when he or she separated from Service.
(b) Any living Participant not receiving benefits on August 23,1984, who
was credited with at least one Hour of Service under this Plan or a
predecessor Plan on or after September 2, 1974, and who is not otherwise
credited with any Service in a Plan Year beginning on or after January 1,
1976, must be given the opportunity to have his or her benefits paid in
accordance with paragraph 8.9.
(c) The respective opportunities to elect [as described in (a) and (b)
above] must be afforded to the appropriate Participants during the period
commencing on August 23, 1984 and ending on the date benefits would otherwise
commence to said Participants.
8.9 Automatic Joint And Survivor Annuity And Early Survivor Annuity - Any
Participant who has elected pursuant to paragraph 8.8(b) and any Participant
who does not elect under paragraph 8.8(a) or who meets the requirements of
paragraph 8.8(a), except that such Participant does not have at least 10
years of vesting Service when he or she separates from Service, shall have
his or her benefits distributed in accordance with all of the following
requirements if benefits would have been payable in the form of a life
annuity.
(a) Automatic Joint and Survivor Annuity. If benefits in the form of a
life annuity become payable to a married Participant who:
(1) begins to receive payment s under the Plan on or after Normal
Retirement Age, or
(2) dies on or after Normal Retirement Age while still working for
the Employer, or
(3) begins to receive payments on or after the Qualified Early
Retirement Age, or
(4) separates from Service on or after attaining Normal Retirement
(or the Qualified Early Retirement Age) and after satisfying the eligibility
requirements for the payment of benefits under the Plan and thereafter dies
before beginning to receive such benefits, then such benefits will be received
under this Plan in the form of a Qualified Joint and Survivor Annuity, unless
the Participant has elected otherwise during the Election Period. The
Election Period must begin at least 6 months before the Participant attains
Qualified Earlv Retirement Age and end not more than 90 days before the
commencement of benefits. Any election will be in writing and may be changed
by the Participant at any time.
(b) Election of Early Survivor Annuity. A Participant who is employed
after attaining the Qualified Early Retirement Age will be given the
opportunity to elect, during the Election Period, to have a survivor annuity
payable on death. If the Participant elects the survivor annuity, payments
under such annuity must not be less than the payments which would have been
made to the Spouse under the Qualified Joint and Survivor Annuity if the
Participant had retired on the day before his or her death. Any election
under this provision will be in writing and may be changed by the Participant
at any time. The Election Period begins on the later of:
(1) the 90th day before the Participant attains the Qualified
Early Retirement Age, or
(2) the date on which participation begins, and ends on the date
the Participant terminates employment.
8.10 Annuity Contracts - Any annuity contract distributed under this Plan
must be nontransferable. The terms of any annuity contract purchased and
distributed by the Plan to a Participant or Spouse shall comply with the
requirements of this Plan.
ARTICLE IX
VESTING
9.1 Employee Contributions - A Participant shall always have a 100 %
vested and nonforfeitable interest in his or her Elective Deferrals,
Voluntary Contributions, Qualified Voluntary Contributions, Rollover
Contributions,and Transfer Contributions plus the earnings thereon. No
forfeiture of Employer related contributions (including any minimum
contributions made under paragraph 14.2) will occur solely as a result of
an Employee's withdrawal of any Employee contributions.
9.2 Employer Contributions - A Participant shall acquire a vested and
nonforfeitable interest in his or her account attributable to Employer
contributions in accordance with the table selected in the Adoption
Agreement, provided that if a Participant is not already fully vested, he
or she shall become so upon attaining Normal Retirement Age, Early Retirement
Age, on death prior to normal retirement, on retirement due to Disability,
or on termination of the Plan.
9.3 Computation Period - The computation period for purposes of determining
Years of Service and Breaks in Service for purposes of computing a
Participant's nonforfeitable right to his or her account balance derived
from Employer contributions shall be determined by the Employer in the
Adoption Agreement. In the event a former Participant with no vested
interest in his or her Employer contribution account requalifies for
participation in the Plan after incurring a Break in Service, such
Participant shall be credited for vesting with all pre-break and post-break
Service.
9.4 Requalification Prior To Five Consecutive One-Year Breaks In Service -
The account balance of such Participant shall consist of any undistributed
amount in his or her account as of the date of re-employment plus any future
contributions added to such account plus the investment earnings on the
account. The Vested Account Balance of such Participant shall be determined
by multiplying the Participant's account balance (adjusted to include any
distribution or redeposit made under paragraph 6.3) by such Participant's
vested percentage. All Service of the Participant, both prior to and
following the break, shall be counted when computing the Participant's
vested percentage.
9.5 Requalification After Five Consecutive One-Year Breaks In Service - If
such Participant is not fully vested upon re-employment, a new account shall
be established for such Participant to separate his or her deferred vested
and nonforfeitable account, if any, from the account to which new allocations
will be made. The Participant's deferred account to the extent remaining
shall be fully vested and shall continue to share in earnings and losses of
the Fund. When computing the Participant's vested portion of the new account,
all pre-break and post-break Service shall be counted. However, notwithstanding
this provision, no such former Participant who has had five consecutive
one-year Breaks in Service shall acquire a larger vested and nonforfeitable
interest in his or her prior account balance as a result of requalification
hereunder.
9.6 Calculating Vested Interest - A Participant's vested and nonforfeitable
interest shall be calculated by multiplying the fair market value of his or
her account attributable to Employer contributions on the Valuation Date
preceding distribution by the decimal equivalent of the vested percentage as
of his or her termination date. The amount attributable to Employer
contributions for purposes of the calculation includes amounts previously
paid out pursuant to paragraph 6.3 and not repaid. The Participant's vested
and nonforfeitable interest, once calculated above, shall be reduced to
reflect those amounts previously paid out to the Participant and not repaid
by the Participant. The Participant's vested and nonforfeitable interest so
determined shall continue to share in the investment earnings and any
increase or decrease in the fair market value of the Fund up to the Valuation
Date preceding or coinciding with payment.
9.7 Forfeitures - Any balance in the account of a Participant who has
separated from Service to which he or she is not entitled under the foregoing
provisions, shall be forfeited and applied as provided in the Adoption
Agreement. A forfeiture may only occur if the Participant has received a
distribution from the Plan or if the Participant has incurred five
consecutive 1-year Breaks in Service. Furthermore, a Highly Compensated
Employee's Matching Contributions may be forfeited, even if vested, if the
contributions to which they relate are Excess Deferrals, Excess Contributions
or Excess Aggregate Contributions.
9.8 Amendment Of Vesting Schedule - No amendment to the Plan shall have
the effect of decreasing a Participant's vested interest determined without
regard to such amendment as of the later of the date such amendment is
adopted or the date it becomes effective. Further, if the vesting schedule
of the Plan is amended, or the Plan is amended in any way that directly or
indirectly affects the computation of any Participant's nonforfeitable
percentage or if the Plan is deemed amended by an automatic change to or
from a Top-Heavy vesting schedule, each Participant with at least three
Years of Service with the Employer may elect, within a reasonable period
after the adoption of the amendment, to have his or her nonforfeitable
percentage computed under the Plan without regard to such amendment. For
Participants who do not have at least one Hour of Service in any Plan Year
beginning after 1988, the preceding sentence shall be applied by substituting
"Five Years of Service" for 'Three Years of Service" where such language
appears. The period during which the election may be made shall commence
with the date the amendment is adopted and shall end on the later of:
(a) 60 days after the amendment is adopted;
(b) 60 days after the amendment becomes effective; or
(c) 60 days after the Participant is issued written notice of the
amendment by the Employer or the Trustee/Custodian. If the Trustee/Custodian
is asked to so notify, the Fund will be charged for the costs thereof.
No amendment to the Plan shall be effective to the extent that it has the
effect of decreasing a Participant's accrued benefit. Notwithstandine the
preceding sentence, a Participant's account balance may be reduced to the
extent permitted under section 412(c)(8) of the Code (relating to financial
hardships). For purposes of this paragraph, a Plan amendment which has the
effect of decreasing a Participant's account balance or eliminating an
optional form of benefit, with respect to benefits attributable to service
before the amendment, shall be treated as reducing an accrued benefit.
9.9 Service With Controlled Groups - All Years of Service with other
members of a controlled group of corporations [as defined in Code Section
414(b)], trades or businesses under common control [as defined in Code
Section 414(c)], or members of an affiliated service group [as defined in
Code Section 414(m)] shall be considered for purposes of determining a
Participant's nonforfeitable percentage.
ARTICLE X
LIMITATIONS ON ALLOCATIONS
AND ANTIDISCRIMINATION TESTING
10.1 Participation In This Plan Only - If the Participant does not
participate in and has never participated in another qualified plan, a
Welfare Benefit Fund (as defined in paragraph 1.89) or an individual medical
account, as defined in Code Section 415(l)(2), maintained by the adopting
Employer, which provides an Annual Addition as defined in paragraph 1.4,the
amount of Annual Additions which may be credited to the Participant's account
for any Limitation Year will not exceed the lesser of the Maximum Permissible
Amount or any other limitation contained in this Plan. If the Employer
contribution that would otherwise be contributed or allocated to the
Participant's account would cause the Annual Additions for the Limitation
Year to exceed the Maximum Permissible Amount, the amount contributed or
allocated will be reduced so that the Annual Additions for the Limitation
Year will equal the Maximum Permissible Amount. Prior to determining the
Participant's actual Compensation for the Limitation Year, the Employer may
determine the Maximum Permissible Amount for a Participant on the basis of
a reasonable estimate of the Participant's Compensation for the Limitation
Year, uniformly determined for all Participants similarly situated. As soon
as is administratively feasible after the end of the Limitation Year, the
Maximum Permissible Amount for the Limitation Year will be determined on the
basis of the Participant's actual Compensation for the Limitation Year.
10.2 Disposition Of Excess Annual Additions - If, pursuant to paragraph
10.1 or as a result of the allocation of forfeitures, there is an Excess
Amount, the excess will be disposed of under one of the following methods as
determined in the Adoption Agreement. If no election is made in the Adoption
Agreement then method "(a)" below shall apply.
(a) Suspense Account Method
(1) Any nondeductible Employee Voluntary, Required Voluntary Contributions
and unmatched Elective Deferrals to the extent they would reduce the Excess
Amount will be returned to the Participant. To the extent necessary to
reduce the Excess Amount, non-Highly Compensated Emplovees will have all
Elective Deferrals returned whether or not there was a corresponding match.
(2) If after the application of paragraph (1) an Excess Amount still
exists, and the Participant is covered by the Plan at the end of the
Limitation Year, the Excess Amount in the Participant's account will be used
to reduce Employer contributions (including any allocation of forfeitures)
for such Participant in the next Limitation Year, and each succeeding
Limitation Year if necessary;
(3) If after the application of paragraph (1) an Excess Amount still
exists, and the Participant is not covered by the Plan at the end of the
Limitation Year, the Excess Amount will be held unallocated in a suspense
account. The suspense account will be applied to reduce future Employer
contributions (including allocation of any forfeitures) for all remaining
Participants in the next Limitation Year, and each succeeding Limitation
Year if necessary;
(4) If a suspense account is in existence at any time during the
Limitation Year pursuant to this paragraph, it will not participate in the
allocation of investment gains and losses. If a suspense account is in
existence at any time during a particular Limitation Year, all amounts in
the suspense account must be allocated and reallocated to Participants'
accounts before any Employer contributions or any Employee Contributions.
may be made to the Plan for that Limitation Year. Excess amounts may not
be distributed to Participants or former Participants.
(b) Spillover Method
(1) Any nondeductible Employee Voluntary, Required Voluntary Contributions
and unmatched Elective Deferrals to the extent they would reduce the Excess
Amount will be returned to the Participant. To the extent necessary to reduce
the Excess Amount, non-Highly Compensated Employees will have all Elective
Deferrals returned whether or not there was a corresponding match.
(2) Any Excess Amount which would be allocated to the account of an
individual Participant under the Plan's allocation formula will be reallocated
to other Participants in the same manner as other Emplover contributions. No
such reallocation shall be made to the extent that it will result in an
Excess Amount being created in such Participant's own account.
(3) To the extent that amounts cannot be reallocated under (1) above,
the suspense account provisions of (a) above will apply.
10.3 Participation In This Plan And Another Master and Prototype Defined
Contribution Plan, Welfare Benefit Fund Or Individual Medical Account
Maintained By The Employer - The Annual Additions which may be credited to
a Participant's account under this Plan for any Limitation Year will not
exceed the Maximum Permissible Amount reduced by the Annual Additions
credited to a Participant's account under the other Master or Prototype
Defined Contribution Plans, Welfare Benefit Funds, and individual medical
accounts as defmed in Code Section 415(l)(2), maintained by the Employer,
which provide an Annual Addition as defined in paragraph 1.4 for the same
Limitation Year. If the Annual Additions, with respect to the Participant
under other Defined Contribution Plans and Welfare Benefit Funds maintained
by the Employer, are less than the Maximum Permissible Amount and the
Employer contribution that would otherwise be contributed or allocated to
the Participant's account under this Plan would cause the Annual Additions
for the Limitation Year to exceed this limitations the amount contributed
or allocated will be reduced so that the Annual Additions under all such
plans and funds for the Limitation Year will equal the Maximum Permissible
Amount. If the Annual Additions with respect to the Participant under such
other Defined Contribution Plans and Welfare Benefit Funds in the aggregate
are equal to or greater than the Maximum Permissible Amount, no amount will
be contributed or allocated to the Participant's account under this Plan
for the Limitation Year. Prior to determining the Participant's actual
Compensation for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant in the manner described in paragraph
10.1. As soon as administratively feasible after the end of the Limitation
Year, the Maximum Permissible Amount for the Limitation Year will be
determined on the basis of the Participant's actual Compensation for the
Limitation Year.
10.4 Disposition Of Excess Annual Additions Under Two Plans - If, pursuant
to paragraph 10.3 or as a result of forfeitures, a Participant's Annual
Additions under this Plan and such other plans would result in an Excess
Amount for a Limitation Year, the Excess Amount will be deemed to consist of
the Annual Additions last allocated except that Annual Additions attributable
to a Welfare Benefit Fund or Individual Medical Account as defined in Code
Section 415(l)(2) will be deemed to have been allocated first regardless of
the actual allocation date. If an Excess Amount was allocated to a
Participant on an allocation date of this Plan which coincides with an
allocation date of another plan, the Excess Amount attributed to this Plan
will be the product of:
(a) the total Excess Amount allocated as of such date, times
(b) the ratio of:
(1) the Annual Additions allocated to the Participant for the Limitation
Year as of such date under the Plan, to
(2) the total Annual Additions allocated to the Participant for the
Limitation Year as of such date under this and all the other qualified Master
or Prototype Defmed Contribution Plans.
Any Excess Amount attributed to this Plan will be disposed of in the manner
described in paragraph 10.2.
10.5 Participation In This Plan And Another Defined Contribution Plan
Which Is Not A Master Or Prototype Plan If the Participant is covered under
another qualified Defined Contribution Plan maintained by the Employer which
is not a Master or Prototype Plan, Annual Additions which may be credited to
the Participant's account under this Plan for any Limitation Year will be
limited in accordance with paragraphs 10.3 and 10.4 as though the other plan
were a Master or Prototype Plan, unless the Employer provides other limitations
in the Adoption Agreement.
10.6 Participation In This Plan And A Defined Benefit Plan - If the
Employer maintains, or at any time maintained a qualified Defined Benefit
Plan covering any Participant in this Plan, the sum of the Participant's
Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not
exceed 1.0 in any Limitation Year. For any Plan Year during which the Plan is
Top-Heavy, the Defined Benefit and Defined Contribution Plan Fractions shall
be calculated in accordance with Code Section 416(h). The Annual Additions
which may be credited to the Participant's account under this Plan for any
Limitation Year will be limited in accordance with the provisions set forth
in the Adoption Agreement.
10.7 Average Deferral Percentage (ADP) Test With respect to any Plan Year,
the Average Deferral Percentage for Participants who are Highly Compensated
Employees and the Average Deferral Percentage for Participants who are
non-Highly Compensated Employees must satisfy one of the following tests:
(a) Basic Test - The Average Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year is not more than 1.25 times
the Average Deferral Percentage for Participants who are non-Highly
Compensated Employees for the same Plan Year, or
(b) Alternative Test - The Average Deferral Percentage for Participants
who are Highly Compensated Employees for the Plan Year does not exceed the
Average Deferral Percentage for Participants who are non-Highly Compensated
Employees for the same Plan Year by more than 2 percentage points provided
that the Average Deferral Percentage for Participants who are Highly
Compensated Employees is not more than 2.0 times the Average Deferral
Percentage for Participants who are non-Highly Compensated Employees.
10.8 Special Rules Relating To Application Of ADP Test
(a) The Actual Deferral Percentage for any Participant who is a Highly
Compensated Employee for the Plan Year and who is eligible to have Elective
Deferrals (and Qualified Non-Elective Contributions or Qualified Matching
Contributions, or both, if treated as Elective Deferrals for purposes of the
ADP test) allocated to his or her accounts under two or more arrangements
described in Code Section 401(k), that are maintained by the Employer, shall
be determined as if such Elective Deferrals (and, if applicable, such
Qualified Non-Elective Contributions or Qualified Matching Contributions, or
both) were made under a single arrangement. If a Highly Compensated Employee
participates in two or more cash or deferred arrangements that have different
Plan Years, all cash or deferred arrangements ending with or within the
same calendar year shall be treated as a single arrangement.
(b) In the event that this Plan satisfies the requirements of Code
Sections 401(k), 401(a)(4), or 410(b), only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
Code Sections only if aggregated with this Plan, then this Section shall be
applied by determining the Actual Deferral Percentage of Employees as if all
such plans were a single plan. For Plan Years beginning after 1989,plans may
be aggregated in order to satisfy Code Section 401(k) only if they have the
same Plan Year.
(c) For purposes of determining the Actual Deferral Percentage of a
Participant who is a 5 percent owner or one of the ten most highly-paid Highly
Compensated Employees, the Elective Deferrals (and Qualified Non-Elective
Contributions or Qualified Matching Contributions, or both, if treated as
Elective Deferrals for purposes of the ADP test) and Compensation of such
Participant shall include the Elective Deferrals (and, if applicable,
Qualified Non-Elective Contributions and Qualified Matching Contributions,
or both) for the Plan Year of Family Members as defined in paragraph 1.36 f
this Plan. Family Members, with respect to such Highly Compensated Employees,
shall be disregarded as separate Employees in determining the ADP both for
Participants who are non-Highly Compensated Emplovees and for Participants
who are Highly Compensated Employees. In the event of repeal of the family
aggregation rules under Code Section 414(q)(6), all applications of such
rules under this Plan will cease as of the effective date of such repeal.
(d) For purposes of determining the ADP test, Elective Deferrals,
Qualified Non-Elective Contributions and Qualified Matching Contributions
must be made before the last day of the twelve-month period immediately
following the Plan Year to which contributions relate.
(e) The Employer shall maintain records sufficient to demonstrate
satisfaction of the ADP test and the amount of Qualified Non-Elective
Contributions or Qualified Matching Contributions, or both, used in such
test.
(f) The determination and treatment of the Actual Deferral Percentage
amounts of any Participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
10.9 Recharacterization - If the Employer allows for Voluntary Contributions
in the Adoption Agreement, a Participant may treat his or her Excess
Contributions as an amount distributed to the Participant and then
contributed by the Participant to the Plan. Recharacterized amounts will
remain nonforfeitable and subject to the same distribution requirements as
Elective Deferrals. Amounts may not be recharacterized by a Highly
Compensated Employee to the extent that such amount in combination with
other Employee Contributions made by that Employee would exceed any stated
limit under the Plan on Voluntary Contributions. Recharacterization must
occur no later than two and one-half months after the last day of the Plan
Year in which such Excess Contributions arose and is deemed to occur no
earlier than the date the last Highly Compensated Employee is informed in
writing of the amount recharacterized and the consequences thereof.
Recharacterized amounts will be taxable to the Participant for the
Participant's tax year in which the Participant would have received them
in cash.
10.10 Average Contribution Percentage (ACP) Test - If the Employer makes
Matching Contributions or if the Plan allows Employees to make Voluntary
Contributions the Plan must meet additional nondiscrimination requirements
provided under Code Section 401(m). If Employee Contributions (including
any Elective Deferrals recharacterized as Voluntary Contributions) are made
pursuant to this Plan, then in addition to the ADP test referenced in
paragraph 10.7, the Average Contribution Percentage test is also applicable.
The Average Contribution Percentage for Participants who are Highly
Compensated Employees for each Plan Year and the Average Contribution
Percentage for Participantswho are Non-Highly Compensated Employees for the
same Plan Year must satisfy one of the following tests:
(a) Basic Test - The Average Contribution Percentage for Participants
who are Highly Compensated Employees for the Plan Year shall not exceed the
Average Contribution Percentage for Participants who are non-Highly Compensated
Employees for the same Plan Year multiplied by 1.25 or
(b) Alternative Test - The ACP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the Average Contribution
Percentage for Participants who are non-Highly Compensated Employees for the
same Plan Year multiplied by two (2), provided that the Average Contribution
Percentage for Participants who are Highly Compensated Employees does not
exceed the Average Contribution Percentage for Participants who are non-Highly
Compensated Employees by more than two (2) percentage points.
10.11 Special Rules Relating To Application of ACP Test
(a) If one or more Highly Compensated Employees participate in both a
cash or deferred arrangement and a plan subject to the ACP test maintained
by the Employer and the sum of the ADP and ACP of those Highly Compensated
Employees subject to either or both tests exceeds the Aggregate Limit, then
the ADP or ACP of those Highly Compensated Employees who also participate in
a cash or deferred arrangement will be reduced (beginning with such Highly
Compensated Employee whose ADP or ACP is the highest) as set forth in the
Adoption Agreement so that the limit is not exceeded. The amount by which
each Highly Compensated Employee's Contribution Percentage Amounts is reduced
shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the
Highly Compensated Employees are determined after any corrections required
to meet the ADP and ACP tests. Multiple use does not occur if both the ADP
and ACP of the Highly Compensated Employees does not exceed 1.25 multiplied
by the ADP and ACP of the non-Highly Compensated Employees.
(b) For purposes of this Article, the Contribution Percentage for any
Participant who is a Highly Compensated Employee and who is eligible to have
Contribution Percentage Amounts allocated to his or her account under two or
more plans described in Code Section 401(a), or arrangements described in
Code Section 401 (k) that are maintained by the Employer, shall be determined
as if the total of such Contribution Percentage Amounts was made under each
Plan. If a Highly Compensated Employee participates in two or more cash or
deferred arrangements that have different plan years, all cash or deferred
arrangements ending with or within the same calendar year shall be treated as
a single arrangement.
(c) In the event that this Plan satisfies the requirements of Code
Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
Code Sections only if aggregated with this Plan, then this Section shall be
applied by determining the Contribution Percentage of Employees as if all
such plans were a single plan. For plan years beginning after 1989, plans
may be aggregated in order to satisfy Code Section 401(m) only if the
aggregated plans have the same Plan Year.
(d) For purposes of determining the Contribution percentage of a
Participant who is a five-percent owner or one of the ten most highly-paid,
Highly Compensated Employees, the Contribution Percentage Amounts and
Compensation of such Participant shall include the Contribution Percentage
Amounts and Compensation for the Plan Year of Family Members as defined in
Paragraph 1.36 of this Plan. Family Members, with respect to Highly
Compensated Employees, shall be disregarded as separate Employees in
determining the Contribution Percentage both for Participants who are non-
Highly Compensated Employees and for Participants who are Highly Compensated
Employees. In the event of repeal of the family aggregation rules under Code
Section 414(q)(6), all applications of such rules under this Plan will cease
as of the effective date of such repeal.
(e) For purposes of determining the Contribution Percentage test,
Employee Contributions are considered to have been made in the Plan Year in
which contributed to the trust. Matching Contributions and Qualified Non-
Elective Contributions will be considered made for a Plan Year if made no
later than the end of the twelve-month period beginning on the day after the
close of the Plan Year.
(f) The Employer shall maintain records sufficient to demonstrate
satisfaction of the ACP test and the amount of Qualified Non-Elective
Contributions or Qualified Matching Contributions, or both, used in such
test.
(g) The determination and treatment of the Contribution Percentage of
any Participant shall satisfy such other requirements as may be prescribed
by the Secretary of the Treasury.
(h) Qualified Matching Contributions and Qualified Non-Elective
Contributions used to satisfy the ADP test may not be used to satisfy the
ACP test.
ARTICLE XI
ADMINISTRATION
11.1 Plan Administrator - The Employer shall be the named fiduciary and
Plan Administrator. These duties shall include:
(a) appointing the Plan's attorney, accountant, actuary, or any other
party needed to administer the Plan,
b) directing the Trustee/Custodian with respect to payments from
the Fund.
(c) communicating with Employees regarding their participation and
benefits under the Plan, including the administration of all claims
procedures,
(d) filing any returns and reports with the Internal Revenue Service,
Department of Labor, or any other governmental agency,
(e) reviewing and approving any financial reports, investment reviews.
or other reports prepared by any party appointed by the Employer under
paragraph (a),
(f) establishing a funding policy and investment objectives consistent
with the purposes of the Plan and the Employee Retirement Income Security Act
of 1974, and
(g) construing and resolving any question of Plan interpretation. The
Plan Administrator's interpretation of Plan provisions including eligibility
and benefits under the Plan is formal, and unless it can be shown to be
arbitrary and capricious will not be subject to "de novo' review.
11.2 Trustee/Custodian - The Trustee/Custodian shall be responsible for the
administration of investments held in the Fund. These duties shall include:
(a) receiving contributions under the terms of the Plan,
(b) making distributions from the Fund in accordance with written
instructions received from an authorized representative of the Employer,
(c) keeping accurate records reflecting its administration of the Fund
and making such records available to the Employer for review and audit
Within 90 days after each Plan Year, and within 90 days after its removal or
resignation, the Trustee/Custodian shall file with the Employer an accounting
of its administration of the Fund during such year or from the end of the
preceding Plan Year to the date of removal or resignation. Such accounting
shall include a statement of cash receipts and disbursements since the date
of its last accounting and shall contain an asset list showing the fair
market value of investments held in the Fund as of the end of the Plan Year.
The value of marketable investments shall be determined using the most
recent price quoted on a national securities exchange or over the counter
market. The value of non-marketable investments shall be determined in the
sole judgement of the Trustee/Custodian which determination shall be binding
and conclusive. The value of investments in securities or obligations of
the Employer in which there is no market shall be determined in the sole
judgement of the Employer and the Trustee/Custodian shall have no
responsibility with respect to the valuation of such assets.
the Employer shall review the Trustee/Custodian's accounting and notify
the Trustee/Custodian in the event of its disapproval of the report within
90 days, providing the Trustee/Custodian with a written description of the
items in question. The Trustee/Custodian shall have 60 days to provide the
Employer with a.written explanation of the items in question. If the
Employer again disapproves, the Trustee/Custodian shall file its accounting
in a court of competent jurisdiction for audit and adjudication, and
(d) employing such agents, attorneys or other professionals as the
Trustee may deem necessary or advisable in the performance of its duties.
The Trustee's/Custodian's duties shall be limited to those described above.
The Employer shall be responsible for any other administrative duties
required under the Plan or by applicable law.
11.3 Administrative Fees And Expenses - All reasonable costs, charges and
expenses incurred by the Trustee/Custodian in connection with the
administration of the Fund and all reasonable costs, charges and expenses
incurred by the Plan Administrator in connection with the administration of
the Plan (including fees for legal services rendered to the Trustee/Custodian
or Plan Administrator) may be paid by the Employer, but if not paid by the
Employer when due, shall be paid from the Fund. Such reasonable compensation
to the Trustee/Custodian as may be agreed upon from time to time between
the Employer and the Trustee/Custodian and such reasonable compensation to
the Plan Administrator as may be agreed upon from time to time between the
Employer and Plan Administrator may be paid by the Employer, but if not paid
by the Employer when due shall be paid by the Fund. The Trustee shall have
the right to liquidate trust assets to cover its fees. Notwithstanding the
foregoing, no compensation other than reimbursement for expenses shall be
paid to a Plan Administrator who is the Emplover or a full-time Employee of
the Employer. In the event any part of the Trust/Custodial Account becomes
subject to tax, all taxes incurred will be paid from the Fund unless the Plan
Administrator advises the Trustee/Custodian not to pay such tax.
11.4 Division Of Duties And Indemnification
(a) The Trustee/Custodian shall have the authority and discretion to
manage and govern the Fund to the extent provided in this instrument, but
does not guarantee the Fund in any manner against investment loss or
depreciation in asset value, or guarantee the adequacy of the Fund to meet
and discharge all or any liabilities of the Plan.
(b) The Trustee/Custodian shall not be liable for the making, retention
or sale of any investment or reinvestment made by it, as herein provided, or
for any loss to, or diminution of the Fund, or for any other loss or damage
which may result from the discharge of its duties hereunder except to the
extent it is judicially detemiined that the Trustee/Custodian has failed to
exercise the care, skill, prudence and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character with like aims.
(c) The Employer warrants that all directions issued to the Trustee/
Custodian by it or the Plan Administrator will be in accordance with the
terms of the Plan and not contrary to the provisions of the Employee
Retirement Income Security Act of 1974 and regulations issued thereunder.
(d) The Trustee/Custodian shall not be answerable for any action taken
pursuant to any direction, consent, certificate, or other paper or document
on the belief that the same is genuine and signed by the proper person.
All directions by the Employer, Participant or the Plan Administrator shall be
in writing. The Employer shall deliver to the Trustee/Custodian certificates
evidencing the individual or individuals authorized to act as set forth in the
Adoption Agreement or as the Employer may subsequently inform the Trustee/
Custodian in writing and shall deliver to the Trustee/Custodian specimens of
their signatures.
(e) The duties and obligations of the Trustee/Custodian shall be limited
to those expressly imposed upon it by this instrument or subsequently agreed
upon by the parties. Responsibility for administrative duties required under
the Plan or applicable law not expressly imposed upon or agreed to by the
Trustee/Custodian, shall rest solely with the Employer.
(f) The Trustee shall be indemnified and saved harmless by the Employer
from and against any and all liability to which the Trustee/Custodian may be
subjected, including all expenses reasonably incurred in its defense, for any
action or failure to act resulting from compliance with the instructions of
the Employer, the employees or agents of the Employer, the Plan Administrator,
or any other fiduciary to the Plan, and for any liability arising from the
actions or non-actions of any predecessor Trustee/Custodian or fiduciary or
other fiduciaries of the Plan.
(g) The Trustee/Custodian shall not be responsible in any way for the
application of any payments it is directed to make or for the adequacy of
the Fund to meet and discharge any and all liabilities under the Plan.
ARTICLE XII
TRUST FUND/CUSTODIAL ACCOUNT
12.1 The Fund - The Fund shall consist of all contributions made under A
rticle III and Article IV of the Plan and the investment thereof and earnings
thereon. All contributions and the earnings thereon less payments made under
the terms of the Plan, shall constitute the Fund. The Fund shall be
administered as provided in this document.
12.2 Control Of Plan Assets - The assets of the Fund or evidence of
ownership shall be held by the Trustee/Custodian under the terms of the Plan
and Trust/Custodial Account. If the assets represent amounts transferred
from another turstee/custodian under a former plan, the Trustee/Custodian
named hereunder shall not be responsible for the propriety of any investment
under the former plan.
12.3 Exclusive Benefit Rules - No part of the Fund shall be used for, or
diverted to, purposes other than for the exclusive benefit of Participants,
former Participants with a vested interest, and the beneficiary or
beneficiaries of deceased Participants having a vested interest in the Fund
at death.
12.4 Assignment And Alienation Of Benefits No right or claim to, or
interest in, any part of the Fund, or any payment from the Fund shall be
assignable, transferable, or subject to sale, mortgage, pledge, hypothecation,
commutation, anticipation, garnishment, attachment, execution, or levy of
any kind. The Trustee/Custodian shall not recognize any attempt to assign,
transfer, sell, mortgage, pledge, hypothecate, commute, or anticipate the
same, except to the extent required by law. The preceding sentences shall
also apply to the creation, assignment, or recognition of a right to any
benefit payable with respect to a Participant pursuant to a domestic
relations order, unless such order is determined to be a qualified domestic
relations order, as defined in Code Section 414(p), or any domestic
relations order entered before January 1, 1985 which the Plan attorney and
Plan Administrator deem to be qualified.
12.5 Determination Of Qualified Domestic Relations Order (QDRO) A Domestic
Relations Order shall specifically state all of the following in order to be
deemed a Qualified Domestic Relations Order ('QDRO"):
(a) Tne name and last known mailing address (if any) of the Participant
and of each alternate payee covered by the QDRO. However, if the QDRO does
not specify the current mailing address of the alternate payee, but the Plan
Administrator has independent knowledge of that address, the QDRO will still
be valid.
(b) The dollar amount or percentage of the Participant's benefit to be
paid by the Plan to each alternate payee, or the manner in which the amount
or percentage will be determined.
(c) The number of payments or period for which the order applies.
(d) The specific plan (by name) to which the Domestic Relations Order
applies.
The Domestic Relations Order shall not be deemed a QDRO if it requires the
Plan to provide:
(e) any type or form of benefit, or any option not already provided for
in the Plan;
(f) increased benefits, or benefits in excess of the Participant's
vested rights;
(g) payment of a benefit earlier than allowed by the Plan's earliest
retirement provisions or in the case of a profit-sharing plan, prior to the
allowability of in-service withdrawals, or
(h) payment of benefits to an alternate payee which are required to be
paid to another alternate payee under another QDRO.
Promptly, upon receipt of a Domestic Relations Order ('Order") which may or
may not be "Qualified', the Plan Administrator shall notify the Participant
and any alternate payee(s) named in the Order of such receipt, and include
a copy of this paragraph 12.5. The Plan Administrator shall then forward the
Order to the Plan's legal counsel for an opinion as to whether or not the
Order is in fact 'Qualified'as defined in Code Section 414(p). Within a
reasonable time after receipt of the Order, not to exceed 60 days, the
Plan's legal counsel shall make a determination as to its 'Qualified' status
and the Participant and any alternate payee(s) shall be promptly notified
in writing of the determination.
If the "Qualified" status of the Order is in question, there will be a delay
in any payout to any payee including the Participant, until the status is
resolved. In such event, the Plan Administrator shall segregate the amount
that would have been payable to the alternate payee(s) if the Order had been
deemed a QDRO. If the Order is not Qualified, or the status is not resolved
(for example, it has been sent back to the Court for clarification or
modification) within 18 months beginning with the date the first payment
would have to be made under the Order, the Plan Administrator shall pay the
segregated amounts plus interest to the person(s) who would have been
entitled to the benefits had there been no Order. If a detemiination as to
the Qualified status of the Order is made after the 18-month period described
above, then the Order shall only be applied on a prospective basis. If the
Order is determined to be a QDRO, the Participant and alternate payee(s)
shall again be notified promptly after such determination. Once an Order is
deemed a QDRO, the Plan Administrator shall pay to the alternate payee(s)
all the amounts due under the QDRO, including segregated amounts plus
interest which may have accrued during a dispute as to the Order's
qualification.
Unless specified otherwise in the Adoption Agreement, the earliest retirement
age with regard to the Participant against whom the order is entered shall
be the date the order is detemiined to be qualified. This will only allow
payouts to alternate payee(s) and not the Participant.
ARTICLE XIII
INVESMENTS
13.1 Fiduciary Standards - The Trustee/Custodian shall invest and reinvest
principal and income in the Fund in accordance with the investment objectives
established by the Employer provided that:
(a) such investments are prudent under the Employee Retirement Income
Security Act of 1974 and the regulations thereunder,
(b) such investments are sufficiently diversified or otherwise insured
or guaranteed to minimize the risk of large losses, and
(c) such investments are similar to those which would be purchased by
another professional money manager for a like plan with similar investment
objectives.
13.2 Funding Arrangement - The Employer shall, in the Adoption Agreement,
appoint the Sponsor to serve as either Trustee or Custodian of the Fund. If
the Sponsor is appointed Trustee, the Fund shall be invested in any of the
alternatives available to the Trustee under paragraph 13.3 herein. If the
Sponsor is appointed Custodian. the Fund shall be invested only in the
alternatives available to the Custodian under paragraph 13.4 herein.
13.3 Investment Alternatives Of The Trustee - As Trustee, the Sponsor shall
implement an investment program based on the Employer's investment objectives
and the Employee Retirement Income Security Act of 1974. In addition to
powers given by law, the Trustee may:
(a) invest the Fund in any form of property, including common and
preferred stocks, exchange traded put and call options, bonds, money market
instruments, mutual funds (including funds for which the Trustee or its
affiliates serve as investment advisor), savings accounts, certificates of
deposit, Treasury bills, insurance policies and contracts, or in any other
property, real or personal, having a ready market. The Trustee may invest
in time deposits (including, if applicable, its own or those of affiliates)
which bear a reasonable interest rate. No portion of any Qualified Voluntary
Contribution, or the earnings thereon, may be invested in life insurance
contracts or, as with any Participant-directed investment, in tangible
personal property characterized by the IRS as a collectible,
(b) transfer any assets of the Fund to a group or collective trust
established to permit the pooling of funds of separate pension and profit-
sharing trusts, provided the Internal Revenue Service has ruled such group
or collective trust to be qualified under Code Section 401 (a) and exempt
under Code Section 501 (a) (or the applicable corresponding provision of any
other Revenue Act) or to any other common, collective, or comniingled trust
fund which has been or may hereafter be established and maintained by the
Trustee and/or affiliates of the Trustee. Such commingling of assets of the
Fund with assets of other qualified trusts is specifically authorized, and to
the extent of the investment of the Fund in such a group or collective trust,
the terms of the instrument establishing the group or collective trust shall
be a part hereof as though set forth herein,
(c) invest up to 100% of the Fund in the common stock, debt obligations,
or any other security issued by the Employer or by an affiliate of the
Employer within the limitations provided under Sections 406, 407, and 408
of the Employee Retirement Income Security Act of 1974 and further provided
that such investment does not constitute a prohibited transaction under Code
Section 4975. Any such investment in Employer securities shall only be made
upon written direction of the Employer who shall be solely responsible for
propriety of such investment.
(d) hold cash uninvested and deposit same with any banking or savings
institution, including its own banking department,
(e) join in or oppose the reorganization, recapitalization, consolidation,
sale or merger of corporations or properties, including those in which it is
interested as Trustee, upon such terms as it deems wise,
(f) hold investments in nominee or bearer form,
(g) vote proxies and, if appropriate, pass them on to any investment
manager which may have directed the investment in the equity giving rise to
the proxy,
(h) exercise all ownership rights with respect to assets held in the Fund.
13.4 Investment Alternatives Of The Custodian As Custodian, the Sponsor
shall be depository of the Fund and shall, at the direction of the Employer,
invest all contributions exclusively in savings or time accounts, savings
certificates of deposit, or other savings or time instruments offered by the
Custodian and, if offered, by an affiliate of the Custodian.
13.5 Par-ticipant Loans If agreed upon by the Trustee and permitted by
the Employer in the Adoption Agreement, a Plan Participant may make
application to the Employer requesting a loan from the Fund. The Employer
shall have the sole right to approve or disapprove a Participant's
application provided that loans shall be made available to all Participants
on a reasonably equivalent basis. Loans shall not be made available to
Highly Compensated Employees (as defined in Code. Section 414(q)] in an
amount greater than the amount made available to other Employees. Any loan
granted under the Plan shall be made subject to the following rules:
(a) No loan, when aggregated with any outstanding Participant loan(s),
shall exceed the lesser of (i) $50.000reduccd by the excess, if any, of the
highest outstanding balance of loans during the one year period ending on the
day before the loan is made, over the outstanding balance of loans from the
Plan on the date the loan is made or (ii) one-half of the fair market value
of a Participant's Vested Account Balance built up from Employer Contributions,
Voluntary Contributions. and Rollover Contributions. If the Participant's
Vested Account Balance is $20,000 or less, the maximum loan shall not exceed
the lesser of $10,000 or 100% of the Participant's Vested Account Balance.
For the purpose of the above limitation, all loans from all plans of the
Employer and other members of a group of employers described in Code Sections
414(b), 414(c), and 414(m) are aggregated. An assignee or pledge of any
portion of the Participant's interest in the Plan and a loan, pledge, or
assignment with respect to any insurance contract purchased under the Plan,
will be treated as a loan under this paragraph.
(b) All applications must be made on forms provided by the Employer and
must be signed by the Participant.
(c) Any loan shall bear interest at a rate reasonable at the time of
application, considering the purpose of the loan and the rate being charged
by representative commercial banks in the local area for a similar loan
unless the Employer sets forth a different method for determining loan
interest rates in its loan procedures. The loan agreement shall also
provide that the payment of principal and interest be amortized in level
payments not less than quarterly.
(d) The term of such loan shall not exceed five years except in the case
of a loan for the purpose of acquiring any house,..apartment, condominium, or
mobile home (not used on a transient basis) which is used, or is to be used
within a reasonable time as the principal residence of the Participant. The
term of such loan shall be determined by the Employer considering the
maturity dates quoted by representative commercial banks in the local area
for a similar loan.
(e) The principal and interest paid by a Participant on his or her loan
shall be credited to the Fund in the same manner as for any other Plan
investment. If elected in the Adoption Agreement, loans may be treated as
segregated investments of the individual Participants. This provision is not
available if its election will result in discrimination in operation of the
Plan.
(f) If a Participant's loan application is approved by the Employer, such
Participant shall be required to sign a note, loan agreement, and assignment
of 50% of his or her interest in.the Fund as collateral for the loan. The
Participant, except in the case of a profit-sharing plan satisfying the
requirements of paragraph 8.7 must obtain the consent of his or her Spouse,
if any, within the 90 day period before the time his or her account balance
is used as security for the loan. A new consent is required if the account
balance is used for any renegotiation, extension, renewal or other revision
of the loan, including an increase in the amount thereof. The consent must
be written, must acknowledge the effect of the loan, and must be witnessed
by a plan representative or notary public. Such consent shall subsequently
be binding with respect to the consenting Spouse or any subsequent Spouse.
(g) If a valid Spousal consent has been obtained, then, notwithstanding
any other provision of this Plan, the portion of the Participant's Vested
Account Balance used as a security interest held by the Plan by reason of a
loan outstanding to the Participant shall be taken into account for purposes
of determining the amount of the account balance payable at the time of death
or distribution, but only if the reduction is used as repayment of the loan.
If less than 100% of the Participant's Vested Account Balance (determined
without regard to the preceding sentence) is payable to the Surviving Spouse,
then the account balance shall be adjusted by first reducing the Vested
Account Balance by the amount of the security used as repayment of the loan,
and then determining the benefit payable to the Surviving Spouse.
(h) The Employer may also require additional collateral in order to
adequately secure the loan.
(i) A Participant's loan shall immediately become due and payable if
such Participant terminates employment for any reason or fails to make a
principal and/or interest payment as provided in the loan agreement.
If such Participant terminates employment, the Employer shall immediately
request payment of principal and interest on the loan. If the Participant
refuses payment following termination, the Employer shall reduce the
Participant's Vested Account Balance by the remaining principal and interest
on his or her loan. If the Participant's Vested Account Balance is less
than the amount due, the Employer shall take whatever steps are necessary to
collect the balance due directly from the Participant. However, no
foreclosure on the Participant's note or attachment of the Participant's
account balance will occur until a distributable event occurs in the Plan.
(j) No loans will be made to Owner-Employees (as defined in paragraph
1.51) or Shareholder-Employees (as defined in paragraph 1.74), unless the
Employer obtains a prohibited transaction exemption from the Department of
Labor.
13.6 Insurance Policies - If agreed upon by the Trustee and permitted by
the Employer in the Adoption Agreement, Employees may elect the purchase of
life insurance policies under the Plan. If elected, the maximum annual
premium for a whole life policy shall not exceed 50% of the aggregate
Employer contributions allocated to the account of a Participant. For
profit-sharing plans the 50% test need only be applied against Employer
contributions allocated in the last two years. Whole life policies are
policies with both nondecreasing death benefits and nonincreasing premiums.
The maximum annual premium for term contracts or universal life policies and
all other policies which are not whole life shall not exceed 25 % of
aggregate Employer contributions allocated to the account of a Participant.
The two-year rule for profit-sharing plans again applies. The maximum annual
premiums for a Participant with both a whole life and a term contract or
universal life policies shall be limited to one-half of the whole life
premium plus the term premium, but shall not exceed 25% of the aggregate
Employer contributions allocated to the account of a Participant, subject to
the two year rule for profit-sharing plans. Any policies purchased under
this Plan shall be held subject to the following rules:
(a) The Trustee shall be applicant and owner of any policies issued.
(b) All policies or contracts purchased hereunder shall be endorsed as
nontransferable, and must provide that proceeds will be payable to the
Trustee; however, the Trustee shall be required to pay over all proceeds of
the contracts to the Participant's Designated Beneficiary in accordance with
the distribution provisions of this Plan. Under no circumstances shall the
Trust retain any part of the proceeds.
(c) Each Participant shall be entitled to designate a beneficiary under
the terms of any contract issued; however, such designation will be given
to the Trustee which must be the named beneficiary on any policy. Such
designation shall remain in force, until revoked by the Participant, by
filing a new beneficiary form with the Trustee. A Participant's Spouse will
be the Designated Beneficiary of the proceeds in all circumstances unless a
Qualified Election has been made in accordance with paragraph 8.4. The
beneficiary of a deceased Participant shall receive, in addition to the
proceeds of the Participant's policy or policies, the amount credited to
such Participant's investment account.
(d) A Participant who is uninsurable or insurable at substandard rates,
may elect to receive a reduced amount of insurance, if available, or may
waive the purchase of any insurance.
(e) All dividends or other returns received on any policy purchased shall
be applied to reduce the next premium due on such policy, or if no further
premium is due, such amount shall be credited to the Fund as part of the
account of the Participant for whom the policy is held.
(f) If Employer contributions are inadequate to pay all premiums on all
insurance policies, the Trustee may, at the option of the Employer, utilize
other amounts remaining in each Participant's account to pay the premiums on
his or her respective policy or policies, allow the policies to lapse,
reduce the policies to a level at which they may be maintained, or borrow
against the policies on a prorated basis, provided that the borrowing does
not discriminate in favor of the policies on the lives of Officers,
Shareholders, and highly compensated Employees.
(g) On retirement or termination of employment of a Participant, the
Employer shall direct the Trustee to cash surrender the Participant's policy
and credit the proceeds to his or her account for distribution under the
terms of the Plan. However, before so doing, the Trustee shall first offer
to transfer ownership of the policy to the Participant in exchange for
payment by the Participant of the cash value of the policy at the time of
transfer. Such payment shall be credited to the Participant's account for
distribution under the terms of the Plan. All distributions resulting from
the application of this paragraph shall be subject to the Joint and Survivor
Annuity Rules of Article VIII, if applicable.
(h) The Employer shall be solely responsible to see that these insurance
provisions are administered properly and that if there is any conflict
between the provisions of this Plan and any insurance contracts issued that
the terms of this Plan will control.
13.7 Employer Investment Direction - If agreed upon by the Trustee and
approved by the Employer in the Adoption Agreement, the Emplover shall have
the right to direct the Trustee with respect to investments of the Fund, may
appoint an investment manager (registered as an investment advisor under the
Investment Advisors Act of 1940) to direct investments, or may give the
Trustee sole investment management responsibility, The Employer may purchase
and sell interests in a registered investment company (i.e., mutual funds)
for which the Sponsor, its parent, affiliates, or successors, mav serve as
investment advisor and receive compensation from the registered investment
companv tor its services as investment advisor. The Employer shall advise
the Trustee in writing regarding the retention of investment powers, the
appointment of an investment manager, or the delegation of investment powers
to the Trustee. Any investment directive under this Plan shall be made in
writing by the Employer or investment manager, as the case may be. In the
absence of such written directive, the Trustee shall automatically invest
the available cash in its discretion in an appropriate interim investment
until specific investment directions are received. Such instructions
regarding the delegation of investment responsibility shall remain in force
until revoked or amended in writing. The Trustee shall not be responsible
for the propriety of any directed investment made and shall not be required
to consult with or advise the Employer regarding the investment quality of
any directed investment held hereunder. If the Employer fails to designate
an investment manager, the Trustee shall have full investment authority.
If the Employer does not issue investment directions, the Trustee shall have
authority to invest the Fund in its sole discretion. While the Employer may
direct the Trustee with respect to Plan investments, the Employer may not:
(a) borrow from the Fund or pledge any of the assets of the Fund as
security for a loan,
(b) buy property or assets from or sell property or assets to the Fund,
(c) charge any fee for services rendered to the Fund, or
(d) receive any services from the Fund on a preferential basis.
13.8 Employee Investment Direction - If agreed to by the Trustee and
approved by the Employer in the Adoption Agreement, Participants shall be
given the option to direct the investment of their personal contributions
and their share of the Employer's contribution among alternative investment
funds established as part of the overall Fund. Unless otherwise specified by
the Employer in the Adoption Agreement, such investment funds shall be under
the fail control of the management of the Trustee. If investments outside
the Trustee's control are allowed, Participants may not direct that
investments be made in collectibles, other than U.S. Government or State
issued gold and silver coins. In this connection, a Participant's right to
direct the investment of any contribution shall apply only to selection of
the desired fund. The following rules shall apply to the administration of
such funds.
(a) At the time an Employee becomes eligible for the Plan, he or she
shall complete an investment designation form stating the percentage of his
or her contributions to be invested in the available funds.
(b) A Participant may change his or her election with respect to future
contributions by filing a new investment designation form with the Employer
in accordance with the procedures established by the Plan Administrators.
(c) A Participant may elect to transfer all or part of his or her balance
from one investment fund to another by filing an investment designation form
with the Employer in accordance with the procedures established by the Plan
Administrators.
(d), The Employer shall be responsible when transmitting Employee and
Employer contributions to show the dollar amount to be credited to each
investment fund for each Employee.
(e) Except as otherwise provided in the Plan, neither the Trustee, nor
the Employer, nor any fiduciary of the Plan shall be liable to the Participant
or any of his or her beneficiaries for any loss resulting from action taken
at the direction of the Participant.
ARTICLEN XIV
TOP-HEAVY PROVISIONS
14.1 Applicability Of Rules - If the Plan is or becomes Top-Heavy in any
Plan Year beginning after 1983, the provisions of this Article will supersede
any conflicting provisions in the Plan or Adoption Agreement.
14.2 Minimum Contribution - Notwithstanding any other provision in the
Employer's Plan, for any Plan Year in which the Plan is Top-Heavy or Super
Top-Heavy, the aggregate Employer contributions and forfeitures allocated on
behalf of any Participant (without regard to any Social Security contribution)
under this Plan and any other Defined Contribution Plan of the Employer shall
be lesser of 3 % of such Participant's Compensation or the largest percentage
of Employer contributions and forfeitures, as a percentage of the first
$200,000,as adjusted under Code Section 415(d), of the Key Employee's
Compensation, allocated on behalf of any Key Employee for that year.
Each Participant who is employed by the Employer on the last day of the Plan
Year shall be entitled to receive an allocation of the Employer's minimum
contribution for such Plan Year. The minimum allocation applies even though
under other Plan provisions the Participant would not otherwise be entitled
to receive an allocation, or would have received a lesser allocation for the
year because the Participant fails to make Mandatory Contributions to the
Plan, the Participant's Compensation is less than a stated amount, or the
Participant fails to complete 1,000 Hours of Service (or such lesser number
designated by the Employer in the Adoption Agreement) during the Plan Year.
A Paired profit-sharing plan designated to provide the minimum Top-Heavy
contribution must do so regardless of profits. An Employer may make the
minimum Top-Heavy contribution available to all Participants or just non-Key
Employees.
For purposes of computing the minimum allocation, Compensation shall mean
Compensation as defined in paragraph 1. 12(c) of the Plan.
The Top-Heavy minimum contribution does not apply to any Participant to the
extent the Participant is covered under any other plan(s) of the Employer and
the Employer has provided in Section 11 of the Adoption Agreement that the
minimum allocation or benefit requirements applicable to Top-Heavy Plans
will be met in the other plan(s).
If a Key Employee makes an Elective Deferral or has an allocation of Matching
Contributions made to his or her account, a Top-Heavy minimum will be
required for non-Key Employees who are Participants, however, neither
Elective Deferrals by nor Matching Contributions to non-Key Employees may
be taken into account for purposes of satisfying the top-heavy Minimum
Contribution requirement.
14.3 Minimum Vesting - For any Plan Year in which this Plan is Top-Heavy,
the minimum vesting schedule elected by the Employer in the Adoption Agreement
will automatically apply to the Plan. If the vesting schedule selected by
the Employer in the Adoption Agreement is less liberal than the allowable
schedule, the schedule will automatically be modified. If the vesting
schedule under the Employer's Plan shifts in or out of the Top-Heavy schedule
for any Plan Year, such shift is an amendment to the vesting schedule and
the election in paragraph 9.8 of the Plan applies. The minimum vesting
schedule applies to all accrued benefits within the meaning of Code Section
41 1 (a)(7) except those attributable to Employee contributions, including
benefits accrued before the effective date of Code Section 416 and benefits
accrued before the Plan became Top-Heavy. Further, no reduction in vested
benefits may occur in the event the Plan's status as Top-Heavy changes for
any Plan Year. However, this paragraph does not apply to the account
balances of any Employee who does not have an Hour of Service after the Plan
initially becomes Top-Heavy and such Employee's account balance attributable
to Employer contributions and forfeitures will be determined without regard
to this paragraph.
14.4 Limitations On Allocations - In any Plan Year in which the Top-Heavy
Ratio exceeds 90% (i.e.The Plan becomes Super Top-Heavy), the denominators
of the Defined Benefit Fraction (as defined in paragraph 1.16) and Defined
Contribution Fraction (as defined in paragraph 1.19) shall be computed using
1 00 % of the dollar limitation instead of 125 %.
ARTICLE XV
AND TERMINATTON
15.1 Amendment By Sponsor - The Sponsor may amend any or all provisions of
this Plan and Trust/Custodial Account at any time without obtaining the
approval or consent of any Employer which has adopted this Plan and Trust/
Custodial Account provided that no amendment shall authorize or permit any
part of the corpus or income of the Fund to be used for or diverted to
purposes other than for the exclusive benefit of Participants and their
beneficiaries, or eliminate an optional form of distribution. In the case
of a mass-submitted plan, the mass submitter shall amend the Plan on behalf
of the Sponsor.
15.2 Amendment By Emplover - The Employer may amend any option in the
Adoption Agreement, and may include language as permitted in the Adoption
Agreement,
(a) to satisfy Code Section 415, or
(b) to avoid duplication of minimums under Code Section 416 because of
the required aggregation of multiple plans.
The Employer may add certain model amendments published by the Internal
Revenue Service which specifically provide that their adoption will not cause
the Plan to be treated as an individually designed plan for which the
Employer must obtain a separate determination letter.
If the Employer amends the Plan and Trust/Custodial Account other than as
provided above, the Employer's Plan shall no longer participate in this
Prototype Plan and will be considered an individually designed plan.
15.3 Termination - Employers shall have the right to terminate their Plans
upon 60 days notice in writing to the Trustee/Custodian. If the Plan is
terminated, partially terminated, or if there is a complete discontinuance of
contributions under a profit-sharing plan maintained by the Employer, all
amounts credited to the accounts of Participants shall vest and become
nonforfeitable. In the event of a partial termination, only those who are
affected by such partial temrmination shall be fully vested. In the event of
termination, the Employer shall direct the Trustee/Custodian with respect to
the distribution of accounts to or for the exclusive benefit of Participants
or their beneficiaries. The Trustee/Custodian shall dispose of the Fund in
accordance with the written directions of the Plan Administrator, provided
that no liquidation of assets and payment of benefits, (or provision
therefore), shall actually be made by the Trustee/Custodian until after it is
established by the Employer in a manner satisfactory to the Trustee/
Custodian, that the applicable requirements, if any, of the Employee
Retirement Income Security Act of 1974 and the Internal Revenue Code
governing the termination of employee benefit plans, have been or are being,
complied with, or that appropriate authorizations, waivers, exemptions, or
variances have been, or are being obtained.
15.4 Qualification Of Employer's Plan - If the adopting Employer fails to
attain or retain Internal Revenue Service qualification, such Employer's
Plan shall no longer participate in this Prototype Plan and will be
considered an individually designed plan.
15.5 Mergers And Consolidations
(a) In the case of any merger or consolidation of the Employer's Plan
with, or transfer of assets or liabilities of the Employer's Plan to, any
other plan, Participants in the Employer's Plan shall be entitled to receive
benefits immediately after the mrger, consolidation, or transfer which are
equal to or greater than the benefits they would have been entitled to
receive immediately before the merger, consolidation, or transfer if the
Plan had then terminated.
(b) Any corporation into which the Trustee/Custodian or any successor
trustee/custodian may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Trustee/
Custodian or any successor trustee/custodian may be a party, or any
corporation to which all or substantially all the trust business of the
Trustee/Custodian or any successor trustee/custodian may be transferred,
shall be the successor of such Trustee/Custodian without the filing of any
instrument or performance of any further act, before any court.
15.6 Resignation And Removal - The Trustee/Custodian may resign by written
notice to the Employer which shall be effective 60 days after delivery.
The Employer may discontinue its participation in this Prototype Plan and
Trust/Custodial Account effective upon 60 days written notice to the Sponsor.
In such event the Employer shall, prior to the effective date thereof, amend
the Plan to eliminate any reference to this Prototype Plan and Trust/Custodial
Account and appoint a successor trustee or custodian or arrange for another
funding agent. The Trustee/Custodian shall deliver the Fund to its successor
as practicable, provided that this shall not waive any lien the Trustee/
Custodian may have upon the Fund for its compensation or expenses. If the
Employer fails to amend the Plan and appoint a successor trustee, custodian,
or other funding agent within the said 60 days, or such longer period as
the Trustee/Custodian may specify in writing, the Plan shall be deemed
individually designed and the Employers shall be deemed the successor
trustee/custodian. The Employer must then obtain its own determination
letter.
15.7 Qualification Of Prototype - The Sponsor intends that this Prototype
Plan will meet the requirements of the Code as a qualified Prototype
Retirement Plan and Trust/Custodial Account. Should the Commissioner of
Internal Revenue or any delegate of the Commissioner at any time determine
that the Plan and Trust/Custodial Account fails to meet the requirements of
the Code, the Sponsor will amend the Plan and Trust/Custodial Account to
maintain its qualified status.
ARTICLE XVI
GOVERNING LAW
Construction, validity and administration of the Prototype Plan and Trust/
Custodial Account, and any Employer Plan and Trust/Custodial Account as
embodied in the Prototype document and accompanying Adoption Agreement, shall
be governed by Federal law to the extent applicable and to the extent not
applicable by the laws of the State/Commonwealth in which the principal
office of the Sponsor is located.
PART I -SECTION 401(a)(17) LIMITATION
MAU BE ADOPTED BY DEFINED CONTRIBUTION
AND DEFINED BENEFIT PLANS]
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan
Years beginning on or after January 1, 1994, the annual Compensation of each
Employee taken into account under the Plan shall not exceed the OBRA '93
annual compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with Section 401(a)(17)(19) of the Internal Revenue
Code. The cost-of-living in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation is determined
(determination period) beginning in such calendar year. If a determination
period consists of fewer than 12 months, the OBRA '93 annual compensation
limit will be multiplied by a fraction, the numerator of which is the number
of months in the detern-Lination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Section 401(a)(17) of the Code shall mean the
OBRA '93 annual compensation limit set forth in this provision.
If Compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period.
For this purpose, for determination periods beginning before the first day
of the first Plan Year beginning on or after January 1, 1994, the OBRA '93
annual compensation limit is $150,000.
MODEL AMENDMENT
Revenue Procedure 9347
(This model amendment allows Participants receiving distribution from safe-
harbored profit sharing plans to waive the 30-day period required under the
Unemployment Compensation Act of 1992. Non-safe harbored plans must still
provide notice not less than 30 days and not more than 90 days prior to the
distribution.)
If a distribution is one to which Section 401(a)(11) and 417 of the Internal
Revenue Code do not apply, such distribution may commence less than 30 days
after the notice required under Section 1.41 I(a)-1 I (c) of the Income Tax
Regulations is given, provided that:
(1) the plan administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
1997 STOCK OPTION PLAN
1. Purpose. HEDSTROM HOLDINGS, INC., a Delaware corporation (herein,
together with its successors, referred to as the "Company"), by means of
this 1997 Stock Option Plan (the "Plan"), desires to afford certain officers,
directors and other key employees of the Company and any parent corporation
or subsidiary corporation thereof now existing or hereafter formed or
acquired (such parent and subsidiary corporations sometimes referred to
herein as "Related Entities") who are responsible for the continued growth
of the Company an opportunity to acquire a proprietary interest in the
Company, and thus to create in such persons an increased interest in and
a greater concern for the welfare of the Company and any Related Entities.
As used in the Plan, the terms "parent corporation" and "subsidiary
corporation" shall mean, respectively, a corporation within the definition
of such terms contained in Sections 424(e) and 424(f), respectively, of the
Internal Revenue Code of 1986, as amended (the "Code").
The stock options described in Sections 6 and 7 (the "Options"), and
the shares of Common Stock (as defined in Section 3) acquired
pursuant to the exercise of such Options are a matter of separate
inducement and are not in lieu of any salary or other compensation
for services.
2. Administration. The Plan shall be administered by the Option Committee,
or any successor thereto, of the Board of Directors of the Company (the
"Board of Directors"), or by any other committee appointed by the Board of
Directors to administer this Plan (the "Committee"); provided, however, that
the entire Board of Directors may act as the Committee if it chooses to do so.
The number of individuals that shall constitute the Committee shall be
determined from time to time by a majority of all the members of the Board
of Directors, and, unless that majority of the Board of Directors determines
otherwise, shall be no less than two individuals. A majority of the Committee
shall constitute a quorum (or if the Committee consists of only two members,
then both members shall constitute a quorum), and subject to the provisions
of Section 5, the acts of a majority of the members present at any meeting
at which a quorum is present, or acts approved in writing by all members of
the Committee, shall be the acts of the Committee. Whenever the Company
shall have a class of equity securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Committee shall be comprised solely of not less than two members who
shall be (i) Non-Employee Directors and (ii) unless otherwise determined
by the Board of Directors, "outside directors" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The members of the Committee shall serve at the pleasure of the
Board of Directors, which shall have the power, at any time and from
time to time, to remove members from or add members to the Committee.
Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right
to resign from membership in the Committee by written notice to the
Board of Directors. The Board of Directors, and not the remaining
members of the Committee, shall have the power and authority to fill
vacancies on the Committee, however caused. The Board of Directors
shall promptly fill any vacancy that causes the number of members of
the Committee to be less than two.
3. Shares Available. Subject to the adjustments provided in Section 10,
the maximum aggregate number of shares of common stock, $.01 par value per s
hare, of the Company ("Common Stock") which may be granted for all purposes
under the Plan shall be 2,750,000 shares. If, for any reason, any shares
as to which Options have been granted cease to be subject to purchase
thereunder, including the expiration of such Option, the termination of
such Option prior to exercise, or the forfeiture of such Option, such shares
shall thereafter be available for grants to any individual or individuals
under the Plan as determined by the Committee. Options granted under the
Plan may be fulfilled in accordance with the terms of the Plan with (i)
authorized and unissued shares of the Common Stock, (ii) issued shares of
such Common Stock held in the Company's treasury, or (iii) issued shares of
Common Stock reacquired by the Company in each situation as the Board of
Directors or the Committee may determine from time to time.
4. Eligibility and Bases of Participation. Grants of Incentive Options
(as defined in Section 6) and Non-Qualified Options (as defined in Section 6)
may be made under the Plan, subject to and in accordance with Section 6, to
Key Employees. As used herein, the term "Key Employee" shall mean any
employee of the Company or any Related Entity, including officers and
directors of the Company or any Related Entity who are also employees of
the Company or any Related Entity, who are regularly employed on a salaried
basis and who are so employed on the date of such grant, whom the Committee
identifies as having a direct and significant effect on the performance of
the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used
herein, the term "Eligible Non-Employee" shall mean any director
or officer (who is not also an employee) of the Company or any
Related Entity whom the Board of Directors or the Committee
identifies as having a direct and significant effect on the
performance of the Company or any Related Entity.
The adoption of this Plan shall not be deemed to give any Person a
right to be granted any Options.
5. Authority of Committee. Subject to and not inconsistent with the
express provisions of the Plan and the Code, the Committee shall have plenary
authority to:
a. determine the Key Employees and Eligible Non-Employees to whom
Options shall be granted, the time when such Options shall be granted,
the number of Options, the purchase price or exercise price of each
Option, the period(s) during which such Options shall be exercisable
(whether in whole or in part), the restrictions to be applicable to
Options and all other terms and provisions thereof (which need not be
identical);
b. require, as a condition to the granting of any Option, that the
Person receiving such Option agree not to sell or otherwise dispose
of such Option, any Common Stock acquired pursuant to such Option, or
any other "derivative security" (as defined by Rule 16a-1(c) under
the Exchange Act) for a period of six months following the later of
(i) the date of the grant of such Option or (ii) the date when the
exercise price of such Option is fixed if such exercise price is not
fixed at the date of grant of such Option, or for such other period
as the Committee may determine;
c. provide an arrangement through registered broker-dealers whereby
temporary financing may be made available to an optionee by the
broker-dealer, under the rules and regulations of the Board of
Governors of the Federal Reserve, for the purpose of assisting the
optionee in the exercise of an Option, such authority to include the
payment by the Company of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i) to
have withheld from the total number of shares of Common Stock to be
acquired upon the exercise of an Option (other than an Incentive
Option) that number of shares having a Fair Market Value (as defined
in Section 18) which, together with such cash as shall be paid in
respect of fractional shares, shall equal the Option exercise price,
and (ii) to exercise a portion of an Option by delivering that number
of shares of Common Stock already owned by such optionee having an
aggregate Fair Market Value which shall equal the partial Option
exercise price and to deliver the shares thus acquired by such
optionee in payment of shares to be received pursuant to the exercise
of additional portions of such Option, the effect of which shall be
that such optionee can in sequence utilize such newly acquired shares
in payment of the exercise price of the entire Option, together with
such cash as shall be paid in respect of fractional shares; provided,
however, that in the case of an Incentive Option, no shares shall
be used to pay the exercise price unless such shares were not
acquired through the exercise of an Incentive Option or, if so
acquired, have been held for more than two years since the grant
of such Option and for more than one year since the exercise of
such Option;
e. provide (in accordance with Section 13 or otherwise) the
establishment of a procedure whereby a number of shares of Common
Stock or other securities may be withheld from the total number of
shares of Common Stock or other securities to be issued upon exercise
of an Option (other than an Incentive Option) to meet the obligation
of withholding for income, social security and other taxes incurred
by an optionee upon such exercise or required to be withheld by the
Company or a Related Entity in connection with such exercise;
f. prescribe, amend, modify and rescind rules and regulations
relating to the Plan;
g. make all determinations permitted or deemed necessary, appropriate
or advisable for the administration of the Plan, interpret any Plan or
Option provision, perform all other acts, exercise all other powers,
and establish any other procedures determined by the Committee to be
necessary, appropriate, or advisable in administering the Plan or for
the conduct of the Committee's business. Any act of the Committee,
including interpretations of the provisions of the Plan or any Option
and determinations under the Plan or any Option shall be final,
conclusive and binding on all parties.
The Committee may delegate to one or more of its members, or to one
or more agents, such administrative duties as it may deem advisable,
and the Committee or any Person to whom it has delegated duties as
aforesaid may employ one or more Persons to render advice with respect
to any responsibility the Committee or such Person may have under the
Plan; provided, however, that whenever the Company has a class of
equity securities registered under Section 12 of the Exchange Act,
the Committee may not delegate any duties to a member of the Board
of Directors who, if elected to serve on the Committee, would not be
a Non-Employee Director. The Committee may employ attorneys,
consultants, accountants, or other Persons and the Committee,
the Company, and its officers and directors shall be entitled to
rely upon the advice, opinions, or valuations of any such Persons.
No member or agent of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with
respect to the Plan and all members and agents of the Committee shall
be fully protected by the Company in respect of any such action,
determination or interpretation.
6. Stock Options for Key Employees.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant incentive stock options pursuant to Section
422 of the Code ("Incentive Options"), to grant non-qualified stock
options (options which do not qualify under Section 422 of the Code)
("Non-Qualified Options"), and to grant both types of Options to Key
Employees. No Incentive Option shall be granted pursuant to this Plan
after the earlier of ten years from the date of adoption of the Plan
or ten years from the date of approval of the Plan by the stockholders
of the Company. Notwithstanding anything in this Plan to the contrary,
Incentive Options may be granted only to Key Employees. The terms and
conditions of the Options granted under this Section 6 shall be
determined from time to time by the Committee; provided, however,
that the Options granted under this Section 6 shall be subject to
all terms and provisions of the Plan (other than Section 7), including
the following:
a. Option Exercise Price. The Committee shall establish the option
exercise price at the time any Option is granted at such amount as
the Committee shall determine; provided, that such price shall not
be not less than the Fair Market Value per share of Common Stock at
the date such Option is granted; and provided, further, that in the
case of an Incentive Option granted to a person who, at the time such
Incentive Option is granted, owns shares of the Company or any Related
Entity which possess more than 10% of the total combined voting power
of all classes of shares of the Company or of any Related Entity,
the option exercise price shall not be less than 110% of the Fair
Market Value per share of Common Stock at the date such Option is
granted. The option exercise price shall be subject to adjustment
in accordance with the provisions of Section 10 of the Plan.
b. Payment. The price per share of Common Stock with respect to each
Option exercise shall be payable at the time of such exercise. Such
price shall be payable in cash or by any other means acceptable to the
Committee, including delivery to the Company of shares of Common
Stock owned by the optionee or by the delivery or withholding of
shares pursuant to a procedure created pursuant to Section 5.d. of
the Plan (but, with respect to Incentive Options, subject to the
limitations described in such Section 5.d.). Shares delivered to
or withheld by the Company in payment of the option exercise price
shall be valued at the Fair Market Value of the Common Stock on the
day preceding the date of the exercise of the Option.
c. Continuation of Employment. Each Incentive Option shall require
the optionee to remain in the continuous employ of the Company or any
Related Entity from the date of grant of the Incentive Option until
no more than three months prior to the date of exercise of the
Incentive Option.
d. Exercisability of Stock Option. Subject to Section 8, each Option
shall be exercisable in one or more installments as the Committee may
determine at the time of the grant. No Option by its terms shall be
exercisable after the expiration of ten years from the date of grant
of the Option, unless, as to any Non-Qualified Option, otherwise
expressly provided in such Option; provided, however, no Incentive
Option shall be exercisable after the expiration of ten years from
the date such Option is granted; and provided, further, that no
Incentive Option granted to a person who, at the time such Option
is granted, owns stock of the Company, or any Related Entity,
possessing more than 10% of the total combined voting power of all
classes of stock of the Company, or any Related Entity, shall be
exercisable after the expiration of five years from the date such
Option is granted.
e. Death. If any optionee's employment with the Company or a Related
Entity terminates due to the death of such optionee, the estate of
such optionee, or a Person who acquired the right to exercise such
Option by bequest or inheritance or by reason of the death of the
optionee, shall have the right to exercise such Option in accordance
with its terms at any time and from time to time within one year
after the date of death unless a longer or shorter period is expressly
provided in such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration date of such Option).
f. Disability. If the employment of any optionee terminates because
of his Disability (as defined in Section 18), such optionee or his
legal representative shall have the right to exercise the Option
in accordance with its terms at any time and from time to time within
one year after the date of such termination unless a longer or
shorter period is expressly provided in such Option or established
by the Committee pursuant to Section 8 (but not after the expiration
date of the Option); provided, however, that in the case of an
Incentive Option, the optionee or his legal representative shall in
any event be required to exercise the Incentive Option within one
year after termination of the optionee's employment due to his
Disability.
g. Other Termination of Employment. If the employment of an
optionee with the Company or a Related Entity terminates for any
reason other than those specified in subsections 6(e) and (f) above,
such optionee shall have the right to exercise his Option in
accordance with its terms, within 60 days after the date of such
termination, unless a longer period is expressly provided in such
Option or established by the Committee pursuant to Section 8 (but
not after the expiration date of the Option); provided, that no
Incentive Option shall be exercisable more than three months after
such termination; and, provided, further, that, unless the Option
expressly provides otherwise, if such optionee's employment was
terminated by the Company or any Related Entity for Good Cause (as
defined in Section 18), or if the optionee voluntarily terminates
employment without the consent of the Company or any Related Entity
(other than on a basis expressly permitted by the optionee's employment
agreement with the Company or any Related Entity), such optionee shall
immediately forfeit all rights under his Option except as to the shares
of stock already purchased. The determination that there exists Good
Cause for termination shall be made by the Committee (unless otherwise
agreed to in writing by the Company and the optionee or unless
otherwise restricted by the optionee's employment agreement).
h. Maximum Exercise. The aggregate number of shares of stock with
respect to which Incentive Options may be granted to any Key Employee
shall not exceed one-half of the number of shares described in Section
3.
7. Stock Option Grants to Eligible Non-Employees.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant Non-Qualified Options to Eligible
Non-Employees; provided, however, that whenever the Company has any
class of equity securities registered pursuant to Section 12 of the
Exchange Act, no Eligible Non-Employee then serving on the Committee
(or such other committee then administering the Plan) shall be granted
Options hereunder if the grant of such Options would cause such
Eligible Non-Employee to no longer be a Non-Employee Director. The
terms and conditions of the Options granted under this Section 7 shall
be determined from time to time by the Committee; provided, however,
that the Options granted under this Section 7 shall be subject to all
terms and provisions of the Plan (other than Section 6), including
the following:
a. Option Exercise Price. The Committee shall establish the option
exercise price at the time any Non-Qualified Option is granted at such
amount as the Committee shall determine. The option exercise price
shall be subject to adjustment in accordance with the provisions of
Section 10 of the Plan.
b. Payment. The price per share of Common Stock with respect to each
Option exercise shall be payable at the time of such exercise. Such
price shall be payable in cash or by any other means acceptable to the
Committee, including delivery to the Company of shares of Common Stock
owned by the optionee or by the delivery or withholding of shares
pursuant to a procedure created pursuant to Section 5.d. of the Plan.
Shares delivered to or withheld by the Company in payment of the
option exercise price shall be valued at the Fair Market Value of the
Common Stock on the day preceding the date of the exercise of the
Option.
c. Exercisability of Stock Option. Subject to Section 8, each Option
shall be exercisable in one or more installments as the Committee may
determine at the time of the grant. No Option shall be exercisable
after the expiration of ten years from the date of grant of the Option,
unless otherwise expressly provided in such Option.
d. Death. If the retention by the Company or any Related Entity of
the services of any Eligible Non-Employee terminates because of his
death, the estate of such optionee, or a Person who acquired the right
to exercise such Option by bequest or inheritance or by reason of the
death of the optionee, shall have the right to exercise such Option in
accordance with its terms, at any time and from time to time within
one year after the date of death unless a longer or shorter period is
expressly provided in such Option or established by the Committee
pursuant to Section 8 (but in no event after the expiration date of
such Option).
e. Disability. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee terminates because of his
Disability, such optionee or his legal representative shall have the
right to exercise the Option in accordance with its terms at any time
and from time to time within one year after the date of the optionee's
termination unless a longer or shorter period is expressly provided
in such Option or established by the Committee pursuant to Section 8
(but not after the expiration of the Option).
f. ther Termination of Relationship. If the retention by the Company
or any Related Entity of the services of any Eligible Non-Employee
terminates for any reason other than those specified in subsections
7(d) and (e) above, such optionee shall have the right to exercise
his or its Option in accordance with its terms within 30 days after
the date of such termination, unless a longer or shorter period is
expressly provided in such Option or established by the Committee
pursuant to Section 8 (but not after the expiration date of the
Option); provided, that, in the case of an Eligible Non-Employee
serving as a director of the Company or of any Related Entity,
unless the Committee provides otherwise, if the optionee is removed
from office for cause by action of the stockholders in accordance
with the by-laws of the Company or such Related Entity, as applicable,
and the General Corporation Law of the State of Delaware or if such
optionee voluntarily terminates his service without the consent of the
Company or any Related Entity, then such optionee shall immediately
forfeit his rights under his Option except as to the shares of stock
already purchased.
g. Ineligibility for Other Grants. Any Eligible Non-Employee who
receives an Option pursuant to this Section 7 shall be ineligible to
receive any Options under any other Section of the Plan unless such
Person becomes a Key Employee subsequent thereto.
8. Change of Control.
If a Change of Control (as defined in Section 18) shall occur, or if
the Company shall enter into an agreement providing for a Change of
Control, the Committee may declare any or all Options outstanding
under the Plan to be vested and exercisable in full at such time or
times as the Committee shall determine, notwithstanding the express
provisions of such Options. Each Option accelerated by the Committee
in connection with a Change of Control pursuant to the preceding
sentence may be terminated, notwithstanding any express provision
thereof or any other provision of the Plan, on such date (not later
than the stated expiration date) as the Committee shall determine.
9. Purchase Option.
a. To the extent and only to the extent expressly provided in any
particular Option, if any optionee's employment (or, in the case of
any Option granted under Section 7, the optionee's relationship)
with the Company or a Related Entity terminates for any reason at
any time, the Company and/or its designee(s) shall have the option
(the "Purchase Option") to purchase, and if the option is exercised,
the optionee (or the optionee's executor or the administrator of the
optionee's estate, in the event of the optionee's death, or the
optionee's legal representative in the event of the optionee's
incapacity (hereinafter, collectively with such optionee, the
"Grantor")) shall sell to the Company and/or its assignee(s), all
or any portion (at the Company's option) of the shares of Common
Stock and/or Options held by the Grantor (such shares of Common
Stock and Options collectively being referred to as the "Purchasable
Shares").
b. The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within 60 days from the date of the
termination of the optionee's employment or engagement. Such notice
shall state the number of Purchasable Shares to be purchased and the
determination of the Board of Directors of the Fair Market Value per
share of such Purchasable Shares. If no notice is given within the
time limit specified above, the Purchase Option shall terminate.
c. The purchase price to be paid for the Purchasable Shares purchased
pursuant to the Purchase Option shall be, in the case of any Common
Stock, the Fair Market Value per share times the number of shares
being purchased, and in the case of any Option, the Fair Market Value
per share, less the applicable per share Option exercise price, times
the number of vested shares subject to such Option which are being
purchased. The purchase price shall be paid in cash. The closing of
such purchase shall take place at the Company's principal executive
offices within ten days after the notice described in Section 9.b
has been delivered to Grantor. At such closing, the Grantor shall
deliver to the purchaser(s) the certificates or instruments evidencing
the Purchasable Shares being purchased, duly endorsed (or accompanied
by duly executed stock powers) and otherwise in good form for delivery,
against payment of the purchase price by check of the purchaser(s).
In the event that, notwithstanding the foregoing, the Grantor shall
have failed to obtain the release of any pledge or other encumbrance
on any Purchasable Shares by the scheduled closing date, at the option
of the purchaser(s) the closing shall nevertheless occur on such
scheduled closing date, with the cash purchase price being reduced to
the extent of all unpaid indebtedness for which such Purchasable Shares
are then pledged or encumbered.
d. To assure the enforceability of the Company's rights under this
Paragraph 9, each certificate or instrument representing Common Stock
or an Option held by him or it shall bear a conspicuous legend in
substantially the following form: "THE SHARES REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO AN OPTION TO REPURCHASE PROVIDED UNDER
THE PROVISIONS OF THE HEDSTROM HOLDING CORP. 1997 STOCK OPTION PLAN
AND A STOCK OPTION AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF
SUCH OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN
REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES."
The Company's rights under this Section 9 shall terminate upon the
consummation of an underwritten public offering of the Common Stock,
registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to which the Company receives aggregate
cash sales proceeds, before underwriting discount, of at least
$25 million or such lesser amount as the Committee shall determine.
10. Adjustment of Shares.
Unless otherwise expressly provided in a particular Option, in the
event that, by reason of any merger, consolidation, combination,
liquidation, reorganization, recapitalization, stock dividend, stock
split, split-up, split-off, spin-off, combination of shares,
exchange of shares or other like change in capital structure of
the Company (collectively, a "Reorganization"), the Common Stock
is substituted, combined, or changed into any cash, property, or
other securities, or the shares of Common Stock are changed into a
greater or lesser number of shares of Common Stock, the number and/or
kind of shares and/or interests subject to an Option and the per
share price or value thereof shall be appropriately adjusted by the
Committee to give appropriate effect to such Reorganization. Any
fractional shares or interests resulting from such adjustment shall
be eliminated. The adjustments set forth in this paragraph shall
be applied to each successive Reorganization, if any.
Notwithstanding the foregoing, (i) each such adjustment with respect
to an Incentive Option shall comply with the rules of Section 424(a)
of the Code, and (ii) in no event shall any adjustment be made which
would render any Incentive Option granted hereunder other than an
"incentive stock option" for purposes of Section 422 of the Code.
In the event the Company is not the surviving entity of a
Reorganization and, following such Reorganization, any optionee will
hold Options issued pursuant to this Plan which have not been
exercised, cancelled, or terminated in connection therewith, the
Company shall cause such Options to be assumed (or cancelled and
replacement Options issued) by the surviving entity or a Related
Entity.
11. Assignment or Transfer. Except as otherwise expressly provided in
any Non-Qualified Option, no Option granted under the Plan or any
rights or interests therein shall be assignable or transferable by
an optionee except by will or the laws of descent and distribution,
and during the lifetime ofan optionee, Options granted to him or
her hereunder shall be exercisableonly by the optionee or, in the
event that a legal representative has beenappointed in connection
with the Disability of an optionee, such legalrepresentative.
12. Compliance with Securities Laws. The Company shall not in any event
be obligated to file any registration statement under the Securities
Act or any applicable state securities law to permit exercise of any
Option or to issue any Common Stock in violation of the Securities
Act or any applicable state securities law. Each optionee (or, in
the event of his death or, in the event a legal representative has
been appointed in connection with his Disability, the Person
exercising the Option) shall, as a condition to his right to exercise
any Option, deliver to the Company an agreement or certificate
containing such representations, warranties and covenants as the
Company may deem necessary or appropriate to ensure that the issuance
of shares of Common Stock pursuant to such exercise is not required
to be registered under the Securities Act or any applicable state
securities law.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately
transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD,
PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF
PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION
OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION
WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Common Stock issued
pursuant to an effective registration statement under the Securities
Act and in accordance with applicable state securities laws.
13. Withholding Taxes. By acceptance of the Option, the optionee will
be deemed to (i) agree to reimburse the Company or Related Entity by
which the optionee is employed for any federal, state, or local
taxes required by any government to be withheld or otherwise deducted
by such corporation in respect of the optionee's exercise of all or
a portion of the Option; (ii) authorize the Company or any Related
Entity by which the Grantee is employed to withhold from any cash
compensation paid to the optionee or in the optionee's behalf, an
amount sufficient to discharge any federal, state, and local taxes
imposed on the Company, or the Related Entity by which the optionee
is employed, and which otherwise has not been reimbursed by the
optionee, in respect of the optionee's exercise of all or a portion
of the Option; and (iii) agree that the Company may, in its
discretion, hold the stock certificate to which the optionee is
entitled upon exercise of the Option as security for the payment of
the aforementioned withholding tax liability, until cash sufficient
to pay that liability has been accumulated, and may, in its
discretion, effect such withholding by retaining shares issuable
upon the exercise of the Option which shares shall have a Fair
Market Value on the date of exercise which is equal to the amount
to be withheld.
14. Costs and Expenses. The costs and expenses of administering the
Plan shall be borne by the Company and shall not be charged against
any Option nor to any employee receiving an Option.
15. Funding of Plan. The Plan shall be unfunded. The Company shall
not be required to make any segregation of assets to assure the
payment of any Option under the Plan.
16. Other Incentive Plans. The adoption of the Plan does not preclude
the adoption by appropriate means of any other incentive plan for
employees.
17. Effect on Employment. Nothing contained in the Plan or any
agreement related hereto or referred to herein shall affect, or
be construed as affecting, the terms of employment of any Key
Employee except to the extent specifically provided herein or
therein. Nothing contained in the Plan or any agreement related
hereto or referred to herein shall impose, or be construed as
imposing, an obligation on (i) the Company or any Related Entity
to continue the employment of any Key Employee, and (ii) any Key
Employee to remain in the employ of the Company or any Related
Entity.
18. Definitions. In addition to the terms specifically defined elsewhere
in the Plan, as used in the Plan, the following terms shall have the
respective meanings indicated:
a. "Affiliate" shall mean, as to any Person, a Person that
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person.
b. "Board of Directors" shall have the meaning set forth in Section
2 hereof.
c. "Change of Control" shall mean the first to occur of the
following events: (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 the Company to any Person or group
of related Persons for purposes of Section 13(d) of the Exchange Act
(a "Group"); (ii) a majority of the Board of Directors of the Company
shall consist of Persons who are not Continuing Directors (as defined
below); or (iii) the acquisition by any Person or Group (other than
HMTF) 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 the Company.
d. "Code" shall have the meaning set forth in Section 1 hereof.
e. "Committee" shall have the meaning set forth in Section 2
hereof.
f. "Common Stock" shall have the meaning set forth in Section 3
hereof.
g. "Company" shall have the meaning set forth in Section 1 hereof.
h. "Continuing Director" shall mean, as of the date of determination,
any Person who (i) was a member of the Board of Directors of the
Company on the date of adoption of this Plan or (ii) was nominated
for election or elected to the Board of Directors of the Company 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.
i. "Disability" shall mean permanent disability as defined under the
appropriate provisions of the long-term disability plan maintained for
the benefit of employees of the Company or any Related Entity who are
regularly employed on a salaried basis unless another meaning shall
be agreed to in writing by the Committee and the optionee; provided,
however, that in the case of an Incentive Option "disability" shall
have the meaning specified in Section 22(e)(3) of the Code.
j. "Eligible Non-Employee" shall have the meaning set forth in
Section 4 hereof.
k. "Exchange Act" shall have the meaning set forth in Section 2
hereof.
l. "Fair Market Value" shall, as it relates to the Common Stock,
mean the average of the high and low prices of the Common Stock as
reported on the principal national securities exchange on which the
shares of Common Stock are then listed on the date specified herein,
or if there were no sales on such date, on the next preceding day on
which there were sales, or if such Common Stock is not listed on a
national securities exchange, the last reported bid price in the
over-the-counter market, or if such shares are not traded in the
over-the-counter market, the per share cash price for which all of
the outstanding Common Stock could be sold to a willing purchaser in
an arms length transaction (without regard to minority discount,
absence of liquidity, or transfer restrictions imposed by any
applicable law or agreement) at the date which is the end of the
Company's fiscal quarter preceding the event giving rise to a need
for a determination. Except as may be otherwise expressly provided
in a particular Option, Fair Market Value shall be determined in good
faith by the Committee.
m. "Good Cause" shall mean (unless another definition is agreed to
in writing by the Company and the optionee) termination by action of
the Board of Directors because of: (A) the optionee's conviction of,
or plea of nolo contendere to, a felony or a crime involving moral
turpitude; (B) the optionee's personal dishonesty, incompetence,
willful misconduct, willful violation of any law, rule, or regulation
(other than minor traffic violations or similar offenses) or breach
of fiduciary duty which involves personal profit; (C) the optionee's
commission of material mismanagement in the conduct of his duties as
assigned to him by the Board of Directors or the President of the
Company; (D) the optionee's willful failure to execute or comply with
the policies of the Company or his stated duties as established by
the Board of Directors or the President of the Company, or intentional
failure to perform his stated duties; or (E) substance abuse or
addiction on the part of the optionee.
n. "Grantor" has the meaning set forth in Section 9 hereof.
o. "HMTF" shall mean Hicks, Muse, Tate & Furst Equity Fund II, L.P.
and its Affiliates.
p. "Incentive Options" shall have the meaning set forth in Section 6
hereof.
q. The term "including" when used herein shall mean "including, but
not limited to".
r. "Key Employee" shall have the meaning set forth in Section 4
hereof.
s. "Non-Employee Director" shall have the meaning specified in Rule
16b-3(b)(3) promulgated under the Exchange Act.
t. "Non-Qualified Options" shall have the meaning set forth in
Section 6 hereof.
u. "Options" shall have the meaning set forth in Section 1 hereof.
v. "Person" shall mean any person or entity of any nature
whatsoever, specifically including an individual, a firm, a company,
a corporation, a partnership, a trust, or other entity.
w. "Plan" shall have the meaning set forth in Section 1 hereof.
x. "Purchasable Shares" shall have the meaning set forth in
Section 9 hereof.
y "Purchase Option" shall have the meaning set forth in Section
9 hereof.
z. "Related Entities" shall have the meaning set forth in Section
1 hereof.
aa. "Reorganization" shall have the meaning set forth in Section 10
hereof.
bb. "Securities Act" shall have the meaning set forth in Section 9
hereof.
19. Amendment of Plan. The Board of Directors shall have the right to
amend, modify, suspend or terminate the Plan at any time; provided,
that no amendment shall be made which shall increase the total
number of shares of the Common Stock which may be issued and sold
pursuant to Options granted under the Plan or decrease the minimum
Option exercise price in the case of an Incentive Option, or modify
the provisions of the Plan relating to eligibility with respect to
Incentive Options unless such amendment is made by or with the
approval of the stockholders. The Board of Directors shall be
authorized to amend the Plan and the Options granted thereunder to
qualify as "incentive stock options" within the meaning of Section
422 of the Code. No amendment, modification, suspension or
termination of the Plan shall alter or impair any Options previously
granted under the Plan, without the consent of the holder thereof.
20. Effective Date. The Plan shall become effective on the date on
which it is approved by the Board of Directors of the Company and
shall be void retroactively if not approved by the stockholders of
the Company within twelve months of the date of approval by the
Board of Directors.
FIRST AMENDMENT, dated as of November 11, 1997 (this "First Amendment"),
to the CREDIT AGREEMENT, dated as of June 12, 1997, among:
(a) HEDSTROM CORPORATION, a Delaware corporation (the "Borrower");
(b) HEDSTROM HOLDINGS, INC., a Delaware corporation (the "Parent");
(c) the Lenders from time to time parties thereto;
(d) SOCIETE GENERALE, as Documentation Agent for the Lenders;
(e) UBS SECURITIES LLC, as Syndication Agent for the Lenders; and
(f) CREDIT SUISSE FIRST BOSTON, as Administrative Agent for the Lenders.
W I T N E S S E T H :
WHEREAS, the parties hereto wish to amend certain provisions of
the Credit Agreement on the terms set forth herein:
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined
in the Credit Agreement shall be used as so defined.
2. Amendment to Subsection 1.1 of the Credit Agreement.
A. Amendment to Subsection 1.1. Subsection 1.1 of the Credit
Agreement is hereby amended by deleting in its entirety the definitions
of "Aggregate Tranche B Commitment", "Clean-Down Amount" and "Tranche B
Loan" and adding the following definitions:
`Aggregate Tranche B Commitment': $45,000,000, as such amount
may be reduced from time to time pursuant to this Agreement.
`Clean-Down Amount': the amount equal to $10,000,000 for
fiscal years 1998 and 1999 and $15,000,000 for each fiscal year
thereafter; provided that with respect to each such fiscal year
such amount shall be increased by the lesser of (a) $15,000,000
and (b) the aggregate principal amount of the Revolving Credit
Loans borrowed to consummate the acquisition permitted by
subsection 11.10(n)(i).
`First Amendment Effective Date': as defined in the First
Amendment dated as of November 11, 1997 to this Agreement.
`Tranche B Loans': as defined in subsection 3.1."
3. Amendment to Section 3. Section 3 of the Credit Agreement is
hereby amended in its entirety by deleting such Section in its entirety and
substituting in lieu thereof the following:
"SECTION III. AMOUNT AND TERMS OF TRANCHE B LOAN
COMMITMENTS
3.1. Tranche B Loans. (a) Subject to the terms and
conditions hereof, each Tranche B Lender severally agrees to (a) continue
the Tranche B Loans outstanding on the First Amendment Effective Date
pursuant to the terms hereof and (b) make a term loan (the Tranche B Loans
continued or made pursuant to clauses (a) and (b), collectively, the
"Tranche B Loans") to the Borrower prior to December 31,1997 in an amount
not to exceed such Tranche B Lender's Tranche B Commitment Percentage of
$10,000,000. The Tranche B Loans may from time to time be (a) Eurodollar
Loans, (b) ABR Loans or (c) a combination thereof, as determined by the
Borrower and notified to the Administrative Agent in accordance with
subsections 3.2 and 7.6. The Borrower shall have the right, upon not less
than one Business Day's notice to the Administrative Agent, to terminate up
to $10,000,000 of the Aggregate Tranche B Commitment or, from time to time
prior to any borrowing pursuant to subsection 3.2, to reduce the amount
thereof. Any such reduction shall be in an amount equal to $1,000,000 or
a whole multiple of $250,000 in excess thereof and shall reduce permanently
the Aggregate Tranche B Commitment then in effect.
(b) Subsequent to a Notice of Borrowing given by the
Borrower pursuant to subsection 3.2 and immediately prior to any borrowing
of Tranche B Loans, without the necessity of further action by any party,
one or more Tranche B Lenders (the "Selling Lenders") as specified on
Schedule 1.1C hereto shall sell, transfer and assign to one or more other
Tranche B Lenders (the "Purchasing Lenders") as specified on Schedule 1.1C
hereto a portion of the Selling Lender's right, title and interest in and
to its Tranche B Term Loans as specified on Schedule 1.1C hereto, without
recourse, representation or warranty, and each Purchasing Lender shall
purchase, take and acquire from a Selling Lender a portion of such Selling
Lender's right, title and interest in and to its Tranche B Term Loans as
specified on Schedule 1.1C hereto, so that after giving effect to all such
transfers, each Tranche B Lender's interest in the Tranche B Term Loans
shall be as specified on Schedule 1.1C hereto.
3.2. Procedure for Tranche B Loan Borrowing. The Borrower
shall give the Administrative Agent its irrevocable Notice of Borrowing
(which notice must be received by the Administrative Agent prior to 11:00
A.M., New York City time, (a) three Business Days prior to the requested
Borrowing Date, if all or any part of the requested Tranche B Loans are to
be initially Eurodollar Loans or (b) on the requested Borrowing Date,
otherwise) requesting that the Tranche B Lenders make the Tranche B Loans
on the requested Borrowing Date and specifying the amount to be borrowed.
Upon receipt of such Notice of Borrowing, the Administrative Agent shall
promptly notify each Tranche B Lender thereof. Each Tranche B Lender will
make the amount of its pro rata share of the Tranche B Loans available to
the Administrative Agent for the account of the Borrower at the office of
the Administrative Agent specified in subsection 14.2 prior to 11:00 A.M.,
New York City time, on the Borrowing Date in funds immediately available
to the Administrative Agent. Such Tranche B Loans will then be made
available to the Borrower by the Administrative Agent transferring to the
account directed by the Borrower (which account need not be maintained by
the Administrative Agent) with the aggregate of the amounts made available
to the Administrative Agent by the Tranche B Lenders and in like funds as
received by the Administrative Agent.
3.3. Amortization of Tranche B Loans. (a) The Borrower
shall repay the Tranche B Loans on each date set forth below by the amount
set forth below opposite such date:
Period Amount
December 31, 1997 $158,460
March 31, 1998 158,460
June 30, 1998 158,460
September 30, 1998 158,460
December 31, 1998 158,460
March 31, 1999 158,460
June 30, 1999 158,460
September 30, 1999 158,460
December 31, 1999 158,460
March 31, 2000 158,460
June 30, 2000 158,460
September 30, 2000 158,460
December 31, 2000 158,460
March 31, 2001 158,460
June 30, 2001 158,460
September 30, 2001 158,460
December 31, 2001 158,460
March 31, 2003 6,338,020
June 30, 2003 1,584,510
September 30, 2003 6,338,020
December 31, 2003 1,584,510
March 31, 2004 6,845,065
June 30, 2004 1,711,265
September 30, 2004 6,845,065
December 31, 2004 1,711,265
March 31, 2005 6,464,785
June 30, 2005 2,249,835
(b) The Borrower shall repay any then outstanding Tranche
B Loans on June 30, 2005.
3.4. Use of Proceeds of Tranche B Loans. The proceeds of
the Tranche B Loans shall be utilized by the Borrower only (a) to finance
the purchase by AcquisitionCo of the Tendered Shares, (b) to finance the
Merger, (c) to refinance outstanding Indebtedness of the Borrower and its
Subsidiaries (including, without limitation, ERO), (d) to finance the
acquisition permitted by subsection 11.10(n)(ii) and (e) to pay any fees
and expenses relating thereto."
4. Amendment to Section 7. Subsection 7.2 is hereby amended
by adding "(a)" immediately prior to the text thereof and adding at the end
thereof the following paragraph:
"(b) The Borrower agrees to pay to the Administrative
Agent for the account of each Purchasing Lender specified
on Schedule 1.1C a commitment fee for the period from and
including the First Amendment Effective Date to but excluding
the earliest of (a) December 31, 1997, (b) subsequent Borrowing
Date for Tranche B Loans (as to which the Borrower has given
notice pursuant to subsection 3.2) and (c) the date on which
the Tranche B Commitments shall terminate as provided herein,
computed at the rate equal to 1/2 of 1% per annum on the
Tranche B Commitment of such Purchasing Lender (or any assignee
who purchases such Tranche B Commitment pursuant to the terms
hereof), payable quarterly in arrears on the earlier of (i)
the last Business Day of December 1997 or (ii) the date on
which the Tranche B Commitments shall terminate as provided
herein, commencing on the first of such dates to occur after
the date hereof."
5. Amendments to Section 11.
A. Amendment to Subsection 11.1. Subsection 11.1 is hereby
amended by deleting the paragraph at the end of such subsection
(which paragraph begins with the word "Notwithstanding") and
substituting the following paragraph in lieu thereof:
"Notwithstanding anything to the contrary herein, for
the purposes of determining the Leverage Ratio and the
Consolidated Interest Coverage Ratio for the periods ending
on or about December 31, 1997, March 31, 1998, June 30, 1998
and September 30, 1998, (i) Consolidated EBITDA for the
relevant period shall be deemed to equal actual Consolidated
EBITDA for such period (commencing with the period ended on
or about June 30, 1997) plus $17,000,000, $8,000,000,
$4,000,000 and $2,500,000, respectively; and (ii)
Consolidated Interest Expense for the relevant period shall
be deemed to equal actual Consolidated Interest Expense for
such period (since on or about October 1, 1997) multiplied
by 4, 2 and 4/3, respectively."
B. Amendment to Subsection 11.10. Subsection 11.10 is
hereby amended by adding the following paragraph "(n)" at the
end of such subsection (and adjusting the punctuation at the
end of paragraph (m) accordingly):
"(n) so long as after giving effect thereto no Default
or Event of Default shall have occurred and be continuing
or would result therefrom, (i) the Borrower may use proceeds
of Revolving Credit Loans to acquire certain assets of
Bollinger Industries, Inc. on terms and conditions reasonably
satisfactory to the Required Lenders so long as the
aggregate amount of consideration paid in connection
therewith (which may include Indebtedness permitted by
subsection 11.2(m)) shall not exceed approximately
$15,000,000 and (ii) the Borrower may purchase the assets
of RDM Sports Group, Inc. on terms and conditions reasonably
satisfactory to the Required Lenders so long as the
aggregate amount of consideration paid in connection
therewith (which may include Indebtedness permitted by
subsection 11.2(m)) shall not exceed $10,000,000, provided
that, in the case of clauses (i) and (ii), (A) such actions
as may be required or reasonably requested to ensure that
the Administrative Agent, for the ratable benefit of the
Lenders, has a perfected first priority security interest in
any assets acquired, subject to Liens permitted by
subsection 11.3, shall have been taken, (B) (I) on a pro
forma basis for the period of four consecutive fiscal
quarters most recently ended (assuming the consummation of
such acquisition and the incurrence or assumption of any
Indebtedness in connection therewith occurred on the first
day of such period of four consecutive fiscal quarters), the
Borrower shall be in compliance with the covenants contained
in subsection 11.1 and (II) the Administrative Agent shall
have received calculations in reasonable detail reasonably
satisfactory to it showing compliance with the requirements
of this clause (B) certified by a Responsible Officer of the
Borrower and (C) such acquisitions are Permitted
Acquisitions."
6. Amendment to Schedule 1.1A. Schedule 1.1A to the Credit
Agreement is hereby amended by deleting Schedule 1.1A in its
entirety and substituting in lieu thereof Annex A hereto.
7. Addition of Schedule 1.1C. Schedule 1.1C in the form of
Annex B hereto is hereby added to the Credit Agreement.
8. Effective Date. This First Amendment will become
effective as of the date (the "First Amendment Effective Date")
hereof upon its execution by the Borrower and the Required
Lenders in accordance with the terms of the Credit Agreement.
9. Representations and Warranties. The Borrower represents
and warrants to each Lender that (a) this First Amendment
constitutes the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its
terms, except as such enforcement may be limited by
bankruptcy, insolvency, fraudulent conveyances,
reorganization, moratorium or similar laws affecting
creditors' rights generally, by general equitable
principles (whether enforcement is sought by proceedings
in equity or at law) and by an implied covenant of good
faith and fair dealing, (b) the representations and
warranties made by the Credit Parties in the Credit
Documents are true and correct in all material respects
on and as of the date hereof (except to the extent that
such representations and warranties are expressly stated
to relate to an earlier date, in which case such
representations and warranties shall have been true and
correct in all material respects on and as of such earlier
date) and (c) no Default or Event of Default has occurred
and is continuing as of the date hereof.
10. Continuing Effect. Except as expressly waived or
amended hereby, the Credit Agreement shall continue to be and
shall remain in full force and effect in accordance with its
terms.
11. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK.
12. Counterparts. This First Amendment may be executed by
the parties hereto in any number of separate counterparts, and
all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
13. Payment of Expenses. The Borrower agrees to pay and
reimburse the Administrative Agent for all of its out-of-pocket
costs and reasonable expenses incurred in connection with this
First Amendment, including, without limitation, the reasonable
fees and disbursements of counsel to the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
HEDSTROM CORPORATION
By:
Title:
CREDIT SUISSE FIRST BOSTON, as
Administrative Agent
By:
Title:
By:
Title:
CREDIT SUISSE FIRST BOSTON, as a Lender
By:
Title:
By:
Title:
SOCIETE GENERALE, as a Lender
By:
Title:
UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as a Lender
By:
Title:
By:
Title:
BANK POLSKA KASA OPIEKI S.A. -
PEKAO S.A. GROUP
By:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
Title:
By:
Title:
CITICORP USA, INC.
By:
Title:
DEEPROCK & COMPANY
By: Eaton Vance Management,
as Investment Advisor
By:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:
Title:
FIRST SOURCE FINANCIAL, LLP
By: First Source Financial, Inc.,
as Agent/Manager
By:
Title:
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By:
Title:
MERRILL LYNCH DEBT STRATEGIES FUND, INC.
By:
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor
By:
Title:
MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor
By:
Title:
NATIONAL WESTMINSTER BANK PLC
By:
Title:
ORIX USA CORPORATION
By:
Title:
SANWA BUSINESS CREDIT CORPORATION
By:
Title:
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND RESEARCH, as Investment Advisor
By:
Title:
PAMCO CAYMAN LTD., by Protective Asset Management as Collateral Manager
By:
Title:
THE CHASE MANHATTAN BANK
By:
Title:
SECOND AMENDMENT, dated as of December 19, 1997 (this "Second Amendment"),
to the CREDIT AGREEMENT, dated as of June 12, 1997, among:
(a) HEDSTROM CORPORATION, a Delaware corporation (the "Borrower");
(b) HEDSTROM HOLDINGS, INC., a Delaware corporation (the "Parent");
(c) the Lenders from time to time parties thereto;
(d) SOCIETE GENERALE, as Documentation Agent for the Lenders;
(e) UBS SECURITIES LLC, as Syndication Agent for the Lenders; and
(f) CREDIT SUISSE FIRST BOSTON, as Administrative Agent for the Lenders.
W I T N E S S E T H :
WHEREAS, the parties hereto wish to amend certain provisions of the
Credit Agreement on the terms set forth herein:
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined in
the Credit Agreement shall be used as so defined.
2. Amendment to Section 3. Section 3.3 of the Credit Agreement is
hereby amended in its entirety by deleting such Section 3.3 in its entirety
and substituting in lieu thereof the following:
"3.3. Amortization of Tranche B Loans. (a) The Borrower shall
repay the Tranche B Loans on each date set forth below by the amount
set forth below opposite such date:
Period Amount
December 31, 1997 $125,000
March 31, 1998 125,000
June 30, 1998 125,000
September 30, 1998 125,000
December 31, 1998 125,000
March 31, 1999 125,000
June 30, 1999 125,000
September 30, 1999 125,000
December 31, 1999 125,000
March 31, 2000 125,000
June 30, 2000 125,000
September 30, 2000 125,000
December 31, 2000 125,000
March 31, 2001 125,000
June 30, 2001 125,000
September 30, 2001 125,000
December 31, 2001 125,000
March 31, 2002 125,000
June 30, 2002 125,000
September 30, 2002 125,000
December 31, 2002 125,000
March 31, 2003 5,000,000
June 30, 2003 1,250,000
September 30, 2000 5,000,000
December 31, 2003 1,250,000
March 31, 2004 5,400,000
June 30, 2004 1,350,000
September 30, 2004 5,400,000
December 31, 2004 1,350,000
March 31, 2005 5,100,000
June 30, 2005 1,275,000
(b) The Borrower shall repay any then outstanding Tranche B
Loans on June 30, 2005."
3. Amendments to Section 11.
A. Amendment to Subsection 11.1. Subsection 11.1 is hereby
amended by deleting the paragraph at the end of such subsection
(which paragraph begins with the word "Notwithstanding") and
substituting the following paragraph in lieu thereof:
"Notwithstanding anything to the contrary herein, for
the purposes of determining the Leverage Ratio and the
Consolidated Interest Coverage Ratio for the periods ending
on or about December 31, 1997, March 31, 1998, June 30, 1998
and September 30, 1998, (i) Consolidated EBITDA for the
relevant period shall be deemed to equal actual Consolidated
EBITDA for such period (commencing with the period ended on
or about June 30, 1997) plus $12,000,000, $3,700,000,
$2,000,000 and $1,200,000, respectively; and (ii)
Consolidated Interest Expense for the relevant period shall
be deemed to equal actual Consolidated Interest Expense for
such period (since on or about October 1, 1997) multiplied by
4, 2 and 4/3, respectively."
B. Amendment to Subsection 11.10. Subsection 11.10 is hereby
amended by adding the following paragraph "(n)" at the end of such
subsection (and adjusting the punctuation at the end of paragraph (m)
accordingly):
"(n) so long as after giving effect thereto no Default
or Event of Default shall have occurred and be continuing or
would result therefrom, the Borrower may use proceeds of
Revolving Credit Loans to acquire certain assets of Bollinger
Industries, Inc. on terms and conditions reasonably
satisfactory to the Required Lenders so long as the aggregate
amount of consideration paid in connection therewith (which
may include Indebtedness permitted by subsection 11.2(m))
shall not exceed approximately $15,000,000 provided that (A)
such actions as may be required or reasonably requested to
ensure that the Administrative Agent, for the ratable benefit
of the Lenders, has a perfected first priority security
interest in any assets acquired, subject to Liens permitted
by subsection 11.3, shall have been taken, (B) (I) on a pro
forma basis for the period of four consecutive fiscal quarters
most recently ended (assuming the consummation of such
acquisition and the incurrence or assumption of any
Indebtedness in connection therewith occurred on the first
day of such period of four consecutive fiscal quarters), the
Borrower shall be in compliance with the covenants contained
in subsection 11.1 and (II) the Administrative Agent shall
have received calculations in reasonable detail reasonably
satisfactory to it showing compliance with the requirements
of this clause (B) certified by a Responsible Officer of the
Borrower and (C) such acquisitions are Permitted Acquisitions."
4. Effective Date. This Second Amendment will become effective
as of the date (the "Second Amendment Effective Date") hereof upon its
execution by the Borrower and the Required Lenders in accordance with
the terms of the Credit Agreement.
5. Representations and Warranties. The Borrower represents
and warrants to each Lender that (a) this Second Amendment constitutes
the legal, valid and binding obligation of the Borrower, enforceable
against it in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency, fraudulent conveyances,
reorganization, moratorium or similar laws affecting creditors' rights
generally, by general equitable principles (whether enforcement is
sought by proceedings in equity or at law) and by an implied covenant
of good faith and fair dealing, (b) the representations and warranties
made by the Credit Parties in the Credit Documents are true and correct
in all material respects on and as of the date hereof (except to the
extent that such representations and warranties are expressly stated
to relate to an earlier date, in which case such representations and
warranties shall have been true and correct in all material respects
on and as of such earlier date) and (c) no Default or Event of Default
has occurred and is continuing as of the date hereof.
6. Continuing Effect. Except as expressly waived or amended
hereby, the Credit Agreement shall continue to be and shall remain in
full force and effect in accordance with its terms.
7. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK.
8. Counterparts. This Second Amendment may be executed by
the parties hereto in any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and
the same instrument.
9. Payment of Expenses. The Borrower agrees to pay and
reimburse the Administrative Agent for all of its out-of-pocket costs
and reasonable expenses incurred in connection with this Second
Amendment, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
HEDSTROM CORPORATION
By:
Title:
CREDIT SUISSE FIRST BOSTON, as
Administrative Agent
By:
Title:
By:
Title:
CREDIT SUISSE FIRST BOSTON, as a
Lender
By:
Title:
By:
Title:
SOCIETE GENERALE, as a Lender
By:
Title:
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH, as a Lender
By:
Title:
By:
Title:
BANK POLSKA KASA OPIEKI S.A. -
PEKAO S.A. GROUP
By:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
Title:
By:
Title:
CITICORP USA, INC.
By:
Title:
DEEPROCK & COMPANY
By: Eaton Vance Management,
as Investment Advisor
By:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:
Title:
FIRST SOURCE FINANCIAL, LLP
By: First Source Financial, Inc.,
as Agent/Manager
By:
Title:
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
Title:
MERRILL LYNCH DEBT STRATEGIES FUND,
INC.
By:
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset
Management,
L.P., as Investment Advisor
By:
Title:
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset
Management, L.P., as
Investment Advisor
By:
Title:
NATIONAL WESTMINSTER BANK PLC
By:
Title:
ORIX USA CORPORATION
By:
Title:
SANWA BUSINESS CREDIT CORPORATION
By:
Title:
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND
RESEARCH, as Investment
Advisor
By:
Title:
PAMCO CAYMAN LTD., by Protective
Asset Management as Collateral
Manager
By:
Title:
THE CHASE MANHATTAN BANK
By:
Title:
EXHIBIT 10.30
LICENSE AGREEMENT
Date: December 13, 1996
Re: DISNEY'S GEORGE OF THE JUNGLE
This License agreement ("Agreement") is entered into by and between Disney
Enterprises, Inc. ("Disney"), with a principal place of business at 500
South Buena Vista Street, Burbank, California 91521, and IMPACT, INC.
("Licensee"), with its principal place of business at 1515 N. Federal
Highway, Suite 208, Boca Raton, Florida 33432. Disney and Licensee agree
as follows:
1. MEANING OF TERMS
A. "LICENSED MATERIAL" means the graphic representations of the
following:
DISNEY'S GEORGE OF THE JUNGLE characters, but only such
characters and depictions of such characters as may be
designated by Disney; and designated still scenes from
the motion picture identified in Subparagraph 1.B.
hereafter.
B. "TRADEMARKS" means "Wait Disney", "Disney", the
representations ofLicensed Material included in Subparagraph
1.A. above, and the logo of the following motion picture:
DISNEY'S GEORGE OF THE JUNGLE
C. "ARTICLES" means the following items on or in connection with
which the Licensed Material and/or the Trademarks are
reproduced or used, and includes each and every stock
keeping unit ("SKU") of each Article:
(1) Portfolios
(2) Binders
(3) Theme books
(4) Study kits, including pencil pouch, ruler,
sharpener, eraser (poly bagged)
(5) 12" die-cut rulers
(6) Five (5) pack pencils
(7) 3"x5" memo pads
(8) Die-cut erasers
D. "MINIMUM PER ARTICLE ROYALTY" means for each Article
identified herein which is sold the sum indicated herein:
[*]
E. "PRINCIPAL TERM" means the period commencing December 13,
1996, and ending December 31, 1999.
F. "TERRITORY" means the United States, United States PX's
wherever located, and United States territories and
possessions, excluding Puerto Rico, Guam, Commonwealth
of Northern Mariana Islands and Palau. However, if sales
are made to chain stores in the United States which have
stores in Puerto Rico, such chain stores may supply Articles
to such stores in Puerto Rico.
G. "ROYALTIES" means a royalty in the amounts set forth below
in Subparagraphs 1.G.(1)(a), (b), and (c) and Royalties shall
be further governed by the provisions contained in
Subparagraphs 1.G.(2)-(6):
(1)(a) [*] of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers for Articles shipped by
Licensee from a location in the Territory for delivery
to a customer located in the Territory ("F.O.B. In
Sales"); or
(b) [*] of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers when Licensee's customer l
ocated in the Territory takes title to the Articles
outside the Territory and/or bears the risk of loss
of Articles manufactured and shipped to the customer
from outside the Territory ("F.O.B. Out Sales"); or
(c) if a Minimum Per Article Royalty has been specified
in Subparagraph 1.D. above, and it would result in a
higher royalty to be paid for the Articles, Licensee
agrees to pay the higher royalty amount.
__________________________________
* FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
(2) The sums paid to Disney as Royalties on any sales to
Licensee's Affiliates shall be no less than the sums
paid on sales to customers not affiliated with
Licensee.
(3) All sales of Articles shipped to a customer outside
the Territory pursuant to a distribution permission
shall bear a Royalty at the rate for F.O.B. Out Sales.
However, sales of Articles to Disney's Affiliates
outside the Territory shall bear a Royalty at the
rate for F.O.B. In Sales.
(4) No Royalties are payable on the mere manufacture of
Articles.
(5) The full Royalty percentage shall be payable on
close-out or other deep discount sales of Articles,
including sales to employees.
(6) Royalties reported on sales of Articles which have
been returned to Licensee for credit or refund and
on which a refund has been made or credit memo issued
may be credited against Royalties due. The credit
shall be taken in the Royalty Payment Period in which
the refund is given or credit memo issued. Unused
credits may be carried forward, but in no event shall
Licensee be entitled to a refund of Royalties.
H. "NET INVOICED BILLINGS" means the following:
(1) actual invoiced billings (i.e., sales quantity
multiplied by Licensee's selling price) for Articles
sold, and all other receivables of any kind whatsoever,
received in payment for the Articles, whether received
by Licensee or any of Licensee's Affiliates, except as
provided in Subparagraph 1.H.(2), less "Allowable
Deductions" as hereinafter defined.
(2) The following are not part of Net Invoiced Billings:
invoiced charges for transportation of Articles
within the Territory which are separately identified
on the sales invoice, and sales taxes.
I. "ALLOWABLE DEDUCTIONS" means the following:
(1) volume discounts, and other discounts from the
invoice price (or post-invoice credits) unilaterally
imposed in the regular course of business by
Licensee's customers, so long as Licensee documents
such discounts (or credits) to Disney's satisfaction.
In the event a documented Impact, Inc. Disney's George
of the Jungle Agreement dated December 13, 1996 Page 4
unilateral discount (or credit) is taken with respect
to combined sales of Articles and other products not
licensed by Disney, and Licensee cannot document the
portion of the discount (or credit) applicable to the
Articles, Licensee may apply only a pro rata portion
of the discount (or credit) to the Articles. Unilateral
discounts or credits are never deductible if they
represent items listed below in Subparagraph 1.I.(2).
(2) The following are not Allowable Deductions, whether
granted on sales invoices or unilaterally imposed
as discounts or as post-invoice credits: cash discounts
granted as terms of payment; early payment discounts;
allowances or discounts relating to advertising; mark
down allowances; new store allowances; defective goods
allowances or allowances taken by customers in lieu of
returning goods; costs incurred in manufacturing,
importing, selling or advertising Articles; freight
costs incorporated in the selling price; and
uncollectible accounts.
J. "ROYALTY PAYMENT PERIOD" means each calendar quarterly period
during the Principal Term and during the sell-off period, if
granted.
K. "ADVANCE" means the following sum(s) payable by the following
date(s) as an advance on Royalties to accrue in the following
period(s):
[*] payable upon Licensee's signing of this Agreement
for the Principal Term,
L. "GUARANTEE" means the following sum(s) which Licensee
guarantees to pay as minimum Royalties on Licensee's
cumulative sales in the following period(s):
[*] for the Principal Term.
M. "SAMPLES" means twelve (12) samples of each SKU of each
Article, from the first production run of each supplier of
each SKU of each Article.
N. "PROMOTION COMMITMENT" means the following sum(s) which
Licensee agrees to spend in the following way(s):
__________________________________
* FILED SEPARATELY WITH COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Licensee hereby acknowledges Licensee's understanding that
Disney is implementing a common marketing and promotional
fund (the "Common Marketing Fund"), during the Principal
Term, for purposes of marketing and promoting the Licensed
Material and the Trademarks, as Disney may deem appropriate
in Disney's absolute discretion. In order to implement the
Common Marketing Fund, Licensee shall be required, from time
to time at Disney's request, to provide a contribution(s)
to the Common Marketing Fund, the cumulative total of which
shall not exceed one percent (1%) of Licensee's Net Invoiced
Billings for Articles (such Net Invoiced Billings to be
estimated by Disney in a reasonable manner) during the
Principal Term, but in no event less than a cumulative total
of one percent (1%) of the quotient of (the Guarantee divided
by the Royalty rate for F.O.B. In Sales). Within fifteen
(15) days after each request by Disney, Licensee shall pay
to Disney the amount of the contribution designated by
Disney. Such contribution may be expended by Disney and/or
Disney's designees in the amount and in the manner Disney
deems most appropriate in order to market, promote, and
advertise the Licensed Material and the Trademarks.
Licensee's contribution shall only be spent for the
promotion of the Licensed Material and the Trademarks
licensed hereunder. However, Disney does not ensure that
Licensee will benefit directly or pro-rata from the operation
of the Common Marketing Fund. Licensee shall not be
entitled to any audit rights with regard to the Common
Marketing Fund.
O. "MARKETING DATE" means the following date(s) by which the
following Article(s) shall be available for purchase by the
public at the retail outlets authorized pursuant to
Subparagraph 2.A.:
By the release date of the motion picture referenced
in Subparagraph 1.B. (to be determined), for all
Articles. When the actual release date of the motion
picture is determined, Licensee shall be advised of
such date in writing.
P. "AFFILIATE" means, with regard to Licensee, any corporation
or other entity which directly or indirectly controls, is
controlled by, or is under common control with Licensee, with
regard to Disney, "Affiliate" means any corporation or other
entity which directly or indirectly controls, is controlled
by, or is under common control with Disney. "Control" of
an entity shall mean possession, directly or indirectly, of
power to direct or cause the direction of management : or
policies of such entity, whether through ownership of voting
securities, by contract or otherwise.
Q. "LAWS" means any and all applicable laws, rules, regulations,
voluntary industry standards, association laws, codes or
other obligations pertaining to any of Licensee's activities
under this Agreement, including but not limited to those
applicable to the manufacture, pricing, sale and/or
distribution of the Articles.
R. RETAILER" means independent and chain retail outlets which
have storefronts and business licenses, and which customers
walk into, not up to; "WHOLESALER" means a seller of items
to retailers, not consumers, and includes the term
"distributor". The following do not qualify as authorized
sales outlets for Articles under this Agreement under any
circumstances: swap meets, flea markets, street peddlers,
unauthorized kiosks, and the like.
2. RIGHTS GRANTED
A. In consideration for Licensee's promise to pay and Licensee's
payment of all Royalties, Advances and Guarantees required
hereunder, Disney grants Licensee the non-exclusive right,
during the Principal Term, and only within the Territory,
to reproduce the Licensed Material only on or in connection
with the Articles, to use such Trademarks and uses thereof
as may be approved when each SKU of the Articles is approved
and only on or in connection with the Articles, and to
manufacture, distribute for sale and sell the Articles
(other than by direct marketing methods, which includes but
is not limited to, computer on-line selling, direct mail and
door-to-door solicitation). Licensee will sell the Articles
only to the following Retailers in the Territory for resale
to the public in the Territory, or to Wholesalers in the
Territory for resale only to the following Retailers:
(1) mass market Retailers (including such Retailers as
Target, Toys R Us, WalMart and KMart), (2) value-oriented
department stores (including such Retailers as Sears,
Mervyn's and Montgomery Ward), (3) value-oriented specialty
stores, (4) mid-tier department stores (including such
Retailers as J.C. Penney and Kohl's), and (5) drug chains.
Licensee will not sell the Articles to other Retailers, or
to supermarkets or food chains, or to other Wholesalers.
In addition, Licensee may not sell the Articles to Retailers
selling merchandise on a duty-free basis, or to Wholesalers for
resale to such Retailers, unless such Retailer or Wholesaler
has a then-current license agreement with Disney or any of
Disney's Affiliates permitting it to make such duty-free sales.
Licensee may sell the Articles to authorized customers for
resale through the pre-approved mail order catalogs listed on
the Catalog Schedule to this Agreement. If there is a question
as to whether a particular customer falls within any of the
categories specified above, Disney's determination shall be
binding.
B. Unless Disney consents in writing, Licensee shall not sell or
otherwise provide Articles for use as premiums (including
those in purchase-with purchase promotions), promotions,
give-aways, fund-raisers, or entries in sweepstakes, or
through unapproved direct marketing methods, including but
not limited to, home shopping television programs, or to
customers for inclusion in another product. If Licensee
wishes to sell the Articles to customers for resale through
mail order catalogs other than those listed on the Catalog
Schedule hereto, Licensee must obtain Disney's prior written
consent in each instance. However, Licensee may solicit
orders by mail from those Wholesalers or Retailers authorized
pursuant to Subparagraph 2.A. above, and Licensee may sell
to such authorized Retailers which sell predominantly at
retail, but which include the Articles in their mail order
catalogs, or otherwise sell Articles by direct marketing
methods as well as at retail.
C. The prohibition of computer on-line selling referenced in
Subparagraph 2.A. includes, but is not limited to, the
display, promotion or offering of Articles in or on any
on-line venues, including but not limited to, any catalog
company's or Retailer's "Websites," "home pages," or any
similar venues, except as specifically permitted in the
next two sentences. With Disney's prior written permission,
Articles approved by Disney may be displayed and promoted
on Disney-controlled Internet services, only within the
Territory. In addition, with Disney's prior written
permission, Articles approved by Disney may be displayed
and promoted on Licensee's own Website; however, Licensee
must obtain Disney's prior written approval of all creative
and editorial elements of such promotional uses, in
accordance with the provisions of Paragraph 7 of this
Agreement.
D. Unless Disney consents in writing, Licensee shall not give
away or donate Articles to Licensee's accounts or other
persons for the purpose of promoting sales of Articles,
except for minor quantities or samples which are not for
onward distribution.
E. Nothing contained herein shall preclude Licensee from selling
Articles to Disney or to any of Disney's Affiliates, or to
Licensee's or Disney's employees, subject to the payment to
Disney of Royalties on such sales.
F. Disney further grants Licensee the right to reproduce the
Licensed Material and to use the approved Trademarks, only
within the Territory, during the Principal Term, on
containers, packaging and display material for the Articles,
and in advertising for the Articles.
G. Nothing contained in this Agreement shall be deemed to imply
any restriction on Licensee's freedom and that of Licensee's
customers to sell the Articles at such prices as Licensee
or they shall determine.
H. Licensee recognizes and acknowledges the vital importance to
Disney of the characters and other proprietary material
Disney owns and creates, and the association of the Disney
name with them. In order to prevent the denigration of
Disney's products and the value of their association with
the Disney name, and in order to ensure the dedication of
Licensee's best efforts to preserve and maintain that value,
Licensee agrees that, during the Principal Term and any
extension hereof, Licensee will not manufacture or
distribute any merchandise embodying or bearing any artwork
or other representation which Disney determines, in Disney's
reasonable discretion, is confusingly similar to Disney's
characters or other proprietary material.
I. Licensee's obligations under this Agreement shall be secured
by the letter of credit which is the subject of the Revised
Global Amendment dated December 6, 1996, between Disney and
ERO, Inc. In the event such Revised Global Amendment is not
executed, then Licensee shall maintain the irrevocable letter
of credit it currently has in place to secure payment of
Licensee's obligations hereunder and under any other prior,
concurrent or subsequent agreement between the parties (in
addition to any and all separate letters of credit that may
be in place regarding such agreement(s)). Licensee agrees to
modify such letter of credit as necessary to ensure that it
does not expire earlier than May 31, 2000. In the event of
one or more partial draws on such letter of credit, Licensee
agrees to restore it to the original amount within fifteen
(15) days after the partial draw(s).
3. ADVANCE
A. Licensee agrees to pay the Advance, which shall be on account
of Royalties to accrue during the Principal Term only, and
only with respect to sales in the Territory; provided,
however, that if any part of the Advance is specified
hereinabove as applying to any period less than the Principal
Term, such part shall be on account of Royalties to accrue
during such lesser period only. If said Royalties should be
less than the Advance, no part of the Advance shall be
repayable.
B. Royalties accruing during any sell-off period or extension of
the Principal Term shall not be offset against the Advance
unless otherwise agreed in writing.Royalties accruing during
any extension of the Principal Term or any other term shall
be offset only against an advance paid with respect to such
extended term.
C. In no event shall Royalties accruing by reason of any sales
to Disney or any of Disney's Affiliates or by reason of sales
outside the Territory pursuant to a distribution permission
be offset against the Advance or any subsequent advance.
4. GUARANTEE
A. Licensee shall, with Licensee's statement for each Royalty
Payment Period ending on a date indicated in Subparagraph
I.L. hereof defining "Guarantee," or upon termination if the
Agreement is terminated prior to the end of the Principal
Term, pay Disney the amount, if any, by which cumulative
Royalties paid with respect to sales in the Territory during
any period or periods covered by the Guarantee provision, or
any Guarantee provision contained in any agreement extending
the term hereof, fall short of the amount of the Guarantee
for such period.
B. Advances applicable to Royalties due on sales in the period
to which the Guarantee relates apply towards meeting the
Guarantee.
C. In no event shall Royalties paid with respect to sales to
Disney or to any of Disney's Affiliates, or with respect to
sales outside the Territory pursuant to a distribution
permission, apply towards the meeting of the Guarantee or
any subsequent guarantee.
5. PRE-PRODUCTION APPROVALS
A. As early as possible, and in any case before commercial
production of any Article, Licensee shall submit to Disney
for Disney's review and written approval (to utilize such
materials in preparing a pre-production sample) all concepts,
all preliminary and proposed final artwork, and all three
dimensional models which are to appear on or in any and all
SKUs of the Article. Thereafter, Licensee shall submit to
Disney for Disney's written approval a pre-production sample
of each SKU of each Article. Disney shaH endeavor to respond
to such requests within a reasonable time, but such approvals
should be sought as early as possible in case of delays.
In addition to the foregoing, as early as possible, and in
any case no later than sixty (60) days following written
conceptual approval, Licensee shall supply to Disney for
Disney's use for Impact, Inc. Disney's George of the Jungle
Agreement dated December 13, 1996 Page 10 internal purposes,
a mock-up, prototype or pre production sample of each SKU of
each Article on or in connection with which the Licensed
Material is used. Licensee acknowledges that Disney may not
approve concepts or artwork submitted near the end of the
Principal Term. Any pre-production approval Disney may give
will not constitute or imply a representation or belief by
Disney that such materials comply with any applicable Laws.
B. Approval or disapproval shall lie solely in Disney's
discretion, and any SKU of any Article not so approved in
writing shall be deemed unlicensed and shall not be
manufactured or sold. If any unapproved SKU of any Article
is being sold, Disney may, together with other remedies
available to Disney, including but not limited to, immediate
termination of this Agreement, by written notice require
such SKU of such Article to be immediately withdrawn from
the market. Any modification of any SKU of an Article,
including, but not limited to, change of materials, color,
design or size of the representation of Licensed Material
must be submitted in advance for Disney's written approval
as if it were a new SKU of an Article. Approval of any SKU
of an Article which uses particular artwork does not imply
approval of such artwork for use with a different Article.
The fact that artwork has been taken from a Disney
publication or a previously approved Article does not mean
that its use will necessarily be approved in connection
with an Article licensed hereunder.
C. If Licensee submits for approval artwork from an article or
book manufactured or published by another licensee of Disney's
or of any of Disney's Affiliates, Licensee must advise Disney
in writing of the source of such artwork. If Licensee fails
to do so, any approval which Disney may give for use by
Licensee of such artwork may be withdrawn by giving Licensee
written notice thereof, and Licensee may be required by Disney
not to sell Articles using such artwork.
D. Licensee is responsible for the consistent quality and safety
of the Articles and their compliance with applicable Laws.
Disney will not unreasonably object to any change in the
design of an Article or in the materials used in the
manufacture of the Article or in the process of manufacturing
the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
E. If Disney has supplied Licensee with forms for use in applying
for approval of artwork, models, pre-production and production
samples of Articles, Licensee shall use such forms when
submitting anything for Disney's approval.
F. The Articles are subject to any third party approvals Disney
deems necessary to obtain. Disney will act as the liaison with such
third parties during the approval process.
6. APPROVAL OF PRODUCTION SAMPLES
A. Before shipping an Article to any customer, Licensee agrees
to furnish to Disney, from the first production run of each
supplier of each of the Articles, for Disney's approval of
all aspects of the Article in question, the number of Samples
with packaging which is hereinabove set forth, which shall
conform to the approved artwork, three-dimensional models
and pre-production sample. Approval or disapproval of the
artwork as it appears on any SKU of the Article, as well as
of the quality of the Article, shall lie in Disney's sole
discretion and may, among other things, be based on
unacceptable quality of the artwork or of the Article as
manufactured. Any SKU of any Article not so approved shall
be deemed unlicensed, shall not be sold and, unless otherwise
agreed by Disney in writing, shall be destroyed. Such
destruction shall be attested to in a certificate signed by
one of Licensee's officers. Production samples of Articles
for which Disney has approved a preproduction sample shall
be deemed approved, unless within twenty (20) days of
Disney's receipt of such production sample Disney notifies
Licensee to the contrary. Any approval of a production
sample attributable to Disney win not constitute or imply
a representation or belief by Disney that such production
sample complies with any applicable Laws.
B. Licensee agrees to make available at no charge such additional
samples of any or all SKUs of each Article as Disney may from
time to time reasonably request for the purpose of comparison
with earlier samples, or for Disney's anti-piracy efforts,
or to test for compliance with applicable Laws, and to permit
Disney to inspect Licensee's manufacturing operations and
testing records (and those of Licensee's third-party
manufacturers) for the Articles.
C. Licensee acknowledges that Disney may disapprove any SKU of an
Article or a production run of any SKU of an Article because
the quality is unacceptable to Disney, and accordingly, Disney
recommends that Licensee submit production samples to Disney
for approval before committing to a large original production
run or to purchase a large shipment from a new supplier.
D. No modification of an approved production sample shall be
made without Disney's further prior written approval. All SKUs
of Articles being sold must conform in all respects to the
approved production sample. It is understood that if in
Disney's reasonable judgment the quality of any SKU of an
Article originally approved has deteriorated in later
production runs, or if the SKU has otherwise been altered,
Disney may, in addition to other remedies available to Disney,
by written notice require such SKU of the Article to be
immediately withdrawn from the market.
E. The rights granted hereunder do not permit the sale of
"seconds" or "irregulars". All Articles not meeting the
standard of approved samples shall be destroyed or all Licensed
Material and Trademarks shall be removed or obliterated
therefrom.
F. Licensee is responsible for the consistent quality and safety
of the Articles and their compliance with applicable Laws.
Disney will not unreasonably object to any change in the
design of an Article or in the materials used in the
manufacture of the Article or in the process of manufacturing
the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
G. Disney shall have the right, by written notice to Licensee,
to require modification of any SKU of any Article approved by
Disney under this or any previous agreement between the
parties pertaining to Licensed Material. Likewise, if the
Principal Term of this Agreement is extended by mutual
agreement, Disney shall have the fight, by written notice
to Licensee, to require modification of any SKU of any
Article approved by Disney under this Agreement. It is
understood that there is no obligation upon either party
to extend the Agreement.
H. If Disney notifies Licensee of a required modification under
Subparagraph 6.G. with respect to any SKU of a particular
Article, such notification shall advise Licensee of the
nature of the changes required, and Licensee shall not a
ccept any order for any such Article until the subject SKU
has been resubmitted to Disney with such changes and Licensee
has received Disney's written approval of the Article as
modified. However, Licensee may continue to distribute
Licensee's inventory of the previously approved Articles
until such inventory is exhausted (unless such Articles are
dangerously defective, as determined by Disney). Upon
Disney's request, Licensee agrees to give Disney written
notice of the first ship date for each Article.
I. If Disney has inadvertently approved a concept, pre-production
sample, or production sample of a product which is not included
in the Articles under this agreement, or if Disney has
inadvertently approved an Article using artwork and/or
trademarks not included in the Agreement, such approval may be
revoked at any time without any obligation whatsoever on
Disney's part to Licensee. Any such product as to which
Disney's approval is revoked shall be deemed unauthorized and
shall not be distributed or sold by or for Licensee.
7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND ADVERTISING
A. All containers, packaging, display material, promotional
material, catalogs, and all advertising, including but not
limited to, television advertising and press releases, for
Articles must be submitted to Disney and receive Disney's
written approval before use. To avoid unnecessary expense
if changes are required, Disney's approval thereof should
be procured when such is still in rough or storyboard format.
Disney shall endeavor to respond to requests for approval
within a reasonable time. Approval or disapproval shall lie
in Disney's sole discretion, and the use of unapproved
containers, packaging, display material, promotional material,
catalogs or advertising is prohibited. Disney's approval of
any containers, packaging, display material, promotional
material, catalogs or advertising under this Agreement will
not constitute or imply a representation or belief by Disney
that such materials comply with any applicable Laws. Whenever
Licensee prepares catalog sheets or other printed matter
containing illustrations of Articles, Licensee will furnish
to Disney five (5) copies thereof when they are published.
B. If Disney has supplied Licensee with forms for use in applying
for approval of materials referenced in this Paragraph 7,
Licensee shall use such forms when submitting anything for
Disney's approval.
C. Disney has designed character artwork and/or a brand name
logo(s) to be used by all licensees in connection with the
packaging of all merchandise using the Licensed Material, and,
if applicable, on hang tags and garment labels for such
merchandise. Disney will supply Licensee with reproduction
artwork thereof, and Licensee agrees to use such artwork
and/or logo(s) on the packaging of the Articles, and, if
applicable, on hang tags and garment labels, which Licensee
will have printed and attached to each Article at Licensee's
cost. Disney recommends that Licensee source the hang tags
and garment labels from Disney's authorized manufacturer
(if any) of pre approved hang tags and garment labels, the
name of which will be provided to Licensee upon request.
However, Licensee may use another manufacturer for the
required hang tags Impact, Inc. Disney's George of the Jungle
Agreement dated December 13, 1996 Page 14 and garment labels
if the hang tags and garment labels manufactured are of
equivalent quality and are approved by Disney in accordance
with Disney's usual approval process.
8. ARTWORK
Licensee shall pay Disney, within thirty (30) days of receiving an
invoice therefor, for Style Guides and for artwork done at Licensee's
request by Disney or third parties under contract to Disney in the
development and creation of Articles, display, packaging or promotional
material (including any artwork which in Disney's opinion is necessary
to modify artwork initially prepared by Licensee and submitted to
Disney for approval, subject to Licensee's prior written approval) at
Disney's then prevailing commercial art rates. Estimates of artwork
charges are available upon request. While Licensee is not obligated to
utilize the services of Disney's Art Department, Licensee is encouraged
to do so in order to minimize delays which may occur if outside artists
do renditions of Licensed Material which Disney cannot approve and to
maximize the attractiveness of the Articles. Artwork will be returned
to Licensee by overnight courier, at Licensee's cost (unless other
arrangements are made).
9. PRINT, RADIO OR TV ADVERTISING
Licensee will obtain all approvals necessary in connection with
print, radio or television advertising, if any, which Disney may
authorize. Licensee represents and warrants that all advertising and
promotional materials shall comply with all applicable Laws.
Disney's approval of copy or storyboards for such advertising will
not constitute or imply a representation or belief by Disney that
such copy or storyboards comply with any applicable Laws. This
Agreement does not grant Licensee any rights to use the Licensed
Material in animation. Licensee may not use any animation or live
action footage from the motion picture from which the Licensed
Material comes without Disney's prior written approval in each
instance. In the event Disney approves the use of film clips of
the motion picture from which the Licensed Material comes, for use
in a television commercial, Licensee shall be responsible for any
re-use fees which may be applicable, including SAG payments for
talent. No reproduction of the film clip footage shall be made
except for inclusion, as approved by Disney, in such commercial
and there shall be no modifications of the film clip footage. All
film clip footage shall be returned to Disney immediately after its
inclusion in such commercial. Disney shall have the right to prohibit
Licensee from advertising the Articles by means of television and/or
billboards. Such fight shall be exercised within Disney's absolute
discretion, including without limitation for reasons of overexposure
of the Licensed Material.
10. LICENSEE NAME AND ADDRESS ON ARTICLES
A. Licensee's name, trade name (or Licensee's trademark which
Licensee has advised Disney in writing that Licensee is
using) and Licensee's address (at least city and state) will
appear on permanently affixed labeling on each Article or,
if the Article is sold to the public in packaging or a
container, printed on such packaging or a container so that
the public can identify the supplier of the Article. On
soft goods "permanently affixed" shall mean sewn on. RN
numbers do not constitute a sufficient label under this
paragraph.
B. Licensee shall advise Disney in writing of all trade names
or trademarks Licensee wishes to use on Articles being sold
under this license. Licensee may sell the Articles only
under mutually agreed upon trade names or trademarks.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE LAWS AND STANDARDS
A. Licensee covenants that each Article and component thereof
distributed hereunder shall be of good quality and free of
defects in design, materials and workmanship, and shall
comply with all applicable Laws, and such specifications,
if any, as may have been specified in connection with this
Agreement (e.g., Disney's Apparel Performance Specification
Manual, if the Articles are items of apparel), and shall
conform to the Sample thereof approved by Disney.
B. Without limiting the foregoing, Licensee covenants on behalf
of Licensee's own company, and on behalf of all of Licensee's
third-party manufacturers and suppliers (collectively,
"Manufacturers"), as follows:
(1) Licensee and the Manufacturers agree not to use child
labor in the manufacturing, packaging or distribution
of Disney merchandise, The term "child" refers to a
person younger than the age for completing compulsory
education, but in no case shall any child younger than
fourteen (14) years of age be employed in the
manufacturing, packaging or distribution of Disney
merchandise.
(2) Licensee and the Manufacturers agree to provide
employees with a safe and healthy workplace in
compliance with all applicable Laws. Licensee and
the Manufacturers agree to provide Disney with all
information Disney may request about manufacturing,
packaging and distribution facilities for the Articles.
(3) Licensee and the Manufacturers agree only to employ
persons whose presence is voluntary. Licensee and
the Manufacturers agree not to use prison labor, or
to use corporal punishment or other forms of mental
or physical coercion as a form of discipline of
employees.
(4) Licensee and the Manufacturers agree to comply with
all applicable wage and hour Laws, including minimum
wage, overtime, and maximum hours. Licensee and the
Manufacturers agree to utilize fair employment
practices as defined by applicable Laws.
(5) Licensee and the Manufacturers agree not to
discriminate in hiring and employment practices on
grounds of race, religion, national origin, political
affiliation, sexual preference, or gender.
(6) Licensee and the Manufacturers agree to comply with
all applicable environmental Laws.
(7) Licensee and the Manufacturers agree to comply with
all applicable Laws pertaining to the manufacture,
pricing, sale and distribution of the Articles.
(8) Licensee and the Manufacturers agree that Disney may
engage in activities such as unannounced on-site
inspections of manufacturing, packaging and
distribution facilities in order to monitor
compliance with applicable Laws.
C. Both before and after Licensee puts Articles on the market,
Licensee shall follow reasonable and proper procedures for
testing that Articles comply with a applicable Laws, and
shall permit Disney's designees to inspect testing,
manufacturing and quality control records and procedures
and to test the Articles for compliance. Licensee agrees
to promptly reimburse Disney for the reasonable costs of
such testing. Licensee shall also give due consideration
to any recommendations by Disney that Articles exceed the
requirements of applicable Laws. Articles not manufactured,
packaged or distributed in accordance with applicable Laws
shall be deemed unapproved, even if previously approved by
Disney, and shall not be shipped unless and until they have
been brought into full compliance therewith.
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
Licensee acknowledges that the copyrights and all other proprietary
rights in and to Licensed Material are exclusively owned by and
reserved to Disney or its licensor. Licensee shall neither acquire
nor assert copyright ownership or any other proprietary rights in
Licensed Material or in any derivation, adaptation, variation or
name thereof Without limiting the foregoing, Licensee hereby assigns
to Disney an Licensee's worldwide right, title and interest in the
Licensed Material and in any material objects consisting of or
incorporating drawings, paintings, animation cels, or sculptures
of Licensed Material, or other derivations, adaptations, computations,
collective works, variations or names of Licensed Material,
heretofore or hereafter created by or for Licensee or any of
Licensee's Affiliates. All such new materials shall be included
in the definition of "Licensed Material" under this Agreement. If
any third party makes or has made any contribution to the creation
of any new materials which are included in the definition of Licensed
Material under this Paragraph 12, Licensee agrees to obtain from
such party a full assignment of rights so that the foregoing
assignment by Licensee shall vest full rights to such new materials
in Disney. Licensee further covenants that any such new materials
created by Licensee or by any third party Licensee has engaged are
original to Licensee or -such third party and do not violate the
rights of any other person or entity; this covenant regarding
originality shall not extend to any materials Disney supplies to
Licensee, but does apply to all materials Licensee or Licensee's
third party contractors may add thereto. The foregoing assignment
to Disney of material objects shall not include that portion of
Licensee's displays, catalogs or promotional material not containing
Licensed Material, or the physical items constituting the Articles,
unless such items are in the shape of the Licensed Material.
13. COPYRIGHT NOTICE
As a condition to the grant of rights hereunder, each Article and
any other matter containing Licensed Material shall bear a properly
located permanently affixed copyright notice in Disney's name (e.g.,
"(C) Disney"), and in the name of Jay Ward Productions, Inc. (e.g.,
"Animated characters (C)Jay Ward Productions, Inc."), or such other
notice as Disney specifies to Licensee in writing. Licensee will
comply with such instructions as to form, location and content of
the notice as Disney may give from time to time. Licensee will not,
without Disney's prior written consent, affix to any Article or any
other matter containing Licensed Material a copyright notice in any
other name. If through inadvertence or otherwise a copyright notice
on any Article or other such matter should appear in Licensee's name
or the name of a third party, Licensee hereby agrees to assign to
Disney the copyright represented by any such copyright notice in
Licensee's name and, upon request, cause the execution and delivery
to Disney of whatever documents are necessary to convey to Disney
that copyright represented by any such copyright notice. If by
inadvertence a proper copyright notice is omitted from any Article
or other matter containing Licensed Material, Licensee agrees at
Licensee's expense to use all reasonable efforts to correct the
omission on a such Articles or other matter in process of manufacture
or in distribution. Licensee agrees to advise Disney promptly and in
writing of the steps being taken to correct any such omission and to
make the corrections on existing Articles which can be located.
14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH LICENSED MATERIAL
To preserve Disney's identification with Disney's characters and to
avoid confusion of the public, Licensee agrees not to associate other
characters or licensed properties with the Licensed Material or the
Trademarks either on the Articles or in their packaging, or, without
Disney's written permission, on advertising, promotional or display
materials. If Licensee wishes to use a character which constitutes
Licensee's trademark on the Articles or their packaging, or otherwise
in connection with the Articles, Licensee agrees to obtain Disney's
prior written permission.
15. ACTIVE MARKETING OF ARTICLES
Licensee agrees to manufacture (or have manufactured for Licensee)
and offer for sale all the Articles and to exercise the rights
granted herein. Licensee agrees that by the Marketing Date
applicable to a particular Article or, if such a date is not
specified in Subparagraph 1.0., by six (6) months from the
commencement of the Principal Term or the date of any applicable
amendment, shipments to customers of such Article will have taken
place in sufficient time that such Article shall be available for
purchase in commercial quantities by the public at the retail
outlets authorized pursuant to Subparagraph 2.A. In any case in
which such sales have not taken place or when the Article is not
then and thereafter available for purchase in commercial quantities
by the public, Disney may either invoke Disney's remedies under
Paragraph 28, or withdraw such Article from the list of Articles
licensed in this Agreement without obligation to Licensee other
than to give Licensee written notice thereof.
16. PROMOTION COMMITMENT
Licensee agrees to carry out the Promotion Commitment, if any, as
defined in Subparagraph 1.N.
17. TRADEMARK RIGHTS AND OBLIGATIONS
A. All uses of the Trademarks by Licensee hereunder shall inure
to Disney's benefit. Licensee acknowledges that Disney or
its licensor is the exclusive owner of all the Trademarks,
and of any trademark incorporating all or any part of a
Trademark or any Licensed Material, and the trademark rights
created by such uses. Without limiting the foregoing, Licensee
hereby assigns to Disney all the Trademarks, and any trademark
incorporating all or any part of a Trademark or any Licensed
Material, and the trademark rights created by such uses,
together with the goodwill attaching to that part of the
business in connection with which such Trademarks or
trademarks are used. Licensee agrees to execute and deliver
to Disney such documents as Disney requires to register
Licensee as a Registered User or Permitted User of the
Trademarks or such trademarks and to follow Disney's
instructions for proper use thereof in order that protection
and/or registrations for the Trademarks and such trademarks
may be obtained or maintained.
B. Licensee agrees not to use any Licensed Material or Trademarks,
or any trademark incorporating all or any part of a Trademark
or of any Licensed Material, on any business sign, business
cards, stationery or forms (except as licensed herein), or to
use any Licensed Material or Trademark as the name of
Licensee's business or any division thereof, unless otherwise
agreed by Disney in writing.
C. Nothing contained herein shall prohibit Licensee from using
Licensee's own trademarks on the Articles or Licensee's
copyright notice on the Articles when the Articles contain
independent material which is Licensee's property. Nothing
contained herein is intended to give Disney any rights to,
and Disney shall not use, any trademark, copyright or patent
used by Licensee in connection with the Articles which is not
derived or adapted from Licensed Material, Trademarks, or
other materials owned by Disney or its licensor.
18. REGISTRATIONS
Except with Disney's written consent, neither Licensee nor any of
Licensee's Affiliates will register or attempt in any country to
register copyrights in, or to register as a trademark, service mark,
design patent or industrial design, or business designation, any of
the Licensed Material, Trademarks or derivations or adaptations
thereof, or any word, symbol or design which is so similar thereto
as to suggest association with or sponsorship by Disney or any of
Disney's Affiliates. In the event of breach of the foregoing, Licensee
agrees, at Licensee's expense and at Disney's request, immediately
to terminate the unauthorized registration activity and promptly to
execute and deliver, or cause to be delivered, to Disney such
assignments and other documents as Disney may require to transfer to
Disney all rights to the registrations, patents or applications
involved.
19. UNLICENSED USE OF LICENSED MATERIALS
A. Licensee agrees that Licensee will not use the Licensed
Material, or the Trademarks, or any other material the
copyright to which is owned or licensed by Disney in any way
other than as herein authorized (or as is authorized in any
other written contract in effect between the parties). In
addition to any other remedy Disney may have, Licensee
agrees that all revenues from any use thereof on products
other than the Articles (unless authorized by Disney in
writing), and all revenues from the use of any other
copyrighted material of Disney's or its licensor's without
written authorization, shall be immediately payable to Disney.
B. Licensee agrees to give Disney prompt written notice of any
unlicensed use by third parties of Licensed Material or
Trademarks, and that Licensee will not, without Disney's
written consent, bring or cause to be brought any criminal
prosecution, lawsuit or administrative action for infringement,
interference with or violation of any fights to Licensed
Material or Trademarks. Because of the need for and the high
costs of an effective anti piracy enforcement program, Licensee
agrees to cooperate with Disney, and, if necessary, to be
named by Disney as a sole complainant or co-complainant in
any action against an infringer of the Licensed Material or
Trademarks and, notwithstanding any right of Licensee to
recover same, legal or otherwise, Licensee agrees to pay to
Disney, and hereby waives all claims to, all damages or other
monetary relief recovered in such action by reason of a
judgment or settlement whether or not such damages or other
monetary relief, or any part thereof, represent or are
intended to represent injury sustained by Licensee as a
licensee hereunder; in any such action against an infringer,
Disney agrees to reimburse Licensee for reasonable expenses
incurred at Disney's request, including reasonable attorney's
fees if Disney has requested Licensee to retain separate
counsel.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
A. Licensee agrees to furnish to Disney by the 30th day after
each Royalty Payment Period full and accurate statements on
statement forms Disney designates for Licensee's use, showing
all information requested by such forms, including but not
limited to, the quantities, Net Invoiced Billings and
applicable Royalty rate(s) of Articles invoiced during the
preceding Royalty Payment Period, and the quantities and
invoice value of Articles returned for credit or refund in
such period. At the same time Licensee %kill pay Disney all
Royalties due on billings shown by such statements. To the
extent that any Royalties are not paid, Licensee authorizes
Disney to offset Royalties due against any sums which Disney
or any of Disney's Affiliates may owe to Licensee or any of
Licensee's Affiliates. No deduction or withholding from
Royalties payable to Disney shall be made by reason of any
tax. Any applicable tax on the manufacture, distribution and
sale of the Articles shall be borne by Licensee.
B. The statement forms Disney designates for Licensee's use may
be changed from time to time, and Licensee agrees to use the
most current form Disney provides to Licensee. Licensee
agrees to fully comply with all instructions supplied by
Disney for completing such forms.
C. In addition to the other information requested by the
statement forms, Licensee's statement shall with respect
to all Articles report separately:
(1) F.O.B. In Sales;
(2) F.O.B. Out Sales,
(3) if licensed hereunder, sales of Articles using
Licensed Material consisting of animated characters
(separately reported by SKU and character);
(4) if licensed hereunder, sales of Articles using
Licensed Material consisting of live action characters
from the motion picture referenced in Subparagraph 1.B.
(separately reported by SKU and character);
(5) sales of Articles outside the Territory pursuant to a
distribution permission (indicating the country
involved);
(6) Licensee's sales of Articles to any of Disney's
licensees or Disney's Affiliates' licensees who are
licensed to sell the Articles, and who are reselling
such Articles and paying Disney royalties on such
resales;
(7) sales of Articles to Disney or any of Disney's
Affiliates;
(8) sales of Articles to Licensee's or Disney's employees;
(9) sales of Articles under any brand or program
identified in Subparagraph 1.B. hereinabove,
(10) sales of Articles to or for distribution through any
mail order catalogs approved under this Agreement.
D. Sales of items licensed under contracts with Disney other
than this Agreement shall not be reported on the same
statement as sales of Articles under this Agreement.
E. Licensee's statements and payments, including all Royalties,
shall be delivered to Wachovia South Metro Center, DEI
Account,P.O. Box 101947, Atlanta, Georgia 30392. A copy of
each statement must be sent to Disney at 500 South Buena Vista
Street, Burbank, California 91521-6771, to the attention of the
Contract Administrator, Consumer Products Division. If Licensee
wishes to send statements and payments by overnight courier,
please use the following address: Wachovia South Metro Center,
DEI Account, 3585 Atlanta Avenue, Hapeville, GA 30354,
Attention Peggy Morris, Reference Lock box 101947. However,
Advances should be mailed directly to Disney at 500 South Buena
Vista Street, Burbank, California 91521-6771, to the attention
of the Contract Administrator or Legal Department, Consumer
Products Division.
21. CONFIDENTIALITY
Licensee represents and warrants that Licensee did not disclose to
any third party the prospect of a license from Disney, and that
Licensee did not trade on the prospect of a license from Disney,
prior to full execution of this Agreement. Licensee agrees to keep
the terms and conditions of this Agreement confidential, and Licensee
shall not disclose such terms and conditions to any third party
without obtaining Disney's prior written consent; provided, however,
that this Agreement may be disclosed on a need-to-know basis to
Licensee's attorneys and accountants who agree to be bound by this
confidentiality provision.
22. INTEREST
Royalties or any other payments due to Disney hereunder which are
received after the due date shall bear interest at the rate of 18%
per annum from the due date (or the maximum permissible by law if
less than 18%).
23. AUDITS AND MAINTAINING RECORDS
A. Licensee agrees to keep accurate records of all transactions
relating to this Agreement and any prior agreement with
Disney regarding the Licensed Material, including, without
limitation, shipments to Licensee of Articles and components
thereof, inventory records, records of sales and shipments
by Licensee, and records of returns, and to preserve such
records for the lesser of seven (7) years or two (2) years
after the expiration or termination of this Agreement.
B. Disney, or Disney's representatives, shall have the right
from time to time, during Licensee's normal business hours,
but only for the purpose of confirming Licensee's performance
hereunder, to examine and make extracts from all such records,
including the general ledger, invoices and any other records
which Disney reasonably deems appropriate to verify the
accuracy of Licensee's statements or Licensee's performance
hereunder, including records of Licensee's Affiliates if they
are involved in activities which are the subject of this
Agreement. In particular, Licensee's invoices shall identify
the Articles separately from goods which are not licensed
hereunder. Licensee acknowledges that Disney may furnish
Licensee with an audit questionnaire, and Licensee agrees to
fully and accurately complete such questionnaire, and return
it to Disney within the designated time. Disney's use of an
audit questionnaire shall not limit Disney's ability to
conduct any on-site audit(s) as provided above.
C. If in an audit of Licensee's records it is determined that
there is a short fall of five percent (5%) or more in
Royalties reported for any Royalty Payment Period, Licensee
shall upon request from Disney reimburse Disney for the full
out-of-pocket costs of the audit, including the costs of
employee auditors calculated at $60 per hour per person for
travel time during normal working hours and actual working
time.
D. If Licensee has failed to keep adequate records for one or
more Royalty Payment Periods, Disney will assume that the
Royalties owed to Disney for such Royalty Payment Period(s)
are equal to a reasonable amount, determined in Disney's
absolute discretion, which may be up to but will not exceed
the highest Royalties owed to Disney in a Royalty Payment P
eriod for which Licensee has kept adequate records; if
Licensee has failed to keep adequate records for any Royalty
Payment Period, Disney will assume a reasonable amount of
Royalties which Licensee will owe to Disney, based on the
records Licensee has kept and other reasonable assumptions
Disney deems appropriate.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
A. If Licensee at any time desires to have Articles or components
thereof containing Licensed Material manufactured by a third
party, whether the third party is located within or outside
the United States, Licensee must, as a condition to the
continuation of this Agreement, notify Disney of the name and
address of such manufacturer and the Articles or components
involved and obtain Disney's prior written permission to do so.
If Disney is prepared to grant permission, Disney will do so
if Licensee and each of Licensee's manufacturers and any
submanufacturers sign a Consent/Manufacturer's Agreement in
a form which Disney will furnish to Licensee and Disney
receives all such agreements properly signed.
(A SAMPLE OF SAID AGREEMENT FORM IS AVAILABLE ON REQUEST)
B. It is not Disney's policy to reveal the names of Licensee's
suppliers to third parties or to any Disney division involved
with buying products, except as may be necessary to enforce
Disney's contract fights or protect Disney's trademarks and
copyrights.
C. If any such manufacturer utilizes Licensed Material or
Trademarks for any unauthorized purpose, Licensee shall
cooperate fully in bringing such utilization to an immediate
halt. If, by reason of Licensee's not having supplied the
above mentioned agreements to Disney or not having given
Disney the name of any supplier, Disney makes any
representation or takes any action and is thereby subjected
to any penalty or expense, Licensee will fully compensate
Disney for any cost or loss Disney sustains (in addition to
any other legal or equitable remedies available to Disney.
25. INDEMNITY
A. Licensee shall indemnify Disney during and after the term
hereof against all claims, demands, suits, judgments, losses,
liabilities (including settlements entered into in good faith
with Licensee's consent, not to be unreasonably withheld)
and expenses of any nature (including reasonable attorneys'
fees) arising out of Licensee's activities under this
Agreement, including but not limited to, any actual or
alleged: (1) negligent acts or omissions on Licensee's part,
(2) defect (whether obvious or hidden and whether or not
present in any Sample approved by Disney) in an Article,
(3) personal injury, (4) infringement of any rights of any
other person by the manufacture, sale, possession or use of
Articles, (5) breach on Licensee's part of any covenant
contained in this Agreement, or (6) failure of the Articles
or by Licensee to comply with applicable Laws. The parties
indemnified hereunder shall include Disney Enterprises, Inc.,
its licensor, and its and their parent, Affiliates and
successors, and its and their officers, directors, employees
and agents. The indemnity shall not apply to any claim or
liability relating to any infringement of the copyright of
a third party caused by Licensee's utilization of the Licensed
Material and the Trademarks in accordance with the provisions
hereof, unless such claim or liability arises out of Licensee's
failure to obtain the full assignment of rights referenced in
Paragraph 12.
B. Disney shall indemnify Licensee during and after the term
hereof against all claims, demands, suits, judgments, losses,
liabilities (including settlements entered into in good faith
with Disney's consent, not to be unreasonably withheld) and
expenses of any nature (including reasonable attorneys' fees)
arising out of any claim that Licensee's use of any
representation of the Licensed Material or the Trademarks
approved in accordance with the provisions of this Agreement
infringes the copyright of any third party or infringes any
right granted by Disney to such third party, except for claims
arising out of Licensee's failure to obtain the full assignment
of rights referenced in Paragraph 12. ~Licensee shall not, in
any case, be entitled to recover for lost profits.
C. Additionally, if by reason of any claims referred to in
Subparagraph 25.B., Licensee is precluded from selling any
stock of Articles or utilizing any materials in Licensee's
possession or which come into Licensee's possession by reason
of any required recall, Disney shall be obligated to purchase
such Articles and materials from Licensee at their out-of-
pocket cost to Licensee, excluding overheads, but Disney
shall have no other responsibility or liability with respect
to such Articles or materials.
D. Disney gives no warranty or indemnity with respect to any
liability or expense arising from any claim that use of the
Licensed Material or the Trademarks on or in connection with
the Articles hereunder or any packaging, advertising or
promotional material infringes on any trademark right of any
third party or otherwise constitutes unfair competition by
reason of any prior rights acquired by such third party,
other than rights acquired from Disney. It is expressly
agreed that it is Licensee's responsibility to carry out such
investigations as Licensee may deem appropriate to establish
that Articles, packaging, and promotional and advertising
material which are manufactured or created hereunder,
including any use made of the Licensed Material and the
Trademarks therewith, do not infringe such right of any
third party, and Disney shall not be liable to Licensee if
such infringement occurs.
E. Licensee and Disney agree to give each other prompt written
notice of any claim or suit which may arise under the
indemnity provisions set forth above. Without limiting the
foregoing, Licensee agrees to give Disney written notice of
any product liability claim made or suit filed with respect
to any Article, any investigations or directives regarding
the Articles issued by the Consumer Product Safety Commission
("CPSC") or other federal, state or local consumer safety a
gency, and any notices sent by Licensee to, or received by
Licensee from, the CPSC or other consumer safety agency
regarding the Articles within seven (7) days of Licensee's
receipt or promulgation of the claim, suit, investigation,
directive, or notice.
26. INSURANCE
Licensee shall maintain in full force and effect at all times while
this Agreement is in effect and for three years thereafter commercial
general liability insurance on a per occurrence form, including broad
form coverage for contractual liability, property damage, products
liability and personal injury liability (including bodily injury and
death), waiving subrogation, with minimum limits of no less than two
million dollars (US $2,000,000.00) per occurrence, and naming as
additional insureds those indemnified in Paragraph 25 hereof.
Licensee also agrees to maintain in full force and effect at all
times while this Agreement is in effect such Worker's Compensation
Insurance as is required by applicable law and Employer's Liability
Insurance with minimum limits of one million dollars (US $1,000,000.00)
per occurrence. All insurance shall be primary and not contributory.
Licensee shall deliver to Disney a certificate or certificates of
insurance evidencing satisfactory coverage and indicating that Disney
shall receive thirty (30) days unrestricted prior written notice of
cancellation, non-renewal or of any material change in coverage.
Licensee's insurance shall be carried by an insurer with a BEST Guide
rating of B + VII or better. Compliance herewith in no way limits
Licensee's indemnity obligations, except to the extent that Licensee's
insurance company actually pays Disney amounts which Licensee would
otherwise pay Disney.
27. WITHDRAWAL OF LICENSED MATERIAL
Licensee agrees that Disney may, without obligation to Licensee other
than to give Licensee written notice thereof, withdraw from the scope
of this Agreement any Licensed Material which by the Marketing Date
or, if such a date is not specified in Subparagraph 1.O., by six (6)
months from the commencement of the Principal Term or the date of
any applicable amendment, is not being used on or in connection with
the Articles. Disney may also withdraw any Licensed Material or
Articles the use or sale of which under this Agreement would infringe
or reasonably be claimed to infringe the rights of a third party,
other than rights granted by Disney, in which case Disney's
obligations to Licensee shall be limited to the purchase at cost of
Articles and other materials utilizing such withdrawn Licensed
Material which cannot be sold or used. In the case of any withdrawal
under the preceding sentence, the Advances and Guarantees shall be
adjusted to correspond to the time remaining in the Principal Term,
or the number of Articles remaining under the Agreement, at the date
of withdrawal.
28. TERMINATION
Without prejudice to any other right or remedy available to Disney:
A. Disney shall have the right at any time to terminate this
Agreement by giving Licensee written notice thereof, if
Licensee fails to manufacture, sell and distribute the
Articles, or to furnish statements and pay Royalties as
herein provided, or if Licensee otherwise breaches the terms
of this Agreement, and if any such failure is not corrected
within fifteen (15) days after Disney sends Licensee written
notice thereof.
B. Disney shall have the right at any time to terminate this
Agreement immediately by giving Licensee written notice
thereof:
(1) if Licensee delivers to any customer without Disney's written
authorization merchandise containing representations of
Licensed Material or other material the copyright or other
proprietary rights to which are owned or licensed by Disney
other than Articles listed herein and approved in accordance
with the provisions hereof,
(2) if Licensee delivers Articles outside the Territory or
knowingly sells Articles to a third party for delivery outside
the Territory, unless pursuant to a written distribution
permission or separate written license agreement with Disney
or any of Disney's Affiliates;
(3) if a breach occurs which is of the same nature, and which
violates the same provision of this Agreement, as a breach of
which Disney has previously given Licensee written notice;
(4) if Licensee breaches any material term of any other license
agreement between the parties, and Disney terminates such
agreement for cause;
(5) if Licensee shall make any assignment for the benefit of
creditors, or file a petition in bankruptcy, or is adjudged
bankrupt, or becomes insolvent, or is placed in the hands of
a receiver, or if the equivalent of any such proceedings or
acts occurs, though known by some other name or term;
(6) if Licensee is not permitted or is unable to operate
Licensee's business in the usual manner, or is not permitted
or is unable to provide Disney with assurance satisfactory to
Disney that Licensee will so operate Licensee's business, as
debtor in possession or its equivalent, or is not permitted,
or is unable to otherwise meet Licensee's obligations under
this Agreement or to provide Disney with assurance
satisfactory to Disney that Licensee will meet such
obligations; and/or
(7) if Licensee breaches any covenant set forth in Paragraph 11
of this Agreement.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
A. Upon the expiration or termination of this Agreement, all
rights herein granted to Licensee shall revert to Disney,
any unpaid portion of the Guarantee shall be immediately due
and payable, and Disney shall be entitled to retain all
Royalties and other things of value paid or delivered to
Disney. Licensee agrees that the Articles shall be
manufactured during the Principal Term in quantities
consistent with anticipated demand therefor so as not to
result in an excessive inventory build-up immediately prior
to the end of the Principal Term. Licensee agrees that from
the expiration or termination of this Agreement Licensee
shall neither manufacture nor have manufactured for Licensee
any Articles, that Licensee will deliver to Disney any and
all artwork (including Style Guides, animation cels and
drawings) which may have been used or created by Licensee in
connection with this Agreement, that Licensee ,will at
Disney's option either sell to Disney at cost or destroy or
efface any molds, plates and other items used to reproduce
Licensed Material or Trademarks, and that, except as
hereinafter provided, Licensee will cease selling Articles.
Any unauthorized distribution of Articles after the
expiration or termination of this Agreement shall constitute
copyright infringement.
B. If Licensee has any unsold Articles in inventory on the
expiration or termination date, Licensee shall provide
Disney with a full statement of the kinds and numbers of
such unsold Articles. If such statement has been provided to
Disney and if Licensee has fully complied with the terms of
this Agreement, including the payment of all Royalties due
and the Guarantee, upon notice from Disney Licensee shall
have the right for a limited period of three (3) calendar
months from such expiration or earlier termination date to
sell off and deliver such Articles as authorized under
Subparagraph 2.A. Licensee shall furnish Disney statements
covering such sales and pay Disney Royalties in respect of
such sales. Such Royalties shall not be applied against the
Advance or towards meeting the Guarantee. If the sell-off
period is extended by Disney to a date which is not a quarter
end month, Licensee's statement and Royalties for such sell-
off period shall be due thirty (30) days after the last day
of the sell-off period.
C. In recognition of Disney's interest in maintaining a stable
and viable market for the Articles during and after the
Principal Term and any sell-off period, Licensee agrees
to refrain from "dumping" the Articles in the market during
any sell-off period granted to Licensee. "Dumping" shall mean
the distribution of product at volume levels significantly
above Licensee's prior sales practices with respect to the
Articles, and at price levels so far below Licensee's prior
sales practices with respect to the Articles as to disparage
the Articles; provided, however, that nothing contained
herein shall be deemed to restrict Licensee's ability to set
product prices at Licensee's discretion.
D. Except as otherwise agreed by Disney in writing, any inventory
of Articles in Licensee's possession or control after the
expiration or termination hereof and of any sell-off period
granted hereunder shall be destroyed, or all Licensed Material
and Trademarks removed or obliterated therefrom.
E. If Disney supplies Licensee with forms regarding compliance
with this Paragraph 29, Licensee agrees to complete, execute
and return such forms to Disney expeditiously.
F. Notwithstanding any provision to the contrary, in the case of
termination under Paragraph 28.B. (5) or (6), in order to
protect the value of the Articles and to avoid any
disparagement of the Articles which could occur as a result
of the circumstances of termination, Disney shall have the
option, in Disney's absolute discretion, to purchase any
or all unsold Articles in Licensee's inventory on the
termination date at 20% over Licensee's cost of goods for
such Articles (not including overhead).
30. WAIVERS
A waiver by either party at any time of a breach of any provision of
this Agreement shall not apply to any breach of any other provision
of this Agreement, or imply that a breach of the same provision at
any other time has been or will be waived, or that this Agreement has
been in any way amended, nor shall any failure by either party to
object to conduct of the other be deemed to waive such party's right
to claim that a repetition of such conduct is a breach hereof.
31. PURCHASE OF ARTICLES BY DISNEY
If Disney wishes to purchase Articles, Licensee agrees to sell such
Articles to Disney or any of Disney's Affiliates at as low a price
as Licensee charges for similar quantities sold to Licensee's regular
customers and to pay Disney Royalties on any such sales.
32. NON-ASSIGNABILITY
A. Licensee shall not voluntarily or by operation of law assign,
sub-license, transfer, encumber or otherwise dispose of all
or any part of Licensee's interest in this Agreement without
Disney's prior written consent, to be granted or withheld in
Disney's absolute discretion. Any attempted assignment,
sub-license, transfer, encumbrance or other disposal without
such consent shall be void and shall constitute a material
default and breach of this Agreement. "Transfer" within the
meaning of this Paragraph 32 shall include any merger or
consolidation involving Licensee or any directly or
indirectly controlling Affiliate(s) of Licensee ("Controlling
Affiliate"), any sale or transfer of all or substantially all
of Licensee's or its Controlling Affiliate(s)' assets; any
transfer of Licensee's rights hereunder to a division,
business segment or other entity different from the one
specifically referenced on page I hereof (or any sale or
attempted sale of Articles under a trademark or trade name of
such division, business segment or other entity); any public
offering, or series of public offerings, whereby a cumulative
total of thirty-three and one-third percent (33-1/3%) or more
of the voting stock of Licensee or its Controlling Affiliate(s)
is offered for purchase, and any acquisition or series of
acquisitions, by any person or entity, or group of related
persons or entities, of a cumulative total of thirty-three
and one-third percent (33-1/3%) or more of the voting stock
of Licensee or its Controlling Affiliate(s), or the right to
vote such percentage (or, if Licensee is a partnership,
resulting in the transfer of thirty-three and one-third
percent (33-1/3%) or more of the profit and loss participation
in Licensee, or the occurrence of any of the foregoing with
respect to any general partner of Licensee).
B. Licensee agrees to provide Disney with at least two (2) weeks
prior written notice of any desired assignment of this
Agreement or other transfer as defined in Subparagraph 32.A. At
the time Licensee gives such notice, Licensee shall provide
Disney with the information and documentation necessary to
evaluate the contemplated transaction. Disney's consent (if
given) to any assignment of this Agreement or other transfer as
defined in Subparagraph 32.A. shall be subject to such terms
and conditions as Disney deems appropriate, including but not
limited to, payment of a transfer fee. The amount of the
transfer fee shall be determined by Disney based upon the
circumstances of the particular assignment or transfer, taking
into account such factors as the estimated value of the
license being assigned or otherwise transferred, the risk of
business interruption or loss of quality, production or
control Disney may suffer as a result of the assignment or
other transfer; the identity, reputation, creditworthiness,
financial condition and business capabilities of the proposed
assignee or transferee; and Disney's internal costs related
to the assignment or other transfer, provided, however, in no
event shall the transfer fee be less than $100,000,00. The
foregoing transfer fee shall not apply if this Agreement is
assigned to one of Licensee's Affiliates as part of a
corporate reorganization exclusively among some or all of the
entities existing in Licensee's corporate structure when this
Agreement is signed; provided, however, that Licensee must
give Disney written notice of such assignment and a
description of the reorganization. The provisions of this
Subparagraph 32.B. shall supersede any conflicting provisions
on this subject in any merchandise license agreement
previously entered into between the parties for this Territory.
C. Notwithstanding Subparagraph's 32.A. and B., Licensee may,
upon written notice to Disney, unless Disney has objected
within thirty (30) days of receipt of such notice, sublicense
Licensee's rights hereunder to Licensee's Affiliates.
Licensee hereby irrevocably and unconditionally guarantees
that they will observe and perform all of Licensee's
obligations hereunder, including, without limitation, the
provisions governing approvals, and compliance with approved
samples, applicable Laws, and all other provisions hereof,
and that they will otherwise adhere strictly to all of the
terms hereof and act in accordance with Licensee's obligations
hereunder. Any involvement of an Affiliate in the activities
which are the subject of this Agreement shall be deemed
carried on pursuant to such a sublicense and thus covered by
such guarantee; however such involvement may be treated by
Disney as a breach of this Agreement, unless Licensee has
notified Disney of Licensee's intent to sublicense an
Affiliate in each instance, and Disney has failed to object
within thirty (30) days of receipt of such notice.
33. RELATIONSHIP
This Agreement does not provide for a joint venture, partnership,
agency or employment relationship between the parties, or any other
relationship than that of licensor and licensee.
34. CONSTRUCTION
The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning and not strictly
for or against any of the parties. Headings of paragraphs herein are
for convenience of reference only and are without substantive
significance.
35. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
Except as otherwise provided herein, this Agreement can only be
extended or modified by a writing signed by both parties; provided,
however, that certain modifications shall be effective if signed by
the party to be charged and communicated to the other party.
36. NOTICES
All notices which either party is required or may desire to serve
upon the other party shall be in writing, addressed to the party to
be served at the address set forth on page 1 of this Agreement, and
may be served personally or by depositing the same addressed as
herein provided (unless and until otherwise notified), postage
prepaid, in the United States mail. Such notice shall be deemed
served upon personal delivery or upon the date of mailing; provided,
however, that Disney shall be deemed to have been served with a
notice of a request for approval of materials under this Agreement
only upon Disney's actual receipt of the request and of any required
accompanying materials. Any notice sent to Disney hereunder shall be
sent to the attention of "Vice President, Licensing", unless Disney
advises Licensee in writing otherwise.
37. MUSIC
Music is not licensed hereunder. Any charges, fees or royalties
payable for music rights or any other tights not covered by this
Agreement shall be additional to the Royalties and covered by separate
agreement.
38. PREVIOUS AGREEMENTS
This Agreement, and any confidentiality agreement Licensee may have
signed pertaining to any of the Licensed Material, contains the entire
agreement between the parties concerning the subject matter hereof and
supersedes any pre-existing or contemporaneous agreement and any oral
or written communications between the parties.
39. CHOICE OF LAW AND FORUM
This Agreement shall be deemed to be entered into in California and
shall be governed and interpreted according to the laws of the State
of California. Any legal actions pertaining to this Agreement shall
be commenced within the State of California and within either Los
Angeles or Orange Counties.
40. EQUITABLE RELIEF
Licensee acknowledges that Disney will have no adequate remedy at law
if Licensee continues to manufacture, sell, advertise, promote or
distribute the Articles upon the expiration or termination of this
Agreement. Licensee acknowledges and agrees that, in addition to any
and all other remedies available to Disney, Disney shall have the
right to have any such activity by Licensee restrained by equitable
relief, including, but not limited to, a temporary restraining order,
a preliminary injunction, a permanent injunction, or such other
alternative relief as may be appropriate, without the necessity of
Disney posting any bond.
41. GOODWILL
Licensee acknowledges that the rights and powers retained by Disney
hereunder are necessary to protect Disney's or its licensor's
copyrights and property rights, and, specifically, to conserve
Disney's and its licensor's goodwill and good name, and the name
"Disney", and therefore Licensee agrees that Licensee will not allow
the same to become involved in matters which will, or could, detract
from or impugn the public acceptance and popularity thereof, or
impair their legal status.
42. POWER TO SIGN
The parties warrant and represent that their respective representatives
signing this Agreement have full power and proper authority to sign
this Agreement and to bind the parties.
43. SURVIVAL OF OBLIGATIONS
The respective obligations of the parties under this Agreement,
which by their nature would continue beyond the termination,
cancellation or expiration of this Agreement, including but not
limited to indemnification, insurance, payment of Royalties, and
Paragraph 29, shall survive termination, cancellation or expiration
of this Agreement.
Please sign below under the word "Agreed". When signed by both parties this
shall constitute an agreement between Disney and Licensee.
AGREED:
DISNEY ENTERPRISES, INC.
By: /s/ [ILLEGIBLE] ------------------------------------------------
Title: ---------------------------------------------
Date: ----------------------------------------------
IMPACT, INC.
By: /s/ [ILLEGIBLE] ------------------------------------------------
Title: ---------------------------------------------
CATALOG SCHEDULE
(LIST OF PRE-APPROVED CATALOGS)
STATIONERY
MASS
Currents
Fingerhut
Lillian Vernon
The Right Start
Troll Learn and Play
Viewers Edge
This Catalog Schedule is subject to change, Disney reserves the right to add
catalogs to or delete catalogs from the Catalog Schedule without prior
notice to Licensee. Licensee agrees to cease selling Articles to a deleted
catalog within sixty (60) days after written notice of the deletion. Disney
will consider new catalogs requested by Licensee on a case-by-case basis,
SCHEDULE OF DISNEY LICENSES
The license agreement to which this schedule is attached has been filed as a
specimen of all Disney license agreements to which Hedstrom Corporation and
its subsidiaries are parties. It has been filed as a specimen because it is
substantially similar in all material respects to each of the Disney license
agreements listed below, except, perhaps, with respect to the information
that has been redacted from the specimen and filed with the Securities and
Exchange Commission pursuant to a request for confidential treatment under
Rule 406 under the Securities Act of 1933, as amended.
LICENSOR PROPERTY LICENSEE TERM TERRITORY
Disney Mickey's Stuff for Kids Amav 12/31/99 US
Disney Mickey's Stuff for Kids Amav 12/31/99 Canada
Disney 101 Dalmatians/Live ERO 12/31/99 US
Action #57
Disney 101 Dalmatians/Live ERO 12/31/99 US
Action #56
Disney Hercules ERO 12/31/99 US
Disney Little Mermaid #65 ERO 12/31/99 US
Disney Mickey's Stuff for ERO 12/31/99 US
Kids/Babies
Disney Mulan ERO 12/31/99 US
Disney Toy Story ERO 12/31/99 US
Disney Winnie The Pooh ERO 12/31/99 US
Disney 101 Dalmatians/Live ERO 6/30/98 Carribean
Action
Disney Standard Characters, ERO 4/30/98 Carribean
Winnie the Pooh, Little
Mermaid, Hercules, 101
Dalmatians/Live Action
Disney Standard Characters, ERO 3/31/98 Central
Winnie the Pooh, Little America
Mermaid, Hercules, 101
Dalmatians/Live Action
Disney Dalmatians, Hercules, ERO 4/30/98 Mexico
Standard Characters,
Winnie the Pooh
Disney Standard Characters, ERO 3/31/98 Central
Winnie the Pooh, Little America
Mermaid, Hercules, 101
Dalmatians Animated,
Toy Story
LICENSOR PROPERTY LICENSEE TERM TERRITORY
Disney 101 Dalmatians/ ERO-Canada 12/31/98 Canada
Live Action
Disney Hercules ERO-Canada 12/31/99 Canada
Disney 101 Dalmatians/ ERO-Canada 12/31/99 Canada
Live Action
Disney Little Mermaid ERO-Canada 8/30/99 Canada
Disney Mickey's Stuff for Kids ERO-Canada 12/31/99 Canada
Disney Toy Story ERO-Canada 12/31/99 Canada
Disney Mickey for Kids Hedstrom 12/31/99 US
Disney Hercules Hedstrom 12/31/98 US
Disney The Little Mermaid Hedstrom 11/30/98 US
Disney Mulan Hedstrom 12/31/99 US
Disney Simba's Pride Hedstrom 12/31/99 US
Disney A Bug's Life Hedstrom 12/31/99 US
Disney 101 Dalmatians/Live Impact 6/30/99 US
Action
LICENSOR PROPERTY LICENSEE TERM TERRITORY
Disney George of the Jungle Impact 12/31/99 US
Disney Brand Spanking New Doug Impact 12/31/99 US
Disney Hercules Impact 12/31/99 US
Disney Hercules Impact 12/31/99 Canada
Disney Hunchback of Notre Dame Impact 12/31/98 US
Disney Little Mermaid Impact 12/31/99 US
Disney Little Mermaid Impact 12/31/99 Canada
Disney Mickey's Stuff for Kids Impact 12/31/98 US
Disney Mickey's Stuff for Kids Impact 12/31/98 US
Disney Mighty Ducks Impact 6/30/98 US
Disney Mighty Ducks Impact 6/30/98 Canada
Disney Mulan Impact 12/31/99 US
Disney Toy Story Impact 12/31/99 US
Disney Winnie The Pooh Impact 12/31/99 US
Disney Winnie The Pooh Impact 12/31/99 Canada
Disney 101 Dalmatians/ Priss 12/31/99 Canada
Live Action
Disney Cinderella Priss 12/31/99 Canada
Disney Disney Babies Priss 12/31/99 US
Disney Hercules Priss 12/31/99 US
LICENSOR PROPERTY LICENSEE TERM TERRITORY
Disney Hercules Priss 12/31/99 Canada
Disney Lion King Priss 12/31/97 Canada
Disney Little Mermaid Priss 12/31/99 Canada
Disney Little Mermaid Priss 12/31/99 US
Disney Mickey's Stuff for Kids Priss 12/31/99 US
Disney Mickey's Stuff for Priss 12/31/99 Canada
Kids/Disney Babies
Disney Toy Story Priss 12/31/99 US
Disney Winnie the Pooh Priss 12/31/99 US
Disney Winnie the Pooh Priss 12/31/98 Canada
Disney 101 Dalmations/Live Priss 12/31/98 US
Action
Disney Dalmatians, Disney Priss 2/28/98 Brazil
Babies, Hercules,
Hunchback, Lion King,
Little Mermadid,
Standard Characters,
Toy Story
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
EARNINGS PER SHARE DISCLOSURE
For the year ended December 31, 1997
(Dollars in thousands)
Income Shares Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share:
Net income $ 9,576 52,153 $0.18
Effect of Dilutive Securities:
Stock options in the money -- 2,374 --
Buyback of shares at
average price of $1.13 -- (2,111)
-------- ------- -----
Net effect of stock options -- 263 --
-------- ------- -----
Diluted Earnings Per Share:
Net income $ 9,576 52,416 $0.18
========= ====== =====
Options to purchase 1,767,912 shares of common stock at $1.25 per share
were outstanding at December 31, 1997 but were not included in the
computation of diluted EPS because average market price of the common
shares was not greater than the options exercise price.
ARTHUR ANDERSEN, LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statement File No. 333-33377.
/s/Arthur Andersen
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Income Statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,844
<SECURITIES> 0
<RECEIVABLES> 84,999
<ALLOWANCES> 2,297
<INVENTORY> 47,464
<CURRENT-ASSETS> 152,856
<PP&E> 63,253
<DEPRECIATION> 20,430
<TOTAL-ASSETS> 385,773
<CURRENT-LIABILITIES> 93,927
<BONDS> 244,682
0
0
<COMMON> 676
<OTHER-SE> 46,488
<TOTAL-LIABILITY-AND-EQUITY> 385,773
<SALES> 256,146
<TOTAL-REVENUES> 256,146
<CGS> 172,390
<TOTAL-COSTS> 172,390
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,131
<INCOME-PRETAX> 17,573
<INCOME-TAX> 7,997
<INCOME-CONTINUING> 9,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,576
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
