FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Numbers: 333-32385-05 and 333-32385
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0329830
Delaware 51-0329829
(State or other jurisdiction (IRS Employer
of incorporation Identification
or organization) Number)
585 Slawin Court, Mount
Prospect, Illinois 60056
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
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
At August 13, 1998, there were outstanding: (i) 36,142,883 shares of
the Common Stock, par value $.01 per share, of Hedstrom Holdings,
Inc., (ii) 31,520,000 shares of the Non-Voting Common Stock, par
value $.01 per share, of Hedstrom Holdings, Inc. and (iii) 10 shares
of the Common Stock, par value $.01 per share, of Hedstrom
Corporation.
<PAGE>
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
Consolidated Income Statements
Three months ended June 30, 1998 and 1997
Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity
As of and for the six months ended June 30,
1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1998 1997
<S> (unaudited)
ASSETS ----------- ------------
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 7,233 $ 10,844
Trade accounts receivable, net of
allowance for doubtful accounts 81,681 82,702
Inventories 53,564 47,464
Deferred income taxes 7,050 7,045
Prepaid expenses and other current assets 4,735 4,801
-------- --------
TOTAL CURRENT ASSETS 154,263 152,856
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 44,474 42,823
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated amortization 17,025 18,861
Goodwill, net of accumulated amortization 162,254 161,176
Deferred income taxes 10,096 10,057
-------- --------
TOTAL OTHER ASSETS 189,375 190,094
-------- --------
TOTAL ASSETS $388,112 $385,773
======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Revolving line of credit $ 44,152 $ 35,500
Current portion of long-term debt and capital leases 10,466 9,222
Accounts payable 28,900 23,381
Accrued expenses 17,486 25,824
-------- -------
TOTAL CURRENT LIABILITIES 101,004 93,927
-------- -------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 24,897 23,288
Term Loans 99,125 104,375
Notes payable to related parties 2,500 2,500
Capital leases 1,878 1,605
Other 2,417 2,914
-------- --------
TOTAL LONG-TERM DEBT 240,817 244,682
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000
shares authorized, no shares issued and outstanding - -
Common stock, $0.01 par value, 100,000,000 shares
authorized, 36,142,883 and 36,142,883 shares
issued and outstanding, respectively 361 361
Non-voting common stock, $0.01 par value, 40,000,000 shares
authorized, 31,520,000 and 31,520,000 issued and outstanding,
respectively 315 315
Additional paid-in capital 51,553 51,553
Foreign currency translation adjustment (1,053) (778)
Accumulated deficit (4,885) (4,287)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,291 47,164
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $388,112 $385,773
======== ========
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 data)
(Unaudited)
For the three months ended June 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $83,272 $56,114
Cost of sales 60,191 39,038
------- -------
Gross profit 23,081 17,076
Selling, general and administrative expense 15,874 9,454
------- -------
Operating income 7,207 7,622
Interest expense 7,793 3,174
------- -------
Income (loss) before income taxes (586) 4,448
Income tax (benefit) expense (247) 1,679
------- -------
Net income (loss) $ (339) $ 2,769
======= =======
Basic earnings (loss) per share:
Net income (loss) per share ($0.01) $0.08
Weighted average number of common shares
outstanding (in thousands) 67,633 36,393
Diluted earnings (loss) per share:
Net income (loss) per share ($0.01) $0.08
Weighted average number of common shares
outstanding (in thousands) 67,633 36,868
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 data)
(Unaudited)
For the six months ended June 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 161,661 $104,051
Cost of sales 116,516 73,579
--------- --------
Gross profit 45,145 30,472
Selling, general and administrative expense 30,689 16,242
--------- --------
Operating income 14,456 14,230
Interest expense 15,481 4,709
--------- --------
Income (loss) before income taxes (1,025) 9,521
Income tax (benefit) expense (427) 3,536
--------- --------
Net income (loss) $ (598) $ 5,985
========= ========
Basic earnings (loss) per share:
Net income (loss) per share ($0.01) $0.16
Weighted average number of common shares
outstanding (in thousands) 67,663 36,393
Diluted earnings (loss) per share:
Net income (loss) per share ($0.01) $0.16
Weighted average number of common shares
outstanding (in thousands) 67,663 36,868
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)
(Unaudited)
For the six months ended June 30,
--------------------------------
1998 1997
---- ----
<S>
Cash flows from operating activities: <C> <C>
Net income (loss) $ (598) $ 5,985
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation of property, plant and equipment and
amortization of goodwill 6,580 2,767
Amortization of deferred financing fees 3,445 -
Deferred income tax benefit (44) (2,676)
Changes in current assets and current liabilities,
net of acquisitions:
Accounts receivable 1,682 (32,260)
Inventories (5,454) 6,239
Prepaid expenses and other current assets 6 983
Accounts payable 5,519 949
Accrued expenses (7,730) 13,890
Other - (2,845)
------- --------
Net cash provided by (used for) operating activities 3,466 (6,968)
-------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (4,962) (3,446)
Acquisition of ERO, Inc. (3,037) (122,600)
Other acquisitions (3,500) -
------- --------
Net cash used for investing activities (11,499) (126,046)
------- ---------
Cash flows from financing activities:
Net proceeds from issuance of Senior Subordinated Notes - 110,000
Net proceeds from issuance of new term loans - 110,000
Net proceeds from issuance of Senior Discount Notes - 21,618
Principal payments on Term Loans (4,066) -
Borrowings on Revolving Credit Facility, net 8,652 2,700
Repayments of old term loans - (91,393)
Repayments of old revolving lines of credit, net - (38,925)
Debt financing costs - (17,800)
Net proceeds from issuance of voting common stock - 3,982
Net proceeds from issuance of non-voting common stock - 37,462
Other (164) (1,998)
------- ----------
Net cash provided by financing activities 4,422 135,646
------- ----------
Net increase (decrease) in cash and cash equivalents (3,611) 2,632
Cash and cash equivalents:
Beginning of period 10,844 533
------- ----------
End of period $ 7,233 $ 3,165
======= ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Common Stock Foreign
------------ Additional Currency
Par Paid-In Translation Accumulated
Shares Value Capital Adjustment Deficit Total
---------- ------ ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 67,662,883 $ 676 $51,553 $ (778) $(4,287) $47,164
Foreign currency translation - - - (275) - (275)
adjustment
Net loss - - - - (598) (598) (5 (598)
---------- ------ ------- ------- ------- ------
Balance at June 30, 1998 67,662,883 $ 676 $51,553 $(1,053) $(4,885) $46,291
========== ====== ======= ======= ======= =======
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
(unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include
the accounts of Hedstrom Holdings, Inc. ("Holdings") and its wholly
owned subsidiary, Hedstrom Corporation ("Hedstrom," and together
with Holdings, the "Company"). Effective June 12, 1997, the Company
acquired ERO, Inc. ("ERO"), which became a wholly owned subsidiary
of Hedstrom (see Note 2). The accompanying consolidated financial
statements reflect the operations of ERO since June 1, 1997. These
financial statements are unaudited but, in the opinion of
management, contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial
condition, results of operations and cash flows of the Company.
Certain prior period amounts have been reclassified to conform with
the current period presentation. All intercompany balances and
transactions have been eliminated in consolidation.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 as filed with the Securities and
Exchange Commission.
The results of operations for the three months and six months ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - ACQUISITION OF ERO, INC.:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly
owned subsidiary of Hedstrom, entered into an Agreement and Plan of
Merger (the "Merger Agreement") with ERO to acquire ERO for a total
enterprise value of approximately $200 million. Pursuant to the
Merger Agreement, HC Acquisition Corp. commenced and, on June 12,
1997, consummated a tender offer for all of the outstanding shares
of the common stock of ERO at a purchase price of $11.25 per share
(the "Tender Offer"). The Company also assumed a purchase price
contingency related to ERO, Inc.'s acquisition of Amav in October of
1995. The contingency included an additional $3.0 million of
purchase price contingent upon achievement of certain conditions. As
those conditions were met as of December 31, 1997, the Company
accrued a liability for the contingency against goodwill. This was
reflected in accrued expenses in the consolidated balance sheet as
of December 31, 1997. The payment was 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 (subsequent to June 30, 1998 the
Tranche B Term Loan was amended to $65.0 million to allow for the
acquisition of Backyard Products Limited, see further discussion at
Note 8) (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 $150.0 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 150,000
Liabilities assumed (118,300)
--------
Cash paid for ERO $122,600
========
<PAGE>
The unaudited pro forma results below assume the Acquisition
occurred at the beginning of the six month period ended June 30,
1997 (in thousands, except per share amounts):
Six Months Ended
June 30, 1997
----------------
Net sales $142,355
Net loss $ (26)
Net loss per share basic $ (0.00)
Net loss per share diluted $ (0.00)
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 cost savings resulting from the rationalization of
the 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. These 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, 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 of ERO been consummated and had the cost actions giving
rise to the cost savings been implemented as of the beginning of the
six month period ended June 30, 1997 nor are they necessarily
indicative of future operating results.
NOTE 3 - INCOME 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.
NOTE 4 - INVENTORIES:
Inventories at June 30, 1998 and December 31, 1997 consist of the
following (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Raw materials $18,527 $16,502
Work-in-process 10,109 5,690
Finished goods 24,928 25,272
------- -------
$53,564 $47,464
======= =======
<PAGE>
NOTE 5 - DEBT:
Debt consists of the following (in thousands):
June 30, December 31,
1998 1997
-------- -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 108,375 112,375
Revolving Credit Facility 44,152 35,500
Senior Discount Notes 24,897 23,288
Other 8,011 8,241
-------- --------
$295,435 $289,404
======== ========
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 the Company prior to June 1, 2002.
On and after such date, the Senior Subordinated Notes are
redeemable, at the Company'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:
Redemption
Period 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, the Company 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 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 the Company), 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.
<PAGE>
The Senior Subordinated Notes are unsecured senior subordinated
obligations of the Company 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 the
Company. The Senior Subordinated Notes are subordinated to all
senior indebtedness (as defined) of the Company and rank pari passu
in right of payment with all senior subordinated indebtedness (as
defined) of the Company.
The Senior Subordinated Notes Indenture contains certain covenants
that, among other things, limit (i) the incurrence of additional
indebtedness by the Company and its restricted subsidiaries (as
defined), (ii) the payment of dividends and other restricted
payments by the Company and its restricted subsidiaries, (iii)
distributions from restricted subsidiaries, (iv) asset sales, (v)
transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Term Loans and Revolving Credit Facility
As discussed in Note 2, in connection with the Acquisition, the
Company obtained the Senior Credit Facilities. The Senior Credit
Facilities consisted of (a) the six-year $75.0 million Tranche A
Senior Secured Term Loan Facility; (b) the eight-year $35.0 million
Tranche B Senior Secured Term Loan Facility (As discussed in Note 8,
subsequent to June 30, 1998 the Tranche B Term Loan was amended to
$65.0 million to allow for the acquisition of Backyard Products
Limited); and (c) the Senior Secured Revolving Credit Facility
providing for revolving loans to the Company and the issuance of
letters of credit for the account of the Company in an aggregate
principal and stated amount at any time not to exceed $70.0 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 the Company'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.
<PAGE>
The obligations of the Company under the Senior Credit Facilities
are unconditionally, fully and irrevocably guaranteed (jointly and
severally) by Holdings and each of the Company'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 the Company and 65% of the
capital stock of, or other equity interests in, each direct foreign
subsidiary of the Company, or any of its domestic subsidiaries and
(ii) all tangible and intangible assets (including, without
limitation, intellectual property and owned real property) of the
Company and the Senior Credit Facilities Guarantors.
The Senior Credit Facilities contain a number of significant
covenants that, among other things, restrict the ability of the
Company to dispose of assets, incur additional indebtedness, repay
other indebtedness or amend 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, the Company is required to comply with specified
interest coverage and maximum leverage ratios.
Senior Discount Notes
In connection with the acquisition, Holdings received $25.0 million
of gross proceeds from the issuance by Holdings of 44,612 units,
consisting of the Discount Notes and 2,705,896 shares of Holdings
common stock. Of the $25.0 million in gross proceeds, $3.4 million
($1.25 per share) was allocated to the common stock, based upon
management's estimate of fair market value, and $21.6 million was
allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an
aggregate principle amount at maturity (June 1, 2009) of $44.6
million, representing a yield to maturity of 12%. No cash interest
will accrue on the Discount Notes prior to June 1, 2002.
Thereafter, cash interest will be payable on June 1 and December 1
of each year, commencing December 1, 2002.
Except as set forth below, the Discount Notes will not be redeemable
at the option of Holdings prior to June 1, 2002. On and after such,
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:
Redemption
Period Price
------ ----------
2002 106.000
2003 104.000
2004 102.000
2005 and thereafter 100.00%
<PAGE>
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, 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) 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. The mortgages and equipment loans have varying interest
rates and maturities.
NOTE 6 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
Holdings has adopted SFAS No. 130, "Reporting Comprehensive Income",
as of January 1, 1998. SFAS No. 130 establishes standards for the
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. Holdings Comprehensive Income for the quarter
ended and six months ended June 30, 1998 would be as follows (in
thousands):
3 months 6 months
-------- --------
Net Loss $(339) $(598)
Foreign currency translation
adjustments (393) (162)
----- -----
Comprehensive Loss $(732) $(760)
===== =====
<PAGE>
Adjustments to other non-owner changes will be reflected in
comprehensive income and cumulative comprehensive income that will
be reported in the consolidated statement of shareholders' equity in
Holding's Annual Report on Form 10-K for the fiscal year ending
December 31, 1998.
Holdings has adopted SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", as of 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 requires companies to select segments based on their internal
reporting system. Hedstrom is assessing the impact on its disclosures
of this pronouncement. As required by SFAS No 131, compliance with the
respective reporting requirements will be reflected in Holdings 1998
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
Holdings has adopted SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits," as of January 1, 1998.
This pronouncement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or recognition of those plans, however, it does require
additional information on changes in the benefit obligations and
fair values of plan assets in order to facilitate financial
analysis. Management does not believe that SFAS No. 132 will have a
significant impact on Holdings' financial statements.
<PAGE>
NOTE 7 - SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION:
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At June 30, 1998 At December 31, 1997
-------------------------------------------- ------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Assets Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ------------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 6,470 $ 763 $ - $ 7,233 $ 8,984 $ 1,860 $ - $ 10,844
Accounts receivable, net 73,869 7,812 - 81,681 73,625 9,077 - 82,702
Inventories 35,989 17,724 (149) 53,564 38,429 9,075 (40) 47,464
Deferred income taxes (c) 7,050 - - 7,050 7,045 - - 7,045
Prepaid expenses and other
current assets 4,254 481 - 4,735 4,310 491 - 4,801
-------- ------- -------- -------- -------- ------- -------- --------
Total current assets 127,632 26,780 (149) 154,263 132,393 20,503 (40) 152,856
-------- ------- -------- -------- -------- ------- -------- --------
27,511 16,963 - 44,474 27,448 15,375 - 42,823
-------- ------- -------- -------- -------- ------- -------- --------
Investment in and advances to
Nonguarantor Subsidiaries 45,121 - (45,121) - 44,799 - (44,799) -
Deferred charges, net 15,983 - - 15,983 17,715 - - 17,715
Goodwill, net 143,231 19,023 - 162,254 142,692 18,484 - 161,176
Deferred income taxes 10,574 (478) - 10,096 10,579 (522) - 10,057
Total other assets 214,909 18,545 (45,121) 188,333 215,785 17,962 (44,799) 188,948
-------- ------- -------- -------- -------- ------- -------- --------
$370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
Liabilities and stockholders
equity
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revolving line of credit $ 35,355 $ 8,797 $ - $ 44,152 $ 33,282 $ 2,218 $ - $ 35,500
Current portion of long-term
debt and capital leases 9,736 730 - 10,466 8,492 73 - 9,222
Advances from Guarantor - -
Subsidiaries - 32,270 (32,270) 31,956 (31,956) -
Accounts payable (c) 25,667 3,233 - 28,900 20,784 2,597 - 23,381
Accrued expenses 14,113 4,664 (132) 18,645 23,939 2,432 (16) 26,355
-------- ------- -------- -------- -------- ------- -------- --------
Total current liabilities 84,871 49,694 (32,402) 102,163 86,497 39,933 (31,972) 94,458
------- ------- -------- -------- -------- ------- -------- --------
Senior Subordinated Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 99,125 - - 99,125 104,375 - - 104,375
Capital leases 1,878 - - 1,878 1,605 - - 1,605
Other 1,765 652 - 2,417 1,857 1,057 - 2,914
-------- ------- -------- -------- -------- ------- -------- --------
Total long-term debt (a) 212,768 652 - 213,420 217,837 1,057 - 218,894
-------- ------- -------- -------- -------- ------- -------- --------
Total Liabilities 297,639 50,346 (32,402) 315,583 304,334 40,990 (31,972) 313,352
-------- ------- -------- -------- -------- ------- -------- --------
Total stockholder's equity
(deficit) (b) 72,413 11,942 (12,868) 71,487 71,292 12,850 (12,867) 71,275
-------- ------- -------- -------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
------------------------------------------- --------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $79,535 $9,664 $(5,927) $83,272 $54,396 $5,614 $(3,896) $56,114
Cost of sales 59,672 6,445 (5,926) 60,191 37,940 3,625 (2,527) 39,038
------- ------ ------- ------- ------- ------ ------- -------
Gross profit (loss) 19,863 3,219 (1) 23,081 16,456 1,989 (1,369) 17,076
Selling, general and
administrative expense 13,411 2,463 - 15,874 8,750 718 (14) 9,454
------- ------ ------- ------- ------- ------ ------- -------
Operating income (loss) 6,452 756 (1) 7,207 7,706 1,271 (1,355) 7,622
Interest expense (c) 6,238 623 - 6,861 2,893 218 - 3,111
------- ------ ------- ------- ------- ------ ------- -------
Income (loss) before
income taxes 214 133 (1) 346 4,813 1,053 (1,355) 4,511
Income tax provision
(benefit) (c) 12 122 - 134 1,970 20 (285) 1,705
------- ------ ------- ------- ------- ------ ------- -------
Net income (loss) $ 202 $ 11 $ (1) $ 212 $ 2,843 $1,033 $(1,070) $ 2,806
======= ====== ======= ======= ======= ====== ======= =======
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
-------------------------------------------- -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non Adjustments Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $156,274 $ 15,605 $(10,218) $ 161,661 $100,923 $7,024 $(3,896) $104,051
Cost of sales 115,110 11,685 (10,279) 116,516 71,344 4,762 (2,527) 73,579
-------- -------- -------- --------- -------- ------ ------- --------
Gross profit 41,164 3,920 61 45,145 29,579 2,262 (1,369) 30,472
Selling, general and
administrative expense 26,488 4,201 - 30,689 15,270 986 (14) 16,242
-------- -------- -------- --------- -------- ------ ------- --------
Operating income (loss) 14,676 (281) 61 14,456 14,309 1,276 (1,355) 14,230
Interest expense 12,460 1,183 - 13,643 4,364 219 - 4,583
-------- --------- -------- --------- -------- ------ ------- --------
Income (loss) before
income taxes 2,216 (1,464) 61 813 9,945 1,057 (1,355) 9,647
Income tax provision
(benefit) (c) 806 (505) 25 326 3,849 21 (285) 3,585
-------- -------- -------- -------- -------- ------ ------- --------
Net income (loss) $ 1,410 $(959) $ 36 $ 487 $ 6,096 $1,036 $(1,070) $ 6,062 6,062
======== ======= ======== ======== ======= ====== ======= ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------- ---------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total
Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom
--------- --------- ------------ -------- --------- --------- ----------- --------
<S>
Cash Flows from operating activities: <C> <C> <C> <C> <C> <C> <C> <C>
Net income(loss)(c) $ 1,410 $ (959) $ 36 $ 487 $6,096 $ 1,036 $(1,070) $ 6,062
Adjustments to reconcile net income
(loss) to net cash (used for)
provided by operating activities
Depreciation of property, plant
and equipment and amortization
of goodwill and deferreds 6,834 1,478 - 8,312 2,614 153 - 2,767
Deferred income tax provision(c) (44) - - (44) (2,676) - - (2,676)
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable 417 1,265 - 1,682 (30,173) (2,126) 39 (32,260)
Inventories 3,384 (8,649) (189) (5,454) 7,830 (1,451) (140) 6,239
Prepaid expenses and other
current assets 56 10 - 66 979 4 - 983
Deferred charges and other - - - - 4,089 12 - 4,077
Accounts payable(c) 4,884 636 - 5,520 805 1,100 654 949
Accrued expenses (9,488) 2,232 153 (7,103) 12,124 1,266 500 13,890
Other - - - - - - - -
Net cash(used for) provided by ------- ------- ------- ------- ------- ------- ------- -------
operating activities 7,453 (3,987) - 3,466 (8,100) (6) (17) (8,123)
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------- ---------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total
Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom
--------- --------- ------------ -------- --------- --------- ----------- --------
<S>
Cash flows from investing activities:
Acquisitions of property, plant <C> <C> <C> <C> <C> <C> <C> <C>
and equipment (3,621) (1,341) - (4,962) (3,444) (2) - (3,446)
Acquisition of ERO, Inc. (3,037) - - (3,037) (122,600) - - (122,600)
Other Acquisition - (3,500) - (3,500) - - - -
------ ------ ------- ------- -------- ------- ------- --------
Net cash used for investing
activities (6,658) (4,841) - (11,499) (126,044) (2) - (126,046)
------ ------ ------- ------- -------- ------- ------- --------
Cash flows from financing activities:
Net proceeds from issuance of
Senior Subordinated notes - - - - 110,000 - - 110,000
Net proceeds from issuance of
new term loans - - - - 110,000 - - 110,000
Equity contribution from
Holdings (b) - - - 63,062 - - 63,062
Principal payments on term loans (4,066) - - (4,066) - - - -
Equity contribution from
Holdings (b) - - - - - - - -
Borrowings on new revolving line
of credit 8,652 - - 8,652 2,700 - - 2,700
Repayment of old term loans - - - - (91,851) - - (91,851)
Debt financing cost (b) - - - - (16,550) - - (16,550)
Borrowings(repayments)on old
revolving loans of credit, net - - - - (38,925) 458 - (38,467)
Advances to/(from) Nonguarantor
subsidiaries (8,136) 8,136 - - - - - -
Other 241 (405) - (164) (2,093) - - (2,093)
------ ------ ------- ------- ------- ------- ------- --------
Net increase(decrease)in cash and
cash equivalents (3,309) 7,731 - 4,422 136,343 458 - 136,801
------ ------ ------- ------- -------- ------- ------- ---------
Cash and cash equivalents (6,498) (598) - (3,611) 2,199 450 (17) 2,632
Beginning of period 8,984 1,860 - 10,844 467 66 - 533
------ ------ ------- ------- -------- ------- ------- ---------
End of period $6,470 $ 763 $ - $ 7,233 $ 2,666 $ 516 $ (17) $ 3,165
====== ====== ======= ======= ======== ======= ======= =========
</TABLE>
<PAGE>
Each of the Subsidiary Guarantors is a wholly-owned subsidiary of Hedstrom
and 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 each Subsidiary
Guarantor 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 issuance of Senior Discount Notes valued at $24.1 million at March 31,
1998.
(b) Hedstrom Corporation's stockholder's equity includes Holdings'
stockholders' equity plus $21.6 million in proceeds from the issuance of
Senior Discount Notes, which proceeds were contributed as equity by Holdings
to Hedstrom Corporation less the interest, net of taxes, accrued thereon and
as of both March 31, 1998 and December 31, 1997, the $2.5 million note payable
described in (a) above less the interest, net of taxes, accrued thereon.
(c) Accounts payable, interest expense, and deferred income taxes do not
reflect the accrued interest, interest expense and the deferred tax benefit
of accrued interest on the obligations discussed in (a) above.
NOTE 8 - SUBSEQUENT EVENTS:
On July 24, 1998 the Company acquired 100% of the outstanding shares
of Backyard Products Limited, which has annual sales of
approximately $13.9 million, is a leading Canadian manufacturer and
supplier of wood gym sets and accessories. The purchase price of
approximately $17.1 million was financed through an amendment to the
Company's existing Senior Credit Facilities, which increased the
Tranche B Term Loan to $65 million. The $30 million proceeds from
the amendment was used to fund the acquisition as well as pay down
borrowings under the revolving credit facility. The acquisition will
be accounted for as a purchase; accordingly, the purchase price will
be allocated to the underlying assets and liabilities based on their
respective estimated fair values at the date of the acquisition. The
estimated value of assets acquired was $7.5 million and the
liabilities assumed was $4.2 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the
consolidated financial statements of the Company and the notes
thereto contained herein, as well as included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission. This Quarterly
Report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, which are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or
implied in such statements. These risks, which are further detailed
below as well as included in the Registration Statement on Form S-1
of the Company and Hedstrom as filed with the Securities and
Exchange Commission (File Nos. 333-32385-05 and 333-32385), include,
but are not limited to, the Company's recent net losses, substantial
leverage and debt service, financing restrictions and covenants,
reliance on key customers, dependence on key licenses and obtaining
new licenses, raw materials prices and product liability risks. In
addition, such forward-looking statements are necessarily dependent
upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward-looking statements
can be identified by, among other things, the use of forward -
looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "pro-forma," "anticipates" or intends' or the
negative of any thereof, or other variations or comparable
terminology, or by discussions of strategy or intentions. Given
these uncertainties, undue reliance should not be placed on any
forward-looking statements. The Company and Hedstrom disclaim any
obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
<PAGE>
Results of Operations
The following table sets forth net sales and gross profit for
each of Hedstrom's operating divisions for the periods indicated:
Three months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales
Bedford Division....... $42.1 $27.8 $82.0 $58.7
Ashland Division....... 10.6 11.0 24.3 24.8
International Division.. 8.8 3.3 13.9 6.6
ERO Division............ 11.9 5.6 25.5 5.6
Amav Division........... 9.9 8.4 16.0 8.4
----- ----- ------ ------
Total net sales $83.3 $56.1 $161.7 $104.1
===== ===== ====== ======
Gross profit:
Bedford Division........ $ 9.7 $ 7.8 $19.4 $16.2
Ashland Division........ 3.2 3.5 7.3 7.7
International Division.. 2.0 0.8 3.2 1.6
ERO Division............ 4.1 1.8 10.1 1.8
Amav Division........... 4.1 3.2 5.1 3.2
----- ----- ----- -----
Total gross profit $23.1 $17.1 $45.1 $30.5
===== ===== ===== =====
A comparison of the Company's results of operations for the three
months and six months ended June 30, 1998 with the same period in
1997 is necessarily affected by the impact of the consummation of
the acquisition of ERO on June 12, 1997. Due to the inclusion of
ERO's results from and after June 12, 1997, management does not
believe the comparison of operating results with the same period in
1997 is meaningful.
Net Sales. Net sales for the second quarter ended June 30, 1998
increased to $83.3 million from $56.1 million for the comparable
prior year quarter, an increase of $27.2 million. The increase was
attributable to increased sales at the Bedford Division, the
inclusion of the ERO and AMAV Divisions and increased sales at the
International Division. Net sales of the Bedford Division increased
by $14.3 million for the second quarter of 1998 versus the prior
year comparable period. The Bedford Division increase was primarily
a result of increased sales of trampolines due to the business
acquired from Bollinger Industries, Inc. and increased gym set
sales as a result of increased market share. The inclusion of the ERO
and AMAV Divisions acquired in June 1997 resulted in an increase in
net sales of $ 7.8 million for the quarter ended June 30, 1998
compared to the comparable period in 1997. The net sales of the
International division increased to $8.8 million for the second
quarter 1998 from $3.3 million in the comparable quarter of 1997.
The International Division increase can be attributed to the
acquisition of certain assets of a U.K. Manufacturer made during the
first quarter of 1998. and sales associated with the acquisition of
M.A. Henry Limited in August of 1997. Net sales for the Ashland
Division for the second quarter of 1998 versus the second quarter of
1997 remained relatively unchanged.
<PAGE>
Net sales for the six months ended June 30, 1998 versus the six
months ended June 30, 1997 increased to $161.7 million from $104.1
million an increase of $57.6 million. The increase was attributable
to the inclusion of the ERO and AMAV Divisions and increased sales
at the Bedford and International Divisions. The inclusion of the
ERO and AMAV Divisions resulted in an increase in net sales of
$27.5 million for the six months ended June 30, 1998 compared to the
comparable period in 1997. Net sales of the Bedford Division
increased by $23.3 million for the second quarter of 1998 versus the
prior year comparable period. The Bedford Division increase is
primarily a result of increased sales of trampolines due to the
business acquired from Bollinger Industries, Inc. and increased gym
set sales as a result of increased market share. The net sales of
the International division increased to $13.9 million for the first
six months of 1998 from $6.6 million in the comparable period of
1997. The International Division increase can be attributed to the
acquisition of certain assets of a U.K. Manufacturer made during the
first quarter of 1998 and sales associated with the acquisition of
M.A. Henry Limited in August of 1997. Net sales for the Ashland
Division for the first six months of 1998 versus the same period of
1997 remained relatively unchanged.
Gross Profit. Gross profit for the second quarter ended June
30, 1998 increased by $6.0 million to $23.1 million as compared to
$17.1 million for the quarter ended June 30, 1997 as a result of
higher consolidated net sales. As a percentage of consolidated net
sales, consolidated gross profit percentage decreased to 27.7% in
the second quarter of 1998 from 30.5% for the second quarter of
1997. The decrease was primarily the result of the Bedford
Division's gross profit margin decreasing to 23.0% for the second
quarter of 1998, from 28.1% for the quarter ended June 30, 1997.
The decline in the Bedford Division's gross profit percentage was
due to increased sales of trampolines, which carry a lower overall
gross profit margin, and decreased wood kit sales, which generally
carry a higher overall gross margin. These unfavorable product
sales mix items at the Bedford Division were partially offset by
lower material costs. In addition, slight decreases in the gross
margin percentage of the Ashland and International Divisions were
offset by the inclusion of the ERO and AMAV Divisions whose combined
gross profit margins of 37.6% for the second quarter ended June 30,
1998 were higher than the other divisions of Hedstrom.
<PAGE>
Gross profit for the six months ended June 30, 1998 increased by
$14.6 million to $45.1 million as compared to $30.5 million for the
six months ended June 30, 1997 as a result of higher consolidated
net sales. As a percentage of consolidated net sales, consolidated
gross profit percentage decreased to 27.9% for the six months ended
June 30, 1998 from 29.3% for the comparable prior year period. The
decrease was primarily the result of the Bedford Division's gross
profit margin decreasing to 23.7% for the six months ended June 30,
1998, from 27.6% for the six months ended June 30, 1997. The
decline in the Bedford Division's gross profit percentage was due to
increased sales of trampolines, which carry a lower overall gross
profit margin, and decreased wood kit sales, which generally carry a
higher overall gross margin. These unfavorable product sales mix
items at the Bedford Division were partially offset by lower material
costs. The decrease in the consolidated gross profit percentage was
partially offset by the inclusion of the ERO and AMAV Divisions,
which had a higher gross profit margin of 36.6% for the six month
period ended June 30, 1998, than the other divisions of Hedstrom.
Gross profit margin at the Ashland Division for the six months ended
June 30, 1998 decreased slightly to 30.0% from 31.0% versus the
comparable period in 1997 due to unfavorable product sales mix.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $6.4 million to $ 15.9 million
in the second quarter ended June 30, 1998 versus $9.5 million in the
prior years second quarter. As a percentage of net sales, selling,
general and administrative expenses increased to 19.1% from 16.8%.
For the six months ended June 30, 1998 selling, general and
administrative expenses increased $14.5 million to $30.7 million
from $16.2 million in the six months ended June 30, 1997. Expressed
as a percentage of sales, selling, general and administrative
expenses increased to 19.0% from 15.6%. The increases for the three
and six month periods ended June 30, 1998 were primarily due to the
inclusion of the ERO and AMAV Divisions which experience relatively
high selling, general and administrative expenses, and include the
amortization of acquisition-related intangible assets and royalty
expense.
Interest expense. Interest expense for the three and six month
periods ended June 30, 1998 versus June 30, 1997 increased as a
result of the incurrence of Acquisition-related indebtedness.
Income Tax Expense. Holdings effective tax rate for the quarter
ended June 30, 1998 was 42.2% versus 37.7% for the quarter ended
June 30, 1997. The effective tax rate for the six months ended June
30, 1998 was 41.7% compared to 37.1% for the prior year comparable
period. The increase was attributable to the acquisition of ERO,
which generated a large amount of non-deductible goodwill.
<PAGE>
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash provided from the operating activities was $3.5 million
for the six months ended June 30, 1998. The cash provided by
operations reflects the seasonal nature of sales. The ERO and Amav
Divisons Sales and Accounts Receivable build during the second half
of the year and are liquidated in the first half of the following
year. The Bedford, Ashland and International Divisions build Sales
and Accounts Receivable during the first half of the year and
liquidate during the second half of the year.
Net cash used for investing activities was $11.5 million during the
six months ended June 30, 1998, including $5.0 million used for the
acquisition of property, plant and equipment, $3.0 million of
contingency payments relating to the ERO Acquisition as discussed in
Note 2 and $3.5 million used to purchase certain assets of a United
Kingdom Manufacturer.
Net cash provided for financing activities was $4.4 million
representing net proceeds on the Companies revolving loan to fund
operating cash requirements of $8.7 million offset by the $4.3
million of principal payments on the Companies term loans.
Liquidity
Interest payments on the Senior Subordinated Notes and interest
and principal payments under the Senior Credit Facilities, as
detailed in the Registration Statements, represent significant cash
requirements for the Company. The senior subordinated notes require
semiannual interest payments of $5.5 million commencing in December
1997. Borrowings under the Senior Credit Facilities will bear
interest at floating rates and will require interest payments on
varying dates depending on the interest rate option selected by the
Company. Borrowings under the Senior Credit Facilities consisted of
$110 million under the Term Loan Facilities, comprised of a $75
million Tranche A Term Loan maturing in 2003 and a $35 million
Tranche B term loan maturing in 2005 (subsequent to June 30, 1998
the Tranche B Term Loan was amended to $65 million to allow for the
acquisition of Backyard Products Limited, see further discussion at
Note 8 of the Notes to Consolidated Financial Statements.) In
addition, the Senior Credit Facilities include a $70 million
Revolving Credit Facility.
At present, the Discount Notes do not require cash interest
payments. Rather, principal will accrete to an aggregate principal
amount of $44.6 million on June 1, 2002. Commencing on such date,
Holdings will be required to make semiannual interest payments of
$2.7 million.
<PAGE>
The Company's remaining liquidity demands will be 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 Company's credit agreement imposes an annual limit of $10.0
million on its 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, the
Company may incur expenditures in order to achieve certain
anticipated cost savings.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of
June 30, 1998, approximately $21.3 million was available to the
Company as cash and available borrowings under the Revolving Credit
Facility (subject to borrowing base limitations). 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.
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 February 1999. The additional
cost of achieving Year 2000 compliance is estimated to be
approximately $500,000 and will be incurred through December 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 during 1999. It is anticipated that corrective action, if
any, will be made by year 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in several lawsuits
arising in the ordinary course of business. The Company
maintains insurance covering such liability, and does not
believe that the outcome of any such lawsuits will have a
material adverse effect on the Company's financial
condition.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
<PAGE>
(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) 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.
10.1 - Stock Purchase Agreement, dated July 24,
1998 by and between Hedstrom Corporation
and Richard Boyer.
10.2 - Amendment Number Three dated July 24, 1998
to the Credit Agreement, dated as of June
12, 1997, among Hedstrom Corporation, Hedstrom
Holdings, Inc., the financial institution party
thereto and Credit Suisse First Boston, as
agent.
<PAGE>
11.1 - Computation of Earnings Per Share.
27.1 - Financial Data Schedule.
(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).
b) Reports on Form 8-K
The registrant has not filed any reports on Form 8-K
during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on
their behalf by the undersigned thereunto duly authorized.
Date: August 13, 1998
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
David F.Crowley
Chief Financial Officer
Execution Copy
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is
made and entered into this 24th day of July, 1998 by and
between Hedstrom Corporation, a Delaware corporation (the
"Purchaser") and Richard Boyer, an individual residing at 21
Grandbridge Drive, West Montrose, Township of Woolwich,
Regional Municipality of Waterloo, Ontario N0B2V0 (the
"Seller")and the individuals whose names are set forth on
schedule I annexed hereto (the Seller and such individuals
are hereinafter referred to collectively as the "Sellers").
RECITALS:
A. Sellers own 100 Common shares,
1000 Class A Preference Shares and 11000 Class B Preference
Shares (the "Shares") in the capital of Backyard Products
Limited., an Ontario corporation (the "Company"),
constituting all the issued and outstanding shares in the
capital of the Company;
B. Sellers desire to sell the Shares to
Purchaser, and Purchaser desires to purchase the Shares from
Sellers, all on the terms and subject to the conditions set
forth herein;
THEREFORE, Purchaser and Sellers agree as follows:
ARTICLE I
SALE OF SHARES AND CLOSING
1.1 Purchase and Sale of Shares. Subject to the
terms and conditions of this Agreement, Sellers agree to
sell the Shares to Purchaser and Purchaser agrees to
purchase the Shares from Sellers.
1.2 Purchase Price.
Subject to adjustment as provided in Section 1.2(b),
Purchaser shall pay to Sellers, on the Closing Date, the
amount of $ 24,785,767 in cash in consideration () for
the sale of the Shares (the "Unadjusted Purchase Price"),
allocated amongst the Sellers in accordance with
Schedule I.
<PAGE>
(ba) If, for the fiscal year ending August 31,
1998, the Company's earnings before interest expense, taxes,
depreciation and amortization (determined in accordance with
Section 1.3) (the "Company's 1998 EBITDA") is other than
$3,813,195, the Unadjusted Purchase Price will be
increased or decreased, as appropriate, by an amount equal
to 6.5 times that excess or deficiency. Seller shall be
responsible to pay any deficiency and Purchaser shall be
responsible to pay any excess. The party required to make
any payment due under this Section 1.2(b) shall make that
payment to the other party in immediately available funds
not more than three days after the determination of the
Company's 1998 EBITDA. The Unadjusted Purchase Price, as
adjusted pursuant to this Section 1.2(b), constitutes the
"Purchase Price" for the Shares.
1.3 Determination of the Company's 1998 EBITDA.
(a) As promptly as practicable after August 31,
1998 (but in no event more than 90 days thereafter),
Purchaser will deliver to Seller a certificate prepared and
executed by Purchaser's chief financial officer setting
forth the calculation by Purchaser of the Company's 1998
EBITDA in sufficient detail to permit Seller and its
independent auditors to verify that calculation. Within 15
days after Seller's receipt of Purchaser's calculation of
the Company's 1998 EBITDA, Seller shall provide Purchaser
with written notice (in reasonable detail) indicating
whether Seller disagrees with the calculation of the
Company's 1998 EBITDA. If Seller fails to object in writing
to the calculation of the Company's 1998 EBITDA within that
15-day period, Seller will be deemed conclusively to have
agreed to that calculation, which thereafter shall be deemed
to be the "Company's 1998 EBITDA."
1. (b) Within 15 days after Purchaser's receipt of
notice of Seller's disagreement with the calculation of the
Company's 1998 EBITDA, Purchaser and Seller will cause their
independent auditors to begin good faith negotiations to
resolve such disagreement. If the disagreement is resolved
within the 15-day period, the Company's 1998 EBITDA amount
agreed to by Seller's and Purchaser's independent
accountants shall be deemed conclusively to be the Company's
1998 EBITDA. If the independent auditors are unable to
resolve Seller's disagreement within 15 days after such
negotiations begin, such disagreement will be submitted to
the Settlement Auditor (as defined below) for resolution.
Purchaser and Seller will cooperate, and will cause their
respective independent auditors to cooperate, with the
Settlement Auditor and will proceed in good faith to cause
the Settlement Auditor to resolve such disagreement not
later than 15 days after the engagement of the Settlement
Auditor. Purchaser and Seller each will pay one-half of the
fees and expenses of the Settlement Auditor. "Settlement
<PAGE>
Auditor" shall mean Ernst and Young, Toronto office, or
if such firm is unable or unwilling to serve as Settlement
Auditor, such other of the "Big Six" nationally recognized
independent auditing firms (other than the accounting firms
regularly engaged by Purchaser, Seller, the Company, or any
Subsidiary) that Purchaser and Seller may agree upon.
(c) The Settlement Auditor, in its sole
discretion, will determine (i) the nature and extent of the
participation by Purchaser, Seller and their respective
independent auditors in connection with the resolution of
any disagreement submitted to the Settlement Auditor,
(ii) the nature and extent of the information that Purchaser
and Seller may submit to the Settlement Auditor for
consideration in connection with such resolution and
(iii) the personnel of the Settlement Auditor who will
review such information and resolve such disagreement. The
Settlement Auditor's resolution of any such disagreement
will be reflected in a written report which will be
delivered promptly to, and will be final and binding upon,
Purchaser and Seller. The Company's 1998 EBITDA will be
adjusted to reflect the Settlement Auditor's determination
and, as adjusted, will be deemed to be the Company's 1998
EBITDA.
(d) In connection with the determination of the
Company's 1998 EBITDA, Purchaser and its independent
auditors, assisted by the Company's employees and observed
by Seller and his representatives, shall conduct a physical
inventory as of August 31, 1998. Purchaser will cause its
independent auditors (i) to provide to Seller and his
independent auditors copies of such work papers and other
documents relating to the calculation of the Company's 1998
EBITDA as Seller and his independent auditors reasonably may
request and (ii) cooperate with and be reasonably available
to Seller and his independent auditors to provide such other
information reasonably requested by Seller or his
independent auditors concerning such calculation and the
accounting and auditing issues relating to such calculation.
(e) For the purposes of this Agreement the
Company's 1998 EBITDA shall be determined by applying generally
accepted accounting principles as applied in Canada("GAAP").
Schedule 1.3 sets forth certain accounting matters to which
Purchaser and Seller agree, subject to only the memo of
July 1, 1998 being in accordance with GAAP.
1.4 Closing.
(a) The Closing will take place at the offices of
Gowling, Strathy and Henderson, at 9:00 a.m., local time on
July 31, 1998,(the "Closing Date") or at such other place
and at such other time as Seller and Purchaser may agree in
writing.
<PAGE>
(b) At the Closing, Purchaser shall deliver to
Sellers (i) via wire transfer of immediately available
funds, cash in the amount of the Unadjusted Purchase Price
less $2,220,000 (the "Hold-Back Amount"), which will be
retained by Purchaser in accordance with the Escrow
Agreement attached as Exhibit A and (ii) such documents and
instruments required to be delivered by Purchaser pursuant
to this Agreement.
(c) At the Closing, Sellers will deliver to
Purchaser (i) a certificate or certificates representing all
the Shares in appropriate form for transfer to Purchaser or
accompanied by stock powers duly executed in blank and
(ii) such other documents and instruments required to be
delivered by Sellers pursuant to this Agreement and as
otherwise reasonably required by Purchaser to complete the
transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller and the Sellers, as the case may be,
hereby represent and warrant to Purchaser as follows:
2.1 Residence of Seller. Sellers are
individuals and a trust residing in the Province of Ontario.
2.2 Authority. Sellers have all requisite power
and authority to enter into this Agreement and the other
agreements to be entered into in connection herewith and to
perform their obligations hereunder and thereunder. This
Agreement has been duly and validly executed and delivered
by Sellers and constitutes legal, valid and binding
obligations of Sellers, enforceable against them in
accordance with its terms and does not violate the terms of
any other agreement to which they are a party.
2.3 Organization of the Company; No Subsidiaries.
The Company is a corporation duly organized and validly
existing under the laws of its province of incorporation
and has all requisite corporate power and authority to own,
lease and operate its assets and carry on its business as it
is now being conducted. The Company does not own or have any
interest in the capital stock of any other company.
Schedule 2.3 lists all jurisdictions in which the Company is
duly qualified as a foreign corporation, and the Company is
in good standing in each such jurisdiction, and there are no
other jurisdictions in which the ownership, leasing or use
of its assets or the conduct or nature of businesses make
such qualification necessary. The Company is a private
company(as that term is defined in the Securities Act
(Ontario)).
<PAGE>
2.4 Capital Stock of the Company. The authorized
capital stock of the Company consists of an unlimited
number of common shares and an unlimited number of Class
A Preference Shares and unlimited member of Class B
Preference Shares , of which the Shares are the only shares
issued and outstanding. The Shares are duly authorized,
validly issued, fully paid and nonassessable, and have not
been issued in violation of any preemptive or similar
rights. Sellers are the owners of record and beneficially
of the Shares, free and clear of all mortgages, pledges,
encumbrances, security interests, charges, agreements or
claims of any kind (collectively, "Liens). There are no
authorized or outstanding options, warrants, calls,
subscriptions or rights, commitments or other agreements of
any kind to purchase shares in the capital of the Company
or to cause the Company to issue any shares or securities
convertible into or exchangeable or exercisable for any
shares. There are no authorized or outstanding securities
of the Company convertible into or exchangeable or
exercisable for any shares in the capital of the Company.
There are no agreements or understandings to which the
Sellers or the Company are parties ,or by which it or they
are bound with respect to the voting, sale or transfer of
the Shares. Upon delivery of the Shares against payment
therefor in accordance with this Agreement, Purchaser will
acquire good and marketable title to the Shares, free and
clear of any and all Liens.
2.5 Intentionally Omitted
2.6 Consents and Approvals.
(a) Neither Sellers nor the Company is required to
make any filing with, or to obtain any permit,
authorization, consent or approval of or from, any
governmental authority as a condition to the consummation of
the transactions contemplated by this Agreement. The
execution, delivery of this Agreement by Sellers does not,
and the performance by Sellers of its obligations under this
Agreement will not: (i) conflict with or result in a breach
of any of the terms, conditions or provisions of the
articles of incorporation or bylaws of the Company; (ii)
except as set forth in Schedule 2.6, conflict with or
constitute a default under, or give rise to any right to
terminate, cancel, modify or accelerate, or to the loss of
any material right under, any contract, agreement, license,
mortgage, note, debenture or other evidence of indebtedness
to which Seller or the Company is a party or by which any of
their respective properties may be bound; (iii) violate any
term or provision of any law, rule or regulation or any
permit, concession, grant, franchise, license, writ,
judgment, decree, injunction, order or ruling of any court
<PAGE>
or governmental or regulatory authority applicable to Seller
or the Company; (iv) result in the creation or imposition of
any Lien upon Sellers, the Company or any of their
respective assets; or (v) require the consent or approval of
any third party.
(b)Competition Act. The Company does not have
assets in Canada that exceed, in the aggregate, $35 million
in aggregate value or does not have gross revenues from
sales in, from or into Canada that exceed, in the aggregate,
$35 million in value, determined for purposes of and in the
manner prescribed by the Competition Act (Canada).
2.7 Financial Statements; Contingent Liabilities.
(a) Schedule 2.7 contains true, correct and
complete copies of (i) the unaudited balance sheets of the
Company at August 31, 1996 and 1997 and the related
unaudited statements of income, stockholder's equity and
cash flows of the Company for the years ended August 31,
1996 and 1997, together with the notes related thereto and
the reviews thereof of KPMG; and (ii) the unaudited balance
sheet of the Company at June 30, 1998 (the "Interim Balance
Sheet") and the related unaudited statements of income,
stockholder's equity and cash flows for the 10-month period
ended June 30, 1998. The foregoing financial statements
have been prepared in accordance with GAAP and present
fairly the financial position of the Company at the
respective dates thereof and the related results of
operations and cash flow and changes in shareholder's equity
of the Company for the respective periods covered thereby
except, with respect to the unaudited interim financial
statements, for normal recurring year-end audit adjustments
and the absence of notes.
(b) All debts, obligations and other liabilities
(whether absolute, accrued, contingent, fixed or otherwise)
(collectively, "Liabilities") of the Company (i) are fully
reflected and quantified in, or reserved against on the
Interim Balance Sheet (or are disclosed in the notes
thereto) or (ii) were incurred in arms' length transactions
in the ordinary course of business since the date of the
Interim Balance Sheet and through the date of this Agreement
and do not exceed $1,000,000 individually,with respect to
trade payables or (iii) were incurred after the date of this
Agreement in transactions permitted by Section 4.5 hereof.
<PAGE>
2.8 Absence of Changes. Except as set forth in
Schedule 2.8, since August 31, 1997, the Company has
conducted business only in the ordinary course of business
and consistent with past practices and, since August 31,
1997, there has not been (i) any material adverse change in
the condition, financial or otherwise, business, assets,
properties or results of operations of the Company taken as
a whole, or any event, occurrence or circumstance that could
reasonably be expected to result in such a material adverse
change, (ii) any event which, if it had taken place after
the execution of this Agreement, would not have been
permitted by Article IV hereof, or (iii) any condition,
event or occurrence which could reasonably be expected to
prevent, hinder or materially delay the ability of the
Company to consummate the transactions contemplated by this
Agreement.
Without limiting the generality of the foregoing,
since August 31, 1997, there has not been:
(a) any declaration, setting aside, or payment
of any dividend or distribution (whether in cash,
securities, property or a combination thereof) in
respect of any of the shares in the capital of the
Company or any direct or indirect redemption, purchase,
or other acquisition by the Company of any shares in
the capital of the Company or of any interest in or
right to acquire any such shares;
(b) (i)except for the payment of a deferred bonus
to the Seller in February, 1998, any employment,
deferred compensation, or other salary, wage, or
compensation contract entered into between the Company
or any subsidiary and any of its officers, directors,
employees, agents, consultants or representatives; (ii)
any increase in the salary, wages, or other
compensation, whether current or deferred, of any
officer, director, employee, agent, consultant or
representative of the Company or any subsidiary other
than increases in the ordinary course of business and
consistent with past practice and not resulting in an
increase of more than 25% of the respective salary,
wages, or other compensation of any such person, or
(iii) any creation of Plans (as defined in
Section 11.3(p) hereof) or any contribution to (other
than required contributions in the ordinary course of
business and consistent with past practice), or
amendment or modification of, any Plans;
(c) any issuance, sale, or other disposition by
the Company of any debenture, note, share, or other
security of the Company, or any modification or
amendment of any of the foregoing (or any contract
pursuant to which such securities were issued or such
Liabilities were incurred);
<PAGE>
(d) any Liability incurred by the Company for
borrowed money or for the deferred and unpaid purchase
price of goods or services (other than trade payables
incurred in the ordinary course of business and
consistent with past practice);
(e) any Liability incurred by the Company in any
transaction not involving the borrowing of money which
Liability individually or in the aggregate could
subject the Company to liability for an amount in
excess of $1,000,000, as to trade payables;
(f) any mortgage or pledge of, or the creation of
any Lien on, any assets of the Company securing
Liabilities of the Company or another person in an
amount in excess of $5,000,000;
(g) any damage, destruction or loss (whether or
not covered by insurance) (a "Casualty Event") of any
assets having a replacement value, individually or in
the aggregate, in excess of $50,000.00 or,
regardless of the replacement value of the assets
involved, any Casualty Event that has had or could
reasonably be expected to have a material adverse
effect on the business, condition (financial or
otherwise), assets, results of operations or prospects
of the Company taken as a whole;
(h) any material change in any financial
reporting, tax, or accounting practice or policy
followed by the Company or in any assumption underlying
such a practice or policy, or in any method of
calculating any bad debt, contingency, or other reserve
for financial reporting purposes or for any other tax
or accounting purposes;
(i) any material payment, prepayment, discharge,
or satisfaction by the Company of any Lien or Liability
other than Liens or Liabilities that were paid,
discharged, or satisfied in the ordinary course of
business and consistent with past practice;
(j) any material cancellation of any Liability
owed to the Company by any other person (other than
trade credit concessions made in the ordinary course of
business and consistent with past practice);
(k) any material write-off or write-down of, or
any determination to materially write off or write
down, the assets of the Company or any portion thereof;
(l) any sale, transfer, or conveyance of any
material assets of the Company except dispositions of
obsolete inventory or equipment or dispositions of
inventory in the ordinary course of business and
consistent with past practice;
<PAGE>
(m) any amendment, termination, waiver, disposal,
or lapse of, or other failure to preserve, any license,
permit, or other form of governmental authorization of
the Company , the result of which individually or in
the aggregate has had or could have a material adverse
effect on the business, condition (financial or
otherwise), assets, results of operations or prospects
of the Company taken as a whole;
(n) any sale, transfer, conveyance or lapse of
any interest in any material franchise, patent,
trademark, trade name, copyright, license or similar
intangible asset of the Company used or useful in their
businesses as now conducted;
(o) any transaction or arrangement under which
the Company paid, lent, advanced or invested any amount
to or in respect of, or sold, transferred, or leased
any of its assets or any services to, (i) Seller,
(ii) any officer or director of the Company or of any
affiliate of Seller; (iii) any affiliate of Seller, or
the Company or of any such officer or director, or
(iv) any business or other person in which Seller, the
Company, any such officer or director, or any such
affiliate has any material interest, except for
payments of salaries, wages and other employee benefits
to officers or directors of the Company or any
subsidiary in the ordinary course of business and
consistent with past practice and except for advances
made to, or reimbursements of, officers or directors of
the Company for travel and other business expenses in
reasonable amounts in the ordinary course of business
and consistent with past practice;
(p) any amendment of, any failure to perform any
of its obligations under, any default under, any waiver
of any right under, or any termination (other than on
the stated expiration date) of, any contract that
involves or may reasonably be expected to involve the
annual expenditure or receipt by the Company or any
subsidiary of more than $50,000.00 or that
individually or in the aggregate is material to the
business, condition (financial or otherwise), assets,
results of operations or prospects of the Company taken
as a whole;
(q) any amendment to the articles or certificate
of incorporation or bylaws of the Company or any
subsidiary;
(r) any expenditure or commitment for additions
to property, plant, equipment, or other tangible or
intangible capital assets of the Company or any
subsidiary, which expenditure or commitment exceeds
$750,000.00, individually or in the aggregate; or
<PAGE>
(s) any agreement or commitment to take any of
the actions that should be disclosed as exceptions to
this Section 2.8.
2.9 Taxes. Except as disclosed in Schedule 2.9:
(a) Adequate provision has been made by the
Company in the Interim Balance Sheet for any Taxes due
and unpaid at the date of the Interim Balance Sheet and
any Tax installments due in respect of the current
taxation year of the Company. Except to the extent
reflected or reserved against in the Interim Balance
Sheet, the Company is not liable for any Taxes,
covering all past periods through the 1997 fiscal year.
Canadian federal and provincial income tax assessments
or reassessments have been received by the Company
covering all past periods through the 1997 fiscal year,
and the Company has paid all such assessments and
reassessments, or where permitted by law, security
therefor has been provided. There are no notices of
objection or appeals outstanding with respect to any
assessment, reassessment or determination of the
Company by any Tax Authority. There are no actions,
suits, investigations, claims or other proceedings
pending or, to the best of the Seller's knowledge,
after due inquiry, threatened, against the Company in
respect of any Taxes, and there are no facts or
circumstances known to the Seller, or to the best of
Seller's knowledge, acts, omissions, events,
transactions or series of transactions (including the
transactions contemplated by this Agreement) occurring
wholly or partly on or before the Time of Closing,
which could, or are likely to, give rise to any such
actions, suits, audits, proceedings, investigations or
claims. There are no agreements, waivers or other
arrangements providing for an extension of time with
respect to the filing of any Tax return or the payment
of any Taxes by the Company. Purchaser acknowledges
that Revenue Canada shall be proceeding with a standard
GST audit of the Company in July, 1998.
(b) The Company has on a timely basis filed all
Tax returns, information returns, elections or
designations in respect of any Taxes required to be
filed by them under any Tax legislation. No such filing
has contained any material misstatement or omitted any
statement of material fact that should have been
included therein. The Company has not and is not
required to file any Tax returns, information returns
or designations in any jurisdiction outside Canada,
provided, however, a United States tax information
return.
<PAGE>
(c) The Company has withheld and remitted to the
proper authority, or where permitted by law, provided
security for, on a timely basis and in a form required
under the appropriate Tax legislation all amounts in
respect of Taxes, including Canadian pension plan
contributions, employment insurance premiums and any
other deductions, required to be withheld and remitted
by them.
(d) There is no deductible outlay or expense owing
by the Company to a person with whom it was not dealing
at Arm's Length at the time the outlay or expense was
incurred which is unpaid and which will be included in
the Company's income for any taxation year ending on or
after the Closing Date.
(e) The Company does not have any loans in excess
of $10,000, or indebtedness outstanding which have been
made to shareholders, directors, officers or employees,
or former shareholders, directors, officers or
employees of the Company, or to any person or
corporation not dealing at Arm's Length with the
Company.
(f) The Company is a registrant for purposes of
the ETA and its registration number for purposes of
goods and services tax is 137839304 RT.
(g) The Company has not, directly or indirectly,
transferred property to or acquired property from a
person with whom the Company was not dealing at Arm's
Length for consideration other than consideration equal
to the fair market value of the property at the time of
the disposition or acquisition thereof.
(h) All of the interest which has been paid or is
payable by the Company in respect of its current
liabilities and long-term debt is deductible in
calculating the Company's income for tax purposes.
(i) The Company is not a financial institution
within the meaning of the ETA.
(j) The Company is not a party to any elections
made under the ETA.
2.10 Litigation. Except as disclosed in Schedule
2.10:
(a) There are no actions, suits, investigations,
arbitrations, or proceedings pending, or, to the
knowledge of Seller or the Company, threatened, against
Seller or any of his assets that questions the validity
or enforceability of this Agreement or that could have
an adverse effect on the ability of Seller to perform
its obligations hereunder.
<PAGE>
(b) There are no actions, suits, investigations,
arbitrations, or proceedings pending, or, to the
knowledge of Seller , threatened, against the Company
or any of its assets or which questions the safety,
reliability or suitability of any of the Company's
products.
(c) There are no writs, judgments, decrees,
injunctions, or similar orders of any court or
governmental or arbitral authority outstanding against
the Company or any of its respective assets.
2.11 Compliance With Laws. Except as disclosed in
Schedule 2.11, since August 31, 1995 the Company has not
been in violation (or with or without notice or lapse of
time or both would be in violation) of any term or provision
of any applicable law, rule or regulation (including without
limitation any Environmental Law, as defined in
Section 11.3) or any writ, judgment, decree, injunction, or
similar order applicable to such entity or any of its
assets. Without limiting the generality of the foregoing
the Company has duly and validly filed or caused to be filed
all reports, statements, documents, registrations, filings,
or submissions that were required by applicable law, rule or
regulation to be filed with any court or other governmental
authority. All such filings complied with applicable laws,
rule or regulation in all material respects when filed and
to the knowledge of Seller and the Company, no deficiencies
have been asserted by any person with respect to any such
filings.
2.12 Employment Matters; Pension and Benefit
Plans.
(a) Employment Matters
(i) Schedule 2.12 sets forth a true and complete
list of all directors, officers and salaried
employees of the Company, their respective
positions, current salaries, benefits and other
remuneration and indicating which officers and
employees are parties to a written or oral
agreement with the Company (including
confidentiality and non-competition agreements).
Except as disclosed in Schedule 2.12, the
Company is not a party to any agreement with
former or present officers, employees, agents or
independent contractors in connection with the
business of the Company.
(ii) The Company has no obligation to reinstate
any former officer or employee of the Company.
<PAGE>
(iii) There are no oral contracts of employment
entered into with any officers or employees
employed by the Company which are not terminable
in accordance with applicable law. The Company
has not entered into any agreement with any
officer or employee employed by the Company with
respect to termination of employment, and no
officer or employee employed by the Company has
indicated his or her intention to resign.
(iv) There has been no material change in the
directors, officers and salaried employees of
the Company, their positions or the terms and
conditions of their employment since August 31,
1997 which is not identified in Schedule 2.12,
and no such change is anticipated.
(v) All wages, salaries, vacation pay, bonuses,
commissions and other emoluments relating to the
Company's business or the directors, officers
and employees of the Company are reflected and
accrued in the records of the Company , except
with respect to vacation pay, for which no
accrual is provided for salaried employees.
Such vacation pay is expensed as incurred and
will be reflected appropriately in the Company's
1998 EBITDA.
(vi) The Company has withheld from each payment
made to any of their directors, officers and
employees, and their former directors, officers
and employees, the amount of all Taxes and other
deductions (including income taxes, pension
plan, unemployment insurance and disability
contributions) required to be withheld, and have
paid the same together with the employer's share
of same, if any (to the extent required to be
paid so that no such amount is past due), to the
proper Tax and other receiving officers within
the time required under applicable legislation.
(vii) There are no outstanding, pending, or to the
best of the Seller's knowledge, threatened or
anticipated assessments, actions, causes of
action, claims, complaints, demands, orders,
prosecutions or suits against the Company, or
their former or present directors, officers or
agents pursuant to or under any applicable law,
statutes, rules, regulations, ordinances or
orders, including social security, unemployment
insurance, income tax, employer health tax,
employment standards, labor relations,
occupational health and safety, human rights,
worker's compensation and pay equity.
<PAGE>
(viii) The Company has not made any agreement,
directly or indirectly, with any labor union,
employee association or other similar entity or
made commitments to or conducted negotiations
with any labor union or employee association or
other similar entity with respect to any future
agreements. No trade union, employee association
or other similar entity holds any bargaining
rights with respect to any of the employees of
the Company acquired by certification, interim
certification, voluntary recognition,
designation or successor rights, or has applied
to be certified as the bargaining agent of the
employees of the Company. The Seller is not
aware of any current attempts to organize or
establish any labor union, employee association
or other similar entity affecting the Company or
the Company's business.
(ix) The Company has not experienced any strikes,
work stoppages, claims of unfair labor practice
or other material labor disputes.
(x) To the best of the Seller's knowledge, after
due inquiry, no officer or employee of the
Company is eligible for short-term or long-term
disability benefits.
(xi) All of the officers and employees of the
Company identified in Schedule 2.12 are in good
standing under the terms and conditions of their
employment, and the Seller is not aware of any
problem or difficulty associated with any such
officer or employee, or the employment of any
such officer or employee.
(b)Pension and Benefit Matters
The Company does not maintain or provide Plans and
has no liabilities under or to any Plans. Schedule
2.12 sets forth a true and complete list of all
employee benefits of any kind including but not
limited to health, life or disability insurance
plans or programs, and with respect to such
benefits there is no unfunded liability, solvency
deficiency, unpaid regular or special payment,
experience deficiency, whether due or not and the
costs of such benefits are reflected or accrued in
the records of the Company..
<PAGE>
2.13 Properties.
(a) The Company does not own any real property.
(b) Schedule 2.13(b) contains a true and complete
list and description of all real property leased by the
Company. The Company has a valid leasehold interest in
all real property leased in connection with the
business, operations, or affairs of the Company. No
improvement on any leased real property encroaches upon
any real property of any other person. The Company
leases, or has a valid right under contract to use,
adequate means of ingress and egress to, from and over
all such real property.
(c) Except as set forth as Schedule 2.13(c), the
Company has good and marketable title to, or has a
valid leasehold interest in or has a valid right under
contract to use, all tangible personal property that is
used in the conduct of the business, operations, or
affairs of the Company, free and clear of all Liens
(including without limitation the assets reflected on
the Interim Balance Sheet which have not been disposed
of since its date in the ordinary course of business
and consistent with past practice). All such tangible
personal property is in good operating condition and
repair (reasonable wear and tear excepted), is suitable
for its current uses and such property is, in the
aggregate, adequate and sufficient for the operation of
the business of the Company, as currently conducted at
the current production level and conforms in all
material respects to all applicable laws.
(d) Schedule 2.13(d) contains a true and complete
list and description of all registered (i) marks,
names, trademarks, service marks, patents, patent
rights, assumed names, logos, trade secrets,
copyrights, trade names and service marks, and all
applications in respect thereof, that are used in the
conduct of the business, operations, or affairs of the
Company and (ii) all computer software, programs and
similar systems owned by or licensed to the Company or
used in the conduct of the business, operations, or
affairs of the Company. The Company has and, after the
Closing, will have, the right to use, in the manner
currently used by the Company, free and clear of any
royalty or other payment obligations or other Liens,
such intellectual property and computer software,
programs and similar systems, except for such
royalties, licensing fees or other payment obligations
set forth in Schedule 2.13(d), subject to all standard
licensing agreements with respect to the software
programs licensed by the Company. The Company is not
in conflict with or in violation or infringement of,
nor has Seller or the Company received any notice of
any conflict with or violation or infringement of or
any claimed conflict with, any asserted rights of any
other person with respect to any such intellectual
property or computer software, programs, or similar
systems.
<PAGE>
2.14 Environmental Matters. Except as disclosed
in Schedule 2.14:
(a) The Company's business has been and is being
carried on, and the Property is, in compliance with all
applicable environmentally related common law and all
Environmental Laws, Environmental Regulations and
Environmental Orders.
(b) No Environmental Permits are required for
carrying on the Business as it is presently being
conducted and as it is anticipated it will be conducted
hereafter.
(c) The Company has not used and does not use any
of its facilities or permit them to be used to
generate, manufacture, refine, treat, transport,
handle, store, dispose, transfer, produce or process
Hazardous Waste.
(d) The Company has not received any written or
oral notice of any alleged violation of any
Environmental Laws or other damage to the environment
or human health emanating from or occurring on the
Property or any of the facilities of the Company
situated on the Property and to the best of the
Seller's knowledge, after due inquiry, no fact or
circumstance exists which would give rise to such a
claim.
(e) The Company does not own or operate, and the
Seller has no knowledge of, any underground storage
tanks under the Property or any of the facilities of
the Company.
(f) There is no radon at levels deemed
unacceptable by any health, labor or environmental
authority of any Authority present at, on, in or under,
or discharged or emitted from the property or any of
the facilities of the Company situated on the Property.
(g) The Company has not been convicted of an
offense for non-compliance with any Environmental Laws,
Environmental Regulations or Environmental Order or has
been fined or otherwise sentenced or settled any
prosecution short of conviction in connection with the
Business. The Seller does not know, or have reasonable
grounds to know, of any fact which could give rise to a
notice of non-compliance with any Environmental Laws,
Environmental Regulations or Environmental Orders.
(h) The Company is not required to maintain
environmental records relating to its business. The
Company has not conducted an environmental audit of its
business.
<PAGE>
(i) The Company has not caused or permitted, and
the Seller does not have any knowledge of any
predecessor having caused or permitted, the Release of
any Hazardous Substances on or off-site from the place
or places where the Company carries on the Business,
and all wastes and substances disposed of, treated or
stored by the Company or to the knowledge of Sellers,
by any predecessor on or off-site such places of
business, whether hazardous or non-hazardous, have been
and are disposed of, treated and stored in compliance
with all Environmental Laws, Environmental Regulations
or Environmental Orders.
2.15 Contracts. Schedule 2.15 contains a true and
complete list of each of the following contracts (whether or
not in writing) or other documents or arrangements (true and
complete copies, or, in the case of oral contracts or
arrangements, written summaries of the terms, of which have
been furnished to Purchaser), to which the Company is a
party or by which any of its assets is or may be bound:
(a) all employment, agency, consultation, or
representation contracts or other contracts of any type
(including without limitation agreements relating to
loans or advances) with any present officer, director,
employee, agent, consultant, or other similar
representative (or any former officer, director,
employee, agent, consultant or similar representative
if there exists any present or future Liability with
respect to such contract), other than contracts with
consultants, agents and similar representatives who do
not receive compensation of $35,000.00 or more per
year;
(b) all contracts with any person containing any
stipulation, provision, or covenant limiting the
ability of any person to compete with or to provide
products or services to the Company or limiting the
ability of the Company to (i) sell any products or
services of any other person, (ii) transact business or
engage in any line of business, or (iii) compete with
or to obtain products or services from any person;
<PAGE>
(c) except with respect to trade payables
incurred in the ordinary course of business, all
contracts relating to the borrowing of money by the
Company, relating to the deferred purchase price for
property or services, or relating to the direct or
indirect guarantee by the Company of any Liability that
individually or in the aggregate exceeds $10,000.00,
including, without limitation, any contract relating to
(i) the maintenance of compensating balances that are
not terminable without penalty upon not more than 60
calendar days' notice, (ii) any line of credit or
similar facility, (iii) the payment for property,
products, or services of any other person, or (iv) the
obligation to take-or-pay, keep-well, make-whole, or
maintain surplus or earnings levels or perform other
financial ratios or requirements;
(d) all contracts pursuant to which the Company
has agreed to indemnify or hold harmless any person;
(e) all leases or subleases of real property used
in the business, operations, or affairs of the Company;
(f) all contracts or arrangements (including,
without limitation, those relating to allocations of
expenses, personnel, services, or facilities) between
or among the Company, or Seller or any affiliate of
Seller;
(g) all outstanding proxies, powers of attorney,
or similar delegations of authority of the Company;
(h) all collective bargaining or similar labor
contracts;
(i) all leases or subleases of personal property
that involve the payment or potential payment, pursuant
to the terms of such lease or sublease, by the Company
of more than $10,000.00 per year (it being understood
that any such leases not listed on Schedule 2.15 do not
have an aggregate annual cost to the Company in excess
of $10,000.00;
(j) all other contracts that involve the payment
or potential payment, pursuant to the terms of such
contracts, by or to the Company of more than $10,000.00
individually or in the aggregate or that are otherwise
material to the business, condition (financial or
otherwise), results of operations or prospects of the
Company.
<PAGE>
Each contract or arrangement disclosed or required
to be disclosed in Schedule 2.15 is in full force and
effect and constitutes a legal, valid and binding obligation
of each party thereto, and to the best of Seller's knowledge
enforceable against each party in accordance with its terms.
Neither Seller nor the Company has received any notice,
whether written or oral, of termination or intention to
terminate from any other party to such contract. Neither
the Company nor, to the knowledge of Seller and the Company,
any other party to such contract is in violation or breach
of or default under any such contract (or with or without
notice or lapse of time or both, would be in violation or
breach of or default under any such contract).
2.16 Licenses and Permits. Except as disclosed in
Schedule 2.16, the Company owns or validly holds all
licenses, franchises, permits, approvals, authorizations,
exemptions, classifications, certificates, registrations and
similar documents or instruments that are required for its
business, operations and affairs. All such licenses,
franchises, permits, approvals, authorizations, exemptions,
classifications, certificates, registrations and similar
documents or instruments are and will remain, immediately
following the Closing, valid, binding and in full force and
effect.
2.17 Insurance. Schedule 2.17 contains a true and
complete list of all liability, property, workers
compensation, directors and officers liability and other
similar insurance contracts that insure the business,
operations, or affairs of the Company or that affect or
relate to the ownership, use, or operations of any of its
assets. All such insurance is in full force and effect and
copies of all such contracts have been made available to
Purchaser.
2.18 Intercompany Liabilities. Except as
disclosed in Schedule 2.18, (a) neither Seller nor any
Affiliate of Seller or the Company provides or causes to be
provided to the Company any products, services, equipment,
facilities, or similar items and (b) there are no
Liabilities between the Company and Seller or any other
Affiliate of the Company or the Seller. Except as disclosed
in Schedule 2.18, since the date of the Interim Balance
Sheet, such intercompany Liabilities have been paid in the
ordinary course of business and consistent with past
practice.
2.19 Corporate Records. The minute books and
corporate records of the Company contain complete and
accurate records of all proceedings and actions taken at all
meetings, or by written consent in lieu of meetings, of the
stockholders and the Board of Directors and all authorized
committees of the Board of Directors thereof.
<PAGE>
2.20 Bank Accounts. Schedule 2.20 contains (a) a
true and complete list of the names and locations of all
banks, trust companies, securities brokers and other
financial institutions at which the Company has accounts or
safe deposit boxes or maintains banking, custodial, trading,
or other similar relationships and (b) a true and complete
list and description of each such account, box and
relationship.
2.21 Warranties and Returns. Schedule 2.21 hereto
sets forth a summary of present practices and policies
followed by the Company with respect to guarantees,
warranties, servicing, or repairs of any products
manufactured or sold and services rendered by it, whether
such practices are oral or in writing or are deemed to be
legally enforceable. Except as set forth on Schedule 2.21
hereto, to the knowledge of Seller or of the Company, there
are no written statements, citations, or decisions by any
court, arbitrator, governmental authority or nationally
recognized standards organization stating that any product
actually sold by the Company is defective or unsafe or fails
to meet any standards promulgated by any court, arbitrator,
governmental authority or nationally recognized standards
organization . Except as set forth on Schedule 2.21 hereto,
there is not presently, nor has there been, any failure of a
product sold by the Company such as to require, or which may
require, a general recall or replacement campaign with
respect to such product or a reformulation or change of such
product. Except as set forth on Schedule 2.21 hereto, there
is no (a) fact, known to the Seller, relating to any product
of the Company that may impose upon the Company a duty to
recall any such product or a duty to warn customers of a
defect in any such product, (b) material design,
manufacturing, or other defect, known to the Seller, in any
such product, or (c) material liability for warranty claims,
returns, or servicing with respect to any such product not
fully reflected on the Interim Balance Sheet.
2.22 Customers and Suppliers. Schedule 2.22 sets
forth (a) list of the Company's ten largest customers based
on sales during the ten month period ending June 30, 1998,
showing: (i) the approximate total sales by the Company to
each such customer during such period, and (ii) current
prices, anticipated volumes and principal terms and
conditions of sale to each such customer respectively, and
(iii) and the questions to be asked of each such customer
pursuant to Section 4.3 and the Seller's anticipated
answers; and (b) a list of the Company's ten largest
suppliers for such periods, showing the approximate total
purchases by the Company from each such supplier during each
such period. Since August 31, 1997, there has not been any
material adverse change in the business relationship of the
Company with any material customer or supplier. Seller has
no actual knowledge of the existence of any such material
adverse change (whether as a result of the consummation of
the transactions contemplated by this Agreement or
otherwise).
<PAGE>
2.23 Disclosure. No representation or warranty
made by Seller in this Agreement, in the schedules hereto,
or in any certificate furnished by Seller to Purchaser in
connection with this Agreement or the transactions
contemplated hereby contains any untrue statement of
material fact or omits to state a material fact necessary to
make the statements herein or therein not misleading in
light of the circumstances under which they were made.
2.24 Residency. Each of the Sellers is not a
non-resident of Canada within the meaning of the Tax Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to
Sellers as follows:
3.1 Organization. Purchaser is a corporation
duly organized, validly existing and in good standing under
the laws of the State of Delaware.
3.2 Corporate Authority. Purchaser has full
corporate power and authority to enter into this Agreement
and to perform its obligations hereunder. The Purchaser's
execution and delivery of this Agreement and the performance
of its obligations hereunder have been duly and validly
authorized by all necessary corporate action on the part of
Purchaser. This Agreement constitutes a legal, valid and
binding obligation of Purchaser, enforceable against
Purchaser in accordance with its terms.
3.3 Consents and Approvals. Purchaser is not
required to make any filing with, or to obtain any permit,
authorization, consent or approval of, any governmental
authority as a condition to the lawful consummation of the
transactions contemplated by this Agreement. The execution
and delivery of this Agreement by Purchaser does not, and
the performance by Purchaser of its obligations under this
Agreement will not: (i) conflict with or result in a breach
of any of the terms, conditions or provisions of the
certificate of incorporation or bylaws of Purchaser;
(ii) except as set forth in Schedule 3.3, conflict with or
constitute a default under, or give rise to any right to
terminate, cancel, modify or accelerate, any contract,
agreement, license, mortgage, note, bond, debenture or other
evidence of indebtedness to which Purchaser is a party or by
which any of its assets may be bound; (iii) violate any term
or provision of any law, rule or regulation or any permit,
concession, grant, franchise, license, writ, judgment,
decree, injunction, order or ruling of any court or
governmental or regulatory authority applicable to
Purchaser; or (iv) result in the creation or imposition of
any Lien upon Purchaser or any of it assets.
<PAGE>
3.4 Purchase for Investment. Purchaser is
acquiring the Shares for its own account for investment
purposes and not with a view to the distribution of the
Shares. Purchaser has such knowledge and experience in
financial and business matters so as to be capable of
evaluating the merits and risks of its investment in the
Shares. Purchaser will not, directly or indirectly, dispose
of the Shares except in compliance with applicable federal
and state securities laws.
ARTICLE IV
COVENANTS OF SELLER
Seller covenants and agrees with Purchaser as
follows:
4.1 Contract and Regulatory Approvals. Seller
will take and will cause the Company (a) to take all
commercially reasonable steps necessary or desirable, and to
proceed diligently and in good faith and to use all
commercially reasonable efforts, to obtain as promptly as
practicable all (i) approvals and consents of any person
under all contracts to which the Seller or the Company is a
party, or by which their respective assets may be bound,
necessary to permit Seller to consummate the transactions
contemplated hereby and (ii) all approvals, authorizations
and clearances of governmental authorities required of the
Seller or the Company to consummate the transactions
contemplated hereby, (b) to provide such other information
and communications to such governmental authorities as
Purchaser or such authorities may reasonably request and
(c) to cooperate with Purchaser in obtaining, as promptly as
practicable, all approvals, authorizations and clearances of
governmental authorities and other persons required of
Purchaser to consummate the transactions contemplated hereby
Without limiting the generality of the foregoing, Seller
shall obtain the assignment by Boyer Investments Ltd. as
Lessee of its lease dated April 4 , 1997 with D. Graeme
Investments Ltd. as Lessor to the Company (the "Assignment")
and the consent to the Assignment by Lessor (the "Consent").
The Assignment and Consent shall be in form and substance
satisfactory to Purchaser.
4.2 Intentionally Omitted.
<PAGE>
4.3 Investigation by Purchaser. Seller will
provide and will cause the Company to provide, Purchaser,
its counsel, accountants and other representatives
(including its financing sources and their respective
representatives) with full access, upon prior notice and
during normal business hours, to all facilities, officers,
employees, agents, accountants, assets and books and records
of the Company and will furnish Purchaser and such other
persons with all such information and data (including
without limitation copies of contracts, Plans and other
books and records) concerning the business, operations and
affairs of the Company as Purchaser or any of such other
persons reasonably may request. Not less than 24 hours
before the Closing Date, Seller shall arrange for Purchaser
to speak with the customers set forth on Schedule 2.22 in
accordance with the procedure set forth on Schedule 2.22.
4.4 No Negotiations. Seller shall not initiate
or encourage (including by way of furnishing information or
assistance), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or
may be reasonably expected to lead to, any Company
Acquisition Proposal (as defined below), or enter into
discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain a Company
Acquisition Proposal, or authorize or permit any of the
officers, directors or employees of Seller or the Company,
or any investment bank, financial advisor, attorney,
accountant or other representative of Seller or the Company
to take any such action. With respect to any such inquires
or proposals received after the date of this Agreement,
Seller shall promptly notify Purchaser of all relevant terms
of any such inquiries and proposals received by it or the
Company or by any such officer, director, employee,
investment banker, financial advisor, attorney, accountant
or other representative relating to such matters, and if
such inquiry or proposal is in writing, Seller shall deliver
or cause to be delivered to Purchaser a copy of such inquiry
or proposal. For purposes of this Agreement, "Company
Acquisition Proposal" shall mean any of the following (other
than the transactions between Seller and Purchaser
contemplated hereunder) involving the Company: (i) any
merger, consolidation, share exchange, business combination,
or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of
51 % or more of the assets or securities of the Company in
a single transaction or series of transactions; or (iii) any
acquisition, issuance or transfer of shares in the capital
or other securities of the Company.
4.5 Conduct of Business. Seller will cause the
Company to conduct its business only in the ordinary course
and consistent with past practice. Seller will not take and
will not permit the Company to take action that would cause
the representations set forth in Article II hereof to be
untrue at any date after the date hereof. Without limiting
the generality of the foregoing:
<PAGE>
(a) Seller will use, and will cause the Company
to use, all commercially reasonable efforts to
(i) preserve intact the present business organization,
reputation and customer relations of the Company,
(ii) keep available the services of the present
officers, directors, employees, agents, consultants and
other similar representatives of the Company, and
(iii) maintain in full force and effect all contracts,
documents and arrangements referred to in Section 2.15
hereof;
(b) Seller will, and will cause the Company to,
(i) maintain all licenses, qualifications and
authorizations of the Company to do business in each
jurisdiction in which it is so licensed, qualified, or
authorized, (ii) maintain all assets of the Company in
good working order and condition, ordinary wear and
tear excepted and (iii) continue all current marketing
and selling activities relating to the business,
operations and affairs of the Company;
(c) Seller will cause the books and records of
each of the Company to be maintained in a prudent
manner;
(d) Seller will cause the Company (i) to prepare
properly and to file duly and validly all reports and
all Tax Returns required to be filed with any
governmental or regulatory authorities with respect to
the business, operations, or affairs of the Company and
(ii) to pay duly and fully all Taxes indicated by such
Tax Returns or otherwise levied or assessed upon the
Company or any of its assets and to withhold or collect
and pay to the proper taxing authorities or hold in
separate bank accounts for such payment all Taxes that
the Company is required to so withhold or collect and
pay, unless such Taxes are being contested in good
faith and, if appropriate, reasonable reserves therefor
have been established and reflected in the books and
records of such entity and in accordance with GAAP; and
(e) Seller will use, and will cause the Company
to use, all commercially reasonable efforts to maintain
in full force and effect substantially the same levels
of coverage as the insurance afforded under the
contracts listed in Schedule 2.17.
(f) Seller will cause the Company to not declare
or pay any dividends or other distributions to
stockholders.
4.6 Financial Statements and Reports.
(a) As promptly as practicable, Seller will
deliver to Purchaser true and complete copies of the
following:
<PAGE>
(i) the unaudited balance sheet of
the Company as of the fiscal year ending August 31,
1998 and the related statements of income,
shareholder's equity and cash flows of the Company for
such year then ending and for the prior year,
together with the notes relating thereto, which
financial statements (and the notes relating thereto
together with the Company's independent accountants
report of review) will be prepared in accordance with
GAAP and will present fairly the financial position of
the Company as of each date thereof and the related
results of operations and cash flow and changes in
stockholder's equity of the Company for each period
covered thereby.
(ii) the unaudited balance sheet of
the Company as of each month ending after the date of
the Interim Balance Sheet up to and including August
31, 1998 and the related statements of income,
shareholder's equity and cash flows of the Company for
such month and the year-to date period then ending,
which financial statements will be prepared in
accordance with GAAP (except for the absence of notes)
and will present fairly the financial position of the
Company as of each date thereof and the related results
of operations and cash flow and changes in
shareholder's equity of the Company for each period
covered thereby.
(b) As promptly as practicable, Seller will
deliver to Purchaser true and complete copies of such
other material financial statements, reports, or
analyses as may be prepared or received by Seller or
any affiliate of Seller as relate to the business,
operations, or affairs of the Company, including,
without limitation, routine internal management reports
and special reports (such as those prepared by the
Seller's or the Company's consultants or advisers).
4.7 Employee Matters.
(a) Except as may be required by law, rules or
regulations, Seller will refrain, and will cause the
Company to refrain, from directly or indirectly:
(i) making any representation or
promise, oral or written, to any officer, director,
employee, agent, consultant, or other similar
representative of the Company concerning any Plan;
<PAGE>
(ii) making any change to, or
amending in any way, the contracts, salaries, wages, or
other compensation of any officer, director, employee,
agent, consultant, or other representative of the
Company other than changes or amendments that (a) are
made in the ordinary course of business and consistent
with past practice, (b) do not and will not result in
increases of more than 4% in the salary, wages, or
other compensation of any such person and (c) do not
and will not exceed, in the aggregate, 5% of the total
salaries, wages and other compensation of all employees
of such entity;
(iii) adopting, entering into,
amending, altering, or terminating, partially or
completely, any Plans relating to or affecting any
employee of the Company;
(iv) adopting, entering into,
amending, altering, or terminating, partially or
completely, any employment, agency, consultation, or
representation contract that is, or had it been in
existence on the effective date of this Agreement would
have been, required to be disclosed in Schedule 2.15;
(v) entering into any contract
with any officer, director, employee, agent,
consultant, or other similar representative of the
Company;
(vi) assuming, entering into,
amending, altering, or terminating any labor or
collective bargaining agreement or contract to which
the Company is a party or by which it is affected;
(vii) hiring any officer, director,
employee, agent, consultant, or other representative of
the Company whose annual compensation exceeds $50,000;
or
(viii) implementing any termination
of any employee except for cause or with Purchaser's
consent.
4.8 Participation in Plans.
[Intentionally Omitted]
(a)
<PAGE>
4.9 No Disposal of Property. Except as expressly
permitted in this Agreement, Seller will cause the Company
to refrain from (a) disposing of any assets of the Company
and from permitting any of such assets to be subjected to
any Liens, except for dispositions of assets in the ordinary
course of business in the ordinary course of the business
and consistent with past practice and except for non-
consensual Liens imposed by operation of law, (b) entering
into any contracts obligating the Company to administer or
manage the operations of any other person and (c) entering
into any contracts permitting any person other than the
Company to administer or manage the operations of the
Company.
4.10 No Breach or Default. Seller will cause the
Company to refrain from violating, breaching, or defaulting
and from taking or failing to take any action that (with or
without notice or lapse of time or both) would constitute a
violation, breach, or default, under any term or provision
of any contract listed in Schedule 2.15 or which, if
permitted by this Agreement to be entered into after the
date of this Agreement would have been required to be listed
in Schedule 2.15 if such representation had been made at the
date of such contract.
4.11 No Acquisitions. Seller will cause the
Company to refrain from (a) merging, consolidating, or
otherwise combining or agreeing to merge, consolidate, or
otherwise combine with any other person, (b) acquiring or
agreeing to acquire all or substantially all assets or
capital stock or other equity securities of any other
person, or (c) otherwise acquiring or agreeing to acquire
control or ownership of any other person.
4.12 Intercompany Liabilities. Seller will cause
the Company to refrain from incurring any Liabilities
between the Company and Seller or any affiliate of Seller
(other than the Company) to be outstanding on the Closing
Date. At or prior to the Closing, all such Liabilities
shall be paid or otherwise settled in full. The Company will
not enter into any contract or, except as required by any
contract disclosed in Schedule 2.15, engage in any
transaction with Seller or any Affiliate of Seller (other
than the Company). Except as otherwise specifically
provided herein, on the Closing Date Seller will terminate
and will cause the Affiliates of Seller (other than the
Company) to terminate each contract between the Company and
Seller or any such Affiliate.
4.13 Resignations of Directors. Seller will cause
such members of the boards of directors and such officers of
the Company as are designated by Purchaser to tender,
effective at the Closing, their resignations from such
boards of directors or from such offices. If requested by
Purchaser, Seller will cause the election of Purchaser's
nominees to such boards of directors.
<PAGE>
4.14 Tax Matters. Seller will refrain and will
cause the Company to refrain from making, filing, or
entering into (whether before or after the Closing) any
election, consent, or agreement with respect to the Company
or its assets.
4.15 Books and Records. On the Closing Date,
Seller will deliver to Purchaser or will make available to
Purchaser all books and records of the Company. If (at any
time after the Closing) Seller discovers in its possession
or under its control any other books and records of the
Company, Seller will forthwith deliver such books and
records to Purchaser.
4.16 Notice and Cure. Seller will notify
Purchaser promptly in writing of and contemporaneously will
provide Purchaser with true and complete copies of any and
all information or documents relating to, any event,
transaction, or circumstance occurring after the date hereof
that causes or will cause any covenant or agreement of
Seller under this Agreement to be breached or that renders
or will render untrue any representation or warranty of
Seller contained in this Agreement. Seller will use all
commercially reasonable efforts to cure, before the Closing,
(a) any such breach or misrepresentation and (b) any
violation or breach of any representation, warranty,
covenant, or agreement made by it in this Agreement, whether
occurring or arising before or after the date hereof.
4.17 Recoveries. Seller shall pay to Purchaser
(i) any net loss incurred in connection with foreign
currency transaction described on Schedule 2.15 and (ii) the
net loss, if any, from the litigations described on
Schedule 2.10, such net loss be inclusive of legal fees and
other costs incurred or received by the Company, as the case
may be.
ARTICLE V
COVENANTS OF PURCHASER
Purchaser covenants and agrees with Seller as follows:
5.1 Conduct of the Business. Following the
Closing and through August 31, 1998 the Purchaser shall
operate the business of the Company only in the ordinary
course of business consistent with the past practices of the
Company.
5.2 Recoveries. Purchaser shall pay to Seller
(i) the net gain, if any, obtained in connection with the
foreign currency transactions described on Schedule 2.15 and
(ii) the net recovery, if any, from the litigations
described on Schedule 2.10, such net recovery to be
inclusive of legal fees and other costs incurred or received
by the Company, as the case may be.
<PAGE>
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligation of Purchaser to close the
transaction of purchase and sale contemplated hereby is
subject to the following conditions precedent each of which
is for the exclusive benefit of Purchaser and may be waived
by Purchaser in whole or in part:
6.1 Representations and Warranties. Each
representation and warranty made by Sellers in this
Agreement, in the certificates delivered by Sellers pursuant
to this Agreement and in schedules hereto shall be true in
all material respects on the date on which made and shall be
true in all material respects on and as of the Closing Date
as though such representation and warranty were made on and
as of the Closing Date.
6.2 Performance. Seller shall have performed or
complied with all its agreements, covenants and obligations
required to be performed or complied with by this Agreement
on or before the Closing Date.
6.3 Employment Agreement. The Company and Seller
shall have entered into an Employment Agreement
substantially in the form annexed hereto as Exhibit D.
6.4 No Injunctions. There shall not be in effect
on the Closing Date any injunction or similar restraining
order of any court or governmental authority of competent
jurisdiction preventing either party from consummating any
of the transactions contemplated by this Agreement nor shall
there be any writ, injunction, decree or similar order or
any court or governmental authority of competent
jurisdiction that would impose any limitation on Purchaser's
ability to exercise full rights of ownership of the Shares.
6.5 Consents and Authorizations. Each of the
governmental and other approvals, consents, permits, or
waivers listed in Schedule 3.3 including adequate financing
to consummate this transaction contemplated hereby shall
have been obtained on or before July 31, 1998 unless
Purchaser on or before such date has waived such condition
to its obligation to close and in Schedule 2.6 shall have
been obtained and the Assignment and Consent shall have been
obtained.
<PAGE>
6.6 No Adverse Change. Except as disclosed in
Schedule 2.8, since the date of the Interim Balance Sheet,
there shall not have been, occurred, or arisen any change
in, or any event (including without limitation any damage,
destruction, or loss whether or not covered by insurance),
condition, or state of facts of any character that
individually or in the aggregate has or may reasonably be
expected to have a material adverse effect on the business,
condition (financial or otherwise), assets, results of
operations or properties of the Company.
6.7 Opinion of Counsel. Seller shall have
delivered to Purchaser the opinion, dated the Closing Date,
of Gowling, Strathy & Henderson, counsel to Seller, to the
effect set forth in Exhibit B hereto.
6.8 Officer's Certificates. Seller shall have
delivered to Purchaser a certificate, dated the Closing Date
, to the effect set forth in Exhibit C-1 hereto. In
addition, Seller shall have delivered to Purchaser a
certificate, dated the Closing Date and executed by the
secretary or any assistant secretary of Company, to the
effect set forth in Exhibit_C-2 hereto.
6.9 Resignations. Seller shall have delivered to
Purchaser the written resignations of the directors and
officers of the Company or requested by Purchaser.
6.10 Escrow Agreement. Purchaser and Seller shall
have entered into the Escrow Agreement.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLERS
The obligation of Sellers to close is subject to the
following conditions precedent each of which is for the
exclusive benefit of Sellers and may be waived by Sellers in
whole or in part:
7.1 Representations and Warranties. Each
representation and warranty made by Purchaser in this
Agreement, in the certificates delivered by Purchaser
pursuant to this Agreement and in schedules hereto shall be
true in all material respects on the date on which made and
shall be true in all material respects on and as of the
Closing Date as though such representations and warranties
were made on and as of the Closing Date.
7.2 Performance. Purchaser shall have performed
or complied with all its agreements, covenants and
obligations required to be performed or complied with by
this Agreement on or before the Closing Date.
<PAGE>
7.3 Employment Agreement. The Company and Seller
shall have entered into an Employment Agreement
substantially in the form annexed hereto as Exhibit D.
7.4 No Injunctions. There shall not be in effect
on the Closing Date any injunction or similar restraining
order of any court or governmental authority of competent
jurisdiction preventing either party from consummating any
of the transactions contemplated by this Agreement.
7.5 Consents and Authorizations. Each of the
governmental and other approvals, consents, permits, or
waivers listed in Schedule 3.3 and in Schedule 2.6 shall
have been obtained.
7.6 Opinion of Counsel. Purchaser shall have
delivered to Seller the opinion, dated the Closing Date, of
Alan Plotkin, Esq, counsel to Purchaser, to the effect set
forth in Exhibit E hereto.
7.7 Officer's Certificates. Purchaser shall have
delivered to Seller a certificate, dated the Closing Date
and signed by its chief executive officer, to the effect set
forth in Exhibit F-1 hereto. In addition, Purchaser shall
have delivered to Seller a certificate, dated the Closing
Date and executed by the secretary or any assistant
secretary of Purchaser, to the effect set forth in Exhibit
F-2 hereto.
7.8 Escrow Agreement. Purchaser and seller shall
have entered into the Escrow Agreement.
ARTICLE VIII
SURVIVAL OF PROVISIONS
8.1 Survival of Representations and Warranties.
Subject to Section 8.3 and ARTICLE IX hereof, the
representations and warranties respectively made by Sellers,
and Purchaser in this Agreement, in the schedules hereto and
in any certificate delivered pursuant to this Agreement will
survive the Closing and will remain in full force and effect
thereafter:
(a) indefinitely in the case of Sections 2.2 and
2.4 and 2.13;
(b) until 60 days after the expiration of all
periods allowed for objecting and appealing the
determination of any proceedings relating to any
assessment or reassessment of the Company by any Tax
Authority in respect of any Tax period ending prior to
the Closing in the case of the representations and
warranties of Seller set forth in Section 2.9; and
<PAGE>
(c) until the second anniversary of the Closing
Date in the case of all other representations and
warranties.
8.2 Survival of Covenants and Agreements. Subject to
Section 8.3 and ARTICLE IX hereof, all covenants and
agreements respectively made by Sellers and Purchaser in
this Agreement to be performed after the date hereof will
survive the Closing and will remain in full force and effect
thereafter, until the expiration of the terms or periods
specified therein or (if there is no such specified term or
period) indefinitely without regard to duration.
8.3 Pursuit of Claims. Notwithstanding the foregoing,
any representation, warranty, covenant, or agreement as to
which a bonafide claim for indemnification has been asserted
in accordance with ARTICLE IX hereof during the applicable
survival period set forth in Section 8.1 or 8.2 hereof will
(with respect to such claim) survive and such claim may be
pursued, beyond the expiration of such survival period until
such claim is resolved by final, nonappealable judgment or
by settlement.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Sellers. Subject to the
provisions of Sections 9.3 and 9.4 hereof and this
ARTICLE IX, Sellers will indemnify and hold harmless the
Purchaser and its officers, directors, shareholders,
employees and agents (each a "Purchaser Party") (whether or
not such Purchaser Party owns any Shares) in respect of any
and all monetary damages, Liabilities, fines, fees,
penalties, interest obligations, deficiencies, losses and
expenses (including without limitation punitive, treble, or
other exemplary or extra contractual damages, amounts paid
in settlement, interest, court costs, costs of
investigation, fees and expenses of attorneys, accountants,
actuaries, environmental consultants, engineers and
geologists and other experts and other expenses of
litigation or of any claim, default, or assessment)
(collectively, "Damages") resulting from or relating to each
of the following:
(a) any breach by Sellers of any representation,
warranty, covenant, or agreement made by Sellers in
this Agreement, in the schedules hereto, or in any
certificate delivered by Sellers in connection with
this Agreement;
(b) the employment or termination of employment
(including constructive termination) by the Company of
any individual (including without limitation any
employee of the Company) attributable to any action or
inaction occurring before the Closing Date; and
<PAGE>
(c) any claim by any employee of the Company for
workers compensation or related medical benefits
asserted after the Closing Date that relates to an
injury or illness originating before the Closing Date.
9.2 Indemnification by Purchaser. Subject to the
provisions of Sections 9.3 and 9.4 hereof and this
ARTICLE IX hereof, Purchaser will indemnify and hold
harmless Sellers and its officers, directors, shareholders,
employees and agents (each a "Seller Party") (whether or not
such Seller Party sells any Shares) in respect of any and
all Damages resulting from or relating to any breach by
Purchaser of any representation, warranty, covenant, or
agreement made by Purchaser in this Agreement
9.3 Indemnification Procedures.
(a) If any Purchaser Party or Seller Party, as the
case may be (each an "Indemnitee") becomes aware of any
matter for which it believes it is entitled to
indemnification hereunder that involves (i) any claim made
against the Indemnitee by any person or entity other than a
Purchaser Party or a Seller Party or (ii) the commencement
of any action, suit, investigation, arbitration, or similar
proceeding against the Indemnitee by any person other than a
Purchaser Party or a Seller Party, the Indemnitee will give
the Seller or Purchaser, as appropriate (each an
"Indemnifying Party") prompt written notice of such claim or
the commencement of such action, suit, investigation,
arbitration, or similar proceeding, provided that the
failure of the Indemnitee to give such notice on a timely
basis shall not limit the rights of the Indemnitee
hereunder, except to the extent that the Indemnifying Party
has suffered actual prejudice as a result thereof. Such
notice will (A) provide (with reasonable specificity) the
basis on which indemnification is being asserted, (B) set
forth the actual or estimated amount of Damages for which
indemnification is being asserted, if known, and (C) be
accompanied by copies of all relevant pleadings, demands and
other papers served on the Indemnitee.
<PAGE>
(b) The Indemnifying Party will have a period of 30
days after the delivery of each notice required by
Section 9.3(a) hereof during which to respond to such
notice. If the Indemnifying Party elects to defend the
claim described in such notice or does not respond within
such 30-day period, the Indemnifying Party will be obligated
to compromise or defend (and will control the defense of)
such claim, at its own expense and by counsel chosen by the
Indemnifying Party and reasonably satisfactory to the
Indemnitee. The Indemnitee will cooperate fully with the
Indemnifying Party and counsel for the Indemnifying Party in
the defense against any such claim and the Indemnitee will
have the right to participate at its own expense in the
defense of any such claim. If the Indemnifying party
responds within such 30-day period and elects not to defend
such claim, the Indemnitee will be free to compromise or
defend (and control the defense of) such claim and to pursue
such remedies as may be available to the Indemnitee under
applicable law.
(c) Any compromise or settlement of any claim (whether
defended by the Indemnitee or by the Indemnifying Party)
will require the prior written consent of the Indemnitee and
the Indemnifying Party (which consent will not be
unreasonably withheld).
(d) If an Indemnitee becomes aware of any matter for
which it believes it is entitled to indemnification
hereunder and such matter involves a claim made by any
Purchaser Party or Seller Party, the Indemnitee will give
the Indemnifying Party prompt written notice of such claim.
Such notice will (i) provide (with reasonable specificity)
the bases for which indemnification is being asserted and
(ii) set forth the actual or estimated amount of Damages for
which indemnification is being asserted. The Indemnifying
Party will have a period of 30 days after the delivery of
each notice required by this Section 9.3(d) during which to
respond to such notice. If the Indemnifying Party accepts
(in writing) full responsibility for the claim described in
such notice, the actual or estimated amount of Damages
reflected in such notice will be conclusively deemed a
Liability that the Indemnifying Party owes and will pay (in
cash) upon demand, to the Indemnitee. If the Indemnifying
Party has disputed such claim or does not respond within
such 30-day period, the Indemnifying Party and the
Indemnitee agree to proceed in good faith to negotiate a
resolution of such dispute. If all such disputes are not
resolved through negotiations within 30 days after such
negotiations begin, either the Indemnifying Party or the
Indemnitee may initiate litigation to resolve such disputes.
If the Indemnifying Party does not respond within 30 days
after delivery of any claim notice required by this
Section 9.3(d), the Indemnitee may initiate litigation to
resolve such claim.
<PAGE>
9.4 Indemnification Payments. Sellers and
Purchaser agree that any payment made under ARTICLE IX
hereof will be treated by the parties on their Tax Returns
as an adjustment to the aggregate consideration for the
Shares. If, notwithstanding such treatment by the parties,
any indemnity payment is determined to be taxable to
Purchaser by any taxing authority, Seller shall indemnify
Purchaser for any Taxes payable by Purchaser by reason of
the receipt of such indemnity payment (including any
payments under this Section 9.4), determined at a Tax rate
equal to the appropriate federal, state and local corporate
income Tax rate for the taxable year in which the indemnity
is determined to be taxable to Purchaser.
ARTICLE X
TERMINATION
10.1 Termination. Without limiting the rights or
remedies that any party hereto may otherwise have, this
Agreement may be terminated and the transactions
contemplated hereby may be abandoned:
(a) at any time before the Closing by written
agreement of Seller and Purchaser; or
(b) at any time after August 4, 1998, by
Seller or Purchaser if the transactions contemplated by
this Agreement have not been consummated on or before
such date and such failure to consummate is not caused
by a breach of this Agreement (or any representation,
warranty, covenant, or agreement included herein) by
the party electing to terminate pursuant to this
Section 10.1(b).
(c) by Purchaser, on or prior to July 31, 1998,
if the results and findings of Purchaser's discussions
with the Company's customers as set forth in Section 4.3
here of are not satisfactory to Purchaser in its sole
discretion, provided, however, that Purchaser shall not
have the right to terminate this Agreement solely if such
customers confirm the information set forth on Schedule
2.22,
(d) by Sellers on or after July 31, 1998 if
Purchaser on or before such date has not obtained the
consents and approvals set forth on Schedule 3.3.
(e) by Purchaser on or before July 31, 1998 if
Purchaser on or before such date has not obtained the
consents and approvals set forth on Schedule 3.3.
(f) by either Purchaser or Seller, if, prior to
the Closing Date, the other party is in material breach
of any material representation, warranty, covenant or
agreement herein contained.
<PAGE>
10.2 Effect of Termination. If this Agreement is
validly terminated pursuant to Section 10.1 hereof, (a) the
obligation of Purchaser to purchase the Shares and the
obligation of Seller to sell the Shares will terminate,
(b) the provisions of Sections 11.5, 11.7 and 11.8 hereof
will continue to apply following any such termination and
(c) no party hereto will be relieved of any Liability for
Damages that such party may have to the other party by
reason of such party's breach of this Agreement (or any
representation, warranty, covenant, or agreement included
herein).
ARTICLE XI
MISCELLANEOUS
11.1 Section 338(h)(10) Election.
(a) Purchaser may elect, at Purchaser's sole
option, to file an election under Section 338(h)(10) of the
Code and under any comparable provisions of state, local, or
foreign law with respect to the purchase of the Shares [and
may include in such election any of the Subsidiaries as
Purchaser may determine] (collectively the "Election").
Seller shall join and shall cause any affiliate to join, [in
both cases] at the request of Purchaser, in the Election.
So long as the Election is made, Seller and Purchaser shall
report, in connection with the determination of Taxes, the
transactions contemplated by this Agreement in a manner
consistent with the Election, including the reasonable
determination by Purchaser of the fair market value of the
assets of the Company [and the Subsidiaries] and the
allocation of the deemed purchase price of the assets of the
Company [and the Subsidiaries] within the meaning of
Section 338(h)(10) of the Code and the Treasury Regulations
promulgated thereunder. Purchaser shall notify Seller in
writing of its intention to file the Election no later than
15 days prior to the due date for filing the Election (the
"Election Notice").
<PAGE>
(b) Purchaser shall be responsible for the
preparation and filing of all forms and documents required
in connection with the Election. On the Closing Date,
Seller shall execute five copies of Form 8023 provided by
Purchaser. In connection with the Election Notice,
Purchaser shall provide Seller with copies of (i) any
necessary corrections, amendments, or supplements to such
Form 8023, (ii) all attachments required to be filed
therewith pursuant to applicable Treasury Regulations and
(iii) any comparable forms and attachments with respect to
any applicable state, foreign, or local elections being made
pursuant to the Election. Seller shall execute and deliver
to Purchaser within five days of receipt of the Election
Notice such documents or forms as are required by any tax
laws to complete properly the Election. Seller and
Purchaser shall cooperate fully with each other and make
available to each other such Tax data and other information
as may be reasonably required by Seller or Purchaser in
order to timely file the Election and any other required
statements or schedules. Seller shall promptly execute and
deliver to Purchaser any amendments made to Form 8023 (and
any comparable state, local and foreign forms) subsequent to
the filing of the Election and any attachments which are
required to be filed under applicable law.
(c) Seller shall comply with all of the
requirements of Section 338(h)(10) of the Code and the
Treasury Regulations thereunder. Seller shall take no
action which is inconsistent with the requirements for
filing the Election under the Code and the applicable
Treasury Regulations.
(d) To the extent permitted by state and local
laws, the principles and procedures of this Section 11.1
shall also apply with respect to a Section 338(h)(10)
election or equivalent or comparable provision under state,
local, or foreign law, including, without limitation an
election under Section 338(g) of the Code or equivalent or
comparable provision under state, local, or foreign law.
Seller covenants and agrees that to the extent that an
election similar to a Section 338(h)(10) election under the
Code is optional under any state, local, or foreign law,
Seller shall join in any such election as designated by
Purchaser in the Election Notice.]
11.2 Notices. Any notice or other communication given
pursuant to this Agreement must be in writing and
(a) delivered personally, (b) sent by telefacsimile or other
similar facsimile transmission, (c) delivered by overnight
express, charges prepaid, or (d) sent by registered or
certified mail, postage prepaid, as follows:
<PAGE>
(i) If to Sellers:
Richard Boyer
% Gowling, Strathy & Henderson
Suite 1020
50 Queen Street North
Kitchener, Ontario N2H 6M2
Attention: Thomas Hunter, Esq.
Facsimile number: (516) 576-6030
with copy to:
Gowling, Strathy and Henderson
Suite 1020
50 Queen Street North
Suite 1020
Kitchener, Ontario N2H 6M2
Attention: Thomas Hunter, Esq
Facsimile number: (519) 576-6030
(ii) If to Purchaser:
Hedstrom Corporation
585 Slawin Court
Mount Prospect, Illinois 60056
Attention: Arnold E. Ditri
Facsimile number: 847-803-1971
with copy to:
Law Offices of Alan Plotkin
18 E. 48th Street
New York, New York 10017
Attention: Alan Plotkin
Facsimile number: 212-758-2268
All notices and other communications required or permitted
under this Agreement that are addressed as provided in this
Section 11.2 will (A) if delivered personally or by
overnight express, be deemed given upon delivery; (B) if
delivered by telefacsimile or similar facsimile
transmission, be deemed given when electronically confirmed;
and (C) if sent by registered or certified mail, be deemed
given on the third day after delivery of such notice to the
United States post office for delivery. Any party from time
to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new
address, but no such notice will be deemed to have been
given until it is actually received by the party sought to
be charged with the contents thereof.
11.3 Definitions. As used in this agreement, the
following terms shall have the following meanings:
<PAGE>
(a) "Affiliate" shall have the meaning given
to such term in the Securities Act
(Ontario);
(b) "Arm's Length" shall have the meaning
given to such term in the Tax Act
(c) "Authority" means any governmental or
regulatory authority, body, agency or
department, whether federal, provincial
or municipal, having jurisdiction over
the Vendor, the Guarantor, the
Corporation, any of the Subsidiaries or
the Business or any aspect thereof;
(d) "Environmental Laws" shall include all
applicable federal, provincial,
regional, municipal or local laws,
statutes, regulations, ordinances,
rules, policies, guidelines, decrees,
orders, authorizations, approvals,
notices, licenses, permits, directives
or other requirements of any Authority,
court, tribunal or other similar body,
relating to environmental or
occupational health and safety matters;
(e) "Environmental Orders" means applicable
orders, decisions or the like rendered
by any Authority under or pursuant to
any Environmental Laws;
(f) "Environmental Permits" means all
permits, certificates, approvals,
registrations and licenses issued by any
Authority and relating to or required
for the operation of the Business and
the Property in compliance with all
Environmental Laws, Environmental Orders
or Environmental Regulations;
(g) "Environmental Regulations" means all
applicable regulations or the like
promulgated under or pursuant to any
Environmental Laws.
(h) "ETA" means Part IX of the Excise Tax Act
(Canada);
(i) "GST" means all Taxes payable under the
ETA or under any provincial legislation
similar to the ETA;
(j) "Hazardous Substances" means PCBs,
asbestos, urea formaldehyde foam
insulation or any other substance or
material that is prohibited, controlled
or regulated under Environmental Laws;
(k) "Hazardous Waste" means any
contaminants, pollutants and dangerous
substances, including asbestos, liquid
waste, special waste, toxic substances,
hazardous or toxic chemicals, Hazardous
Substances or hazardous materials as
defined in or pursuant to any
Environmental Laws; trust and funding
agreements and applicable insurance
contracts of the Company;
<PAGE>
(l) "Plans" means all plans established,
organized and administered which provide
pensions for officers, employees and
former officers and employees of the
Company, or predecessor corporations,
and their beneficiaries, including,
where applicable:
(i)the assets and funds maintained to
provide benefits under or related to
Plans; and
(ii) Plan Terms
(m) "Predecessors" means any owner, occupier
or Person who previously had
charge, management or control of the
Property or any part thereo
(n) "Property" menas all real property,
whether owned or leased, used in
carrying on the Business or previously
used for such purpose;
(o) "Release" means a releasing, spilling,
leaking, pumping, pouring, emitting,
emptying, discharging, injecting,
escaping, leaching, disposing or dumping
which is in breach of any Environmental
Law, Environmental Regulation or
Environmental Order;
(p) "Tax Act" means the Income Tax Act
(Canada);
(q) "Tax" means all governmental taxes,
levies, duties, assessments,
reassessments, and other charges of any
nature whatsoever, whether direct or
indirect, including income tax, profits
tax, gross receipts tax, corporation
tax, commodity tax, sales and use tax,
wage tax, payroll tax, worker's
compensation levy, employer health tax,
capital tax, stamp duty, real and
personal property tax, land transfer
tax, customs or excise duty, excise tax,
turnover or value added tax on goods
sold or services rendered, withholding
tax, Canada pension plan, social
security and unemployment insurance
charges or retirement contributions, and
any interest, fines, additions to tax
and penalties thereon.
<PAGE>
11.4 Entire Agreement; Interpretation. Except for
documents executed by Seller and Purchaser pursuant hereto,
this Agreement supersedes all prior discussions and
agreements between the parties with respect to the subject
matter of this Agreement and this Agreement contains the
sole and entire agreement between the parties hereto with
respect to the subject matter hereof. Unless the context of
this Agreement otherwise requires, (a) words of any gender
are deemed to include each other gender; (b) words using the
singular or plural number also include the plural or
singular number, respectively; (c) the terms "hereof,"
"herein," "hereby," "hereto," and derivative or similar
words refer to this entire Agreement; (d) the terms
"ARTICLE" or "Section" refer to the specified ARTICLE or
Section of this Agreement; (e) the term "or" means "and/or";
(f) the term "party" means, on the one hand, Purchaser and,
on the other hand, Seller; (g) the phrase "in the ordinary
course of business and consistent with past practice" refers
to the business, operations, affairs and practice of the
Company consistent with past practices of such business,
operations and affairs and consistent with all applicable
laws; and (h) all references to "dollars" or "$" refer to
currency of Canada.
11.5 Expenses. Except as otherwise expressly provided
in this Agreement (including without limitation as provided
in ARTICLE IX hereof), each of Seller and Purchaser will pay
its own costs and expenses in connection with this Agreement
and the transactions contemplated hereby. For greater
certainty, the Seller shall not change to the Company any
fees, costs or expenses relating to the negotiations and
execution of this Agreement or the completion of the
transaction of purchase and sale contemplated hereby.
11.6 Public Announcements. At all times at or before
the Closing, Seller and Purchaser will each consult with the
other before issuing or making any reports, statements, or
releases to the public with respect to this Agreement or the
transactions contemplated hereby and will use good faith
efforts to agree on the text of a joint public report,
statement, or release or will use good faith efforts to
obtain the other party's approval of the text of any public
report, statement, release to be made solely on behalf of a
party. If Seller and Purchaser are unable to agree on or
approve any such public report, statement, or release and
such report, statement, or release is, in the opinion of
legal counsel to a party, required by law or appropriate to
discharge such party's disclosure obligations, then such
party may make or issue the legally required or appropriate
report, statement, or release. Any such report, statement,
or release approved or permitted to be made pursuant to this
Section 11.6 may be disclosed or otherwise provided by
Seller or Purchaser to any person, including without
limitation to any employee or customer of either party
hereto and to any governmental or regulatory authority.
<PAGE>
11.7 Confidentiality. For a period of three years
after the date hereof, (a) each of Purchaser and Seller will
refrain, and will cause its respective officers, directors,
employees, agents and other representatives to refrain, from
disclosing to any other person any confidential documents or
confidential information concerning the other party hereto
furnished to it in connection with this Agreement or the
transactions contemplated hereby and (b) Seller will
refrain, and will cause its respective officers, directors,
employees, agents and other representatives to refrain, from
disclosing to any person any confidential documents or
confidential information concerning the Company unless
(i) such disclosure is compelled by judicial or
administrative process or by other requirements of law and
notice of such disclosure is furnished to such other party
hereto; (ii) either party hereto deems it advisable (upon
advice of such party's legal counsel) to disclose any such
confidential documents or information in connection with the
requirements of any securities law; or (iii) such
confidential documents or information can be shown to have
been (A) previously known by the party hereto receiving such
documents or information, (B) in the public domain through
no fault of such receiving party, or (C) later acquired by
such receiving party from other public sources.
11.8 Brokers. Seller will indemnify and hold harmless
Purchaser in respect of any and all claims or demands for
commission, compensation, or other Damages by any broker,
finder, or other agent (whether or not a present or former
employee or agent of Seller or the Company) claiming to have
been engaged by Seller or the Company in connection with the
transactions contemplated by this Agreement and Seller will
bear the cost of the reasonable out-of-pocket expenses
incurred by each Purchaser in investigating, defending
against, or appealing any such claim or demand.
11.9 Further Assurances. Seller and Purchaser agree
that, from time to time after the Closing, upon the
reasonable request of the other, they will cooperate and
will cause their respective Affiliates to cooperate with
each other to effect the orderly transition of the business,
operations and affairs of the Company. Without limiting the
generality of the foregoing, (a) Seller will provide, and
will cause its Affiliates to provide, representatives of
Purchaser reasonable access to all Books and Records of the
Company reasonably requested by Purchaser in the preparation
of any post-Closing financial statements, reports, or Tax
Returns of the Company; (b) Purchaser will provide
representatives of Seller reasonable access to all
post-Closing Books and Records of the Company or any
Subsidiary reasonably requested by Seller in the preparation
of any post-Closing financial statements, reports, or Tax
Returns of Seller; and (c) each party hereto will execute
such documents and instruments as the other party hereto may
reasonably request containing terms and conditions mutually
satisfactory to each party hereto to further effectuate the
terms hereof. Purchaser agrees to retain, until the sixth
anniversary of the Closing Date, all books and records of
the Company.
<PAGE>
11.10 Waiver. Any term or condition of this Agreement
may be waived at any time by the party that is entitled to
the benefit thereof. Such waiver must be in writing and
must be executed by an executive officer of such party. A
waiver on one occasion will not be deemed to be a waiver of
the same or any other breach or nonfulfillment on a future
occasion. All remedies, either under this Agreement, or by
law or otherwise afforded, will be cumulative and not
alternative.
11.11 Amendment. This Agreement may be modified or
amended only by a writing duly executed by or on behalf of
Seller and Purchaser.
11.12 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which
will be deemed an original, but all of which will constitute
one and the same instrument.
11.13 No Third Party Beneficiary. The terms and
provisions of this Agreement are intended solely for the
benefit of Seller, Purchaser, each Seller Party, each
Purchaser Party and their respective successors and
permitted assigns and it is not the intention of the parties
to confer third-party beneficiary rights upon any other
person.
11.14 Governing Law. This Agreement will be governed
by and construed and enforced in accordance with the laws of
Ontario (without regard to the principles of conflict of
laws) applicable to a contract executed and performable in
such state.
11.15 Binding Effect. This Agreement is binding upon
and will inure to the benefit of the parties and their
respective successors and permitted assigns.
11.16 No Assignment. Neither this Agreement nor any
right or obligation hereunder or part hereof may be assigned
by any party hereto without the prior written consent of the
other party hereto (and any attempt to do so will be void),
except as otherwise specifically provided herein and except
that Purchaser may assign all or any part of the rights or
obligations of Purchaser hereunder to one or more Affiliates
of Purchaser without the consent Seller; provided, however,
that upon such assignment Purchaser shall not be deemed to
be released from any of its obligations hereunder.
11.17 Time of Essence. Time is of the essence to every
<PAGE>
11.18 Invalid Provisions. If any provision of this
Agreement is held to be illegal, invalid, or unenforceable
under any present or future law and if the rights or
obligations under this Agreement of Seller and Purchaser
will not be materially and adversely affected thereby,
(a) such provision will be fully severable; (b) this
Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a
part hereof; (c) the remaining provisions of this Agreement
will remain in full force and effect and will not be
affected by the illegal, invalid, or unenforceable provision
or by its severance herefrom; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement a legal,
valid and enforceable provision as similar in terms to such
illegal, invalid, or unenforceable provision as may be
possible.
IN WITNESS WHEREOF, this Agreement has been duly
executed and delivered as of the date first written above by
the duly authorized officers of Seller and Purchaser.
PURCHASER:
Hedstrom Corporation
By:
Name:
Title:
SELLERS:
______________________________
Richard Boyer
______________________________
Robert G. Boyer
______________________________
Belinda Boyer
The Richard Boyer Family Trust
By:___________________________
Richard Boyer, Trustee
________________________
Robert G. Boyer, Trustee
________________________
Belinda Boyer, Trustee
<PAGE>
STOCK PURCHASE AGREEMENT
Dated as of July__, 1998
Between
Hedstrom Corporation
and
Richard Boyer
With Respect to all of the
Outstanding Capital Stock of
Backyard Products Ltd.
TABLE OF CONTENTS
Page
ARTICLE I .................................................1
1.1 Purchase and Sale of Shares ......................2
1.2 Purchase Price ...................................2
<PAGE>
1.3 Determination of Net Working Capital .............3
1.4 Closing ..........................................5
ARTICLE II ................................................6
2.1 Organization of Seller. ..........................6
2.2 Corporate Authority ..............................6
2.3 Organization of the Company and Subsidiaries. ....6
2.4 Capital Stock of the Company .....................7
2.6 Consents and Approvals ...........................7
2.7 Financial Statements .............................9
2.8 Absence of Changes ...............................9
2.9 Taxes ...........................................13
2.10 Litigation .....................................15
2.11 Compliance With Laws ...........................16
2.12 Pension and Benefit Plans; ERISAError! Bookmark not
defined.
2.13 Properties. ....................................19
2.14 Environmental Matters ..........................20
2.15 Contracts ......................................22
2.16 Licenses and Permits ...........................24
2.17 Insurance ......................................24
2.18 Intercompany Liabilities .......................24
2.19 Corporate Records ..............................24
2.20 Bank Accounts ..................................25
2.21 Disclosure .....................................26
<PAGE>
ARTICLE III ..............................................26
3.1 Organization ....................................26
3.2 Corporate Authority .............................26
3.3 Consents and Approvals ..........................26
3.4 Purchase for Investment .........................27
ARTICLE IV ...............................................28
4.1 Contract and Regulatory Approvals ...............28
4.2 Intentionally Omitted ...........................28
4.3 Investigation by Purchaser ......................28
4.4 No Negotiations .................................28
4.5 Conduct of Business .............................29
4.6 Financial Statements and Reports ................30
4.7 Employee Matters ................................31
4.8 Participation in Benefit Plans ..................33
4.9 No Disposal of Property .........................34
4.10 No Breach or Default ...........................34
4.11 No Acquisitions ................................34
4.12 Intercompany Liabilities .......................34
4.13 Resignations of Directors ......................35
4.14 Tax Matters ....................................35
4.15 Books and Records ..............................35
4.16 Notice and Cure ................................35
ARTICLE V ................................................36
5.1 Governmental Approvals ..........................36
<PAGE>
ARTICLE VI ...............................................37
6.1 Representations and Warranties ..................37
6.2 Performance .....................................37
6.3 Regulatory Approvals ............................37
6.4 No Injunctions ..................................37
6.5 Consents and Authorizations .....................37
6.6 No Adverse Change ...............................37
6.7 Opinion of Counsel ..............................38
6.8 Officer's Certificates ..........................38
6.9 Resignations ....................................38
ARTICLE VII ..............................................38
7.1 Representations and Warranties ..................38
7.2 Performance .....................................38
7.3 Regulatory Approvals ............................38
7.4 No Injunctions ..................................39
7.5 Consents and Authorizations .....................39
7.6 Opinion of Counsel ..............................39
7.7 Officer's Certificates ..........................39
ARTICLE VIII .............................................39
8.1 Survival of Representations and Warranties ......39
8.2 Survival of Covenants and Agreements ............40
8.3 Pursuit of Claims ...............................40
<PAGE>
ARTICLE IX ...............................................40
9.1 Indemnification by Seller .......................40
9.2 Indemnification by Purchaser ....................41
9.3 Indemnification Procedures ......................42
9.4 Tax Indemnification .............................43
9.5 Indemnification Payments ........................43
ARTICLE X ................................................44
10.1 Termination ....................................44
10.2 Effect of Termination ..........................44
ARTICLE XI ...............................................45
11.1 Section 338(h)(10) Election ....................45
11.2 Notices ........................................46
11.3 [Intentionally Omitted] ........................47
11.4 Entire Agreement; Interpretation ...............49
11.5 Expenses .......................................50
11.6 Public Announcements ...........................50
11.7 Confidentiality ................................50
11.8 Brokers ........................................51
11.9 Further Assurances .............................51
11.10 Waiver ........................................52
<PAGE>
11.11 Amendment .....................................52
11.12 Counterparts ..................................52
11.13 No Third Party Beneficiary ....................52
11.14 Governing Law .................................52
11.15 Binding Effect ................................52
11.16 No Assignment .................................52
11.17 Invalid Provisions ............................53
EXHIBIT LIST
THIRD AMENDMENT, dated as of July 29, 1998 (this "Third
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. Subsection 1.1 of the Credit Agreement is hereby
amended by deleting in its entirety the definition of "Aggregate
Tranche B Commitment" and by adding the following definitions:
"'Aggregate Tranche B Commitment': $65,000,000,
as such amount may be reduced from time to time
pursuant to this Agreement.
'Third Amendment Effective Date': as defined in
the Third Amendment to this Agreement dated as of
July 29, 1998."
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:
<PAGE>
"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 Third 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 on the
Third Amendment Effective Date in an amount not to exceed
such Tranche B Lender's Tranche B Commitment Percentage
(after giving effect to subsection 3.1(b)) of $30,000,000.
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 $30,000,000 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 subsections 3.1(a) and 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 1.1D hereto shall sell, transfer and assign to
one or more other Tranche B Lenders (the "Purchasing
Lenders") as specified on Schedule 1.1D hereto a portion of
the Selling Lender's right, title and interest in and to its
Tranche B Loans as specified on Schedule 1.1D 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 Loans as
specified on Schedule 1.1D hereto, so that after giving
effect to all such transfers, each Tranche B Lender's
interest in the Tranche B Loans shall be as specified on
Schedule 1.1D hereto.
<PAGE>
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
September 30, 1998 $233,303.25
December 31, 1997 233,303.25
March 31, 1999 233,303.25
June 30, 1999 233,303.25
September 30, 1999 233,303.25
December 31, 1999 233,303.25
March 31, 2000 233,303.25
June 30, 2000 233,303.25
September 30, 2000 233,303.25
December 31, 2000 233,303.25
March 31, 2001 233,303.25
<PAGE>
June 30, 2001 233,303.25
September 30, 2001 233,303.25
December 31, 2001 233,303.25
March 31, 2002 233,303.25
June 30, 2002 233,303.25
September 30, 2002 233,303.25
December 31, 2002 233,303.25
March 31, 2003 9,332,129.96
June 30, 2003 2,333,032.49
September 30, 2003 9,332,129.96
December 31, 2003 2,333,032.49
March 31, 2004 10,078,700.36
June 30, 2004 2,519,675.09
September 30, 2004 10,078,700.36
December 31, 2004 2,519,675.09
March 31, 2005 9,518,772.56
June 30, 2005 2,379,693.14
Total $64,625,000.00
; provided that in the event the aggregate principal amount
of Tranche B Loans outstanding on the Third Amendment
Effective Date is less than $64,625,000, an amount equal to
such difference shall be applied to reduce the then
remaining scheduled installments set forth above in the
table above pro rata based on the then remaining principal
amount of each such amount."
(b) The Borrower shall repay any then outstanding
Tranche B Loans on June 30, 2005.
<PAGE>
3.4. Use of Proceeds of Tranche B Loans. (i) The
proceeds of the Tranche B Loans borrowed prior to the Third
Amendment Effective Date 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 and
(ii) the proceeds of the Tranche B Loans borrowed on or
subsequent to the Third Amendment Effective Date shall be
utilized only to finance the acquisition permitted by
subsection 11.10(o), to pay related fees and expenses and to
repay Revolving Credit Loans."
4. Amendment to Subsection 11.
A. 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 September 30, 1998, December
31, 1998 and March 31, 1999, Consolidated EBITDA for
the relevant period shall be deemed to equal actual
Consolidated EBITDA for such period plus $3,800,000,
$2,600,000 and $1,200,000, respectively."
B. Subsection 11.10 is hereby amended (i) by adding a
reference in paragraph (h) in the proper order to subsection
"11.2", (ii) by deleting the reference in paragraph (k)
thereof to "$5,000,000" and substituting in lieu thereof a
reference to "$20,000,000", (iii) by deleting the reference
in paragraph (l) to "$3,000,000" and substituting in lieu
thereof a reference to $4,000,000" and (iv) by adding the
following paragraphs at the end of such subsection (and
adjusting the punctuation at the end of paragraph (n)
accordingly):
<PAGE>
"(o) 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 purchase all of the
capital stock of Backyard Products Limited, an Ontario
corporation ("Backyard"), on terms and conditions reasonably
satisfactory to the Administrative Agent, 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 $17,200,000, 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 at least 65% of the
outstanding capital stock issued by Backyard 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 acquisition is a Permitted Acquisition; and
(p) an equity contribution by the Borrower to Hedstrom
(U.K.) Limited in an aggregate amount not to exceed
$5,000,000 to eliminate an intercompany account deficit in
an equal amount, so long as in connection therewith the
Borrower satisfies the requirements of subsection 10.10(c)."
5. 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.
6. Addition of Schedule 1.1D. Schedule 1.1D in the
form of Annex B hereto is hereby added to the Credit Agreement.
7. Effective Date. This Third Amendment will become
effective as of the date (the "Third Amendment Effective Date")
hereof upon (i) its execution by the Parent, the Borrower and the
Required Lenders in accordance with the terms of the Credit
Agreement, (ii) delivery to the Administrative Agent of
resolutions of the Borrower authorizing the execution and
delivery of this Third Amendment and (iii) delivery to the
Administrative Agent of stock certificates (and stock powers in
respect thereof) in respect of at least 65% of the outstanding
voting stock of Backyard.
<PAGE>
8. Representations and Warranties. The Parent and the
Borrower represent and warrant to each Lender that (a) this Third
Amendment constitutes the legal, valid and binding obligation of
the Parent and 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.
9. 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. This Third Amendment shall constitute a Credit Document.
10. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
11. Counterparts. This Third 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.
12. 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 Third Amendment, including, without limitation, the
reasonable fees and disbursements of counsel to the
Administrative Agent.
13. Acknowledgement with Respect to Various Credit
Documents. Each Credit Party, by its execution and delivery of
a copy of this Third Amendment, hereby consents to the extensions
of credit pursuant to the Credit Agreement. Each Credit Party
further acknowledges and agrees to the provisions of this Third
Amendment and hereby agrees for the benefit of the Lenders that
all extensions of credit (including without limitation all
Tranche B Loans) pursuant to the Credit Agreement (as same is
amended by this Third Amendment, and as same may be further
amended, modified or supplemented from time to time) shall be
fully entitled to all benefits of (and shall be fully guaranteed
pursuant to) the Master Guarantee and Collateral Agreement and
shall be fully secured pursuant to, and in accordance with the
terms of, all the Security Documents.
<PAGE>
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:
HEDSTROM HOLDINGS, INC.
By:
Title:
CREDIT SUISSE FIRST BOSTON, as
Administrative Agent and 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:
<PAGE>
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:
<PAGE>
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:
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE
By:
Title:
ORIX USA CORPORATION
<PAGE>
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:
IMPERIAL BANK
By:
Title:
ACKNOWLEDGED AND AGREED:
ERO, INC.
By:
Name:
Title:
<PAGE>
ERO INDUSTRIES, INC.
By:
Name:
Title:
ERO MARKETING, INC.
By:
Name:
Title:
PRISS PRINTS, INC.
By:
Name:
Title:
IMPACT, INC.
By:
Name:
Title:
ERO CANADA, INC.
By:
Name:
Title:
AMAV INDUSTRIES INC.
By:
Name:
Title:
EXHIBIT 11.1
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
EARNINGS PER SHARE DISCLOSURE
For the six month period ended June 30, 1998
(Dollars in thousands)
Income Shares Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share:
Net loss $(598) $67,663 $(0.01)
Effect of Dilutive Securities:
Stock options in the money - - -
Buyback of shares at average
price of $1.64 - - -
---- ------- ------
Net effect of stock options - - -
Diluted Earnings Per Share:
Net income $(598) $67,663 $(0.01)
===== ======= ======
Options to purchase 4,087,216 shares of common stock at
prices ranging from $1.00 - $1.64 per share were outstanding
at June 30, 1998 but were not included in the computation of
diluted EPS as they were anti-dilutive at the end of the
period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,233
<SECURITIES> 0
<RECEIVABLES> 81,681
<ALLOWANCES> 0
<INVENTORY> 53,564
<CURRENT-ASSETS> 154,263
<PP&E> 44,474
<DEPRECIATION> 0
<TOTAL-ASSETS> 388,112
<CURRENT-LIABILITIES> 101,044
<BONDS> 0
0
0
<COMMON> 676
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 388,112
<SALES> 161,661
<TOTAL-REVENUES> 161,661
<CGS> 116,516
<TOTAL-COSTS> 116,516
<OTHER-EXPENSES> 30,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,481
<INCOME-PRETAX> (1,025)
<INCOME-TAX> (427)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (598)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
